Insurer USAA is set to return a further $25 million of catastrophe bond capital to investors from the extended notes of its aggregate cat bond, presumably as loss development has continued to be more favourable under the coverage provided, this publication has learned.As we reported back in June, USAA had opted to extend the maturity date for $225 million of catastrophe bond notes issued under its originally $400 million Residential Reinsurance 2021-1 deal, but allowed the remaining $175 million of notes to mature and pay back their capital to investors.Having a four-year term, each of the four tranches of notes that made up this aggregate cat bond backed reinsurance protection for USAA were originally due for maturity in May 2025.Back in April we had reported that , including this Series 2021-1 issuance, as they were viewed as being at-risk of potential losses from the latest annual risk period.

The last risk period included events from 2024 hurricane season activity, wildfires including the Los Angeles outbreak earlier this year, plus severe convective storms (SCS), tornado outbreaks, and other severe and winter weather.The severe weather and wildfires in 2025 drove a number of tranches of USAA’s cat bonds much closer to attaching their coverage, which would result in reinsurance recoveries coming due for the insurer.As a result, USAA opted to allow the lowest risk tranche of the Residential Re Series 2021-1 cat bond, the Class 14 notes, to mature on schedule, while it also returned $75 million of the next tranche up its reinsurance tower (the Class 13 notes) to investors.

But, the $25 million remaining from those Series 2021-1 Class 13 notes was retained on extended maturity, effectively turning it into trapped capital for the investors.Now, however, sources have told us that USAA has decided to cancel that extension of maturity and return that remaining $25 million of principle from the Class 13 notes to investors, presumably as it has deemed the layer of reinsurance is unlikely to attach and result in recoveries for the insurer.Which will be welcomed by investors and also be viewed positively, as the extended maturity date had been set to June 2028, so this early decision to return the capital shows USAA not holding onto the capital for any longer than it needs to, which investors and cat bond fund managers will both view positively as a sign of a mature sponsor in the sector.

So, now $200 million from the originally $400 million Residential Re 2021-1 aggregate cat bond has been returned to its investors.USAA continues to have capital retained from the Class 12 and the riskiest Class 11 notes from the deal, each of which are $100 million in size and remain extended to June 2028 at this time.Investors will be pleased with the way USAA is being equitable in returning capital just as fast as it can, while managing its own interests in retaining sufficient in case of reinsurance recoveries coming due.

As a reminder, that there are other tranches of aggregate catastrophe bonds sponsored by USAA that are marked down, including from the Residential Reinsurance 2022 Limited (Series 2022-1) issuance, the issuance and the Residential Reinsurance 2024 Limited (Series 2024-1) issuance.Some of these are also heavily marked down at this time, but all remain on-risk through the next year so there is no need for a maturity extension at this time, however cat bond investors are on-watch for potential payouts coming due...

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