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Homeand auto insurer Allstate Corp. (ALL - Analyst Report) announced that its pre-tax catastrophe (CAT) loss estimate has jumped to $323 million for May 2013. With an estimate of $216 million pegged for Apr 2013, this takes the total CAT loss estimate for the second quarter to $539 million thus far.

After tax, Allstate is expected to incur CAT losses worth $210 million in May 2013 and $140 million in Apr 2013, bringing the total to about $350 million in the second quarter of 2013. The losses in the past 2 months were primarily incurred from three severe weather events.

Over the recent years, CAT losses have been affecting Allstate’s earnings, also deteriorating the combined ratio and cash flow significantly. With the changes in weather patterns, which have increased the occurrence of floods, earthquakes, hurricanes, hailstorms, tsunami and more, the insurers and reinsurers have more reasons to worry about.

Following the catastrophes, CAT losses have not only been augmenting the claims payments of the insurers but have been distorting the operational dynamics for quite some time. Allstate had recorded $2.34 billion in CAT losses in the second quarter of 2011, which moderated to $819 million in the corresponding quarter in 2012. Though it declined, the CAT losses were still high enough to adversely affect earnings in 2012.

However, assuming some additional loss for Jun 2013, we expect total CAT losses in the second quarter of 2013 to be below or in the neighbourhood of the year-ago quarter number. Further, Allstate has been taking proactive steps to reduce its risks related to CAT losses, as reflected by its Enterprise Risk and Return Management (ERRM) system.

Additionally, the company is investing into CAT bonds that provide insurance coverage. We believe these efforts should at least partly mitigate the financial risks related to the uncertain weather-related events, thereby boosting Allstate’s operating and competitive strength.

While Allstate carries a Zacks Rank #3 Hold), other outperformers in the insurance sector include Amerisafe Inc. (AMSF - Analyst Report), Hilltop Holdings Inc. (HTH - Analyst Report) and Montpelier Re Ltd. (MRH - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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