USAA is moving a little closer to understanding just how big a recovery it can make from ILS investors against the reinsurance provided by its Residential Re catastrophe bond series, now opting to repay $20 million of the extended notes to investors, but still holding onto $150 million more with a further extension of maturity.
The U.S. primary military mutual insurer has a number of catastrophe bonds in play that could face losses following the impacts of the 2017 hurricanes, the California wildfires and also winter storm Riley, both per-occurrence and aggregate structures.
As time passes USAA is gaining increasing clarity of the potential reinsurance recoveries the insurer could make under the term of the catastrophe bonds that are exposed.
The clearest sign of this comes today, as the insurer now intends to release a $20 million slice of one of the retained and extended Residential Re cat bonds, showing that the loss picture has actually improved slightly for exposed ILS investors.
Currently with their maturity dates extended are the $50 million zero-coupon aggregate Class 10 tranche of notes from USAA’s Residential Reinsurance 2017 Ltd. (Series 2017-1) cat bond, the $80 million aggregate Class 10 notes from the Residential Reinsurance 2014 Ltd. (Series 2014-1) transaction and the remaining $40 million of principal of the Residential Reinsurance 2013 Ltd. (Series 2013-2) catastrophe bond per-occurrence Class 1 notes.
These three cat bond tranches, which all provided USAA with reinsurance cover for the hurricanes, wildfires and winter storm loss events, were previously scheduled to mature as of 6th June 2018 but that was extended by three months to 6th September 2018.
Now USAA has updated ILS investors on its intentions for this $170 million of at-risk catastrophe bond tranches and for some investors the news of an impending repayment for a portion of one tranche will be welcomed.
The $50 million ResRe 2017-1 Class 10 and $80 million ResRe 2014-1 Class 10, which are both annual aggregate notes, have both had their maturity dates extended by another three months till December 6th 2018.
Both of these cat bond tranches are still priced at zero on the secondary market by brokers, suggesting the expectation remains that there will be a full loss of the $130 million of principal across the pair.
But investors in the $40 million of Residential Re 2013-2 Class 1 cat bond notes, which are per-occurrence in nature, are set for a repayment, as USAA has elected to repay half of that extended principal, so $20 million, while the remaining $20 million has also been further extended to December 6th 2018.
Investors holding the ResRe 2013-2 Class 1 cat bond notes will receive this repayment of the $20 million portion of their principal as of the current maturity date of September 6th.
The upshot is that still $150 million of notes across three tranches of USAA’s Residential Re cat bonds remain extended in preparation for potential reinsurance recoveries.
Another $115 million of USAA’s in-force cat bond coverage remains considered at risk as well, with the $65 million of Class 10 notes from Residential Reinsurance 2016 Ltd. (Series 2016-1) seen as next most at-risk and potentially triggered, while the $50 million of Class 10 Residential Reinsurance 2015 Ltd. (Series 2015-1) cat bond notes are also marked down on secondary broker pricing sheets.
Given the way cat bond maturity extension works, these notes could remain in limbo for some time to come, although likely with increasing clarity in time over the eventual size of the cat bond reinsurance recovery USAA will make.