Residential Reinsurance 2023 Limited (Series 2023-1)

USAA, the U.S. primary mutual insurer, has returned to the catastrophe bond market with what will be the 40th transaction listed under the Residential Re name in our extensive Deal Directory.

Having been sponsoring catastrophe bonds since 1997, USAA is one of the longest-standing and perhaps the most consistent of sponsors in the cat bond market, with regular Q2 and Q4 deals stretching back many years.

This is actually the insurers 41st cat bond we have tracked to-date, as one in 2016 came under the Espada Re issuing vehicle. View information on every USAA sponsored cat bond here.

The insurer has established a new Cayman Islands based special purpose vehicle, Residential Reinsurance 2023 Limited for its cat bonds this year.

Residential Reinsurance 2023 Limited will look to issue two tranches of Series 2023-1 notes, that will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the vehicle and USAA.

The two tranches will provide USAA with annual aggregate reinsurance protection against losses from the perils of 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).

This is the same group of perils covered by all of USAA’s multi-peril cat bonds for some years now.

The reinsurance protection will run across annual risk periods though a four-year term, beginning June 2023 and running to the end of May 2027, we understand.

Both tranches of notes will feature an indemnity trigger and their provide annual aggregate coverage after an initial event deductible of $50 million is applied, to qualify catastrophes under the terms of the cat bond deal, we’re told.

A tranche of Class 13 notes have a preliminary size of $75 million and would attach their coverage at $2.725 billion in losses to USAA, exhausting that at $3.6 billion, sources said.

This gives the Class 13 notes an initial attachment probability of 3.63%, an initial base expected loss of 2.11% and this tranche is being offered with price guidance in a range from 10% to 10.75%.

A tranche of Class 14 notes have a preliminary size of $125 million and are less risky, attaching at $3.6 billion in losses and covering a share of layer to $4.65 billion in losses, we understand.

Which we’re told gives the Class 14 notes an initial attachment probability of 1.18%, an initial base expected loss of 0.75% and these notes are being offered with price guidance in a range from 6.75% to 7.25%.

At the mid-points of these spread guidance ranges, the Class 13 notes would pay a multiple-at-market of 4.9 times the initial base expected loss, while the Class 14 notes would pay a multiple of 9.3 times EL, with these multiples appearing roughly 30% and more higher than comparable tranches issued early in 2022.

Update 1:

We’re now told that the target for this Residential Re 2023-1 cat bond has been lifted to between $300 million and $400 million, so a potential doubling in size of the reinsurance protection it will provide to USAA.

A tranche of Class 13 notes had a preliminary size of $75 million, but the target has now been lifted to between $100 million and $125 million of protection for USAA.

The Class 13 notes have an initial base expected loss of 2.11% and were first offered with price guidance in a range from 10% to 10.75%, but this has now been narrowed to guidance of 10% to 10.5%, we understand.

A tranche of Class 14 notes launched with a preliminary size of $125 million, but this target is now for between $200 million and $275 million of cover for USAA.

The Class 14 notes have an initial base expected loss of 0.75% and were first offered with price guidance in a range from 6.75% to 7.25%, but this has now also narrowed to a range of 6.5% to 6.75%, so could price at or below the low-end of initial guidance, we’re told.

Update 2:

USAA secured the 100% upsizing of its latest catastrophe bond, with this issuance set to provide it $400 million of collateralized multi-peril reinsurance protection.

The Class 13 notes upsized to $125 million, with the notes having an initial base expected loss of 2.11%, they were priced to pay investors a spread of 10.5%, so in the upper-half of initial price guidance.

The Class 14 notes secured USAA $275 million of reinsurance cover, with their initial base expected loss of 0.75% they priced to pay investors a spread of 6.5%, so below the low-end of initial guidance.