Will September Weather Events Dent Allstate's (ALL) Margins?

Property and casualty insurer The Allstate Corporation ALL has announced estimated catastrophe losses of $339 million pretax ($268 million after tax) for the month of September.

These weather-related losses emanate from 20 events at an estimated cost of $293 million pretax ($231 million after tax). The rest of the expected loss of $46 million pretax is related to unfavorable prior-period reserve re-estimates.

About 65% of the estimated catastrophe losses for September include the impacts of 11 wildfires,   Hurricane Laura ($430 million pretax) and Hurricane Isaias ($200 million pretax).

Allstate previously announced $651 million pretax ($514 million after tax) in a combined estimated catastrophe loss for July and August 2020. These along with the current estimate bring estimated catastrophe losses for the third quarter of 2020 to $990 million pretax ($782 million after tax).

In the first half of 2020, the company incurred catastrophe losses worth $1.39 billion, down 20% year over year. It is likely to see higher cat loss this year as the 2020 Atlantic hurricane season is expected to be above normal.

The third quarter of a year generally bears the brunt of catastrophes as the hurricane season typically starts in June and lasts through November during a year, gathering strength in August and September.

In a report on Aug 5, 2020, Colorado State University stated that the hurricane activity will be about 190% of the average season’. There will be 24 named storms including 12 hurricanes and six major hurricanes, per CSU.

RMS, the world’s leading catastrophe risk solutions company, projects total insured losses from Hurricane Laura between $9 billion and $13 billion while the total U.S. insurance and reinsurance industry losses from Hurricane Sally are estimated between $2 billion and $3.5 billion.

This above-normal catastrophe loss combined with expenses incurred for the company’s multi-year Transformative Growth Plan and low interest rates is likely to hurt the company  third-quarter earnings results. Allstate is also expected to have recognized a premium deficiency reserve for immediate annuities with life contingencies. This might have diminished net income but not the adjusted figure.

Nevertheless, given the company’s managerial skills in tackling catastrophe-related losses, our confidence in its ability to deliver impressive underwriting results is intact. Allstate is covered under a catastrophe reinsurance program, which materially lowers its exposure to wind and earthquake-borne losses. These reinsurance agreements are placed in the traditional reinsurance and insurance-linked securities markets.

Allstate has also been delivering solid revenues from the past many years, led by premium growth. The company’s strength in the first half of 2020 reflects its resilience and its rapid adaptation to the coronavirus environment.

The company’s focus on increasing its personal Property-Liability market share and further penetrating other protection businesses also bodes well for the long haul. Moreover, its solid capital position spurs investment in business.

Shares of the company have lost 12.6% in six months’ time against the industry’s growth of 8.3%.

Among other property and casualty insurers, United Insurance Holdings Corp. UIHC estimates a catastrophe loss of $135 million before income taxes.  RLI Corp. RLI and Arch Capital Group ACGL too provided a pre-tax loss of $35-$45 million and $190-$210 million, respectively.

Allstate’s stock has a Zacks Rank #3 (Hold), presently.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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