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Allstate (ALL) Suffers from High Auto Claims, Cat Exposure

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On Jul 5, 2016, we issued an updated research report on The Allstate Corporation (ALL - Free Report) . This property and casualty insurer continues to suffer from continued stress on the auto repair industry from higher industry frequency, cost of repairing newer more complex vehicles and a higher total loss volume that has persistently increased claim severity.

It is therefore busy making progress in five operating priorities – to better serve its customers through innovation, effectiveness and efficiency; achieve target economic returns on capital; grow insurance policies in force; proactively manage investments; and build and acquire long-term growth platforms.

To achieve these objectives, the company instituted auto insurance rate increases across all of its three underwriting brands in first-quarter 2016. The company also changed its underwriting guidelines to slowdown new business and target underperforming segments. It is also organizing its claims review to achieve operating excellence. The company has also undertaken expense reduction initiatives. New marketing campaigns for Allstate and Esurance brands will soon be launched.

These initiatives will bear fruit over the long term. Presently, growing the number of customer relationships is facing headwinds as the company is adapting to the increasing cost of providing auto insurance. Property liability items in force in the first quarter of 2016 were also down from year-end 2015. Also, Allstate brand's total policies in force growth slowed in the first quarter from the prior-year quarter as a result of the company’s targeted actions to improve underlying auto profitability. Presently, growth is being impacted by profit improvement actions in both brands – Esurance and Encompass, both of which witnessed a decline in policies in force.

Also, exposure to catastrophe losses continues to weigh on the operating results of the company. In the first quarter, cat loss of $827 million drained the earnings and the company anticipates $835 million pre tax ($542 million after tax) of catastrophe-related loss for the second quarter. In addition, like other insurers Aflac Inc. (AFL - Free Report) , American Financial Group Inc. (AFG - Free Report) and MetLife Inc. (MET - Free Report) , declining net investment income is a headwind for Allstate too.

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