Residential Reinsurance 2016 Limited (Series 2016-2)
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Residential Reinsurance 2016 Limited (Series 2016-2) - At a glance:
- Issuer / SPV: Residential Reinsurance 2016 Limited (Series 2016-2)
- Cedent / Sponsor: USAA
- Placement / structuring agent/s: Goldman Sachs and Swiss Re Capital Markets are joint structuring agents and bookrunners. Citigroup is joint bookrunner
- Risk modelling / calculation agents etc: AIR Worldwide
- Risks / Perils covered: U.S. tropical cyclones (plus renter policy flood), earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, other perils
- Size: $400m
- Trigger type: Indemnity
- Ratings: ?'
- Date of issue: Nov 2016
Residential Reinsurance 2016 Limited (Series 2016-2) - Full details
This is USAA’s 28th securitization of insurance risk as a catastrophe bond, continuing its prolific use of the capital markets as a source of reinsurance capacity.
The firm currently has more than $1.65 billion of cat bonds in-force providing it with fully collateralized reinsurance coverage and is now seeking to add a fresh $280 million or more with Residential Re 2016-2.
Sources told Artemis that again this latest Residential Re cat bond sees USAA looking to gain coverage for all of the main perils it faces in the United States, as like the firms Residential Re 2016-1 cat bond, which it sponsored in June, the firm has again expanded the peril description to include a category of “others”.
So USAA’s latest foray to the capital markets will see its Residential Reinsurance Ltd., its Cayman Islands based special purpose vehicle, seeking to issue three classes of notes to investors in order to fully collateralize underlying reinsurance agreements between the SPV and USAA.
In total, USAA is seeking at least $280 million of reinsurance coverage from this Residential Re 2016-2 transaction. All three of the classes of notes will be exposed to tropical cyclone risks (including renter policy flood cover), earthquake (including fire following), severe thunderstorm, wildfire, winter storm, volcanic eruption, meteorite impact and “other perils” across the U.S.
Coverage from all three classes of notes will be on a per-occurrence basis and each tranche will feature an indemnity trigger. One of the three tranches will provide coverage over just a single risk period for one year, while the other two will provide USAA with multi-peril reinsurance protection over a four year term.
The $80m Class 2 tranche of notes has the single year term and are structured as zero-coupon discount notes, Artemis understands. This is typically the case when an issuer wants to test ILS investors ability to take on a more reinsurance type of layer, so single year and using the discount structure to pay investors premiums upfront, through discounting the cost of the notes.
The Class 2 notes will have a modelled attachment probability of 7.53% (that’s an attachment point of $1.015bn) and an expected loss of 5.55% base and 6.35% at the sensitivity case, and will be offered to investors at a 91% to 91.75% discount to par (implying an 8.25% to 9% coupon equivalent). These are the riskiest tranche with the lowest multiple equivalent.
A $100m Class 3 tranche of notes will have a four year term, with an attachment probability of 4.12% (equivalent to a $1.539bn attachment point), an expected loss of 2.91% at the base case or 3.29% sensitivity, and are being marketed to investors with coupon guidance of 5.75% to 6.5%.
Finally, a $100m Class 4 tranche of notes are the least risky of the three, providing their reinsurance ocver over a four year term, with an attachment probability of 2.13% (or $2.3bn of losses to USAA), a base expected loss of 1.53% and a sensitivity case EL of 1.72%. This tranche of notes are being offered to investors with price guidance of 4% to 4.75%, we’re told.
USAA is seeking to upsize its latest catastrophe bond issuance, with the Residential Reinsurance 2016 Ltd. (Series 2016-2) transaction now targeting from $280m to $400m of reinsurance coverage for the firm and sources said that price guidance has been reduced on all three tranches.
The Class 2 tranche of Series 2016-2 notes being issued by Residential Re have not upsized and remain targeting $80m of cover. This tranche only has a one-year term and are structured as zero-coupon discount notes.
The Class 2 notes were initially offered to investors at a 91% to 91.75% discount to par (implying an 8.25% to 9% coupon equivalent), but this has tightened to 91.75% to 92.25% we understand, which implies a coupon equivalent in the range of 7.75% to 8.25%. This is the riskiest tranche of this Residential Re cat bond.
Meanwhile a Class 3 tranche of notes which have a four-year term launched targeting $100m of coverage, but now target $100m to $150m, we understand. This tranche launched with coupon guidance of 5.75% to 6.5%, but this has been reduced to 5.25% to 5.75% we’re told.
The final tranche, of Class 4 notes which also have a four-year term and are the least risky of the three, began life at $100m but now target between $100m and $170m of reinsurance cover for USAA. This tranche of notes launched with price guidance of 4% to 4.75%, but this has been reduced to 3.5% to 4%.
So USAA looks set to secure as much as $400m of reinsurance protection from the capital markets with this Residential Re 2016-2 cat bond deal and at reduced pricing, with all three tranches seeing guidance dropping to below the launch range.
This cat bond achieved the upsize to $400m of cover for USAA, while the pricing settled at the lowest ends of reduced guidance for all three tranches.
The $80m Class 2 tranche of notes, which didn’t upsize, are structured as zero-coupon discount notes and have a one-year term. These were at first offered to investors at a 91% to 91.75% discount to par (implying an 8.25% to 9% coupon equivalent), which tightened to 91.75% to 92.25% or a coupon equivalent in the range of 7.75% to 8.25%. These notes settled at a discount to par of 92.25%, so a 7.75% coupon equivalent.
The Class 3 tranche of notes which have a four-year term upsized to the targeted $150m, while pricing again settled at the lowest end of reduced guidance. These notes launched with coupon guidance of 5.75% to 6.5%, which was reduced to 5.25% to 5.75%, but now has settled at the lowest end at 5.25%, we’re told.
The final tranche, of Class 4 notes which also have a four-year term, hit their $170m upsize target. This tranche launched with price guidance of 4% to 4.75%, which was reduced to 3.5% to 4%, and has now settled at 3.5% at the lowest end.
The Class 2 notes, which are riskiest, have a base expected loss of 5.55%, which with a 7.75% coupon equivalent to be paid to investors implies a multiple of 1.4 times EL.
The Class 3 notes have a base expected loss of 2.91%, so with a coupons of 5.25% these notes will offer investors a multiple of 1.8 times EL.
Finally, the Class 4 notes, which are least risky and have a base expected loss of 1.53% and the coupon of 3.5%, will pay investors a multiple of 2.3 times EL.
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