The Wilson effect: Sure signs the market is becoming concerned about Allstate’s long term solvency

If you’re insured with Allstate or are thinking about insuring with them this post is for you as I’ve had Allstate and its incompetent CEO Tom Wilson on my mind for the past week or so.  Now that I have a few good links, allow me to share some of the indicators I look at on individual stocks when performing DD (due diligence). Speaking of DD, it is an ongoing process that never ends which is one of the reasons I think most folks are far better off in no load mutual funds (offered by low-cost producers like Vanguard).

We last visited with Allstate last Thursday after they whiffed on their Q4 earnings.  Mr Wilson has a curious business strategy for an insurance company in withdrawing Allstate from taking HO (homeowners insurance ) risks in coastal America, where roughly half the nation’s population lives.  That is not unusual as many of the insurance companies are doing like wise but unlike State Farm, which bought into the Bermudian reinsurance market to capitalize on the shortage of coverage they helped create, Allstate has pursued a different strategy of using non admitted carriers to insure the void, at so-called market rates as non admitted carriers do not have rate regulation.

The rationale for using non admitted carriers is simple.  Consumers typically bundle their HO coverage with their auto policy and insurance companies make a mint selling auto insurance.  Withdrawing from the coast has its draw backs and the loss of the auto policies with the homeowners is a real downside to the industry’s current price-fixing scheme for wind insurance.

A chunk of the premiums you pay are invested by your insurer, in the case of the Property and Casualty insurers AIG and The Hartford circa 2008, into subprime mortgages which also explains the subsequent bail out with taxpayer money.  Allstate had its share of bad paper too but they didn’t plunge which is to their credit. That said Wilson and his band of idiots in portfolio management department have still managed to make a mess of Allstate’s portfolio, which is in a respect the only big gun they have left since they exited our coast line. It appears they plunged into muni bonds and let’s just say the timing could not have been worse.

With all that said let’s examine some current market indicators. (First one H/T Mr CLS)

Allstate Corporation (The) (FINANCIALS/Nonlife Insurance)

Credit spreads have widened over the last three months, with the five-year point widening from 66 basis points (bps) to 93 bps, an increase of 40%. The liquidity score on Allstate Corporation (The) decreased from 7.32 to 7.14 over the three-month period, causing an increase in liquidity from trading in the 10th percentile to the sixth percentile.

What does this mean in layman’s terms? The cost to hedge or insure Allstate debt against a default are rising significantly signaling the market is turning bearish on Allstate’s longer term business prospects. Here are a few others:

I say all this because it is also clear the Board of Directors is not looking out for the interest of the long-term owners of Allstate, thus IMHO, breaching their fiduciary duty to the shareholders by keeping the failure known as Tom Wilson in charge despite the fact the ship is clearly sinking.  CNBC loves to help stuck institutions distribute their shares in bad companies on greedy rubes that are otherwise known as retail investors, but make no mistake the folks on Wall Street have little use for Wilson outside the financial shilling industry.

But it is the agents that know their leader best as they are on the front lines and completely understand the disaster that is Wilson as it is directly impacting their wallets:

After 27+ years with Allstate, I am calling it quits! TW has beaten me down to the point I have not faith Allstate will come out of where TW put it! Bad investments, bad management, bad approach in dealings with customers and agency force, lack of knowledge on how to run an insurance company, etc., etc…This guy, like Obama, and coincidentally from the same Chicago area as our illustrious president, is driving this once great company to the ground!!!

Typically after a bunch of greedy little piggies known as management drains a company dry they skate away scott free. Shareholders putting the Board of Directors and  management on notice that they will not tolerate needless risks or management ineptitude can change that equation.  The bottom line here is Allstate is no bargain with Wilson at the helm.


6 thoughts on “The Wilson effect: Sure signs the market is becoming concerned about Allstate’s long term solvency”

  1. Good comments….except that part about “price-fixing”. Just not true. If we could “fix the price”, we’d be falling over each other to write wind insurance. Or, even if we could write “wind” insurance” and trust that it was not going to be forced to cover flood damage, we’d be falling all over ourselves to write wind insurance on the MS Gulf Coast. 😉

  2. A healthy, efficient market would not be fragmented so that like risks could be spread. A fragmented market prevents coastal wind risk from being spread. I’d submit that what the industry terms as right tail risk is nothing of the sort when coastal america as a whole is considered.

    So instead insurers pull out of each fragmented market saying they can’t make money writing policies while they take stakes in the reinsurers that sell to state wind pools and small startups, none of whom have any bargaining power as they are limited in speading their risks despite their intentions.

    Ed Rust and a few other roibber barons are slitting everyone’s throat, including your Lynda. You just have to open your eyes and apply some basic economic theory to understand how.

    The proof of what I’m saying lies in the Travelers 4 Pillar plan, which divides coastal America just 3 ways instead of 16. Personally I have no problem sharing my risk with my buddy Cap in Coral Gables.

    We’re getting up on the time of year when the new Hurricane models come out. Watch shill Bob Hartwig slither out from under his rock and start poor mouthing those poor insurers who will certainly have to raise rates in advance of storms that never seem to strike. It is an annual rite of spring. 🙂


  3. And, Allstate continues to complain about how they can’t make a buck in this State, they grind claimants down, AND WORSE, they treat their defense attorneys worse than claimants and their attorneys, expecting them to defend the indefensible for free.

    This is a scary trend among insurers. They have figured out that they squeezed the turnip as much as they could, so now they figure they will eat their own (i.e. defense lawyers). Gone are the halcyon days when defense lawyers could bill $250 per hour and do whatever on a file without being questioned.

  4. The last case which I tried pre-KATRINA (jury in Civil District Court – a real “vipers’ pit”) was a medical malpractice case for an orthopedic surgeon, Dr. Joseph Rauchwerk. We won with a defense verdict after 5 or 6 days of trial, just before Easter 2005. In that case, I worked for St. Paul Insurance Company for $95.00 per hour. The ONLY reason I took the case was because Dr. Rauchwerk, who was a personal friend, asked me to do so. Had I not handled the case, with Dr. Rauchwerk’s able assistance, then St. Paul probably would have lost the statutory maximun. But then, as long as they were paying a lawyer, ANY lawyer, only $95.00 per hour, St. Paul didn’t really give a shit. I hope they go broke, if they haven’t already. Ashton O’Dwyer.

  5. Ashton:

    You may want to thank your antagonists for doing you a favor. Dealing with audits and micromanaging is no fun.

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