Allstate Catastrophe Losses: Bad Luck or Bad Judgment?

Allstate, the largest publicly traded home and auto insurer in the country, didn't do terribly well in second quarter earnings. Operating income per share, the way insurers are measured by Wall Street, was only 55 cents, less than half the year ago number, and its shares were off in trading today.

The problem: its homeowners unit. While most of the company, including auto, hummed along like a well-oiled machine, catastrophe losses took a huge chunk out of that division's earnings.

"Allstate had record catastrophe losses of $818 million in the quarter and $1.3 billion for the first half ... due to costly windstorms and hailstorms," the insurer said in its earnings statement. Ironically, the first half of the year is supposed to be the "quiet" half as Mother Nature gears up to give insurers the one-two hurricane punch from July to November.

But that didn't happen. Instead, the losses "exceeded expectations," a grim-sounding CEO Tom Wilson told analysts on a conference call, and led to a payout of $1.16 for every dollar in premiums the home insurance division took in.

Wilson pointed out that catastrophes, unlike fender-benders, slips and falls, and other insurance payouts, can't be factored into an insurer's costs in any given year. "They bounce around a lot," he said. "2006 and 2007 were good, 2008 and 2009 were not good." In fact, 2009 catastrophe losses more than doubled the 15-year average.

Allstate pointed out that it was not alone in catastrophe losses, and that industry bible The National Underwriter said there was $11.1 billion worth of insured disasters in the first half of the year.

Insurers such as Farmers Group, with huge Midwestern exposure, have also taken heavy hits. "Hail, tornados - we haven't escaped a disaster in the last 18 months," said the president of its personal property and casualty business, according to CNNMoney.

But analysts questioned whether Allstate's strategy was right. Allstate has been leaving areas with heavy exposure to hurricanes, like Florida and the Atlantic and Gulf coasts. But this may have left the insurer too heavily exposed to Midwestern storms, suggested analyst Paul Newsome of Sandler O'Neill. Ironically, hurricanes have caused little U.S. damage since 2005, when Allstate suffered $5 billion of losses, largely in Louisiana and Florida.

Other property insurers, like Chubb and Travelers, haven't experienced these difficulties. At Travelers, catastrophe losses were a little more than half the year ago level.

Allstate said there was no drastic change in weather conditions in the heartland. But it needed to get its business "priced right" by receiving rate increases from regulators in states where tornados and hailstorms did the most damage. And that is exactly what it plans to do. The "Good Hands" people promise to get a grip on the tiller.