Allstate lets go of more policies in New York
Allstate is pulling out of New York. Should investors pull out of the stock as its market share and premium growth take a hit?
NEW YORK (CNNMoney.com) - Faced with over $3 billion in claims from the barrage of hurricanes last year, Allstate is going on the defensive by pulling out of of high-risk markets as the industry prepares for increasingly severe hurricanes over the next two decades.
Allstate (Research) began to reduce exposure in hurricane-prone Florida in 2005, severing ties with 95,000 homeowners. But the country's largest publicly-held auto and home insurer, now has its eyes set on New York.
The company announced last month that it would stop writing new homeowners' policies in the New York region which includes the five boroughs, Long Island and Westchester. But starting this May, Allstate will also cancel an increasing number of policies each year once they reach the end of their three-year expiration period, said Allstate spokesman Michael Trevino.
At first glance, the company's loss of market share is troubling to investors. Shortly after Hurricane Katrina, Allstate's stock price jumped on the expectation that it would benefit from a surge in rates. The company's chief executive Edward Liddy also said Allstate would attempt to raise rates significantly in part to pass along reinsurance rate increases to customers. Reinsurance is coverage that insurers buy to allow them to lay off the risk of losses from the policies they sell to individuals and companies.
Allstate recently paid $600 million a year for $5.8 billion in reinsurance coverage -- a $400 million increase from premiums the company paid last year. And despite the higher costs, its been an uphill battle with regulators to raise rates for its policy holders. To minimize its losses, the company actively began to reconsider just how much exposure its willing to have in high-risk markets such as Florida and New York.
As a result, its stock price began to suffer, sinking near a 52-week low of about $50.
"A failing of the regulatory environment is not allowing insurers to pass along those higher costs or simply raise rates to meet higher levels of risk," said Robert Hartwig, chief economist at Insurance Information Institute. "Allstate is under pressure from ratings agencies who are now requiring insurers to carry more capital if they write in hurricane-prone areas."
Less growth, better earnings?
Reducing exposure is a move that will put a wrench in the company's growth prospects this year although it could ultimately improve its earnings down the road, said Al Capra, insurance analyst at Oppenheimer & Co.
"After seeing its catastrophe experience over the past two years, Allstate felt it prudent to cuts its exposure at the expense of its topline," he said. "While growth may slow somewhat, the reduced volatility could lead to multiple expansion and generate a more stable bottomline."
While the company has about 450,000 homeowner policies, accounting for about a 26 percent market share, in the region, Allstate spokesman Trevino said the non-renewals will only impact a small percentage of those policyholders.
He said the company isn't currently disclosing the criteria by which it is determining which policies to cancel.
In Florida, the company struck a deal with Universal Insurance Company of North America to accommodate its policyholders and Trevino added that Allstate would like to have a similar arrangement in place for New York policyholders. While Allstate is in talks with other insurance carriers to transfer the policies, he said there is no set deal in place just yet.
A good buy
But analysts said investors shouldn't be frightened off by lower premium growth as a result of its shrinking market share.
"I expect zero percent growth out of Allstate but it's never really been a growth company," said Cliff Gallant, equity analyst at Keefe, Bruyette & Woods. "They are lowering their risk profile and investors should be more concerned with the company's ROE (return on equity) and its profitability," which should continue to be solid despite the number of challenges it faces with both weather patterns and increased competition in the auto market.
During its fourth quarter earnings call last week, Allstate's Liddy said the company should earn $5.60 to $6 per share in 2006. Analysts had anticipated earnings of $6.06. He added that the company hoped for a 12 percent to 13 percent return on equity over the next few years.
Nick Pirsos, managing director at Sandler O'Neill, added that long-term investors should take advantage of the relative weakness in the company's stock.
He expects rates to climb in homeowners policies over time and despite the company's current pullback, Allstate's market share will be marginally higher over the next five years.
And investors looking for an added confidence builder can turn to the company's aggressive share buyback plan, analysts said.
Liddy said the insurer will complete a $4 billion share-buyback program in 2006. The insurer has already bought back $2.5 billion of its shares.
"The stock has reacted in a way that suggests people are nervous about what its catastrophe management means for topline growth going forward," said Oppenheimer's Capra. "But the company does generate meaningful cash and it appears the bad news is already in the stock."
Capra upgraded the Allstate to buy from neutral last week.
None of the analysts quoted in the story own shares of Allstate.
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