Property and casualty insurer The Allstate Corporation ALL expects to incur catastrophe loss of $154 million, pretax ($100 million after tax), for the month of Aug 2016.
Though the loss is estimated at $144 million, this will be increased by $10 million reserve re-estimates of prior-reported catastrophe losses. These losses accrue to 10 events that occurred in August.
Earlier, the company had announced its expected cat loss of $253 million, pretax ($164 million after tax), for the month of Jul 2016. Though the loss was estimated at $269 million, it had taken into account a partial reduction from favorable reserve re-estimates of prior-reported catastrophe losses. These losses accrued to 16 events that occurred in July.
As Allstate deals with property and casualty business, it is significantly exposed to catastrophic events. Given the continued occurrence of weather-related events, catastrophe losses had surged to $2.35 billion in 2012 and $3.82 billion in 2011, radically exceeding $2.21 billion in 2010 and $2.07 billion in 2009, pushing up claims and benefits’ expenses, and hurting cash flow. In 2013, catastrophe losses declined year over year to $1.25 billion but increased again to $1.99 billion in 2014 and was $1.72 in 2015.
For the first six months of this year, the company incurred catastrophe losses of $1.79 billion, which is higher than $1.09 billion incurred in the year-ago period. Net income for the first half of 2016 also declined to $459 million from $974 million owing to higher catastrophe losses. Also, claims expense rose to $11.6 billion from $10.6 billion in the year-ago period.
Allstate is focusing on reducing losses through its catastrophe management strategy and reinsurance programs, while maintaining its underlying combined ratio. However, we cannot rule out the possibility of significant losses from catastrophes and severe weather incidents, going forward.
The insurance industry had enjoyed a peaceful time for the past several quarters till the last reported second quarter, which was ravaged by calamities. It saw varied catastrophes, including a wildfire in Canada, flooding in Europe, earthquakes in Japan and Ecuador, and hailstorms in Texas. The industry incurred an approximate loss of $15 billion to over $20 billion owing to 25 weather events.
Going by a Munich Re report, U.S. economic losses caused by natural catastrophes in the first half of 2016 were $17 billion compared with $12 billion in the year-ago period. Insured losses due to natural disasters in the United States in 2015 totaled $16.1 billion, according, more than the $15.3 billion total for 2014.
On the face of it, high catastrophe losses dent the industry’s margins and cause a spike in combined ratio which results in underwriting loss. Then again, these losses act as a catalyst in turning the insurance pricing cycle. In recent years, the industry amassed ample reserves owing to low catastrophe losses, which led to loose underwriting standards as insurers were compelled to lower their prices. This caused stiff competition and pricing woes in the industry.
So the rise in catastrophe losses came as a boon for the industry by denting capital and encouraging players to try out disciplined underwriting by hiking premium prices. This should ultimately lead to a hard insurance cycle.
Allstate carries a Zacks Rank #3 (Hold). Some better-ranked stocks in this space are Allied World Assurance Company Holdings, AG, AWH, NMI Holdings Inc. NMIH and Argo Group International Holdings, Ltd. AGII. While both Allied World Assurance and NMI Holdings sport a Zacks Rank #1 (Strong Buy), Argo Group carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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