March 11, 2013 / 2:15 PM / 7 years ago

"Cat bond" prices seen rising after Nationwide Mutual deal

LONDON, March 11 (Reuters) - Strong demand for a $270 million catastrophe bond allowed its issuer, U.S. Nationwide Mutual Insurance Co, to price it more cheaply than expected, leaving investors looking for a higher return from future issues.

Investors have been keen to buy “cat bonds”, which insurers use to pass on the risk of having to make big payouts towards damage caused by natural catastrophes such as hurricanes and earthquakes.

But supply has been slow so far this year, distorting price levels, as insurers are still assessing the impact of superstorm Sandy, a 1,000-mile wide storm that struck the northeast of the United States in October and is expected to cost the insurance industry up to $25 billion.

This meant that the latest bond, which provides protection against U.S. hurricanes and earthquakes, was completed on Monday at a coupon of 5.25 percentage points over U.S. money market funds. It was originally marketed with a price guidance of between 6.75 percent and 7.75 percent.

“We know there are two or three more bonds coming to market in the next few months and we expect prices to come up because investors will have more deals to choose from,” said one UK-based investor.

The bond, issued under Nationwide’s Cayman Islands-based Caelus Re vehicle and assigned a BB- rating by Standard & Poor’s, was increased from an initial $200 million in the marketing phase due to higher than expected demand.

One U.S.-based investor said the deal was a success for the cat bond market with an initial round of bids totaling $1.3 billion.

Caelus Re 2013 is only the second bond to be closed so far this year, which is why there was so much interest in the deal, one UK-based investor said.

PRICE DISPROPORTIONATE TO RISK

Despite the bond being heavily oversubscribed, some investors said they felt the pricing was disproportionately low given a 1.28 percent risk that the bond will be activated and investors will have to pay all or part of the amount they purchased.

Nationwide would have to incur total payments from a hurricane or an earthquake of $1.90 billion before payouts are triggered.

S&P said it expects Nationwide to pay the first 10 percent of any claims.

Caelus Re 2013 is the third cat bond issued by Nationwide, whose last issue in the market was in 2010.

In January, U.S. health insurer Aetna sold a $150 million deal to cover higher-than-expected medical claims.

Last week, S&P rated a bond from Munich Re to cover two North Carolina associations from hurricane losses in the region. The bond, Tar Heel Re, is looking to raise $200 million from investors.

Goldman Sachs and Aon Benfield helped to structure the Caelus Re bond.

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