Sandy to Hurt Allstate's 4Q

Home and auto insurer, Allstate Corp. (ALL - Analyst Report) announced its pre-tax catastrophe (CAT) estimates for October 2012 yesterday, stating that it expects losses of over $150 million. However, a final estimate is yet to be computed.

The loss primarily includes the damages created by Hurricane Sandy on the north-east of the US, where Allstate owns about 10.7% of the market share. Disaster modelling firm, RMS projects insured losses of $20–25 billion related to the superstorm in the US.

In order to generate greater transparency, since last year Allstate has started disclosing its quarterly and monthly CAT loss estimates if the amount exceeds $150 million in any month.

CAT Loss Mars 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.

Over the past few years, CAT losses have not only been augmenting the claims payments of the insurers but 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 such as Allstate, Hartford Financial Services Inc. (HIG - Analyst Report), PartnerRe Ltd. (PRE - Analyst Report) and The Travelers Companies (TRV - Analyst Report) saw most or all of their earnings being washed away after incurring severe CAT losses in 2011.

Although CAT losses moderated in the first nine months of 2012 and also helped the bottom line regain stability, the recent hurricane Sandy is expected to erode the insurers’ earnings once again. Recently, The Chubb Corp. (CB - Analyst Report) deferred its share buyback program due to the inability to estimate the extent of loss related to the recent catastrophe. More insurers are expected to release their CAT losses soon.

Estimate Trend Revision

Over the last 30 days, 15 out of 22 analysts covering the stock have reduced their estimates for the fourth quarter of 2012, while no upward revision was witnessed. Currently, the Zacks Consensus Estimate for the fourth quarter is operating earnings of 34 cents per share, which would plunge by about 77% from the year-ago quarter.

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 expenses and income until the markets regain momentum. Consequently, Allstate carries a Zacks Rank #3, which implies a short-term Hold rating.