Allstate's April CAT Loss Falls YoY - Analyst Blog
May 18 2012 - 9:15AM
Zacks
Home and auto insurer, Allstate Corp. (ALL)
announced its pre-tax catastrophe (CAT) loss estimates for April
2012 yesterday, which is expected to be about $280 million.
Besides, the company’s CAT loss includes the effect of about 10
natural disasters.
Although Allstate’s April CAT loss estimates are higher than
that recorded in the whole of first quarter of 2012, it is still
meek figure when compared with $1.4 billion worth of CAT loss
recorded in April last year. CAT losses stood at $259 million in
the first quarter of 2012, plunging 22.2% from $333 million in the
year-ago quarter.
Since last year Allstate has started disclosing its quarterly
and monthly CAT loss estimates if the amount exceeded $150 million
in any month. Allstate decided to do so in order to generate
greater transparency. On Wednesday, another peer –
Progressive Corp. (PGR) – reported a decline in
CAT losses for April 2012 to $46 million from $55 million in April
last year.
Earlier this month, Aon Benfield, through its latest Global
Catastrophe Recap report, projected CAT losses of over $1.0 billion
in April 2012 for the US insurance industry. The losses are mostly
due to the widespread tornado, hail and wind that smashed life and
property in central and southern parts of the US.
CAT Loss’ Effect on Earnings
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.
Moreover, CAT losses have not only been increasing the claims
payments of the insurers, but it also has been nibbling into the
earnings of the companies, thereby distorting the operational
dynamics for quite some time post the weather-related events.
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 swabbed away after
incurring significant 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, Allstate reported operating earnings per share of $1.42
in the first-quarter of 2012, which outpaced the Zacks Consensus
Estimate of $1.12 and the year-ago quarter’s earnings of 93 cents.
Operating income spiked up 43.7% to $710 million from $494 million
in the year-ago quarter.
Results for the quarter reflected lower catastrophe losses,
which further led to reduced claims expenses coupled with higher
premiums. Besides, expansion in the underlying margin for Allstate
brand homeowners and other personal lines along with higher
investment income and realized capital gains benefited results.
These were offset by higher operating expenses. However,
prudent capital management and liquidity were quite impressive
during the reported quarter.
Despite the CAT losses, the Zacks Consensus Estimate projects
Allstate’s second quarter earnings to shoot up 175% year over year
to 93 cents per share. With respect to the estimate revisions, 14
of 22 firms have revised their estimates upward in the last 30
days, while a couple of downward revisions were witnessed, thereby
justifying the underlying strength of the stock.
Neutral on the long term
Nevertheless, by and large, we believe the tough market
situation looks likely 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.
ALLSTATE CORP (ALL): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis Report
PROGRESSIVE COR (PGR): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
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