USAA’s latest catastrophe bond, the U.S. multi-peril, three tranche Residential Reinsurance 2016 Limited (Series 2016-1), is set to achieve the insurers upsized target of $250m of collateralised reinsurance cover, with all three tranches expected to price at the lowest end of the already reduced guidance.
When the Residential Re 2016-1 catastrophe bond launched just over a week ago USAA was targeting a a $150m cat bond issuance split across three $50m tranches of notes.
The ResRe 2016-1 cat bond will provide USAA with a four-year source of collateralised reinsurance for losses from tropical cyclone risks (including renter policy flood cover), earthquake (including fire following), severe thunderstorm, wildfire, winter storm, volcanic eruption, meteorite impact and the “other perils” across the U.S, on an indemnity trigger and annual aggregate basis.
We understand that USAA is set to achieve its upsized target of $250m for this Residential Re 2016-1 cat bond issuance, an increase of 67% in terms of reinsurance capacity secured. At the same time the expectation is that pricing will settle today at the lowest end of the already reduced guidance, as the ILS investor market once again supports USAA’s risk transfer needs.
The Class 10 tranche of notes, which is the riskiest, is expected to be $65m in size. This tranche launched with price guidance of 11.75% to 12.75%, which was subsequently reduced to 11.5% to 11.75% and is now expected to price at the low-end of that reduced guidance at 11.5%. That is a multiple of 1.51 times the 7.58% expected loss.
The Class 11 tranche of notes are expected to hit $75m, which are the mid-risk of the three, launched with pricing guidance of 5.25% to 6%, which was reduced to 4.75% to 5.25% and is now set to price at 4.75%. With an expected loss of 2.13% these notes offer investors a multiple of 2.23 times.
Finally, the Class 13 lowest risk tranche of notes are anticipated to reach $110m in size, which launched with coupon guidance of 3.75% to 4.25%, which was then reduced to 3.25% to 3.75%, are expected to price at 3.25%. With the 0.62% expected loss these notes will offer a multiple of 5.24 times.
The reduction in pricing over the marketing life of this Residential Re 2016-1 catastrophe bond is not that surprising. Given the inclusion of the “other perils” classification, which allows USAA to define other natural peril events to include under the coverage, excluding flood, a higher guidance level of coupon was likely thought required.
However, the “other perils” classification, defined as “any naturally occurring event that is identified as a catastrophe and assigned a catastrophe code by Property Claims Services (PCS)”, is considered to add very little to the attachment probability of these ResRe 2016 cat bond notes, according to rating agency Standard & Poor’s.
S&P explained that there are “no examples of other peril events resulting in losses in the covered area in any material amount to USAA. The impact of unmodeled risks including other perils added four basis points (bps) to our estimate of the probability of attachment.”
So it’s likely that this cat bond was marketed with higher price guidance in case investors had any concerns regarding the inclusion of additional, unmodelled perils. But after analysis investors and ILS fund managers that want to invest in these notes are clearly not concerned, like S&P and appreciate that the “other perils” contribute only a very small percentage of the expected losses associated with this cat bond, enabling the price to decline significantly.
The multiples remain aligned with other transactions and in fact the lowest risk Class 13 notes offer a particularly high multiple for a lower coupon tranche of a cat bond.
This Residential Reinsurance 2016 Ltd. (Series 2016-1) catastrophe bond is expected to be priced today at the levels detailed above and completion is expected in May, we understand. You can read all about this and every other catastrophe bond in the Artemis Deal Directory.