Warning: Attempt to read property "post_excerpt" on null in /home/u860630112/domains/catscute.net/public_html/wp-content/themes/blogus/single.php on line 77

[ad_1]

Receive free US insurance industry updates

You’re in good hands with Allstate. But the hands are maybe slightly less good than they were a few years ago, from a credit-ratings perspective.

Allstate’s holding company just caught its second credit downgrade to BBB+, three tiers above junk, this time from S&P Ratings. Its operating subsidiaries’ credit was downgraded one notch to A+, from AA-.

To be sure, bond markets usually reflect deteriorating credit quality through higher borrowing costs long before the ratings firms downgrade anything, so fund managers won’t be especially surprised by this. Still, this downgrade comes as US insurance-underwriting losses spread from the troubled auto-insurance businesses — where insurers are slowly getting their rates higher — and into homeowners’ policies.

We are now in the peak US season for storms and wildfires, and things aren’t looking great for insurers so far. Allstate is just one of multiple insurers that have stopped offering new homeowners’ policies in California because of the risk, as local press has reported.

Allstate’s 2Q underwriting results (as measured by its “combined ratio”) highlights what can happen when weather and economic conditions turn against property and casualty insurers. If a combined ratio is above 100, that means a company’s insurance business is unprofitable, or it’s paying out more in claims and operating expenses than it is earning in premiums. The opposite goes for ratios below 100.

With that in mind, let’s look at S&P’s downgrade of Allstate, with our emphasis below:

The downgrade reflects Allstate’s continued weak underwriting performance given elevated catastrophe losses, persistently high loss costs for the personal auto business, and the increased exposure — measured by premiums — consuming higher levels of capital. Through the first six months of 2023, the S&P-adjusted consolidated combined ratio for Allstate rose to 115.6% from 105.4% for the same period in the prior year. The homeowners line of business saw the steepest erosion with the company’s reported combined ratio increasing to 132.3% for the first six months of 2023 from 95.9% for the same period in 2022 with Property-Liability year-to-date catastrophe losses of $4.4 billion, greater than the $3.1 billion loss in all of 2022. The auto business, while improving on an underlying basis in the quarter, still weakened year to date on a calendar year basis to 106.4% from 105% as elevated catastrophe losses and minimal adverse development outpaced a meaningful expense improvement. As a result, we expect the company to achieve a net loss for the year with the combined ratio in the 108%-110% range, assuming a normalised level of catastrophe losses in the second half of the year.

So not only did Allstate swing to a steep loss for the first half of this year in its homeowners’ insurance business, it also saw greater catastrophe losses than it did for all of last year.

This raises a question: insurance losses from natural disasters and catastrophes are usually offset by reinsurance, right? So why are insurers experiencing such elevated losses?

Well, it turns out that this year’s inclement weather has been especially bad for insurers rather than reinsurers (at least until last week’s disaster in Hawaii). First, as Moody’s wrote in January, reinsurers are cutting back on coverage and raising prices. Second, reinsurers often cover risk from single events with huge losses. But S&P writes that this year has brought a steady storm of only moderate disasters to the mainland US, leaving Allstate on the hook for more of the claims.

Also with our emphasis:

Since losses stemmed from a higher frequency of events there were minimal recoveries from reinsurance. We believe the company continues to face catastrophe risks in its homeowners business line in the third and fourth quarters of 2023 mainly from wind and fire disasters that could further erode earnings, and ultimately, capitalisation. Despite the challenges within reinsurance capacity across the industry, Allstate was able to renew its reinsurance protection, although at a higher cost, which will help protect the balance sheet from severity of losses. The company has historically used reinsurance buying effectively to manage net profitability, which is proven by its homeowners line’s underwriting profitability that outperformed the industry over the past 10 years. Subsequently, we have revised our view of risk exposure to moderately high from moderately low given the greater share of the balance sheet exposed to catastrophe, reserve, and investment risks than in the past.

But hey, at least insurers are earning more yield on the safest bonds, right? The worry used to be that insurers owned investments that were too risky because they needed the yield. Now they can earn more than 5 per cent on short-dated bonds! And all these worrying combined ratios exclude investment income.

Let’s see what S&P had to say about that in its downgrade:

As Allstate has de-risked the investment portfolio since the end of 2022 mainly through equity exposure reduction, it still has higher proportions of risk investments relative to its capital base, increasing the potential capital and earnings volatility.

. . . oh.

Further reading:
What’s going on with US car insurance?
Car insurance! Again!
The US insurance storm continues
Taking a CLOser look at insurers

[ad_2]

Source link

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *