U.S. primary insurance carrier Nationwide Mutual Insurance Company is set for its largest slice of catastrophe bond backed reinsurance coverage ever, after its latest Caelus Re VI Ltd. (Series 2020-1 & 2020-2) transaction has now priced at a 44% upsized $490 million, we’re told.
That is very close to the maximum guide size that the issuance was targeting of $500 million and it is only the highest risk tranche of notes that failed to reach its upper-end target.
At the same time, sources said that the notes have largely priced from just below the initial mid-point for the lower risk tranches, up into the upper-end of initial guidance for the riskier layers, reflecting cat bond investors continued demand for higher spreads.
Nationwide returned to the catastrophe bond market earlier this month with a dual series transaction that sought at least $340m or greater of capital market’s backed U.S. multi-peril reinsurance protection, on both a per-occurrence and aggregate basis.
Quickly that target was lifted, with the issuance becoming a transaction that could have secured as much as $500 million of reinsurance protection for the sponsor and it has now settled at $490 million, so representing a 44% increase from the initially marketed tranche sizes.
Nationwide is a regular cat bond sponsor and has also benefited from reinsurance recoveries under the Caelus Re program in the last year, so it is encouraging to see the insurer back in the market and looking to expand on the type of reinsurance protection it receives from the insurance-linked securities (ILS) space.
Nationwide will benefit from $490 million of reinsurance protection against certain losses from the U.S. multiple perils of named storm, earthquake, severe thunderstorm, winter storm, wildfire, meteorite impact, volcanic eruption, as well as other perils.
This cat bond deal is the first sponsored by Nationwide Mutual that will secure both per-occurrence and aggregate catastrophe reinsurance for the insurer and its subsidiaries from a single visit to the cat bond market.
Two series of notes are being issued, split up into five tranches of notes, with two tranches of Series 2020-1 notes being issued to provide per-occurrence indemnity reinsurance protection to Nationwide Mutual, while three Series 2020-2 tranches of notes will provide annual aggregate indemnity reinsurance protection to the sponsor.
On the 2020-1 per-occurrence side of the issuance, Nationwide Mutual is looking to secure one tranche of coverage for a three year term and the other for four years. While all three of the annual aggregate structured 2020-2 tranches of notes will run across a three-year term.
To summarise how this Caelus Re VI 2020 catastrophe bond transaction will now settle, here are the tranche details.
The first Series 2020-1 Class A-1 tranche of per-occurrence notes will provide three years of coverage had targeted between $100 million and $150 million in terms of issuance size and will now settled at the upper-end of $150 million. With an initial expected loss of 1.3% at the base case, these notes were initially offered to cat bond investors with price guidance in a range from 5.25% to 6%, which tightened to 5.5% to 5.75% and pricing has now been fixed at 5.5%, so a little below the mid-point of guidance.
The Series 2020-1 Class B-1 tranche of per-occurrence notes, providing four years of protection, targeted between $100 million and $150 million of cover for Nationwide and will also settled at the top-end of $150 million. This tranche of notes have an initial expected loss of 1.3% at the base case and were offered to cat bond investors with the same price guidance, so 5.25% to 6%, which again tightened to 5.5% to 5.75% and the notes have now also been priced at 5.5%.
The Series 2020-2 Class A-2 notes, set to provide three years of aggregate reinsurance protection, targeted $50 million to $75 million of reinsurance protection, now settling at the upper-end at $75 million. These notes have an initial expected loss of 0.97% at the base case and were at first offered with price guidance of 5% to 5.75%, which tightened to 5.5% to 5.75% and has now been fixed at 5.5%, so towards the upper-end of guidance.
The Series 2020-2 Class B-2 notes, also annual aggregate and providing three years of protection, targeted an issuance size of between $50 million and $75 million and have also settled at $75 million. These notes have an initial expected loss of 1.7% at the base case and were marketed with price guidance of 7% to 8%, which tightened to 7.5% to 8% and has now been priced at 7.75%, so almost at the top-end of guidance.
The final Series 2020-2 Class C-2 tranche of notes, also annual aggregate and covering three years, targeted between $40 million and $50 million of cover for the sponsor and these failed to reach the upper-end, settling at $40 million. These notes have an initial expected loss of 4.1% at the base case and had initial price guidance of 12% to 13%, which tightened to 12.75% to 13% and has now been fixed at 12.75%, again in the upper-half of guidance.
It’s a good result for Nationwide and also for catastrophe bond investors, as the sponsor has secured its largest every catastrophe bond, placing the capital markets even more firmly within its reinsurance arrangements. While investors have secured pricing at levels that are a definite step up from previous Caelus Re deals and that reflect the cat bond market’s generally higher spreads in 2020.
This new transaction will more than replace the maturing and loss impacted $375 million Caelus Re V Ltd. (Series 2017-1) cat bond transaction. However Nationwide also has its $300 million Caelus Re IV Ltd. (Series 2016-1) transaction maturing this year as well.
Hence, the insurer could have less cat bond backed reinsurance in place for 2020, once those two deals have matured and if it doesn’t return for a second transaction in the coming months.
So while it’s encouraging to see Nationwide Mutual expanding the type of protection it receives from its catastrophe bonds, it would be even more so to see it return for a second deal in 2020 to replenish its capital market supported reinsurance.