The maturity date for the remaining $40 million of principal of U.S. primary military mutual insurer USAA’s Residential Reinsurance 2013 Ltd. (Series 2013-2) catastrophe bond Class 1 notes has been extended by another three months, as the insurer waits for its loss estimates from Californian wildfires to be finalised.
The Residential Re 2013-2 catastrophe bond provides sponsor USAA with per-occurrence reinsurance coverage and had originally been scheduled to mature as of the 6th December 2017.
But, as we reported first last year, USAA only allowed half of the $80 million Residential Re 2013-2 Class 1 tranche of notes to mature, as it held back $40 million of collateral in case the insurers losses from the California wildfires reached the trigger point.
At that time the $40 million of Residential Re 2013-2 Class 1 notes had their maturity extended to March 6th 2018.
This remaining $40 million of notes from this cat bond tranche provide sponsor USAA with collateralized per-occurrence reinsurance against losses from U.S. tropical storms, U.S. earthquakes, severe thunderstorms, winter storms and wildfires in California. It is understood that the California wildfire losses are the ones that threaten this riskiest Class 1 tranche of notes of the issuance.
But loss development can take time and USAA has opted to extend the maturity of the remaining $40 million of notes again, to allow for further development of qualifying losses from the California wildfires.
The notes have been extended for a further three months, to allow for this loss development to continue, with the $40 million of Series 2013-2 Class 1 notes now slated for maturity on June 6th 2018.
As we wrote last year, USAA’s loss estimate for the California wildfires had been estimated at between $387 million and $581 million, and with the Series 2013-2 Class 1 notes having an attachment point of $400 million it seemed likely some erosion of this tranches principal would occur.
The notes cover a broad reinsurance layer for USAA though, with the exhaustion point set at $800 million when the cat bond was launched. So by retaining $40 million of the principal USAA is allowing for its losses to reach $600 million, it seems.
This per-occurrence tranche of Residential Re notes are not the only USAA sponsored cat bond deemed at risk from the hurricanes and other catastrophes of 2017. A number of tranches of its aggregate reinsurance coverage are also deemed at risk, with some tranches marked down considerably for potential losses.
Most clearly at risk is the Class 10 riskiest tranche of USAA’s Residential Reinsurance 2017 Limited (Series 2017-1) transaction, while also priced down are the riskier Class 10 tranche of the Residential Reinsurance 2014 Ltd. (Series 2014-1) cat bond, the Class 10 tranche of the Residential Reinsurance 2015 Ltd. (Series 2015-1) and the Class 10 tranche of the Residential Reinsurance 2016 Ltd. (Series 2016-1) cat bond from USAA.
These catastrophe bond losses will become clear in months to come, as USAA finalises its loss estimates and makes claims against the notes which are eventually triggered.