Swiss Re Insurance-Linked Fund Management

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Residential Reinsurance 2012-2 cat bond prices at lower end of range


The latest catastrophe bond to come to market has now priced and is expected to formally close by the end of this week, according to our sources. Residential Reinsurance 2012 Ltd. (Series 2012-2) is the 19th transaction from regular cat bond sponsor USAA and the first to come to market containing U.S. hurricane risk since Sandy. Residential Re 2012 has been very well received, with strong investor demand helping it upsize by 60% to $400m and achieve very attractive pricing.

Through their latest Residential Reinsurance cat bond USAA have secured themselves a $400m capital markets source of fully-collateralized reinsurance cover for U.S. perils including hurricane, earthquake, severe thunderstorm, winter storm and California wildfire on a per-occurrence basis. The deal is split into four tranches, two of which are rated and two, which are much riskier are unrated. All four of the tranches provide multi-peril per-occurrence reinsurance cover using an indemnity trigger.

The two rated tranches have priced at the bottom end of the reduced expected range, meaning that over the course of marketing this deal USAA have significantly cheapened the price of the cover from those two tranches of cat bond notes. The unrated tranches finally priced slightly up on the mid-point of the original expected ranges. Pricing history of this cat bond over the course of the marketing period can be found below.

Class 1:

  • Doubled in size from $75m to $155m.
  • Pricing expectations began at 5.0% to 6.0%, dropped to 4.5% to 5.0% and finished at 4.5% (a reduction of 1% or 100bps from the original mid-point).

Class 2:

  • Increased in size from $50m to $70m.
  • Pricing expectations began at 6.25% to 7.25%, dropped to 5.75% to 6.25% and finished at 5.75% (a reduction of 1% or 100bps from the original mid-point).

Class 3:

  • Increased in size from $75m to $95m.
  • Pricing expectations began at 12.25% to 13.25%, tightened to 12.75% to 13.25% and finished at 12.75% (pricing right on the original mid-point).

Class 4:

  • Increased in size from $50m to $80m.
  • Pricing expectations began at 18.0% to 19.5%, tightened to 18.5% to 19.5% and finished at 19.0% (pricing higher than the original mid-point by 0.25%).

We’re told that Classes 1 and 2 were oversubscribed due to investor demand while 3 and 4 also saw strong demand but investors were not keen enough to take the higher risk notes for them to price downwards. It’s encouraging to see this deal complete so successfully as it tests both the top end of cat bond investors risk-appetite and the bottom end in the same deal.

This leaves the catastrophe bond market empty for the moment, with no other deals currently being marketed. There is still an expectation from investors that more transactions will come to market in the final few weeks of the year but we now hear that some deals may move into 2013 due to continuing uncertainty around Sandy industry losses. We’ll update you as soon as we hear of any other new transactions coming to market.

This transaction closes later this week. You can read more details on Residential Re 2012-2 in our catastrophe bond Deal Directory.

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