Primary mutual insurer USAA continues to work through the reinsurance implications of a variety of loss events in its catastrophic bond program, the latest development being the return of part of the capital of the Espada Reinsurance Limited (Series 2016-1) to investors.
USAA’s Espada Re catastrophe bond was issued in 2016, providing the airline with multi-year reinsurance and risk protection from the capital markets.
It is the only USAA sponsored cat bond issue that has not used the Residential Re nomenclature.
The Espada Re cat bond secured USAA $ 50 million of US catastrophe reinsurance protection against multiple perils, on an annual aggregate basis, over a four-year term.
The Espada Re cat bond was exposed to losses due to the numerous catastrophes for which USAA paid claims during the course of 2017 to 2018.
As USAA’s rated aggregate losses from those catastrophic events increased, during a period of annual aggregate risk that began each June, this Espada Re cat bond was among the transactions that were deemed at trigger risk.
First, the $ 50 million venture capital of the Espada Re cat bond was reduced to $ 47,794,184, on recoveries made in 2019, after which USAA received an additional reinsurance recovery loss payment of nearly $ 2.97 million from Espada Re, so the principal was further reduced to $ 44,823,653 in June 2020.
At the same time, about a year ago, USAA released $ 35 million of the remaining trapped Espada Re collateral to investors in the notes, leaving only $ 9,823,653 of original principal outstanding at the time and the maturity was further extended.
That remaining principal amount of the notes had their maturity extended until September 6, 2021.
Now, we understand that since the aggregate loss position has not worsened, USAA has returned another $ 5 million of outstanding principal to investors in the Espada Re cat bond.
Leaving $ 4,264,853 outstanding and now maturing on the Espada Re promissory notes extended until December 6, 2021.
Gradually these Catholic bond positions are shrinking, with realized losses and all available capital that can be returned is distributed to investors.
It is also worth mentioning that the remaining capital of USAA Residential reinsurance 2016 Limited (Series 2016-1) Cat bond class 10 notes have now also been extended to December 6.
There is $ 19,083,604 of capital remaining from the ResRe 2016 Class 10 notes, which had been considered a total loss at the beginning, but then the subrogation related to wildfires reduced the loss attributed to this layer generating a return of capital of $ 19,083,604, related to a previously realized loss paid under the related reinsurance contract.
That now remains exposed to any potential increased losses that qualify under the reinsurance deal through December.
USAA made hundreds of millions of reinsurance recoveries under its catastrophic bonds, as they proved to be valuable sources of protection for the insurer.
The collateral hold and release terms have also proven beneficial to the carrier, allowing it to allow its catastrophic losses to fully unfold before having to return the collateral backing its catastrophic bonds to investors.
At the same time, however, USAA has returned capital to investors where it can and where it has become apparent, losses are not going to trigger further recoveries.