USAA targets $375m+ Residential Re 2022-1 aggregate cat bond
USAA, the U.S. primary mutual insurer, is sponsoring a $375 million plus aggregate catastrophe bond transaction, with a Residential Reinsurance 2022 Limited (Series 2022-1) deal being marketed to cat bond funds and investors. This is USAA’s regular May sponsorship of an annual aggregate catastrophe bond, as the insurer continues to place the capital markets at the heart of its large reinsurance program
USAA remains the most prolific sponsor of catastrophe bonds for its reinsurance protection and this new Residential Re deal will be the 39th issuance from the company that we have listed in our extensive Artemis Deal Directory and the 38th to use the Residential Re name (with one Espada Re cat bond sponsored in 2016).
For more than a decade USAA has sponsored an aggregate cat bond for May issuance and then a per-occurrence cat bond around November.
Last year in 2021, the insurer sponsored a $400 million aggregate cat bond in May and a $300 million occurrence deal in November.
This first Residential Reinsurance catastrophe bond of 2022 has the potential to be a relatively large issuance for USAA, with the target said by our sources to be at least $375 million across four tranches of notes, with a fifth tranche currently unsized as well.
USAA has formed a new Cayman Islands special purpose vehicle Residential Reinsurance 2022 Limited for this first cat bond of the year.
Residential Reinsurance 2022 Limited will look to issue five tranches of Series 2022-1 notes, each of which will provide USAA with annual aggregate reinsurance protection against losses from multiple US perils.
One as yet unsized tranche of notes will provide one year of annual aggregate and indemnity trigger based reinsurance protection, while the other four will cover USAA across a four-year term again on an aggregate indemnity basis.
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).
We’re told there will be an event deductible of $50 million per event across all five tranches of notes issued.
An as yet unsized Class 10 tranche of notes will provide one year of coverage and are the riskiest layer in this cat bond issuance, having an initial expected loss of 8.24%, would attach at $1.575 billion of losses and being offered as zero-coupon discount notes with price guidance of 82.5% to 83.5% of par, a rough coupon equivalent being 16.5% to 17.5%.
A $50 million Class 11 tranche of notes will have an initial expected loss of 4.83%, would attach at $1.775 billion of losses and are being offered with price guidance of 11% to 11.75%.
A $75 million Class 12 tranche of notes will have an initial expected loss of 2.33%, would attach at $2.125 billion of losses and are being offered with price guidance of 6% to 6.75%.
A $125 million Class 13 tranche of notes will have an initial expected loss of 1.19%, would attach at $2.475 billion of losses and are being offered with price guidance of 4.25% to 4.75%.
A $125 million Class 14 tranche of notes will have an initial expected loss of 0.61%, would attach at $3.175 billion of losses and are being offered with price guidance of 3% to 3.5%.
This layered approach to securing annual aggregate reinsurance protection is core to USAA’s use of catastrophe bonds and this year each of these layers will provide coverage for a percentage of losses from its attachment up to the next layer, leaving plenty of room for upsizing should the insurer choose.
USAA’s catastrophe bonds, in particular its aggregate cat bond deals, have provided valuable reinsurance recoveries in a number of cases over recent years, with investors support a critical component of its ability to moderate its catastrophe PML’s and providing valuable liquidity when losses occur.