LONDON – U.S. insurer USAA will not be able to cash in on two of its catastrophe bonds, because losses from superstorm Sandy and other 2011 natural disasters were not high enough to trigger a payout, Standard & Poor's said.
Insurers and reinsurers use "cat bonds" to manage their exposure to natural disasters by transferring some of the risk to capital market investors.
Cat bond investors such as pension funds receive an income in return for agreeing to pay some of the issuers' claims if an earthquake or hurricane strikes and losses from it meet a predetermined amount.
Ratings agency S&P took the two bonds - 2011 and 2012 class 5 notes sold through USAA's Residential Re vehicle - off CreditWatch Negative, meaning it now considers them to be less risky for investors than it previously estimated.
It downgraded the two cat bonds in November, believing at the time that the risk to investors had increased as a result of Sandy, which crashed into the U.S. east coast in October, causing billions of dollars' worth of damage as it wrecked homes and businesses.
The transactions are structured as "aggregate" bonds, meaning they only result in a payout if there are enough losses on an annual basis to reach a pre-agreed trigger point.
Losses for USAA from Sandy and other natural disasters in 2011, such as tornadoes that struck central and northeast U.S. in June, did not amount to enough to trigger a payout, S&P said.
The trigger points were $1.365 billion for the Res Re 2011 notes and $1.571 billion for the Res Re 2012 bond. Both are due to mature on May 31.
S&P said it had received updated loss estimates from USAA concerning Sandy and the U.S. tornadoes and the new estimate of covered losses from the four events was less than the total estimated in November.
- For more details on cat bond transactions, see the Thomson Reuters Insurance Linked Securities Community, click on http://financial.thomsonreuters.com/ils.
(Reporting by Sarah Mortimer; Editing by Helen Massy-Beresford)