U.S. military mutual primary insurer USAA is back with its latest catastrophe bond, targeting $280 million of multi-peril coverage from a Residential Reinsurance 2016 Ltd. (Series 2016-2) issuance.
This is USAA’s 28th securitization of insurance risk as a catastrophe bond, continuing its prolific use of the capital markets as a source of reinsurance capacity.
The firm currently has more than $1.65 billion of cat bonds in-force providing it with fully collateralized reinsurance coverage and is now seeking to add a fresh $280 million or more with Residential Re 2016-2.
Sources told Artemis that again this latest Residential Re cat bond sees USAA looking to gain coverage for all of the main perils it faces in the United States, as like the firms Residential Re 2016-1 cat bond, which it sponsored in June, the firm has again expanded the peril description to include a category of “others”.
So USAA’s latest foray to the capital markets will see its Residential Reinsurance Ltd., its Cayman Islands based special purpose vehicle, seeking to issue three classes of notes to investors in order to fully collateralize underlying reinsurance agreements between the SPV and USAA.
In total, USAA is seeking at least $280 million of reinsurance coverage from this Residential Re 2016-2 transaction. All three of the classes of notes will be exposed to tropical cyclone risks (including renter policy flood cover), earthquake (including fire following), severe thunderstorm, wildfire, winter storm, volcanic eruption, meteorite impact and “other perils” across the U.S.
Coverage from all three classes of notes will be on a per-occurrence basis and each tranche will feature an indemnity trigger. One of the three tranches will provide coverage over just a single risk period for one year, while the other two will provide USAA with multi-peril reinsurance protection over a four year term.
The $80m Class 2 tranche of notes has the single year term and are structured as zero-coupon discount notes, Artemis understands. This is typically the case when an issuer wants to test ILS investors ability to take on a more reinsurance type of layer, so single year and using the discount structure to pay investors premiums upfront, through discounting the cost of the notes.
The Class 2 notes will have a modelled attachment probability of 7.53% (that’s an attachment point of $1.015bn) and an expected loss of 5.55% base and 6.35% at the sensitivity case, and will be offered to investors at a 91% to 91.75% discount to par (implying an 8.25% to 9% coupon equivalent). These are the riskiest tranche with the lowest multiple equivalent.
A $100m Class 3 tranche of notes will have a four year term, with an attachment probability of 4.12% (equivalent to a $1.539bn attachment point), an expected loss of 2.91% at the base case or 3.29% sensitivity, and are being marketed to investors with coupon guidance of 5.75% to 6.5%.
Finally, a $100m Class 4 tranche of notes are the least risky of the three, providing their reinsurance ocver over a four year term, with an attachment probability of 2.13% (or $2.3bn of losses to USAA), a base expected loss of 1.53% and a sensitivity case EL of 1.72%. This tranche of notes are being offered to investors with price guidance of 4% to 4.75%, we’re told.
Once again USAA is coming to market with a new catastrophe bond issue that will offer a range of risk and return profiles to investors, while providing it with further capital markets participation in its reinsurance tower.
These aren’t the riskiest cat bond notes that USAA has ever sponsored and in terms of pricing they are not really pushing the multiples down significantly, but they are aligned with some of its other recent transactions.
This transaction is the first of Residential Re’s catastrophe bonds to include the “other perils” category and to be structured for per-occurrence coverage. The continued expansion and innovation that we see from USAA in its use of the capital markets is encouraging as its practices will likely be emulated by other existing cat bond sponsors and could encourage new sponsors to try out the capital markets for their reinsurance needs.
Goldman Sachs and Swiss Re Capital Markets are leading this cat bond transaction, acting as joint structuring agents and bookrunners, while Citigroup is acting as a joint bookrunner. AIR Worldwide is risk modeling agent.
USAA is targeting a mid-November issuance for its new $280m Residential Reinsurance 2016 Ltd. (Series 2016-2) catastrophe bond, we understand.
We will keep you updated as this transaction comes to market and you can read about this and every other catastrophe bond issued since 1997 in the Artemis Deal Directory.