U.S. primary military mutual insurer USAA is back once again in the catastrophe bond market, with what will be the company’s 29th securitization of insurance risk, seeking a $300 million source of multi-peril collateralized reinsurance coverage through a Residential Reinsurance 2017 Ltd. (Series 2017-1) issuance.
USAA remains the most prolific sponsor of catastrophe bonds, currently with $1.655 billion of reinsurance protection sourced from the capital markets through securitization of nine outstanding transactions.
This transaction sees USAA with a new special purpose insurer, Residential Reinsurance 2017 Limited, which will seek to issue $300 million at least of Series 2017-1 notes to collateralize a multi-peril reinsurance arrangement for the insurer, we understand.
Residential Re 2017-1 will feature three tranches of notes all of which will provide USAA with reinsurance protection against losses from U.S. tropical cyclones, earthquakes, severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and other perils.
All three tranches of notes will provide USAA with annual aggregate reinsurance protection on an indemnity trigger basis and two tranches will provide four years of cover, with the other structured as a zero-coupon note providing just a single year of reinsurance.
A $50 million tranche of Class 10 notes are the zero-coupon notes, which will be issued to investors at a discount akin to how collateralized reinsurance transactions are completed. These are the riskiest notes of the Residential Re 2017 issue, with an initial attachment probability of 16.22%, or $883m of losses, and an expected loss of 14.06%. This one-year tranche of zero-coupon notes are being offered at 82.5% to 83.5% of par value, we’re told, which approximates to a coupon of 16.5% to 17.5%.
A Class 11 tranche of notes, preliminarily sized at $150 million, and with a four-year risk period have an attachment probability of 4.56%, or $1.28 billion of losses, and an expected loss of 2.11%. This tranche is being offered to investors with price guidance of 4.75% to 5.25% we understand and will not be rated.
Finally, a $100 million Class 13 tranche of notes will be issued with a four-year risk period as well. The Class 13 notes will have an attachment probability of 0.99%, or $2.05 billion of losses, an expected loss of 0.59% and are offered to investors with coupon price guidance of 3% to 3.5% we’re told. This tranche of notes are being rated, which is now becoming a rarity in the world of catastrophe bonds and have received a preliminary BB-(sf) rating from Standard & Poor’s.
These three tranches of notes will go some way to replace the maturing Residential Re 2013-1 cat bond, which expires in June, although they are all aggregate notes on this occassion. That cat bond also gives us an idea of just how efficient pricing is now, as an aggregate tranche of the 2013-1 Res Re cat bond had an expected loss of 2.1% and paid investors an 8% coupon. How times have changed in terms of the value of this coverage for sponsors such as USAA.
As with USAA’s last cat bond, the “other perils” category effectively makes the Residential Re 2017-1 deal into a true all natural perils catastrophe bond cover, extending coverage to all natural hazards to which USAA is exposed and more closely matching the coverage available in the traditional reinsurance markets.
With cat bond pricing so competitive right now it will be interesting to see where this bond completes. Should it price at a competitively low level, compared to traditional reinsurance, it could be a sign that cat bond investors are ready to offer more all-encompassing catastrophe cover at prices below traditional reinsurance for the most experienced and trusted sponsors.
USAA joins a raft of repeat sponsors coming to market with new cat bonds in the second-quarter of 2017. Read all about the record $2.76 billion of issuance seen in the first-quarter and the new market record outstanding size of $27.19 billion in our latest quarterly market report here.
We’ll update you as USAA’s new Residential Reinsurance 2017 Ltd. (Series 2017-1) catastrophe bond comes to market and you can read about this and every other cat bond USAA has ever sponsored in the Artemis Deal Directory.
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