Residential Reinsurance 2023 Limited (Series 2023-2)

USAA, the most consistent and prolific of catastrophe bond sponsors, is back in the market with what will be the 42nd catastrophe bond transaction we have covered that is sponsored by the military mutual insurer.

Cayman Islands based structure Residential Reinsurance 2023 Limited will seek to issue three tranches of Series 2023-2 notes, that will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the vehicle and USAA, we understand.

The three tranches will provide USAA with per-occurrence and indemnity based 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).

One riskier and also zero-coupon tranche will provide USAA with a single year of reinsurance protection to the end of November 2024, while the other two will provide protection across a four-year term, running to the end of November 2027.

A Class 2 tranche of notes are $50 million in size and the zero-coupon layer set to provide a single year of protection to USAA. As said, these are riskier, attaching at $1.75 billion of losses to USAA, so have an initial attachment probability of 7.84%, an initial expected loss of 5.91% and are offered with price guidance of 85% to 86% of par, so a rough spread equivalent would be 14% to 15%.

A $100 million Class 3 tranche of notes would offer four years of reinsurance protection, attaching at $2.45 billion of losses to USAA, so have an initial attachment probability of 4.43%, an initial expected loss of 3.05% and are offered with price guidance of 8.5% to 9.25%, we’re told.

The final $150 million Class 5 tranche of notes will also have a four year term, but are the most remote attaching at $4.35 billion of losses to USAA, so have an initial attachment probability of 1.49%, an initial expected loss of 1.25% and are offered with spread price guidance of 5.75% to 6.25%.

Update 1:

USAA is aiming to upsize this Residential Re 2023-2 catastrophe bond issuance to provide as much as $400 million of reinsurance protection.

At the same time, the price guidance has lowered towards the bottom end of the marketed range for all three layers of notes on offer.

The Class 2 tranche of notes remain at $50 million in size and are the riskier layer of notes on offer, with an initial expected loss of 5.91%. They were first offered as zero-coupon notes with price guidance of 85% to 86% of par, so a rough spread equivalent would be 14% to 15%, but that has now narrowed to 86% to 86.5%, so a rough spread equivalent of 13.5% to 14%, meaning the price has dropped while being marketed.

The Class 3 tranche of notes have increased in size from $100 million to now become a $150 million offering. With their initial initial expected loss of 3.05%, they were first offered with price guidance of 8.5% to 9.25%, but we’re now told this has also dropped to 8.5% to 8.75%.

The final $150 million Class 5 tranche of notes are now targeted at between that level and $200 million, depending on demand. They have an initial expected loss of 1.25% and were first offered with spread price guidance of 5.75% to 6.25%, but sources said this price has also fallen to be fixed at 5.75%.

Update 2:

USAA successfully secured its latest Residential Re catastrophe bond upsized by roughly one-third, to provide it $400 million of reinsurance protection.

At the same time the spread was priced for each of the three tranches of notes at the low-ends of guidance.

The Class 2 tranche of notes were finalised at $50 million in size with spread guidance of 86.5%, being zero-coupon discount notes, so a rough spread equivalent of 13.5%.

The Class 3 tranche of notes were finalised at $150 million in size, while their spread was fixed at the low-end of 8.5%.

The final Class 5 tranche of notes were finalised at $200 million, with their spread pricing fixed at 5.75%.