The chairman and CEO of Allstate Insurance remains hesitant that market conditions are right for second largest property/casualty carrier in the U.S. to issue another catastrophe bond or dive further into the use of third-party capital sources of reinsurance.
“I don’t think you expect to see anything in the short term, because it is a complicated problem,” said Allstate chairman and CEO Tom Wilson on an analyst call yesterday. “But we are spending a lot of time on it.”
Allstate currently has three catastrophe bonds totalling $1.2 billion in the market through its Sanders Re Ltd. program. The insurer returned to market after a five year hiatus following the default of its Willow Re catastrophe bond in the aftermath of the Lehman Brother collapse and the resulting liquidity problems many cat bond collateral programs.
During the call, JPMorgan Chase analyst Sarah DeWitt asked if Allstate had plans to up its catastrophe bond program as part of plan to take advantage of the soft reinsurance market.
“Would you consider reinsuring a significant portion of the business, or maybe even the whole thing, given that reinsurance market conditions are increasingly favorable?,” DeWitt said. “If so, do you think you could find a counterparty for that?”
Wilson responded by acknowledging the falling prices in catastrophe reinsurance and the increased interest of competitors in catastrophe bonds and third party capital, but was hesitant to commit Allstate to further.
“There are a number of people who want to get into that market, because the returns are uncorrelated with overall market returns,” Wilson said “ It’s just whether you use preferred stock, or common stock, or a third-party alternative capital, we have a number of requirements that we have on that which have not yet been resolved in terms of how to do it.”
Wilson listed three hurdles for increasing Allstate’s commitments to reinsurance and third party capital, including price stability.
“We don’t want to be out in the market every year, trying to find $2 billion, $3 billion, $4 billion worth of capital, and what are we going to charge our customers for it, and have to run that through prices,” Wilson explained. The second hurdle for Allstate is economic, Wilson said, adding that it needs to be “a good trade for us.” Finally the capital would need to make sense in accounting terms.
“Sometimes things show up as derivatives and stuff like that, and it just makes everybody’s life more confusing” he explained.
Wilson concluded that while alternative capital and catastrophe bonds are always on the table, they would need to add stability rather than volatility to the insurer’s balance sheet in order to be effective.
“I think the biggest driver will be if we can take some volatility out of the P&L. That should reduce our cost of capital,” Wilson said during the call. “To the extent [ Allstate executive vice president and CFO Steve Shebik] can find a way to access alternative capital, reduce volatility, maybe even reduce some of the capital we have in the business, that should not only free up capital, Sarah; it should also improve our PE.”
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