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Allstate (ALL) Catastrophe Losses to be Lowered by Reinsurance

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Zacks Equity Research
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Property and casualty insurer The Allstate Corporation ALL has announced estimated catastrophe losses of $252 million pretax or $54 million after tax and anticipated recoveries for the month of March 2021.

These weather-related losses emanate from six events at an estimated cost of $208 million plus increased prior-period reserve estimates of $44 million. Approximately, 55% of March estimated catastrophe losses was due to one large wind/hail event. The nationwide aggregate reinsurance cover will offset $184 million of losses.

Allstate is likely to incur losses worth $1.67 billion for the first quarter of 2021. This will, however, be offset by $1.08 billion of subrogation recoveries and anticipated reinsurance. Thus, on a net basis, catastrophe losses will be to the tune of $466 million after tax.

Due to a relatively large property insurance business, Allstate is significantly exposed to catastrophic events. Weather-related losses over the years have weighed on the company’s claims and benefits as well as expenses and cash flow, thereby draining its underwriting profitability.

In 2020, the company incurred catastrophe losses of $2.8 billion, which increased 9.9% year over year. Though it is focused on reducing losses through its catastrophe management strategy and reinsurance programs, and also aims at limiting exposure to riskier geographic markets by raising premiums, it will suffer a decline in the number of policies in force.

Other property and casualty insurers that incur catastrophe losses due to their exposure to property and casualty insurance are United Insurance Holdings Corp. UIHC, RLI Corp. RLI and Arch Capital Group ACGL.

Nevertheless, given the company’s managerial skills in tackling losses due to cat occurrences, our confidence in its ability to deliver impressive underwriting results is intact.

Allstate is covered under a catastrophe reinsurance program, which materially mitigates its exposure to wind and earthquake losses. These reinsurance agreements are placed in the traditional reinsurance and insurance-linked securities markets.

The company has also been delivering solid revenues from the past many years, led by premium growth. Its strong performance in 2020 reflects its resilient strategy to rapidly adapt to the coronavirus pandemic environment. We expect revenue growth to continue, given a number of strategic initiatives taken, such as product enhancements and changes in business mix to focus on the areas that command a high return on equity.

Recently, the company agreed to divest its Allstate Life Insurance Company of New York (ALNY) unit to Wilton Re for $220 million. Post the receipt of a regulatory approval and fulfilling other closing conditions, the divestiture is anticipated to be completed in second-half 2021. Also, in January 2021, Allstate agreed to sell off Allstate Life Insurance Company (ALIC) to Blackstone-managed entities for $2.8 billion.

The joint deals to sell ALIC and ALNY are likely to create a deployable capital of $1.7 billion. However, the combined agreements are expected to generate a GAAP net loss of $4 billion, which will be reflected in first-quarter 2021 results.

Shares of this currently Zacks Rank #3 (Hold) company have gained 16.6% in a year’s time, underperforming its industry’s growth of 31.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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