One tranche of Allstate’s Sanders Re 2014 cat bond upgraded by S&P

Ratings agency Standard & Poor’s has upgraded one of the three tranches of notes issued in U.S. primary insurer Allstate’s $750 million Sanders Re Ltd. (Series 2014-1) catastrophe bond, as the tranche has now passed its final reset date without the expected loss having been increased.

Allstate benefits from three layers of fully-collateralized reinsurance protection against losses from U.S. named storms and earthquakes (including fires following) on a state-weighted PCS industry loss and per-occurrence basis with this Sanders Re 2014-1 cat bond. The reinsurance protection covers a portion of Allstate’s personal and auto lines of business.

Each of the tranches of notes has a variable reset feature, a common feature of almost every catastrophe bond today as it allows the reinsurance coverage to be adjusted slightly, based on factors such as the sponsors exposure.

In the case of the $115 million Series 2014-1 Class C tranche of notes issued by Sanders Re Ltd., the final reset date has now passed and the notes continue to have the same expected loss as when the transaction was originally launched.

As a result, it seems S&P now view the notes as holding lower risk for investors, as the notes now cannot have their expected loss increased with no further reset to come before the notes maturity in May 2018.

Given the fact there is now no risk that the notes become more risky, S&P Global Ratings said it was raising its rating on the Sanders Re Ltd. Series 2014-1 Class C notes to ‘BB+(sf)’ from ‘BB(sf)’. At the same time, S&P affirmed the ‘BB+(sf)’ and ‘BB(sf)’ ratings it had given to the Class B and D notes of this cat bond issuance.

S&P has reassessed the three tranches, based on the reset having passed. Classes B and C both only have one year to run now, where as the Class D notes have a five-year tenure and so mature in May 2019.

The variable reset would have allowed the expected loss of the Class C notes to be set at plus/minus 20 basis points of the initial expected loss, which could have materially changed the level of risk associated with the tranche.

On assessment, and with no chance of the expected loss being adjusted at reset now, the Class C notes came out with a natural catastrophe risk factor in the ‘bb+’ category, hence the raising of the rating for this tranche of notes. It is to be assumed that the bracket for that risk factor also includes the Class B notes, hence the S&P rating for that tranche did not change.

Ratings for catastrophe bond notes are now increasingly rare, with the majority of transactions now opting not to have one at all. However, the constant monitoring of catastrophe bond notes by a rating agency is one of the benefits a rating can offer, as evidenced from this upgrade.