USAA’s aggregate losses near $1bn, putting more ResRe cat bonds at risk

According to its latest update to investors in its catastrophe bonds, U.S. primary military mutual insurer USAA’s aggregated catastrophe losses from events in the last twelve months have now neared $1 billion, putting a number of its outstanding Residential Re cat bonds at significant risk of paying out at least some of their principal.

The latest cause of a jump in USAA’s aggregated catastrophe losses is winter storm activity in the United States, with the insurer expecting estimated losses of close to $200 million at the top-end due to Winter Storm Riley, a so-called nor’easter storm that experienced a rapid pressure drop off the New England coast, resulting in destructive wind, snow and coastal flooding impacts across the U.S. northeast between March 1st and 4th 2018.

USAA had already reported aggregated and covered losses of around $798 million from catastrophe loss events including the California wildfires, hurricanes Harvey and Irma, as well as other smaller covered events during the year, as of November last year, putting a number of its aggregate cat bond tranches increasingly close to being triggered.

At the time, investor sources explained that based on a normal modelled year additional losses from winter storms and severe convective storm activity would be expected to increase the aggregate losses to at least high enough to trigger payouts on the riskiest of the layers of cat bond coverage USAA has in place.

Now winter storm Riley, as well as some loss estimate increases on previous events since November, look set to do exactly that, with the aggregated covered loss total, taken from the mid-point of all of USAA’s latest estimates, now sitting around $980 million to $1 billion, we’re told.

Working out the exact loss amounts is tricky, given the retained portions of each event can see 10% taken off each of the loss estimates, but at this stage it looks like investors in as many as three tranches of USAA’s Residential Re cat bonds could be on the hook for at least some losses, and the insurers Espada Re cat bond is also not far from the trigger point.

With the aggregated loss total at close to $1 billion, this puts the $50 million zero-coupon tranche of notes from USAA’s Residential Reinsurance 2017 Ltd. (Series 2017-1) cat bond firmly in play and likely set to be exhausted and pay-out in full.

These 2017-1 Class 10 notes attach at the lowest end of USAA’s cat bond coverage currently and are likely to be a total loss, we hear.

Next most at risk are the $80 million Class 10 notes from the Residential Reinsurance 2014 Ltd. (Series 2014-1) transaction, which looks likely to pay-out at least some of their principal, while the $65 million of Class 10 notes from Residential Reinsurance 2016 Ltd. (Series 2016-1) are seen as next most at-risk and likely triggered, and the $50 million of Class 10 Residential Reinsurance 2015 Ltd. (Series 2015-1) cat bond notes are close to being in play.

The first three of the above four Res Re cat bond tranches all look like they are set to take some level of losses at this stage, based on the current estimates, with the total losses to ILS investors across these tranches likely between $90 million and $100 million.

Additionally, the trigger for USAA’s only cat bond that doesn’t use the Residential Re moniker, the $50 million Espada Reinsurance Limited (Series 2016-1) transaction, now sits not that far above the current level of aggregated losses and if the winter storm loss finalises nearer the top end of estimates, at closer to $200 million, this cat bond tranche could also come into play.

With a few months left until the reset of most of these cat bond tranches, largely in May, there is still time for the losses to rise further due to outbreaks of severe convective weather, or perhaps even due to other U.S. winter storm impacts witnessed in recent weeks.

The secondary market has already priced in the potential for losses in all of these tranches of cat bond notes.

The ResRe 2017-1 Class 10 notes have been seen marked down for bids as low as 0 (suggesting the total loss of this tranche), the 2014-1 Class 10 notes for bids as low as 5 (suggesting the expectation of a near total loss), the 2016-1 Class 10 notes for bids as low as 40, the 2015-1 Class 10 for bids as low as 50, and the Espada Re notes for bids as low as 87.

Of course we musn’t forget the per-occurrence Residential Reinsurance 2013 Ltd. (Series 2013-2) catastrophe bond Class 1 notes, which had half of their principal withheld and are now priced down for losses by the secondary market, with bids as low as 25 seen, so currently it looks like this tranche faces roughly a 50% reduction in the remaining principal based on the current estimates.

Overall this suggests USAA could make recoveries from its cat bonds of as much as $120 million at the moment, proving their usefulness at both aggregate and per-occurrence reinsurance provision and marking the first time the most prolific sponsor of cat bonds has seen its ILS triggered.

Find details of catastrophe bonds triggered and payouts made, as well as those cat bonds currently at-risk, since the market began in our Directory.