U.S. primary military mutual insurer USAA is set to secure a $300 million multi-year and multi-peril source of fully-collateralized reinsurance through the issuance of its latest catastrophe bond Residential Reinsurance 2018 Ltd. (Series 2018-1), with pricing that has settled below the initial spread guidance.
This is USAA’s 31st time of sponsoring a cat bond, making it the most prolific sponsor we have listed in our Deal Directory.
The transaction was launched to the market as a $175 million Residential Re 2018-1, designed to cover USAA with reinsurance to protect against losses from U.S. tropical cyclones (plus renter policy flood), earthquakes (plus fire following and renter policy flood), severe thunderstorm, winter storm, wildfire, volcanic eruption, meteorite impact, and other perils (including auto policy flood).
As we’ve highlighted before, the inclusion of auto policy flood losses from the other perils category, in the covered risks, is a new addition in this cat bond for USAA, as it pushes the scope of reinsurance coverage that the capital markets provide it with.
The coverage from the two tranches of Series 2018-1 notes that Residential Re 2018 Ltd. will issue, are set to provide USAA with annual aggregate reinsurance cover on an indemnity trigger basis, with the Class 11 tranche structured as a zero-coupon note offering one year of cover, and Class 13 tranche set to provide the insurer with four years of reinsurance protection.
Investors demonstrated a strong appetite for this latest USAA cat bond, which caused the insurer to lift its target to as much as $325 million of coverage, while at the same time the price guidance for the notes was slashed.
Now, the Residential Re 2018-1 cat bond looks set to complete at $300 million in size and with pricing well-below the initial spread guidance levels.
When the transaction launched, the zero coupon Residential Re 2018-1 Class 11 tranche was sized at $75 million, but the target was then lifted to $100 million for USAA which we now understand to have been achieved.
The Class 11 tranche of notes, with an expected loss of 7.3%, were initially offered to investors with price guidance of 86.75% to 87.75% of par value, akin to a coupon of 12.25% to 13.25%, which subsequently dropped to 87.75% to 88.25%, an 11.75% to 12.25% coupon equivalent and we’re now told that it settled at the bottom of this reduced range, at 88.25% of par value, reflecting a 12.25% coupon.
The four-year term Residential Re 2018-1 Class 13 tranche of notes began as a $100 million layer, but the target was lifted to $150 million to $225 million and we’re now told this tranche is likely to settle at $200 million in size.
The Class 13 notes have an initial expected loss of 0.82% and were offered to investors with initial coupon guidance of 3.5% to 4%, but this dropped to between 3% and 3.5% and we’re now told is going to settle at 3.25%.
So both tranche of notes from this Residential Re 2018-1 cat bond have increased in size and their pricing has settled at levels below the initial guidance range, demonstrating the continue strong appetite that investors have for new catastrophe bond issues.
The upsizing of deals and strong investor appetite for new issues has helped the cat bond market to a record start to 2018, we’ve now recorded $5.7 billion of issuance in just the first four months of the year.