Allstate Corp. is no stranger to natural disasters. The company, one of the largest U.S. property insurers, paid out about $500 million in claims after Hurricane Ida devastated Louisiana and other parts of the country in August. The storm was one of the most costly disasters of 2021, causing an estimated $18 billion in insured losses, according to AIR Worldwide.
To cope with such unpredictable and potentially catastrophic events, Allstate relies on a diversified reinsurance strategy that includes both traditional and alternative sources of capital. One of the alternative tools that Allstate uses is catastrophe bonds, or cat bonds for short.
Cat bonds are securities that transfer the risk of natural disasters from insurers to investors, who receive interest payments in exchange for agreeing to cover losses above a certain threshold. They are popular among pension funds and hedge funds that seek to diversify their portfolios and earn above-market returns.
Allstate has been a regular issuer of cat bonds since 2007, having sponsored 16 deals under its Sanders Re program. The company typically issues at least one new bond every year, as part of its ongoing proactive management of its catastrophe exposure and capital position.
The latest bond, which closed on March 31, provides Allstate with $250 million of reinsurance coverage for multiple perils across the U.S., excluding Florida. The bond consists of two tranches of notes that provide Allstate with four years of reinsurance protection against losses from named storms, earthquakes, severe weather, wildfires, volcanic eruptions and meteorite impacts.
The bond was well received by investors, who were attracted by its relatively high yields and diversification benefits. The Class A notes priced at 5.75%, while the Class B notes priced at 15.5%, both within or below the initial guidance ranges.
However, not all of Allstate’s original plans for the bond were realized. The company had also proposed a third tranche of Class C notes that would have offered occurrence protection for a lower layer of its reinsurance tower. These notes were particularly risky and structured as zero-coupon notes, meaning they would pay no interest but instead be sold at a deep discount to their face value.
Sources said this tranche was unlikely to be placed with this syndicated deal, as the appetite for such high-risk levels may no longer be there in the cat bond market. The Class C notes could either be placed privately or in the traditional reinsurance market instead.
The deal was arranged by Swiss Re Capital Markets and Aon Securities. The bond was issued through a Bermuda-based entity called Sanders Re III Ltd., a new special-purpose vehicle that Allstate set up for this transaction.
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