Allstate warns of unexpected losses despite auto insurance rates jumping 16% in some areas last month

Stock of Allstate Corp. ALL,
+4.16%
The drop on Thursday was enough to sharply pace the S&P 500 index losers after insurers warned of unexpected losses in the third quarter amid weakness in the personal auto business.

The company said late Wednesday it expects a net loss of $675 million to $725 million, and a loss of $400 million to $450 million excluding nonrecurring items. This compares to the FactSet consensus for adjusted net income at the end of September of $256.4 million.

Expected losses will occur even though Allstate said it will continue to implement “significant auto insurance rate actions” in response to rising cost of loss inflation in the second half of 2022.

Actions taken included a 16.2% increase in Allstate branded auto insurance rates in September and 4.4% increase in National General rates in 11 locations. Total Allstate Brand Auto Insurance Rates After rising 3.2% in August and 1.0% in July, it rose 0.9% in September.

read also: Allstate plans ‘significant’ price hikes on auto insurance in second half in response to inflationary pressures.

The stock fell 11.4% in midday trading, its biggest one-day drop since 14.1% on March 18, 2020.
+1.36%,
The next biggest drop in the index was Equifax Inc. stock EFX, so
+2.09%,
This decreased by 5.5%.

According to Allstate, Allstate Protection’s auto insurance combined ratio for the third quarter, which compares underwriting expenses and net loss reserves to earned premiums, was 117.4%. A ratio above 100% means the business is losing money, with outflows exceeding inflows.

Excluding certain items, the underlying combined ratio for Auto was 104%, compared to 74.6% for Allstate Protection (homeowners) and 96.4% for Property Liability.

JPMorgan analyst Jimmy Buller said the company’s third-quarter results were simply “poor.” He expects auto margins to remain weak for the foreseeable future, and believes Allstate’s auto insurance policy in force (PIF) growth will slow. This is because the company cuts marketing costs on new contracts and higher prices reduce customer retention. .

However, it reiterated its overweight rating, citing “attractive valuations” and expectations that automotive margins and PIF growth will begin to improve by the end of the year.

Bhullar also said Allstate’s third-quarter catastrophe loss estimate is $763 million, well below his forecast of $1.1 billion.

read more: Hurricane Ian: These stocks could feel the effects of the storm.

MKM Partners’ Harry Fong has lowered his price target from $165 to $145, but reiterated his buy assessment, saying he believes the company can return to profitability within a year.

“While this announcement was not what we had hoped for, we are determined to restore underwriting profitability to the mid-90s combined ratio from the estimated 117.4% level in the third quarter. We continue to believe that we will continue to be very proactive in our evaluations,” Fong wrote in a note to clients.

Allstate shares have fallen 2.1% over the past three months, while SPDR S&P Insurance exchange-traded fund KIE
+1.32%
was up 1.3% and the S&P 500 was down 6.7%.

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