New York Presses Allstate on Credit Default Swaps

Discussion in 'Stocks' started by ASusilovic, Apr 19, 2009.

  1. Insurer Allstate Corp. has been asked by the New York Insurance Department to immediately report its participation in "unregulated insurance markets," along with its knowledge of any insurance companies that conducted unregulated writing of credit-default swaps.

    The move follows a comment made by Allstate Chief Executive Tom Wilson in an opinion article in Thursday's New York Times in which he said Allstate played "only a small role in unregulated insurance markets. ... The insurance companies that wrote credit default swaps were happy not to be regulated."

    State insurance superintendent Eric R. Dinallo said it is illegal for an insurance company to write a credit-default swap unless approved by the state insurance regulator under limited conditions.

    "While the credit default swap market is not regulated, insurance company use of credit default swaps is," Mr. Dinallo said in a statement. "In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval."

    Credit-default swaps protect holders by paying them in the event bonds and loans default, but also are used by investors to bet on the fortunes of companies. They play a big role in the financial markets; CDS losses helped bring giant insurer American International Group Inc. to the brink of bankruptcy last fall. Unlike traditional insurance, they aren't heavily regulated.

    CDS currently trade "over the counter," or directly between large dealers, or between dealers and customers such as hedge funds. The contracts often remain outstanding for years, making holders exposed to the fortunes of their trading partners. It also is difficult to track the effect of a collapse of a large company on others.

    Allstate, the nation's largest publicly held personal-lines insurer, didn't immediately respond to a request for comment.

    In January, Allstate posted a $1.13 billion fourth-quarter loss tied to growing investment losses, market-driven charges on its annuity business and higher-than-usual catastrophe losses. As such, it said it will cut back the size of its life-insurance business.

    Allstate shares fell 58 cents, or 2.4%, to $23.42 Friday.