Some of the loss hit catastrophe bonds sponsored by U.S. primary mutual insurer USAA have benefited from a return of principal with respect to previously made loss payments under certain reinsurance agreements, presumably a sign of wildfire related subrogation recoveries flowing to the benefit of cat bond funds and investors.
USAA faced losses across a number of annual aggregate catastrophe bonds after the California wildfires of 2018 raised its losses to the level where it began to make reinsurance recoveries from a number of its outstanding catastrophe bond issues.
Now, we’ve learned that three cat bond issuances have benefited from returns of principal, as some loss payments made under specific reinsurance agreements have been returned.
That’s such a rare occurrence that it can only be due to the PG&E wildfire subrogation payments that have been flowing through the insurance and reinsurance markets, being recorded as recoveries by impacted primary insurers who in turn reduce their ultimate losses from the fires and are seeing some adjustments to reinsurance benefits received as a result of this.
This the first example of catastrophe bonds having some principal that was considered lost paid back, which will please holders in the bonds as their positions will increase in value in-line with the returns of principal made.
USAA is not one of the primary insurance carriers that has reported a subrogation recovery at this stage.
Most recently, Allstate reported a significant $450 million PG&E related subrogation on claims related to the California wildfires, which is the figure reported by the carrier net of reinsurance adjustments.
Some benefits from these recoveries are expected to flow to reinsurance providers, with certain private ILS and collateralised reinsurance positions and also quota shares expected to be beneficiaries.
But these USAA cat bonds are the first we know of to benefit, presumably from the same source of PG&E related wildfire subrogation claim recoveries made by the insurer.
The first of USAA’s cat bonds to benefit from a recovery of principal is the Residential Reinsurance 2015 Limited (Series 2015-1) aggregate cat bond transaction.
This transaction has seen a particularly significant return of principal, under the related reinsurance agreement as a recovery from a previously made loss payment, amounting to $49,844,508 with respect to its Class 10 Notes The payment will be made on September 8th 2020.
These notes had been considered a total loss, so the outstanding net principal of the ResRe 2015-1 Class 10 Notes has been increased to that same amount, just under $50 million.
At the same time, the Class 11 notes from the same ResRe 2015-1 catastrophe bond, has recovered $446,279 taking their net principal up to $20,000,000.
The $20 million of Class 11 notes will now be allowed to mature on schedule on September 6th, we understand, while the maturity date for the almost $50 million of Class 10 notes from this cat bond have had their maturity extended again to December 6th 2020.
The second affected transaction is USAA’s Residential Reinsurance 2016 Limited (Series 2016-1) cat bond.
The Class 10 notes of this cat bond will benefit from a $19,083,604 return of principal on September 8th, related to a previously made loss payment under the related reinsurance agreement. As a result, its net principal has been raised to the same level, with this tranche of notes having been also considered a total loss before.
The Class 11 notes from the same ResRe 2016-1 cat bond transaction have also received a return of principal, again a recovery from a previously made loss payment, of $334,710 which takes this tranches net principal to $15,000,000.
Like the 2015 Residential Re cat bond, the Class 11 notes of this 2016-1 deal are now set to be allowed to mature on September 6th, while the Class 10 notes will have their maturity extended to December 6th.
Another of USAA’s catastrophe bonds that had been hit by catastrophe losses has also benefited, the Espada Reinsurance Limited (Series 2016-1) transaction.
This single tranche arrangement will receive a $5,157,934 return of principal on September 8th, increasing its net principal amount to $14,981,587.
USAA is then releasing some of the trapped collateral back to the investors in this cat bond, returning $5,000,000 and so reducing the remaining principal to to $9,981,587.
At the same time that remaining principal of USAA’s Espada Re cat bond has had its maturity extended to December 6th.
So, in total it appears USAA’s catastrophe bonds have benefited from a more than $75 million return of principal, which will please investors in the notes who stand to benefit from additional value being recovered in holdings they assumed had been lost, as well as additional trapped collateral being returned.
Some of the notes remain on risk, so loss creep from other qualifying catastrophe events could dent the principal again. But thanks to these returns of principal, which we can only assume are related to the PG&E wildfire subrogation recovered made by USAA, the holders of the cat bonds have increased the value of their investments in the notes.
It will be interesting to see whether any other catastrophe bonds benefit from returns of principal as a result of the subrogation.
As we said, these are the first we’ve heard of and it’s good to see the benefits of the subrogation payments flowing through the market right down to catastrophe bond investors.
Also, we have no official confirmation this is due to wildfire subrogation recoveries made by USAA, but it seems the most likely reason for principal returning to catastrophe bonds that had been considered a total loss.