Swiss Re Insurance-Linked Fund Management

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Residential Reinsurance 2016 Ltd. (Series 2016-1)

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Residential Reinsurance 2016 Ltd. (Series 2016-1) – At a glance:

  • Issuer: Residential Reinsurance 2016 Ltd. (Series 2016-1)
  • 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: $250m
  • Trigger type: Indemnity
  • Ratings: S&P: Class 13 - 'BB-(sf)'
  • Date of issue: May 2016

Residential Reinsurance 2016 Ltd. (Series 2016-1) – Full details:

Sources familiar with the transaction said that this 2016-1 cat bond sees USAA looking for another expansion to the terms of its ILS investor backed reinsurance coverage, with the peril description extended to include a category of “others”.

The “other perils” category will enable USAA to use its coverage from this Residential Re 2016 cat bond for losses from any natural disaster or severe weather event which is classified as a catastrophe by reporting agency PCS, aside from the named perils or flood.

Despite the flood exception, USAA has included flood coverage for renters policies under the tropical storm and hurricane event definition, for what we believe to be the first time, so there is an element of flood risk in this new cat bond.

This transaction will see newly registered Cayman Islands registered Residential Reinsurance 2016 Limited issuing three tranches of Series 2016-1 notes, with each tranche having a preliminary size of $50m.

All three tranches 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 the “other perils” across the U.S.

All three tranches will feature an indemnity trigger and provide USAA with reinsurance protection on an annual aggregate basis, we understand. The notes will have a four-year term.

A $50m Class 10 tranche of notes are set to be the riskiest, attaching at $910m and covering a percentage of USAA’s losses up to $1.202 billion. These notes have an initial attachment probability of 12.03% and an expected loss of 7.58%. The coupon spread for this tranche is marketed as a range of 11.75% to 12.75%.

Next, a $50m Class 11 tranche of notes would attach at $1.202 billion of losses and exhaust at $1.918 billion, resulting in an attachment probability of 4.61% and an expected loss of 2.13%. This tranche is being offered to investors with price guidance of 5.25% to 6%.

Finally, a $50m Class 13 tranche has an attachment point at $1.918 billion, covering losses to an exhaustion point at $2.638 billion. This tranche has an attachment probability of 0.98% and an expected loss of 0.62% and offer investors a coupon in the range of 3.75% to 4.25%.

So this Residential Re 2016-1 cat bond offers ILS investors a range of risk and return options, from the much more risky Class 10 notes, which have a base multiple of 1.6 times expected loss at the mid-point of guidance. To the mid-risk Class 11, which have a multiple of 2.6 times at the mid-point of guidance. Or the much lower risk, but perhaps higher return per unit of risk, Class 13 notes which have a much higher multiple of 6.5 times expected loss at the mid-point of coupon guidance.

With the selection of risk and return levels, as well as the broad layers that each tranche will cover, USAA has plenty of scope to increase the size of this cat bond, if it should choose to hand over more of its reinsurance program to the capital markets and ILS investors.

The attachment point is comparable with some existing USAA cat bonds, allowing us to compare the potential pricing to a degree and giving another snapshot of how cat bond pricing has declined in-line with the overall reinsurance market.

The 2016-1 Class 10 notes attach at the same level as USAA’s Residential Re 2014-1 Class 10 notes, which paid investors a coupon of 15%.

The 2016-1 Class 11 notes attach at the same level as the Residential Re 2013-1 and 2015-1 Class 11 notes, which paid investors coupons of 8% and 6% respectively.

Finally the 2016-1 Class 13 notes attach at the same level as the Residential Re 2014-1 Class 13 notes, which paid investors a coupon of 3.5%.

So again, it’s clear that pricing will be more attractive than the similar deals for the two riskier tranches, for the Class 10 and 11 notes. Of course it’s important to note the expansion of the covered perils, suggesting even greater value for USAA from this its latest cat bond deal.

However, the lowest risk Class 13 notes in this Residential Re 2016-1 cat bond issuance could actually end up paying a higher coupon than the 2014-1 deal, reflecting investors demand for minimum returns on bonds with lower yields.

Update 1:

The tranches are now proposed as $50m to $75m for the riskiest Class 10 and mid-risk Class 11 notes, while the lowest risk tranche of Class 13 notes are now proposed as between $50m to $150m in size.

At the same time as the proposed upsize, all three tranches of notes have seen their price guidance reduced down to levels below the lowest end of initial guidance with the ranges tightened, again suggesting enough investors have received the transaction and its peril expansion positively.

The riskier Class 10 notes, which launched with price guidance of 11.75% to 12.75%, are now offered with guidance of 11.5% to 11.75%. The mid-risk Class 11 notes, which launched at 5.25% to 6%, are now offered at 4.75% to 5.25%. Finally, the lower risk Class 13 notes, which launched at 3.75% to 4.25%, are now offered with price guidance of 3.25% to 3.75%.

Update 2:

The lowest risk Class 13 tranche of notes have been given a ‘BB-(sf)’ rating by Standard & Poor’s.

Update 3: 

We understand that USAA is set to achieve its upsized target of $250m for this Residential Re 2016-1 cat bond issuance, an increase of 67% in terms of reinsurance capacity secured. At the same time the expectation is that pricing will settle today at the lowest end of the already reduced guidance, as the ILS investor market once again supports USAA’s risk transfer needs.

The Class 10 tranche of notes, which is the riskiest, is expected to be $65m in size. This tranche launched with price guidance of 11.75% to 12.75%, which was subsequently reduced to 11.5% to 11.75% and is now expected to price at the low-end of that reduced guidance at 11.5%. That is a multiple of 1.51 times the 7.58% expected loss.

The Class 11 tranche of notes are expected to hit $75m, which are the mid-risk of the three, launched with pricing guidance of 5.25% to 6%, which was reduced to 4.75% to 5.25% and is now set to price at 4.75%. With an expected loss of 2.13% these notes offer investors a multiple of 2.23 times.

Finally, the Class 13 lowest risk tranche of notes are anticipated to reach $110m in size, which launched with coupon guidance of 3.75% to 4.25%, which was then reduced to 3.25% to 3.75%, are expected to price at 3.25%. With the 0.62% expected loss these notes will offer a multiple of 5.24 times.

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 2016-1 Class 10 notes are triggered and if the estimates remain unchanged investors will face some losses. 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 a growing loss of principal.

Update June 4th 2019:

It appears that a reinsurance recovery may have been made under the Residential Re 2016-1 cat bond.

The Residential Re 2016-1 Class 10 notes tranche has had its principal reduced from the issued $65 million to $21,467,693, a roughly two-thirds reduction in the amount of notes left outstanding.

The maturity date for these notes is June 6th 2020, so still a year to run and be on-risk for.

The Residential Re 2016-1 Class 10 notes were marked down for bids as low as 7 in secondary broker pricing sheets, which suggested that investors expect this catastrophe bond to face more losses and an almost total loss of principal.

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