U.S. primary insurer Allstate has hailed its current reinsurance program as the best coverage it’s ever had, as the availability of lower-cost ILS and alternative reinsurance capital, plus recent catastrophe bond issuances, help it to increase capital efficiencies.
Allstate returned to the catastrophe bond market in May 2013 for the first time in five years, with the $350m Sanders Re Ltd. (Series 2013-1). It then took advantage of further reductions in pricing of insurance-linked securities (ILS) in May 2014, by issuing another $950m of cat bonds through the Sanders Re Ltd. (Series 2014-1) and Sanders Re Ltd. (Series 2014-2) transactions.
With $1.2 billion of fully-collateralized reinsurance secured through catastrophe bonds, providing protection over four and five-year terms, Allstate will have reduced its cost of reinsurance capital significantly in recent years. With this pricing locked in over the coming years and maturities staggered, Allstate will be able to come back to the ILS market as and when it finds conditions attractive to replace these bonds.
Alongside the catastrophe bonds, which all attach at losses in excess of $2.75 billion to Allstate, the insurer has also taken advantage of lower priced traditional reinsurance to protect the lower end of its program and reduce its retention. Allstate’s executive team discussed the benefits that cat bonds and cheaper reinsurance pricing have brought to its capital structure.
“For several years, we’ve had a first event $750m retention, we lowered that to $500m this year and we increased the amount of coverage on the topside of the program,” explained Allstate’s CFO Steven Shebik.
“We have the best coverage I believe we’ve ever had and we have multiple sources, both the traditional reinsurance program and the catastrophe bonds that are 4 and 5 year maturity bonds, So we’re covered over a longer period of time,” Shebik continued.
Chairman and CEO Thomas Wilson said that Allstate looks at reinsurance as just another form of capital at this point and they use it to reduce volatility across their business.
Wilson noted the growing ILS and reinsurance-linked investments market, saying; “I think what you’re seeing in reinsurance pricing is really the growth of, the increased interest in, insurance-related investments and assets.”
Wilson expects this trend to continue and that Allstate will be able to further benefit from additional protection and further reduce volatility in the business as the insurance-linked asset class continues to develop.
“We think you’ll continue to see new forms of alternative capital being developed, which will enable us to either lower reinsurance costs, take advantage of other things in the capital structure, find other ways to lower our cost of capital or take volatility out of the business,” Wilson explained.
U.S. primary insurers are increasingly turning to cat bonds, with a number of first-time sponsors bring their first ILS deals to market in the last year. This trend is expected to continue, particularly with pricing seemingly at record lows and investor appetite for new cat bonds remaining at a high.