Residential Reinsurance 2020 Limited (Series 2020-1)

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Residential Reinsurance 2020 Limited (Series 2020-1) – At a glance:

  • Issuer: Residential Reinsurance 2020 Limited
  • 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: $100m
  • Trigger type: Indemnity
  • Ratings: S&P: Class 13 - 'B-(sf)'
  • Date of issue: May 2020

Residential Reinsurance 2020 Limited (Series 2020-1) – Full details:

USAA’s first catastrophe bond of any given year tends to be an annual aggregate structure, while its second issuance is typically per-occurrence and the same is seen with this new transaction.

Sticking with its preferred issuance domicile of the Cayman Islands, USAA has registered Residential Reinsurance 2020 Limited as the vehicle for its latest cat bond issuance.

Residential Reinsurance 2020 will look to issue two tranches of cat bond notes that will be sold to investors and the proceeds used to collateralise multi-year catastrophe reinsurance agreements between the issuing vehicle and USAA itself.

The two tranches of notes will provide USAA with multi-peril, annual aggregate reinsurance protection across four-year terms, providing coverage for certain losses from 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) in the United States.

While “other perils” are covered and there is no specific exclusion of a risk such as a pandemic, the terms of the Residential Reinsurance 2020 cat bond are such that for an event to qualify it must be designated as a catastrophe by PCS first.

As we explained before though, this “other peril” category is a source of uncertainty in some catastrophe bond transactions, especially where no official designation is required and exclusions are lacking.

While the initial targeted size for this ResRe 2020-1 catastrophe bond is $100 million, one tranche of notes remains unsized we’re told, so it’s almost certain the issuance will grow.

A Class 12 tranche of notes are the as yet unsized layer of this issuance. This tranche of notes will have an initial expected loss of 3.97% at the base case, attaching at some $2.1 billion of losses to USAA and are being offered to investors with price guidance in a range from 9.25% to 10%, we’re told.

A currently $100 million Class 13 tranche of notes is less risky, with an initial base expected loss of 1.08% and price guidance in a range from 5% to 5.5%, attaching at $2.7 billion of losses we understand. The Class 13 notes are set to get a rating from S&P of ‘B-(sf)’.

The multiples available from these Residential Re 2020 catastrophe bond notes are an increase from last years deal.

The Residential Re 2019-1 cat bond featured a tranche with an initial expected loss of 3.61% that eventually priced with a coupon of 8.25%, so a multiple at market of almost 2.3 times the EL.

The ResRe 2020-1 Class 12 notes would have a multiple of at least 2.3 times even at the low-end of pricing, 2.5 times at the top-end.

The same goes for the Class 13 layers, as the 2019-1 ResRe had a multiple at market of 4.5 times, where as this new ResRe 2020 Class 13 tranche of notes would be 4.6 times the EL at the low-end of pricing, 5 times at the upper-end.

However, the increase is not all that significant, so we suspect pricing may rise above the mid-point for both of the new Residential Re 2020 catastrophe bond tranches of notes.

Update 1:

Sources told us that the deal documents for this catastrophe bond had to be revised to include a specific exclusion for pandemics and communicable diseases, after catastrophe bond investors requested the change.

Update 2:

USAA has elected to withdraw the riskier tranche from its newest Residential Reinsurance 2020 Limited (Series 2020-1) catastrophe bond transaction, but will aim to slightly upsize the remaining lower-risk layer of the issuance.

The higher risk Class 12 tranche of notes will not be issued at all, we’re told.

The lower risk Class 13 tranche that began as a $100 million offering, did then target a potential upsizing to as much as $125 million we understand, but that was not successful and the tranche has remained at $100 million in size, but with coupon pricing now fixed at the upper-end of initial guidance, at 5.5%.

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