Residential Reinsurance 2015 Ltd. (Series 2015-1)

USAA is seeking to secure a new source of fully-collateralized reinsurance from the capital markets. A newly Cayman Islands vehicle, Residential Reinsurance 2015 Limited will seek to sell two tranches of notes to ILS investors, to collateralized the underlying reinsurance agreements.

The reinsurance protection provided by the cat bond will cover USAA for certain losses suffered from tropical cyclones (and flood for rented property policies), earthquakes (and fire following), severe thunderstorms, winter storms, wildfires, volcanic eruption and meteorite impacts.

The protection afforded by the two tranches of notes will be on an indemnity trigger and annual aggregate basis, over a four-year term against losses suffered from the above perils across the U.S. and District of Columbia.

A Class 10 tranche of notes is being marketed with an initial size of $50m and will cover losses from an attachment point of $959m up to an exhaustion at $1.134 billion. That equates to an initial attachment probability of 8.33%, an exhaustion probability of 4.63% and an expected loss of 6.2% base, 7.28% sensitivity case.

A $100m tranche of Class 11 notes are less risky, covering losses from an attachment point of $1.134 billion up to an exhaustion point of $1.791 billion. That gives these notes an initial attachment probability of 4.63%, an exhaustion probability of 0.89% and an expected loss of 2.16% base, 2.5% sensitivity case.

So the Class 10 notes are significantly more risky than the Class 11.

The Class 10 notes are being offered with coupon price guidance of 10.75% to 11.75%. That would suggest a multiple of just 1.9x’s the base expected loss, or 1.6x the sensitivity case, even if it priced at the top end of guidance. That is a low multiple by any degree of analysis, especially for a riskier tranche.

The Class 11 tranche are being offered to investors with price guidance of 5.5% to 6%, suggesting a multiple of 2.8x’s the base expected loss, or 2.4x the sensitivity case, again taking the top end of price guidance.

Update 1:

The Class 10 notes launched with price guidance of 10.75% to 11.75%, which showed USAA’s ambitions to secure the cover at a very low multiple. Now, Artemis understands that the price guidance has been fixed at 11%, near the lower end of that range.

So if final pricing is set at an 11% coupon, the Class 10 notes will have a multiple of 1.77 times the base expected loss or 1.51 times the sensitivity case. That’s a particularly low multiple, which clearly reflects the appetite of investors to access higher yielding cat bond notes and their willingness to accept a lower multiple payment in return.

Class 11 launched with price guidance of 5.5% to 6% and interestingly these notes have had the guidance fixed at the top end of guidance, at 6%. That suggests a multiple of 2.8x’s the base expected loss, or 2.4x the sensitivity case.

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 2015-1 Class 10 notes are now getting close to being triggered. 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 some level of principal loss.

Update June 4th 2019:

It appears that a reinsurance recovery may have been made under these Residential Re 2015-1 cat bond tranches

The Residential Reinsurance 2015 Limited (Series 2015-1) aggregate cat bond transaction has seen the net principal amount of its $50 million Class 10 notes reduced by almost half to $26,511,039, while the $100 million of Class 11 notes has seen its net principal amount reduced by 50% to $50 million.

Both of these ResRe 2015-1 tranches of cat bonds have had their maturities further extended to September 6th 2019.

The Class 10 notes issued by ResRe 2015 were marked down for an almost total loss, for bids as low as 7, while the Class 11 notes were marked down by brokers for roughly a 50% loss of principal.

Update, September 3rd 2019:

The Class 10 notes of this cat bond had already seen their net principal amount of $50 million reduced by almost half to $26,511,039. This tranche has now had the maturity of its remaining notes extended to December 6th 2019.

But the Class 11 tranche of the ResRe 2015-1 notes, which were $100 million in size but saw its net principal amount reduced by 50% to $50 million, has now been reduced by another $10 million, leaving $40 million remaining and these notes are also now extended to maturity at December 6th.

Update, December 3rd 2019:

The Class 10 notes that already had their net principal amount of $50 million reduced by almost half to $26,511,039 is also extended to March 6th 2020.

But the Class 11 tranche of the ResRe 2015-1 cat bond deal, which were originally $100 million in size, but saw reductions in principal of $40 million and then another $10 million, leaving $40 million still outstanding, have now seen another reduction in net principal taking the outstanding notes left down to just $20 million, while also being extended until March 6th 2020.