Tickers in this Article: ALL, TRV, WRB, HIG, ACE
Allstate Insurance (NYSE:ALL) announced estimated losses from catastrophes for August, a substantial portion of which were due to Hurricane Irene. The pre-tax losses for August reached $735 million. Combined with July losses, Allstate's pre-tax losses may total $865 million. (For more, read Understanding The Income Statement.)

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Hurricanes and More
Allstate pegged the loss figure for Hurricane Irene at roughly $500 million. The August losses include eight casualty events which comprise the $735 million total. As devastating as Hurricane Irene was, particularly to any of its victims, financial losses from the hurricane are far less than the $2 billion Allstate suffered in losses from tornadoes earlier in the year. In April and May, these $2 billion in tornado losses equaled all of Allstate's losses from disasters in 2010. Allstate now releases estimates of its losses from catastrophes for some months. Allstate has begun doing this in response to pressure from analysts who wanted information on the company's catastrophe exposure on a more timely basis.

The Business of Catastrophes
One of the things worth noting about the Allstate exposure to losses is that the insurance business has had some tough conditions already in the last several years. Insurance rates have been held down in the weakened economy. The poor results of many insurers point to their need to raise prices eventually. While many of the large insurers are in diverse lines with equally diverse products and very different markets even as far as property and casualty, there is something they share, that natural disasters put dents in financial results. Travelers (NYSE:TRV), even though it has had solid earnings, had weather related losses of $1.2 billion for the first half of 2011. This reduced earnings for the period to $475 million, $825 million less than the previous first half results.

Property and casualty insurer WR Berkley (NYSE:WRB) had a mixed quarter recently, as revenue increased but earnings were down 29% year over year. Hartford Financial Services Group (NYSE:HIG) and Allstate had losses from Hurricane Irene that will impact its third quarter earnings. The hurricane losses are expected to total pre-tax $75 million to $175 million, with total catastrophe losses estimated to be from $150 million to $250 million. Some insurers responded by broadening their lines further. Ace Limited (NYSE:ACE), a reinsurer which has some exposure to catastrophic losses, continues to build its business via acquisitions. Still, the same current pricing pressures and competitive environment are likely to dampen performance for the industry in the near term.

Managing Risk
The insurance business seems incredibly dull until something like a natural disaster hits. Both policy-holders and insurers then scramble. The business of risk management, which attempts to keep things stable to the point of being staid, can become too exciting when losses from catastrophes hit. Allstate had an operating loss of $1.23 per share in the second quarter, but prudent capital management likely held these down. It's when disasters strike that well-managed insurers bring to life the phrase, "limit your losses."

The Bottom Line
Although Allstate is a well-managed company, there is some concern that the exposure and continuing losses to catastrophes are eroding its cash flows and filtering down to its bottom line results. Allstate's also had the double-whammy of some bad investment results due to market declines and poor returns. Still, the company is well capitalized and is largely prudently managed over its long term. It should emerge from this difficult period for the industry and economy in reasonable shape. After that, they just need the weather to cooperate. (For more on insurance, check out The Importance Of Property Insurance.)

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