USAA returns $17.44m more in collateral from loss affected cat bonds

Investors in two of primary mutual insurer USAA’s outstanding and loss affected catastrophe bonds have received additional returns of collateral from the structures, with approximately $17.44 million delivered back to holders of each set of notes, Artemis has learned.

We can’t be sure exactly when this return of collateral occurred, but as the extended maturity date for the two USAA sponsored catastrophe bonds had been set for early December, we understand this to have been a relatively recent occurrence.

Again, we can’t be sure exactly what led to this return of collateral, but we believe it is due to losses development meaning further principal can be returned, meaning the positions have worked out better than last anticipated when the collateral had been extended again earlier this year.

USAA has benefited from a number of reinsurance recoveries under its catastrophe bonds over the last few years.

While some of those losses to investors have crystalised relatively quickly, in some cases it has taken a while for the losses to develop, resulting in collateral being trapped as the cat bond note terms were extended to allow for a clearer picture of USAA’s ultimate loss from certain catastrophe events to be obtained.

As a result, the insurer has continued to work through the reinsurance implications of a range of loss events to its catastrophe bond program, but again the latest development is a further a return of some principal to holders of these specific cat bonds.

The issuances in question this time are the Espada Reinsurance Limited (Series 2016-1) and Residential Reinsurance 2016 Limited (Series 2016-1) Class 10 notes.

The Espada Re cat bond was exposed to losses due to the numerous catastrophes that USAA paid claims for over the course of 2017 and into 2018.

The originally $50 million of principal-at-risk from the Espada Re cat bond notes was at-first reduced to $47,794,184, on reinsurance recoveries made in 2019, after which USAA received a further reinsurance recovery loss payment of almost $2.97 million from the deal, taking the principal down to $44,823,653 in June 2020.

USAA then released $35 million of the remaining trapped Espada Re collateral to investors in the notes, resulting in $9,823,653 left outstanding at that time.

After which USAA recovered another $716,734 from the Espada Re cat bond, lowering its outstanding to $9,264,853 as of May 2021.

USAA then returned a further $5 million of the outstanding principal to investors in the Espada Re cat bond, leaving $4,264,853 outstanding and with maturity of the Espada Re notes extended again.

Which is where the trapped capital level sat for this Espada Re catastrophe bond, with its maturity extended, until recently.

Now, Artemis has learned that a further $3,946,671 of collateral has been returned to holders of the Espada Re notes, leaving just $318,182 of principal left at-risk and now with maturity extended further to March 6th 2023, which is now roughly seven years since the cat bond was first issued.

So, in the end, the $50 million Espada Re cat bond delivered roughly $6 million in reinsurance recoveries to USAA, while the majority of the remaining ~$44 million has been returned as collateral to investors and just a small amount is still trapped.

For the Residential Re 2016-1 Class 10 cat bond notes, this transaction had been considered a total loss based on aggregate estimates of USAA’s losses from a range of catastrophe events.

But, for this cat bond, wildfire related subrogation recoveries reduced the loss attributed to the layer, driving a $19,083,604 return of principal to the deal and trust, related to a previously made loss payment under the related reinsurance agreement.

That just over $19 million of principal then remained exposed to any potential loss creep that could have qualified under the reinsurance agreement.

Until recently that is, as USAA’s cat bond deal has now made a $13,492,349 return of collateral to holders of the notes, reducing the retained collateral to $5,591,255. The notes have also now been extended to a new maturity date of March 6th 2023.

The Residential Re 2016-1 cat bonds Class 10 notes are a case where originally the full principal had been thought to be lost, but the wildfire related subrogation recoveries made have turned out to mean almost $13.5 million of collateral has been returned. Out of the original $65 million of principal from this tranche, that’s an unexpected but welcome result for investors perhaps.

USAA has made hundreds of millions of dollars in reinsurance recoveries under its catastrophe bond program over the last few years, and they have proven to be extremely valuable sources of protection for the insurer.

Gradually these cat bond positions are winding down, with losses being realised, reinsurance recoveries made where available and then any excess capital that can be returned, as the chance of it being required to pay losses reduces, distributed back to investors in the deals.