Sanders Re II Ltd. (Series 2019-1)

U.S. primary insurance company Allstate is back in the ILS market for its first catastrophe bond issuance of 2019.

For this transaction a new insurance vehicle has been established for Allstate and this will be the first cat bond issuance from Sanders Re II Ltd.

As we understand it, the cat bond will provide Allstate with collateralized reinsurance covering the same range of perils as its last cat bond in 2018, so U.S. named storm, earthquake, severe weather, fire and other perils.

But the transaction will not cover any risks in the state of Florida, we’re told.

The issuance is targeting $350 million of coverage across two tranches of notes, both of which will provide Allstate with a fully collateralized source of reinsurance on an indemnity trigger basis and across a four-year term, split into a $50 million Class A tranche and a $300 million Class B tranche.

Both tranches will provide occurrence and aggregate coverage we understand, with the tranches offering sectioned protection to the insurer sponsoring the deal.

The Class B tranche is a much riskier layer of Allstate’s reinsurance tower, we’re told, while Class A is a more remote layer of the insurers risk.

The coverage is designed in an interesting structure, so as to provide greatest efficacy to the sponsor, with the occurrence and aggregate protection of each tranche triggering at different levels in the tower.

The currently $50 million of Class A notes would attach on an occurrence basis at $2.75 billion of losses and aggregate basis at $4.44 billion, we understand. Both will cover a $100 million layer, suggesting this tranche could double in size if Allstate wanted it to and ILS investor demand responds.

The Class A tranche has an initial expected loss of just slightly under 1% combined across the two sections of coverage, with price guidance targeted in a range from 4% to 4.5%.

The currently $300 million Class B tranche of notes would attach on an occurrence basis at the same $2.75 billion of losses and aggregate basis at $3.54 billion, we understand. But this tranche will cover a $400 million layer of Allstate’s reinsurance tower, suggesting it could grow if Allstate elects to

The Class B tranche has an initial expected loss of just slightly under 1.57% combined across the two sections of coverage, with price guidance targeted in a range from 11.25% to 12.25%.

The Class B tranche is much more exposed to the annual aggregate catastrophe risk in this cat bond, while the occurrence attachment probability is the same for both tranches of notes.

The design of the structure will provide useful reinsurance protection to Allstate, slotting neatly into its tower alongside its traditional layers of protection and being available to respond to large single catastrophe loss events as well as attrition caused by multiple smaller losses.

Update 1:

We understand that the less risky $50 million Class A tranche of notes from Allstate’s latest catastrophe bond was pulled from this issuance.

The $300 million Class B tranche was priced with no increase in size and at the upper-end of the initial spread guidance (11.25% to 12.25%), so will offer ILS investors a 12.25% coupon.

Update – Mar 18 2021:

Following a significant winter storm and deep freeze event in Texas, Allstate said that thanks to gross losses of around $1.3 billion its aggregate catastrophe losses had surpassed its retention on its nationwide aggregate reinsurance tower.

The coverage of that nationwide aggregate reinsurance tower is provided by Allstate’s Sanders Re catastrophe bonds, in particular the ones providing both occurrence and aggregate protection.

This Sanders Re II 2019-1 catastrophe bond sits lowest down in the aggregate tower, meaning it faces some losses.

As of the time of writing, broker pricing sheets had the $300m of notes issues in this cat bond deal marked down at between 10 and 20 cents on the dollar, implying up to a 90% loss of principal, which could be as much as $270m.

Update – May 6th 2021:

The erosion of principal for investors in this cat bond continued, now amounting to $195 million, leaving just $105 million of coverage from this cat bond to cover future losses or loss creep.

Update – August 5th 2021:

Erosion of this $300 million of catastrophe bond notes issued by Sanders Re II in 2019 continued in the second-quarter of 2021, with now $253 million of the principal eroded and just $47 million of the coverage remaining, as of the end of June.

The continued erosion was due to loss creep on first-quarter catastrophe events, predominantly the Texas freeze, we believe.

Update – Feb 2022:

It became clear that Allstate has booked a full recovery from this catastrophe bond, so is expecting the full $300m of principal to be paid out after ongoing loss creep from events affecting the 2020/21 aggregate loss period, which again we believe to have been predominantly the winter storm Uri and Texas freeze loss.