Residential Re 2013 cat bond prices at low end of reduced guidance

The Residential Reinsurance 2013 Ltd. (Series 2013-1) catastrophe bond, the 20th Res Re cat bond deal from prolific sponsor the U.S. primary insurer and military focused mutual insurer USAA, has now priced. Once again, as with all recent cat bond deals, the risk premium paid to investors has dropped even further by the time the transaction was priced. The final pricing is significantly lower than comparable tranches of earlier ResRe cat bonds.

The Residential Re 2013 cat bond had increased in size to $300m and saw the price guidance range on both tranches of notes reduced a few days ago as it was still being marketed to investors. Today we understand from sources that the deal has reached its final pricing and that the risk premium on both tranches of notes settled at the lowest marketed point, at the bottom of the already reduced coupon guidance range.

The cat bond will provide sponsor USAA with a $300m source of fully-collateralized reinsurance, both per-occurrence and aggregate protection, using an indemnity trigger. The deal covers personal-lines losses over a four-year risk period for the perils of U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm, U.S. winter storm and California wildfire within a defined covered area.

When we wrote about the deals upsizing and price drop a couple of days ago the price guidance had dropped on both tranches of notes and one tranche had grown in size by $50m.

The Class 3 notes did not grow in size, still offering the $95m of notes they were launched with, but began marketing with a coupon range of 9.75% to 10.5%, which dropped a few days ago to 9.25% to 9.75% before pricing today at the bottom of that adjusted range at 9.25%. That’s a drop in the risk spread on these notes of approximately -9% from the mid-point of the originally marketed range.

The Class 11 notes upsized by $50m to offer $205m of notes. They launched with a marketed price range of 8.5% to 9.5%, to a reduced range of 8% to 8.5% but priced today at the lower end of the reduced range at 8%. That equates to a drop in risk spread of around -11% from the mid-point of the coupon pricing range these notes launched with.

Sponsor USAA will be pleased with the pricing this cat bond has achieved. Comparing the tranches with some of its older deals, which have comparable attachment points, it is clear how much pricing in the cat bond market has dropped in 2013.

The 2013-1 Class 3 notes are per-occurrence cat bond notes, attach at $1.356 billion of losses to USAA which will pay investors 9.25%. A comparable tranche which sit close to those notes in USAA’s reinsurance tower would be the Residential Reinsurance 2011 Ltd. (Series 2011-2) Class 2 per-occurrence notes which pay investors 13.25%. So a rough comparison shows a 4% drop in coupon which could equate to as much as 30% cheaper protection for USAA.

The 2013-1 Class 11 notes are aggregate notes, attach at $1.075 billion of losses to USAA and will pay investors an 7% risk spread. There isn’t a directly comparable tranche of notes but we could take the Residential Reinsurance 2012 Ltd. (Series 2012-1) aggregate Class 5 notes, which attach much higher up at $1.571 billion of losses but priced at the same level of 8%. So the 2013-1 Class 11 notes provide significantly riskier aggregate protection at the same risk premium to investors.

Once again capital market institutional and specialist ILS investors have shown their appetite for catastrophe and reinsurance risk in cat bond form, enabling a sponsor to secure coverage at a greatly reduced price compared to previous years issuances.

The Residential Reinsurance 2013 Ltd. (Series 2013-1) catastrophe bond is expected to complete at the end of May bringing the coverage it provides into play just in time for the start of the U.S. hurricane season. You can read all about the transaction in our Deal Directory and we’ll update you when the deal closes.