USAA returns for $300m Residential Re 2020-2 catastrophe bond issue

U.S. primary mutual insurer USAA is back in the catastrophe bond market with its second transaction of 2020, a Residential Reinsurance 2020 Limited (Series 2020-2) deal that seeks $300 million of multi-year, fully collateralized, multi-peril catastrophe reinsurance protection from the capital markets for the carrier.

USAA remains the most prolific and consistent of catastrophe bond sponsors in the market’s history, with typically two issuances per-year helping it to become the most regular of cat bond market features for more than a decade now.

In fact, this new $300 million Residential Re 2020 Limited (Series 2020-2) cat bond will be the 36th issuance sponsored by USAA that we have listed in our extensive Artemis Deal Directory.

35 of those cat bonds issued since 1997 that USAA has sponsored have taken the Residential Re naming convention, making it the longest running and most consistent name in the cat bond market.

The insurer has also benefited from the reinsurance protection its cat bonds provide, having claimed successfully against a number of the issuances for losses suffered since 2017.

With its latest deal, we’re told that USAA is seeking at least $300 million of fully collateralized reinsurance from the capital markets through the issuance of three tranches of catastrophe bond notes by its Residential Reinsurance 2020 Limited Cayman Islands domiciled vehicle.

One tranche of this transaction could be the highest priced ResRe cat bond notes ever issued sources told us, reflecting the rising of reinsurance rates at this time.

The transaction is designed to provide USAA with up to four years of reinsurance protection against losses in the United States from multiple catastrophe perils.

The protection will be on indemnity trigger and per-occurrence basis, which is typical of the second USAA cat bond of the year, the first tending to be annual aggregate in nature.

Two of the tranches of notes will provide four years of protection and the third one year, providing coverage for certain 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, the typical range of perils from all recent ResRe cat bond deals.

Important to note that this latest USAA cat bond has an explicit exclusion of communicable diseases within the other perils bucket, we understand.

Residential Re 2020 will seek to issue a $50 million Class 1 tranche of notes that will be zero coupon in nature and provide a single year of coverage. USAA typically has these one-year tranches in its cat bonds, normally the riskiest layer of any issuance.

It’s the same with this Residential Re 2020-2 cat bond, with the $50 million of Class 1 notes having an initial expected loss of 14.84% at the base case, attaching at $688 million of losses to USAA and being offered to cat bond investors with a coupon equivalent price guidance in a range from 24% to 26%, or 76% to 74% of par.

With this layer set to sit alongside a Class 1 tranche from USAA’s ResRe 2019-2 cat bond in the carriers reinsurance tower, we’re told the price guidance does reflect an increase on that year-old transaction which paid a coupon equivalent of 22.75% and at the time was the highest priced ResRe tranche ever.

A $100 million Class 3 tranche of notes will have a four-year term and have an initial expected loss of 3.53% at the base case. This tranche of notes are set to attach at $1.875 billion of losses to USAA on a per-occurrence basis and are being offered to investors with coupon guidance of 8.75% to 9.25%, sources said.

The final $150 million Class 4 tranche of notes will also have a four-year term. Their initial expected loss will be 2.32% at the base case, making them the least risky, attaching at $2.55 billion of losses to USAA. Price guidance for this last tranche of the issuance is in a range from 6.75% to 7.25%, we understand.

All three tranches look set to offer cat bond investors a risk-adjusted price increase on previous USAA cat bonds and the one-year tranche looks like it could be one of the highest coupon 144A cat bond tranches to ever hit the market.

USAA continues to utilise the catastrophe bond market throughout its reinsurance tower, as evidenced by the range of attachment points on offer here.

This offers something for catastrophe bond investors with differing return targets, while enabling the insurer to bring diversifying sources of reinsurance capital into the heart of its reinsurance program, placing cat bonds alongside its traditional reinsurance partnerships.

As is typical with cat bonds from USAA, the insurer will be covering a wide layer of its reinsurance program with each of these tranches, meaning there is ample room to upsize should investor demand and pricing support it.

You can read all about this Residential Reinsurance 2020 Limited (Series 2020-2) catastrophe bond and every other cat bond transaction USAA has ever sponsored in the Artemis Deal Directory.