USAA could upsize new Residential Re 2023-2 cat bond to $400m


Insurer USAA looks set to have a strong result from its latest catastrophe bond, with significant support shown by the investor base for its new Residential Reinsurance 2023 Limited (Series 2023-2) deal, from which it is now targeting as much as $400 million of multi-peril reinsurance.

USAA is a highly respected and regular sponsor of catastrophe bonds, the most prolific in the market with its more than 40 deals in the Residential Re series.

When this new cat bond launched in October, as we reported at the time the target issuance size was $300 million, across three tranches of notes on offer.

As is typical with USAA’s Q4 cat bond deals, this one is seeking per-occurrence and indemnity based 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) for the insurer.

The overall target size has been lifted, with up to $400 million of reinsurance now sought across the three cat bond tranches being offered to investors.

At the same time, the price guidance has lowered towards the bottom end of the marketed range for all three layers of notes on offer, suggesting strong execution of the issuance and support for USAA from the cat bond investor base.

The Class 2 tranche of notes remain at $50 million in size and are the riskier layer of notes on offer, with an initial expected loss of 5.91%. They were first offered as zero-coupon notes with price guidance of 85% to 86% of par, so a rough spread equivalent would be 14% to 15%, but that has now narrowed to 86% to 86.5%, so a rough spread equivalent of 13.5% to 14%, meaning the price has dropped while being marketed.

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The Class 3 tranche of notes have increased in size from $100 million to now become a $150 million offering. With their initial initial expected loss of 3.05%, they were first offered with price guidance of 8.5% to 9.25%, but we’re now told this has also dropped to 8.5% to 8.75%.

The final $150 million Class 5 tranche of notes are now targeted at between that level and $200 million, depending on demand. They have an initial expected loss of 1.25% and were first offered with spread price guidance of 5.75% to 6.25%, but sources said this price has also fallen to be fixed at 5.75%.

All of which implies a strong result in the catastrophe bond market for USAA and a quite different experience to some other sponsors that continue to see pricing rise more than fall, which likely partly reflects a more realistic initial guidance, as well as the respect cat bond investors have for USAA as a long-term, repeat sponsor.

With 41 transactions now listed in our Deal Directory, the Residential Re cat bond program is the most prolific in the marketplace and has been a regular and consistent feature of the cat bond market since it was first developed.

You can read all about this new Residential Reinsurance 2023 Limited (Series 2023-2) catastrophe bond from USAA and view details on almost every other cat bond ever issued in our extensive Artemis Deal Directory.

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