Allstate warns of surprise loss, even as car insurance rates jumped 16% in some places last month

Allstate Corp. shares. ALL,
fell on Thursday, enough to beat the S&P 500 index losers by a wide margin, after the insurer warned of a surprise third-quarter loss amid weakness in its personal auto business.

The company said late Wednesday that it expects a net loss of between $675 million and $725 million, and losses excluding one-time items of between $400 million and $450 million. That compares to the FactSet consensus for adjusted net income at the end of September of $256.4 million.

The expected losses come even as Allstate said it was continuing to implement “significant auto insurance rate actions” in the second half of 2022 in response to inflationary increases in loss costs.

Actions taken include 16.2% increases in Allstate-branded auto insurance rates at eight locations in September and a 4.4% increase in general national rates at 11 locations. Allstate-brand auto insurance total rates rose 0.9% in September, after rising 3.2% in August and 1.0% in July.

Read also: Allstate forecasts “significant” price increases for auto insurance in the second half in response to inflationary pressures.

The stock fell 11.4% by midday, putting it on track for the biggest one-day decline since dropping 14.1% on March 18, 2020. It was by far the least performance of the S&P 500 SPX,
while the second biggest drop in the index was Equifax Inc.’s EFX stock,
which lost 5.5%.

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

Excluding certain items, the underlying combined ratio for auto insurance was 104%, compared to 74.6% for Allstate Protection — home insurance and 96.4% for home liability.

JPMorgan analyst Jimmy Bhullar said third-quarter results were just “poor”. He expects auto margins to remain depressed in the near term and thinks the pace of policy-in-force (PIF) growth for Allstate’s auto book will slow, as the company cuts marketing spend for new business and retention decreases due to price increases. .

However, it reiterated its overweight rating, citing expectations that auto margins and PIF growth would start to improve by the end of the year and an “attractive valuation”.

Bhullar also noted that Allstate’s estimate for third-quarter catastrophe losses of $763 million was well below its forecast of $1.1 billion.

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MKM Partners’ Harry Fong cut his share price target to $145 from $165, but also reiterated his buy rating, saying he believed the company could turn around profitability within a year.

“While the announcement is not what we wanted to see, we continue to believe that the company will remain very aggressive in repricing its automotive business to restore underwriting profitability with a combined ratio in the mid-90s per compared to the estimated level of 117.4% in the third quarter,” Fong wrote in a note to clients.

Allstate’s stock has lost 2.1% over the past three months, while exchange-traded fund SPDR S&P Insurance KIE,
gained 1.3% and the S&P 500 fell 6.7%.