U.S. primary insurer and military focused mutual insurer USAA is returning to the catastrophe bond market once again with a dual-tranche Residential Reinsurance 2013 Ltd. (Series 2013-2), offering investors both high and low yield opportunities.
It’s now over sixteen years since the first Residential Reinsurance catastrophe bond was sponsored by USAA and the insurer is now returning to the capital markets for reinsurance protection for the twenty-first time for this latest deal, according to sources.
The Residential Re 2013-2 cat bond looks particularly interesting as it brings two tranches to market, one of which is said to be possibly the riskiest single tranche of a 144A cat bond ever issued, while the other offers a fairly typical level of risk and reward to investors. Given the reduction in ILS pricing this year, it looks like USAA is seeking an opportunity to insert cat bond cover right at the bottom layer of its reinsurance protection.
This latest Residential Re cat bond sees USAA seeking a multi-peril source of fully-collateralized reinsurance protection, using an indemnity trigger and on a per-occurrence basis over a four-year period, via the issuance and sale to investors of two tranches of Series 2013-2 notes through Cayman Islands based Residential Reinsurance 2013 Limited. The deal has a preliminary size of $120m.
The first tranche of notes, which we understand to be Class 1, will cover U.S. tropical storms but excluding the state of Florida, U.S. earthquakes, severe thunderstorms, winter storms and wildfires in California. This tranche is being marketed with a preliminary size of $50m.
The second tranche, which we’re told is Class 4, covers U.S. tropical storms including the state of Florida, U.S. earthquakes, severe thunderstorms, winter storms and wildfires in California. This tranche has a preliminary size of $70m, we understand.
Now the interesting aspect of the deal, the levels of risk and reward in the two classes of notes offered.
Class 1 is the riskier of the two and we’re told has a probability of attachment of 21.38%, an expected loss of 13.06% and is being marketed with a coupon guidance range of 21% to 22%. We’re struggling to think of a cat bond tranche in our Deal Directory with a higher attachment probability and coupon than that.
The Class 4 tranche is much less risky, with an attachment probability of 2.26%, an expected loss of 1.61% and offering a coupon in the range of 5.75% to 6.5%. This is much more typical of an average yielding cat bond tranche.
We understand that the Class 1 notes attach at $400m of losses to USAA and will pay losses on a sliding scale, depending on the size the tranche actually completes at, up to an exhaustion point of $800m. Class 4 notes meanwhile attach at $2.076 billion of losses and again cover losses on a pro-rata basis up to the exhaustion point of $2.993 billion.
We understand that Goldman Sachs and Swiss Re Capital Markets are bringing this deal to market for USAA along with support from Deutsche Bank. AIR Worldwide is providing risk modelling services.
That’s all we have on this new catastrophe bond transaction for now. We hope to bring you more detail as the deal comes to market.