Allstate has managed to both irritate state regulators and delight its shareholders in the past 12 months. Nick Thorpe delves into the background of this insurance behemoth.

Allstate is, in American terms, a granddaddy in US industry. Its roots can be traced back to the 1930s when it was founded as part of Sears, Roebuck & Co. Taking its name from an automobile tyre sold in the back of the Sears catalogue, according to the official Allstate history, the company was borne out of a suggestion to the president that there was a gap in the market for the sale of auto insurance by mail.

Sure enough, 75 years later, Allstate has grown to become the second-largest personal lines insurer in the US (behind insurance giant State Farm) and the largest publicly held personal lines insurer. It has diversified widely from its original auto roots and now sells homeowners, property/casualty and life insurance products throughout the US and Canada alongside its successful auto policies.

Successful Allstate
This diversification has been both an asset and a hindrance to the company in recent years. Allstate reported its second highest net income in its history for 2007 – $4.6bn – which was second only the $4.9bn reported for 2006. Revenues were up 2.7% to $36.7bn from $35.7bn in 2006 and the combined ratio was up 6 points to 89.8. However catastrophe losses for the year were up 74% from $810m in 2006 to $1.4bn in 2007.

This economic hiccup was felt the most strongly in the fourth quarter, which saw Allstate’s profits drop 37% on catastrophe losses. Q4 net income was down to $760m from $1.2bn in the same quarter of 2006. Catastrophe losses for the quarter amounted to $472m, almost entirely due to the Californian wildfires in October 2007. This compares with the $279m losses reported the previous year.

The corporation reported that it had received over 7,000 claims from the Southern California wildfires, resulting in approximately $315m to $335m in wildfire-related catastrophe losses to be recorded in fourth quarter 2007. Chief executive Thomas Wilson remained upbeat despite these heavy losses. “Allstate’s strategy and operating performance in 2007 delivered on our commitments, generated excellent results, and enabled us to strengthen our competitive position,” he said. “Our team also delivered strong results in the fourth quarter despite increased catastrophe losses and tumultuous investment markets.”

Risky Allstate
The losses the company suffered at the hands of the wildfires in California were a stark reminder to Allstate’s board of the company’s catastrophe-exposed book of business. $335m in wildfire-related losses in one quarter is enough to make any insurer nervous and goes someway to justifying a landmark decision by Allstate in May 2007. Announced five months before the wildfires, the company said that as of 1 July 2007, Allstate would stop offering new homeowners and landlord package polices in California. Robert Barge, field vice president for Allstate in California, said the company was taking “responsible action now so that the company will continue to be in a strong position to help protect customers in California and across the country.” He added that the new strategy would help to protect existing customers and revealed that the company would continue to renew their policies for the foreseeable future.

“Allstate's roots can be traced back to the 1930s when it was founded as part of Sears, Roebuck & Co. Taking its name from an automobile tyre sold in the back of the Sears catalogue

While undoubtedly a blow for Californian customers, the move by Allstate is the latest in a spate of catastrophe-exposure management techniques by the big primary insurers in the US. Back in June 2006 Allstate announced it would not renew its earthquake cover, affecting hundreds of thousands of policyholders. Allstate spokeswoman Julie Capozzi told GR at the time that “limiting our exposure to mega catastrophes like hurricanes and earthquakes makes sense.” With some experts predicting a 62% chance of a quake hitting San Francisco in the next 30 years, on paper this appeared an understandable move by the insurer.

The decision by the company to drop 120,000 policies in hurricane-prone Florida was more controversial. It brought its tally of policies dropped to almost 400,000 over the last four years and the company has shown no sign of reversing any of its decisions. Indeed, Floridian residents were dealt a further blow by the news in February this year that State Farm was following suit and ceasing to write new homeowner policies in the state.

The moves by the two insurers comes after a series of controversial rate hikes over the last four years which has culminated in an angry confrontation between Floridian politicians and Allstate this month. Amid a cacophony of protests the company maintained that this was the first increase in “almost four years” and actually reflected “the true cost of providing homeowners insurance.” This unfortunately did nothing to quell the angry politicians.

Naughty Allstate
After announcing that it would be seeking a rate rise of 43% in Florida, incensed politicians have been demanding that Allstate explain itself. The controversy lies in Florida governor Charlie Crist’s decision to pass new legislation in February 2007 which effectively doubled the capacity of the state’s reinsurer, the Florida Hurricane Catastrophe Fund (FHCF). With subsidised reinsurance on offer, primary insurers were in turn expected to pass on savings to consumers.

The Florida Office of Insurance Regulation is now investigating Allstate to determine whether the insurer conspired with its peers to artificially inflate premiums and set prices. Following a subpoena from the state last year, the insurer was almost banned from doing business in the state in January 2008 when it failed to cooperate with Florida Insurance Commissioner Kevin McCarty. McCarty said in a statement: “In view of Allstate's ongoing, blatant disregard of our subpoenas, I have little choice but to take an action that will send a clear message about how seriously I'm taking this issue. Suspending their certificate of authority to write new business in our state should make my point.” Although the High Court has now over-turned this ruling and McCarty has been satisfied that the insurer is cooperating, it has done little to mend relationships.

Even before the latest clash in Florida, Allstate surprised the US insurance industry by announcing its intention to leave the Property Casualty Insurers Association of America (PCI). As one of its founding members, the company’s decision to resign was especially surprising and caused concern among some in the industry. But PCI president and CEO David Sampson said that Allstate was simply taking a “different direction” and would be insourcing its advocacy functions in the future. Either way, Allstate is clearly not afraid of going against the grain.

“The Florida Office of Insurance Regulation is now investigating Allstate to determine whether the insurer conspired with its peers to artificially inflate premiums and set prices

Innovative Allstate
Bickering with US state officials is not Allstate’s raison d’être by any means however. It is also a primary insurance company and as such requires reinsurance to protect itself in the event of major catastrophe losses. Particularly after its record catastrophe a losses in 2005, Allstate has significantly upped its reinsurance spending and focused on new ways of securitising its wide and varied risks.

The company has proven it possesses an entrepreneurial spirit by embracing the burgeoning catastrophe bond and securitisation market. Cat bonds, essentially risk-linked securities which transfer risk from the sponsor to the investor, have been growing in popularity fast in the insurance market with issuances doubling every year from 2005 to a high of around $9bn in 2007, according to Guy Carpenter.

Allstate sponsored its first hurricane-linked cat bond in 2007 through Willow Re Ltd, a $2bn principal-at-risk variable note programme. The first Class B $250m notes were assigned a “BB+” rating from Standard & Poor’s and provides Allstate with index-based collateralisation reinsurance on a per-occurrence basis for three years. S&P credit analyst Gary Martucci, who rated the bonds, points out that the use of cat bonds by primary insurers does not signify a lack of traditional reinsurance. “It is just a way of diversifying risk at a comparable price,” he says. “And they are fully collateralised.”

Allstate appears to be very aware of its risk profile and its dogged pursuit of rate hikes and risk reductions prove that the company has an active risk management policy. Having suffered huge catastrophe losses in the past, the company now seems to have learnt its lesson and is actively reducing or securitising its risk profile. The Willow Re transaction proved that Allstate is not afraid of transferring its risk to the capital markets and it is undoubtedly not the last cat bond deal Allstate will sponsor.

Nick Thorpe is associate editor of Global Reinsurance.

Allstate: Thomas Wilson, President and CEO

Thomas Wilson is the president and chief executive officer of The Allstate Corporation and Allstate Insurance Company. Wilson is also a member of The Allstate Corporation board of directors. From 2005 to 2006, Wilson was president and chief operating officer of The Allstate Corporation, and from 2002 to 2006 he was also president of Allstate Protection. From 1999 to 2002, Wilson was chairman and president of Allstate Financial. From 1995 to 1998, Wilson served as Allstate's chief financial officer. He joined Allstate in 1995 from Sears, Roebuck and Co., where he was vice president of strategy and analysis.