Primary and military mutual insurer USAA’s latest, and twenty-first, catastrophe bond transaction, Residential Reinsurance 2013 Ltd. (Series 2013-2), has been priced at the lowest end of the guidance ranges, demonstrating investors appetite for riskier cat bond tranches.
USAA’s latest cat bond contains perhaps the riskiest tranche, with the highest probability of attachment and expected loss, ever issued in the catastrophe bond market. Investors showed their appetite for participating at the lowest level within the insurers reinsurance tower by helping the deal upsize and its pricing decline.
Residential Re 2013-2 will provide USAA with a source of fully-collateralized reinsurance protection, using an indemnity trigger and on a per-occurrence basis over a four-year period. The riskier Class 1 notes cover U.S. tropical storms (excluding the state of Florida), U.S. earthquakes, severe thunderstorms, winter storms and wildfires in California. The lower risk Class 4 tranche, covers U.S. tropical storms (including the state of Florida), U.S. earthquakes, severe thunderstorms, winter storms and wildfires in California.
The cat bond deal grew in size by 25%, from a launch size of $120m to price at $150m. All of the upsizing was within the riskier Class 1 tranche of cat bond notes, which grew from $50m to $80m, an increase of 60%. Sources tell us however that the original $50m of notes may well have been on order already at the time the deal launched, giving USAA certainty that the deal would get done. If this is the case, all of the upsizing was from the marketing to the rest of the insurance-linked securities investor community.
Both of the tranches issued saw their price guidance lowered as the deal came to market. In the end both tranches were priced at the lowest end of the already reduced range, showing continued strong appetite for cat bond risk, even at the riskier attachment level.
The Class 1 tranche, with a probability of attachment of 21.38% and an expected loss of 13.06% was marketed with pricing guidance of 21% to 22%, which was subsequently lowered to 20% to 21%. Final pricing for this risky tranche was at 20%, which is almost a 7% drop in pricing from the mid-point of the originally marketed range. This Class 1 tranche is now $80m in size, up by 60% from the $50m.
The Class 4 tranche of notes, with an attachment probability of 2.26% and an expected loss of 1.61%, launched with a pricing range of 5.75% to 6.5%, which subsequently was lowered to 5.25% to 5.75%. This tranche priced at the lowest end again, at 5.25%, a 14% decline in pricing from the originally marketed mid-point. This tranche remained at $70m in size.
For USAA this cat bond transaction has demonstrated that ILS investors are happy to take on much higher attachment levels of catastrophe risk, which should have interesting ramifications for the marketplace. Other primary insurers will likely have been watching this deal closely to see how successful it was and now it has priced so attractively we may see others attempt to bring riskier cat bond tranches to market in future.
We understand that the target closing date for this cat bond is the 2nd December. We will update you once the transaction has completed.
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