ALL Allstate Corporation

Yesterday, home and auto insurer, Allstate Corp. (ALL) projected about $215 million in pre-tax catastrophe (CAT) losses for September 2011. Summing up this with the July and August estimates, the company is expected to incur about $1.08 billion in CAT losses in the third quarter of 2011.

Allstate’s CAT losses in the last month include about seven natural disasters, while about eight weather-related adversities were included in August, in the US. Particularly, Hurricane Irene is projected to cause the maximum damage, whereby losses are anticipated to be about $500 million from August this year.

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 favorable for the insurance industry. Allstate had already 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.

Hence, we believe that Allstate would report earnings of 25 cents per share in the third quarter, reflecting a substantial 70% 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 20 firms have revised their estimates downward in the last 30 days, while no upward revision was witnessed. For 2011, earnings are expected to be $91 per share for Allstate, declining about 68% over 2010.

Allstate is scheduled to release its third quarter results after the market closes on October 31, 2011.

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 is expected to continue, may be with a lower magnitude, in the third quarter as well. While most of the insurers are 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 also expect the results of other insurers, such as PartnerRe Ltd. (PRE), to be dampened by CAT losses in the third quarter of 2011, as we await results in the beginning of next month. By and large, we believe a state of hard market is about to return after years of sharp decline in prices as the disasters caused by severe weather-related events this year are pushing prices higher in the insurance industry.

 
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