Residential Re 2018 cat bond launched at $175m for USAA

by Artemis on April 16, 2018

U.S. primary military mutual insurer USAA is back to sponsor its 31st catastrophe bond issuance with a $175 million Residential Reinsurance 2018 Ltd. (Series 2018-1) transaction, that seeks aggregate reinsurance protection against losses from multiple catastrophe and weather perils.

USAA is the most prolific catastrophe bond sponsor still, with regular issuances that provide capital markets diversification within the insurers reinsurance tower.

This Residential Re 2018 deal will extend the collateralized protection the company receives, with a further extension of the perils coverage as well, as the firm adds coverage for flood damage to auto policies, we understand. In the wake of hurricane Harvey this would be a clever addition to the reinsurance coverage the ResRe cat bonds provide to USAA.

For its latest transaction, we understand that USAA is returning with a newly formed Cayman Islands based special purpose insurer named Residential Reinsurance 2018 Limited. The vehicle will seek to issue $175 million of notes at least, across two tranches of Series 2018-1 notes in order to collateralize multi-peril reinsurance agreements for the insurer.

We’re told that the Residential Re Ltd. 2018-1 cat bond will provide USAA with reinsurance protection against losses from U.S. tropical cyclones (plus renter policy flood), earthquakes (plus fire following and renter policy flood), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and other perils (including auto policy flood).

In this cat bond the one new addition, compared to previous Residential Re deals, is this inclusion in the covered perils of auto policy flood losses caused by the other perils category.

Both tranches of notes will provide USAA with annual aggregate reinsurance protection on an indemnity trigger basis, from a $75 million Class 11 tranche structured as a zero-coupon note and providing one year of cover, as well as a $100 million Class 13 tranche which will provide four years of reinsurance protection.

A $75 million layer of Residential Re 2018-1 Class 11 notes, the one year zero coupon tranche, will attach at $1.45 billion of losses to USAA, covering a layer of its aggregate reinsurance tower up to $1.7 billion, and will have an initial attachment point of 9.74% and expected loss of 7.3%. This tranche of notes are being offered to ILS investors with price guidance of 86.75% to 87.75% of par value, which is akin to a coupon of 12.25% to 13.25%, we hear.

A $100 million Residential Re 2018-1 Class 13 tranche of notes, which will cover USAA for four years, will attach at $2.3 billion of losses and cover right up to $3.7 billion, so a wide layer. These notes have an initial attachment point of 1.76% and expected loss of 0.82%, we are told. These notes are being offered to investors with coupon guidance of 3.5% to 4%.

By further extending the reinsurance coverage that catastrophe bonds provide, with the auto policy flood damage inclusion, USAA is making good use of the capital markets and cat bonds to better protect itself and its policyholders.

We will update you as this Residential Reinsurance 2018 Ltd. (Series 2018-1) catastrophe bond proceeds to market for USAA and you can read about every deal sponsored by the insurer in the Artemis Deal Directory.

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