09/30/2011

Allstate Slashes Rates to Win Low-Risk Loans

Allstate is seeking to originate $500 million of low-leverage commercial mortgages by yearend.

The insurer is offering rock-bottom rates — 3.11% for five-year loans and 3.87% for 10-year mortgages of $10 million to $50 million on a variety of property types in major markets across the U.S. But the loan-to-value ratios have to be in the neighborhood of 55%, significantly limiting the pool of qualified borrowers. Allstate would also write loans with slightly higher leverage, at higher rates. The insurer began informing brokers of the allocation within the past couple of weeks.

While insurers routinely earmark funds for mortgages, Allstate is somewhat unusual in that it tends to do so in spurts, rather than in a steady flow. Life companies invest some proceeds from their insurance products in commercial mortgages with an eye toward “match-funding” the mortgage maturities with the products’ expected payout dates. Market pros said Allstate’s business mix often results in sporadic bursts of available capital that needs to be invested relatively quickly.

When that occurs, Allstate tends to aggressively pursue low-leverage loans. “That’s clearly an Allstate phenomenon, when they go out and do stuff at very low coupons,” said an executive at a rival life company.

For five-year loans with low leverage, most insurers currently are unwilling to go much below 3.5%. Many life companies now have floor rates of 3.5% for five-year loans and insist that coupons exceed 4% for 10-year loans.

By that yardstick, Allstate’s rates are viewed as aggressive. Based on the prevailing Treasury yields yesterday, a five-year mortgage with a 3.11% coupon would carry a spread of just 211 bp, and a 10-year loan with a 3.87% rate would have a skimpy 185-bp spread.

Last year, Allstate originated $794 million of commercial mortgages, ranking 12th among insurers. That was down sharply from $2.4 billion of originations in 2009, but Allstate said the 2009 figure was inflated by an accounting anomaly. In any event, the insurer’s activity appears to have increased significantly this year.

Some insurers said they had no intention of matching Allstate’s rates. Allstate’s program “creates greater competition, but we’re not going to be pricing at those levels,” said an executive at another life company.

Allstate’s allocation comes at a time when securitization shops have sharply pulled back on originations because of volatility in the bond market. Many insurers have also turned cautious, after actively lending earlier in the year.

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