USAA’s new Residential Re 2017-2 cat bond set to upsize to ~$285m

by Artemis on November 2, 2017

The latest and 30th catastrophe bond to be sponsored by U.S. primary military mutual insurer USAA looks set to increase in size, as the latest information from our sources suggests the transaction will complete to provide the sponsor up to $285 million in reinsurance coverage.

USAA launched its latest catastrophe bond, a Residential Reinsurance 2017 Ltd. (Series 2017-2) multi-peril deal, just a fortnight ago, initially seeking $225 million of collateralized reinsurance protection with the transaction.

Sources now suggest that the transaction will increase in size, with $280 million or $285 million now the target, depending on investor demand for the notes.

At the same time as increasing the targeted size for its 30th catastrophe bond, we understand that the pricing target has narrowed and dropped for each of the three tranches of notes on offer.

With this transaction USAA is seeking per-occurrence reinsurance protection against losses from multiple perils, on an indemnity trigger basis and across four years.

The covered perils are U.S. tropical cyclones (plus renter policy flood), earthquakes (plus fire following and renter policy flood), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact and other perils.

The riskiest Class 1 tranche of notes, which is a one-year zero coupon layer and was sized at $50 million from launch, is now targeting up to $55 million, we understand. The pricing guidance on this tranche had launched at 78% to 80% of par value, but that has been narrowed now to 78% to 79% of par, we’re told, approximating a coupon of 20% to 21%.

The Class 2 tranche launched targeting $100 million of reinsurance protection with price guidance of 12.5% to 13.5%. This tranche is still aiming for $100 million, but now the pricing has dropped to 12.5% to 13%, we understand.

The final Class 3 tranche, which are the lowest risk, launched with a size target of $75 million and coupon price guidance of 5.5% to 6.25%. This tranche now targets $130 million, so all the upsizing is here in this lower risk layer, while the pricing guidance has been fixed at the bottom-end at 5.5%.

The pricing on this cat bond sets the bar for future issues and really does not look to be significantly higher at all than previous Residential Re cat bonds issued in the last year. However, demand will help the transaction to increase in size anyway.

Investors have clearly shown that they want a higher return for the riskier layers though, as evidenced by the fact that all of the upsizing is in the lowest-risk tranche, where they perhaps feel better compensated for the risk in this cat bond.

We understand that this Residential Reinsurance 2017 Ltd. (Series 2017-2) catastrophe bond will be priced this week and complete later this month. You can read all about this and every other cat bond in the Artemis Deal Directory.

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