Residential Reinsurance 2017 Limited (Series 2017-1)

This is USAA’s 29th securitization of insurance risk as a catastrophe bond, extending its use of the capital markets as a source of reinsurance capacity.

This transaction sees USAA with a new special purpose insurer, Residential Reinsurance 2017 Limited, which will seek to issue $300 million at least of Series 2017-1 notes to collateralize a multi-peril reinsurance arrangement for the insurer, we understand.

Residential Re 2017-1 will feature three tranches of notes all of which will provide USAA with reinsurance protection against losses from U.S. tropical cyclones, earthquakes, severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and other perils.

All three tranches of notes will provide USAA with annual aggregate reinsurance protection on an indemnity trigger basis and two tranches will provide four years of cover, with the other structured as a zero-coupon note providing just a single year of reinsurance.

A $50 million tranche of Class 10 notes are the zero-coupon notes, which will be issued to investors at a discount akin to how collateralized reinsurance transactions are completed. These are the riskiest notes of the Residential Re 2017 issue, with an initial attachment probability of 16.22%, or $883m of losses, and an expected loss of 14.06%. This one-year tranche of zero-coupon notes are being offered at 82.5% to 83.5% of par value, we’re told, which approximates to a coupon of 16.5% to 17.5%.

A Class 11 tranche of notes, preliminarily sized at $150 million, and with a four-year risk period have an attachment probability of 4.56%, or $1.28 billion of losses, and an expected loss of 2.11%. This tranche is being offered to investors with price guidance of 4.75% to 5.25% we understand and will not be rated.

Finally, a $100 million Class 13 tranche of notes will be issued with a four-year risk period as well. The Class 13 notes will have an attachment probability of 0.99%, or $2.05 billion of losses, an expected loss of 0.59% and are offered to investors with coupon price guidance of 3% to 3.5% we’re told. This tranche of notes are being rated, which is now becoming a rarity in the world of catastrophe bonds and have received a preliminary BB-(sf) rating from Standard & Poor’s.

Update 1:

USAA’s latest Residential Re has been received well by investors, helping the insurer lift the target size of the issue by 50% to up to $450 million.

The Class 10 tranche of notes to be issued by Residential Reinsurance 2017 are now targeting between $40 million and $50 million of coverage, and this zero-coupon slice of cover has actually seen its pricing move out. This tranche was initially targeting $50 million at an offering price of 82.5% to 83.5% of par, but we now understand the price to have been fixed at 82.5%, equating to a 17.5% coupon.

The Class 11 notes, which began their life with a preliminary size of $150 million, are now targeting from $200 million to $250 million, we’re told. The pricing on this tranche, which launched with price guidance of 4.75% to 5.25%, now sits at a narrowed 4.75% to 5%.

Finally, the Class 13 tranche of notes, which began as a $100 million layer with coupon price guidance of 3% to 3.5%, now targets $125 million to $150 million and has price guidance at a narrowed towards the bottom of guidance 3% to 3.25%.

Update 2:

The Residential Re 2017-1 cat bond transaction is now set for completion with finalised tranche sizes and pricing now released to the market, we’re told, with the total deal-size now set to be $425 million.

The Class 10 zero-coupon tranche of notes to be issued by Residential Reinsurance 2017 are set to complete at their initial target size of $50 million, while final pricing is set at 82.5%, equating to a 17.5% coupon. This is actually the upper end of initial guidance, as the tranche was offered with a discount range of 82.5% to 83.5%.

The Class 11 notes, which began their life with a preliminary size of $150 million and then targeted $200 million to $250 million, have settled at $225 million, we understand. The pricing was initially 4.75% to 5.25%, then narrowed to 4.75% to 5% and has now been finalised at the low-end of that range, at 4.75%.

The final Class 13 tranche of notes was initially a $100 million layer with coupon price guidance of 3% to 3.5%, then targeted $125 million to $150 million and we are told is set to complete at $150 million. The pricing will complete at the bottom end of the narrowed 3% to 3.25% range, to offer investors a 3% coupon.

Update, October 31st 2017:

USAA’s losses from catastrophe events in the current risk period now look set to trigger the riskiest Class 10 tranche of notes from this Residential re 2017-1 catastrophe bond.

USAA has reported a loss estimate of $147 million for hurricane Harvey and the mid-point of USAA’s initial estimated range of losses from hurricane Irma is $316 million, giving a $463 million total from the hurricane season, to-date.

USAA has also reported its initial losses from the California wildfires, the mid-point of the per-occurrence range reported works out on an aggregate basis as $442 million, we’re told.

Together, the losses from hurricanes and wildfires total a preliminary $905 million, which is above the attachment point for the Class 10 notes of $883 million.

The $50 million of Class 10 notes cover a 50% share of a $100 million layer of USAA’s reinsurance program, meaning that the $905 million of losses currently suggests an impact to noteholders of around $11 million.

Updates to loss estimates will change this and the notes will remain on risk until end of May 2018. That means there is plenty of time for the 2017/18 winterstorm season and 2018 convective storm season to add additional aggregate losses, potentially wiping out this tranche of notes.

Update, March 23rd 2018:

USAA’s aggregated losses from catastrophe events in the current risk period have now reached roughly $1 billion, suggesting that these 2017-1 Class 10 notes are triggered and if the estimates remain unchanged investors will face losses. With some months left until the end of the risk period and the next reset, there is the potential for noteholders of this tranche to face a total loss of principal.

Update, August 29th 2018:

The $50 million of Class 10 notes have had their maturity extended again to December 6th 2018.