December 2, 2021

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Will Allstate’s April Catastrophe Losses Drain Its Margins?

The Allstate Corporation ALL expects to incur $632 million, pre-tax ($499 million, after-tax) catastrophe loss for April 2020. The loss of $627 million, pretax (495 million, after tax) can be attributed to six weather-related events. Rest of the loss estimate ($4 million, pretax) is on account of unfavorable reserve re-estimates of prior-reported catastrophe losses.

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

In the first quarter of 2020, the company incurred catastrophe loss of $211 million, down 69% year over year. Though it remains focused on reducing losses through its catastrophe management strategy and reinsurance programs, and limiting exposure to riskier geographic markets by raising premiums, it would lead to a decline in the number of policies in force.

Other companies in the property and casualty space, such as W.R. Berkley Corp. WRB, Chubb Ltd. CB and Everest Re Group, Ltd. RE also remain exposed to catastrophe losses.

Despite having incurred low catastrophe loss in the first quarter of 2020, the company is likely to see higher catastrophe-related loss this year, as the 2020 Atlantic hurricane season is expected to be above normal.

The  hurricane season, which starts Jun 1, is expected to cause losses greater  than the earlier catastrophes, such as  Hurricane Katrina, the tsunami in Japan or the militant-orchestrated 9/11 terror attacks. Per industry experts, the losses may run into tens of billions or half a trillion for the industry.

This above-normal catastrophe loss combined with Shelter-in-Pay expense, (expense incurred to pay back a part of the auto insurance premium to the customers due to a decline in auto mobile insurance claims) is likely to cause an increase in combined ratio and drain the company’s underwriting profitability.

Nevertheless, given the company’s good management of catastrophe related losses, our confidence in its ability to deliver impressive underwriting results remains intact. Allstate covers itself with a catastrophe reinsurance program which materially reduces its exposure to wind and earthquake losses. These reinsurance agreements are placed in the traditional reinsurance and insurance linked securities markets.

Allstate has been delivering revenue growth from the past many years led by premium growth. Though in the first quarter of 2020, revenues declined 8%, it was mainly on account of a declinein net investment income partly offset by premium growth.

Allstate’s focus on increasing personal Property-Liability market share and expanding into other protection businesses also bodes well for its long-term growth. Its solid-capital position also enables investment in business.

Shares of the company have lost 16.3% year to date compared with the industry’s decline of 23.2%.

The stock carries a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also the stock carries an impressive Value Score of A. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.

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