The top-end of the target size for U.S. primary military mutual insurer USAA’s latest, the Residential Reinsurance 2018 Ltd. (Series 2018-1) transaction, has been lifted to as much as $325 million, an 85% increase on the launch size and at the same time the pricing is set to drop.
USAA, the most prolific sponsor of catastrophe bonds, returned to the market this month with its 31st cat bond issuance that was launched to the market as a $175 million Residential Re 2018-1 transaction.
Once again, 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.
The Residential Re 2018-1 cat bond seeks a source of reinsurance to protect USAA 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).
The inclusion in the covered perils of auto policy flood losses, caused by the other perils category, is a new addition in this cat bond for USAA, as the insurer continues to push the scope of the reinsurance coverage that the capital markets provide.
The cat bond, which features two tranches of Series 2018-1 notes, will provide USAA with annual aggregate reinsurance protection on an indemnity trigger basis, from a Class 11 tranche structured as a zero-coupon note offering one year of cover, as well as a Class 13 tranche which will provide the insurer with four years of reinsurance protection.
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%.
So this looks set to be the latest 2018 catastrophe bond to increase in size and see its pricing become keener, thanks to the abundant demand being shown by investors for the reinsurance asset class at this time.
With records having been set for cat bond issuance in the first-quarter of 2018, the second-quarter may not beat the huge amount of issuance seen a year ago, but overall we could see first-half issuance at least being the second-highest on record this year.