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Allstate Dodges the Eye of the Storm

By Joseph Weber Even with a second hurricane bearing down on the Southeast only a couple weeks after Hurricane Charley cut a swath of devastation through the region, investors seem to be shrugging off the likely impact on one of the area's biggest insurers, Allstate (ALL). After dropping roughly $1 on Sept. 1, Allstate regained almost half that loss the next day, closing at $46.67 and keeping the price within $2 of April's 12-month high.

Allstate's saving grace: Even if Hurricane Frances hits Florida head-on on Sept. 4, as many forecasters have predicted, area insurers will largely be shielded by the Florida Hurricane Catastrophe Fund (see BW, 9/13/04, "Chubb's Safe Harbor"). The state-backed fund, created after 1992's Hurricane Andrew to keep insurers writing policies in Florida, could deliver as much as $828 million to Allstate, if Frances makes that necessary. Allstate says the fund will already provide some $155 million to help cover Charley's destruction. As Banc of America Securities analyst Brian R. Meredith notes, the fund "helps buffer the losses."

Still, Allstate won't escape either hurricane entirely unscathed, which explains the stock's recent downtick. On Aug. 31, the Northbrook (Ill.) insurer estimated that Charley will cost it some $276 million, after taxes, in the current quarter.

STILL STANDING. That blow will be big enough to end four successive quarters that saw Allstate post steadily rising net operating gains, which topped out at above $1 billion in the second quarter. Even before Frances' impact is taken into account, by Meredith's projections, Allstate's third-quarter operating gains should dip below $900 million, maybe even as low as $833 million.

Industry insiders, moreover, are concerned about the impact of Frances and other storms yet to hit this season. Industry-rating service A.M. Best, for instance, on Aug. 31 put Allstate's Florida operation on watch -- essentially saying it's considering a downgrade because Charley so weakened the unit's capital strength. A.M. Best put the operation's rating at "A- under review."

Allstate officials are seeking to minimize the financial impact of the storms. Spokesman Michael J. Trevino says catastrophic losses last year totaled about $1.5 billion, including costs from wildfires that ravaged California. Yet the outfit still posted a net gain of about $2.7 billion. Putting it in context, Hurricane Charley, which hit Florida on Aug. 13, is likely to cost Allstate $425 million before taxes and after the payout Allstate will recoup from the Florida disaster fund. Unless other major catastrophes loom, Allstate could still prove to be a major moneymaker. Weber is BusinessWeek's Chicago bureau chief

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