USAA pulls riskier ResRe 2020 cat bond tranche & settles for $100m

U.S. primary mutual insurer USAA has elected to withdraw the riskier tranche from its newest Residential Reinsurance 2020 Limited (Series 2020-1) catastrophe bond transaction and despite aiming to slightly upsize the remaining lower-risk layer of the issuance has now settled for $100 million of coverage, we understand.

We’re told this is in response to a lack of catastrophe bond investor appetite for the higher risk, aggregate reinsurance layer of the Residential Re 2020-1 cat bond issuance.

Investors in insurance-linked securities (ILS) are showing an increased desire to allocate capital higher up in reinsurance towers in 2020, particularly on aggregate contracts – a response to the losses suffered in recent years, as well as a belief that new issuances often aren’t priced highly enough to compensate for losses taken, or for the perceived higher cost-of-capital as a result of the Covid-19 pandemic.

USAA had come back to the catastrophe bond market earlier in May with a two tranche ResRe 2020-1 cat bond deal, that sought multi-peril, annual aggregate reinsurance protection for the insurer across a four-year term.

The deal featured two tranches of notes, with only one having a target size of $100 million, while the higher risk layer had no target size.

Both tranches would have covered USAA against 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.

As we explained, the path to market has not been easy for this ResRe catastrophe bond, with USAA already having had to add a specific pandemic and communicable disease exclusion to the deals terms to cover the risk of it being included under ‘other’ perils.

It seems the pandemic exposure was not the only feedback cat bond investors had for this issuance, with the appetite for the higher risk tranche insufficient to make issuance viable at the right price, we understand.

So the riskier Class 12 tranche of notes, that were unsized and had an initial expected loss of 3.97% at the base case, with price guidance in a range from 9.25% to 10%, have now been withdrawn from the issuance completely.

We understand it’s likely USAA will secure this layer of aggregate reinsurance protection in the traditional reinsurance market if it can.

The remaining Class 13 tranche of notes, which are lower risk but still set to provide four years of annual aggregate and multi-peril reinsurance protection to USAA are still being issued, we’re told.

This Class 13 tranche launched targeting a $100 million issuance, which we’re told USAA looked to upsize with the target lifting to up to $125 million. But in the end, we understand that this wasn’t successful and the tranche remained at $100 million in size.

The Class 13 notes are less risky, with an initial base expected loss of 1.08% and price guidance in a range from 5% to 5.5%, attaching at $2.7 billion of losses. We’re told the price guidance has now been moved to the top-end of that guidance range, at 5.5%.

At this upper end of pricing, the notes would have a multiple of around 5 times the base expected loss, a healthy return for a USAA catastrophe bond deal.

The most comparable recent notes are the Class 13 Residential Re 2019-1 notes, which had a multiple at market of 4.5 times.

The multiple on the now withdrawn Class 12 notes from this 2020-1 issuance was marketed as just 2.3 to 2.5 times the base expected loss.

It seems catastrophe bond funds and investors are just not going to price that kind of risk as low any more, for this aggregate, all-natural perils type coverage that USAA tends to secure with its cat bond transactions.

Sources suggest catastrophe bond investors are making a conscious move away from riskier layers, which at a time of hardening catastrophe rates and after the repeated years of losses, is perhaps a sensible move.

It’s encouraging to see repeat sponsors such as USAA persisting with their catastrophe bond issues, even in more challenging market conditions.

You can read all about this Residential Reinsurance 2020 Limited (Series 2020-1) catastrophe bond and every other cat bond transaction USAA has ever sponsored in the Artemis Deal Directory.