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Cat bond investors braced for new USAA claims

The Californian wildfires are expected to contribute to aggregate cat bond losses for the second year running, sources told sister publication Trading Risk.

USAA is expected to benefit from major cat bond recoveries this year after recouping capital from several ILS transactions in the 2017-2018 year as well.

The insurer’s aggregate series of cat bonds includes several notably high-risk layers providing it with cover over 12-month periods from 1 June to 31 May.

Earlier this year, Trading Risk reported that USAA was on track to reclaim $183mn from cat bonds for the 2017-2018 year.

And now, secondary market pricing indications show that investors are expecting another $227mn of losses.

Earlier this month, ahead of the Californian wildfires, USAA informed ILS investors that it had incurred $1.06bn of covered catastrophe losses since 1 June.

This would only trigger around $11mn of cat bond recoveries for the current risk year, Trading Risk has estimated.

But deals have been marked down far more steeply in anticipation of wildfire losses and attritional claims eroding more cat bond capital over the remaining risk period to 31 May 2019.

Two of USAA’s highest risk aggregate layers – the $65mn Residential Re 2016-1 class 10 notes and the $50mn Residential Re 2015-1 class 10 notes – are now expected to be a full loss to investors this year, after having already faced some claims in 2017. Both bonds exhaust at $1.28bn.

Meanwhile, the insurer’s newest high-risk aggregate cat bond layer – the $100mn Residential Re 2018 class 11 notes – are already being offered by secondary market sellers between 10 cents and 20 cents in the dollar, sources said.  

This represents a steep and rapid descent from average marks of around 89 cents on a couple of broker-dealer pricing sheets as of 9 November.

The 2018 class 11 layer includes coverage for auto losses that were not covered by USAA’s 2017 and prior-year cat bond transactions, which are expected to produce slightly higher losses for this tranche from Hurricane Michael and the wildfires.

Overall, the secondary pricing valuations on the ResRe bonds imply investors are pricing in another $227mn of cat bond claims from USAA this year.

However, the mark-downs could also reflect the volatility of the current cat bond market to some extent, with many sellers seeking to cash out holdings but few buyers emerging to kick-start trading.  

The insurer is the longest-running cat bond sponsor, having regularly raised ILS cover since 1997. Last year was the first time it had made a claim under its ILS issuances.

The ResRe aggregates are not the only cat bond instruments that are expected to be impacted by wildfire claims.

Investors are also marking Pacific Gas and Electric’s (PG&E’s) $200mn Cal Phoenix Re cat bond as a full loss following reports of electrical outages on the utility’s network ahead of the Camp Fire.

Morgan Stanley analysts have estimated that PG&E’s possible liabilities will be well above its reinsurance cover triggers, although no liability for the fire has yet been determined.


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