U.S. primary mutual insurance company USAA has seen its latest catastrophe bond, the upsized $400 million Residential Reinsurance 2021 Limited (Series 2021-1) transaction, price far below guidance in the latest sign of elevated cat bond investor demand.
USAA returned to the catastrophe bond market with a new Residential Re cat bond in April, seeking at least $275 million of collateralized aggregate reinsurance protection from what will be the 37th transaction from the insurer that we have listed in our extensive Artemis Deal Directory.
Just ten days later USAA’s target for the new Residential Re 2021-1 catastrophe bond had increased, with the insurer seeking $400 million of protection, evenly split across the four tranches of notes on offer to investors.
At the same time the price guidance on each of those four tranches had been lowered as well, in each case with the ranges revised to below the initial spreads.
Now, we’re told that USAA’s latest cat bond has been successfully priced and in all cases the deal has priced at the bottom or even below the revised and lowered price guidance, signalling yet another strong execution for a sponsor in the catastrophe bond market.
As a reminder, USAA has registered a new Cayman Islands vehicle Residential Reinsurance 2021 Limited for this issuance and it will issue four classes of notes, to be sold to cat bond investors, with the proceeds used to collateralize reinsurance agreements between the issuer and USAA itself.
The Residential Re 2021-1 cat bond will provide USAA with four-years of annual aggregate reinsurance protection covering losses from the same range of perils as its recent cat bonds, so 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).
The communicable disease exclusion continues to be in place for the “other perils” category, something investors pushed into USAA’s first cat bond of 2020, to ensure no exposure to the COVID-19 pandemic was possible.
Having upsized to $400 million, each of the tranches of notes has now remained at $100 million in size, providing USAA with four $100 million layers of multi-year aggregate reinsurance protection.
But, as with almost every catastrophe bond of 2021, the pricing tells a story of elevated investor demand for new cat bond issues, which is serving to lower pricing at issuance and bringing multiples-at-market down considerably on where they sat in 2020.
In the case of this issuance, at launch the multiples proposed at the mid-point of price guidance did look quite generous, perhaps a reflection of the fact USAA has made so many cat bond recoveries in recent years, so it’s no surprise they’ve reduced given how strong cat bond investor demand is at this time.
So, with each tranche having upsized to $100 million, here’s how the pricing was finalised for them, according to our sources.
The riskiest Class 11 tranche of notes have an initial expected loss of 4.32%. These notes were first offered to cat bond investors with price guidance in a range from 10% to 10.75%, which subsequently fell to a revised range of 9.25% to 10%. At final pricing the Class 11 notes were priced to pay investors a 9.25% risk interest spread, an 11% drop from the initial mid-point.
A Class 12 tranche of notes have an initial expected loss of 2.35%. These notes were first offered to cat bond investors with price guidance in a range from 6.5% to 7.25%, which then dropped to 5.75% to 6.5%. The final pricing for this tranche puts the risk interest spread at 5.25%, which represents a near 24% decline from the initial mid-point.
A Class 13 tranche with an initial expected loss of 1.31%, were first offered to investors with price guidance of 4.75% to 5.25%, which then fell to 4.25% to 4.75%. At final pricing the risk interest spread was fixed at 3.75%, representing a 25% decline from the initial mid-point.
The final Class 14 tranche of notes are the least risky and have an initial expected loss of 0.61%. Initial price guidance was 3.5% to 4%, but this dropped to below the initial range at 3% to 3.5%. At final pricing, the risk interest spread was fixed at just 2.5%, again representing a steep fall of 33% from the initial mid-point of guidance.
These price declines are some of the steepest seen this quarter and we suspect that the original price guidance was pitched a little higher than needed in order to ensure investors felt well-compensated for supporting USAA’s reinsurance needs, even after having taken some losses from the carrier.
But the multiples these now fixed spreads offer are still comparable to other recent transactions, so it’s important not to read too much into the magnitude of the price drop seen.
USAA will be delighted with the support from catastrophe bond investors, especially at a time when some of its already in-force deals are in-focus once again after the recent US winter storms.
The pricing achieved should attract more sponsors to the catastrophe bond market, as cat bond investors continue to provide well-priced reinsurance coverage in 2021.
Read about this new Residential Reinsurance 2021 Limited (Series 2021-1) catastrophe bond and every other cat bond in our Artemis Deal Directory.