Allstate (ALL) Announces July Catastrophe Loss Estimate

Property and casualty insurer The Allstate Corporation (NYSE:ALL) expects to incur catastrophe loss of $253 million, pretax ($164 million after tax) for the month of Jul 2016.

Though the loss is estimated at $269 million, this will be partly reduced by favorable reserve re-estimates of the prior reported catastrophe losses. The month’s loss will account for 16 events that occurred in it.

As Allstate deals with property and casualty, it’s business is significantly exposed to catastrophe. Given the consistent occurrence of weather-related events, catastrophe losses had increased to $2.35 billion in 2012 and $3.82 billion in 2011 from $2.21 billion in 2010 and $2.07 billion in 2009. This weighed on the company’s claims and benefits expenses and cash flow. Catastrophe losses declined year over year to $1.25 billion in 2013 but again increased to $1.99 billion in 2014 and $1.72 in 2015.

For the first six months of this year, the company incurred cat loss of $1.79 billion, higher than $1.09 billion incurred in the year-ago period. The effect of this was felt on the net income decline to $459 million from $974. Also claims expense rose to $11.6 billion from $10.6 billion in the year-ago period.

Though the company is focusing on reducing losses through its catastrophe management strategy and reinsurance programs, while maintaining its underlying combined ratio, we cannot rule out the possibility of significant losses from catastrophes and severe weather incidents, going forward.

The insurance industry was uneventful for several quarters till the second quarter of 2016, which was again ravaged by calamities. This quarter witnessed varied catastrophes, including a wildfire in Canada, flooding in Europe, earthquakes in Japan and Ecuador, and hailstorms in Texas.

A report by Munich Re says that U.S. economic losses caused by natural catastrophes in the first half of 2016 were $ 17 billion compared with $12 billion in the year-ago period. Insured losses due to natural disasters in the United States in 2015 totaled $16.1 billion, more than $15.3 billion incurred in 2014.

While high catastrophe dents the industry’s margins and causes a spike in combined ratio which causes underwriting loss, it also acts as a catalyst to the insurance pricing cycle. In recent years, the industry has amassed ample reserves owing to low catastrophe losses which led to loose underwriting standards with companies trimming insurance prices. This has resulted in stiff competition and pricing woes in the industry. Huge catastrophe losses could now come as a blessing in disguise by denting capital and forcing companies to practice disciplined underwriting by hiking premium prices. This would eventually lead to a hard insurance cycle.

Allstate carries a Zacks Rank #3 (Hold). Some better-ranked stocks in this space are Allied World Assurance Company Holdings, AG, (NYSE:AWH) , Argo Group International Holdings, Ltd. (NASDAQ:AGII) and NMI Holdings Inc. (NASDAQ:NMIH) , each carrying a Zacks Rank #1 (Strong Buy).