Allstate Estimates Catastrophe Loss, Will It Hurt Profits?

Property and casualty insurer, The Allstate Corporation (NYSE:ALL) expects to incur $202 million pre-tax ($160 million after tax) catastrophe loss for the month of October. These losses can be attributed to eight events at an estimated cost of $174 million, pretax. The rest of the loss pertains to unfavorable reserve re-estimates of prior-reported catastrophe losses.

Hurricane Michael, a Category 4 storm that made landfall in October 2018, accounted for $136 million pretax, or 78% of the month’s catastrophe losses.

Catastrophe modeling firms have estimated that the total cost of Hurricane Michael claims will range from $4.5 billion to $10 billion.

Catastrophe risk modeling firm AIR Worldwide said its industry insured loss estimate, resulting from Hurricane Michael’s winds and storm surge, will range from $6 billion to $10 billion.

Being a relatively large property insurance business, Allstate is significantly exposed to catastrophic events. Weather-related losses for the past many years have weighed on the company’s claims and benefits plus expenses and cash flow, draining its underwriting profitability.

In 2016 and 2017, the company's cat loss widened 51% and 26% year over year, respectively. Allstate has incurred $1.89 billion of catastrophe loss in the first nine months of 2018, down 28.2% year over year.

Therefore, the company is focused on reducing losses through its catastrophe management strategy and reinsurance programs along with limiting exposure to riskier geographic markets via premium hikes. This, in turn, might cause a decline in the number of policies in force. However, we cannot rule out the possibility of significant losses from cat events and inclement weather incidents.

Despite the cat loss, our confidence in the company’s ability to deliver impressive results for full-year 2018 remains intact. Increasing premiums in property and casualty businesses, an improving auto business, growing net investment income, a low tax rate, and a strong balance sheet should act as the key catalysts to earnings growth.

Year to date, shares of the company have lost 14%, underperforming the industry’s 5.5% growth.

Allstate carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Berkshire Hathaway Inc. (NYSE:BRKa) BRK.B, Mercury General Corporation (NYSE:MCY) and State Auto Financial Corporation (NASDAQ:STFC) .

Each of these stocks carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2018 earnings for each of these stocks has been revised 1.8%, 27.3% and 4.5% upward, respectively, over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>