Allstate Q3 market beat not sustainable: Credit Suisse

Personal lines insurer The Allstate Corporation has exceeded analysts’ estimates with a reported net income applicable to common shareholders of $637 million for the third quarter of 2017, but it is unlikely to keep this momentum going forward, according to Credit Suisse analysts.

The third quarter beat was driven by lower than expected catastrophe losses, higher reserve releases, and better underlying property/casualty (P&C) margins, Credit Suisse analysts wrote in a Nov. 2 note.

The Allstate results included catastrophe losses of $861 million, up 79 percent year on year.

A reported property liability underlying combined ratio of 85.4 percent was better than Credit Suisse’s estimate of 87.9 percent, driven by improved underlying auto loss ratio results.

“Although we don't think an underlying combined ratio of 85.4 percent is sustainable, we can't ignore the magnitude of the progress that Allstate has made as it pivots more aggressively towards growth,” the analysts said.

CEO Tom Wilson has highlighted an improved profitability in auto insurance reflecting actions taken since 2015 and strong profitability in the Allstate brand homeowners insurance.

But while Allstate continues to deliver strong improvement in underlying margins this year, there are several items that will likely prevent continued margin expansion into 2018/2019, the analysts noted.

Allstate has benefited from benign 2017 frequency, location specific rate increases over the past couple of quarters of 3 percent that are likely not enough to expand margins in a normal loss cost trend year, the analysts explained.

Furthermore, expenses continued to tick up and are likely to continue putting pressure on the margin. As profitability improves, the company is returning to growth mode which requires higher spending and likely will also require better variable compensation, the analysts added.

Auto policy growth could become sequentially positive in the fourth quarter, but is more likely in the first quarter.

In addition, Allstate Financial results benefitted from higher than expected alternative investment returns and favourable mortality, but the unit may face a reserve charge in the fourth quarter, Credit Suisse analysts noted.

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