We now have more detailed information about the recently launched catastrophe bond transaction from U.S. primary insurer and military focused mutual insurer USAA. The $250m Residential Reinsurance 2013 Ltd. (Series 2013-1) is the 20th cat bond USAA has sponsored under the Residential Reinsurance banner, and once completed will take the total risk transferred via cat bonds by the insurer to over $5.4 billion in total.
Residential Reinsurance 2013 Limited is a recently registered Cayman Islands domiciled Class C insurer established by USAA to issue series of catastrophe bond notes.
This first Series 2013-1 issuance by Residential Re 2013 is designed to provide sponsor USAA, and certain affiliates, with a source of fully-collateralized indemnified risk transfer via a reinsurance agreement. The deal uses an indemnity trigger and will provide a source of both per-occurrence protection and aggregate protection to USAA for 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 the covered area.
The transaction is being marketed with a preliminary size of $250m and is split into two tranches of notes, a tranche of Class 3 notes sized at $95m and a tranche of Class 11 notes sized at $155m. The Class 3 tranche of notes provide protection on a per-occurrence basis and are being rated while the Class 11 notes provide protection on an annual aggregate basis and will not be rated.
The $95m Class 3 per-occurrence tranche of notes will cover a percentage of losses between an attachment point of $1.356 billion and an exhaustion point of $2.057 billion. The Class 3 notes have an attachment probability of 4.75%, an expected loss of 3.26% and an exhaustion probability of 2.27%. We understand that the Class 3 tranche of notes are being marketed with a coupon guidance range of 9.75% to 10.5%.
The $155m Class 11 annual aggregate tranche will cover a percentage of losses between an attachment point of $1.075 billion and an exhaustion point of $1.593 billion. These notes have an attachment probability of 4.55%, an expected loss of 2.1%, an exhaustion probability of 0.85% and are being offered with a coupon guidance range of 8.5% to 9.5%.
The Class 11 notes are therefore slightly less risky, according to the attachment probability and expected loss, despite the UNL attachment point actually being lower than Class 3. The reason for this, we understand, is due to the underlying reinsurance contracts meaning that the Class 11 notes have a franchise deductible applied so that only events causing an ultimate net loss of $50m or greater can be aggregated towards the trigger point. The Class 3 notes do require USAA to retain at least 10% of losses from its occurrence layer of reinsurance.
For the Class 3 tranche of notes, risk modeller AIR Worldwide’s analysis shows that one historical hurricane and three historical earthquakes generated ultimate losses that would have reached the attachment point for that tranche of notes; the 1938 “Northeast Clipper” hurricane ($1.626 billion), the 1906 San Francisco earthquake ($1.972 billion), the 1812 New Madrid earthquake ($1.828 billion), and the 1886 Charleston earthquake ($1.502 billion). None of these events would have reached the exhaustion point however. For the Class 11 aggregate notes we understand that no year on record has seen aggregate ultimate net losses high enough to breach the attachment point.
The U.S. hurricane and tropical cyclone covered area includes the following states; Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, and the District of Columbia. Earthquake coverage is for all 50 states and the District of Columbia. However, losses caused by fire following will not be covered in Hawaii or Alaska. Severe thunderstorms and winter storms coverage is for the 48 contiguous states and the District of Columbia. Wildfire protection is in California only.
Reporting agencies used for each peril are the National Hurricane Center for U.S. hurricane and tropical cyclones, the U.S. Geological Survey for earthquakes and Property Claims Services (PCS) for severe thunderstorm, winter storm and wildfire. With PCS acting as reporting agency it means that for an event to qualify for those perils it would have to have been designated a catastrophe event by it.
The proceeds from the sale of the two tranches of notes will be deposited in a reinsurance trust account and then invested in highly rated Treasury or Federal money-market funds.
Goldman Sachs and Swiss Re Capital Markets are acting as joint structuring agents and joint book runners for the transaction. Deutsche Bank Securities Inc. are co-manager. Deutsche Bank Trust Co. Americas are indenture trustee and collateral account provider. Kane (Cayman) Ltd. are administrator for the Res Re 2013 entity.
Standard & Poor’s has assigned its ‘B-(sf)’ preliminary rating to the Series 2013-1 Class 3 notes that are being issued by Residential Re 2013. The Class 11 notes have not been submitted for rating.
While this is the 20th catastrophe bond from USAA it is worth noting that none of its previous cat bond deals have ever faced any losses. A number of transactions have had covered events which resulted in qualifying losses on aggregate tranches but attachment points have never been reached.
As we said in our article when this deal launched, investor side sources we have spoken with suggest that Res Re 2013 has a good chance of increasing in size grow and there is some speculation in the market as to whether USAA will take advantage of recent cat bond pricing to grow this deal significantly given its track record and liking for cat bond protection.
That’s all the information we have on this 20th catastrophe bond from USAA for the moment. We’ll keep you updated as Residential Reinsurance 2013 Ltd. (Series 2013-1) and as always full details can be found in our catastrophe bond Deal Directory.
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