Allstate shares tumble as reserving, claims inflation take toll

The Allstate Corp.'s stock dropped more than 9% this week after the company reported third-quarter losses in the hundreds of millions of dollars and unfavorable prior-year reserves.

Estimated pretax gross catastrophe losses due to Hurricane Ian, excluding National Flood Insurance Program losses, totaled $671 million, for Allstate. That figure stands to be reduced by $305 million in anticipated reinsurance recoveries for a net estimated loss of $366 million.

Unfavorable prior-year reserves totaled $875 million in the third quarter, excluding catastrophe losses. Third-quarter adverse reserve development was $643 million, primarily from bodily injury coverages due to medical inflation, complex treatment, accident severity and litigation.

Allstate's shares lost nearly 11% on Oct. 20, immediately following the announcement. For the week ending Oct. 21, the insurer's stock was down 9.33%. CFRA Research analyst Cathy Seifert said the drop could likely be attributed more to investor concern over adverse prior-year development rather than the quarterly catastrophe losses.

"Catastrophe losses at an insurer do not make a stock go down by 10% to 11% because investors knew the hurricane was there and they know that Allstate has a big footprint in the affected area," Seifert said. "The thing that rattled investors, I think, was the fact that it appears like Allstate does not have a good handle on their loss cost trends and their loss cost inflationary trends, and that has hurt their credibility in the marketplace."

Seifert said Allstate's results are probably going to be worse than the property and casualty industry average, and investors were not expecting this degree of deterioration. Third-quarter results for peer The Travelers Cos. Inc. were encouraging, and while The Progressive Corp. reported top-line growth that was not particularly robust, its underwriting trends were generally "not terrible," Seifert said.

"Against the backdrop of Progressive's and Travelers' results, Allstate's results are even more stunning in a negative sense," the analyst said.

Piper Sandler analyst Paul Newsome in a research note also pointed to Allstate's perceived inability to get ahead of rising claims inflation.

"Allstate has historically had very little unfavorable reserve development," Newsome said. "The problems of the last several quarters suggest a need to examine more closely what changes Allstate has made that could have short-circuited Allstate's ability to accurately monitor claims."

Progressive's and Travelers' shares rose 5.66% and 7.92%, respectively, for the week.

Managed care insurers post healthy earnings

UnitedHealth Group Inc., the first of the major U.S. managed care insurers to announce third-quarter results, reported better-than-expected revenues. Its shares were up a bit more than 4% on the week.

CEO Andrew Witty said during an Oct. 14 earnings call that the impact of COVID-19 on medical costs trends has become less of a focus during the year, as inflation and related impacts hit the marketplace.

Stephens analyst Scott Fidel in a note described the progression of the health insurance giant's financial results in 2022 as "a textbook case study in executing on its long-term growth algorithm."

Elevance Health Inc. this week posted third-quarter results that largely fell in line with analyst predictions and showed high premium growth in Medicaid. CFO John Gallina cautioned that this could change when COVID-19-related redetermination suspension ends but labeled that as one of the few headwinds facing the company.

J.P. Morgan analyst Lisa Gill said in a note that Elevance management previously stated that the company expects to retain about 35% of Medicaid members added during the pandemic.

"We think downside risk to [Elevance's] initial 35% assumption is unlikely given a supportive administration and potential for recession," Gill said.

For the week, the S&P 500 added 4.74% to close at 3,752.75, while the S&P 500 U.S. Insurance index gained 3.30% to end at 533.18.