Residential Reinsurance 2011 Ltd. (Series 2011-1)

Three tranches of Series 2011-1 notes were issued by Cayman Islands domiciled special purpose reinsurance vehicle Residential Reinsurance 2011 Ltd. for USAA. It is USAA’s 16th natural catastrophe bond securitization to date.

Residential Reinsurance 2011 Ltd. will provide USAA (and certain subsidiaries) with cover for some of their U.S. hurricane, earthquake, severe thunderstorm, winter storm, and wildfire exposure over a four year term with maturity expected in June 2015.

The deal is structured in three tranches. Class 1 and 2 provide protection on a per-occurrence basis while the Class 5 notes protect them on an annual aggregate basis.

The Class 1 notes will cover a to be reported percentage of losses between an attachment point of $2 billion and an exhaustion point of $2.8 billion, the Class 2 notes between an attachment point of $1.3 billion and an exhaustion point of $2 billion, and the Class 5 notes losses between an attachment point of $1.382 billion and an exhaustion point of $1.758 billion.

For an event to qualify as covered under the terms of the deal they must cause USAA a loss of at least $45m.

$57m of Series 2011-1 Class 1 notes.
$33m Class 2 notes.
$160m of Class 5 notes.

This deal uses highly rated U.S. Treasury money market funds as a source of collateral.

The Class 5 notes had to have their rating upgraded while the deal was still marketing as S&P said they hadn’t taken into account the reinsurance USAA maintain.

Update (19th July 2012): Two severe thunderstorm events have caused qualifying UNL losses under the terms of this cat bond deal, affecting the Class 5 annual aggregate notes. The two catastrophe events which have qualified under the terms of the deals are Catastrophe Series 77 and 78, two severe thunderstorm events (so including damage from tornadoes and hail we believe). These events have resulted in ultimate net losses of $95m and $45m respectively to USAA. This reduces the attachment point of the notes slightly making them more risky.

Standard & Poor’s said that it has lowered its ratings on the Residential Reinsurance 2011 Ltd. (Series 2011-1) Class 5 notes to ‘B’ from ‘BB-’, and placed them on CreditWatch with negative implications.

Update (24th October 2012):

S&P have upgraded the Class 5 notes back to their original rating of ‘BB-’ due to improved loss experience. Some of the loss estimates which had originally qualified have been reduced, dropping Catastrophe Series 78 from being a qualifying event. Based on the reduced probability of attachment this results in, the rating downgrade was reversed.

Update (16th November 2012):

The Class 5 notes are back on Creditwatch and have been downgraded one notch to ‘B+’ after USAA released a loss estimate from hurricane Sandy (Catastrophe Series 90) which means the aggregate protection will be eroded further. S&P said the increase in attachment probability led them to downgrade the notes. Further downgrades are possible as the loss estimate from USAA could rise.