Sanders Re Ltd. (Series 2014-1)

With the Sanders Re 2014-1 cat bond Allstate is seeking to secure three layers of fully-collateralized reinsurance protection from U.S. named storms and earthquakes (including fires following) on a state-weighted PCS industry loss and per-occurrence basis.The reinsurance protection is for a portion of Allstate’s personal and auto lines of business.

The U.S. named storm (so tropical storm and hurricane) cover is across all U.S. hurricane exposed states, but with the sole exception of the hurricane prone state of Florida. The earthquake protection is for the states of California, New York and Washington, Artemis understands.

This transaction will see Sanders Re issue three tranches of Series 2014-1 notes, two tranches providing four years of cover and the third having a five-year term. All three tranches are exposed to both perils on a per-occurrence basis, with differing attachment probabilities and levels of expected loss.

A $250m Class B tranche of notes, providing four years of protection, has an attachment probability of 0.81%, an expected loss of 0.72% and an exhaustion probability of 0.64%. The notes attach at reported index losses of $3.83 billion and exhaust at $4.18 billion.

The $100m Class C tranche of notes, providing four years of protection, has an attachment probability of 0.97%, an expected loss of 0.87% and an exhaustion probability of 0.81%. These notes attach an index level of $3.499 billion with exhaustion set at $3.83 billion.

The $250m Class D tranche, providing five years of protection, has an attachment probability of 1.27%, an expected loss of 1.13% and an exhaustion probability of 1.04%. These notes attach at reported index losses of $2.954 billion up to an exhaustion point of $3.436 billion.

According to Artemis’ sources, Allstate may elect to issue a fourth Class A tranche of notes if the issuance is well received by investors. This Class A tranche, which we understand is not yet being marketed to investors, would sit below the Class B tranche with an initial expected loss of 0.61%. Of course that means that a $600m starting point for Sanders Re 2014-1 could be upsized considerably if Allstate chooses.

But back to the three tranches which are being marketed right now. The Class B tranche of notes is being offered with initial guidance of a coupon range from 2.75% to 3%. The Class C tranche, which is slightly riskier, is being offered with a coupon range of 3% to 3.5%. The final Class D tranche, which is again holding slightly more risk, is offered at a range of 3.5% to 4%.

Should the Class A tranche be launched it would likely be offered with pricing guidance slightly below the level of the Class B notes.

We’re told that Aon Benfield Securities, Goldman Sachs and Deutsche Bank are all providing joint structuring agent and bookrunner services, while AIR Worldwide is the risk modelling firm for this transaction.

The Sanders Re 2013 cat bond is still in force for another three years, having had a four-year term, which means that if Sanders Re 2014-1 completes successfully at $600m or greater Allstate will have at least $950m of reinsurance protection in catastrophe bond form sourced from the capital markets.

Update 1:

Artemis understands that each tranche of notes may increase in size and they are now being marketed with a range of possible sizes, giving them room to upsize should investor demand support it.

The Class B tranche of notes, providing four years of protection, which launched at $250m is now being marketed with a size range of $250m to $330m.

The Class C tranche of notes, which also provide four years of protection, launched at $100m and is now said to be marketed with a range of $100m to $115m.

Finally the Class D tranche, which has the five-year term, had launched at $250m and is now offered with a size range of $250m to $305m.

So if all three of these tranches of Sanders Re 2014-1 cat bond notes were to grow to their maximum the deal would come in at $750m of cover for Allstate.

The Class B tranche of notes launched with initial price guidance of 2.75% to 3%, but look set to price at the upper end at 3% we understand. The Class C tranche was offered with a coupon range of 3% to 3.5%, but will price right in the middle at 3.25%. Finally, the Class D tranche was offered at a range of 3.5% to 4%, but that has been narrowed and moved towards the upper end at 3.75% to 4%.

Update 2:

The Sanders Re 2014-1 cat bond did upsize to $750m and the pricing settled towards the top end of guidance on two tranches and at the mid-point on the third.

Here is how the Sanders Re 2014-1 catastrophe bond looks after upsizing and final pricing:

A Class B tranche of notes, providing four years of protection, which launched at $250m grew by 32% to $330m. Price wise, the Class B tranche of notes launched with initial price guidance of 2.75% to 3%, pricing settled at the upper end at 3%

The Class C tranche of notes, which also provide four years of protection, launched at $100m and grew by 15% to $115m. The pricing for this tranche launched with a coupon range of 3% to 3.5%, but priced right in the middle at 3.25%.

Finally the Class D tranche, which has a five-year term, launched at $250m but by close grew by 22% to $305m. The pricing on the Class D notes had launched with a guidance range of 3.5% to 4% but finally settled almost at the top end at 3.9%, Artemis understands.

Update, July 2017

The Class C tranche of notes had their rating upgraded to BB+, as the final reset was passed and no adjustment made to the notes expected loss.