As expected after the insurer withdrew around $1 billion of limit from the traditional reinsurance market as it restructured its catastrophe programme to take advantage of alternative reinsurance capacity and the capital markets, U.S. insurer Allstate has launched a new $250m catastrophe bond. The new cat bond from Allstate, Sanders Re Ltd. (Series 2013-1), is the insurers third time in the cat bond market after two Willow Re cat bond deals in 2007 and 2008.
Allstate is the second largest U.S. personal lines insurer, and the largest publicly held U.S. insurer, so it was encouraging to hear of the insurers plans to leverage capital markets sources of reinsurance capacity in earnest this year. The insurer has clearly noticed the increasingly competitive nature of capital markets backed reinsurance capacity and the attractive pricing that has been possible this year in the cat bond market.
So, here are the details on Allstate’s new Sanders Re cat bond. Sanders Re Ltd. is a Bermuda domiciled exempted company that will be registered as a 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. is aiming to 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 will use an industry loss index trigger, with PCS insurance 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 an as yet undefined percentage of losses from an attachment point of $3.25 billion and an exhaustion point of $3.55 billion. The Class B tranche of notes are sized at $150m at launch and will cover an as yet undefined percentage of losses from an attachment point of $2.75 billion up to where the Class A notes kick in at $3.25 billion.
So 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%.
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.
Coverage is in specified states for U.S. hurricanes; 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 earthquakes 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.
Rating agency Standard & Poor’s Ratings Services has assigned its ‘BB+(sf)’ preliminary rating to the Series 2013-1 class A catastrophe bond notes and its ‘BB(sf)’ preliminary rating to the Series 2013-1 class B catastrophe bond notes to be issued by Sanders Re Ltd.
That’s all we have on this Sanders Re Ltd. cat bond from Allstate for the moment.
Allstate’s 2007 Willow Re cat bond became one of the few to default in the markets history as it was affected by the collapse of Lehman Brothers as the firm was total-return swap counterparty for the deal. It’s 2008 Willow Re deal matured in June 2011, leaving the insurer with no coverage from the cat bond market.
It’s encouraging to see the insurer return to the market and we understand from sources that Sanders Re Ltd. will almost definitely increase in size above $250m if the pricing Allstate can secure is competitive enough. The insurer is seemingly keen to secure as much reinsurance as it can via the capital markets this year.
So this deal is definitely one to watch from an upsizing point of view, as Allstate could capitalise on the current attractive pricing in the cat bond market to secure a very large layer of cover with this deal, up to $800m, if they choose to. However it’s worth pointing out that our sources said that the offering documents distributed by the brokers of this deal state that the Class B tranche will not increase in size.