U.S. primary military mutual insurer USAA is returning to the catastrophe bond market in 2019 for what will be its 33rd Residential Re cat bond issuance, as it seeks to expand its capital markets backed multi-peril reinsurance protection.
USAA is the longest standing and most prolific sponsor of catastrophe bonds, having already sponsored 32 transactions over the more than 20 years since its first issuance in 1997.
Now, the insurer is returning to the capital markets for yet another slice of collateralized reinsurance protection with a new and as yet unsized Residential Reinsurance 2019 Limited (Series 2019-1) multi-peril cat bond deal, sources said.
In total USAA has already secured almost $8.1 billion of reinsurance protection from the capital markets through its ResRe catastrophe bond series.
This new transaction looks to add to that, as the insurer seeks a fully collateralized source of reinsurance capacity to protect it against losses from multiple perils, on an indemnity trigger and annual aggregate basis, across a four-year term.
For this issuance, newly registered Cayman Islands vehicle Residential Reinsurance 2019 Limited will seek to issue two tranches of Series 2019-1 cat bond notes, we understand, both of which will have four-year terms.
Both tranches of notes will be exposed to losses from the same perils as USAA’s last cat bond transaction, we’re told, so these will be U.S. tropical cyclones, earthquakes (plus fire following), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and so-called other perils (with other perils all including auto & renter policy flood losses).
At this time we’re told no sizes have been assigned to either of the tranches of notes, giving USAA plenty of room to choose how much reinsurance coverage to receive from its latest cat bond based on the appetites of cat bond investors.
We understand that a Class 12 tranche of notes are the riskier layer of this cat bond, attaching at $2.075 billion of losses and with an initial expected loss of 3.61%. These notes are offered to investors with price guidance ranging from 7.75% to 8.5%.
The second tranche, a Class 13 set of notes, attaching at $2.675 billion of losses to the sponsor and so are less risky with an initial expected loss of 0.98%. These are offered with price guidance in a range from 4% to 4.5%, we’re told.
This second tranche is actually a little higher risk than a Class 13 tranche of notes from one of USAA’s 2018 catastrophe bond deals which was priced with a coupon of 3.25%.
So the indicative guide pricing of this latest cat bond from the insurer looks like it may seek to compensate investors for some of the losses they have taken in recent years and reflect slightly higher risk-adjusted pricing.
That’s encouraging for the cat bond investor base, as it demonstrates this long-standing sponsor is prepared that it may need to pay a higher premium for its capital markets backed reinsurance coverage this time around.
It’s encouraging to see USAA back in the catastrophe bond market again in 2019, for what may be just the first of its issues as the insurer has a number of tranches that will roll off risk over the course of this year.
As ever, USAA is likely to take the placement process of this catastrophe bond as an opportunity to balance feedback from cat bond investors with pricing expectations for the traditional reinsurance layers renewed around mid-year.
This allows the insurer to utilise the capital markets and traditional markets in harmony, to achieve the most efficient distribution of its risk and pricing of its reinsurance coverage.
You can read all about this Residential Reinsurance 2019 Limited (Series 2019-1) catastrophe bond and every other transaction USAA has ever sponsored in the Artemis Deal Directory.
We’ll update you as and when any further information on this latest cat bond comes to light.
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