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Nationwide’s Caelus Re 2018 cat bonds priced for wildfire losses


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.

The Caelus Re V cat bond transaction provides U.S. primary insurer Nationwide Mutual with a source of capital markets backed reinsurance indemnification against losses suffered from multiple U.S. perils, including California wildfire risks.

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 riskiest two tranches have both been marked down in broker secondary pricing sheets and we understand that cat bond fund managers have marked the positions down in their funds as well.

At this stage these are only mark-to-market losses, as no official loss notice has been forthcoming from the sponsor or SPI yet. So these positions could recover, but they certainly add to the overall impact of recent catastrophe events on the cat bond investment market.

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.

All of the losses and potential losses from catastrophe bonds stricken by catastrophe events through the years are detailed here in our Deal Directory.

These two tranches add to the reinsurance recoveries expected on Nationwide Mutual’s Caelus cat bond series, with a number of tranches of notes also expecting losses from the 2017 hurricanes and wildfire events.

These are all annual aggregate cat bonds, hence they can accumulate losses from across multiple events before paying out.

As a result, these two 2018 tranches, which were only issued in May, have some time to run before any reset making the chance of losses perhaps seem particularly high to warrant the mark down.

All four tranches of Nationwide’s Caelus Re V 2017 cat bond are currently expected to face some level of losses from the combined impacts of 2017 hurricanes, wildfires and winter storms, as also detailed here.

The expected losses (based on secondary pricing) for those four tranches currently amounts to around $285 million, so if the two tranches of 2018 Caelus Re V cat bond notes face the losses that their secondary prices currently imply the total cat bond payout to Nationwide Mutual could reach roughly $377.5 million (based on Artemis’ data on their latest secondary marks).

The catastrophe bond market as a whole was already facing roughly $1.1 billion to $1.2 billion of losses, based on current secondary market pricing and investors expectation of losses from the 2017 and 2018 catastrophe events. Add in these two tranches and the expected loss rises to $1.2 billion to $1.3 billion.

However, it must be stated that the final loss won’t be known until sponsors have reported their ultimate net losses and from the recent wildfires there hasn’t even been a loss notification yet, we understand.

As a result the outlook for losses can and will most likely change across the full range of Caelus cat bonds from Nationwide.

All of the losses and potential losses from catastrophe bonds stricken by catastrophe events through the years are detailed here in our Deal Directory.

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