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

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

Auto-insurance businesses are still losing money. And a run of unusually destructive bad weather has brought additional losses for their property-insurance businesses.

Allstate reported a 2Q loss of $4.42 per diluted share earlier this week, with its stock down around 3 per cent since last Friday. (The stock is off nearly 20 per cent year to date.) Progressive’s stock has fared better after it eked out 57c of 2Q per-share profit, but that was because it cut spending on advertising; it still lost money on its underwriting businesses.

As we’ve covered previously, the US’s auto insurance rates have soared 24 per cent over the past two years (v BLS data). Yet the insurers are still losing money on their auto businesses, going by Progressive and Allstate’s latest quarterly reports. It seems to have been caused by the same drivers we’ve been covering and recently discussed with our pals at Unhedged: Repair costs, litigation and accident severity.

What’s new is that weather is dealing a bigger blow to insurers’ profits. Severe thunderstorms and tornadoes caused lots of damage and multiple deaths this spring; the US had $40bn of insured catastrophe losses in the first half of this year, the third-highest on record after 2011 and 2021, according to Aon, an Illinois consulting firm and reinsurance broker:

The main takeaway so far is that Allstate could be at risk for downgrades from ratings firms, say CreditSights analysts, who called it a “brutal” quarter for the insurer:

With ongoing quarterly losses pushing leverage higher [and] regulatory capital/ratios lower, we’re looking at [an] increasingly financially constrained insurer at least in the near term . . . 

At some point, implemented premium rate increases in the personal auto business will be more fully reflected in earned premiums and loss cost trends will eventually stabilize, but for the time being the operating environment remains highly unfavorable . . . 

If we were going to hunt for bright spots, we’d point to a homeowners’ underlying combined ratio that still looks strong (but what good is that if weather events continue contributing to enormous CAT losses[?]) and higher net investment income given the positive impact of rising interest rates on fixed maturity investment yields.

Fitch downgraded Allstate’s holding-company credit to BBB+ from A- earlier this year, citing “sharp underwriting result deterioration”.

Ratings have a significant effect on interest rates for borrowers who don’t print their own currency / run the world / etc, so additional downgrades from S&P Global or Moody’s would presumably matter a bit more than a US credit-rating downgrade.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

Now a team of brave UBS analysts is finally calling out this scourge of the sporting world, in a note titled: “Is Pickleball Driving Higher Health Care Utilisation”?

OK fine, in reality pickleball falls somewhere between an absurd public nuisance and a much-needed inclusive outdoor exercise.

Still, the UBS analysts’ note is based on one noteworthy fact: Americans who use Medicare (aged 65 and up) are apparently getting more outpatient surgeries, particularly for their hips and knees. UnitedHealth’s CFO discussed the trend at a Goldman Sachs conference this month. With our emphasis:

. . . outpatient levels have continued to be an area that we’ve really focused on most. . . leading indicators in two weeks of June [are showing] continued strong outpatient care activity.

Think things [like] hips, knees, and senior business. Hips, knees, cardio, very localised in Medicare businesses [are] where we’re particularly seeing the trend. There are some indications that looks a little bit like a pent-up demand or delayed demand being satisfied . . . 

We have insight into other areas, for example, our ambulatory surgery practices that we own and operate, [we’re] seeing very strong volumes . . . So that has continued to be quite strong actually in terms of the care — at the levels of care activity that seniors are getting.

There are some obvious reasons for the recent increase in outpatient surgeries. Older Americans can now get surgery for non-life-threatening conditions that they put on hold during the Covid-19 pandemic, for example, as the UNH executive mentions above.

But blaming pickleball is a much funnier theory. From UBS, with our emphasis:

After analysing the growth in pickleball as well as the nature and frequency of related injuries, we conducted a bottom-up analysis of medical costs. All in, we estimate $250- 500 m of medical costs directly attributable to pickleball and see potential for greater medical costs indirectly linked to pickleball. Of this, we estimate that 80% of the cost is treated in outpatient settings (i.e. ED, Doctor Visits, OP surgeries) and 85% accrues to Medicare, which coincides with higher trend categories called out by UNH and HUM.

To be sure, $250m to $500m doesn’t look like much compared to the $800ish billion spent on Medicare parts A and B (tax-funded inpatient and outpatient care), the analysts point out.

Still, they deem it “plausible” that pickleball is contributing a noticeable amount to medical costs:

. . . we estimate that pickleball contributes 3-6 bps of annual Medicare medical costs. By care setting, we see about 6 bps of medical costs in the outpatient setting and 2 bps of medical costs in the inpatient setting. While this may seem trivial, it’s plausible that pickleball medical costs are driving 5-10 per cent of the unexpected medical cost trend this year.

Also, it’s maybe a stretch to estimate current-day pickleball injuries based on an academic study covering data from 2010-2019, the way the analysts do.

The game’s explosion in popularity has apparently happened in just the past few years, and trend stories portray pickleball as a sport that’s long been popular with retirees and just now catching on with the youth. A younger demographic probably experiences fewer injuries, and definitely won’t have access to Medicare when they do get injured.

That said, here’s more than you ever needed to know about seniors’ pickleball injuries, from UBS and the aforementioned study published in Injury Epidemiology in 2021:

The analysts also use historical Google Trends data to measure the increased popularity of pickleball. While the trend is clear, we don’t want to opine on whether or not this is an accurate reflection of interest from retirees. (Mostly on behalf of the 75-and-under crowd, many of whom seem more tech savvy than the seniors of yore.)

Still, it must have been tough for the analysts to speak out in this manner against the costs to society of Big Pickle.

Private equity has bought a stake, after all, and Hong-Kong listed Prada Group got a cut of the action; at one point it was selling a $2,500 pickleball accessory, as Lex highlighted.

So stay strong, UBS analysts. We’re rooting for you.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

Allstate, State Farm and AIG have stopped underwriting new homeowners’ policies in California because of the risk of destructive wildfires. Private insurers have almost completely withdrawn from parts of Florida, Louisiana and other environmental-disaster-prone areas.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

Your used car isn’t as cheap as it would’ve been six months ago, but it’s fine. You’re making an uncomfortably large down payment because interest rates are high. Before you drive away, you just need to sort out insurance.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

Part of the challenge is that insurers are regulated at the state level, and standards are co-ordinated through the National Association of Insurance Commissioners, or NAIC.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

The Philadelphia stadium — home of the Eagles — has seen the city’s notoriously rowdy American football fans throw batteries, climb lampposts and trash its surroundings. It even briefly had a jail for fans to sober up after brawls, though it didn’t rival its predecessor’s jail-and-courtroom combo.

A few examples from 2022 annual reports: Lincoln had roughly $12bn of net unrealised losses on its $111bn available-for-sale bond portfolio. Prudential had more than $23bn, or 7.5-per cent of its AFS portfolio, AIG had nearly $30bn of unrealised losses on its $226bn portfolio, and MetLife had $29bn, or 12 per cent of its AFS bonds.

One important caveat applies to this part of the story, however.

Safe assets’ unrealised losses are mainly worrisome if those assets need to be liquidated. Treasuries and safe bonds presumably have no default risk, so investors are guaranteed to have their principal repaid if they hold them to maturity.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs

A bank that was the 16th largest in the US by assets has been shuttered and taken over by regulators, just two days after it announced a $2.25bn capital raise after selling nearly all of its available-for-sale bond portfolio.

This story originally appeared on: Financial Times - Author:Alexandra Scaggs