Primary mutual insurer USAA continues to work through the reinsurance implications of a range of loss events to its catastrophe bond program, with the latest development being a return of some principal from the Espada Reinsurance Limited (Series 2016-1) to investors.
USAA’s Espada Re catastrophe bond was issued in 2016, providing the carrier with multi-year and peril reinsurance protection from the capital markets.
It is the only cat bond issuance sponsored by USAA not to have used the Residential Re nomenclature.
The Espada Re cat bond secured USAA $50 million of multi-peril U.S. catastrophe reinsurance protection, on an annual aggregate basis, across a four-year term.
The Espada Re cat bond was exposed to losses due to the numerous catastrophes that USAA paid claims for over the course of 2017 into 2018.
As USAA’s qualifying aggregate losses from those catastrophe events increased, across an annual aggregate risk period that began each June, this Espada Re cat bond was among the transactions that were viewed as at-risk of triggering.
First, the $50 million of principal-at-risk from the Espada Re cat bond was reduced to $47,794,184, on recoveries made in 2019, after which USAA received a further reinsurance recovery loss payment of almost $2.97 million from Espada Re, so the principal was reduced further to $44,823,653 in June 2020.
At the same time, roughly a year ago, USAA released $35 million of the remaining trapped Espada Re collateral to investors in the notes, leaving just $9,823,653 of the original principal left outstanding at that time and the maturity further extended.
Then, we learned that USAA recovered another $716,734 from the Espada Re cat bond, which reduced its outstanding to $9,264,853 as of May 2021.
That remaining principal amount from the notes had its maturity extended to September 6th 2021.
Now, we understand that as the aggregate loss position has not worsened, USAA has returned another $5 million of the outstanding principal to investors in the Espada Re cat bond.
Leaving $4,264,853 outstanding and now with maturity of the Espada Re notes extended to December 6th 2021.
Gradually these cat bond positions are winding down, with losses realised and any available capital that can be returned being distributed back to investors.
Also worth mentioning is that the remaining principal from USAA’s Residential Reinsurance 2016 Limited (Series 2016-1) cat bond Class 10 notes has now been further extended to December 6th as well.
There is $19,083,604 of remaining principal left from the ResRe 2016 Class 10 notes, which had been considered a total loss at first, but then wildfire related subrogation reduced the loss attributed to this layer driving a $19,083,604 return of principal, related to a previously made loss payment under the related reinsurance agreement.
That now remains exposed to any potential loss creep that qualifies under the reinsurance agreement until December.
USAA made hundreds of millions of reinsurance recoveries under its catastrophe bonds, as they proved valuable sources of protection for the insurer.
The collateral retention and release terms have also proven beneficial to the carrier, enabling it to allow its catastrophe losses to fully develop before having to return the collateral that backed its catastrophe bonds to investors.
At the same time though, USAA has released capital back to investors where it can and where it’s become clear losses are not going to trigger any additional recoveries.
You can read details of many catastrophe bonds that have been triggered and made payouts, as well as those cat bonds currently at-risk, since the market began in our Deal Directory.
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