Last week Goldman Sachs, Lehman Brothers and Merrill Lynch were marketing a three-year bullet maturity $100 million hurricane risk catastrophe bond issue for United States Automobile Association (USAA), a triple-A rated sponsor.

The Ba2/BB+ (MDY/S&P) transaction has a similar structure to last year's Residential Reinsurance 2001 Ltd Catastrophe Linked Notes. As with last year's deal, investors in Res Re 2002 provide reinsurance coverage for three years to USAA against hurricane losses in the East and Gulf coast states.However, this year's deal also provides coverage for USAA's book of business in Hawaii.

Last year's transaction priced at three month Libor plus 4.99%, and the 2002 trade is talked at similar levels. This will be the second visible cat bond to date covering Hawaiian risk; and other than this change, the deal is almost identical to the 2001 issue, noted market sources.

This is an indemnity type transaction, whereby losses to investors are directly related to actual losses experienced by USAA due to a qualified hurricane in the covered areas during each of the three, one-year risk periods. Each year the deal resets its attachment point in an attempt to keep investors' risks consistent and capture any changes in USAA's book of business. If more than one qualifying event should occurin a given year, USAA has the discretion to choose which event will be used in calculatinglosses the investors.

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