U.S. insurer Nationwide Mutual is returning to the catastrophe bond market for the first time in almost three years, as it seeks to sponsor a $225m Caelus Re IV Ltd. (Series 2016-1) U.S. multi-peril cat bond to secure collateralised capital markets backed reinsurance capacity.
This is Nationwide’s fifth visit to the catastrophe bond market, following on from 2008’s Caelus Re Ltd., 2010’s Caelus Re II Ltd., and 2013’s Caelus Re 2013 Ltd. (Series 2013-1) and Caelus Re 2013 Ltd. (Series 2013-2).
The $270m Caelus Re 2013 Ltd. (Series 2013-1) is scheduled for maturity at the end of this month, so this new Caelus Re IV 2016-1 cat bond looks to be a replacement while also extending the perils and types of subject business covered for Nationwide.
Nationwide Mutual is back with a newly registered Cayman Islands domiciled Class C insurance vehicle, Caelus Re IV Limited, through which a single tranche of notes will be issued, the same of which will collateralise a reinsurance agreement, sources familiar with the deal said.
Caelus Re IV Ltd. will issue a single tranche of Series 2016-1 Class A notes, currently targeting $225m in size, with the ultimate reinsurance protection covering a Nationwide subsidiaries losses under personal, commercial and excess & surplus specialty lines, sources said.
Interestingly we understand that the cat bond will cover a wide range of property damage type risks, including such items as auto physical damage, inland marine vehicles, commercial agricultural business risks and more.
So Nationwide is seeking a much broader coverage than just its property policies, with the E&S and specialty lines also broadening the subject business covered considerably.
The notes will provide Nationwide Mutual with a four-year source of multi-year reinsurance protection, on an indemnity and per-occurrence basis for losses from the perils of U.S. named storm, earthquake, severe thunderstorm, winter storm, wildfire, meteorite impact and volcanic eruption across the United States. The term of the cover is slated to begin on 1st March 2016.
The Class A notes feature an attachment point of $1.915 billion and cover a layer of losses up to $2.252 billion. The layer covered is $337m in size, leaving room for the tranche to grow from the initial $225m size mooted.
This equates to an attachment probability of 1.82%, an exhaustion probability of 1.43% and an expected loss of 1.58%. The Caelus Re IV 2016-1 Class A notes are being marketed with price guidance of 5.5% to 6.25%, we’re told.
That is a high multiple, likely reflecting the broader range of subject business that this catastrophe bond will cover. At the base case the multiple of expected loss to coupon would be 3.5x even at the lower end of price guidance. At the sensitivity case expected loss, which is 1.94%, the multiple is reduced to 2.8x, still higher than the average (again at the lower end of the coupon range).
Given the broader coverage being sought, which is similar to some of AIG’s Tradewynd cat bonds we understand, it will be interesting to see how the ILS investor community supports the deal and where the pricing settles. Cedents are looking for broader cover from the cat bond market, so transactions like this are a good test of appetite.
The transaction is being brought to market by Goldman Sachs, Aon Securities & Deutsche Bank Securities all acting as joint structuring agents & bookrunners, while BofA Merrill Lynch, BNP Paribas & GC Securities are all co-managers. AIR Worldwide is risk modeller for the cat bond deal.
It’s encouraging to see Nationwide Mutual returning to the catastrophe bond market and seeking to expand the coverage it receives from the capital markets in its latest Caelus Re cat bond.