USAA’s latest cat bond sees riskiest tranche pulled, as prices rise

The latest catastrophe bond for long-standing sponsor USAA has seen its riskiest tranche of notes pulled from the issuance, while the pricing for the other four tranches of notes of the $375 million targeted Residential Reinsurance 2022 Limited (Series 2022-1) deal have all risen.

USAA returned to the catastrophe bond market earlier this month, seeking $375 million or more of collateralized multi-peril reinsurance from a five tranche deal targeting aggregate cover for the U.S. primary military mutual insurer.

It is USAA’s annual May sponsorship of an aggregate catastrophe bond, seeing the insurer continuing to place the capital markets at the heart of its large reinsurance program.

USAA is still the most prolific sponsor of catastrophe bonds for its reinsurance protection and this new Residential Re deal will be the 39th issuance from the company that we have listed in our extensive Artemis Deal Directory and the 38th to use the Residential Re name (with one Espada Re cat bond sponsored in 2016).

These annual aggregate deals have seen a particularly risky Class 10, often single-year duration tranche of notes issued for some years now.

But in 2022, investor appetite for riskier aggregates had impacted USAA’s ability to secure the full five tranche issuance, with it being the Class 10, most risky tranche that we’re now told has been dropped from the deal.

Residential Reinsurance 2022 Limited was aiming to issue five tranches of Series 2022-1 notes, each designed to provide USAA with annual aggregate reinsurance protection against losses from multiple US perils.

The notes will provide USAA with reinsurance against certain losses from the perils of 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), with an event deductible of $50 million per event across all tranches of notes issued.

An unsized Class 10 tranche of notes was supposed to provide one year of annual aggregate and indemnity trigger based reinsurance protection to USAA, but we’re now told this tranche of zero-coupon discount notes won’t be issued anymore.

Presumably that is down to investor appetite for riskier aggregate layers of reinsurance and investors appetite for higher returns to assume such layers of risk.

The remaining four tranches of notes will cover USAA across a four-year term again on an aggregate indemnity basis.

But they have also not had the easiest reception, we understand, with their pricing guidance rising and new ranges being set for each that begin at the upper-end of the initial coupon guidance.

The issuance now targets a $50 million Class 11 tranche of notes, with an initial expected loss of 4.83% and attaching at $1.775 billion of losses. These notes were originally offered with price guidance of 11% to 11.75%, but the guidance has now been elevated to 11.75% to 12.5%, we’re told.

The $50 million Class 12 tranche of notes, with an initial expected loss of 2.33% and attaching at $2.125 billion of losses, were offered with price guidance of 6% to 6.75%, but that has also been elevated to 6.75% to 7.5%.

The $125 million Class 13 tranche of notes, with an initial expected loss of  1.19% and attaching at $2.475 billion of losses were first offered with price guidance of 4.25% to 4.75%, but again this has been raised to 4.75% to 5.25%.

Finally, the $125 million Class 14 tranche of notes, with an initial expected loss of 0.61% and attaching at $3.175 billion of losses, were offered with price guidance of 3% to 3.5%, which has now been hiked to 3.5% to 4%.

So one tranche pulled and the other four all looking set to price at the top-end of guidance or higher, providing further evidence of the spread widening being seen in the catastrophe bond market at this time.

USAA is a reliable sponsor and partner for the catastrophe bond market, hence it’s no surprise to see the insurer accepting a certain degree of price increase, as it will be keen to maintain the capital market participation in its reinsurance tower.

You can read all about this Residential Reinsurance 2022 Limited (Series 2022-1) catastrophe bond from USAA and every cat bond issued in our extensive Artemis Deal Directory.