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Investor demand drives down Nationwide Mutual pricing

Nationwide Mutual has added another $270mn cat bond cover through a new Caelus Re issuance, as the coupon on the transaction fell by 2 percent during the marketing process.

Nationwide will pay investors an insurance-linked coupon of 5.25 percent for the three-year indemnity bond, which covers US hurricane and earthquake losses in specified states on a per-occurrence basis.

The coupon settled significantly lower than the initial guidance of 6.75-7.75 percent provided to investors, and reflected investor enthusiasm for one of the first 2013 transactions.

The insurance-linked coupon equates to a multiple of about 4.5x the deal's 1.15 percent expected loss. This is well below the 8x multiple investors were given for the previous Caelus II issuance, which paid an insurance-linked coupon of 650 basis points for an expected loss of 0.79 percent.

Caelus Re was the first cat bond to come to market in almost two months and sources said the transaction was significantly oversubscribed.

Insurance-linked securities (ILS) investors said the deal was attractive because its hurricane risk was evenly spread out among various states and because the peak Florida wind and California quake exposures had been reduced since the previous Caelus deal. The notes will cover losses between the attachment point of $1.9bn up to an exhaustion point of $2.2bn and have an expected loss of 1.15 percent.

Nationwide first came to the cat bond market in 2008 with the $250mn Caelus Re, and was followed by the $185mn Caelus Re II in 2010. Both were indemnity covers.

The 2010 issuance matures in May this year and carried an insurance-linked coupon of 650 basis points.

The Caelus Re III notes have received a preliminary rating of BB- from Standard & Poor's, while the first two issuances held BB+ ratings. The transaction takes 2013 cat bond issuance to $481mn. The first quarter is traditionally a sluggish one for ILS issuance, but this year has got off to a much slower start than 2012, when $1.5bn was placed.

Earlier this year, Swiss Re Capital Markets forecast that ILS spreads will continue to fall for the near and medium term, as it said the 1 January renewals had been disappointing for some collateralised reinsurance providers. Willis Capital Markets & Advisory also previously described the December pipeline as disappointing for investors hoping to invest cash inflows.

As an example of this trend, Credit Suisse said its cash allocation in the Low Volatility Plus fund had increased to 27 percent by the end of 2012 due to low trading volumes and new inflows, although it said this level was expected to decrease in early 2013.

However, other cat bond issuances are expected to come to market later this month.

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