November 29, 2012 / 2:35 PM / 5 years ago

USAA sells first U.S. hurricane cat bond since Sandy

LONDON, Nov 29 (Reuters) - The first catastrophe bond to cover U.S. hurricane risk since superstorm Sandy will close on Friday after being increased in size by 60 percent due to high investor demand, according to market sources.

The $400 million bond sale by USAA will cover the U.S. insurer against potential losses from hurricanes, earthquakes, thunderstorms, winter storm and wildfires in the United States.

Its Residential Re 2012 Ltd, Series 2012-II bond had been marketed at a size of $250 million in four classes of notes.

The new transaction is the latest from USAA’s long-running Residential Re cat bond programme and is the 19th by the insurer, which sold the very first catastrophe bond in 1997.

Cat bonds allow insurers to pass on extreme risks, such as those from earthquakes or hurricanes, to capital markets investors, and are seen as an alternative to reinsurance.

The notes offer investors such as pension funds a high yield but they risk the loss of some or all of their principal if a major disaster occurs.

The deal follows Standard & Poor’s warning that losses from Sandy could trigger a payout on cat bonds issued by Residential Re in 2012 and 2011. The credit rating agency put the notes on watch with negative implications earlier this month.

The Class 1 notes will have a final size of $155 million and will be priced to yield 450 basis points more than benchmark Treasury Money Market Funds, while the $70 million of Class 2 notes will be priced at 575 bp over TMMF. The notes have been rated BB+ and BB respectively by S&P.

The Class 3 and 4 notes were not rated. The $95 million Class 3 notes will be priced at 1,275 bps over TMMF, and the $80 million of Class 4 notes at 1,900 bps.

The four tranches of notes will provide reinsurance cover for USAA against potential losses of between $850 million and $4.175 billion from a series of natural disasters over the next four years, according to the S&P pre-sale report and investors with knowledge of the deal.

Goldman Sachs and Swiss Re Capital Markets structured the deal and AIR Worldwide will provide the risk analysis.

The deal from USAA provides the insurer with a total of $600 million of protection, following another $200 million transaction under the Residential Re programme in May.

Total cat bond issuance to date stands at $5.6 billion, making year-end total issuance predictions from reinsurers, brokers and ILS funds of a $6 billion seem achievable.

-(Editing by Catherine Evans)

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