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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