Sanders Re 2015-1 cat bond order book building ‘outside of guidance’

Allstate’s latest catastrophe bond issuance is not going as smoothly as its previous attempts to tap the capital markets, as investors showed an unwillingness to meet the insurers pricing ambitions leading to the book building “outside of guidance.”

U.S. primary insurer Allstate launched its fourth Sanders catastrophe bond just over two weeks ago, seeking one of the longest coverages that the cat bond market has provided. The proposed $130m Sanders Re Ltd. (Series 2015-1) saw Allstate looking for a 7 year reinsurance cover against losses from multiple U.S. perils.

According to Paul Schultz, CEO of Aon Benfield Securities (the firm structuring and marketing the deal), the order book where potential investors in a cat bond show their interest has been “building outside of the launch guidance,” he told Artemis by email.

Investors have been showing an appetite to buy into the Sanders Re 2015-1 cat bond, but not within the price guidance range that the deal was launched with. As a result the insurer is said to be considering what options it may have to continue issuing the deal or perhaps even to withdraw it.

The single $130m tranche of Sanders Re 2015-1 Class C cat bond notes were being marketed with price guidance of 362.5 bps (3.625%) to 387.5 bps (3.875%), which with the base expected loss at 0.97% implied a reasonable multiple that ILS investors would typically be expected to welcome.

The pricing and multiple seems aligned with Allstate’s two 2014 cat bond issues as well, so it doesn’t appear to be a purely price-led issue that has resulted in investors pushing back on the issuance.

So what factors could have caused investors to only want to show interest in subscribing to Allstate’s latest cat bond at a higher coupon level than the insurer wanted to pay?

Probably best to look at what’s different about this issuance, compared to its previous transactions, to see if there are any possible reasons for investors refusing to support Allstate’s pricing ambitions.

The first obvious difference, that could have pushed investors to require a higher return and multiple for this Sanders Re 2015-1 cat bond, is of course the perils included.

Allstate included both meteorite impact and volcanic eruption coverage in this cat bond, the first time it has done so. However the low-level of expected loss contributed by these two perils would suggest that this would not be an issue for investors.

The other difference is all related to the tenure of the deal being 7 years.

That is a long time to expect ILS investors to hold onto risk without any opportunity to re-price it. Typically if a major catastrophe occurred investors might seek to adjust their views of risk and as a result the pricing they’d expect might go up. Similarly a catastrophe model could change in that 7 year period, dramatically altering the view of risk but the investors would be stuck with the same coupon.

While investors would be stuck with the launch pricing Allstate itself has some flexibility in the cat bond structure, with redemption clauses allowing it to withdraw the Sanders Re 2015-1 cat bond notes by paying a small premium at specified points in its term.

That might be an issue for some investors, who may feel that Allstate wants all the flexibility for itself while offering them none of the benefits for holding this risk over a long duration for the insurer.

In fact one investor told Artemis that they simply felt the deal was a little one-sided, with Allstate looking for extended cover and flexibility, while investors don’t feel the launch price guidance was set high enough to compensate them adequately for the risk, duration and flexible coverage they would be providing in return.

Another investor Artemis spoke with expressed a dislike for the very tight price guidance range, with just 25 basis points between the upper and lower end of launch guidance, which is effectively only a quarter of a percentage point.

That doesn’t really give ILS investors any room to express their opinions on the pricing and has perhaps been seen as almost forcing them towards a target price that Allstate clearly wanted to achieve. So there may be an element of investors choosing to push back on a cat bond deal that they felt offered more to the sponsor than to them.

Whatever the ultimate reason behind investors choosing to not meet Allstate’s pricing goals the Sanders Re 2015-1 cat bond deal is still in the market and, according to Paul Schultz of Aon Benfield Securities, the insurer is evaluating its options.

We’ll update you if and when more information emerges on Allstate’s Sanders Re Ltd. (Series 2015-1) catastrophe bond and whether it continues to progress to market, with some adjustments likely, or whether the deal gets relaunched, or even perhaps shelved.