USAA’s aggregate Residential Re cat bonds marked lower on rising loss potential

A number of USAA’s aggregate catastrophe bond tranches issued under its Residential Re program of deals have seen their secondary market prices marked repeatedly lower over recent months, with its losses from a severe convective storm (SCS) outbreak now driving them further down with some tranches marked near zero.

It’s important to note that pricing is not equal across all secondary cat bond market sheets at this time, but on certain sheets two of USAA’s Residential Re cat bond tranches are now marked so low as to suggest a total loss of principal is being priced in by the cat bond market.

In addition, a further four tranches of USAA’s aggregate cat bond notes have also been marked lower, with a severe convective storms (SCS) outbreak in March seen as the driver of this additional fall.

As a reminder, all of USAA’s aggregate Residential Reinsurance catastrophe bonds that provide aggregate coverage have annual risk periods that run through until late or the end of May.

As a result, there have been numerous catastrophe events in the last risk period, including 2024 hurricane season activity, wildfires including the Los Angeles outbreak this year, plus severe convective storms (SCS) and tornado outbreaks, as well as other severe and winter weather.

It’s also worth noting that these catastrophe bond tranches have been marked down in secondary pricing sheets for some weeks and months already, with many tumbling lower after the California wildfires. While these recent declines seen are due to severe convective storms and tornado losses suffered by USAA, we understand.

First, from the Residential Reinsurance 2021 Limited (Series 2021-1) catastrophe bond issuance, the $100 million of Class 11 notes which were riskiest are now marked for bids of between as low as 1 cent on the dollar (implying a full loss) to as high as 15 cents, depending on the broker pricing sheet, we understand. These notes have been marked at these low levels since late March.

The $100 million of Class 12 notes from the same Series 2021-1 issuance are marked for bids of between 25 and 40, with these declining further in the past week of pricing updates in early April on a report of a meaningful loss from severe convective storms in March that is estimated into the low hundreds of millions for USAA.

Next, the Residential Reinsurance 2022 Limited (Series 2022-1) aggregate catastrophe bond issuance, whose $35 million of Class 11 notes are also marked at the same low levels, of bids from 1 to around 15 cents on the dollar, again with some pricing sheets implying a total loss of principal is anticipated by the market, we are told.

The $60 million Class 12 tranche of cat bond notes from the Series 2022-1 issuance are also marked for bids as low as 25 and their price declined again at last week’s pricing due to an anticipated USAA loss from March tornadoes.

Another deemed more at-risk are the Residential Reinsurance 2023 Limited (Series 2023-1) $125 million Class 13 tranche of aggregate cat bond notes, which are marked down for bids as low as 25, also falling for the same reasons at the early April pricing.

The final aggregate cat bond tranche from USAA deemed at-risk are the Residential Reinsurance 2024 Limited (Series 2024-1) $50 million of Class 13 notes, which are also marked for bids as low as 25, again falling in the last week.

With these notes adding up to $470 million of cat bond risk capital and given the percentage mark-downs, it seems cat bond pricing sheets currently imply a mark-to-market loss of as much as $323.75 million across these six tranches of aggregate Residential Re catastrophe bonds at this time.

But, with the risk period still having the rest of April and May to run, that could increase. Or, if the rest of the annual risk periods see fewer major catastrophe losses for USAA, there is a chance some increase in value and perhaps don’t attach their coverage at all.

The two Class 11 tranches of notes, from the ResRe 2021-1 and 2022-1 issuances, being marked down for bids as low as 1 cent, may not avoid attaching though, given the market is clearly pricing them for a potential total loss. If they do face a total loss, USAA will benefit from $135 million of reinsurance recoveries from the two tranches.

Other more remote, in risk terms, aggregate cat bond tranches from the Residential Re series are also marked down below par, although at generally higher bids still, implying these are considered safe from loss at this time, given their higher attachment point levels.

It’s worth also noting that USAA is in the market with a new Residential Re 2025-1 aggregate catastrophe bond issuance at this time.

As we explained, the multiples-at-market implied by the price guidance suggest an increase on last year’s spreads for this new USAA aggregate cat bond, likely reflecting the fact the company has experienced losses that could trigger some of its outstanding cat bond coverage.

Details of catastrophe bonds facing losses, deemed at risk, or already paid out, can be found in our cat bond losses Deal Directory here.