U.S. primary and military mutual insurer USAA’s 22nd catastrophe bond issuance, Residential Reinsurance 2014 Ltd. (Series 2014-1), is progressing to market and is set to grow in size while pricing on each tranche of notes moves to the mid and upper end of guidance.
This latest cat bond from USAA features Residential Reinsurance 2014 Ltd., a Cayman Islands domiciled issuance vehicle, which is seeking to issue two tranches of Series 2014-1 cat bond notes to provide reinsurance protection for USAA and subsidiaries.
The Residential Re 2014-1 cat bond will provide fully-collateralized reinsurance protection across a range of U.S. perils, including tropical cyclones, earthquakes, severe thunderstorms, winter storms, wildfire, meteorite impact and volcanic eruption, on an annual aggregate basis and using an indemnity trigger.
At launch just over a week ago, Residential Re 2014-1 was targeting between $100m and $150m of protection, it was understood. Sources told Artemis today that this range has tightened and it is now expected that the cat bond will upsize to provide between $125m and $150m of cover.
At launch both tranches of notes being issued in this cat bond deal were said to be sized at $50m each. Sources told Artemis that the latest information is that the Class 10 tranche of notes is expected to grow to between $75m and $100m in size while the Class 13 tranche of notes remains at $50m.
The Class 10 notes are the riskier of the two, so the fact it is likely to upsize shows that investors are happy to support higher yielding cat bonds in the current pricing environment. The Class 10 notes have an attachment probability of 11.84% and an expected loss of 9.86%. The Class 13 notes have an attachment probability of 0.85% and an expected loss of 0.54%, so constitute a much more remote risk.
In terms of pricing, the riskier Class 10 notes launched with price guidance of 14% to 16% and Artemis understands that this tranche is now being marketed with a 15% coupon, so the middle of launch guidance. The Class 13, lower risk, tranche of notes meanwhile has moved from launch price guidance of 2.75% to 3.5% to the top of the range at 3.5% we understand.
That is encouraging from a point of view of investors finding a floor on pricing below which they are not prepared to be pushed. Even the more in-demand, higher risk/return tranche of notes has not priced right at the bottom, again showing investors have pricing targets that they want to achieve.
We understand that there remains a size limit of $150m on the Residential Re 2014-1 cat bond, so it is unlikely to grow any further. The transaction is due to be priced later this week so we should learn the final size at that time.