Residential Re Issues $350 Million Cat Bond for USAA

Personal lines insurer USAA has completed its 12th consecutive catastrophe risk securitization with Residential Reinsurance Ltd. through a $350 million private placement.

The ResRe catastrophe bond allows USAA to diversify its exposure to different weather perils and natural disasters along the coastal states, California and Hawaii.

Paul Berry, a spokesperson for USAA, said the insurer this year obtained more coverage at a lower price. The notes were issued in three tranches: The Class 1 deal ended up at $125 million at a reduced price of 675 basis points or 6.75%. USAA originally sought $100 million at 700-basis points.

For Class 2, where USAA sought $100 million at 1175 basis points, USAA managed to upsize the value to $124 million with a reduced price of 1150 basis points.

The Class 4 deal came in at $100 million at 525 basis points, Berry said. This year, the Class 4 transaction included additional perils, namely California wildfire, winterstorm, and severe thunderstorms.

The cat bond has an indemnity trigger, with payout based on actual losses.

With more than $125 billion in assets, USAA Group is one of the 10 largest property/casualty insurers in the United States based on policyholders' surplus. USAA group maintains a national spread of risk, with approximately 40% of its premium volume is derived from four catastrophe-prone states, Texas, California, Florida and Virginia, according to an A.M. Best Co. report.

In 2006, the insurer decreased its aggregate and occurrence reinsurance due to firm market conditions. However, availability was less of an issue in 2007, and the company purchased the largest amount of catastrophe reinsurance in the group's history. In addition, reinsurance funded by the capital markets has increased in relation to traditional reinsurance coverage, the report states.

USAA group also has more than $3.5 billion of external catastrophe reinsurance, including $899 million of capital market reinsurance. The group currently has a Best’s Financial Strength Rating of A++(Superior).

(By David Dankwa, senior associate editor, BestWeek: [email protected])