USAA Acquires $450 Million in Cat Reinsurance

USAA has acquired $450 million in catastrophe reinsurance from Residential Reinsurance Limited, a Cayman Island reinsurer, according to Robert T. Herres, USAA chairman and CEO. The transaction is similar to one in 1997 in which USAA acquired catastrophe reinsurance to cover a portion of the risk of hurricane losses for policyholders in 20 states and the District of Columbia. USAA is the sixth largest homeowner and auto insurer in the United States.

"USAA's acquisition of catastrophe reinsurance through a company that uses the capital markets is an integral part of strengthening USAA's financial capacity in preparation for hurricanes," says Herres. "In doing so, a portion of USAA's hurricane risk is transferred to the capital markets at a substantially reduced cost."

On June 15, Residential Reinsurance Limited completed the sale of $450 million in bonds to a group of private investors. The proceeds of that sale were segregated into a Regulation 114 trust to pay claims in excess of $1 billion arising from a category 3, 4 or 5 storm on the Saffir-Simpson index. Residential Reinsurance Limited is a special purpose reinsurance company licensed under the laws of the Cayman Islands.

The ResRe contract enhances other sources of reinsurance USAA currently has in place for exposure to hurricane losses. "Coming on the heels of last year's transaction, I believe that reinsurers who tap into the capital markets provide an efficient level of reinsurance capacity for property and casualty insurers faced with the increasing exposure to hurricane damage," adds Herres. "It also shows that the private sector can and will find acceptable and cost-effective solutions to insurance challenges within the financial marketplace."

To date, USAA's largest aggregate catastrophe loss was attributable to Hurricane Andrew in 1992. The Residential Reinsurance policy is particularly suited to help manage USAA's financial exposure to large hurricanes. The one- year contract applies to catastrophic losses in the District of Columbia and the following states: Alabama, Connecticut, Delaware, Florida, Georgia, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont and Virginia.