Insurance-linked securities (ILS) investors have shown their willingness to take on new levels of catastrophe reinsurance risk, helping USAA’s latest cat bond, Residential Reinsurance 2013 Ltd. (Series 2013-2), increase in size while price guidance has dropped to below the originally marketed range.
Sources told Artemis that investors have confirmed their interest in supporting both tranches of primary insurer USAA’s latest, and twenty-first, Residential Re catastrophe bond deal. The riskier, lower layer tranche of the deal will increase in size while pricing on both will follow trends and come in below the range the deal launched with.
The multi-peril cat bond transaction as a whole has increased in size by 25%, from $120m to a currently marketed size of $150m. The deal has not yet closed to investor subscriptions, Artemis understands, so there is a chance that it could grow a little further.
Interestingly, the tranche which has upsized is the riskier Class 1 tranche, which has a probability of attachment of 21.38%, an expected loss of 13.06% and was marketed with pricing guidance of 21% to 22%. This Class 1 tranche is now $80m in size, up by 60% from the $50m it was marketed at, showing that investors are happy to take this, perhaps most risky cat bond tranche issued, layer of catastrophe risk right at the bottom of USAA’s reinsurance tower.
The Class 1 tranche price guidance has also reduced, down to 20% to 21%, showing that investors are also willing to price this riskier layer at a level which likely makes it extremely attractive to USAA.
Meanwhile, the Class 4 tranche of notes, which is less risky with an attachment probability of 2.26%, an expected loss of 1.61% and launching with a pricing range of 5.75% to 6.5%, has remained the same size at $70m. Pricing expectation has however dropped to 5.25% to 5.75%, again showing ILS investors demand for new risk.
The fact that the riskier tranche has been upsized shows that investors are keen to support catastrophe reinsurance needs right at the bottom of their reinsurance towers. This is interesting, as cat bonds have typically been described as taking the upper layers of risk, while traditional reinsurance capital supports the bottom layers.
This shows that investors are keen to take on more of the higher paying, higher risk, layers of insurers reinsurance needs. It will send a message to other primary insurers that the capital market is open to this possibility and ILS investors have shown an appetite to get involved in lower levels of reinsurance programs.
Artemis understands that this deal will be priced early next week. We will update you once the final transaction size and price is understood.