Residential Re (USAA, 1997)
A cat bond issued in 1997 by US insurer USAA against hurricanes, regarded as the issuance that gave birth to the modern catastrophe bond market.
Hurricane Andrew, in August 1992, cost insurers far more than their models had predicted and left several of them insolvent. Reinsurance became scarce and expensive, and insurers exposed in Florida looked for another pool of capital. Residential Re was the most complete answer: an offshore vehicle issued notes to institutional investors, placed the proceeds in collateral, and promised to pay them to USAA if its hurricane losses on the East Coast and the Gulf of Mexico exceeded one billion dollars. The trigger was indemnity based, on the insurer's own losses. The deal set the template the market still follows: dedicated vehicle, collateral, placement under Rule 144A and a rating.
In June 1997, Residential Re placed 477 million dollars of one-year notes on behalf of USAA, covering its hurricane losses above one billion dollars. USAA renewed the program under the same name for decades, making it the oldest cat bond series in the market.
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