Residential Reinsurance 2014 Ltd. (Series 2014-1)

This is the 22nd catastrophe bond transaction sponsored by USAA that we have recorded since 1997 in the Artemis Deal Directory.

Residential Reinsurance 2014 Ltd., a Cayman Islands domiciled issuance vehicle, will seek to issue two tranches of Series 2014-1 cat bond notes on behalf of USAA and subsidiaries. The proceeds from the sale of the notes will be used to collateralize reinsurance agreements between USAA and Residential Re 2014. Artemis understands that USAA is looking for at least $100m of protection from this issuance, although sources said that it is capped for now at $150m across the two tranches as a maximum.

The Residential Re 2014 catastrophe bond will provide USAA and certain subsidiaries with reinsurance protection across a range of U.S. perils, including tropical cyclones, earthquakes, severe thunderstorms, winter storms, wildfire, meteorite impact and volcanic eruption.

Of that list of perils two are very unusual. This is the first catastrophe bond to provide cover for losses from meteorite impacts, a very remote risk likely only contributing a small amount to the cat bonds expected losses. It is also the first cat bond we have seen which explicitly includes cover for losses from volcanic eruptions. We have seen volcanic eruptions caused by earthquakes included in a cat bond before, but never as a standalone peril like this.

The reinsurance protection provided by this cat bond features an indemnity trigger and the cover is on an annual aggregate basis for both tranche of notes. The covered area is all 50 U.S. states for the perils of earthquakes, severe thunderstorms, winter storms, wildfire, meteorite impact and volcanic eruption, while tropical cyclone cover is for the usual Gulf Coast, Florida, East Coast, Hawaii states as well as a few further inland, which makes sense for wind cover on an aggregate basis. The term of the deal will be four years, we understand.

The first tranche of notes being issued by Residential Reinsurance 2014 Ltd. in this Series 2014-1 cat bond deal is a Class 10 tranche sized at $50m. These notes have an attachment probability of 11.84%, an exhaustion probability of 8.08% and an expected loss of 9.86%. These are risky cat bond notes, although not quite as risky as the tranche USAA issued last year. The attachment point is at $847m of losses and the exhaustion is at $947m, so covering a $100m layer of USAA’s program.

The second tranche is a Class 13 tranche of notes. These have an attachment probability of 0.85%, an exhaustion probability of 0.39% and an expected loss of 0.54%, so a much more remote risk. The attachment point is at $1.651 billion of losses and the exhaustion point is at $2.124 billion, so covering a large layer of USAA’s reinsurance program.

In terms of pricing guidance, the Class 10 tranche of notes, the riskier of the two, has price guidance of 14% to 16%. The Class 13 tranche is offered with guidance of 2.75% to 3.5%.

Interestingly, the Class 13 tranche is very similar in terms of attachment to a Class 5 tranche from USAA’s Residential Reinsurance 2012 Ltd. (Series 2012-1) cat bond. That tranche issued in 2012 priced at 8%, meaning that USAA’s 2014 cover from the Class 13 notes could price as much as 65% cheaper than it, if it priced at the bottom end of guidance at 2.75%.

Update 1:

Artemis understands that the Residential Re 2014-1 catastrophe bond is likely to upsize and it is now expected that the cat bond will provide between $125m and $150m of cover.

The latest information is that the Class 10 tranche of notes is expected to grow to between $75m and $100m in size while the Class 13 tranche of notes remains at $50m.

In terms of pricing, the riskier Class 10 notes are now being marketed with a 15% coupon, so the middle of launch guidance. The Class 13, lower risk, tranche of notes meanwhile has seen pricing moved to the top of the launch range at 3.5% we understand.

Update 2:

At pricing the Residential Re 2014-1 cat bond reached $130m in size. The Class 10 tranche of notes, the higher risk of the two, finally grew to $80m in size while the Class 13 tranche of notes remained at $50m.

The Class 10 tranche has priced at the mid-point of the guidance range, at 15%, making them the highest returning tranche of cat bond notes issued this year and perhaps since USAA’s Residential Reinsurance 2013 Ltd. (Series 2013-2) cat bond deal.

The Class 13 tranche of notes which are much lower risk priced at 3.5% which is the top of the launch guidance.

Update, October 31st 2017:

USAA’s losses from catastrophe events in the current risk period now put the riskiest Class 10 tranche of notes from this Residential Re 2014-1 catastrophe bond on watch for potential losses.

USAA has reported a loss estimate of $147 million for hurricane Harvey and the mid-point of USAA’s initial estimated range of losses from hurricane Irma is $316 million, giving a $463 million total from the hurricane season, to-date.

USAA has also reported its initial losses from the California wildfires, the mid-point of the per-occurrence range reported works out on an aggregate basis as $442 million, we’re told.

Together, the losses from hurricanes and wildfires total a preliminary $905 million, which is just below the attachment point for the 2014-1 Class 10 notes of $910 million (a post-reset attachment point).

The $80 million of Class 10 notes cover the majority share of a $100 million layer of USAA’s reinsurance program.

Updates to loss estimates will change this and the notes will remain on risk until end of May 2018. That means there is plenty of time for the 2017/18 winterstorm season and 2018 convective storm season to add additional aggregate losses and cause payouts to this Class 10 tranche of notes.

Update, March 23rd 2018: 

USAA’s aggregated losses from catastrophe events in the current risk period have now reached roughly $1 billion, suggesting that these 2014-1 Class 10 notes are triggered and if the estimates remain unchanged investors will face some losses. With some months left until the end of the risk period and the next reset, there is the potential for noteholders of this tranche to face a growing loss of principal.

Update, August 29th 2018:

The $80 million of Class 10 notes have had their maturity extended again to December 6th 2018.

Update, Dec 5th, 2018:

The $80 million of Class 10 notes have now been extended to March 6th 2019, to allow for further development of losses. These notes are priced for a total loss of principal in the secondary market.

Update, June 4th 2019:

It seems USAA has made a reinsurance recovery under this $80 million of Class 10 notes issued by ResRe 2014, as the net principal amount has now been reduced to zero. At the same time the maturity was extended to September 6th 2019.

Update, September 3rd 2019:

This cat bond had its maturity date, with principal recorded as “nil”, extended to December 6th 2019.

Update, December 3rd 2019:

This cat bond had its maturity date, with principal recorded as “nil”, extended to March 6th 2020.