U.S. military mutual insurer USAA’s new catastrophe bond, the Espada Reinsurance Limited (Series 2016-1) transaction, is set to complete at the lower end of the insurers volume ambitions, securing just $50m of reinsurance, while the pricing has been set at the top-end of guidance.
The Espada Re 2016-1 catastrophe bond saw USAA looking to change its strategy for securing reinsurance protection from the capital markets through a cat bond. It’s the first time the insurer has not used a vehicle named Residential Re to issue a cat bond and also the first time the insurer has used the services of Rewire Holdings and its Rewireconnect system for structuring and deal marketing purposes.
When USAA launched the Espada Re cat bond it was said to have been seeking between $50m and $100m of collateralized reinsurance protection for the perils U.S. tropical cyclones, earthquakes, severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact.
But the Espada Re cat bond targeted a different type of protection, testing the ILS market’s appetite for the terms of this deal, seeking multi-year aggregate cover over a risk period running for four years from June 2016 to June 2020 across broad section of its reinsurance program on an indemnity trigger basis.
The notes issued by Espada Re were targeted to cover a broad layer of USAA’s reinsurance program of around $1.5 billion, from an attachment point modelled at just under a billion up to an exhaustion point around $2.5 billion.
So the coverage would be on a percentage pro-rata basis across that full range of losses, meaning the notes had a high attachment probability but a lower expected loss. As the chance of suffering a loss was high, but the size of the potential loss considered likely to be lower.
According to sources the response from investors has been mixed to this approach, despite the fact that by supporting it USAA may have been encouraged to issue a much larger tranche in future. Some investors said they saw this issuance as a sign that USAA could have filled that layer in with future cat bond tranches, which would only have been positive for the market in the longer-term.
Others, however, said that the high attachment probability is an issue as they are looking to invest in cat bonds to cover remote, high impact risks, not this more attritional, frequency type loss cover.
Sources said that the deal now looks set to complete at the lower end of USAA’s volume ambitions, to provide just $50m of reinsurance protection. While the pricing on the transaction has been set at the upper end of the marketed range (5.25% to 5.75%) at 5.75%.
So it seems that the Espada Re cat bond has not, perhaps, been as successful as USAA would have liked, but at least it is set to complete and as a result this does expand the insurers usage of the capital markets for its reinsurance protection.
It will be interesting to see whether USAA returns to the catastrophe bond market for its regular May Residential Re issuance, or whether the insurer elects to use Espada Re again.
We understand that the Espada Reinsurance Limited (Series 2016-1) catastrophe bond will now complete on the 1st March. We will update you if any further information emerges and you can read all about this and every other USAA sponsored catastrophe bond in our Deal Directory.