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USAA targets $400m from Residential Re 2016-2, as pricing drops


Insurer USAA is seeking to upsize its latest catastrophe bond issuance, with the Residential Reinsurance 2016 Ltd. (Series 2016-2) transaction now targeting from $280m to $400m of reinsurance coverage for the firm and sources said that price guidance has been reduced on all three tranches.

U.S. military mutual primary insurer USAA returned to the catastrophe bond market just over a week ago, with what will be its 28th securitization of insurance risk as a catastrophe bond, confirming its position as the most prolific sponsor in the ILS market.

At launch the transaction was seeking $280m of fully collateralized reinsurance coverage against losses from multiple U.S. perils and across three tranches of notes with differing risk and return profiles.

All three tranches will provide USAA with coverage for 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, with all three notes structures as per-occurrence coverage and using an indemnity trigger.

All three tranches of notes have had their price guidance reduced, we understand, suggesting that ILS investors are once again prepared to support regular sponsors reinsurance coverage needs at attractive pricing. Of course it’s also reflective of investor appetite for cat bonds in a year when issuance hasn’t grown significantly.

The Class 2 tranche of Series 2016-2 notes being issued by Residential Re have not upsized and remain targeting $80m of cover. This tranche only has a one-year term and are structured as zero-coupon discount notes.

The Class 2 notes were initially offered to investors at a 91% to 91.75% discount to par (implying an 8.25% to 9% coupon equivalent), but this has tightened to 91.75% to 92.25% we understand, which implies a coupon equivalent in the range of 7.75% to 8.25%. This is the riskiest tranche of this Residential Re cat bond.

Meanwhile a Class 3 tranche of notes which have a four-year term launched targeting $100m of coverage, but now target $100m to $150m, we understand. This tranche launched with coupon guidance of 5.75% to 6.5%, but this has been reduced to 5.25% to 5.75% we’re told.

The final tranche, of Class 4 notes which also have a four-year term and are the least risky of the three, began life at $100m but now target between $100m and $170m of reinsurance cover for USAA. This tranche of notes launched with price guidance of 4% to 4.75%, but this has been reduced to 3.5% to 4%.

So USAA looks set to secure as much as $400m of reinsurance protection from the capital markets with this Residential Re 2016-2 cat bond deal and at reduced pricing, with all three tranches seeing guidance dropping to below the launch range.

Potential catastrophe bond sponsors should note that with investor appetite for new cat bonds high, capital markets coverage can be very attractively priced and now could be a great time to bring new transactions to market.

However it should be noted that the launch multiples on each tranche suggested there was some room to manoeuver on price, perhaps due to the inclusion of the “other perils” category which effectively makes this into a true all natural perils catastrophe bond cover.

The ILS investor community is familiar with providing this broader coverage through collateralised reinsurance and private ILS deals and now the catastrophe bond market has shown again that sponsors seeking broader cover can achieve it, as long as they can demonstrate their ability to manage and accurately report claims, as a larger sponsor like USAA no doubt can.

We’re told that this cat bond will be priced by the end of this week, but settlement is likely to be a couple of weeks later. We’ll update you when further information on the size and pricing of this Residential Reinsurance 2016 Ltd. (Series 2016-2) catastrophe bond become available.

We will keep you updated as this transaction comes to market and you can read about this and every other cat bond transaction since 1997 in the Artemis Deal Directory.

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