Hit by an increase in catastrophe losses, Northbrook, Ill.-based insurer Allstate Corp. saw its profit drop by more than 37 percent in the fourth quarter of 2007 compared to the same period in 2006.
The fourth quarter net income of $760 million was down $453 million from the year earlier period. In addition to catastrophe losses, the insurer cited higher underlying property/liability combined ratio and unfavorable prior year reserve re-estimates for the drop.
The combined ratio for the fourth quarter was 95.9 (88.6 excluding catastrophes and the effect of prior year reserve releases) reflecting the same trends as for the year. Also in the fourth quarter, expenses were up, a development the company attributed to related to advertising, marketing and technology investments in product innovations.
Property/liability premiums written declined 0.7 percent from the fourth quarter of 2006, reflecting growth in standard auto and a decline in homeowners due to catastrophe management actions including the increased cost of the catastrophe reinsurance program. The cost of the catastrophe reinsurance program was $222 million in the fourth quarter of 2007 compared to $209 million in the fourth quarter of 2006. Excluding the cost of the catastrophe reinsurance program, premiums written decreased 0.5 percent.
Allstate brand homeowners premiums written declined 1.3 percent in the fourth quarter of 2007, compared to the prior year quarter, primarily due to catastrophe risk management actions
During January 2008, the company completed the renewal of its catastrophe reinsurance agreements countrywide, except for Florida, which it expects to do later this year.
The estimated total annualized cost of all reinsurance programs for the year beginning June 1, 2008 will be approximately $660 million per year or $165 million per quarter, including an estimate for reinsurance coverage in Florida. This is compared to approximately $900 million per year for for the year beginning June 1, 2007, or an estimated annualized cost decrease of $240 million beginning June 1, 2008. The estimated decrease is due in part to reduced exposure in Florida following its non-renewal activities over the past year.
Allstate said it continues to attempt to capture reinsurance cost in premium rates as allowed by state regulatory authorities. The company is currently involved in proceedings regarding homeowners insurance rates and trying to capture these reinsurance costs in various states including California, Florida and Texas.
The effect of catastrophe losses on the Allstate homeowners loss ratio totaled 28.4 in the fourth quarter of 2007 compared to 16.5 in the fourth quarter of 2006.
Catastrophe losses for the quarter totaled $472 million, compared to $279 million in the fourth quarter of 2006. This increase was primarily due to $318 million in catastrophe losses related to the Southern California wildfires in October.
Underwriting income was $276 million during the fourth quarter of 2007 compared to $978 million in the same period of 2006. The decrease was due to a higher underlying combined ratio, the unfavorable change in prior year reserve re-estimates and higher catastrophe losses.
Standard auto property damage frequencies increased 2.8 percent while bodily injury gross claim frequencies decreased 2.8 percent compared to the fourth quarter of 2006. Auto property damage and bodily injury paid severities increased 2.2 percent and 9.3 percent, respectively. The standard auto loss ratio increased 5.3 points compared to the fourth quarter of 2006 to 70.3 in the fourth quarter of 2007.
For the year, revenues reached $36.8 billion and net income of $4.6 billion ($7.77 per diluted share), which the company said was the second highest in its history.
Margins for the year declined resulting in a combined ratio of 89.8, reflecting a smaller benefit from prior year reserve re-estimates, higher catastrophe losses and higher loss costs. Increased loss costs represented about one third of the margin reduction and were due to increased frequency and severity of auto and homeowners claims. For the year, the combined ratio, excluding the effects of catastrophes and reserve re-estimates, was 85.7, within the previously provided outlook range of 84.0 to 86.0.
Allstate’s CEO Thomas J. Wilson said the overall 2007 results, which included a 21.2 percent return on equity, enabled the company to strengthen its competitive position.
“Allstate’s strategy and operating performance in 2007 delivered on our commitments, generated excellent results, and enabled us to strengthen our competitive position,” said Wilson.
“Maintaining a consistent focus on profitable growth resulted in excellent results for our property/liability business in 2007,” Wilson said. “Our consumer focus enabled us to maintain pricing discipline in the face of tough competition, with average premiums increasing in our core lines.”