LONDON (Reuters) – U.S. insurer USAA plans to raise $250 million of protection against natural disasters with the sale of a new catastrophe bond, despite the threat of a payout on previous such deals following Hurricane Sandy.
Standard & Poor’s said late on Thursday it had rated two tranches of cat bonds totalling $125 million being offered by United Services Automobile Association to cover itself against claims arising from hurricanes, earthquakes, thunderstorms, winter storm and wildfires in the United States.
USAA is also marketing two unrated notes for another $125 million, covering the same risks, said investors.
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 related to 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.
S&P warned on Monday that losses from Hurricane Sandy could trigger a payout on cat bonds issued by Residential Re in 2012 and 2011, and put the notes on watch with negative implications.
S&P is awaiting data from risk assessment firm AIR Worldwide and the calculation agent to work out the probability the bonds will be triggered.
S&P has rated two tranches of notes to be issued by Residential Re 2012 Ltd, Series 2012-II.
The Class 1 notes are being marketed at $75 million, and have been given a BB+ rating by S&P. The $50 million Class 2 notes have been rated BB. Both notes will use U.S. money market funds as collateral.
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, ac c ording to the S&P report and investors with knowledge of the deal.
The targeted issue sizes are indicative only and could change depending on the strength of investor demand.
AIR Worldwide will provide the risk modelling analysis, while Goldman Sachs and Swiss Re Capital Markets will help market and structure the bond.
(Editing by Catherine Evans)