When Allstate Corp. executives speak to investors these days, hurricanes and home insurance aren’t the only topics on the agenda.
The Northbrook-based company has about $5 billion in subprime investments in its portfolio, a stake that has been weighing on shares of the nation’s No. 2 home and auto insurer and compelling its managers to spend time assuaging investor worries about a topic far removed from selling property and casualty coverage and financial products.
Allstate’s subprime holdings represent less than 4 percent of its total investment portfolio, but the insurer’s shares are off nearly 8 percent since the end of June. “We believe the decrease mostly stems from investors’ fears regarding the company’s subprime exposure,” Value Line analyst Ian Gendler said in a Sept. 21 report.
Most U.S. property and casualty insurers have little or no exposure to the subprime mortgage sector, according to Moody’s Investors Service. Nonetheless, “investors seem to be running from anything that says ‘subprime,'” Gendler said in an interview Thursday.
In Allstate’s case, investors have “largely overreacted,” Gendler maintains, because the company won’t incur big losses from its subprime assets.
Even so, Allstate acknowledges that concerns about its subprime exposure have pressured its stock.
“If you look at where we are in this particular part of the cycle, if you look at the hurricane season and the subprime issues, you look at pricing today, you can see that we are affected by some of that,” Chief Financial Officer Dan Hale said Sept. 5 at a Keefe Bruyette & Woods Inc. event.
During his presentation, Hale addressed what he called the “topic du jour” — the subprime mortgage securities market. Subprime mortgages are made to consumers with less-than-stellar credit.
As of June 30, Allstate had $4.8 billion in subprime residential mortgage-backed securities. All are investment grade, and 73 percent have AAA ratings.
It also has $1.2 billion in Alt-A securities. All are investment grade, and 92 percent have AAA ratings. Alt-A mortgages serve home buyers who are slightly better credit risks.
For Allstate to lose money on those securities, default rates for the mortgages would have to reach 70 percent, Hale said, citing a Moody’s study on 2006 subprime mortgages.
“That’s a dire scenario that no one I’ve seen is predicting,” he said.
But calming the nerves of one investor during the question-and-answer session required more than Allstate citing a Moody’s report. “I would hope that’s not the only study by Moody’s that you’re depending on to gain comfort in your position in those securities,” the audience member said. “I would take it that you’ve gotten some details from somebody a little bit more in tune to the topic versus a rating agency whose credibility is undoubtedly under pressure now.”
On Wednesday, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings were accused by some legislators of being torn by conflicts of interest that might have contributed to the mortgage market turmoil.
Critics say the agencies, which are paid by the companies whose bonds they rate, failed to give investors adequate warning of the risks associated with mortgage-backed securities, which have plunged in value as defaults soar.
Hale responded to the concerned investor by saying that Allstate’s investment team several years ago predicted troubles for the subprime industry, and responded by upgrading the quality of its holdings.
“We clearly are not dependent on Moody’s or anyone else,” Hale said. “We are comfortable with where we are and don’t anticipate having to take any losses.”
Hale also pointed out that problems generally occur when holders of the residential mortgage-backed securities have to sell investments at a loss or in a panic.
“We don’t need to trade those securities,” he said. “Allstate has excellent liquidity.”
His evidence: Even as Allstate contended with $5 billion in hurricane losses a couple of years ago, it also had the wherewithal to repurchase billions of dollars in stock.
Even though subprime is a tiny share of Allstate’s investment portfolio, and while the company hasn’t strayed into the deep end of subprime, Celent analyst Donald Light still wonders how much might default.
Rating agencies “have been raked over the coals in how they’ve evaluated subprime” securities, he said in an interview Wednesday. Their AAA ratings “are a bit of comfort, but a lot less than they would have been six to 12 months ago.”
Harry Fong, a Calyon Securities analyst with a “buy” rating on Allstate, noted in a Sept. 5 report that Allstate was confident about its subprime portfolio.
But “they do admit that a AAA rating for subprime mortgages is not the same as AAA rating elsewhere,” Fong wrote.
Morningstar analyst Jim Ryan blames soft pricing and higher advertising and agency commission expenses for most of the pressures on Allstate and other insurance stocks.
Allstate shares rose 64 cents Thursday, closing at $56.34 on the New York Stock Exchange.
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byerak@tribune.com
