LONDON Feb 20 U.S. insurer USAA will not be
able to cash in on two of its catastrophe bonds, because losses
from superstorm Sandy and other 2011 natural disasters were not
high enough to trigger a payout, Standard & Poor's said.
Insurers and reinsurers use "cat bonds" to manage their
exposure to natural disasters by transferring some of the risk
to capital market investors.
Cat bond investors such as pension funds receive an income
in return for agreeing to pay some of the issuers' claims if an
earthquake or hurricane strikes and losses from it meet a
Ratings agency S&P took the two bonds - 2011 and 2012 class
5 notes sold through USAA's Residential Re vehicle - off
CreditWatch Negative, meaning it now considers them to be less
risky for investors than it previously estimated.
It downgraded the two cat bonds in November, believing at
the time that the risk to investors had increased as a result of
Sandy, which crashed into the U.S. east coast in October,
causing billions of dollars' worth of damage as it wrecked homes
The transactions are structured as "aggregate" bonds,
meaning they only result in a payout if there are enough losses
on an annual basis to reach a pre-agreed trigger point.
Losses for USAA from Sandy and other natural disasters in
2011, such as tornadoes that struck central and northeast U.S.
in June, did not amount to enough to trigger a payout, S&P said.
The trigger points were $1.365 billion for the Res Re 2011
notes and $1.571 billion for the Res Re 2012 bond. Both are due
to mature on May 31.
S&P said it had received updated loss estimates from USAA
concerning Sandy and the U.S. tornadoes and the new estimate of
covered losses from the four events was less than the total
estimated in November.
- For more details on cat bond transactions, see the
Thomson Reuters Insurance Linked Securities Community, click here.
(Reporting by Sarah Mortimer; Editing by Helen Massy-Beresford)