U.S. primary insurance firm Allstate continues to explore ways it could replace some of its own capital base, using third-party reinsurance investors, “quite aggressively” according to its CEO, who said the firm is “spending a lot of time on it.”
Large primary homeowners insurers like Allstate are almost all tracking the third-party reinsurance capital trend, watching capital market investors appetites to take on portfolios of catastrophe risks and evaluating the best ways to capitalise on these trends.
Allstate is no different and is already a user of the capital markets through its Sanders Re series of catastrophe bond issues in recent years. With $950m sponsored in 2014 with Sanders Re Ltd. (Series 2014-1) and Sanders Re Ltd. (Series 2014-2), as well as another $350m in-force from the 2013 Sanders Re Ltd. (Series 2013-1), a significant chunk of the insurers reinsurance is now fully-collateralized through cat bonds.
It seems Allstate would like to do more and is actively evaluating the best way to bring more external capital into its business. However it is not rushing into this, preferring to take its time and ensure the capital structures or risk transfer tools it adopts are sympathetic to the firm’s overall needs and, of course, that the price is right.
Thomas Wilson, Allstate’s CEO, said during the insurers fourth-quarter earnings call last week that, alongside its own capital and traditional reinsurance, the alternative market is increasingly providing options for insurers like Allstate to leverage catastrophe bonds, sidecars and other vehicles.
Allstate is very aware that this market is growing quite rapidly, Wilson explained and as we said is already very active in the catastrophe bond market.
Wilson was asked whether Allstate might look to reinsure more of its homeowners portfolio given the attractive market pricing and interest from ILS and third-party capital.
The key attraction for insurers like Allstate is the cost of alternative or capital markets backed reinsurance capacity, which is typically lower than traditional sources.
Wilson said on the range of alternative sources of capital available to Allstate; “So we see that growing. That capital has been coming in at a lower cost-of-capital than that provided to us by external sources. So we’ve been actively using that.”
It largely does come down to cost for Allstate, as it weighs up different sources of capital and structures for the most efficient way to reduce its own capital costs.
Wilson continued; “So we did a cat bond this year because we thought it was cheaper than traditional reinsurance.”
Acknowledging that Allstate is looking at opportunities to shift its capital structure to leverage more alternative capital, he continued; “We have looked at replacing some of our own capital with third-party capital, we look at that all the time. It’s whether you use preferred stock, or common stock, or third-party alternative capital.”
However, Allstate has requirements that need to be met by any new capital sources and structures it investigates, Wilson said.
“We have a number of requirements that we have on that, which have not yet been resolved in terms of how to do it, but I can tell you that we continue to look at it quite aggressively,” he explained.
The requirements include the need for stability in pricing, meaning that Allstate does not want to be back out in the market every year looking for new capital leaving it at the whim of pricing expectations of capital providers.
Any selected capital source or provider has to meet Allstate’s economic standards, so being a good trade for the firm, Wilson continued. Thirdly the financial structures and instruments used need to be compatible with the insurers reporting, legal and accounting practices.
“Sometimes things show up as derivatives, and stuff like that, and it just makes everybody’s life more confusing because the financial structure doesn’t show you the economics of that which we got,” Wilson continued.
“So we’re hard at work at it,” Wilson said. “I think this is one of those things that develops over time. I think it is, there’s options in terms of our ability to further improve our return on capital, but 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.”
As this work progresses at Allstate, should the right opportunities present themselves that meet the insurers requirements and reduce its cost-of-capital, it seems ready to act. The firm feels this would benefit its overall financial performance as well.
Wilson explained; “To the extent Steve (Shebik, the insurers CFO) can find a way to access this alternative capital, reduce our volatility, maybe even reduce some of the capital we have in the business, that should not only free up capital, it should also improve our PE.”
Allstate, like other large insurance firms, is actively looking at how to take advantage of the availability of third-party reinsurance capital and the increasing interest that the capital markets have in directly accessing insurance business. As a result the firm is assessing its options and will likely move on them as opportunities present themselves and fit its overall capital model.
“So we’re hard at work on it. I don’t think you can expect to see anything in the short-term, because it is a complicated problem. But we are spending a lot of time on it,” Wilson said.
So it may not happen quickly but there is a definite desire to leverage lower-cost capital sources. If the best way to achieve that happens to be some kind of managed sidecar type vehicle, or issuing more catastrophe bonds, the ILS investment community could benefit by increasingly direct access to large insurance corporations risks.
Finally, Wilson was asked how much of the homeowners business Allstate might choose to reinsure or cede, versus retain, if the new capital could be found which matched the firms requirements and costs.
Wilson simply said that it; “All depends on the price.”
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