Last week, home and auto insurer
) announced its pre-tax catastrophe (CAT) and net of reinsurance
loss estimate to jump to $198 million for Mar 2013. This takes
the total CAT loss estimate for the first quarter to $391
million, occurring from 9 events.
However, the total estimate for the quarter was partly negated
by favorable reserve re-estimates of CAT losses in the prior
years, bringing the net pre-tax CAT loss to $359 million. This is
higher than $259 million incurred in the year-ago quarter.
After tax, Allstate is expected to incur CAT losses worth $129
million in Mar 2013 and $233 million in the first quarter of
2013. The company is slated to release its first quarter results
after the closing bell on May 1, 2013.
Help from the Bond Market
As CAT losses have become a regular phenomenon with uncertain
extent of damages, Allstate now seeks to manage its exposure to
such losses by investing collateral into bonds primarily created
for natural disasters. While these funds carry high interest
rates, they also have the risk of losing capital if a natural
However, Allstate is investing into CAT bond collateral
securities, which are rated "AAA" by Standard & Poor's
Investor Ratings Service (S&P). The last bond, Willow Re
2008, that the company had invested in 2007 had matured in 2011.
Post that, Allstate has now put in its collateral into money
market funds through a special purpose reinsurer - Sanders Re
Subsequently, Allstate intends to buy $100 million of Class A
bonds (rated "BB+" by S&P) and $150 million of Class B (rated
"BB") securities from Sanders. These securities are due to mature
in 4 years and will cover losses related to hurricanes from
Alabama to New York along with the earthquake in California.
Such CAT bonds were very popular in 2007 but the collapse of
Lehman Brothers led to significant losses for the bond investors.
While many insurers are now indulging into such CAT bonds, these
securities have been trading at an all-time low. Nevertheless,
the returns are higher than any alternative mode of protection.
Moreover, market estimates CAT bond sales of about $7 billion by
the end of 2013, at par with 2007-level.
Overall, as the CAT bonds provide insurance coverage to
Allstate, we remain at the edge to analyse the future
developments and traction in this market. Allstate carries a
Zacks Rank #2 (Buy), other outperformers in the insurance sector
Hilltop Holdings Inc.
Montpelier Re Ltd.
). All these stocks carry a Zacks Rank #1 (Strong Buy).
ALLSTATE CORP (ALL): Free Stock Analysis
HILLTOP HLDGS (HTH): Free Stock Analysis
MONTPELIER RE (MRH): Free Stock Analysis
PARTNERRE LTD (PRE): Free Stock Analysis
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