The 28th catastrophe bond from U.S. military mutual primary insurance USAA, Residential Reinsurance 2016 Ltd. (Series 2016-2), is set to achieve its upsize target and will provide the insurance firm with $400m of multi-peril, multi-year reinsurance cover Artemis understands.
USAA has secured the increase in fully collateralised reinsurance coverage, that we explained the insurer was seeking earlier this week when the Residential Re 2016-2 cat bond issuance lifted its coverage target from $280m to $400m.
The increase in size of USAA’s latest Residential Re catastrophe bond reflects strong appetite for new issues from ILS funds and investors, an appetite that has also been reflected in the pricing for this transaction.
As well as upsizing by 43% to the $400m in size, which will make this Residential Re 2016-2 cat bond USAA’s fourth largest catastrophe bond out of its 28 issuances, the pricing on all three tranches of notes dropped and ultimately settled at the bottom end of an already reduced guidance range.
Granted the pricing had seemed generous when this cat bond was launched, but clearly investor appetite has helped USAA to a very attractively priced layer of fully collateralised catastrophe reinsurance coverage with its latest ResRe cat bond.
The $80m Class 2 tranche of notes, which didn’t upsize, are structured as zero-coupon discount notes and have a one-year term. These were at first offered to investors at a 91% to 91.75% discount to par (implying an 8.25% to 9% coupon equivalent), which tightened to 91.75% to 92.25% or a coupon equivalent in the range of 7.75% to 8.25%. These notes settled at a discount to par of 92.25%, so a 7.75% coupon equivalent.
The Class 3 tranche of notes which have a four-year term upsized to the targeted $150m, while pricing again settled at the lowest end of reduced guidance. These notes launched with coupon guidance of 5.75% to 6.5%, which was reduced to 5.25% to 5.75%, but now has settled at the lowest end at 5.25%, we’re told.
The final tranche, of Class 4 notes which also have a four-year term, hit their $170m upsize target. This tranche launched with price guidance of 4% to 4.75%, which was reduced to 3.5% to 4%, and has now settled at 3.5% at the lowest end.
The Class 2 notes, which are riskiest, have a base expected loss of 5.55%, which with a 7.75% coupon equivalent to be paid to investors implies a multiple of 1.4 times EL.
The Class 3 notes have a base expected loss of 2.91%, so with a coupons of 5.25% these notes will offer investors a multiple of 1.8 times EL.
Finally, the Class 4 notes, which are least risky and have a base expected loss of 1.53% and the coupon of 3.5%, will pay investors a multiple of 2.3 times EL.
The multiples are not the lowest seen, but when you factor in the inclusion of a perils classification of “other”, which helps to make the reinsurance provided by this ResRe cat bond more of an all natural perils type cover, these price levels do demonstrate the very strong appetite for new issues among ILS investors and the increasing willingness to expand coverage for sponsors.
For USAA this visit to the capital markets has to be seen as a positive result, helping it to its fourth largest capital markets transaction ever, with expanded coverage at very attractive pricing.