USAA gets $300m target, lower pricing for new Res Re 2021-2 cat bond

U.S. primary mutual insurance company USAA has successfully secured the upsized target of $300 million of collateralized multi-peril property catastrophe reinsurance with its latest catastrophe bond, as the new Residential Reinsurance 2021 Limited (Series 2021-2) transaction also priced at the reduced coupon levels.

The insurer will be delighted with how its latest catastrophe bond issuance will settle, as the issuance grew by one-third to provide USAA with more reinsurance and the pricing has settled well-below guidance, reflecting particularly attractive reinsurance pricing.

USAA returned to the catastrophe bond market last month with its regular November issuance of a per-occurrence catastrophe bond and the initial target was to secure $225 million or more of reinsurance from the capital markets from the deal.

This new Residential Reinsurance cat bond will be the 38th transaction from USAA that we have listed in our extensive Artemis Deal Directory.

Two tranches of notes were set to be issued, both per-occurrence and with indemnity triggers, covering the typical range of catastrophe and severe weather perils that USAA seeks its cat bond reinsurance protection for across a four year term.

Investor appetite helped both tranches of notes to increase in size, but the higher-risk tranche increased the most, reflecting investor appetite for higher-yielding cat bond investment opportunities.

The end-result is that USAA’s latest Cayman Islands special purpose cat bond issuance vehicle Residential Reinsurance 2021 Limited will now issue $300 million of notes across two Series 2021-2 tranches.

This Residential Re 2021-2 cat bond will provide USAA with four-years of per-occurrence reinsurance protection from the capital markets, covering certain losses from the typical perils that its recent cat bonds cover, so 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).

Coverage is across the 50 states of the US, as well as the District of Columbia, and the cat bond will feature an indemnity trigger, as all of USAA’s reinsurance tower does.

So, Residential Reinsurance 2021 will issue a $175 million Class 2 tranche of cat bond notes sized that will attach at $1.177 billion of losses and have an initial modelled expected loss of 6.6%. This higher-risk tranche were at first sized at just $125 million, so have grown by 40%.

They were initially offered to investors with coupon guidance in a range from 11.75% to 12.5%, which was then fixed at the low-end of 11.75%, and this is where the pricing has now settled, we understand.

Meanwhile, the lower-risk Class 3 tranche of notes will secure USAA $125 million of reinsurance, up 25% from the initially marketed $100 million and will attach at $2.125 billion of losses, with an initial modelled expected loss of 2.96%.

This Class 3 tranche were at first offered with price guidance in a range from 6.25% to 6.75%, but that pricing was updated and lowered to between 5.5% and 6.25%. We’re now told the Class 3 notes have priced at the bottom-end of that guidance, at 5.5%.

The price drop for the Class 3 notes has been relatively steep, at roughly 11% from the initial guidance mid-point.

But the multiple of 1.86 times the expected loss is still roughly aligned with other USAA per-occurrence cat bond issues at this risk-level, while the riskier tranches multiple of around 1.78 times the EL is also aligned with historical pricing and current market conditions, it seems.

But this is still a strong result for USAA and a strong indication of the catastrophe bond market’s ability to support long-term sponsors, even those that have delivered losses to investors over recent years.

This new Residential Reinsurance 2021 Limited (Series 2021-2) catastrophe bond settles later this month.

We’ll keep you updated and you can read about this and every other catastrophe bond in our Artemis Deal Directory.