Underwrite insurance long enough, and sooner or later you're going to have a really bad year. With three major hurricanes in its final six months, 2005 was a really bad year. Yet leading personal insurer Allstate (NYSE: ALL ) escaped with only about a 2% hit to its year-end book value.
While results for the insurer's fourth quarter were a bit shy of expectations, they weren't too bad. Revenue was up nearly 1% for the quarter, and Allstate saw premiums written increase 2.4% (with 3.5% growth in auto and 6.3% growth in homeowner's). Operating income, a figure which excludes gains and losses from investments, dropped about 1% for the quarter.
On an after-tax basis, Allstate saw about $427 million in catastrophe losses this quarter, with roughly three-quarters of that coming from Hurricane Wilma in Florida. Still, the reported combined ratio only fell half a point (to 89), and looking at the ratios without the impact of catastrophes shows a positive trend.
Of course, you can't just ignore the impact of catastrophe. Whether you insure personal lines like Progressive (NYSE: PGR ) and Allstate, stick to reinsurance like Arch Capital (Nasdaq: ACGL ) or RenaissanceRe (NYSE: RNR ) , or do a bit of both like Berkshire Hathaway (NYSE: BRK-A ) , you can't ignore the impact of major events. Fortunately, Allstate has been here before, and while the storms hurt results, they didn't threaten the company.
Whether it's acknowledging that it was more exposed to severe hurricanes than it thought, or simply afraid that we may in fact be in a nasty cycle for more hurricanes, Allstate is taking steps to batten down the hatches. It's attempting to cut back business in areas where it feels it's overexposed, and it recently signed on for more reinsurance -- an action that is guaranteed to raise expenses a little, but should also help shield Allstate from another major disaster.
Valuation on these shares is interesting. By some metrics, Allstate seems a bit overpriced. By other metrics, it seems a little undervalued. I ultimately come down more on the "undervalued" side of the argument, though investors shouldn't expect dramatic outperformance.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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