Residential Reinsurance 2018 Limited (Series 2018-1)

This is USAA’s 31st securitization of insurance risk as a catastrophe bond, further extending the insurers use of the capital markets and ILS investors as a source of collateralized reinsurance capacity.

USAA returns with a new special purpose insurer Residential Reinsurance 2018 Limited, which will seek to issue $175 million at least in two tranches of Series 2018-1 notes to collateralize a multi-peril reinsurance agreement for the insurer.

The Residential Re Ltd. 2018-1 cat bond will provide USAA with reinsurance protection against losses from U.S. tropical cyclones (plus renter policy flood), earthquakes (plus fire following and renter policy flood), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and other perils (including auto policy flood).

In this cat bond the one new addition, compared to previous Residential Re deals, is the inclusion in the covered perils auto policy flood caused by other perils.

Both tranches will provide USAA with annual aggregate reinsurance protection on an indemnity trigger basis, with a $75 million Class 11 tranche structured as a zero-coupon note providing one year of cover, while a $100 million Class 13 tranche will provide four years of reinsurance protection.

The $75 million Residential Re 2018-1 Class 11 notes, the one year zero coupon notes, will attach at $1.45 billion of losses to USAA, covering a layer up to $1.7 billion, and have an initial attachment point of 9.74% and expected loss of 7.3%. This tranche are being offered to ILS investors with price guidance of 86.75% to 87.75% of par value, which is akin to a coupon of 12.25% to 13.25%.

The $100 million Residential Re 2018-1 Class 13 notes, which will cover four years for USAA, will attach at $2.3 billion of losses and cover up to $3.7 billion, and have an initial attachment point of 1.76% and expected loss of 0.82%. These notes are being offered to investors with coupon guidance of 3.5% to 4%, our sources said.

Update 1:

The Residential Re 2018-1 cat bond looks set to both increase in size and see its pricing drop, benefiting the sponsor with more coverage at lower cost.

Investors have made their appetite clear and now we’re told that USAA is targeting anywhere from $225 million to as much as $325 million of fully-collateralized reinsurance protection from this deal.

At launch, the zero coupon Residential Re 2018-1 Class 11 notes was sized at $75 million, but we’re told this tranche is now targeting an issuance of up to $100 million for USAA. The Class 11 notes have an expected loss of 7.3% and were initially offered to cat bond investors with price guidance of 86.75% to 87.75% of par value, akin to a coupon of 12.25% to 13.25%, but this has now dropped to 87.75% to 88.25% we’re told, an 11.75% to 12.25% coupon equivalent.

The second tranche of notes with a four-year term, the Residential Re 2018-1 Class 13 tranche of notes, began as a $100 million layer, but sources said the target for this tranche now sits at $150 million to $225 million. The Class 13 notes with an initial expected loss of 0.82% were offered to investors with coupon guidance of 3.5% to 4%, but we’re now told this has dropped to between 3% and 3.5%.

Update 2:

The Residential Re 2018-1 cat bond is set to complete at $300 million in size and with pricing well-below the initial spread guidance levels.

The zero coupon Residential Re 2018-1 Class 11 tranche has settled at $100 million in size for USAA with pricing at the bottom of the reduced range, at 88.25% of par value, reflecting a 12.25% coupon.

The four-year term Residential Re 2018-1 Class 13 tranche of notes settled at $200 million in size with pricing now fixed at 3.25%, so below the initial guidance.

Standard & Poor’s rated the Class 13 tranche of notes ‘B(sf)’ and highlighted that the attachment probability and expected loss can be reset to maximums of 2.26% and 1.07% at resets.

Update June 4th 2019:

The $100 million Residential Reinsurance 2018 Limited (Series 2018-1) Class 11 tranche of notes has had its maturity extended to September 6th, but its principal remains intact at this time.

This ResRe 2018-1 Class 11 tranche of notes has been marked down for bids as low as 20, suggesting a potential 80% loss of principal. This was a one-year tranche providing aggregate reinsurance protection.

Update, September 3rd 2019:

The $100 million Residential Reinsurance 2018 Limited (Series 2018-1) Class 11tranche of notes has had its maturity extended to December 6th, but its principal still remains fully intact at this time.

Update, December 3rd 2019:

The Class 11 tranche of notes has now recorded a loss payment under its reinsurance agreement and as a result a principal reduction of $42,596,036, leaving the tranche with now $57,403,964 of principal left outstanding and also extended through to March 6th 2020.