May 12, 2009 / 11:37 AM / 10 years ago

S&P rates insurer USAA's planned catastrophe bond

LONDON, May 12 (Reuters) - Standard & Poor’s has assigned preliminary ratings to insurer USAA’s forthcoming $150 million catastrophe bond, the credit rating agency said.

The $150 million deal, to be sold via Cayman Islands-based issuance vehicle Residential Reinsurance 2009 Ltd, will be split into three $50 million tranches, rated BB-, B- and BB- by S&P.

The deal will provide USAA and subsidiaries with three-year protection against losses over $35 million from U.S. hurricane and earthquakes, with one tranche also covering potential losses from severe thunderstorms, winter storms and wildfires.

Losses covered are restricted to those with respect to homeowners, dwelling, condominium owners, and renters policies, together with a factor applied to account for pleasure boat and inland marine floater policies, S&P said in a pre-sales report.

Goldman Sachs is structuring agent and bookrunner for the deal. AIR Worldwide Corp will be calculation agent, using data from the U.S. National Hurricane Center, U.S. Geological Survey, and industry body Property Claims Services.

The deal will not employ a total return swap (TRS), under which a counterparty is contracted to manage the collateral backing the bond and make up any shortfall, with the collateral instead invested in U.S. money market funds.

Interest payments on each tranche will be equivalent to the money market yield plus a premium.

The deal, USAA’s 13th catastrophe bond, is expected to be priced before the U.S. hurricane season starts on June 1.

Residential Re 2009 will be 2009’s seventh catastrophe bond, bringing year-to-date issuance to more than $1 billion.

Insurers have used catastrophe bonds since the 1990s to manage their exposure to natural disasters by transferring potential losses to investors, who receive a high interest rate but risk losing their principal if a catastrophe occurs. (Reporting by Catherine Evans; Editing by Jon Loades-Carter) (For additional news on the insurance-linked securities market, go to here )

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