Allstate Anticipates Higher Q2 CAT Loss - Analyst Blog

Homeand auto insurer – Allstate Corp. ALL announced its pre-tax catastrophe CAT and net of reinsurance loss estimate to rise to $440 million for May 2014. About $400 million of this loss occurred from 11 events, 3 of which represent 78% of the loss. The remaining $40 million of loss was the result of unfavorable reserves.

Including the estimate of $280 million in Apr 2014, total pre-tax CAT loss amounts to about $720 million ($468 million post-tax) so far in second-quarter 2014. This is about 34% higher than $539 million ($350 million after-tax) of CAT losses recorded for the same months last year.

CAT Loss Mars Growth

CAT losses play a major role in the insurance industry as they not only augment the claims payments of insurers but also reduce the earnings of the companies, thus distorting the operational dynamics for quite some time. Meanwhile, total CAT loss in the U.S. insurance industry was almost $2.2 billion in first-quarter 2014.

For the same quarter, Allstate's CAT losses  rose 24% year over year to $445 million, due to freeze and fire-related losses in winter. Subsequently, combined ratio deteriorated to 94.7% from 93.2% in the year-ago quarter. Moreover, underwriting income fell 18.8% to $372 million.

Due to persistent weather-related hazards, CAT losses increased to $2.35 billion in 2012 and $3.82 billion in 2011, much wider than $2.21 billion in 2010 and $2.07 billion in 2009. These adversely weigh on Allstate's claims, benefits expenses and cash flow. Although CAT losses were lower than the prior-year period, it still amounted to $1.25 billion in 2013. The CAT losses incurred by the company so far this year signal weak comps for the remainder of 2014 as well.

Despite resorting to CAT bonds to minimize risk exposure, we believe Allstate will likely face challenges that directly risk the operating leverage and capital deployment capacity going forward, given the prevailing competitive pricing pressure and low interest rate environment. 

Estimate Revision

Given the considerable CAT losses, the Zacks Consensus Estimate for second-quarter 2014 and full-year 2014 were revised downward by 3 cents per share, in the last 7 days. At present, the Zacks Consensus Estimate for second-quarter 2014 and full-year 2014 is pegged at $1.13 and $5.12, respectively.

Moreover, the Most Accurate estimate for Allstate's second-quarter 2014 and full-year 2014 earnings currently stand at $1.03 a share and $4.99 a share, resulting in an Earnings ESP of -8.9% and -1.8%, respectively.

Allstate carries a Zacks Rank #3 (Hold). However, some better-ranked insurers include HCI Group Inc. HCI, Endurance Specialty Holdings Ltd. ENH and AmTrust Financial Services Inc. AFSI. All these stocks sport a Zacks Rank #1 (Strong Buy).

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