40th Residential Re cat bond launches for USAA with $200m target

USAA, perhaps the most consistent of catastrophe bond sponsors, at least of any primary company, is back in the cat bond market with what will be its 40th deal under the Residential Re name, seeking $200 million or more in multi-peril reinsurance protection from a Residential Reinsurance 2023 Limited (Series 2023-1) issuance.

USAA has been sponsoring catastrophe bonds since 1997 and this new one is actually its 41st we’ve tracked, with now 40 issuances under the Residential Re naming convention and one under Espada Re all listed in our Deal Directory.

The company has sponsored regular second and fourth quarter cat bonds for many years now, its last being a $195 million Residential Re 2022-2 last November.

For its first catastrophe bond of 2023, USAA is targeting at least $200 million of fully-collateralized multi-peril catastrophe reinsurance on an indemnity and annual aggregate basis.

The insurer has established a new Cayman Islands based special purpose vehicle, Residential Reinsurance 2023 Limited for its cat bonds this year.

Residential Reinsurance 2023 Limited will look to issue two tranches of Series 2023-1 notes, that will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the vehicle and USAA.

The two tranches will provide USAA with annual aggregate reinsurance protection against 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).

This is the same group of perils covered by all of USAA’s multi-peril cat bonds for some years now.

The reinsurance protection will run across annual risk periods though a four-year term, beginning June 2023 and running to the end of May 2027, we understand.

Both tranches of notes will feature an indemnity trigger and their provide annual aggregate coverage after an initial event deductible of $50 million is applied, to qualify catastrophes under the terms of the cat bond deal, we’re told.

A tranche of Class 13 notes have a preliminary size of $75 million and would attach their coverage at $2.725 billion in losses to USAA, exhausting that at $3.6 billion, sources said.

This gives the Class 13 notes an initial attachment probability of 3.63%, an initial base expected loss of 2.11% and this tranche is being offered with price guidance in a range from 10% to 10.75%.

A tranche of Class 14 notes have a preliminary size of $125 million and are less risky, attaching at $3.6 billion in losses and covering a share of layer to $4.65 billion in losses, we understand.

Which we’re told gives the Class 14 notes an initial attachment probability of 1.18%, an initial base expected loss of 0.75% and these notes are being offered with price guidance in a range from 6.75% to 7.25%.

At the mid-points of these spread guidance ranges, the Class 13 notes would pay a multiple-at-market of 4.9 times the initial base expected loss, while the Class 14 notes would pay a multiple of 9.3 times EL.

For comparison, the Class 12 tranche of USAA’s Residential Re 2022-1 aggregate cat bond had a 2.33% expected loss and paid a spread of 7.5%, so had a multiple-at-market of 3.22 times EL.

A Class 14 tranche from the same cat bond deal had an initial expected loss of 0.61% and priced with a spread of 4%, so paying a multiple to investors of just 6.56 times the expected loss.

As a result, the multiples available to investors with this new Residential Re 2023-1 cat bond are considerably higher (it appears more than 30% crudely risk-adjusted, it appears), which should help the carrier in generating support for its latest issuance.

Now at 40 transactions, the Residential Re cat bond program is the most prolific in the marketplace and has been a feature since the cat bond market was first developed.

In that time, investors have provided significant reinsurance capital support to USAA, including through recoveries made after challenging loss years, in particular 2017 and 2018.

Those reinsurance recoveries have continued, as we recently reported, demonstrating the effectiveness of cat bonds as a reinsurance tool for USAA.

You can read all about this new Residential Reinsurance 2023 Limited (Series 2023-1) catastrophe bond issuance from USAA, as well as every other cat bond issued in our extensive Deal Directory.