USAA to upsize new cat bond to $415m as coupons all rise

The target issuance size for the latest catastrophe bond from U.S. primary mutual insurer USAA has been lifted to $415 million, while at the same time the pricing for all four of the remaining tranches of the Residential Reinsurance 2022 Limited (Series 2022-1) deal now look likely to settle at the top of raised guidance.

USAA returned to the catastrophe bond market earlier in April, seeking $375 million or more of collateralized multi-peril reinsurance from a five tranche deal targeting aggregate cover for the U.S. primary military mutual insurer.

The new cat bond is designed to provide USAA with a layered source of fully-collateralized annual aggregate reinsurance protection against losses from multiple US perils, over a four-year term.

As we then reported earlier this week, one tranche of the five tranche issuance was pulled and now won’t be issued, which was the riskiest Class 10 tranche of zero-coupon notes that only had a single year term.

This reflects broader catastrophe bond market conditions, where prices of new issuances are tending to rise and spread widening is being experienced.

At the same time as that Class 10 tranche was dropped from the issue, the price guidance jumped for all four remaining tranches as well.

But USAA still looks set to upsize on its latest catastrophe bond, with the four remaining tranches adjusting in size during the marketing of the new Residential Re deal, but in another clear signal of cat bond investors focus, it is the lower-risk tranches that have increased in size.

As a reminder, Residential Reinsurance 2022 Limited was will issue four tranches of Series 2022-1 notes, each designed to provide USAA with annual aggregate reinsurance protection against losses from multiple US perils.

The notes will provide USAA with reinsurance against 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), with an event deductible of $50 million per event across all tranches of notes issued.

The riskiest remaining tranche, which was targeted as a $50 million Class 11 tranche of notes, with an initial expected loss of 4.83%, is now targeted as being $35 million in size, so has shrunk.

The Class 11 notes were originally offered with price guidance of 11% to 11.75%, but that was elevated to 11.75% to 12.5%, and we’re now told has been fixed at the top-end of 12.5%.

The originally $50 million Class 12 tranche of notes with their initial expected loss of 2.33%, are going to upsize to $60 million, we understand.

The Class 12 notes were first offered with price guidance of 6% to 6.75%, which was elevated to 6.75% to 7.5% and again we’re now told is likely to price at the top-end of raised guidance, at 7.5%.

The originally $125 million Class 13 tranche of notes, with an initial expected loss of  1.19%, is set to upsize to $150 million, we’re told.

The Class 13 notes were first offered with price guidance of 4.25% to 4.75%, which was then raised to 4.75% to 5.25% and is now looking ready to settle at the upper-end of 5.25%, our sources said.

Finally, the originally $125 million Class 14 tranche of notes, with an initial expected loss of 0.61%, are now set to upsize to $170 million, we understand.

At first, the Class 14 notes were offered to cat bond investors with price guidance of 3% to 3.5%, which was subsequently hiked to 3.5% to 4%, and we’re now told will settle at the top-end again, to pay a 4% coupon.

It really is reflective of cat bond market conditions that a very reliable and regular sponsor like USAA, the most prolific in the catastrophe bond market, is seeing such price increases for an aggregate reinsurance deal at this time.

But it is still encouraging that USAA has elected to upsize the deal, as it shows the insurer still has a desire to make the capital markets a significant piece of its reinsurance arrangements, even at these elevated spread levels.

You can read all about this Residential Reinsurance 2022 Limited (Series 2022-1) catastrophe bond from USAA and every cat bond issued in our extensive Artemis Deal Directory.