U.S. primary insurance firm Nationwide Mutual’s return to the catastrophe bond market in 2018 looks set to result in a bumper issuance, as the still-being-marketed Caelus Re V Ltd. (Series 2018-1) has grown by 50% to now offer investors $450 million of U.S. catastrophe risk exposed notes.
Of course Nationwide Mutual is one of the cat bond sponsors which is currently hoping to make a recovery under its outstanding transaction, as the $375 million Caelus Re V Ltd. (Series 2017-1) is still facing an as yet to be determined but growing level of losses, due to the aggregate impacts of hurricanes and wildfires in 2017.
But that hasn’t deterred investors, who keen for opportunities to deploy more of their capital into the ILS asset class appear to have received the new Caelus cat bond from Nationwide Mutual with open arms, assisting the insurer in upsizing its latest collateralized reinsurance deal.
The Caelus Re V 2018-1 cat bond transaction, Nationwide’s seventh in the Caelus series of cat bonds, launched to the ILS investment community with the sponsor seeking a $300 million source of multi-year collateralized reinsurance protection.
With its latest cat bond, Nationwide Mutual and subsidiaries including auto insurer Titan Insurance Company will receive reinsurance protection against 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 protection from the reinsurance agreements with Caelus Re V will all be on an indemnity and annual aggregate basis across a three-year term, provided by four different tranches of notes, each with different risk and return profiles.
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.
The reception from ILS investors appears to have been robust, in terms of demand but also in terms of requiring a minimum level of risk adjusted return on the lower risk of the tranches, while demonstrating investor appetite for the higher risk and reward layers of the program.
Still, the vast majority of catastrophe bonds are increasing in size, seeing the pricing drop and in many cases both are occurring, reflecting the willingness of investors to continue to deploy capital at return levels not much higher than, in some cases lower than, prior to the 2017 losses.