Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

USAA bringing Residential Reinsurance 2012 Ltd. catastrophe bond to market


Regular, and prolific, catastrophe bond sponsor USAA is bringing another cat bond transaction to market through their latest Cayman Islands entity Residential Reinsurance 2012 Ltd. according to our sources. Residential Re 2012 will be their 18th transaction (details of every Residential Re cat bond can be found in our Deal Directory), again confirming USAA’s commitment to the insurance-linked securities market as a source of reinsurance capacity.

It’s always encouraging to see a long time sponsor of cat bonds regularly return to the market, and with 17 deals already under their belt USAA and their Residential series of cat bonds are awaited by investors who tend to appreciate the multi-peril approach of their cat bond strategy. This Residential Reinsurance 2012 Ltd. Series 2012-1 issuance follows along from their last few deals in seeking cover for five peak perils to which USAA is exposed.

Residential Reinsurance 2012 Ltd. will seek to issue three tranches of notes we are told, with each exposed to U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm, U.S. winter storm and U.S. wildfire risks. The deal will provide USAA with a source of fully collateralized reinsurance cover on both per-occurrence and aggregate basis over a four year period. The deal will use indemnity triggers for each tranche with differing attachment and exhaustion points allowing the cover to be tailored to fit nicely within their overall reinsurance program and alongside their other current cat bond coverages.

We are told that this deal will be at least $150m in size. A Class 3 tranche of notes is sized at $50m currently and will provide per-occurrence coverage for the five perils. A Class 5 tranche of notes is currently sized at $100m and provides cover on an annual aggregate basis. A Class 7 tranche of notes has not been given a size yet and will also provide cover on an annual aggregate basis for all perils. This structure should give USAA the opportunity to upsize the deal significantly if investor appetite is strong, which we suspect it will be, and if the price of the cover is attractive to USAA.

We’re told that the Class 3, per-occurrence notes will attach at $2 billion of losses, Class 5 annual aggregate notes attach at $1.571 billion of losses and the Class 7 annual aggregate notes attach at $900m. The Class 7 notes are much riskier therefor and will pay a much higher coupon to investors, we’re told they are unlikely to be submitted for rating.

The only other information we have on this deal at this stage is that Goldman Sachs and Swiss Re Capital Markets are both acting as structuring agents and bookrunners while AIR Worldwide will provide the risk modelling for Residential Reinsurance 2012-1.

It will be interesting to watch this deal come to market as its eventual size should be a good indicator of how attractive the pricing is compared to traditional reinsurance for USAA. Investor appetite is clearly high for cat bonds right now, particularly those paying high coupons, so we fully expect the deal to be over subscribed. It will be up to USAA how far they want to take it and how large it gets.

We’ll update you as and when any further information becomes available on this cat bond and as it progresses to market. Residential Reinsurance 2012 Ltd. Series 2012-1 has been added to our Deal Directory.

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