USAA is planning to issue another $280 million of catastrophe bonds through its Residential Re platform.

Standard & Poor’s expects to assign B- and B ratings to the Series 2016-II class 3 and 4 notes, respectively, which cover losses in all 50 states and the District of Columbia from tropical cyclones (including flood coverage for renters policies), earthquakes (including fire following), severe thunderstorms, winter storms, wildfires, as well as more remote risks, such as volcanic eruption, meteorite impact, and other perils.

S&P’s presale report does not indicate the size of the offering, but website Artemis reports that the two tranches total $280 million.

Goldman Sachs and Swiss Re are the joint structuring agents and joint book runners; Citigroup is also a book runner.

Catastrophe bonds are a form of reinsurance; they transfer the risk of losses from natural disasters to capital markets investors; if a qualifying event occurs, investors forfeit their principal, which is used by the sponsor to pay insurance claims.  In the meantime, the principal is invested in money market funds.

The coverage lasts four years, until December 2020, and is by triggered by a single event. (By comparison, some cat bonds can be triggered by cumulative losses over multiple events.)

The class 3 notes will cover a percentage of losses (not specified in S&P’s presale report) incurred by USAA policyholders between $1.539 billion and $2.30 billion.  At that point, the class 4 notes will cover a percentage of losses up to $3.236 billion.

USAA maintains other forms of reinsurance for these layers. However, it will be required to retain at least 5% of the ultimate loss from each loss occurrence

Based on analysis by risk modeling firm AIR, there have only been four events producing losses that would have been sufficient to trigger coverage by the class 3 notes: the 1938 Great New England Hurricane would have triggered a principal loss of 48%, while the earthquakes of 1906 in San Francisco; 1811-1812 in the New Madrid Seismic Zone, and 1886 in Charleston, South Carolina, would have triggered principal losses of 100%, 48%, and 28%, respectively.

This is USAA’s 28th securitization of insurance risk as a catastrophe bond; the firm currently has more than $1.65 billion of cat bonds in-force, according to Artemis.

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