Allstate Pegs 1Q CAT Loss at $260M - Analyst Blog

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Home and auto insurer, Allstate Corp. ( ALL ) announced its pre-tax catastrophe ( CAT ) estimates for March 2012 yesterday, stating that it expects losses of about $190 million. Summing up this with the January and February estimates, the company is expected to incur about $260 billion in CAT losses for the first quarter of 2012.

Allstate's first quarter CAT losses include about 15 natural disasters, the cost of which is projected to be about $420 million. However, this was partially negated by favorable reserve re-estimates of prior-year CAT losses.

In order to generate greater transparency, since last year Allstate has started disclosing its quarterly and monthly CAT loss estimates if the amount exceeded $150 million in any month.

Earnings Swab by CAT Loss

Severe weather-related adverse events have become a growing concern for insurers and reinsurers in recent years. The weather-pattern changes have resulted in regular occurrence of floods, earthquakes, hurricanes, hailstorms, tsunami, etc.

CAT losses have not only been increasing the claims payments of the insurers but also has been nibbling into the earnings of the companies, thereby distorting the operational dynamics for quite some time post the weather-related events.

Moreover, the year 2011 was not a favorable one for the insurance industry. Several insurers including Allstate, Hartford Financial Services Inc. ( HIG ), PartnerRe Ltd. ( PRE ) and The Travelers Companies ( TRV ), among others, saw most or all of their earnings being washed away after incurring severe CAT losses.

Allstate itself witnessed its CAT loss jump by about 73% over 2010 to $3.82 billion in 2011, while total combined ratio weakened to 103.4% in 2011 from 98.1% in 2010. Consequently, the company's operating net income plunged to $689 million or $1.32 per share against $1.54 billion or $2.84 per share in 2010. However, the underlying combined ratio improved by 0.3 points to 89.3% in 2011.

Given the unfavorable reserve developments and low rate interest environment amid severe CAT losses, Allstate's investment portfolio also reduced to $95.6 billion at end of 2011 from $100.5 billion at 2010-end. These factors also marred the operating cash flow that significantly declined to $1.93 billion at the end of 2011 against $3.69 billion at 2010-end.

Neutral on the long term

Nevertheless, by and large, we believe a hardening market is setting to return after years of sharp decline in prices, as the disasters caused by severe weather-related events this year are pushing prices higher in the insurance industry.

Overall, Allstate should be stable in the long run based on its agency expansion plan, ratings affirmation, product restructuring and acquisitions. However, the new share repurchase comes with higher debt costs as Allstate funds it by issuing debt. Overall, though continued synergies are expected from Allstate's industry-leading position, diversification and pricing discipline, we believe that the current volatile economy will continue to impact its premiums and income until the markets regain momentum. Consequently, we maintain a Neutral stance in the long-term with a Zacks Rank #3, which implies a short-term Hold rating.

Meanwhile, Allstate is expected to report earnings of $1.07 per share in the first quarter, reflecting a modest 15% accretion year over year, according to the Zacks Consensus Estimate. With respect to the estimate revisions, 12 of 22 firms have revised their estimates upward in the last 30 days, while one downward revision was witnessed.

Allstate is scheduled to release its first quarter results after the market closes on May 2, 2012.


 
ALLSTATE CORP ( ALL ): Free Stock Analysis Report
 
HARTFORD FIN SV ( HIG ): Free Stock Analysis Report
 
PARTNERRE LTD ( PRE ): Free Stock Analysis Report
 
TRAVELERS COS ( TRV ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ALL , CAT , HIG , PRE , TRV

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