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USAA’s loss reporting impresses market

Insurer explains impact of 2005 losses on its catastrophe bond.

This article appears courtesy of Reactions

The loss estimates that US insurer USAA began releasing to investors in 2005, detailing the likely impact to indemnity-based catastrophe bonds issued from its Residential Re shelf program, put the firm streets ahead of rival issuers this year, say securitization specialists.

USAA posted estimated losses to Residential Re’s bonds on the Bloomberg news service. The estimates were based on reported and incurred-but-not-reported claims for all outstanding bonds on a quarterly basis, giving investors an indication of how their tranche may be affected by natural disasters. Investors used that information to price their portion of the bond more accurately when trading in the secondary market.

Observers say USAA’s loss reporting was an example of how issuers should communicate with investors. “USAA’s reporting gave investors clarity as they were making assumptions before clearer event reports were released,” says Brett Houghton, vice-president in charge of catastrophe bond product management at investment bank Lehman Brothers.

Shiv Kumar, vice-president of the risk markets group at rival bank Goldman Sachs, which has lead-managed all of Residential Re’s transactions, agrees.

“USAA has made substantial investment over time in terms of talking to investors and explaining to them what was in their portfolio, how their underwriting, risk management and claims management works,” he says. Looking back, the company has truly benefited from those efforts to educate investors.”

Investors were so appreciative of USAA’s openness, believes Kumar, that they made space in their portfolios for Residential Re 2006 this year, despite the losses in 2005. “After Katrina, investors were not keen on aggregate indemnity-based transactions”, he says. “But USAA is the one company that investors believe tends to outperform the risk modelers’ loss estimates and loss expectations.”

USAA issued Residential Re 2006 on May 31 to replace Residential Re 2003, which had matured. The three year, $122.5 million bond is structured in two tranches – class A and class B. Both have indemnity triggers.

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