Residential Reinsurance 2012 Ltd. (Series 2012-2)

This catastrophe bond deal, Residential Reinsurance 2012 Ltd. (Series 2012-2), see’s USAA tapping the capital market for a source of fully-collateralized reinsurance cover for U.S. perils including hurricane, earthquake, severe thunderstorm, winter storm and California wildfire on a per-occurrence basis. This is the 19th Residential Re deal in our Directory.

The deal comprises two rated tranches of notes and two unrated. All four tranches are exposed to all of the perils and each will use an indemnity trigger. We’re told that the deal has a preliminary size of $250m.

The deal will provide USAA, and subsidiaries, with four years of cover. It is split into five loss periods with a shorter one at the start and end, allowing them to reset the risk modelling just prior to the start of the U.S. hurricane season each year.

According to the S&P ratings announcement the cover from this deal will actually benefit a number of USAA subsidiaries, as is the norm with Residential Re deals. S&P says the cedants will be United Services Automobile Assn., a reciprocal interinsurance exchange organized under the laws of Texas; USAA Casualty Insurance Co., a Texas corporation; USAA Texas Lloyd’s Co., a Texas Lloyd’s plan insurer; USAA General Indemnity Co., a Texas-domiciled stock insurance company; Garrison Property and Casualty Insurance Co.; and other affiliates. These cedents, and other affiliates of USAA, will be responsible for the quarterly payment due under the reinsurance agreement with Residential Re 2012.

The Class 1 tranche of notes will cover losses between an attachment point of $3.65 billion and an exhaustion point of $4.175 billion. This tranche has an attachment probability of 0.53% and an expected loss of 0.42%. Pricing for the Class 1 notes is expected to be in the range of 5% – 6%. This tranche has a preliminary size of $75m.

The Class 2 tranche of notes will cover losses between an attachment point of $2.8 billion and an exhaustion point of $3.65 billion. This tranche has an attachment probability of 1.12% and an expected loss of 0.81%. Pricing for the Class 2 notes is expected to be in the range of 6.25% – 7.25%. This tranche has a preliminary size of $50m.

The Class 3 tranche of notes will cover losses between an attachment point of $1.3 billion and an exhaustion point of $2 billion. This tranche has an attachment probability of 4.77% and an expected loss of 3.26%. Pricing for the Class 3 notes is expected to be in the range of 12.25% – 13.25%. This tranche has a preliminary size of $75m.

The Class 4 tranche of notes will cover losses between an attachment point of $850 million and an exhaustion point of $1.3 billion. This tranche has an attachment probability of 9.31% and an expected loss of 6.77%. Pricing for the Class 4 notes is expected to be in the range of 18% – 19.5%. This tranche has a preliminary size of $50m.

Collateral from the sale of the notes will be deposited in a reinsurance trust account and invested in highly rated government securities.

Update (19th Nov 2012):

This cat bond upsized by 60% during marketing from $250m to $400m in size thanks to strong investor demand for new cat bond notes.

Each tranche upsized. The price guidance was reduced on the two rated tranches to below the initially expected range. Price guidance tightened upwards on the two unrated, riskier tranches of notes.

Class 1 has doubled from $75m to $150m, and the Class 1 notes began at 5.0% to 6.0% and have dropped to 4.5% to 5.0%.

Class 2 increased from $50m to $70m, and Class 2 has gone from 6.25% to 7.25% and dropped to 5.75% to 6.25%.

Class 3 jumped from $75m to $95m, Class 3 started at 12.25% to 13.25% and have is aiming for the upper end of the range at 12.75% to 13.25%.

Class 4 increased from $50m to $80m. Pricing wise they began at 18.0% to 19.5% but will price upwards to 18.5% to 19.5%.

Update (28th Nov 2012):

At final pricing this cat bond priced right down on the two rated tranches of notes and near the original mid-point for the two unrated, riskier tranches.

Here’s how the deal ended up:

Class 1:

– Doubled in size from $75m to $155m.
– Pricing expectations began at 5.0% to 6.0%, dropped to 4.5% to 5.0% and finished at 4.5% (a reduction of 1% or 100bps from the original mid-point).

Class 2:

– Increased in size from $50m to $70m.
– Pricing expectations began at 6.25% to 7.25%, dropped to 5.75% to 6.25% and finished at 5.75% (a reduction of 1% or 100bps from the original mid-point).

Class 3:

– Increased in size from $75m to $95m.
– Pricing expectations began at 12.25% to 13.25%, tightened to 12.75% to 13.25% and finished at 12.75% (pricing right on the original mid-point).

Class 4:

– Increased in size from $50m to $80m.
– Pricing expectations began at 18.0% to 19.5%, tightened to 18.5% to 19.5% and finished at 19.0% (pricing higher than the original mid-point by 0.25%).