Caelus Re V Ltd. (Series 2018-1)

This is a new multi-peril catastrophe bond from Nationwide Mutual Insurance Company, the insurers seventh cat bond deal in the Caelus series since it first entered the ILS market back in 2008.

For this issuance, Cayman Islands special purpose insurer (SPI) Caelus Re V Ltd. has been established to issue to issue four tranches of notes which will be sold to ILS and capital market investors in order to fully collateralize multi-peril reinsurance agreements between the SPI and sponsor Nationwide Mutual.

The reinsurance coverage from this Caelus Re V 2018-1 cat bond will benefit Nationwide Mutual and its subsidiaries including Titan Insurance Company which is a dedicated auto insurer of the firm.

This Caelus Re V 2018-1 cat bond will supply fully-collateralized multi-peril reinsurance coverage to Nationwide Mutual and subsidiaries including auto insurer Titan Insurance Company, to protect them against certain losses from multiple U.S. perils, including U.S. named storm, earthquake (with fire following), severe thunderstorm, winter storm, wildfire, meteorite impact, volcanic eruption, and other perils.

The reinsurance protection that Nationwide Mutual will benefit from, through the reinsurance agreements with Caelus Re V, will all be provided on an indemnity and annual aggregate basis across a three-year term.

The four tranches of notes will cover different layers of risk within Nationwide Mutual’s reinsurance tower, running from the most risk-remote to the riskiest layer.

Caelus Re V Ltd. will issue a $75 million Series 2018-1 Class A tranche of notes that will have an initial attachment probability of 1.02%, expected loss of 0.63% and will be offered to investors with coupon price guidance of 3.25% to 3.75%, we understand.

An also $75 million Class B tranche of notes will have an initial attachment probability of 2.02%, expected loss of 1.48% and will be offered to investors with coupon price guidance of 4.75% to 5.25%.

A $100 million Class C tranche of notes will have an initial attachment probability of 4.23%, expected loss of 2.94% and will be offered to investors with coupon price guidance of 7.75% to 8.5%.

Finally, a $50 million Class D tranche of notes are the riskiest, with an initial attachment probability of 5.41%, expected loss of 4.8% and will be offered to investors with coupon price guidance of 10.75% to 11.5%.

All four tranches of notes will cover losses to personal, commercial, excess & surplus and specialty lines business underwritten by Nationwide Mutual, we’re told.

Update 1:

Most of the tranches have increased in size and the majority have also seen their pricing drop to the bottom or below of the initial coupon guidance range, taking the targeted size now to $450 million.

The Caelus Re V Series 2018-1 Class A tranche of notes began at $75 million in size, but have now grown to $125 million thanks to the demand shown by investors. However, this tranche, the least risky with an initial expected loss of 0.63% were initially offered with coupon price guidance of 3.25% to 3.75%, but this has looks set to price at the middle or above, as the guidance is now 3.5% to 3.75%, we understand.

It’s possible that the pricing on this tranche is a reaction to the fact investors are expecting to pay for some of Nationwide’s losses this year, meaning their minimum return requirements are perhaps higher than they would have been otherwise.

The Class B tranche of notes also began at $75 million in size and that hasn’t changed, but the notes with their initial expected loss of 1.48% and initial coupon price guidance of 4.75% to 5.25%, are set to price down, with guidance now lowered to 4.5% to 4.75%, we hear.

The initially $100 million Class C tranche of notes have grown the most, now offering $175 million of notes to investors. With their initial expected loss of 2.94%, we understand that the launch price guidance of 7.75% to 8.5% is falling to 7.5% to 7.75%, reflecting strong demand for this layer of Nationwide’s reinsurance tower.

The last Class D tranche that was targeting $50 million has also grown to $75 million, with an initial expected loss of 4.8% this is the riskiest tranche, but we understand investor appetite has helped to lower the launch with coupon price guidance of 10.75% to 11.5% down to a new range at 10.5% to 10.75%.

At $450 million in size, this Caelus Re V 2018-1 catastrophe bond from Nationwide Mutual is set to be the insurers largest.

Update 2:

Nationwide Mutual’s Caelus Re V 2018-1 catastrophe bond completed at $450 million in size, with pricing on three tranches falling to below the initial guidance, while the fourth settled at the mid-point. However, all four tranches have priced slightly higher than their equivalents from Nationwide’s 2017 cat bond, as investors sought higher rates in return for having taken losses due to the major hurricanes and wildfires in the prior year.

The $125 million Caelus Re V Series 2018-1 Class A tranche of notes priced at the mid-point of 3.5%, we’re told.

The $75 million Class B tranche of notes priced at the lowest end of reduced guidance of 4.5%.

The $175 million Class C tranche of notes priced at the lowest end of 7.5%.

The final $75 million Class D tranche saw pricing has been fixed again at the low-end of already reduced guidance at 10.5%.

Update Dec 12th, 2018:

Two tranches of Nationwide Mutual’s Caelus Re V Ltd. (Series 2018-1) catastrophe bond have been marked down in the secondary market due to market expectations they could face losses from the recent California wildfires.

With the recent Camp and Woolsey wildfires now expected to drive in excess of $15 billion of losses to the insurance and reinsurance industry and Nationwide Mutual exposed through its property book in California, the ILS market is now forecasting potential losses from two tranches of the Caelus Re V 2018-1 bond.

The Caelus Re V 2018-1 Class C tranche of notes is the less risky of the two marked down. This $175 million tranche of notes has been marked down for as much as a roughly 40% loss of principal at this time, equivalent to a $40 million loss to investors.

The most risky tranche from this cat bond is the Caelus Re V Class D, a $75 million tranche of notes which has now been marked down for around a 70% loss, equivalent to a roughly $52.5 million loss of principal.

The Class C notes would attach at $1.5 billion of losses to Nationwide, while the Class D notes attach a little sooner at $1.4 billion.

It’s worth noting that Nationwide said its 2017 wildfire losses amounted to $1.4 billion gross, or $1.1 billion net. So it’s easy to imagine some impact to these cat bonds from the 2018 wildfire events.

Update July 2019:

Some tranches of Nationwide’s $450 million Caelus Re V 2018-1 catastrophe bond issuance remain at risk of losses, due to the impacts of the 2018 year catastrophe events.

Aggregate losses threatening the Caelus 2018 cat bond are due to the California wildfires, hurricane Michael, hurricane Florence and a number of severe thunderstorm events, we understand.

Currently estimated aggregate ultimate net losses for the June 2018 and onwards annual risk period amount to just over $1.08 billion, while the attachment point for the notes sits at $1.4 billion currently, we’re told.

At this stage the riskiest $75 million Class D tranche are marked down in the secondary market on an expectation of a roughly 50% loss of principal, while the $175 million Class C tranche are marked for a 20% or so loss. It’s going to take some serious ongoing development for the triggers to be breached it appears, but after the experience with 2017 it seems investors are being cautious with these 2018 cat bond tranches.

It could be some time before any final loss amounts and reinsurance recoveries are fully understood for these 2018-1 Caelus Re V cat bond tranches.

Update April 2021:

Nationwide elected to extend the maturity dates on all tranches of this catastrophe bond through until June 2025.

The Class A, B, C and D Series 2018-1 notes issued by Caelus Re V Ltd., which amount to $450 million in cat bonds, have all had their maturities extended through to June 7th 2025.

All four of these tranches of notes remain marked down in the secondary market, with the most recent movements in their price being related to the US winter storm and Texas freeze loss event in February 2021 and this latest increase in Nationwide’s ultimate over the latest risk period.

Given these 2018-1 cat bond notes from Caelus Re V have not faced an extension event previously, it seems reasonable to assume that this extension of maturity through till June 2025 is a result of the current risk period and the addition of these winter storm losses, rather than any continuation of loss development from prior years.

The latest annual aggregate risk period for the Caelus Re V 2018-1 cat bonds began in June 2020 and runs until the end of May 2021, so this extension is related to the aggregation of losses over this term, of which the winter storms are potentially the largest contributor, given Nationwide is said to have been quite exposed to those storms and the Texas freezing weather.

We don’t know the exact attachment points for the 2018-1 tranches for the current risk period, as they’ve likely been adjusted at each annual reset, but at their launch the $75 million Class D tranche of notes attached at $1.4 billion of losses, which was the lowest.

The $75 million of Caelus Re V 2018-1 Class D notes attached at $1.4 billion and provides annual aggregate reinsurance protection to $1.5 billion of losses, suggesting these notes are at definite risk of losses, even if the attachment has been adjusted somewhat at a reset (as it’s unlikely to be all that much higher).

This Class D tranche is currently marked down at levels suggesting a total loss of the $75 million of principal in broker secondary pricing sheets.

The $175 million of Caelus Re V 2018-1 Class C notes attached at $1.5 billion and provides annual aggregate reinsurance protection to $1.75 billion of losses, suggesting these notes are also under threat of attachment now.

This Class C tranche is currently marked down at levels suggesting a potential 60% to 80% loss of the $175 million of principal from this layer.

The $75 million of Caelus Re V 2018-1 Class B notes attached at $1.75 billion and provides annual aggregate reinsurance protection to $2 billion of losses, suggesting these notes face a greater threat, but are still not close to attaching at this time.

This Class B tranche is currently marked down at levels suggesting a potential 30% to 50% loss of the $75 million of principal from this layer.

Finally, the $125 million of Caelus Re V 2018-1 Class A notes attached at $2 billion and provides annual aggregate reinsurance protection to $2.5 billion of losses, suggesting these notes are less likely to attach without additional fresh losses in the current risk period, or quite significant loss creep to occur on prior events.

This Class A tranche is currently marked down at levels suggesting a potential 10% to 20% loss of the $125 million of principal from this layer, reflecting ongoing erosion of the aggregate deductible as Nationwide’s ultimate rises.