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USAA’s loss estimates drop, so ResRe cat bond safe for now


According to Artemis’ sources, U.S. primary military mutual insurer USAA has reduced its estimate of aggregated qualifying catastrophe losses and as a result the riskiest layers of the insurers aggregate Residential Re catastrophe bonds are still safe, for the moment.

We wrote almost a fortnight ago that, based on USAA’s latest loss estimates at the time, its exposure to the California wildfires was likely to trigger at least one of its Residential Re catastrophe bond tranches, allowing the insurer to benefit from its capital markets backed reinsurance protection.

However, USAA has since published a reduced loss estimate for both hurricanes Harvey and Irma, which means its aggregated losses now sit below the attachment point, we’re told.

The latest picture, we understand, is that USAA has estimated that hurricane Harvey will cost it $128 million, while hurricane Irma is expected to cause a loss of $209 million to $283 million with a mid-point aggregate estimate of $228m.

The California wildfires were estimated to have caused USAA a loss of between $387 million and $581 million.

On an adjusted aggregate basis, we’re told that the USAA loss that qualifies under the terms of the cat bond deals now looks like it is $798 million as of the beginning of November, which is below the trigger point for even the riskiest tranche of ResRe notes.

USAA’s riskiest exposed aggregate catastrophe bond deal is the $50 million zero-coupon tranche of notes from its Residential Reinsurance 2017 Ltd. (Series 2017-1) transaction. These notes, which had an initial expected loss of 14.06%, had an initial attachment point of $883 million and even after reset we’re told that these are not yet triggered.

Sources said that should USAA’s loss estimates rise and if the run-rate for the insurers losses from all covered perils continues as would normally be expected through the rest of the risk period, there is every chance investors do face a loss from this tranche of notes.

These ResRe 2017-1 Class 10 notes remain significantly marked down on broker pricing sheets, as do a few other tranches of USAA’s aggregate cat bonds such as the Class 10 notes from the Residential Reinsurance 2014 Ltd. (Series 2014-1), Residential Reinsurance 2016 Ltd. (Series 2016-1) and Residential Reinsurance 2015 Ltd. (Series 2015-1) cat bonds.

But it does now look like further loss creep will be required if the catastrophe events that have already occurred are going to trigger the notes on their own. Otherwise we’ll have to wait for the year to progress, but pricing and investor sentiment suggests that there will still be a strong chance that these notes do trigger by the end of that term.

We’ve left the Residential Re 2017-1 Class 10 catastrophe bond tranche from USAA listed in our Directory of cat bond payouts and defaults, until further loss estimates confirm its fate or otherwise. You can find details of all catastrophe bonds triggered and payouts made, since the market began in our Directory.

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