Allstate’s March cat losses increase recoveries under Sanders cat bonds

US primary insurer Allstate revealed today that its catastrophe losses, before reinsurance, subrogation recoveries and taxes totalled $1.67 billion for the first-quarter of 2021, a significant proportion of which will be offset by recoveries under reinsurance and also its Sanders catastrophe bonds, it seems.

As we explained last month, following February’s significant catastrophe losses from the US winter storms and Texas Freeze, Allstate said that it expected its aggregate reinsurance cover would trigger, which is provided by its Sanders Re catastrophe bonds.

After March delivered more losses in the way of severe weather and hail impacts, Allstate is now expecting to recover even more under its nationwide aggregate reinsurance.

Allstate’s nationwide aggregate reinsurance tower is provided by three of its Sanders Re catastrophe bonds, with the Sanders Re II 2019-1 cat bond that provides the carrier with both occurrence and aggregate reinsurance protection sitting lowest in the tower currently.

For March 2021, Allstate announced estimated that its pre-tax catastrophe losses were $252 million, or $54 million after-tax and anticipated reinsurance recoveries.

Six catastrophe events drove losses of $208 million, on top of which increased prior period reserve estimates of $44 million were added last month.

Allstate said that one large wind and hail event accounted for roughly 55% of its estimated March 2021 catastrophe losses.

As a result of the March impacts, Allstate said that its nationwide aggregate reinsurance cover will offset $184 million of these losses, which implies that $184 million is expected to be recovered under the Sanders Re catastrophe bonds in the aggregate tower.

For the entire first-quarter of 2021, Allstate said its losses reached $1.67 billion, before reinsurance, subrogation recoveries and taxes.

But this has been offset by $1.08 billion in anticipated reinsurance and subrogation recoveries, the insurer said, leaving its net catastrophe loss for the quarter at just $466 million, after-tax.

Allstate’s nationwide aggregate reinsurance attached at $3.576 billion of gross losses as of the current risk period (see our previous article for more details and a diagram of the towers), with the Sanders Re II 2019-1 cat bond set to offer $300 million of aggregate reinsurance protection above that trigger point, across a $400 million layer, so covering 75% of the losses to that layer.

We aren’t sure of Allstate’s gross aggregate loss for the current risk period year and given the continued effects of subrogation and previous period recoveries, as well as the fact Allstate reports its catastrophe losses net throughout the year, it’s challenging to estimate how far above the trigger point of the cat bonds Allstate’s losses have reached at this time.

The $300 million Class B tranche of notes issued in the Sanders Re II 2019-1 catastrophe bond remains marked down in the secondary market for bids as low as 10 or 20 cents on the dollar, so the market still expects a loss as high as 80% to 90% of the $300 million of principal, at least.

But with the March recoveries, that Allstate said could be as much as $184 million from the aggregate tower, it seems possible that the price may fall further, as this $300 million Sanders Re II 2019-1 cat bond looks at risk of becoming a total loss.

Also of notes is the fact the riskier $100 million Class B tranche of the Sanders Re II Ltd. (Series 2020-1) catastrophe bond is also marked down for bids around 40 to 50 cents on the dollar, implying that cat bond investors anticipate Allstate’s losses eating into this layer as well, which sits above the 2019 notes and covers 100% of a $100 million layer above them.

Meanwhile, the $500 million of Sanders Re Ltd. (Series 2018-1) cat bond notes sit above that layer, covering 100% of a $500 million layer. These notes are marked down slightly, but only by around 10% as of the latest secondary market pricing we’ve seen.

Given the size of the recoveries, it also looks as if Allstate could be able to benefit from some of its per-occurrence reinsurance arrangements as well, in assisting to pay losses from recent catastrophes, in particular the winter storms.

It may take some time for the catastrophe bond losses to be finalised and for holders of the Sanders cat bond notes to fully understand the scale of principal losses faced, as development could be prolonged for the winter storm event and Allstate is likely to continue reviewing its ultimate for a time.

Also read: Nationwide’s aggregate rises on winter storms, Caelus cat bond losses possible.