U.S. primary mutual insurer USAA has increased its target size for its latest catastrophe bond, with the insurer now aiming to secure as much as $400 million of multi-year, fully collateralized, multi-peril catastrophe reinsurance protection from the capital markets with its new Residential Reinsurance 2020 Limited (Series 2020-2) transaction.
USAA returned to the catastrophe bond market earlier this month with what will be its second cat bond transaction of 2020 and the 36th issuance sponsored by USAA that we have listed in our extensive Artemis Deal Directory.
When the deal launched, 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.
Now, that target has increased, with two tranches of the deal looking likely to be upsized and the overall target lifted to $400 million.
If successful with this upsizing, this ResRe 2020-2 cat bond will be USAA’s largest since mid-2017 and sit among the largest in its extensive Residential Re cat bond program that will now feature some 35 individual issuances.
The new cat bond transaction 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.
Two of the tranches of notes will provide four years of protection and the third one year, with all providing reinsurance cover for 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 and 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, remain at $50 million in size and their pricing has now been fixed at the upper-end of guidance, with a coupon equivalent price of 26%, or 74% of par on offer to investors.
At that level, this will 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.
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, launched seeking $100 million of protection for the carrier. This tranche looks set to increase in size to $150 million, we understand, while the price guidance has dropped from the initial coupon guidance of 8.75% to 9.25%, to now be offered at 8.25% to 8.75%, we understand.
The final million 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, were targeting $150 million of reinsurance limit for the carrier, but this has been increased to $200 million. At the same time, price guidance for this last tranche has also dropped from the initial 6.75% to 7.25%, to now be offered with guidance of 6.25% to 6.75%, we’re told.
So, the two four-year tranches look set to upsize with pricing at or below their initial guidance, while the riskier one-year layer remains static in terms of size and has seen its pricing rise.
It will be interesting to see how the pricing is finalised on the two four-year tranches, as at the bottom of the initial guidance they will still represent an uptick on previous deals, but should they drop below that it will be eroding some of the price gains made by the catastrophe bond market in recent months.
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.