Allstate Reports New Reinsurance Agreements for Hurricanes, Quakes and Other CAT Exposures

January 10, 2006

The Allstate Corporation reported new reinsurance agreements for its countrywide personal lines property and auto insurance business, excluding Florida, and for personal property excess losses in California for fires following earthquakes.

“The fundamental goal of Allstate’s catastrophe management strategy is to enable our shareholders to earn an acceptable return on the risks assumed in our personal lines property business and to reduce the associated variability in our earnings,” said Edward Liddy, chairman and CEO, The Allstate Corporation. “While in many areas of the country we are currently achieving returns within acceptable risk management tolerances, we continue to seek solutions to improve returns in areas that have known exposure to hurricanes, earthquakes and other catastrophes.”

The new reinsurance agreements augment Allstate’s existing reinsurance program and are as follows:

Countrywide Catastrophe Aggregate Excess Reinsurance Agreement — $2 billion coverage in excess of $2 billion of retained losses from: storms named or numbered by the National Weather Service earthquakes and fires following earthquakes.
Agreement is effective June 1, 2006 for a term of one year.

To date, Allstate has placed $750 million of a limit of $2 billion in excess of $2 billion of aggregate losses during the one-year contract term. The company plans to market the remainder of the limit during January 2006, except for at least 5% Allstate plans to retain. This catastrophe aggregate excess reinsurance agreement will apply to Allstate and Encompass brand personal auto and personal property policies (“Allstate Protection”).

California Fire Following Agreement — coverage not to exceed $1.5 billion for any one loss occurrence in excess of $500 million and $3 billion in total. Coverage is fully placed for Allstate Protection’s personal property excess losses in California for fires following earthquakes. Agreement is effective Feb. 1, 2006 and expires May 31, 2008. Allstate retains a 5% share of the agreement’s limit.

With respect to all loss occurrences under the California Fire Following Agreement, the agreement provides in total $3 billion of coverage for all qualifying losses without limitation except when a qualifying loss occurrence exceeds $2 billion. Then for 21 days no additional recovery can occur for any losses within the same seismic geographically affected area. The agreement allows for annual re-measurements, which may produce changes in retention as a result of increases or decreases in our exposure levels.

Allstate also announced changes to its existing multi-year individual state reinsurance program and treaties:

* Allstate expects to exercise its right to increase the coverage limits in its New Jersey and Texas treaties by $100 million for each state treaty effective June 1, 2006.
* The company is also considering additional reinsurance for Allstate Protection’s personal property excess catastrophe losses in New Jersey, effective June 1, 2006. This new agreement could provide as much as $300 million of coverage in excess of the New Jersey multi-year reinsurance treaty limit on an annual basis.
* Allstate also expects to terminate the existing treaties in the states of North Carolina and South Carolina on May 31, 2006.
* Allstate anticipates that the total cost of these agreements will be approximately $600 million per year or $150 million per quarter. This represents an increase of approximately $400 million per year or $100 million per quarter over its current cost once these agreements are fully implemented and effective.

Based on the effective dates of these agreements, its costs are expected to increase to approximately $75 million in the second quarter of 2006 and to approximately $150 million in the third quarter of 2006. Allstate will continue to evaluate additional purchases of reinsurance to mitigate potential exposure to major hurricanes and earthquakes. Additional purchases, if any, are not included in its estimate of total cost.

Was this article valuable?

Here are more articles you may enjoy.