Residential Reinsurance 2020 Limited (Series 2020-2)

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Residential Reinsurance 2020 Limited (Series 2020-2) – 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: $400m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Nov 2020

Residential Reinsurance 2020 Limited (Series 2020-2) – Full details:

U.S. primary mutual insurer USAA is back in the catastrophe bond market with its second transaction for 2020, seeking a $300 million multi-year source of fully collateralized multi-peril catastrophe reinsurance protection from the capital markets.

With its latest deal, we’re told that USAA is seeking at least $300 million of fully collateralized reinsurance from the capital markets through the issuance of three tranches of catastrophe bond notes by its Residential Reinsurance 2020 Limited Cayman Islands domiciled vehicle.

One tranche of this transaction could be the highest priced ResRe cat bond notes ever issued sources told us, reflecting the rising of reinsurance rates at this time.

The transaction is designed to provide USAA with up to four years of reinsurance protection against losses in the United States from multiple catastrophe perils.

The protection will be on indemnity trigger and per-occurrence basis, which is typical of the second USAA cat bond of the year, the first tending to be annual aggregate in nature.

Two of the tranches of notes will provide four years of protection and the third one year, 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, the typical range of perils from all recent ResRe cat bond deals.

Important to note that this latest USAA cat bond has an explicit exclusion of communicable diseases within the other perils bucket, we understand.

Residential Re 2020 will seek to issue a $50 million Class 1 tranche of notes that will be zero coupon in nature and provide a single year of coverage. USAA typically has these one-year tranches in its cat bonds, normally the riskiest layer of any issuance.

It’s the same with this Residential Re 2020-2 cat bond, with the $50 million of Class 1 notes having an initial expected loss of 14.84% at the base case, attaching at $688 million of losses to USAA and being offered to cat bond investors with a coupon equivalent price guidance in a range from 24% to 26%, or 76% to 74% of par.

With this layer set to sit alongside a Class 1 tranche from USAA’s ResRe 2019-2 cat bond in the carriers reinsurance tower, we’re told the price guidance does reflect an increase on that year-old transaction which paid a coupon equivalent of 22.75% and at the time was the highest priced ResRe tranche ever.

A $100 million Class 3 tranche of notes will have a four-year term and have an initial expected loss of 3.53% at the base case. This tranche of notes are set to attach at $1.875 billion of losses to USAA on a per-occurrence basis and are being offered to investors with coupon guidance of 8.75% to 9.25%, sources said.

The final $150 million Class 4 tranche of notes will also have a four-year term. Their initial expected loss will be 2.32% at the base case, making them the least risky, attaching at $2.55 billion of losses to USAA. Price guidance for this last tranche of the issuance is in a range from 6.75% to 7.25%, we understand.

All three tranches look set to offer cat bond investors a risk-adjusted price increase on previous USAA cat bonds and the one-year tranche looks like it could be one of the highest coupon 144A cat bond tranches to ever hit the market.

Update 1:

USAA’s target for its latest cat bond has been lifted and the carrier is now aiming to secure as much as $400 million of multi-year, fully collateralized, multi-peril catastrophe reinsurance protection from the capital markets with its new Residential Reinsurance 2020 Limited (Series 2020-2) transaction.

The highest risk and one-year term zero-coupon Class 1 tranche of notes, which have an initial expected loss of 14.84% at the base case, attaching at $688 million of losses to USAA, remain at $50 million in size and their pricing has now been fixed at the upper-end of guidance, with a coupon equivalent price of 26%, or 74% of par on offer to investors.

At that level, this will be the highest paid ResRe catastrophe bond tranche ever and represents an increase on previous years pricing that looks to be around the 3% equivalent, in coupon terms.

The Class 3 tranche of notes, which will have a four-year term and an initial expected loss of 3.53% at the base case, attaching at $1.875 billion of losses to USAA on a per-occurrence basis, launched seeking $100 million of protection for the carrier. This tranche looks set to increase in size to $150 million, we understand, while the price guidance has dropped from the initial coupon guidance of 8.75% to 9.25%, to now be offered at 8.25% to 8.75%, we understand.

The final million Class 4 tranche of notes, which also have a four-year term with an initial expected loss of 2.32% at the base case and attach at $2.55 billion of losses to USAA, were targeting $150 million of reinsurance limit for the carrier, but this has been increased to $200 million. At the same time, price guidance for this last tranche has also dropped from the initial 6.75% to 7.25%, to now be offered with guidance of 6.25% to 6.75%, we’re told.

So, the two four-year tranches look set to upsize with pricing at or below their initial guidance, while the riskier one-year layer remains static in terms of size and has seen its pricing rise.

Update 2:

USAA secured the upsized $400m of collateralized reinsurance limit from its latest catastrophe bond.

The Class 1 riskiest tranche priced its zero-coupon notes at 74% of par, a roughly 26% coupon equivalent.

The Class 3 tranche priced at the low-end of reduced guidance, at 8.25%.

The Class 4 tranche was also priced at the low-end of the reduced guidance, at 6.25%.

The Class 3 and 4 tranches saw their coupons decline by roughly 8% and 11% from the mid-point of initial guidance during marketing.

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