USAA has secured $295 million of fully-collateralized reinsurance protection from the U.S. primary military mutual insurer’s 30th catastrophe bond issuance, the Residential Reinsurance 2017 Ltd. (Series 2017-2) multi-peril deal, with pricing that has dropped to the bottom of guidance on the lower risk tranches of notes.
USAA’s latest cat bond launched at $225 million, but demonstrating that recent losses are not enough to dampen ILS investor demand this first cat bond to reach pricing after hurricanes Harvey, Irma and Maria has grown in size by 31% to reach $295 billion across the three tranches of notes.
More impressive though is the fact that USAA has secured this capital market backed reinsurance at pricing levels which, while a little higher, are not far off cat bond pricing a year ago and on the mid-risk tranche is not that far from deals seen earlier this year.
USAA has secured $295 million of per-occurrence reinsurance protection against losses from multiple perils, on an indemnity trigger basis and across four years with this deal. The cat bond covers losses from U.S. tropical cyclones (plus renter policy flood), earthquakes (plus fire following and renter policy flood), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact and other perils.
The riskiest Class 1 tranche of notes, a one-year zero coupon layer, launched at $50 million but grew to $55 million at pricing, we understand. The coupon guidance on this tranche had begun at 78% to 80% of par value, which was narrowed to 78% to 79% of par, and now has settled at 79% (the mid-point) offering a coupon equivalent return of 21%.
The Class 2, mid-risk, tranche launched at $100 million in size with price guidance of 12.5% to 13.5%. This tranche eventually grew to $110 million, with pricing that settled at the lowest end of guidance at 12.5%.
The final Class 3 tranche, the lowest risk, launched targeting $75 million of reinsurance, with coupon price guidance of 5.5% to 6.25%. This tranche has secured $130 million of protection, so the majority of the upsizing of this cat bond is here in this lower risk layer, while the coupon pricing settled at 5.5%, again the bottom of guidance.
As we wrote yesterday, this cat bond being the first out of the blocks to reach pricing will set a bar for the catastrophe bond market and is a good reflection of appetite of at least some of the ILS market’s investors.
It’s not that surprising that the lower risk tranches proved the most popular with cat bond investors and funds, given the market is still dealing with its losses from recent events. But the fact the pricing has finished so keenly is perhaps a little surprising as this does not reflect the large price increases that reinsurers have been hoping for, which could offer an insight into just how busy the cat bond market could be through the rest of this quarter and into 2018.