Farmers Insurance Group, the US insurer that also operates across a number of reciprocal insurer brands and has links to Zurich Insurance Group, is sponsoring its first catastrophe bond, seeking at least $100 million of multi-peril US catastrophe reinsurance protection from the capital markets, with a Topanga Re Ltd. (Series 2021-1) issuance.
This is the first time we’ve heard of Farmers Insurance Group as a sponsor of catastrophe bonds, but the insurer was hard-hit by catastrophe losses in recent years, particularly from wildfires, so given rising reinsurance pricing and constrained capacity for certain perils, it’s perhaps no surprise to see the company sponsoring its first cat bond this year.
Topanga Re Ltd. was registered as a special purpose insurer (SPI) in Bermuda earlier this year and the vehicle will seek to issue two tranches of Series 2021-1 notes, which will be sold to investors and the proceeds used as collateral to underpin reinsurance transactions between the SPI and Farmers Insurance Group.
Farmers Insurance Group aims to secure a minimum $100 million of per-occurrence catastrophe reinsurance protection and an as yet unsized amount of annual aggregate catastrophe reinsurance protection, through the support of ILS funds and investors with this Topanga Re cat bond deal, sources have told us.
The two tranches of notes will both provide Farmers with reinsurance protection against certain losses from named storms, earthquakes, severe weather and wildfires affecting the United States.
A $100 million Class A tranche of notes are being issued to provide Farmers with per-occurrence and indemnity trigger protection over a four-year term to the end of 2025, we understand.
The Class A tranche of notes have an initial attachment probability of 1.88%, an initial expected loss of 1.49% and are being offered to catastrophe bond investors with price guidance in a range from 4.25% to 4.75%.
The Class B tranche of notes are as yet unsized, we’re told, and target annual aggregate indemnity reinsurance coverage for Farmers, over just a two-year term to the end of 2023.
The Class B tranche of notes come with an initial attachment probability of 1.34%, an initial expected loss of 1.03% and are being offered to cat bond investors with a particularly high, already fixed coupon at 15%.
Quite why the Class B notes are offering such a high multiple is unclear, as we lack information on the transaction to fully-understand that.
It could be that the notes have a cascading feature and could drop-down if inuring reinsurance beneath them is eroded, which would raise the attachment probability, but we cannot be certain. It is also a reflection of the high cost of aggregate reinsurance protection, of course, but it seems likely there is something else structural to this high coupon.
It’s good to see another new sponsor entering the catastrophe bond market in 2021, as increasing numbers of insurers, reinsurers and corporate entities look to the capital markets for fully-securitized risk transfer and protection.