Sanders Re Ltd. (Series 2013-1)

Sanders Re Ltd. is a Bermuda domiciled special purpose insurer established for the purpose of issuing series of catastrophe bond notes. The reinsurance coverage provided by the cat bond will protect Allstate Insurance Co. and a number of its affiliates.

In this Series 2013-1 issuance Sanders Re Ltd. will secure Allstate a source of fully-collateralized reinsurance protection for covered U.S. hurricanes and earthquakes, including fire following, on a per-occurrence basis over a four-year risk period. The transaction uses an industry loss index trigger, with PCS catastrophe series industry loss estimates providing the data on covered events. The industry loss trigger is a modified, due to state-payout factors, PCS index-based industry loss trigger.

The transaction is being marketed with an initial size of $250m and is split into two tranches of notes. The Class A tranche of notes are sized at $100m at launch and will cover 66.67% of losses between an initial attachment point of $3.25 billion and an initial exhaustion point of $3.55 billion. The Class B tranche of notes are sized at $150m at launch and will cover 30% of losses between an initial attachment point of $2.75 billion up to where the Class A notes kick in at $3.25 billion.

The Class B notes are riskier, attaching further down in Allstate’s reinsurance tower. Class A has an attachment probability of 0.93%, an expected loss of 0.84% and probability of exhaustion of 0.77%, while Class B has an attachment probability of 1.20%, an expected loss of 1.08% and probability of exhaustion of 0.93%.

Coverage U.S. hurricanes is in the following specified States; Alabama, Arkansas, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, and the District of Columbia.

Coverage for U.S earthquake and fire-following is more limited, being just in California, New York and Washington.

Based on historical catastrophe event analysis by the risk modeller on the cat bond AIR Worldwide, there haven’t been any historical events which would have caused modelled losses in excess of the attachment level of each class of notes. The three historical events which came closest to triggering the cat bond are $2.617 billion from the 1906 San Francisco earthquake, $2.444 billion from Hurricane Katrina in 2005 (loss amount includes covered states only), and $2.4 billion from an unnamed storm in 1938 that made landfall in New York.

Proceeds from the sale of the two tranches of notes will be deposited in reinsurance trust accounts and then invested in highly rated U.S. Treasury money-market funds.

Pricing wise, this deal is being marketed to investors with a coupon range of 3.75% to 4.75% for the Class A notes and 4.35% to 5% for the Class B notes.

It’s worth speculating about how large this cat bond could get. The attachment point of Class B, at $2.75 billion, all the way up to the exhaustion point of Class A, at $3.55 billion, is an $800m layer of Allstate’s reinsurance protection.

The cat bond markets investors certainly have the capital and the appetite to help Allstate turn those as yet undefined percentages of coverage into 100% for both layers. It will be interesting to see how large Allstate take this deal.

However it’s worth pointing out that our sources told us that the offering documents distributed by the brokers of this deal state that the Class B tranche will not increase in size.

Update: The Sanders Re cat bond is set to increase in size after it grew during marketing. The Class A tranche is now being marketed at $150m to $200m in size, up from the $100m it launched at. The Class B notes have not changed in size.

The pricing on both tranches has dropped during marketing. The Class A notes are now marketing with a coupon price guide of 3.5% and the Class B notes have price guidance of 4%, down by 17% and 14% from the mid-point of the originally marketed ranges.

Update 2: The size of the deal was confirmed at $350m, with the Class A tranche at $200m and Class B at $150m.

Prcing was confirmed as above.