Residential Reinsurance 2024 Limited (Series 2024-1)

USAA, the most consistent and prolific of catastrophe bond sponsors, is back in the market with what will be the 43rd catastrophe bond transaction issuance we have covered that is sponsored by the military mutual insurer.

This issuance is the regular May deal from USAA, seeing the military mutual insurer looking to secure $175 million in aggregate fully-collateralized catastrophe reinsurance protection from the capital markets.

For this issuance, USAA is bringing a zero-coupon tranche of notes that will provide one-year multi-peril aggregate catastrophe reinsurance protection and two tranches that will provide four years of cover.

Residential Reinsurance 2024 Limited has been established in the Cayman Islands to issue these Series 2024-1 catastrophe bond tranches for USAA.

The three tranches of Series 2024-1 notes will be sold to investors and the proceeds used to collateralize the underlying reinsurance agreements between the issuing vehicle and USAA, we understand.

The three tranches will provide USAA with annual aggregate 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).

All three tranches of notes feature a $50 million event deductible, meaning that loss events must cause that much ultimate loss to USAA before they can be counted for aggregation purposes.

The riskier Class 11 tranche of zero-coupon notes will provide USAA with a single year of reinsurance protection to the end of May 2025, while the other two tranches will provide aggregate protection across a four-year term, running to the end of May 2028, we are told.

The zero-coupon Class 11 tranche of notes are targeted at a maximum size of $50 million we understand and will provide one-year of coverage, attaching at $2.45 billion of qualifying losses to USAA up to $3.1 billion, giving them an initial base attachment probability of 8.5%, an initial base expected loss of 5.47% and these are being offered with pricing at 83% to 84% of par, so a rough 16% to 17% spread equivalent.

A Class 13 tranche are targeted at $50 million in size and will provide four-year coverage, attaching at $3.1 billion of qualifying losses to USAA up to $4.1 billion, giving them an initial base attachment probability of 3.47%, an initial base expected loss of 2.04% and these are being offered with price guidance of 8.5% to 9.25%.

The final Class 14 tranche are preliminarily targeted at $75 million in size and will also provide four-year coverage, attaching at $4.1 billion of qualifying losses to USAA up to $5 billion, giving them an initial base attachment probability of 1.06%, an initial base expected loss of 0.77% and these are being offered with price guidance of 5.5% to 6.25%.

As a result, these three tranches will sit one on top of the other in the USAA aggregate reinsurance tower, taking a share of any aggregated losses from attachment of the riskiest tranche at $2.45 billion right the way up to exhaustion of the most remote tranche at $5 billion.

Update 1:

We’re told the Class 11 riskiest and zero-coupon tranche of notes from this issuance will not now be placed and have been dropped.

As a result, the target size has fallen to $125 million, across the remaining two tranches of four-year notes, while the price guidance for both have narrowed to the lower-end of the initial ranges.

The Class 13 tranche of notes remain $50 million in size and with their initial base expected loss of 2.04% these notes were initially offered with price guidance of 8.5% to 9.25%, but we’ve now learned this has been narrowed towards the lower-end at 8.5% to 9%.

The Class 14 tranche also remain at their initial target of $75 million in size and with their initial base expected loss of 0.77% these were initially offered with price guidance of 5.5% to 6.25%, but again we understand that to have narrowed towards the lower-end at 5.5% to 6%.

Update 2:

USAA successfully priced the remaining two tranches of cat bond notes from this Residential Re 2024-1 issuance, securing the original target for $125 million of reinsurance across the two layers.

The Class 13 tranche of notes priced at their initial $50 million in size. With their initial base expected loss of 2.04% these notes were first offered with price guidance of 8.5% to 9.25%, which was then narrowed towards the lower-end at 8.5% to 9% and we’re now told the spread was finalised at 9%, so nearer to the upper-end of the initial range.

The Class 14 tranche also priced at their initial target size of $75 million. With their initial base expected loss of 0.77% these were first offered with price guidance of 5.5% to 6.25%, which narrowed towards the lower-end at 5.5% to 6%, but we’re now told have priced for a spread of 5.75% to be paid to investors, so in this case nearer to the low-end of initial guidance.