USAA extends maturity for $40m of ResRe 2013-2 cat bond tranche

U.S. primary military mutual insurer USAA has opted to extend the maturity of half of the principal of one tranche of its Residential Reinsurance 2013 Ltd. (Series 2013-2) catastrophe bond, electing to hold back $40 million of collateral to allow for loss development from the California wildfires.

We’re told that USAA has elected to repay half of the $80 million Residential Re 2013-2 Class 1 notes to investors at its upcoming maturity, opting for a partial extension for the remaining $40 million of principal from this tranche of notes, to allow it to wait for further development of qualifying losses.

This cat bond tranche provides USAA with collateralized reinsurance against losses from U.S. tropical storms, U.S. earthquakes, severe thunderstorms, winter storms and wildfires in California. At this time it is understood that it is the California wildfires that threaten the riskiest Class 1 tranche of notes.

The Residential Re 2013-2 cat bond is a per-occurrence structure and was due to mature as of the 6th December.

The $80 million Class 1 tranche of notes was one of the riskiest ever issued in the cat bond market at the time, with an attachment point of just $400 million of losses to USAA (a probability of attachment of 21.38% and an expected loss of 13.06%), so it would always be considered most at risk from any major loss caused by a covered peril, of which wildfires in California is one.

USAA’s loss estimate for the California wildfires was most recently put at between $387 million and $581 million, so there is a reasonable chance that the final loss determination could cause some loss of principal for these notes, eating into the reinsurance coverage they provide with the Class 1 notes being most at risk.

The $80 million of Class 1 cat bond notes issued under the Residential Re 2013-2 transaction provided reinsurance to cover losses at launch from the $400 million attachment point up to an $800 million exhaustion.

By extending maturity on half of the tranche, so $40 million of principal, USAA is making sure there is some collateral remaining on account to pay for any losses should its estimate for the impact of the California wildfires surpass the notes attachment point.

But by electing to repay the other $40 million of principal to investors, it is clear that USAA does not feel its losses will rise considerably. Rather it is just ensuring that this cat bond is not fully repaid to investors at maturity, while there is still a chance that losses may trigger the notes. The investors will receive a 3% extension spread, we understand.

This USAA sponsored Residential Re 2013-2 is just the latest catastrophe bond to be threatened by losses in 2017. At this time it’s not possible to say whether investors in the notes will face a loss of principal, but they will face a retention of the collateral for some time until the final loss to the insurer from the recent wildfires in California is fully understood.

It’s not the only USAA sponsored cat bond at risk of losses this year either. The insurers aggregate reinsurance cover from a Res Re 2017 cat bond is also still potentially at-risk should USAA’s loss estimates from recent catastrophe events rise.

We’ve added the Residential Re 2013-2 Class 1 catastrophe bond tranche from USAA to our Directory of cat bond payouts and defaults, until further loss estimates confirm its fate or otherwise. You can find details of all catastrophe bonds triggered and payouts made, since the market began in our Directory.

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