Espada Reinsurance Limited (Series 2016-1)

U.S. military mutual insurer USAA has returned to the catastrophe bond market with a new issuance vehicle and different approach, as it seeks a source of broad multi-year and peril reinsurance protection from the capital markets through an Espada Reinsurance Limited (Series 2016-1) transaction.

Espada Reinsurance Limited is a recently registered Cayman Islands domiciles special purpose vehicle established for the issuance of catastrophe bonds by USAA.

With this Espada Re 2016-1 cat bond USAA is seeking between $50m and $100m of collateralized reinsurance protection. The issuance will provide multi-year cover over a risk period running for four years from June 2016 to June 2020, we understand.

Espada Re 2016-1 will provide USAA with reinsurance protection across the U.S. for the perils of U.S. tropical cyclones, earthquakes, severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact.

These are the same perils covered by recent Residential Re cat bonds. However for Espada Re USAA has also added a classification of “other perils” which are defined as naturally occurring events that are identified as catastrophes by reporting agency PCS.

This is very interesting as it means a successful Espada Re cat bond would cover flooding risks, storm surge, rainfall events, avalanche and more. It effectively guarantees USAA coverage for any natural catastrophe or weather event that could cause it a major loss. Espada Re could perhaps include coverage for such rare events as a major fire caused by lightning strike (a natural event). The “other peril” classification does not include man-made loss events however, we’re told.

The coverage provided is, as you might expect given the broader peril definition, on an annual aggregate basis and the transaction will utilise an indemnity trigger.

The Espada Re 2016-1 Class 20 tranche of notes that are being issued, while only between $50m and $100m in size, will provide coverage across 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.

That means the coverage is on a percentage pro-rata basis across that full range of losses, which with the notes being aggregate could suggest that USAA is testing the waters for a much more meaningful use of the capital markets across its reinsurance program in future.

As a result of the wide layer that is covered the Espada Re 2016-1 Class 20 catastrophe bond notes will have slightly unusual metrics, with an attachment probability that is quite high at 8.33%, while the expected loss remains lower at 1.93%, sources said. This reflects the greater probability of a loss occurring, while the loss is likely to be smaller due to the way the protection is spread pro-rate across the reinsurance layer.

We understand that the notes are being marketed to ILS investors with coupon price guidance of 5.25% to 5.75%, so offering a multiple that is inline with the market average at this coupon level.

Espada Re 2016-1 is being structured by Rewire Holdings LLC and we understand that the firms web-based marketplace, Rewireconnect, is being used to market the notes. SDDCO Brokerage Advisors, LLC is said to be acting as placement agent (or bookrunner) for this transaction.

Update 1:

The Espada Re cat bond only secured $50m of reinsurance protection for USAA and investors pushed the coupon to settle at the top-end of guidance, at 5.75%.

Update Jan 2019:

The Espada Re catastrophe bond has been added to those considered at risk of loss after USAA’s qualifying losses from catastrophe events in 2017 and 2018 rose to a level where it is assumed this cat bond could be triggered. The notes are currently marked down only around 10% to 20%, suggesting an up to $10 million loss of principal may be expected.

Update June 4th 2019:

It appears USAA may have made a reinsurance recovery under the Espada Re cat bond notes.

The Espada Reinsurance cat bond transaction has seen its principal reduced from the $50 million of notes issued to $47,794,184, a roughly 4.5% reduction in the amount of notes left outstanding.

The maturity date for the Espada Re cat bond is still June 6th 2020, so it remains in-force and on-risk for another year.

The Espada Re cat bond notes were marked down for bids as low as 80 in broker’s secondary market pricing sheets, suggesting the market anticipated a roughly 20% loss of principal for this deal.

Update June 2020:

USAA received a further reinsurance recovery loss payment of almost $2.97 million from Espada Re, so the remaining principal was reduced further to $44,823,653 in June 2020.

The company also returned roughly $35m to investors from this transaction, leaving $9,823,653 outstanding.

Update May 26th 2021:

USAA received another loss payment under the Espada Re cat bond notes of $716,734, which reduced its outstanding to $9,264,853.