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Residential Reinsurance 2018 Limited (Series 2018-2)

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Residential Reinsurance 2018 Limited (Series 2018-2) – At a glance:

  • Issuer: Residential Reinsurance 2018 Limited (Series 2018-2)
  • Cedent / sponsor: USAA
  • Placement / structuring agent/s: Goldman Sachs and Swiss Re Capital Markets are joint structuring agents and bookrunners
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: U.S. tropical cyclones, earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, other perils (all including auto & renter policy flood losses)
  • Size: $200m
  • Trigger type: Indemnity
  • Ratings: ?
  • Date of issue: Nov 2018

Residential Reinsurance 2018 Limited (Series 2018-2) – Full details:

This is USAA’s 32nd securitization of insurance risk in a catastrophe bond format, further extending the firms use of the capital markets and ILS investors as a source of collateralized reinsurance capacity.

This is USAA’s second issuance through its special purpose insurer Residential Reinsurance 2018 Limited. For this transaction the SPI will seek to issue at least $150 million of notes across two tranches of Series 2018-2 notes, with the proceeds set to be used to collateralize multi-peril reinsurance agreements for the insurer.

One tranche of the notes being issued are set to provide the insurer with reinsurance protection across a single year term and the other across four years.

Both tranches of notes will provide USAA with indemnity reinsurance protection on a per-occurrence basis against losses caused the by multiple U.S. perils of U.S. tropical cyclones, earthquakes (including fire following), severe thunderstorms, winter storms, wildfires, volcanic eruptions, meteorite impacts, and the other perils bucket that captures other severe weather and unnamed catastrophes as well as auto & renter policy flood losses, we understand.

The subject business for this catastrophe bond includes USAA’s automobile book of business, as well as homeowners, renters, and other property types, sources said.

This is only the second of USAA’s cat bonds to cover its auto losses as well as property, a new feature that the insurer has added in 2018 and reflecting continued expansion of the reinsurance coverage the insurer benefits from with these cat bond deals.

A currently $50 million Class 1 tranche of notes will provide USAA with one year of reinsurance coverage. This tranche is zero-coupon in nature and the riskier of the two being issued in this deal, with an initial attachment probability of 20.5% (equivalent to a $600m loss for USAA), an expected loss of 14.07% and is being offered to investors with a coupon equivalent (remember it is zero-coupon) spread in a range from 18.25% to 20.25%.

The second tranche of notes, a currently $100 million Class 2 tranche, will provide a four-year term of reinsurance cover to USAA. These notes have an initial attachment probability of 9.53% (equivalent to a $1 billion loss for USAA), an expected loss of 6.45% and are being offered to investors with coupon price guidance in a range from 11% to 12%.

Both tranches of notes cover a wide layer of risk, giving plenty of room for USAA to upsize this latest ResRe catastrophe bond deal should the insurer choose to maximise its reinsurance coverage from the capital markets. With this transaction having a long marketing period of almost one month we expect USAA is looking to use the cat bond as a way to test pricing and appetite for these layers of risk, so any upsizing will depend on demand from traditional reinsurance markets for the risk as well.

Update 1:

USAA’s latest catastrophe bond increased in size to $200 million while marketing.

The $50 million Class 1 tranche of zero-coupon notes did not upsize and have been priced at the top-end of their range, a coupon equivalent of 20.25%.

The Class 2 tranche of notes grew by one-third to $150 million and the pricing on the Class 2 tranche was fixed at the mid-point of guidance, at 11.5%.

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