ALL Allstate Corporation

Yesterday, property and casualty insurer Tower Group, Inc. (TWGP) announced its catastrophe loss estimate for the second quarter of 2011. The company pegged the total pre-tax catastrophe loss (cat loss) estimate from the April-May storm at $8 million.

Earlier during April, Tower announced that the loss from Northeast U.S. winter storms would be in the range of $6.5 million to $9.8 million after tax, or 16 cents to 23 cents per diluted share

In the previous quarter, Tower experienced higher winter-weather-related claims activity from the record snowfall in the Northeast, Midwest and Mid-Atlantic, which persisted from late December 2010 through the first quarter of 2011. The company registered after-tax cat loss of $9.8 million or 23 cents per share during the first quarter of 2011 compared with $12.0 million or 27 cents per share recorded in the year-ago quarter. Excluding the storm losses, first quarter 2011 net income would have totaled $30.1 million, and EPS would have stood at 72 cents in comparison with 56 cents in first quarter 2010.

Catastrophe losses adversely impact combined ratio, a measure of insurers’ profitability. Tower Group’s combined ratio stood at 97.7% at the end of first quarter 2011. During the earning release, management stated that it expected the combined ratio to trend down in the second quarter, given lower loss ratio after first quarter storms and declining expense ratio owing to increased scale. However, considering high cat losses incurred in the second quarter, we do not expect combined ratio to shoot up.

Other insurers and reinsurers that suffered from the April-May 2011 catastrophe include Allstate Corp. (ALL) and Travelers Companies Inc. (TRV). While Allstate expects net losses of $2.0 billion, Travelers estimates April-May cat losses between $1.0 billion and $1.05 billion.  

Experts estimate that the industry would incur cat losses in the range of $7.7– $12.5 billion for the months of April and May. According to them, the insurers overall have suffered huge cat loss, which is almost twice the figure that was forecasted for full year 2011. We expect the market to harden as severe natural calamities this year are pushing prices higher in the reinsurance industry after years of sharp pricing declines. Tower’s CEO is therefore worried that higher reinsurance rates might suppress the company’s operating margin going forward.

Tower Group’s second quarter 2011 results are expected to suffer by 13 cents, which, in turn, might cause the company to post earnings at the lower end of the previously-issued guidance of $2.70 to $2.90 per share.

 
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