U.S. primary military mutual insurer USAA remains the most prolific of catastrophe bond sponsors and is back in the market for its 30th transaction, with a $225 million Residential Reinsurance 2017 Ltd. (Series 2017-2) multi-peril deal, seeking to expand its capital markets backed source of reinsurance.
USAA has returned to the cat bond market every year without fail since its first transaction back in 1997, each of its 30 deals are listed here on Artemis.
Currently the insurer has $1.78 billion of catastrophe bond coverage outstanding, from 9 transactions and 18 tranches of notes according to our data on the outstanding cat bond market, that’s the most outstanding transactions by number of any cat bond sponsor.
USAA is back looking to secure at least $225 million of fully colllateralized reinsurance protection through this Residential Re 2017-2 cat bond issuance.
Three tranches of notes will be offered to investors, all seeking per-occurrence reinsurance protection against losses from multiple perils.
The covered perils are 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. New to this list is the inclusion of renter policy flood in the earthquake peril definition, as USAA continues to expand its cat bond backed reinsurance protection.
Coverage will be on an indemnity trigger basis and two tranches of notes will provide four years of protection, with the other a much riskier zero-coupon tranche that provides just a single year of reinsurance.
The three tranches will sit one on top of the other in USAA’s per-occurrence reinsurance tower, alongside traditional protection and with the zero-coupon tranche set to be the riskiest such tranche outstanding for the sponsoring insurer, we understand.
The first Class 1 tranche of notes is the riskier zero coupon layer and sized at $50 million preliminarily. Being zero-coupon it will be issued to investors at a discount akin to how collateralized reinsurance transactions are completed. These are the riskiest notes of this Residential Re 2017-2 cat bond issue, with an initial attachment probability of 23.17%, or $400m of losses, and an expected loss of 15.75%. This one-year tranche of zero-coupon notes are being offered to investors at 78% to 80% of par value, we’re told, which approximates to a coupon of 20% to 22%.
The riskier Class 1 tranche of notes exclude Florida from the tropical cyclone peril definition, while the other two tranches cover USAA’s in that state.
The Class 2 tranche of notes, preliminarily sized at $100 million and with a four-year risk period, have an attachment probability of 13.14%, or $700 million of losses to the sponsor USAA, and an expected loss of 7.33%. This tranche is being offered to investors with price guidance of 12.5% to 13.5% we understand.
Lastly, a $75 million Class 3 tranche of notes will be issued with a four-year risk period as well. These notes will have an attachment probability of 4.04%, or $1.559 billion of losses, an expected loss of 2.84% and are offered to investors with coupon price guidance of 5.5% to 6.25% we’re told. This tranche of notes are set to be rated by S&P.
Price wise, these tranches all look roughly aligned with other Residential Re cat bonds, so don’t appear to be offering too much uplift to investors at this stage. Therefore it will be interesting to see where pricing settles for this 30th USAA catastrophe bond deal. We will update you as information becomes available.