Allstate Earnings: Catastrophe Losses and Auto Headwinds Take a Heavy Toll

As expected, Allstate ALL endured a very difficult second quarter, as catastrophe losses and headwinds in personal auto pushed the company to a $1.4 billion loss. Catastrophe losses in the second quarter were $2.7 billion, or 140% higher than last year’s level. While we think the company faces a difficult near term, we are comfortable with our $122 per share fair value estimate for the no-moat company, which we will maintain.

Allstate has been struggling with adverse claims trends in personal auto, and we didn’t see signs in the quarter that the situation has materially improved. The personal auto combined ratio for the quarter came in at 108.3% compared with 107.9% last year. On an underlying basis, the combined ratio did improve modestly sequentially, but underwriting results look stuck at a level that is producing sizable underwriting losses. From what we’ve seen from peers, Allstate is not alone in this situation.

Allstate continues to push through pricing increases for personal auto, with rate increase having a 6% positive impact on premiums for Allstate-brand products in the quarter. While personal auto has historically shown an ability to push rates up and bounce back from underwriting issues relatively quickly, we think the magnitude of the business line’s recent issues is making this a more protracted process.

Allstate does appear to be pulling back a bit amid this difficult market, with Allstate-brand auto policies in force down 5% year over year. We think prioritizing profitability over growth is the right move in the current market environment, and see this as an encouraging sign for the company, especially given our concerns that the insurer has overemphasized growth in recent years. However, we would not that the decline in Allstate-brand auto policies in force was partially offset by 12% growth at National General.