Allstate profit under fire - Regulators also call reinsurance into question in debating refunds

By PURVA PATEL - Copyright 2007 Houston Chronicle - Oct. 25, 2007
Allstate Texas Lloyds factored in excessive profits and costs into its latest rate increase imposed on Texas homeowners, regulators allege in an order demanding refunds.

Those are just two on a list of concerns the Texas Department of Insurance has with the way the company justifies its rates.

But for the state's insurance consumer advocate, they are the two most significant — the company's targeted profit and cost of reinsurance, or the coverage it buys to help pay for claims after a catastrophe.

In August, Allstate implemented a flat 5.9 percent increase statewide and an additional average 2.1 percent bump for homeowners in some coastal and near-coastal counties upon renewal.

Regulators then issued an order halting the hike, but Allstate obtained a judge's ruling blocking the state from preventing the increase.

Allstate is preparing to fight the refund order at an administrative law judge hearing scheduled for Dec. 3 in Austin.

"We are confident in the number, and we believe it puts us in a good place and a responsible place for our customers," said Bill Mellander, a spokesman for the insurer. "We would not have implemented these rates if we didn't believe them to be justified, competitive and strong from a consumer perspective."

A spokesman for the department declined to comment on the refund order's specifics.

"We look forward to debating the merits of the rates themselves," said Jerry Hagins, a spokesman for the department.


Various costs
The Insurance Department examines how a company factors various costs and potential profits into its rates to determine if the rates are justified.

One of the more significant factors mentioned in the refund order is Allstate's profit provision, or how much of its collected premiums the company hopes to have left over after paying out losses and expenses, said Rod Bordelon, head of the Office of Public Insurance Counsel, who represents consumers at rate hearings.

The company has a target of 10.4 percent.

"In our view it's grossly too high," Bordelon said.

His office hasn't determined exactly what it should be, he said, but will after it gets more information from the company. He says it's the highest profit provision he's ever seen a Texas home insurer use.

Bordelon notes that profit targets are subjective and companies that take on more risk may expect more of a profit.

"Homeowners is fairly risky, but it doesn't result in huge differences among companies," he said, adding that Allstate has some exposure to risky parts of Texas but is also spread out all over the state and has cut back coverage in some areas, which mitigates some of the riskiness in their business.

Mellander said 10.4 percent is not unusual. He declined to say if this is the first time Allstate has used a profit provision of more than 10 percent for homeowners insurance in Texas.

"Define reasonable," he said. "It's frustrating to see anyone out there making these blanket statements. Well, what's a reasonable profit and what qualifies them to say it's reasonable?"

He also said that if Allstate hadn't pulled back on some of the coverage it offers in Texas, its rates would potentially be even higher.


Balancing act
Insurance companies, especially those that are public, have to play a delicate balancing act, said Craig Weber, a senior analyst with consulting company Celent. Allstate Texas Lloyds is subsidiary of its parent, Allstate Corp.

"I'm sure if I'm an Allstate shareholder, I'm anxious for them to be profitable and keep the stock price healthy," Weber said. "As an Allstate customer, I would want them to keep the rates affordable. They serve many masters."

Allstate Texas Lloyds has about 600,000 home policyholders in Texas and collected $719 million in premiums in 2006.


Reinsurance questioned
Regulators also claim Allstate's estimate of its net cost of reinsurance is too high. The net cost is the actual cost of the coverage, $82.4 million, minus the amount it expects to recover from a reinsurer after a catastrophe, $38.4 million, according to the company's filing.

That cost is usually passed on to consumers as part of their insurance rates.

In the refund order, regulators also note concerns raised by Bordelon's office, such as whether Allstate needs reinsurance, or so much, since the company has reduced its exposure and whether consumers should have to bear the costs for the reinsurance at all.

Allstate stopped writing new homeowners business in some Texas coastal areas in March 2006 and later stopped renewing windstorm coverage for policyholders along the coast.

Allstate says its estimate net cost of reinsurance of $44 million is accurate and that it doesn't pass on all the costs of the coverage to consumers. Mellander declined to say what percent of the cost the company retains.

Without reinsurance, the company's rates could be higher, he said.

"It allows us to assume a little more risk, take on a little more coverage, and it allows us to manage the costs passed on to consumers," he said.