Allstate's first hurricane-linked catastrophe bond was given a Standard and Poor's “double-B-plus” rating yesterday as the firm joined a long list of carriers to use that mechanism for backup reinsurance.
The Willow Re Ltd. $250 million Class B Series 2007-1 principal-at-risk variable-rate notes were assigned an S&P senior secured debt rating of “double-B-plus.”
Proceeds from the notes, according to the company, will provide Allstate with a source of index-based collateralization reinsurance for hurricanes in the covered area–New York, New Jersey and Connecticut–on a per-occurrence basis over a three-year period.
S&P credit analyst Gary Martucci said this is the first hurricane-linked catastrophe bond for which Allstate is the sponsor.
It is also the first issuance under Willow Re's newly established $2 billion principal-at-risk variable note program.
Following the carrier's record 2005 losses, Allstate undertook a major reinsurance-buying program and cut back in the New York City metro area on new coverage in an attempt to ease its catastrophe exposure.
Mr. Martucci said the use of catastrophe bonds by Allstate–and recently by companies such as Chubb, Travelers and Liberty Mutual–does not necessarily mean a lack of traditional reinsurance availability.
“It is just a way of diversifying risk at a comparable price,” he said. “And they are fully collateralized.”
As for the rating of the note itself, Mr. Martucci said it was based on the modeled probability of attachment and the analysis of the deal structure.
The initial trigger amount is $1.6 billion, and the initial exhaustion amount is $2.3 billion. Catastrophe modeler Boston-based AIR Worldwide will remodel the transaction each year to keep the probability of attachment relevant to the initial probability of attachment, while the trigger and exhaustion amounts will also be re-evaluated annually, Allstate said.
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