Residential Reinsurance 2019 Limited (Series 2019-1)

This transaction is USAA’s 33rd catastrophe bond sponsorship, as the primary, military mutual insurer again looks to the securitization of insurance risk to extend its use of the capital markets and ILS investors as a source of collateralized reinsurance capacity.

For this issuance, newly registered Cayman Islands vehicle Residential Reinsurance 2019 Limited will seek to issue two tranches of Series 2019-1 cat bond notes, we understand, both of which will have four-year terms.

Both tranches of notes will be exposed to losses from the same perils as USAA’s last cat bond transaction, we’re told, so these will be U.S. tropical cyclones, earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and so-called other perils (with other perils all including auto & renter policy flood losses).

At this time we’re told no sizes have been assigned to either of the tranches of notes, giving USAA plenty of room to choose how much reinsurance coverage to receive from its latest cat bond based on the appetites of cat bond investors.

We understand that a Class 12 tranche of notes are the riskier layer of this cat bond, attaching at $2.075 billion of losses and with an initial expected loss of 3.61%. These notes are offered to investors with price guidance ranging from 7.75% to 8.5%.

The second tranche, a Class 13 set of notes, attaching at $2.675 billion of losses to the sponsor and so are less risky with an initial expected loss of 0.98%. These are offered with price guidance in a range from 4% to 4.5%, we’re told.

This second tranche is actually a little higher risk than a Class 13 tranche of notes from one of USAA’s 2018 catastrophe bond deals which was priced with a coupon of 3.25%.

So the indicative guide pricing of this latest cat bond from the insurer looks like it may seek to compensate investors for some of the losses they have taken in recent years and reflect slightly higher risk-adjusted pricing.

Update 1:

The Class 12 tranche of notes have now been sized at $60 million, we understand. This is the riskier layer in the transaction, with an initial expected loss of 3.61%. These notes were offered to investors with initial price guidance ranging from 7.75% to 8.5% and we’re told pricing looks set to settle at 8.25%, so just below the upper-end.

The second tranche, a Class 13 set of notes, has now been sized at $75 million. This tranche is lower risk, with an initial expected loss of 0.98%. These were offered to investors with initial price guidance in a range from 4% to 4.5% and we’re now told the pricing looks likely to end up at the top-end, of 4.5%.

Update – Jun 2023:

At the maturity of this cat bond USAA opted to extend the Class 12 notes and retained half the principal, with $30 million repaid to investors.

The remaining $30 million of Class 12 notes from this Residential Re 2019-1 cat bond had their maturity date extended by three months, to September 6th 2026, presumably to allow for development of aggregate losses suffered in the final risk period.

Update – Sep 2023:

The remaining notes had their maturity extended a further full three years, to September 6th 2026, for loss development to continue.