As we hinted at the other day, there is more to come from the catastrophe bond market this month, and the first deal is from the most prolific primary insurer sponsor of cat bonds, USAA. This deal which is now being marketed to investors, with be the 19th Residential Re transaction from USAA in our Deal Directory (find details on all of them there). This cat bond deal, Residential Reinsurance 2012 Ltd. (Series 2012-2), see’s USAA tapping the capital market for another source of multi-peril reinsurance on a per-occurrence basis.
The successful completion of their 19th cat bond deal will secure USAA with a source of fully-collateralized reinsurance cover for U.S. perils including hurricane, earthquake, severe thunderstorm, winter storm, and wildfire (just in California we’re told) on a per-occurrence basis.
An S&P preliminary ratings report details two tranches of rated notes as part of this transaction but market sources tell us that there are two unrated tranches being issued as well in this deal, which is a common trend for USAA’s cat bonds. All four tranches are exposed to all of the perils and each will use an indemnity trigger. Again, this is typical of USAA’s Residential Re series of cat bonds and continues their strategy of increasing capital market investors contribution to their overall reinsurance program.
According to the S&P ratings announcement the cover from this deal will actually benefit a number of USAA subsidiaries, as is the norm with Residential Re deals. S&P says the cedants will be United Services Automobile Assn., a reciprocal interinsurance exchange organized under the laws of Texas; USAA Casualty Insurance Co., a Texas corporation; USAA Texas Lloyd’s Co., a Texas Lloyd’s plan insurer; USAA General Indemnity Co., a Texas-domiciled stock insurance company; Garrison Property and Casualty Insurance Co.; and other affiliates. These cedents, and other affiliates of USAA, will be responsible for the quarterly payment due under the reinsurance agreement with Residential Re 2012.
As one of the largest primary insurers operating in the U.S., USAA now has a number of cat bonds actively providing them with reinsurance as part of their overall risk transfer program. The cover these cat bonds provide augments their reinsurance and also diversifies their sources of risk transfer capacity. This latest Residential Re 2012 Series 2012-II cat bond will further augment that cover as the four tranches of notes provide them with reinsurance protection ranging from the riskiest notes attachment point of $850m right up to the highest notes exhaustion point of $4.175 billion. This is a great example of how to structure a cat bond to complement your other sources of cover providing wide-ranging reinsurance protection.
So, this Series 2012-2 cat bond being issued through Cayman Islands domiciled special purpose insurer Residential Reinsurance 20120 Ltd. is split into four tranches, two of which will be rated. All four tranches provide cover on a per-occurrence basis and using an indemnity trigger.
The Class 1 tranche of notes will cover losses between an attachment point of $3.65 billion and an exhaustion point of $4.175 billion. The Class 2 tranche of notes will cover losses between an attachment point of $2.8 billion and an exhaustion point of $3.65 billion. The Class 3 tranche of notes will cover losses between an attachment point of $1.3 billion and an exhaustion point of $2 billion. Finally, the Class 4 tranche of notes will cover losses between an attachment point of $850 million and an exhaustion point of $1.3 billion.
The way the tranches are constructed provides a stack of reinsurance cover all the way from $850m up to $4.175 billion, with the gap between the Class 2 and 3 notes being filled by some of the notes issued in previous Residential Re deals.
This is also good for USAA when this deal is marketed to investors as the wide range of attachment probabilities, 0.53% for Class 1, 1.12% for Class 2, 4.77% for Class 3 and 9.31% for Class 4, will be attractive to different investors with differing risk appetites and investment strategies. Also pricing wise, the layered approach gives investors a range of possible returns, from 5%-6% for Class 1, 6.25%-7.25% for Class 2, 12.25%-13.25% for Class 3 right up to 18% to 19.5% for the riskier Class 4 notes.
We’re told that USAA are targeting $250m as an initial size for this deal with Classes 1 and 3 targeting $75m and Classes 2 and 4 targeting $50m.
It will be interesting to see whether that grows as this latest cat bond comes to market. It will also be interesting to see how it prices at close. With recent deals upsizing and pricing at the bottom or below the lowest expectations, it’s going to be telling to see whether that continues post hurricane Sandy and as we move closer towards the January renewals.
USAA have themselves got two catastrophe bonds which are considered at risk of accumulating more aggregate losses from hurricane Sandy as we have written about here.
Standard & Poor’s have given the two rated tranches of notes preliminary ratings of ‘BB+’ for the Class 1 notes and ‘BB’ for the Class 2 notes.
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