Swiss Re Insurance-Linked Fund Management

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Further details on the Residential Re 2012 catastrophe bond


Further details have emerged about the Residential Reinsurance 2012 Ltd. catastrophe bond which is being marketed on behalf of sponsor USAA. The transaction, USAA’s eighteenth cat bond, is another multi-peril deal which will see them tap the capital markets for additional cover. Given the appetite of investors for cat bonds recently it will be interesting to see how large this deal becomes. At the moment it is said to be a minimum of $150m across two of the three tranches, with the third tranche as yet unsized.

Residential Reinsurance 2012 Ltd. is issuing three tranches of notes. Each are exposed to U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm, U.S. winter storm and U.S. wildfire risks. The deal will provide USAA with a source of fully collateralized reinsurance cover on both per-occurrence and aggregate basis’ over a four year period until May 2016. The deal will use indemnity triggers for each tranche with differing attachment and exhaustion points so that the cover can be tailored to fit within overall reinsurance program and alongside their other current cat bond coverages.

Standard & Poor’s have now published a rating report on the transaction, although they are only rating two of the three tranches which are being offered. The Class 3 tranche of notes which will provide per-occurrence coverage have been rated ‘BB-‘ while the Class 5 notes which provide annual aggregate coverage have been rated ‘BB’. The Class 7 notes which are also annual aggregate will not be rated.

The S&P rating report shows us that Deutsche Bank Securities are acting as a co-manager on this cat bond alongside joint structuring agents and joint book runners Goldman Sachs and Swiss Re Capital Markets. While AIR Worldwide are the risk modeller and calculation agent, the reporting agencies are the U.S. National Hurricane Center for hurricane, United States Geological Survey for earthquake and Property Claims Service for severe thunderstorm, winter storm, and wildfire.

The notes issued cover personal lines losses only for each peril in the covered areas. USAA are retaining at least a 10% share of losses in the attachment layer for the Class 3 and Class 5 notes. The minimum net loss to USAA from an event so that it will qualify under the terms of the deal is $50m. This will help to appease investors about the severe thunderstorm cover included as many events will not be covered under this deal with the minimum loss size in the terms.

S&P reveal some detail on the historical modelling that has been done for this transaction. For the Class 3 notes, for hurricane, there have been no recorded historical events since 1900 with losses that would have reached the attachment level, and for earthquake, there have been no recorded historical events since 1800 with losses that would have reached the attachment level. According to S&P the events that generated the greatest ultimate net losses were the 1906 San Francisco earthquake ($1.956 billion), the 1812 New Madrid earthquake sequence($1.782 billion), the 1938 “Northeast Clipper” hurricane ($1.589 billion), and the 1886 Charleston earthquake ($1.539 billion).

For the Class 5 notes, when combining hurricane, earthquake, and winter storm, on a historical basis there have not been any years with aggregate losses that would have reached the attachment level. The three years with the largest estimated aggregate ultimate net losses were 1954, 2004, and 2005, with loss estimates of $943 million, $782 million, and $775 million, respectively. Even the 2011 season of severe thunderstorms and tornadoes is said not to hit the attachment point for the aggregate notes.

Hurricane cover is for 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 cover if for all 50 states and the District of Columbia. Earthquake cover includes fire following except for in Alaska and Hawaii. Severe thunderstorm and winter storm cover is in the 48 contiguous states. Wildfire cover is for California only.

Proceeds for the sale of the cat bond notes will be deposited in a different reinsurance trust account for each tranche of notes and invested in highly-rated Treasury money market funds.

Our deal directory entry for Residential Reinsurance 2012 has been updated as well and will be updated further if anymore details become available. We’ll update you as the transaction progresses to market.

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