Lighter Q4 catastrophe loss slows Allstate cat bond annual aggregate erosion

US primary insurer Allstate has reported a much lighter catastrophe loss burden for the fourth-quarter of 2023, which has served to slow down what was looking like a very rapid build-up of annual aggregate catastrophe losses across the first six months of the risk-period for its in-force catastrophe bonds.

As we reported after the third-quarter of 2023, Allstate’s reported pre-tax aggregate catastrophe losses across the risk-period of its annual aggregate cat bonds had reached $3.88 billion.

Allstate has annual aggregate catastrophe bonds in-force that can attach at or above $3.4 billion of qualifying losses, with the annual risk period for those cat bonds beginning on April 1st, 2023 and running to March 31st, 2024.

The accumulated pre-tax cat losses Allstate had reported are already above that attachment level, but as we’ve pointed out before, it’s difficult to know just how the qualifying catastrophe loss tally sits at any point in time.

This is because, the lower down Sanders aggregate cat bonds, that attach at $3.4 billion, feature a $50 million event deductible, meaning smaller loss events do not qualify. As a result, the qualifying loss total is likely lower than the pre-tax reported.

But, it’s safe to assume that as Allstate’s pre-tax aggregate catastrophe losses rose to $3.88 billion by end of Q3, the qualifying losses under the terms of the cat bonds had also risen.

The fourth-quarter of 2023 has been far less impactful, it appears, as Allstate today reported that its total catastrophe losses for the fourth quarter were just $68 million, pre-tax.

Bringing the total, across the annual aggregate cat bond risk period since last April 1st to now just under $3.95 billion.

The second-quarter of 2023 saw Allstate reporting $2.7 billion of pre-tax catastrophe losses, while Q3 resulted in $1.18 billion, pre-tax.

When we last reported on this in October, Allstate’s aggregate cat bonds were marked down in secondary pricing sheets, given the rising aggregation of losses beneath their triggers, with some in the 70’s and others in the 80’s.

Now, a few months later and with a slower quarter of catastrophe losses reported, the pricing for the aggregate Sanders Re catastrophe bonds sit a little lower.

The Sanders Re 2020-1 Class B notes are marked down to as low as 50 cents on the dollar, while the Sanders Re 2022-1 Class C notes are marked as low as 70 cents and the 2022-1 Class B notes are marked around the 80 point. These are the lowest down aggregate cat bond tranches which have the greatest exposure to the current annual aggregate risk period.

We don’t know how high the qualifying and aggregated catastrophe losses have risen under the terms of these cat bonds, but with just under a quarter still to run until the end of the current risk period (March 31st) they will deserve watching as the US continues to face both winter storms and severe convective weather outbreaks.

As a reminder, Allstate just secured $400 million of new catastrophe bond backed reinsurance from the recently priced Sanders Re III Ltd. (Series 2024-1) issuance.

It’s also worth noting that Allstate has been working hard to improve its profitability and the insurers CFO Jess Merten explained today that, “In 2023, rate increases for Allstate brand auto insurance resulted in a premium impact of 16.4%, which are expected to raise annualized written premiums by approximately $4.27 billion, and rate increases for Allstate brand homeowners insurance have resulted in a premium impact of 11.3%, which are expected to raise annualized written premiums by approximately $1.16 billion.”

How this build-up in premium affects Allstate’s reinsurance buying remains to be seen, but as the premium pot grows, the insurer is likely to continue being a really significant buyer of traditional reinsurance and catastrophe bond protection.