USAA gets $400m ResRe cat bond. Lower-risk tranches price down

USAA has successfully secured the upsized target of $400 million of reinsurance limit from its latest catastrophe bond transaction, with the two lower-risk tranches of the Residential Reinsurance 2020 Limited (Series 2020-2) transaction pricing down significantly for the insurer.

USAA returned to the catastrophe bond market around mid-October with its second cat bond transaction of 2020 and what will become the 36th issuance sponsored by USAA that we have listed in our extensive Artemis Deal Directory.

At launch of its new cat bond transaction, USAA was seeking $300 million of fully collateralized reinsurance from the capital markets through the issuance of three tranches of catastrophe bond notes by its recently registered Residential Reinsurance 2020 Limited Cayman Islands domiciled vehicle.

The target increased to $400 million of collateralized catastrophe reinsurance limit and that is where the deal has now priced, securing the upsized deal for USAA.

But the transaction also provided a view of catastrophe bond market pricing, with the higher risk layer, which is perhaps the highest expected loss 144A cat bond tranche ever, has priced up.

But the two lower-risk layers have both priced down well below the bottom of the initial guidance range, demonstrating cat bond investors demand for issuance right now and also the ability of cat bond investors to assume catastrophe risk from well-regarded primary insurance carriers at efficient pricing.

Now priced, the ResRe 2020-2 cat bond will provide USAA with up to four years of reinsurance protection against losses in the United States from multiple catastrophe perils, on an indemnity trigger and per-occurrence basis.

The two lower-risk tranches will provide four years of protection and the third, higher-risk layer one year. All three tranhces will provide USAA with reinsurance cover against certain losses from 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) in the United States.

The highest risk, one-year term zero-coupon Class 1 tranche of notes, which have an initial expected loss of 14.84% at the base case, attaching at $688 million of losses to USAA, will settle providing $50 million of reinsurance at pricing fixed at the upper-end of initial guidance, with a coupon equivalent price of 26%, or 74% of par to be paid to investors.

This will now be the highest paid ResRe catastrophe bond tranche ever and represents an increase on previous years pricing that looks to be around the 3% equivalent, in coupon terms.

At the lower-risk end, the Class 3 tranche of notes, which will have a four-year term and an initial expected loss of 3.53% at the base case, attaching at $1.875 billion of losses to USAA on a per-occurrence basis, will settle at the upsized $150 million (a $50m increase). For this tranche, the price guidance dropped from the initial range of 8.75% to 9.25%, to be offered with pricing of 8.25% to 8.75% and this has now been priced at the bottom of that reduced guidance, with a coupon of 8.25%.

The last Class 4 tranche of notes, which also have a four-year term with an initial expected loss of 2.32% at the base case and attach at $2.55 billion of losses to USAA, so being the lowest-risk layer, have now secured the $200 million upsized target (again an increase of $50m). Price guidance for this last tranche began at 6.75% to 7.25%, which then fell to 6.25% to 6.75% and has now been fixed at the low-end of reduced coupon guidance at 6.25%.

So the Class 3 tranche saw its coupon fall by 8% from the initial mid-point, while the Class 4 notes coupon fell by almost 11% during marketing.

Comparably with previous year’s ResRe deals, the pricing is now close, although still a slight uptick on a risk-adjusted basis it appears.

It’s a good result for USAA though, in securing one layer of reinsurance that reflects the lowest-down cat bond coverage it may ever have had in its tower, even though pricing rose. While the two lower-risk layers came in with pricing much keener than had been expected, reflecting the strong execution in the issuance and also ILS fund investors confidence in USAA as a sponsor of cat bonds.

Once this new transaction settles USAA will have more than $2 billion of catastrophe bond backed reinsurance coverage from the capital markets, according to our chart of cat bond risk capital outstanding by sponsor.

You can read all about this Residential Reinsurance 2020 Limited (Series 2020-2)catastrophe bond and every other cat bond transaction USAA has ever sponsored in the Artemis Deal Directory.