Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

USAA marketing Residential Reinsurance 2011 Ltd. catastrophe bond


USAA are seeking a return to the catastrophe bond market with the latest in their Residential Reinsurance series of transactions. Three tranches of Series 2011-1 notes are being issued by Cayman Islands domiciled special purpose reinsurance vehicle Residential Reinsurance 2011 Ltd. It will be their 16th natural catastrophe securitization to date.

The transaction will replace some of the cover afforded by their soon to mature Residential Re 2008 cat bond, the one that has been accumulating losses from the recent severe thunderstorms in the U.S. and eventually their 2009 transaction which has also been affected by the storms. Residential Re 2011 will provide USAA (and certain subsidiaries) with cover for a portion of their U.S. hurricane, earthquake, severe thunderstorm, winter storm, and wildfire exposure over a four year term with maturity expected in June 2015.

Of the three tranches, the Class 1 and 2 notes will provide protection on a per-occurrence basis while the Class 5 notes protect them on an annual aggregate basis. The Class 1 notes will cover a to be reported percentage of losses between an attachment point of $2 billion and an exhaustion point of $2.8 billion, the Class 2 notes between an attachment point of $1.3 billion and an exhaustion point of $2 billion, and the Class 5 notes losses between an attachment point of $1.382 billion and an exhaustion point of $1.758 billion. For covered events to qualify they must cause USAA a loss of at least $45m. This layering of protection will afford USAA with a well structured source of collateralized reinsurance cover, adding to the cover afforded by other current cat bonds they’ve issued.

This deal will, as with most recent transactions, use highly rated U.S. Treasury money market funds as a source of collateral. AIR Worldwide will be performing risk modelling and reset duties and the transaction will specify that the latest version available of their model will be used each year at the designated reset date. Goldman Sachs and Swiss Re Capital Markets are acting as joint structuring agents and joint book runners. Standard & Poor’s said today that it has assigned a preliminary rating of ‘B+’, ‘B-‘ and ‘B’ to the Class 1, 2, and 5 notes respectively.

This deal is said to be for $200m of cover split between the tranches but the deal report from Standard & Poor’s doesn’t mention that and it’s likely USAA will seek to secure as much cover as they can from this deal. The transaction provides broad cover over a range of risks with different attachment points and as such provides a good diversification offering for investors with minimised risk. As such, it the market can get over its current nervousness due to recent events this deal could prove popular.

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