USAA is adding a retained quota share layer to the stated reinsurance for some of its annual aggregate Residential Re catastrophe bonds for their next loss occurrence period, after an update to the risk model used drove a material increase to the expected loss contribution of the severe thunderstorm peril, Artemis has learned.
The three in-force cat bond issuances subject to this change are the two tranches of the Residential Reinsurance 2023 Limited (Series 2023-1) deal, the remaining two tranches of the Residential Reinsurance 2024 Limited (Series 2024-1) deal and the three remaining tranches of the most recent aggregate cat bond sponsored by USAA, the Residential Reinsurance 2025 Limited (Series 2025-1) deal, we understand from sources.
We’re told that in notices to holders of these Residential Re cat bond notes, USAA has explained that due to material increases in the expected loss contribution for the severe thunderstorm peril under the latest risk model version, presumably Verisk’s as that was the model used in each case, it has decided to include an additional retained stated reinsurance layer.
Sources said this is a 100% retained quota share reinsurance arrangement, which will be applicable to all severe thunderstorm loss occurrences, which now becomes part of the stated reinsurance for each of the cat bonds subject to this change from the start of their next loss occurrence period, which we believe to be from this coming June 1st 2026.
The quota share is said to cover all states and policies that the cat bonds themselves might be exposed to, while it attaches at the zero dollar loss level and has unlimited limit.
We suspect what this means is that, after the risk model update increased the expected loss contribution from severe thunderstorm risks, that would have changed the risk metrics for the cat bonds meaning that additional stated reinsurance beneath the tower would effectively lift them higher.
At annual resets, cat bonds can be adjusted within certain pre-defined bounds, to provide useful flexibility for sponsors, allowing them to be moved within reinsurance towers to a degree. Here, it seems USAA is leveraging other terms in the cat bonds that allow for additional stated reinsurance to be added, in order to control the expected loss metrics of the notes.
Which is a good demonstration of the utility of catastrophe bonds as protection and their well-thought through protection terms, that allow for some flexibility and for the risk level to be controlled by the sponsors, for themselves and the investors.
This addition of a retained quota share reinsurance layer at the bottom of the tower may enable the cat bonds attachments to be lifted higher than would otherwise have been possible under the reset terms, so controlling the expected loss and keeping it within the limits of the reset terms. That’s an assumption, although it’s important to add that we haven’t seen any documents to 100% confirm this.
It is also possible that USAA could be controlling for a potential spread increase that would be needed for a larger increase in expected loss, by using an additional retained reinsurance layer. Again, we cannot be certain.
With 46 catastrophe bond transactions included in our Deal Directory, USAA and its now 45 issuance strong Residential Re cat bond program is the most prolific sponsor and program in the market, a regular and consistent feature since the cat bond instrument was first seen in late 1996 when USAA’s first issuance began marketing.
