US primary insurance carrier Allstate has taken advantage of one of the flexible structural features of catastrophe bonds, to add a recently acquired company as a beneficiary of the reinsurance coverage its Sanders Re occurrence and aggregate cat bonds provide.
The variable reset is one of the most sponsor-friendly structures in the catastrophe bond, allowing the beneficiary of the reinsurance or retrocessional coverage a cat bond provides to adjust its subject business portfolio, as long as certain risk metrics remain within pre-defined bounds.
The variable reset has become a default feature of every cat bond transaction, as with cat bonds providing multi-year coverage sponsors prior to the reset found they lacked some flexibility, compared to an annual reinsurance coverage negotiation and renewal process.
Variable resets tend to be focused on adjustments of the attachment point of coverage from a cat bond, allowing a cedent to adjust the cat bond to better fit its renewed reinsurance tower, or in adding covered areas, which is particularly attractive to expansive property insurers, such as some of the Floridians.
But the reset also allows an entire portfolio inherited through an acquisition to be covered, as evidenced recently by Allstate.
Allstate completed its acquisition of National General Holdings Corp. in January, adding around 1% to its personal lines market share, particularly in the US northeast where National General is headquartered.
The acquisition grew its personal lines premiums by some $4 billion as well, increasing its personal property-liability market share and expanding its independent agent distribution at the same time.
It was a reasonably sized acquisition, so it stands to reason Allstate would want to integrate National General within its reinsurance arrangements, something that was relatively easily achieved with the reset process for its outstanding Sanders Re catastrophe bonds.
At the resets of its catastrophe bonds recently, Allstate added National General as a ceding beneficiary of the reinsurance protection provided by its $375 million Sanders Re Ltd. (Series 2017-1) per-occurrence cat bond, its $500 million occurrence and aggregate Sanders Re Ltd. (Series 2018-1) cat bond, its $300 million Sanders Re II Ltd. (Series 2019-1) occurrence and aggregate deal, and its $250 million Sanders Re II Ltd. (Series 2020-1) occurrence and aggregate issue.
Allstate is also currently back in the cat bond market with a $200 million or greater Sanders Re II Ltd. (Series 2021-1) transaction, which we understand will also cover the National General book.
When cat bond transactions are updated using the variable reset terms, the risk metrics are recalculated and investors compensated for any increase in risk through a re-calculation of the coupon each tranche pays, with investors being paid a higher coupon if the ceding insurer chooses to make the cat bond more risky, or a lower coupon if the deal is made less risky
The variable reset, allowing these adjustments to the covered business and reinsurance protection provided by a cat bond, are now standard features, providing sponsors with the certainty that their cat bond cover will remain useful even when there are significant changes to their businesses.
For Allstate, adding National General under its Sanders Re catastrophe bonds means the company won’t have to renew all of National General’s reinsurance tower, which would normally come up for renewal at July 1st.
Allstate is out in the reinsurance market for additional cover for the book of business at this time, we understand, but the cat bonds look set to provide a significant proportion of what it needs.