Residential Reinsurance 2019 Limited (Series 2019-2) – Full details:
U.S. primary military mutual insurer USAA has returned for its second catastrophe bond transaction of 2019, with a $150 million per-occurrence multi-peril transaction, as it continues to tap the capital markets as part of its reinsurance program.
This transaction will be USAA’s 34th individual catastrophe bond sponsorship attempt, as the primary, military mutual insurer again looks to the securitization of insurance risk and access to capital markets and ILS investor appetite as a source of fully collateralized property catastrophe reinsurance capacity.
This Residential Re 2019-2 cat bond will cover some of USAA’s losses from U.S. tropical cyclones, earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and so-called other perils (with other perils all including auto & renter policy flood losses).
The coverage is on a per-occurrence basis for this ResRe 2019-2 cat bond deal, as USAA continues to mix aggregate and occurrence protection from the capital markets on an issue by issue basis.
USAA’s first cat bond in any given year tends to be an annual aggregate structure, while its second issuance is typically per-occurrence, at least over the last four years.
For this new issuance, Cayman Islands domiciled special purpose vehicle Residential Reinsurance 2019 Limited will seek to issue two tranches of Series 2019-2 notes which will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the SPV and USAA.
The first tranche will be $50 million or greater Class 1 set of notes which will only be on-risk for one year and will provide a lower down layer of reinsurance protection for USAA.
USAA has regularly brought these one-year layers of cat bond notes to market, as it fills out the lower layers of its reinsurance tower with the assistance of the capital markets.
As ever, these lower down, one-year cat bond tranches from USAA are typically much riskier as a result, which is reflected in the metrics for this Class 1 tranche, attaching at $650 million of losses to USAA and having an attachment probability of almost 21% we understand, with an expected loss of 14.31% at the base case.
The Class 1 tranche of notes will be structured as zero-coupon and pricing is currently marketed at between 79% and 76% of par value, which means investors are effectively being offered a coupon equivalent spread in a range from 21% to as high as 24%.
That’s one of the highest coupons ever seen for a USAA sponsored Residential Re catastrophe bond transaction, but the expected loss is only just slightly higher than last year’s equivalent one year tranche, suggesting a higher multiple for the investors that choose to back this deal.
For a pricing comparison we can look back to the Residential Re 2017-2 Class 1 tranche of notes, which were also zero-coupon and provided one year of reinsurance. This tranche had a higher expected loss of 15.75% and in the end paid investors a 21% coupon equivalent.
The 2019-2 cat bond will clearly pay a higher multiple to those who invest in it as a result. Likely a recognition of the losses USAA has borne in recent years and the fact its cat bond backers supported it in paying customer claims.
The second tranche of notes is a currently $100 million Class 2 tranche, which will provide USAA with a four-year layer of reinsurance protection.
The Class 2 notes have an attachment probability of 9.78%, attaching at $1.073 billion of losses to USAA we understand, which gives them an initial expected loss of 5.87%.
The $100 million of Class 2 notes are being offered to investors with coupon price guidance in a range from 11.25% to 12.25%.
For comparison, the 2018-2 Residential Re cat bond had a four-year occurrence Class 2 tranche with an expected loss of 6.45% and it settled to pay investors an 11.5% coupon.
Again, the pricing of the 2019-2 cat bond looks a step up from that, on a multiple at market basis.
As ever, USAA has elected to cover a wide layer of its reinsurance program with each of these cat bond tranches, meaning there is plenty of room to upsize should investor demand support it to do so.
The riskier, one-year, zero-coupon Class 1 layer of notes has now priced at 77.25%, so a coupon equivalent of 22.75% which is around the middle of guidance. This tranche remained at $50 million in size.
The second Class 2 tranche upsized to $110 million we understand. At pricing the coupon of this tranche has been fixed at 11.5%, so towards the lower-end of guidance, but not quite at the bottom.