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Pricing environment tempts Nationwide into another Caelus Re cat bond


U.S. insurer Nationwide Mutual’s Caelus Re 2013-1 catastrophe bond has only just come to market this month yet the insurer is returning to the cat bond market already for a Caelus Re 2013 Ltd. (Series 2013-2) issuance. The recent Caelus Re 2013-1 was extremely well received by investors, which helped it increase in size and the pricing on the deal to drop not once, but twice. It seems the value Nationwide found has tempted the insurer back to the capital markets once more.

Nationwide is ready to test cat bond market investors appetite once again with another slice of its reinsurance programme and this time is looking for a slightly riskier tranche of coverage for a longer term of four years. If it is successful at locking in this extra layer of reinsurance protection for a multi-year period at a cost-effective price it will be a very smart move indeed that the mutual insurers Board will certainly approve of.

The Caelus Re 2013 Ltd. (Series 2013-2) cat bond deal is in the market right now and looks like being an unrated transaction according to our sources. It’s a very similar transaction to the recently completed Series 2013-1 cat bond, providing another layer of multi-year fully collateralized U.S. hurricane and earthquake reinsurance cover to the sponsoring entities, Nationwide Mutual Insurance Co. and Nationwide Insurance Co. of Florida.

The 2013-2 cat bond issuance is seeking to sell $225m of notes to capital market investors. The notes are exposed to hurricanes across the main U.S. hurricane exposed States and earthquakes including fire following across the entire U.S. mainland. The cover that this cat bond provides is on a per-occurrence basis and the structure uses an indemnity trigger, again similar structural features to the recently completed 2013-1 cat bond.

The differences between this Caelus Re 2013-2 cat bond and the 2013-1 cat bond lie in the term of the transaction and the attachment level and probabilities. The 2013-2 transaction will provide an extra years cover, it’s looking for a four-year term, which is a clever move by Nationwide to try to lock in attractive pricing for a longer term.

This tranche of cat bond notes will cover a layer of risk lower down in Nationwide’s reinsurance program. The recently completed deal attached at $1.9 billion of losses to the sponsor, this 2013-2 tranche of notes is said to be pitched with an attachment point of $1.5 billion and the exhaustion point is set where the 2013-1 notes take over, covering a pro-rata amount of losses between those points.

Unsurprisingly the probability of attachment is much higher than the recent 2013-1 deal. We’re told the Caelus Re 2013-2 notes have an initial attachment probability of 1.93% and an expected loss of 1.59%, while the recent 2013-1 cat bond saw a 1.28% attachment probability and 1.15% expected loss.

Interestingly, we’re told that due to the way the Caelus Re 2013-1 notes dropped in pricing by 2% to finish at just 5.25%, after having launched with a 6.75% to 7.75% range, the 2013-2 deal hopes to also secure attractive pricing by taking advantage of market conditions and investor appetite. We’re told the 2013-2 notes are being marketed with a coupon range of 6.25% to 7.25% to reflect current market conditions and this seems reasonable given the pricing the earlier deal achieved.

The fact that Nationwide have returned to the cat bond market so quickly after the successful completion of Caelus Re 2013 Ltd. (Series 2013-1) is clearly an indicator of the value that sponsors have found in the catastrophe bond market in recent months. Pricing has been pushed down thanks to huge investor appetite for insurance-linked securities and catastrophe risk. This has led some to suggest that pricing can drop no further without questions of risk and return being asked, or are investors really being adequately compensated for the risks they have been assuming in recent deals.

That’s a point of much discussion in the market and it’s easy to find people to take sides on that particular issue right now. Some investors are more than happy to deploy capital at the recent lower rates, feeling that the cat bonds risk profile is well understood and once assumed into their overall portfolio can be adequately balanced, for others it makes more sense to hold back to see how rates move over the next few weeks. This further displays the maturing cat bond investor market, with a range of investors with differing motivations and risk appetites, variety which is much-needed to assist the markets continued growth.

We’ll bring you more details as this transaction comes to market. You can read more about this latest Nationwide Mutual cat bond, Caelus Re 2013 Ltd. (Series 2013-2), and about the recent Caelus Re 2013 Ltd. (Series 2013-1) as well as the insurers two earlier cat bonds, Caelus Re Ltd. and Caelus Re II Ltd., in our catastrophe bond and ILS Deal Directory.

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