U.S. primary insurance group USAA has increased the target size of its new Residential Reinsurance 2017 Ltd. (Series 2017-1) catastrophe bond by 50% to as much as $450 million, as the company looks to take advantage of attractive cat bond market conditions.
With 28 catastrophe bond issues already under its belt, this 29th Residential Re 2017-1 transaction looks set to be among the largest USAA has ever sponsored.
When the transaction was launched, almost a fortnight ago, it was targeting a $300 million source of fully collateralized U.S. all natural perils reinsurance protection for USAA, across a four-year total term. The transaction will provide USAA with annual aggregate reinsurance protection on an indemnity trigger basis, with two tranches providing four years of cover and the other structured as a zero-coupon note with a single year term.
USAA has increased its targeted size for the deal, as investor appetite for catastrophe bonds continues to be strong, helping sponsors like the insurer secure upsized amounts of reinsurance from the capital markets. However the riskiest tranche of the deal has not been met with the strongest appetite, perhaps suggesting a difficulty fitting such risky tranches into the typically low volatility cat bond fund portfolios.
The Class 10 tranche of notes to be issued by Residential Reinsurance 2017 are now targeting between $40 million and $50 million of coverage, and this zero-coupon slice of cover has actually seen its pricing move out. This tranche was initially targeting $50 million at an offering price of 82.5% to 83.5% of par, but we now understand the price to have been fixed at 82.5%, equating to a 17.5% coupon.
The Class 11 notes, which began their life with a preliminary size of $150 million, are now targeting from $200 million to $250 million, we’re told. The pricing on this tranche, which launched with price guidance of 4.75% to 5.25%, now sits at a narrowed 4.75% to 5%.
Finally, the Class 13 tranche of notes, which began as a $100 million layer with coupon price guidance of 3% to 3.5%, now targets $125 million to $150 million and has price guidance at a narrowed towards the bottom of guidance 3% to 3.25%.
The appetite of the catastrophe bond investment community looks set to help USAA upsize on the reinsurance coverage it receives from the two lower risk tranches, which have risk profiles more akin to typical cat bond issues.
The more risky, zero-coupon tranche which is more akin to a collateralized reinsurance deal in its structure and rate-on-line payout, has not met with such strong demand it seems, but still looks set to secure another valuable layer of coverage lower down in USAA’s reinsurance tower.
USAA’s new Residential Reinsurance 2017 Ltd. (Series 2017-1) catastrophe bond is scheduled to complete in early May. We’ll keep you updated on this transaction as it comes to market and you can read about this and every other cat bond USAA has ever sponsored in the Artemis Deal Directory.