USAA launches 34th cat bond, a $150m Residential Re 2019-2 multi-peril deal

USAA is returning to the capital markets for what will be its 34th time sponsoring a catastrophe bond, bringing a new multi-peril Residential Reinsurance 2019 Limited (Series 2019-2) deal to market in search of at least $150 million of collateralised reinsurance protection.

USAA remains the longest standing and most prolific sponsor of catastrophe bonds in the market, having sponsored its first transaction in 1997 (the second deal ever listed in our extensive cat bond transaction Deal Directory) and returned every year since with at least one new transaction.

This kind of commitment and repeat sponsorship has seen the insurer generate significant loyalty from the cat bond and ILS fund investor base as well, as investors and fund managers are looking to develop these long-term relationships with the sponsors of catastrophe bonds, in becoming regular providers of reinsurance capital.

This Residential Re 2019-2 cat bond transaction will be USAA’s second issuance of the year and sees the insurer returning to the insurance-linked securities (ILS) market for an at least $150 million source of fully collateralised catastrophe reinsurance protection.

With its latest cat bond, we’re told that USAA is looking to secure a four-year source of collateralised indemnity reinsurance protection.

We understand that the covered perils are the same as in the last couple of USAA cat bond deals, so this will effectively provide an almost all-natural perils type coverage for the insurer.

This Residential Re 2019-2 cat bond will cover some of USAA’s losses from U.S. tropical cyclones, earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and so-called other perils (with other perils all including auto & renter policy flood losses).

The coverage is on a per-occurrence basis for this ResRe 2019-2 cat bond deal, as USAA continues to mix aggregate and occurrence protection from the capital markets on an issue by issue basis.

USAA’s first cat bond in any given year tends to be an annual aggregate structure, while its second issuance is typically per-occurrence, at least over the last four years.

For this new issuance, Cayman Islands domiciled special purpose vehicle Residential Reinsurance 2019 Limited will seek to issue two tranches of Series 2019-2 notes which will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the SPV and USAA.

The first tranche will be $50 million or greater Class 1 set of notes which will only be on-risk for one year and will provide a lower down layer of reinsurance protection for USAA.

USAA has regularly brought these one-year layers of cat bond notes to market, as it fills out the lower layers of its reinsurance tower with the assistance of the capital markets.

As ever, these lower down, one-year cat bond tranches from USAA are typically much riskier as a result, which is reflected in the metrics for this Class 1 tranche, attaching at $650 million of losses to USAA and having an attachment probability of almost 21% we understand, with an expected loss of 14.31% at the base case.

The Class 1 tranche of notes will be structured as zero-coupon and pricing is currently marketed at between 79% and 76% of par value, which means investors are effectively being offered a coupon equivalent spread in a range from 21% to as high as 24%.

That’s one of the highest coupons ever seen for a USAA sponsored Residential Re catastrophe bond transaction, but the expected loss is only just slightly higher than last year’s equivalent one year tranche, suggesting a higher multiple for the investors that choose to back this deal.

For a pricing comparison we can look back to the Residential Re 2017-2 Class 1 tranche of notes, which were also zero-coupon and provided one year of reinsurance. This tranche had a higher expected loss of 15.75% and in the end paid investors a 21% coupon equivalent.

The 2019-2 cat bond will clearly pay a higher multiple to those who invest in it as a result. Likely a recognition of the losses USAA has borne in recent years and the fact its cat bond backers supported it in paying customer claims.

The second tranche of notes is a currently $100 million Class 2 tranche, which will provide USAA with a four-year layer of reinsurance protection.

The Class 2 notes have an attachment probability of 9.78%, attaching at $1.073 billion of losses to USAA we understand, which gives them an initial expected loss of 5.87%.

The $100 million of Class 2 notes are being offered to investors with coupon price guidance in a range from 11.25% to 12.25%.

For comparison, the 2018-2 Residential Re cat bond had a four-year occurrence Class 2 tranche with an expected loss of 6.45% and it settled to pay investors an 11.5% coupon.

Again, the pricing of the 2019-2 cat bond looks a step up from that, on a multiple at market basis.

Of course multiples alone are not a robust pricing metric, without understanding the full terms and conditions of the catastrophe bond and how they differ to prior year deals. But they do provide a rough comparison metric that is useful, which in this case implies higher pricing guidance for this latest USAA cat bonds.

As ever, USAA has elected to cover a wide layer of its reinsurance program with each of these cat bond tranches, meaning there is plenty of room to upsize should investor demand support it to do so.

It will be interesting to see how these tranches price, as it will provide a glimpse into investor demand for higher-yielding cat bonds with the Class 1 notes and a more typical cat bond layer with the Class 2’s.

USAA tends to use the placement process of its catastrophe bonds as an opportunity to balance feedback from cat bond investors with pricing expectations for the traditional reinsurance market as well, allowing the firm to utilise the capital markets and traditional markets in harmony, achieving a more efficient distribution of its risk and pricing of its reinsurance protection.

In total USAA has to-date secured around $8.2 billion of reinsurance protection from the capital markets through its Residential Re catastrophe bond series and the single Espada Re deal. This new transaction will take that to at least $8.35 billion.

You can read all about this Residential Reinsurance 2019 Limited (Series 2019-2) catastrophe bond and every other transaction USAA has ever sponsored in the Artemis Deal Directory.

We’ll update you as and when any further information on this latest cat bond comes to light.