Allstate (ALL) Announces October Catastrophe Loss Estimate

Property and casualty insurer The Allstate Corporation (NYSE:ALL) expects to incur catastrophe loss of $199 million, pretax ($129 million after tax), for the month of Oct 2016.

The expected loss will be incurred due to Hurricane Matthew, which affected the states of Florida, Georgia, North Carolina, South Carolina and Virginia.

As Allstate deals with the property and casualty business, it is significantly exposed to catastrophic events. Given the continued occurrence of weather-related events, catastrophe losses swelled to $2.35 billion in 2012 and $3.82 billion in 2011, radically exceeding $2.21 billion in 2010 and $2.07 billion in 2009, pushing up claims and benefits’ expenses, and hurting cash flow. In 2013, catastrophe losses declined year over year to $1.25 billion but increased again to $1.99 billion in 2014 and was $1.72 in 2015.

For the first six months of this year, the company incurred catastrophe losses of $1.79 billion, which is higher than $1.09 billion incurred in the year-ago period. Net income for the first half of 2016 also declined to $459 million from $974 million owing to higher catastrophe losses. Also, claims expense rose to $11.6 billion from $10.6 billion in the year-ago period. In the third quarter, the company’s earnings declined 17.1% on a year-over-year basis, due to 78% year-over-year higher catastrophe losses of $481 million up.

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

The insurance industry enjoyed a peaceful time in the past several quarters till the first half of 2016, which was ravaged by calamities. The second quarter of the year experienced varied catastrophes, including a wildfire in Canada, flooding in Europe, earthquakes in Japan and Ecuador, and hailstorms in Texas. The industry incurred an approximate loss of $15 billion to over $20 billion owing to 25 weather-related events.

Going by a Munich Re report, 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 in 2014.

On the face of it, high catastrophe losses dent the industry’s margins and cause a spike in combined ratio which results in underwriting loss. Then again, these losses act as a catalyst in turning the insurance pricing cycle. In recent years, the industry amassed ample reserves owing to low catastrophe losses, which led to loose underwriting standards as insurers were compelled to lower their prices. This caused stiff competition and pricing woes in the industry.

A rise in catastrophe losses will cause a dent in capital and encourag players to try out disciplined underwriting by hiking premium prices. This should ultimately lead to a hard insurance cycle.

Allstate carries a Zacks Rank #3 (Hold). Investors may also consider other players like Alleghany Corp. (NYSE:Y) , Arch Capital Group Ltd. (NASDAQ:ACGL) and NMI Holdings, Inc. (NASDAQ:NMIH) . Each of these stocks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany delivered positive surprises in three of the last four quarters, with an average beat of 20.52%.

Arch Capital beat expectations in each of the last four quarters, with an average beat of 9.27%.

NMI Holdings delivered positive surprises in each of the last four quarters, with an average beat of 62.8%.

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