Allstate Stock Falls on Storm Losses as Insurers Reconsider Risks

Insurers have had to deal with an especially difficult quarter due to weather-related losses. And that comes on top of extensive damage from Hurricane Ian, which slammed the coast of southwest Florida last year, not to mention the devastating wildfires in recent years. In June, Allstate said it would longer sell new home policies in California, joining a host of other property and insurance carriers scaling back coverage in high-risk areas.

Tim Zawacki, principal research analyst for the U.S. insurance industry at S&P Global Market Intelligence, said the U.S. insurance industry is at a crossroads.

“Companies are still attempting to escape the economic circumstance left behind in the pandemic’s wake, while revisiting the way they view risk in advance of what we’re hearing about more and more on a daily basis about the effects of climate change,” he said during a webinar discussing the outlook for U.S. insurers. 

Allstate isn’t alone when it comes to losses for the second quarter. Last month The Travelers (TRV) reported a loss of $14 million, mainly due to higher catastrophe losses from “numerous severe wind and hail storms in multiple states,” according to the company. 

Tom Wilson, Allstate’s CEO, said 42 “catastrophe events” affected 160,000 customers and resulted in $2.7 billion in catastrophe losses for the quarter. “In homeowners insurance, catastrophe losses were substantially over the 15-year average,” he said on a call to discuss the results with investors.

That severe-weather-related catastrophe losses resulted in a “combined ratio”—a profitability metric that measures underwriting losses and expenses as a percentage of premiums—of 117.6%, an increase from the prior year. When a combined ratio is higher than 100%, it indicates that the company is paying out more than it is receiving in premiums. Income from invested premiums may or may not make up for underwriting losses.

Allstate’s underlying combined ratio—which strips out catastrophe losses, among other things—was 92.9% versus 93.5% a year ago. Analysts play closer attention to this ratio because it is a better indicator of the health of the core business.

After the close Tuesday, Allstate reported a net loss of $1.4 billion. The stock closed down 5.8% at $106.51 on Wednesday afternoon. The company’s shares are down 21% so far this year and 7.4% over the past 12 months.

“The result was slightly better than we expected,” Paul Newsome, managing director and senior research analyst with
Piper Sandler,
said in a note. “While the result is bad on an absolute basis, the result will likely be viewed as roughly in line with expectations given the difficulty of estimating catastrophe losses.”

Piper Sandler has an “overweight” rating on the stock.

Brian Meredith, managing director at
UBS,
rates the stock “buy” with a 12-month price target of $145. Allstate “remains a top pick as we see underlying margins improving” year over year in the third quarter, he said in a note.

Adam Klauber, analyst with William Blair, also likes the stock. “We continue to rate Allstate outperform given the likely turnaround in personal auto,” he said in a note.

To improve their profitability, insurers are boosting premiums, taking in revenue that they will invest to cover future losses. But it will take time to return to profitability.

Zawacki said he expects another year of underwriting losses in 2023 with a projected combined ratio of 100.8% for the U.S. property and casualty industry, meaning payouts and expenses will be more than the premiums earned.

“While that marks an improvement from the calendar-year 2022 result of 102.6%, it remains above the 100.0% threshold that serves as the metaphorical break-even point for underwriting profitability,” he said. 

“No one, and especially in the insurance sector, has been able to escape the whole idea of climate change this summer,” he said. “We’re seeing the industry take a more proactive approach to refining its risk appetite based on emerging data, when and where it’s been permitted to do so.”

Write to Lauren Foster at [email protected]