At a time when the catastrophe bond market is still uncertain about the impact, or otherwise, of hurricane Sandy on exposed cat bond notes it is encouraging to hear that demand for new issuance remains high. The latest cat bond deal to be marketed in 2012 is the 19th Residential Re transaction from regular sponsor USAA. This cat bond deal, Residential Reinsurance 2012 Ltd. (Series 2012-2), began as a $250m deal but we’re told will upsize by 60% to $400m before it completes.
Given Sandy’s impact and the creeping spectre of a large re/insurance industry loss, you might have thought that investors would be put off new cat bond deals until the impacts of that storm are fully understood. That’s not the case though, interest and demand from investors remains at an all time high. Capital continues to flow into the reinsurance-linked investment sector. USAA, with their 19th Res Re cat bond look set to reap the benefits of this as their latest deal increases from the $250m it began marketing at to the $400m we’re told it’s likely to complete at.
Through this cat bond USAA are seeking 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. The deal is split into four tranches, two of which are rated and two unrated. All four tranches provide multi-peril cover using an indemnity trigger.
Interestingly, two tranches have seen pricing expectations drop to below the initially marketed range while the two riskier, unrated tranches have seen their pricing guidance tighten and aim towards the upper end of the initially marketed range. This is perhaps an acknowledgement that not every risk can price more cheaply, as we’ve seen in the cat bond market in recent months, and perhaps signals that investors are not prepared to take on riskier tranches too cheaply after Sandy.
All four tranches of notes have increased in size. Class 1 has doubled from $75m to $150m, Class 2 increased from $50m to $70m, Class 3 jumped from $75m to $95m and the Class 4 notes increased from $50m to $80m. Pricing wise, the Class 1 notes began at 5.0% to 6.0% and have dropped to 4.5% to 5.0%, Class 2 has gone from 6.25% to 7.25% and dropped to 5.75% to 6.25%, 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% finally the Class 4 notes began at 18.0% to 19.5% but have priced upwards to 18.5% to 19.5%.
It’s encouraging to see this deal grow in size significantly and we hope it will spur the primary cat bond market into life, we understand some new cat bonds may have been held back while Sandy’s impact unfolds. It shows that appetite is sufficiently high to increase even riskier tranches of notes in size, the Class 4 notes in this deal have an attachment probability of 9.31%.
We’ll keep you updated as Residential Reinsurance 2012 Ltd. Series 2012-II progresses towards completion and you can find all of the details on this transaction in our catastrophe bond Deal Directory.