Texas hail storms boost Allstate’s Q1 cat losses, but Sanders Re cat bond safe

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U.S. primary insurer Allstate was hit by losses from convective and severe thunderstorm related weather events in Texas in March, which have resulted in the firms Q1 catastrophe losses rising above some analysts expectations.

Allstate logoThe March hail storms and convective storm related wind losses have been an expensive event for the insurer, as Allstate reported that just three wind and hail related catastrophe events contributed more than 90% of its March losses.

Allstate reported $381 million of pre-tax estimated catastrophe losses for the month of March 2019, $301 million after-tax.

The insurer typically reports its catastrophe losses after the benefits of any reinsurance protection coverage.

Seven catastrophe loss events hit the insurer in March, costing $371 million pre-tax, while unfavorable reserve development on prior month catastrophe losses drove the remaining $10 million of pre-tax losses.

The three wind and hail related catastrophe loss events primarily impacted Texas and accounted for roughly 90% of March losses for the insurer, Allstate said.

Having previously announced $299 million of catastrophe losses, pre-tax ($236 million after-tax), for January and February 2019, this takes Allstate’s first-quarter 2019 catastrophe losses to $680 million pre-tax ($537 million after-tax).

That total came in $178 million above analyst KBW’s forecast for Allstate’s Q1 pre-tax catastrophe losses and $181 million above Credit Suisse analysts estimate.

Both have lowered their earning per share estimates for the insurer as a result, although highlighting that Allstate’s management has taken steps to reduce catastrophe exposure and make greater use of reinsurance in recent months.

Allstate has an aggregate reinsurance layer of protection that attaches at $3.75 billion of annual catastrophe losses to the firm, which is made up by its Sanders Re 2018 catastrophe bond.

The Sanders Re Ltd. (Series 2018-1) catastrophe bond remains in-force and provides annual aggregate reinsurance protection across an annual risk period running from April 1st 2018 to March 31st 2019.

As such, this catastrophe bond includes any qualifying losses that occur since Q2 2018, so if we add up the full risk periods losses from the data made available by Allstate we get a total of just under $3.1 billion of qualifying catastrophe losses.

We can’t precisely say how much of these losses have qualified under the terms of the Sanders Re 2018-1 catastrophe bond, which actually triggers at $3.75 billion, so making up the bottom layer of the aggregate protection.

In order to qualify, catastrophes in an annual risk period must involve two or more exposures and result in more than $1 million in losses to Allstate’s personal lines property and automobile business.

Qualifying losses would then aggregate upwards across a risk period to erode the $3.75 billion of aggregate retention after which reinsurance payouts would begin to be made to Allstate.

So, with Allstate’s reported catastrophe losses having reached $3.174 billion over the course of the risk period for the cat bond, it seems the investors in the Sanders Re 2018-1 cat bond are safe for the last annual risk period.

However, the fact these losses are above analyst expectation does suggest Allstate may look to how it can further strengthen its reinsurance program at future renewals, which could increase opportunities for the ILS market and catastrophe bond investors to work with the insurer.

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