U.S. primary mutual insurer USAA has made a number of reinsurance recoveries under its catastrophe bond programs it appears, reducing the principal outstanding on a number of tranches of both in-force and maturity extended cat bonds in the Residential Reinsurance series and its Espada Reinsurance deals.
Two of USAA’s still in-force catastrophe bonds, ResRe 2016-1 Class 10 and Espada Re, have seen a reduction in their principal, which may be after the sponsoring insurer made a successful reinsurance recovery claim under the terms of the notes.
The $65 million Residential Reinsurance 2016 Limited (Series 2016-1) Class 10 tranche of notes and the $50 million Espada Reinsurance Limited (Series 2016-1) catastrophe bond transaction were both considered at risk of potential loss, having been marked down in the secondary market as investors recognised the chance of a loss of principal.
However, neither of these cat bond tranches had seen a maturity extension yet, given they were both transactions with four-year terms issued in 2016, so still on-risk as of this date.
Now though, the Residential Re 2016-1 Class 10 notes has had its principal reduced from the issued $65 million to $21,467,693, a roughly two-thirds reduction in the amount of notes left outstanding.
The maturity date for these notes is June 6th 2020, so still a year to run.
The Residential Re 2016-1 Class 10 notes were marked down for bids as low as 7 in secondary broker pricing sheets, which suggested that investors expect this catastrophe bond to face more losses and an almost total loss of principal.
Meanwhile, the Espada Reinsurance cat bond transaction, that was also issued in 2016 and runs for four years, has seen its principal reduced from the $50 million of notes issued to $47,794,184, a roughly 4.5% reduction in the amount of notes left outstanding.
The maturity date for the Espada Re cat bond is also June 6th 2020, so too remains in-force and on-risk for another year.
The Espada Re cat bond notes were marked down for bids as low as 80 in broker’s secondary market pricing sheets, suggesting the market anticipated a roughly 20% loss of principal for this deal.
Given these tranches of USAA’s cat bonds had not had their maturity extended and remain on-risk it seems the most likely reason for a reduction in principal is a recognised loss or claim from USAA.
Both provide aggregate protection and it may be that the sponsoring insurers aggregated ultimate losses had risen above the trigger points, leading to an agreement from investors to support a certain level of reinsurance recovery at the end of this risk period, in order to realise some of the loss in advance of the final year of the cat bond term.
However we cannot confirm that at this stage, it just seems the most likely reason for reducing the principal of a cat bond that had not yet reached maturity, been extended or repaid any principal to investors to-date.
A number of other Residential Reinsurance cat bond tranches that had already had their maturities extended have also been affected by principal reductions and further extensions.
USAA’s $80 million Residential Reinsurance 2014 Limited (Series 2014-1) Class 10 tranche of annual aggregate cat bond notes has had its maturity further extended to September 6th 2019, but at the same time the net principal of these notes has been reduced to zero.
This ResRe 2014-1 Class 10 tranche had been priced down for a total loss in the secondary cat bond market, something that now appears to have occurred and it seems USAA has made a reinsurance recovery for the full limit.
Next, the Residential Reinsurance 2015 Limited (Series 2015-1) aggregate cat bond transaction has seen the net principal amount of its $50 million Class 10 notes reduced by almost half to $26,511,039, while the $100 million of Class 11 notes has seen its net principal amount reduced by 50% to $50 million.
Both of these ResRe 2015-1 tranches of cat bonds have had their maturities further extended to September 6th 2019.
The Class 10 notes issued by ResRe 2015 were marked down for an almost total loss, for bids as low as 7, while the Class 11 notes were marked down by brokers for roughly a 50% loss of principal.
Again, this suggests a reinsurance recovery may have been made under these Residential Re 2015-1 cat bond tranches.
Finally, the $100 million Residential Reinsurance 2018 Limited (Series 2018-1) Class 11 tranche of notes has had its maturity extended to September 6th, but its principal remains intact at this time.
This ResRe 2018-1 Class 11 tranche of notes has been marked down for bids as low as 20, suggesting a potential 80% loss of principal. This was a one-year tranche providing aggregate reinsurance protection.
So, adding these potential recoveries (important to stress ‘potential’, as we don’t have the details of any reinsurance recoveries made) together suggests that USAA may have been able to claim almost $200 million back from this range of its sponsored catastrophe bonds.
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