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Original Risk: A Society for Change Agents

Estimate suggests Residential Reinsurance 2010 cat bond safe from Sandy


Sources tell us that one of the catastrophe bonds that has been considered to be at risk from losses due to hurricane Sandy may actually be safe, after an early loss estimate suggested no loss of principal to any of the classes of cat bond notes. As we wrote in an article published yesterday where we highlighted the cat bonds which had seen bid/offer price declines after Sandy, the aggregate tranche of notes from USAA’s Residential Reinsurance 2010 Ltd. cat bond was one which could be at risk.

Now, an update from the issuing entity has given an early estimate of the ultimate net loss suffered by USAA that would qualify for the Res Re 2010 cat bond and whether that would lead to any loss on any of the tranches of notes.

Residential Re 2010 had four classes of notes, all four are indemnity triggered but classes 1 to 3 are on a per-occurrence basis while class 4 are on an aggregate basis. Hence the Class 4 notes were likely the most at risk.

Based on the early loss estimates from sponsor USAA, which suggests a UNL range of $129m to $363m, there is no expected losses for any of the classes of notes issued by Residential Reinsurance 2010 at this time. We don’t know how this might impact the aggregate totals for the Class 4 notes as this is an unrated tranche of cat bond notes so there will not be any announcement on ratings impairment.

The trigger for the aggregate tranche of Class 4 notes is $1.050 billion, so at this time it seems extremely unlikely that losses would rise that much. However it can’t be totally ruled out as it is still very early days to be reporting UNL figures with any accuracy after an event such as Sandy. An effect Sandy will have on those notes though is a reduction in the amount of losses required from any future qualifying events to hit the trigger point, so effectively making the Class 4 notes a little more risky for the rest of their third and final loss period. The other three tranches are all per-occurrence and have higher trigger points so they all seem safe enough unless there is a dramatic increase in USAA’s loss estimates.

We don’t at this time know how this affects the Residential Reinsurance 2011 Ltd. (Series 2011-1) and the more recent Residential Reinsurance 2012 Ltd. (Series 2012-1) cat bonds, both of which have aggregate tranches of notes too and have already suffered some qualifying losses. Those tranches of notes are rated so we expect to hear from Standard & Poor’s in the coming days that the UNL from Sandy will qualify, as it’s well above the $50m deductible limit, and so reduce the aggregate losses required in future to trigger those notes even further. The unrated Class 7 tranche of notes of the 2012-1 deal are likely the most at risk as they have a low attachment point of $900m, however all these notes have annual resets when the annual aggregate limits are restored and so they just become a little more risky in the interim.

We will update you if/when we hear any more about the potential impact to these cat bonds.

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