We learn today that giant insurance company Allstate has sued BankAmerica and its Countrywide Financial unit over a bum investment. It seems Allstate bought $700 million of Collateralized Debt Obligations from Countrywide which were backed by residential mortgages originated by the mortgage lender. Allstate believes Countrywide misrepresented the quality of the portfolio.
Well, we don’t know yet the merits of this case – and we don’t know exactly what Countrywide disclosed in the offering documents for this CDO (were these stated-income mortgages? was performance of the mortgages listed in the documents? default rates? delinquencies?) To be sure, Countrywide originated some really bad mortgages and it is entirely possible that some of those made their way into the CDO Allstate bought.
But we do know that investors of all stripes were looking for ways to stretch yield and returns in the run up to the financial crisis of 2008 – insurance companies included. And Allstate is on that list as well. The most recent investment data Allstate shows (from its wholly-owned unit, Allstate Investments, on its website is from March. But it does give a little bit of an idea to some of the exposure facing the company.
For example, it had $10.6 billion tied up in commercial mortgages. These were primarily first mortgages. It had $6.7 billion in commercial mortgage backed securities, rated anywhere from AAA to junk. Of the $9.2 billion in mortgage-backed securities, Allstate had roughly 26.5% invested in subprime and Alt-A mortgages. Click on the chart that shows the subprime slice and you get taken to a page that says the average credit quality of the MBS portfolio is AAA (hmmm, with 26% of it in subprime and Alt-A mortgages?) And then you get a flavor of the investment philosophy that went into the MBS portfolio (“Looking outside of the box” and “Being an early adopter.”)
It sounds like they should have looked a little more deeply inside the box to see what was wrapped up in their investment portfolio.
To be fair, Allstate has a huge portfolio ($105.4 billion as of March). And it is diversified into investments of all kinds. But the above shows it did opt to take on some calculated risk. And perhaps some it should have looked into a little more.