Regulators question Allstate

Article Courtesy of The Palm Beach Post

Published November 16, 2007


TALLAHASSEE Allstate Corp. officials told state regulators Thursday that the financial survival of the Florida homeowners insurance companies is at stake and that is the reason the companies are seeking major premium hikes.

''The bottom line is that these filings are not solely about profitability, they are about solvency and the ability of Allstate Floridian to pay claims in the future," Bonnie Gill, the company's product manager, told a panel of regulators from the Office of Insurance Regulation.

The Allstate companies in Florida had to be recapitalized by the Northbrook, Ill.-based parent company, Allstate Insurance Co. (NYSE: ALL, $53.21) after a $725 million loss following the 2004 hurricanes, she said.

Meanwhile, continuing claims from Hurricane Wilma had further dropped Allstate's reserves to pay claims from $244 million at the beginning of 2007 to $203 million at Sept. 30, Gill said.

George Grawe, Allstate's legal counsel in Florida, said while the parent company may be highly profitable, ''Mama Allstate'' was unwilling to infuse any new cash into the subsidiary. He said the company was trying to protect policyholders by insuring they had enough money in reserves.

But skeptical regulators at the public hearing questioned the need for an average 41.9 percent rate increase for the Allstate Floridian Insurance Co. and the average 28.3 percent hike for the Allstate Floridian Indemnity Co.

Allstate officials said later that translates to a 19 percent profit. The higher profit was needed, they said, given the high risk they take on in insuring homes in Florida.

The requested increase comes just five months after Allstate Floridian reduced rates by 14.2 percent and Allstate Indemnity cut them by 13.4 percent as part of the legislature and governor's homeowners insurance rate reduction plan.

But Allstate, like several dozen other homeowners insurers, is now asking for a rate increase.

Belinda Miller, the state's deputy insurance commissioner, told Allstate officials that regulators were disappointed. ''It seems like an effort not to pass along the savings," she said.

The rate cuts were based on reducing insurer's costs. To that end, the state added $12 billion worth of discounted backup insurance, called reinsurance, to a state fund accessible to insurers.

Allstate officials said the rate request is largely based on the insurer buying more reinsurance, which increased in cost from $249 million in 2006 to $286 million this year.

They said the extra reinsurance was needed because of calculations by scientists who say Florida is in an increased hurricane activity cycle for the next 10 to 20 years and that the company will be forced to pay out more in hurricane claims as a result.

The insurer's projections, in conjunction with those provided by a hurricane modeling firm it retained, concluded that the companies' loss from a one-in-a-100 year hurricane could be as high as $1.7 billion. Last year, the insurer had concluded that such a storm would result in $1.5 billion worth of damage.

Miller pressed Allstate officials to explain their short-term modeling conclusions, but was told the information was confidential and that the trade secrets belonged to the modeling firm.

Allstate's increased estimates of hurricane damage comes in the midst of a company program to drop tens of thousands of policies by non-renewing their policies. The company expects to have about 200,000 homeowners policies on the books in April, down from around 700,000 two years ago.

Regulators asked how they needed that much more reinsurance with that many fewer policies in place. Company officials replied that they had already purchased the reinsurance before the rosters dropped.

Regulators also suggested that Allstate could save expenses by cutting the standard 10 percent commission to agents, given that they would be making more money if the rate increase was approved.

Allstate officials said their agents would be doing work explaining the increase to policyholders.

Regulators must approve any increase but Allstate also can appeal to state court. No timetable was given on a decision.