The Allstate Corporation ALL expects to incur catastrophe loss worth $204 million, pretax ($161 million, after tax) for June 2020.
The loss of $181 million, pretax (143 million, after tax) can be attributed to 10 weather-related events. The remaining loss estimate ($18 million, pretax) is based on unfavorable reserve re-estimates of prior-reported cat losses.
Majority (nearly 50%) of estimated catastrophe losses for May were caused by three severe cat occurrences, which included heavy wind and hailstorms, primarily affecting Texas, Pennsylvania and Alberta (Canada).
Earlier, the company announced a catastrophe loss estimate of $632 million for April. Along with the previously issued loss projection for both April and May ($982 million, pretax), catastrophe losses totaled $1.19 million ($937 million) for the second quarter.
Being a relatively large property insurance business, Allstate is significantly susceptible to natural disasters. Losses emanating from inclement weather conditions at a stretch weighed on the company’s claims and benefits plus expenses and cash flow, thereby draining its underwriting profitability.
In the first quarter of 2020, the company bore a catastrophe loss of $211 million, narrower than the year-ago loss by 69%. Though it remains focused on reducing losses through its catastrophe management strategy and reinsurance programs, and by limiting exposure to riskier geographies with premium raises, the same will lower the number of policies in force and shrink business.
Other companies in the property and casualty space, such as W.R. Berkley Corp. WRB, Chubb Ltd. CB and Everest Re Group, Ltd. RE also remain vulnerable to catastrophe losses.
Despite enduring a low cat loss in the first quarter of 2020, the company is likely to see higher calamity-related loss through the rest of the year as the 2020 Atlantic hurricane season is expected to be above normal.
The hurricane season, which officially started Jun 1, is expected to trigger losses greater than the earlier cat events, such as Hurricane Katrina, the tsunami in Japan or the militant-orchestrated 9/11 terror attacks. Per industry experts, the losses may run into tens of billions or half a trillion for the industry.
According to the U.S. National Oceanic and Atmospheric Administration (NOAA), the current-year Atlantic hurricane season will be active enough, perhaps similar to last year’s with more storm names than a season, on average, can witness.
This above-normal catastrophe loss clubbed with Shelter-in-Pay expense (expense incurred for refunding a portion of the auto insurance premium to customers due to a decline in automobile insurance claims) is likely to deteriorate the combined ratio and hurt the company’s underwriting profitability.
Nevertheless, given the company’s managerial skills in tackling cat-oriented losses, our confidence in its ability to deliver impressive underwriting results remains 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.
Allstate has been driving revenue growth from the past many years, led by higher premiums. Though in the first quarter, revenues declined 8%, mainly because of weak net investment income, this downside was partly offset by improved premiums.
The company’s focus on increasing personal Property-Liability market share and further penetrating other protection businesses also bodes well for the long haul. In addition, its solid capital position spurs investment in business.
Shares of the company have lost 18.5% year to date compared with the industry's decline of 16%.
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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