U.S. primary insurer USAA returns to the catastrophe bond market with a Residential Reinsurance 2014 Ltd. (Series 2014-2) deal, which again features some more of the unusual perils that featured in its deal earlier this year, meteorite impact and volcanic eruption risks.
This time, the Residential Re 2014-2 cat bond is a per-occurrence layer of protection, where as the Residential Reinsurance 2014 Ltd. (Series 2014-1) deal was an annual aggregate structure. Aside from that, we understand that there is much in common between this new cat bond and the one issued in May.
Residential Reinsurance 2014 Ltd., USAA’s latest Cayman Islands domiciled issuance vehicle, will issue its second series of notes this year. The Series 2014-2 issuance is targeting at least $100m of reinsurance protection, we understand, with a deal structured using an indemnity trigger on a per-occurrence basis and with a four-year term to December 2018.
The proceeds from the sale of the notes issued in this deal will be used to collateralize reinsurance agreements between USAA and Residential Re 2014. The reinsurance agreements will provide USAA with fully-collateralized reinsurance protection for certain U.S. tropical storm, earthquake, severe thunderstorm, winter storm, wildfire, volcanic eruption and meteorite impact risks.
Again, the two unusual perils featuring in this deal are the same as in the earlier 2014 issuance, more volcanic eruption and meteorite impact risks. These two perils are again a low contributor to the cat bonds expected loss we understand, but USAA clearly feels that having named protection for these remote risks is worthwhile and that ILS investors will support its needs with attractively priced protection for them.
The cat bond will provide USAA with reinsurance protection for a per-occurrence layer of its reinsurance program, from an attachment point of $2.175 billion to an exhaustion point of $3.188 billion, we understand. The initial attachment probability for the notes will be 2.26% while the initial expected loss will be 1.61%.
In terms of pricing expectations, we understand that the $100m of notes will be marketed to investors with a coupon guide range of 4.5% to 5.25%. That, even at the bottom end of pricing, is a multiple of expected loss to coupon of approximately 2.8X, which is aligned with average multiples seen during 2014.
AIR Worldwide is providing the risk modelling for the cat bond and Goldman Sachs and Swiss Re Capital Markets are joint structuring agents and bookrunners. Deutsche Bank Securities is co-manager.
The inclusion of meteorite risks will no doubt receive some attention again in the market and from the financial press, however despite this being a largely unmodelled (or perhaps unmodellable) risk it is not really what ILS investors need to worry about from the deal.
If there was a large meteorite impact in the U.S. the investors backing catastrophe bonds and reinsurance would likely have much larger losses to worry about that the USAA cat bonds and the impact to the market and economy could be catastrophic. However it is interesting to see it included again and if after another five USAA cat bonds meteorite continues to feature then it could become a bigger peril and contribution to the ILS market’s risk profile.