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USAA’s new Residential Re 2018-2 cat bond upsized to $200m


The new catastrophe bond that is being marketed on behalf of long-standing catastrophe bond sponsor insurer USAA has upsized, we understand, with the Residential Reinsurance 2018 Ltd. (Series 2018-2) multi-peril cat bond deal now set to complete offering the firm $200 million of fully-collateralized protection.

At launch the deal, which is USAA’s 32nd catastrophe bond issuance since it entered the market back in 1997, was targeting just $150 million of protection from the issuance and sale to investors of two tranches of notes.

Unsurprisingly appetite has proved strong for this new catastrophe bond and the deal has increased in size by one-third to $200 million for USAA.

This Residential Re 2018-2 catastrophe bond features one tranche of notes that will provide the insurer with reinsurance protection across a single year term and the other tranche providing four years.

Both tranches will give USAA a capital markets backed source of collateralized indemnity reinsurance protection on a per-occurrence basis for losses caused by the multiple U.S. perils of U.S. tropical cyclones, earthquakes (including fire following), severe thunderstorms, winter storms, wildfires, volcanic eruptions, meteorite impacts, and the other perils bucket that captures other severe weather and unnamed catastrophes as well as auto & renter policy flood losses.

The subject business for this catastrophe bond includes USAA’s automobile book of business, as well as homeowners, renters, and other property types. This is only the second time a USAA cat bond has covered auto losses as well as property.

At launch the transaction featured a $50 million tranche of Class 1 notes that provide the single year of reinsurance coverage. This tranche has remained at $50 million in size.

Being zero-coupon in nature and the riskier of the two tranches of notes being issued in this deal, with an initial attachment probability of 20.5% (equivalent to a $600m loss for USAA), an expected loss of 14.07%, these notes were offered to investors with a coupon equivalent (remember it is zero-coupon) spread in a range from 18.25% to 20.25%.

We’re told that the Residential Re 2018-2 transaction has now been priced and the $50 million Class 1 tranche of zero-coupon notes have been priced at the top-end of that range, a coupon equivalent of 20.25%.

The second tranche of notes launched at $100 million in size and this is where the growth has been.

The now $150 million Class 2 tranche offers USAA a four-year term of reinsurance cover, with an initial attachment probability of 9.53% (equivalent to a $1 billion loss for USAA) and an expected loss of 6.45%. This tranche of notes were offered to investors with coupon price guidance in a range from 11% to 12%.

We’re told that the pricing on this Class 2 tranche of notes has now been fixed at the mid-point of guidance, at 11.5%.

So USAA is set to secure a $200 million layer of reinsurance coverage from ILS funds and investors, but at pricing that has tipped towards the top-end for the riskier layer of notes and the mid-point for the less risky.

It’s encouraging to see this, given the general downward trend in cat bond spreads over recent years. It perhaps suggests that investors are aware a flood does need to be found given the elevated catastrophe loss levels seen in 2017 and now again in 2018, with it also a consideration that this sponsor has other cat bonds that could face losses in the coming months.

You can read all about this Residential Reinsurance 2018 Ltd. (Series 2018-2) catastrophe bond and every other transaction USAA has ever sponsored in the Artemis Deal Directory.

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