Residential Reinsurance 2017 Limited (Series 2017-2)

This is USAA’s 30th securitization of insurance risk as a catastrophe bond, further extending its use of the capital markets as a source of collateralized reinsurance capacity.

USAA returns with its special purpose insurer Residential Reinsurance 2017 Limited, which will seek to issue $225 million at least in three tranches of Series 2017-2 notes to collateralize a multi-peril reinsurance arrangement for the insurer.

The Residential Re 2017-2 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.

In this cat bond the one new addition in the covered perils is the inclusion of renter policy flood caused by earthquakes.

All three tranches of notes will provide USAA with per-occurrence reinsurance protection on an indemnity trigger basis and two tranches will provide four years of cover, while the Class 1 tranche has been structured as a zero-coupon note providing just a single year of reinsurance protection.

The Class 1, zero coupon tranche of notes is sized at $50 million preliminarily and will be issued to investors at a discount akin to how collateralized reinsurance transactions are completed. These are the riskiest notes of the Residential Re 2017-2 cat bond issue, with an initial attachment probability of 23.17%, or $400m of losses, and an expected loss of 15.75%. This one-year tranche of zero-coupon notes are being offered to investors at 78% to 80% of par value, we’re told, which approximates to a coupon of 20% to 22%.

The Class 1 tranche of notes exclude Florida from the tropical cyclone peril definition, while the other two tranches cover USAA’s losses there.

The Class 2 tranche of notes, preliminarily sized at $100 million and with a four-year risk period, have an attachment probability of 13.14%, or $700 million of losses to the sponsor USAA, and an expected loss of 7.33%. This tranche is being offered to investors with price guidance of 12.5% to 13.5% we understand.

Lastly, a $75 million Class 3 tranche of notes will be issued with a four-year risk period as well. These notes will have an attachment probability of 4.04%, or $1.559 billion of losses, an expected loss of 2.84% and are offered to investors with coupon price guidance of 5.5% to 6.25% we’re told. This tranche of notes are set to be rated by S&P.

Update 1:

This cat bond looks set to upsize to approximately $285 million for USAA.

The riskiest Class 1 tranche of notes, which is a one-year zero coupon layer and was sized at $50 million from launch, is now targeting up to $55 million, we understand. The pricing guidance on this tranche had launched at 78% to 80% of par value, but that has been narrowed now to 78% to 79% of par, we’re told, approximating a coupon of 20% to 21%.

The Class 2 tranche launched targeting $100 million of reinsurance protection with price guidance of 12.5% to 13.5%. This tranche is still aiming for $100 million, but now the pricing has dropped to 12.5% to 13%, we understand.

The final Class 3 tranche, which are the lowest risk, launched with a size target of $75 million and coupon price guidance of 5.5% to 6.25%. This tranche now targets $130 million, so all the upsizing is here in this lower risk layer, while the pricing guidance has been fixed at the bottom-end at 5.5%.

Update 2:

This cat bond eventually settled at $295 million in size, a 31% upsizing during the marketing of this deal to cat bond investors.

The riskiest Class 1 tranche of notes grew to $55 million at pricing, with pricing set at 79% (the mid-point) of par value offering a coupon equivalent return of 21%.

The Class 2, mid-risk, tranche eventually grew to $110 million, with pricing that settled at the lowest end of guidance at 12.5%.

The final Class 3 tranche, the lowest risk, secured $130 million of protection, so the majority of the upsizing of this cat bond is here in this lower risk layer, while the coupon pricing settled at 5.5%, again the bottom of guidance.

Update Dec 5th, 2018:

The $55 million Class 1 tranche of this catastrophe bond was placed at-risk of losses and its maturity extended by three months, to March 6th 2019. The reason for the extension of maturity is assumed to be the 2018 California wildfires and USAA holding back this collateral while its losses from these events develop and become clearer. This Class 1 tranche of notes are the riskiest per-occurrence cat bond protection that USAA has. These notes are priced for up to a 20% loss of principal in the secondary market.