The most prolific sponsor of catastrophe bonds is back with its regular new issue timed for its mid-year reinsurance renewal. USAA has launched a Residential Reinsurance 2014 Ltd. (Series 2014-1) cat bond and the transaction features some new perils for the ILS market.
This is the 22nd catastrophe bond transaction sponsored by USAA that we have recorded since 1997 in the Artemis Deal Directory.
Residential Reinsurance 2014 Ltd., a Cayman Islands domiciled issuance vehicle, will seek to issue two tranches of Series 2014-1 cat bond notes on behalf of USAA and subsidiaries. The proceeds from the sale of the notes will be used to collateralize reinsurance agreements between USAA and Residential Re 2014. Artemis understands that USAA is looking for at least $100m of protection from this issuance, although sources said that it is capped for now at $150m across the two tranches as a maximum.
The Residential Re 2014 catastrophe bond will provide USAA and certain subsidiaries with reinsurance protection across a range of U.S. perils, including tropical cyclones, earthquakes, severe thunderstorms, winter storms, wildfire, meteorite impact and volcanic eruption.
Of that list of perils two are very unusual. This is the first catastrophe bond to provide cover for losses from meteorite impacts, a very remote risk likely only contributing a small amount to the cat bonds expected losses. It is also the first cat bond we have seen which explicitly includes cover for losses from volcanic eruptions. We have seen volcanic eruptions caused by earthquakes included in a cat bond before, but never as a standalone peril like this.
Before the market gets too excited about the addition of new diversifying perils to the ILS market it’s worth noting that these are extremely remote perils, also not well-modelled due to the lack of real data in the U.S., likely none within living memory for an impactful meteorite event. Therefore these aren’t likely to take the market by storm anytime soon, however volcanic eruption cover could prove useful in other countries around the world.
Perhaps more interesting is the potential for other extremely remote unmodelled perils to be included in future cat bonds and how that benefits sponsors. As investors may not charge much of a premium for such remote risks, despite the lack of data on them, it may be a way for sponsors to secure some cover for very remote, but potentially hugely damaging, events.
Back to Residential Re 2014. The reinsurance protection provided by this cat bond features an indemnity trigger and the cover is on an annual aggregate basis for both tranche of notes. The covered area is all 50 U.S. states for the perils of earthquakes, severe thunderstorms, winter storms, wildfire, meteorite impact and volcanic eruption, while tropical cyclone cover is for the usual Gulf Coast, Florida, East Coast, Hawaii states as well as a few further inland, which makes sense for wind cover on an aggregate basis. The term of the deal will be four years, we understand.
The first tranche of notes being issued by Residential Reinsurance 2014 Ltd. in this Series 2014-1 cat bond deal is a Class 10 tranche sized at $50m. These notes have an attachment probability of 11.84%, an exhaustion probability of 8.08% and an expected loss of 9.86%. These are risky cat bond notes, although not quite as risky as the tranche USAA issued last year. The attachment point is at $847m of losses and the exhaustion is at $947m, so covering a $100m layer of USAA’s program.
The second tranche is a Class 13 tranche of notes. These have an attachment probability of 0.85%, an exhaustion probability of 0.39% and an expected loss of 0.54%, so a much more remote risk. The attachment point is at $1.651 billion of losses and the exhaustion point is at $2.124 billion, so covering a large layer of USAA’s reinsurance program.
In terms of pricing guidance, the Class 10 tranche of notes, the riskier of the two, has price guidance of 14% to 16%. The Class 13 tranche is offered with guidance of 2.75% to 3.5%.
Interestingly, the Class 13 tranche is very similar in terms of attachment to a Class 5 tranche from USAA’s Residential Reinsurance 2012 Ltd. (Series 2012-1) cat bond. That tranche issued in 2012 priced at 8%, meaning that USAA’s 2014 cover from the Class 13 notes could price as much as 65% cheaper than it, if it priced at the bottom end of guidance at 2.75%.
We understand that Goldman Sachs and Swiss Re Capital Markets are joint structuring agents and bookrunners, while Deutsche Bank is co-manager for the transaction. AIR Worldwide is providing risk modelling services.
That’s all we have on the latest cat bond from USAA for now. The Residential Reinsurance 2014 Ltd. (Series 2014-1) catastrophe bond has been added to the Artemis Deal Directory. We will update you as it comes to market.