USAA, the U.S. primary mutual insurer, has upsized its latest catastrophe bond, so the Residential Reinsurance 2022 Limited (Series 2022-2) is now set to provide the company $195 million of reinsurance protection, while pricing of both tranches of notes settled at the top-end of initial guidance, Artemis has learned.
In the current market environment this seems a strong result for USAA as a sponsor, with its 40th catastrophe bond issuance receiving good support from the ILS community, enabling it to be upsized by 30% during the marketing phase.
Perhaps more importantly though, USAA appears to have pitched the pricing just right, for a sufficient number of investors, to achieve this execution as well, with the notes pricing at the top-end of the initial guidance range.
Of course, that initial price guidance was already significantly higher than previous USAA cat bonds, as the sponsor looked to go to market with something showing that it appreciates the reinsurance support that cat bond funds and investors provide it with.
But overall, while there are some cat bond investors that now shy away from multi-peril deals as broad as USAA’s, the cat bond market has shown sufficient support to enable the insurer to secure more than the reinsurance it was initially targeting with this deal.
Recall, Artemis was first to report that USAA returned to the catastrophe bond market in October with a $150 million target for this new Residential Re 2022-2 cat bond.
USAA is among the most prolific and long-standing of catastrophe bond sponsors and this is the insurers’ 40th cat bond issuance.
It was also the first cat bond to be launched since hurricane Ian, so the deal provided a first glimpse of the post-Ian cat bond pricing environment.
USAA was seeking $150 million of 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 this cat bond deal.
Residential Reinsurance 2022 Limited is issuing 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.
As we said, the transaction has now been priced and will provide USAA with an upsized $195 million of multi-year catastrophe reinsurance protection.
The fact in includes the “other perils” category makes this cat bond close to an all natural perils reinsurance cover, something sponsors will be delighted to see still being provided, despite all the talk of a further focus on named peril cover only.
Of course, USAA being such a long-standing sponsor of cat bonds, this successful issuance shouldn’t imply all perils cover will be available for every cat bond sponsor going-forwards as investors and fund managers are increasingly discerning and focused on understanding the exposures within cat bond deals.
At launch, this cat bond issuance featured a $50 million tranche of Class 3 notes with an initial base expected loss of 2.72%, attaching at $2.3 billion of losses and that were offered to cat bond investors with price guidance of 9.25% to 10%.
We’re now told this Class 3 tranche of notes has been upsized to $60 million, while the pricing settled with a coupon spread of 10% to be paid to investors, so offering a multiple of almost 3.7 times the expected loss.
A larger $100 million tranche of Class 5 notes were also offered, with an initial base expected loss of 1.34%, attaching higher up at $3.475 billion of losses to USAA, with price guidance of 6.25% to 7%.
We understand this Class 5 tranche of notes has grown in size to offer USAA $135 million of reinsurance protection, while the pricing settled for a spread of 7%, offering investors a multiple of 5.2 times the expected loss.
These multiples are far higher than the most recent comparable cat bond from USAA.
As we explained before, USAA’s cat bond from November 2021, the Residential Reinsurance 2021 Limited (Series 2021-2) deal, had a Class 3 tranche featuring a 2.96% EL, that priced with a coupon of 5.5%, offering a multiple-at-market of just 1.86 times the EL.
The riskier Class 2 tranche from that cat bond issuance had an initial base expected loss of 6.6% and these notes priced to offer investors a coupon of 11.75%, so a multiple-at-market of 1.78 times the EL.
So the multiples are significantly up, indicating the hard reinsurance and insurance-linked securities (ILS) market we are now in.
Which makes the fact USAA has upsized this deal, reaffirming its commitment as a long-standing catastrophe bond sponsor, all the more important as a signal that the carrier did not simply assume it could find the cover cheaper elsewhere and continues to place significant value on the multi-year and diversified source of reinsurance the cat bond market provides it with.
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.