The Allstate Corporation’s ALL exposure to property and casualty insurance makes it prone to catastrophe losses.
The insurer may face earnings volatility this year as the ongoing catastrophe season, which already started Jun 1 and will last through the end of November is expected to be stronger than last year.
Above-Average Catastrophe Season
National Oceanic and Atmospheric Administration's (NOAA) Climate Prediction Center expects a busy 2021 Atlantic hurricane season due to the rising temperature of the ocean surface. It estimates that there can be 13 to 20 named storms this time around. Of these, six to 10 will be hurricanes, of which three to five will be the major ones.
Per the Colorado State University, the 2021 hurricane season is exhibiting characteristics similar to 1996, 2001, 2008, 2011 and 2017. If we go by the year last mentioned, it was the most intense season since 2011. The year 2017 witnessed insured hurricane losses of $58.79 billion. If insurers suffer a similar setback as in 2017, then they should better pull up their socks for staggering levels of losses
Allstate’s underwriting profit might be hit by the unusual catastrophe activity. In the first quarter of 2021, the company suffered gross catastrophe losses worth $1.67 billion, nearly eight times more than the 2020 reading. These losses were, however, offset by $1.08 billion of reinsurance and subrogation recoveries.
This shows that Allstate can effectively deal with weather related losses via its catastrophe management strategy and reinsurance programs. It also aims at limiting its exposure to riskier geographies by raising premiums. This may, however, reduce the number of policies in force.
Other property and casualty insurers that are exposed to catastrophe losses Chubb Limited CB, The Travelers Companies, Inc. TRV and The Progressive Corporation PGR among others.
Allstate Seems Well Placed
Despite Allstate’s vulnerability to Mother Nature’s wrath, our confidence in its ability to deliver strong underwriting results is intact.
This property and casualty insurer has been witnessing annual revenue growth since 2011 and also tided over the pandemic-ravaged 2020 with a 0.3% revenue rise. The company’s ability to stay in a positive territory against the backdrop of a tough operating environment is quite appreciative. In the March quarter, the top line grew a good 14% while the bottom line was up a whopping 73%.
Allstate’s long-term strategy of boosting its personal property-liability market share and expanding protection offerings will fuel growth.
While increasing its personal property-liability market share, the company acquired National General in January 2021. The transaction will expand its market share in the said space by more than one percentage point and enhance its independent agent-facing technology.
It will significantly fortify its distribution footprint, thus leading the company to be one of the top five personal lines carriers in the independent agency distribution channel. Additional expansion opportunities through independent agents also exist in the standard auto and homeowners’ insurance realm.
Recently, Allstate also announced that it will acquire SafeAuto. The deal will broaden the company’s already vast product and distribution presence in auto insurance, which represents a significant portion of its overall business.
Additionally, Allstate sold its Life insurance businesses in the March quarter to focus on its core business areas, namely the auto and homeowners insurance.
Further, the company is also investing in technology. This should increase its efficiency and save operational costs.
We believe, it is firing on all cylinders for growth and that the catastrophe losses will not dent its profitability.
Year to date, Allstate has gained 19.4% compared with the industry's growth of 18.6%.
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Allstate currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
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