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USAA returns for $150m Residential Re 2018-2 catastrophe bond


Long-standing catastrophe bond sponsoring insurer USAA is returning to the capital markets for yet another slice of collateralized reinsurance protection with a $150 million or greater sized Residential Reinsurance 2018 Ltd. (Series 2018-2) new multi-peril cat bond deal.

This is USAA’s 32nd catastrophe bond issuance that it has sponsored, since its first Residential Re transaction over 20 years ago in 1997.

In total the insurer will have sponsored more than $8 billion of catastrophe bonds in the 21 years since it first tapped the capital markets for reinsurance protection by sponsoring a cat bond deal. Details on every one of USAA’s transactions can be found in the Artemis Deal Directory.

With this Residential Re 2018-2 catastrophe bond, we’re told by sources that USAA is seeking at least $150 million of reinsurance protection across two layers of risk, with the resulting two tranches of notes set to be sold to investors to fully collateralize underlying multi-peril reinsurance agreements for the insurer.

The notes are being issued by USAA’s special purpose insurer Residential Reinsurance 2018 Limited, with one tranche set to provide the insurer with reinsurance protection across a single year term and the other across four years.

Both tranches of notes will provide USAA with indemnity reinsurance protection on a per-occurrence basis against losses caused the by multiple U.S. perils of U.S. tropical cyclones, earthquakes (including fire following), severe thunderstorms, winter storms, wildfires, volcanic eruptions, meteorite impacts, and the other perils bucket that captures other severe weather and unnamed catastrophes as well as auto & renter policy flood losses, we understand.

The subject business for this catastrophe bond includes USAA’s automobile book of business, as well as homeowners, renters, and other property types, sources said.

This is only the second of USAA’s cat bonds to cover its auto losses as well as property, a new feature that the insurer has added in 2018 and reflecting continued expansion of the reinsurance coverage the insurer benefits from with these cat bond deals.

A currently $50 million Class 1 tranche of notes will provide USAA with one year of reinsurance coverage. This tranche is zero-coupon in nature and the riskier of the two being issued in this deal, with an initial attachment probability of 20.5% (equivalent to a $600m loss for USAA), an expected loss of 14.07% and is being offered to investors with a coupon equivalent (remember it is zero-coupon) spread in a range from 18.25% to 20.25%.

The second tranche of notes, a currently $100 million Class 2 tranche, will provide a four-year term of reinsurance cover to USAA. These notes have an initial attachment probability of 9.53% (equivalent to a $1 billion loss for USAA), an expected loss of 6.45% and are being offered to investors with coupon price guidance in a range from 11% to 12%.

Both tranches of notes cover a wide layer of risk, giving plenty of room for USAA to upsize this latest ResRe catastrophe bond deal should the insurer choose to maximise its reinsurance coverage from the capital markets.

We’re told that the marketing period for this new Residential Re cat bond from USAA will be quite long, almost one month. This likely provides the insurer with a period to balance feedback from investors with pricing expectations for any traditional reinsurance layers renewed at 1/1, enabling the insurer to utilise the capital markets and traditional markets in tandem to achieve the most efficient distribution of its risk and pricing of its coverage.

You can read all about this Residential Reinsurance 2018 Ltd. (Series 2018-2) catastrophe bond and every other transaction USAA has ever sponsored in the Artemis Deal Directory. We’ll update you as any further details on this latest cat bond come to light.

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