Menlo Park, CA-based Risk Management Solutions (RMS) says it provided the risk analysis to support Arrow Reinsurance Company Limited, the Bermuda-based reinsurance subsidiary of Goldman, Sachs & Co., in a $90 million securitization of State Farm's Florida hurricane risk.
The one-year transaction transfers to investors the risk associated with predefined levels of hurricane losses occurring to State Farm's property insurance portfolio in Florida. Securities were offered to investors by special-purpose Bermuda reinsurer Alpha Wind 2000-A Ltd., which in turn entered into a retrocessional agreement with Arrow Re.
The motivation for the transaction is a reinsurance agreement under which Arrow Re has committed to provide State Farm with $100 million of Florida hurricane coverage. Through Alpha Wind, investors are providing Arrow Re with $90 million of retrocessional capacity for this risk, and Arrow Re is retaining the remaining $10 million.
To help potential investors and rating agencies evaluate the securities, RMS used its proprietary U.S. hurricane risk model and information from State Farm on its Florida portfolio to conduct a comprehensive stochastic analysis of potential hurricane losses. From this analysis, RMS provided estimates of overall loss probabilities, projected loss amounts for key storm scenarios, and insights into the regional composition of the risk.
The securities were offered in two tranches - $37.5 million of Preference Shares and $52.5 million of Notes.
RMS says its modeling indicated that the attachment point of approximately $2.4 billion for the Preference Shares corresponds to the level of single event loss to State Farm's Florida portfolio that can be expected to occur, on average, about every 50 years, and that the exhaustion point of approximately $3.8 billion is roughly the 1 in 100 year loss level. The Notes attach at the exhaustion point of the Shares and provide coverage up to a single event loss of approximately $5.7 billion, which RMS estimated to be slightly beyond the 250 year return period loss level.
Standard & Poor's reviewed the transaction and RMS' modeling and assigned ratings of BB and BB+ to the Shares and the Notes, respectively. Goldman, Sachs & Co. acted as lead manager for the offering, with E.W. Blanch Capital Markets acting as co-manager.