ALL Allstate Corporation

Yesterday, home and auto insurer Allstate Corp. (ALL) projected about $735 million in pre-tax catastrophe (CAT) losses for August 2011. Including the July and August estimates, to date the company is expected to incur about $865 million in CAT losses in the third quarter of 2011.

Allstate’s CAT losses in the third quarter include about 8 natural disasters in the U.S. Hurricane Irene is projected to cause the most damage, whereby losses are anticipated to be about $500 million.

Effect on the Bottom-Line

CAT losses have not only been increasing the claims payments of the insurers but also been nibbling into the earnings of the companies, thereby distorting the operational dynamics for quite some time post the weather-related events. Moreover, the year 2011 does not appear to be favourable for the insurance industry. Allstate itself has crossed its 2010 benchmark in CAT losses in the first half of 2011 itself. 

Allstate incurred $2.34 billion in the second quarter of 2011, as a result of 33 catastrophe loss events including five tornadoes, three wildfires and 25 hailstorms. The dramatic CAT loss resulted in operating loss of $1.23 per share, lagging the year-ago quarter’s earnings of 81 cents per share. Increased frequency and intensity of catastrophes also led to declining premiums, higher claims payables and deteriorating combined ratio, primarily in the Property-Liability segment.

Even during the first quarter of 2011, Allstate’s CAT losses stood at $333 million. The total CAT loss in the first half of 2011 was higher than that of $2.21 billion recorded for the whole of 2010 and $2.1 billion incurred in 2009.

Going ahead, we apprehend that any more devastating CAT losses in the rest of 2011 could skew the operating results for Allstate, which could be as poor as its third quarter of 2005 when the devastating hurricane Katrina smacked New Orleans. The company had incurred CAT losses of $4.71 billion in 2005.

However, we believe that despite the increase in rates, Allstate would report earnings of 74 cents per share in the third quarter, reflecting an 11% plunge year over year, according to the Zacks Consensus Estimate, on the back of mounting CAT losses.

With respect to the estimate revisions, 3 of 18 firms have revised their estimates downward in the last 30 days, while one upward revision was witnessed. For 2011, earnings are expected to be $1.37 per share for Allstate, declining about 52% over 2010.

Industry Concern

Severe weather-related adverse events have become a growing concern for insurers and reinsurers in recent years. The weather-pattern changes have resulted in regular occurrence of floods, earthquakes, hurricanes, hailstorms, tsunami etc.

Overall, CAT losses significantly dampened the industry earnings in the first half of 2011 and the trend are expected to continue, may be with a lower magnitude, in the third quarter as well. While most of the insurers have yet to ascertain their third quarter CAT losses from the recent hurricane Irene, catastrophe modeling firm AIR Worldwide estimates insured losses in the US from Irene in the range of $3–$6 billion.

We expect other insurers such as Hartford Financial Services Group Inc. (HIG) and PartnerRe Ltd. (PRE) to release their losses very soon. By and large, we believe a hardening market is about to return after years of sharp pricing declines as the disasters caused by severe weather-related events this year are pushing prices higher in the insurance industry.

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
HARTFORD FIN SV (HIG): Free Stock Analysis Report
 
PARTNERRE LTD (PRE): Free Stock Analysis Report
 
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