Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

USAA targets $250m at lower pricing for Residential Re 2016 cat bond


U.S. military mutual insurer USAA is targeting an upsized $250m at lower and tightened pricing for its newest and 27th catastrophe bond, the three tranche, Residential Reinsurance 2016 Limited (Series 2016-1).

The insurers latest cat bond, which sees it looking to expand the coverage of its Residential Re series to include all natural peril events (except most floods) if defined as a catastrophe by PCS, launched just over a week ago, as a $150m cat bond split into three $50m tranches of notes.

All three tranches will provide USAA with a source of collateralised reinsurance for losses from tropical cyclone risks (including renter policy flood cover), earthquake (including fire following), severe thunderstorm, wildfire, winter storm, volcanic eruption, meteorite impact and the “other perils” across the U.S.

The reinsurance coverage is on an indemnity trigger and annual aggregate basis, and will cover USAA for a four-year term.

Having launched to target $150m of reinsurance protection across the three tranches, USAA’s cat bond has clearly been well received as sources told us that it is now being marketed at $150m up to $250m in size.

The tranches are now proposed as $50m to $75m for the riskiest Class 10 and mid-risk Class 11 notes, while the lowest risk tranche of Class 13 notes are now proposed as between $50m to $150m in size.

At the same time as the proposed upsize, all three tranches of notes have seen their price guidance reduced down to levels below the lowest end of initial guidance with the ranges tightened, again suggesting enough investors have received the transaction and its peril expansion positively.

The riskier Class 10 notes, which launched with price guidance of 11.75% to 12.75%, are now offered with guidance of 11.5% to 11.75%. The mid-risk Class 11 notes, which launched at 5.25% to 6%, are now offered at 4.75% to 5.25%. Finally, the lower risk Class 13 notes, which launched at 3.75% to 4.25%, are now offered with price guidance of 3.25% to 3.75%.

So, USAA looks set to grow its latest cat bond to a degree, while achieving pricing below the initial guidance on all tranches (as long as investors are receptive to it). The multiples will naturally come down, with the multiple on the riskiest Class 10 tranche set to be as low as 1.55 times the base expected loss, the mid-risk Class 11 tranche 2.46 times, and lowest risk Class 13 tranche 6 times, all at the upper ends of this reduced guidance.

It will be interesting to see where this cat bond does price, as it will provide a good indication of investor appetite across the three differing levels of risk available to them, as well as how accepting of the peril expansion they have been.

This Residential Reinsurance 2016 Ltd. (Series 2016-1) catastrophe bond continues to target pricing before the end of April and completion in early May, we understand. You can read all about this and every other catastrophe bond in the Artemis Deal Directory.

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