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Will Allstate's (ALL) May Catastrophe Loss Dim Q2 Prospects?

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The Allstate Corporation ALL expects to incur $350 million, pre-tax ($277 million, after tax) catastrophe loss for May 2020.

The loss of $346 million, pretax (273 million, after tax) can be attributed to eight weather-related events. Remaining loss estimate ($4 million, pretax) is on account of unfavorable reserve re-estimates of prior-reported catastrophe losses.

Majority (nearly 80%) of estimated catastrophe losses for May were caused by four severe weather events, which included rain, wind and hail, primarily impacting Texas and the Midwest.

Earlier, the company announced a catastrophe loss estimate of $632 million. Together with the loss estimate for April, catastrophe losses have totaled $982 million quarter to date.

Being a relatively large property insurance business, Allstate is significantly susceptible to catastrophic events. Weather-related losses over the years have weighed on the company’s claims and benefits, expenses and cash flow, draining its underwriting profitability.

In the first quarter of 2020, the company bore a catastrophe loss of $211 million, narrower than the year-ago loss by 69%. Though it remains focused on reducing losses through its catastrophe management strategy and reinsurance programs, and limiting exposure to riskier geographies by raising premiums, the same will induce a decline in the number of policies in force and cause a shrinkage in business.

Other companies in the property and casualty space, such as W.R. Berkley Corp. (WRB - Free Report) , Chubb Ltd. CB and Everest Re Group, Ltd. (RE - Free Report) also remain vulnerable to catastrophe losses.

Despite enduring a low cat loss in the first quarter of 2020, the company is likely to see higher calamity-related loss through the rest of the year as the 2020 Atlantic hurricane season is expected to be above normal.

The  hurricane season, which officially started  Jun 1, is expected to trigger losses greater than the earlier catastrophes, such as  Hurricane Katrina, the tsunami in Japan or the militant-orchestrated 9/11 terror attacks. Per industry experts, the losses may run into tens of billions or half a trillion for the industry.

Per the U.S. National Oceanic and Atmospheric Administration (NOAA), the current-year Atlantic hurricane season will be an active enough, perhaps similar to last year’s with more storm names than an average season can witness.

This above-normal catastrophe loss combined with Shelter-in-Pay expense (expense incurred to pay back a portion of the auto insurance premium to customers due to a decline in automobile insurance claims) is likely to deteriorate the combined ratio and drain the company’s underwriting profitability.

Nevertheless, given the company’s managerial skills in tackling catastrophe-related losses, our confidence in its ability to deliver impressive underwriting results remains intact. Allstate is covered under a catastrophe reinsurance program, which materially mitigates its exposure to wind and earthquake losses. These reinsurance agreements are placed in the traditional reinsurance and insurance-linked securities markets.

Allstate has been delivering revenue growth from the past many years, led by premium growth. Though in the first quarter, revenues declined 8%, mainly because of weak net investment income, the downside was partly offset by premium growth.

Allstate’s focus on increasing personal Property-Liability market share and further penetrating other protection businesses also bodes well for the long haul. Its solid capital position also spurs investment in business.

Shares of the company have gained 32.2% year to date compared with the industry's growth of 7.9%.

The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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