Sanders Re III Ltd. (Series 2022-2)

This the second catastrophe bond from Allstate in just two months, as the company looks to expand its capital markets backed reinsurance with a new Florida focused cat bond deal.

Back in March the insurer secured $550 million of nationwide US, ex-Florida, reinsurance from a Sanders Re III Ltd. (Series 2022-1) transaction.

Now, Allstate is seeking Florida focused reinsurance coverage from a catastrophe bond for the first time in two years, with a $250 million or greater Sanders Re III Ltd. (Series 2022-2) multi-peril issuance now in the market.

Previously, Allstate’s Florida focused cat bonds were issued every three years, so renewed, but this year it seems Allstate is coming to market with the deal a year earlier, which will allow it to fill out more of its Florida reinsurance tower with capital market capacity, while staggering their maturities.

Using its Sanders Re III Ltd. special purpose insurer, Allstate is seeking at least $250 million of Florida catastrophe reinsurance protection from this new Series 2022-2 issuance, which looks like it will be the largest of its Florida-focused cat bonds to-date, if the target is hit.

The beneficiaries of the reinsurance protection that this Sanders Re III 2022-2 cat bond will provide, are Allstate’s Florida-focused underwriting subsidiaries Castle Key Insurance, Castle Key Indemnity, as well as National General and Northlight brand entities, we’re told.

For the first two tranches of notes the reinsurance protection will be on an indemnity trigger, per-occurrence basis and is structured to cascade as other reinsurance beneath is eroded, where as a third zero-coupon tranche is indemnity and non-cascading, we understand.

The first two tranches will have a three year term to the end of May 2025, while the third would provide just a single year of protection to the end of May 2023.

While the covered perils will be named storm, earthquake, severe thunderstorm, volcanic eruption, meteorite impact and wildfires impacting the state of Florida, similar to previous Florida-focused cat bond deals.

A $125 million Class A tranche of notes will provide indemnity, cascading per-occurrence reinsurance protection across a three-year term.

The Class A notes will have an initial expected loss of 0.67% and we’re told are being offered to investors with price guidance in a range from 5.75% to 6.5%.

A $125 million Class B tranche of notes are similar, but riskier, so will also provide indemnity, cascading per-occurrence reinsurance protection across a three-year term.

The Class B notes will have an initial expected loss of 1.79% and are being offered to investors with price guidance in a range from 7.75% to 8.75%, we understand.

The final Class C tranche of notes is as yet unsized, while set to provide indemnity, per-occurrence (but not cascading) protection across a single year term.

The unsized Class C notes have a particularly high initial expected loss of 17.43%, but while structured as zero-coupon discount notes we’re currently unaware of their price guidance.

The Class C tranche is a particularly risky layer of notes and they fact they are unsized and lack price guidance suggests Allstate is exploring the idea of bringing capital markets capacity into its Florida reinsurance tower lower-down.

Update 1:

We’re now told that the size may increase a little, with up to $275 million of protection now sought across the two tranches of bullet bonds being issued, Classes A and B.

The Class A tranche of notes is now targeted as between the original $125 million up to $150 million in size we’re told, but we’re now told their price guidance has been fixed at the top-end of 6.5%.

The Class B tranche of notes are similar, but riskier. They also began at $125 million in size, but are now pitched at from $100 million up to that amount, so could actually shrink slightly. Their price guidance has now also been fixed at the top-end of 8.75%, we understand.

The final Class C tranche of one-year zero-coupon notes, which are also indemnity per-occurrence, but not cascading and have a particularly high initial expected loss of 17.43%, are said to still being issued, but we’re told information on their size and pricing has still not been disclosed to our sources.

As a result, it looks like this cat bond will be up to $275 million in size just across the first-two bullet bond tranches, but actually bigger if this higher-risk and lower-down one-layer is also successfully placed, which sources say it is expected to be.

Update 2:

This cat bond issuance eventually priced at $287.5 million in size for Allstate.

The Class A tranche of notes priced at $150 million in size with a coupon of 6.5% to be paid.

The Class B tranche of notes priced at $100 million in size, so shrank a little, with their coupon finalised at the top-end of 8.75%.

The final Class C tranche of one-year zero-coupon notes, which have a particularly high initial expected loss of 17.43%, were eventually confirmed as $37.5 million in size, but their pricing is not known at this time.

Update – Oct 20th 2022:

Allstate pre-announced an expected $671 million gross from September 2022’s major hurricane Ian, with an expected $305 million reinsurance recovery set to reduce this to a net loss of $366 million.

This Sanders Re III 2022-2 catastrophe bond provides Allstate with occurrence reinsurance for losses in Florida and at this stage we believe the lowest layer, the Class C notes, are likely to face a total loss of principal due to hurricane Ian.

The next layer up, the Class B tranche, is harder to derive a loss quantum for at this stage, but there seems a chance this layer could attach as well.