USAA returns for 40th catastrophe bond. Post-Ian pricing evident

USAA, the U.S. primary mutual insurer, has returned to the catastrophe bond market with a $150 million Residential Reinsurance 2022 Limited (Series 2022-2) that will be its 40th issuance and as the first cat bond since hurricane Ian, the deal provides a first glimpse of the post-Ian pricing environment.

USAA is among the most prolific and long-standing of catastrophe bond sponsors, with its first Residential Re deal having come to market in 1997.

Since then, catastrophe bonds as a form of reinsurance capital have become a staple for USAA’s reinsurance tower and predictably, USAA is back with its typical fourth-quarter cat bond deal in 2022.

Using its Cayman Islands based special purpose vehicle, Residential Reinsurance 2022 Limited, USAA is seeking $150 million or more in multi-year and multi-peril catastrophe reinsurance protection from the capital markets for its exposures.

As is typical with its fourth-quarter cat bonds, that tend to be finalised and issued in November, this new Residential Re deal will provide USAA with per-occurrence reinsurance protection.

Residential Reinsurance 2022 Limited will look to issue two tranches of Series 2022-2 notes, each of which will provide USAA with indemnity and per-occurrence based reinsurance protection from the capital markets, covering it against losses from multiple US perils across a four-year term.

The notes will cover USAA for 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).

A $50 million tranche of Class 3 notes will have an initial base expected loss of 2.72%, would attach at $2.3 billion of losses and are being offered to cat bond investors with price guidance of 9.25% to 10%.

A larger, $100 million tranche of Class 5 notes will have an initial base expected loss of 1.34%, would attach higher up at $3.475 billion of losses to USAA and are being offered to cat bond investors with price guidance of 6.25% to 7%.

Which means the Class 3 notes would have a multiple at the mid-point of price guidance of 3.54 times the expected loss, while the Class 5 notes would have a multiple at the mid-point of 4.94 times the base EL.

How does that compare to more recent cat bonds from USAA that have a relatively similar expected loss?

USAA’s cat bond from last November, the Residential Reinsurance 2021 Limited (Series 2021-2) deal, had a Class 3 tranche with a 2.96% EL that priced with a coupon of 5.5%, so had a multiple-at-market of just 1.86 times the EL.

A riskier Class 2 tranche had an initial base expected loss of 6.6% and these priced to offer investors a coupon of 11.75%, so a multiple-at-market of 1.78 times the EL.

With this new Residential Re 2022-2 catastrophe bond suggesting multiples of 3.54 and 4.94 times the EL, the increase is evident.

In fact, the closest comparison between these two USAA cat bonds would be the Series 2022-2 Class 3 notes with their 2.72% EL and indicative multiple of 3.54 times that, compared to the 2.96% EL of the 2021-2 cat bond that paid a multiple of just 1.86 times.

While this isn’t risk-weighted in any way, it is a significant increase in multiple-at-market, so it’s going to be interesting to watch investor appetite for this new cat bond from USAA and where its coupon is priced at.

You can read all about this Residential Reinsurance 2022 Limited (Series 2022-2) catastrophe bond from USAA and every cat bond issued in our extensive Artemis Deal Directory.