USAA’s estimate suggests all Residential Re cat bonds safe from Sandy loss

Insurer USAA, a regular visitor to the catastrophe bond market through their Residential Re series of deals, has released an estimated range for their ultimate net loss (UNL) from hurricane Sandy. As one of, if not the most, prolific primary insurer cat bond sponsors, the estimate will be welcomed by investors in the asset class. We wrote late last week that one of their deals was likely safe from principal losses, now it appears that all of their current cat bonds will not face direct losses.

USAA have issued a loss estimate update which puts a range of $129m to $363m on their UNL from hurricane Sandy. At this level there will be no direct impact to any of these three transactions Residential Reinsurance 2010 Ltd., Residential Reinsurance 2011 Ltd. (Series 2011-1) or Residential Reinsurance 2012 Ltd. (Series 2012-1) according to our sources.

Each of these three cat bond transactions have aggregate tranches of notes which could suffer from an erosion of the protection that the aggregate layer provides. In that range the UNL loss to USAA would qualify as a covered event under the terms of each cat bond we believe, so it is likely that the annual aggregate tranches of Residential Re cat bond notes will become effectively more risky.

Both the 2011 and 2012 deals have already suffered from some aggregate losses, but at the moment it does not look like Sandy would take them up to their trigger points, if the loss estimate remains in that range.

There are two other Residential Re cat bonds which currently provide cover, Residential Reinsurance 2010 Ltd. (Series 2010-II) and Residential Reinsurance 2011 Ltd. (Series 2011-2). At this time we don’t have exact details of the impact to these notes, but both are indemnity cat bonds (like the others) and only structured on a per-occurrence basis, meaning that with the loss estimate USAA have currently given they are most likely safe.