Residential Reinsurance 2015 Ltd. (Series 2015-1) – Full details:
USAA is seeking to secure a new source of fully-collateralized reinsurance from the capital markets. A newly Cayman Islands vehicle, Residential Reinsurance 2015 Limited will seek to sell two tranches of notes to ILS investors, to collateralized the underlying reinsurance agreements.
The reinsurance protection provided by the cat bond will cover USAA for certain losses suffered from tropical cyclones (and flood for rented property policies), earthquakes (and fire following), severe thunderstorms, winter storms, wildfires, volcanic eruption and meteorite impacts.
The protection afforded by the two tranches of notes will be on an indemnity trigger and annual aggregate basis, over a four-year term against losses suffered from the above perils across the U.S. and District of Columbia.
A Class 10 tranche of notes is being marketed with an initial size of $50m and will cover losses from an attachment point of $959m up to an exhaustion at $1.134 billion. That equates to an initial attachment probability of 8.33%, an exhaustion probability of 4.63% and an expected loss of 6.2% base, 7.28% sensitivity case.
A $100m tranche of Class 11 notes are less risky, covering losses from an attachment point of $1.134 billion up to an exhaustion point of $1.791 billion. That gives these notes an initial attachment probability of 4.63%, an exhaustion probability of 0.89% and an expected loss of 2.16% base, 2.5% sensitivity case.
So the Class 10 notes are significantly more risky than the Class 11.
The Class 10 notes are being offered with coupon price guidance of 10.75% to 11.75%. That would suggest a multiple of just 1.9x’s the base expected loss, or 1.6x the sensitivity case, even if it priced at the top end of guidance. That is a low multiple by any degree of analysis, especially for a riskier tranche.
The Class 11 tranche are being offered to investors with price guidance of 5.5% to 6%, suggesting a multiple of 2.8x’s the base expected loss, or 2.4x the sensitivity case, again taking the top end of price guidance.
The Class 10 notes launched with price guidance of 10.75% to 11.75%, which showed USAA’s ambitions to secure the cover at a very low multiple. Now, Artemis understands that the price guidance has been fixed at 11%, near the lower end of that range.
So if final pricing is set at an 11% coupon, the Class 10 notes will have a multiple of 1.77 times the base expected loss or 1.51 times the sensitivity case. That’s a particularly low multiple, which clearly reflects the appetite of investors to access higher yielding cat bond notes and their willingness to accept a lower multiple payment in return.
Class 11 launched with price guidance of 5.5% to 6% and interestingly these notes have had the guidance fixed at the top end of guidance, at 6%. That suggests a multiple of 2.8x’s the base expected loss, or 2.4x the sensitivity case.
Update, March 23rd 2018:
USAA’s aggregated losses from catastrophe events in the current risk period have now reached roughly $1 billion, suggesting that these 2015-1 Class 10 notes are now getting close to being triggered. With some months left until the end of the risk period and the next reset, there is the potential for noteholders of this tranche to face some level of principal loss.