The primary issuance market for catastrophe bond transactions is waking up after an unusually quiet start to 2013 as U.S. P&C insurer Nationwide Mutual looks to return to the catastrophe bond market with its third cat bond, Caelus Re 2013 Ltd. Nationwide Mutual’s Caelus Re II cat bond matures in May and the insurer clearly appreciates the layer of cover its cat bonds have provided and is looking to get in early with a replacement this year.
This latest 2013 cat bond, only the third to be added to our Deal Directory this year, has only recently begun marketing to investors and has now received a preliminary rating from Standard & Poor’s. We’re told it’s been in the works for a while though and it seems likely that rather than wait until nearer the maturity of its current Caelus Re II cat bond at the end of May, Nationwide Mutual is choosing to get into the market while it is quiet in the hope of taking advantage of pent-up investor demand.
That could be a very good move if Nationwide Mutual want to upsize this deal and take advantage of keen pricing. As the first new cat bond in a while it is likely to be in demand and pricing could be very attractive for the sponsor. This could allow Nationwide Mutual to increase its capital markets sourced cat bond cover in 2013 and compete with the rates it achieves in the traditional reinsurance market.
This is the third time that Nationwide Mutual has visited the cat bond market. It’s first cat bond, Caelus Re Ltd., was a $250m U.S. hurricane and earthquake deal issued in June 2008. It returned to the cat bond market following on from that deals maturity with Caelus Re II Ltd., which was $185m in size covering the same perils.
So onto the 2013 cat bond deal, here are some key details on the transaction. This cat bond is being issued by a recently established Cayman Islands domiciled SPV called Caelus Re 2013 Limited which was licensed as an insurer on the 5th February. Caelus Re 2013 will seek to issue a single tranche of Series 2013-1 notes which at their preliminary size will look for around $200m of cover. That’s slightly larger than the maturing Caelus Re II which was $185m in size, although it did also begin marketing at $200m.
Perils covered by this Caelus Re 2013 catastrophe bond will be the same as in Nationwide Mutual’s previous deals, U.S. hurricanes and U.S. earthquakes (including fire-following and sprinkler leakage). The cat bond has been structured to provide cover on a per occurrence basis, for both perils, and the deal will use an indemnity trigger based on the ultimate net loss of Nationwide Mutual and a number of subsidiaries. Details of the transaction name Nationwide Mutual Ins. Co. and Nationwide Insurance Co. of FL as both being cedents but we believe it covers a number of their subsidiaries too.
The notes will cover a share of Nationwide’s losses between an initial attachment point of $1.90 billion and an initial exhaustion point of $2.20 billion. The actual amount of losses from any event will be based on the paid losses and loss reserves of Nationwide, as adjusted by certain factors. S&P said that it expects Nationwide to retain at least a 10% share of the ultimate net loss from any qualifying catastrophe event.
The deals term will run for 2.75 years, with the first risk period set to begin on 1st June 2013 and the deal running until 29th February 2016. Each risk period will run until 31st May and there will be an annual reset at that point.
Hurricane cover is for 29 hurricane exposed states of the U.S. while earthquake is for 48 contiguous states and the District of Columbia. Reporting agencies for each peril are the U.S. National Hurricane Centre and the U.S. Geological Survey. Historical events have been modelled and risk modeller for the deal AIR Worldwide found that only the 1812 New Madrid quake would have caused a 100% loss of principal to the notes. No other modelled historical earthquakes or hurricanes would have caused ultimate net losses which reached the attachment point.
The initial probability of attachment for the notes to be issued by Caelus Re 2013 is 1.28%, the initial probability of exhaustion is 1.04% and the expected loss is 1.15%. North Carolina, New York, Virgina, Texas and California are the five states which contribute most to the expected loss by state as they are where the cat bonds risk is most concentrated and Nationwide Mutual’s exposure is greatest.
This is a relatively low risk cat bond, with an expected loss just over one percent, and we’re told by investor sources that they expect the deal to price between 6.75% and 7.75% above the investment yield of U.S. money market funds which will be used for collateral purposes.
S&P has assigned a preliminary rating of ‘BB-(sf)’ to the single tranche of Series 2013-1 Class A notes which will be issued by Caelus Re 2013 Ltd.
It’s encouraging to see a regular sponsor of cat bonds return to the market first after this lull we’ve experienced. With a number of other regularsponsors cat bond deals maturing in the coming months we expect the primary cat bond market to pick up from now.
We’ll bring you more details on this transaction as it progresses to market. Caelus Re 2013 Ltd. Series 2013-1 has now been added to our Deal Directory and the information there will be updated as it becomes available also.