The Residential Reinsurance 2013 Ltd. (Series 2013-1) catastrophe bond from regular cat bond sponsor U.S. primary insurer and military focused mutual insurer USAA completed successfully last Friday. The completion of its 20th Residential Re cat bond sees USAA benefit from a new $300m source of fully-collateralized reinsurance for a range of U.S. perils.
USAA is the most prolific primary insurer sponsor of catastrophe bonds, with 20 transactions under the Residential Re banner now completed. Between those 20 deals, the insurer has benefitted from over $5.4 billion of fully-collateralized risk transfer supported by investors in the capital markets.
With the completion of this Series 2013-1 issuance through Cayman Islands domiciled special purpose vehicle Residential Reinsurance 2013 Ltd., USAA has secured a $300m source of fully-collateralized reinsurance protection, both per-occurrence and aggregate cover, using an indemnity trigger. The deal covers USAA for personal-lines losses over a four-year risk period for the perils of U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm, U.S. winter storm and California wildfire within the defined coverage area.
The deal involves two tranches of notes. It began marketing with a preliminary size of $250m with a per-occurrence tranche of Class 3 notes sized at $95m and an annual aggregate tranche of Class 11 notes sized at $155m. While marketing the deal upsized, as the Class 11 tranche grew in size by $50m to offer $205m of notes. That was a 32% increase in size for the Class 1 notes and a 20% increase in size for the transaction as a whole.
The Class 3 per-occurrence tranche of notes cover a percentage of losses between an attachment point of $1.356 billion and an exhaustion point of $2.057 billion. The Class 3 notes have an attachment probability of 4.75%, an expected loss of 3.26% and an exhaustion probability of 2.27%.
The Class 11 annual aggregate tranche of notes will cover a percentage of losses between an attachment point of $1.075 billion and an exhaustion point of $1.593 billion. These notes have an attachment probability of 4.55%, an expected loss of 2.1% and an exhaustion probability of 0.85%.
The Class 11 notes are therefore slightly less risky, according to the attachment probability and expected loss, despite the UNL attachment point actually being lower than the Class 3 notes. The reason for this, we understand, is due to the underlying reinsurance contracts meaning that the Class 11 notes have a franchise deductible applied so that only events causing an ultimate net loss of $50m or greater can be aggregated towards the trigger point. The Class 3 notes do require USAA to retain at least 10% of losses from its per-occurrence layer of reinsurance.
As with all recent cat bonds the pricing also dropped during the marketing phase of the transaction. The Class 3 notes began marketing with a coupon range of 9.75% to 10.5%, which dropped to 9.25% to 9.75% before pricing at the bottom of that adjusted range at 9.25%. That’s a drop in the risk spread on these notes of approximately -9% from the mid-point of the originally marketed range.
The Class 11 notes launched with a marketed price range of 8.5% to 9.5%, to a reduced range of 8% to 8.5% but finally priced at the lower end of the reduced range at 8%. That equates to a drop in risk spread of around -11% from the mid-point of the coupon pricing range these notes launched with.
The risk spreads achieved by the bookrunners on behalf of the sponsor in this transaction appear to be lower than any other tranche issued by USAA in its long history in the cat bond market, on a comparable basis. That could make this 2013 cat bond issuance the most cost-effective in USAA’s long relationship with the cat bond market and capital markets investors, a very telling statistic about the growing acceptance of catastrophe risk in investment markets. You can see some comparisons with earlier Res Re cat bond tranches in this article.
Only one of the tranches of notes has been rated, the Class 3 per-occurrence notes. Rating agency Standard & Poor’s said on Friday that it assigned its ‘B-(sf)’ rating to the Series 2013-I Class 3 notes issued by Residential Reinsurance 2013 Ltd.
The Cayman Islands Stock Exchange admitted the Residential Reinsurance 2013 Limited variable rate note program and the two tranches, the $95m Series 2013-1 Class 3 notes and $205m Series 2013-1 Class 11 notes, to its official list.
USAA’s Residential Reinsurance 2013 Ltd. (Series 2013-1) catastrophe bond coverage was timed to come into play just in time for the start of the U.S. Atlantic hurricane season. You can read all about this transaction, as well as every other USAA sponsored catastrophe bond in our Deal Directory.