Why Allstate Stock Dropped 10% at Market Open

What: Shares of Allstate were trading down by more than 10% shortly after the market open. The company reported higher-than-anticipated losses from its auto insurance lines, crimping its second-quarter profits.

So what: Allstate's second-quarter earnings came in at $326 million, or $0.79 per diluted common share. That represents a decline of 43.2% on a per-share basis compared to the same period a year ago.

In the earnings release, the company's CEO, Thomas Wilson, noted that auto losses were not limited to any particular risk pool or customer type. He pointed out that "the increase in auto accidents is broad-based by state, risk class, rating plans and the maturity of the business, and consequently appears to be driven by external factors." Furthermore, increasing losses were the result of both increasing severity (losses per event) and frequency (more events in which the company would have to pay claims).

The company's combined ratio for the second quarter jumped to 100.1%, up from 97.4% in the same period last year. The combined ratio measures losses and expenses as a percentage of premiums. With a combined ratio greater than 100%, Allstate's losses and expenses exceeded premiums earned during the second quarter.

Now what: Allstate has faced challenges for several years as the company's agency model falls out of favor. Its direct platform -- Esurance -- has also dealt with poor underwriting profitability, as the company it acquired in 2011 has consistently generated losses from its underwriting due to its heavy investments in advertising.

Importantly, Allstate sees opportunity to increase its rates to improve underwriting profitability. In the earnings release, the company reported that it received approvals for a 3.5% increase in rates across its Allstate brand in the last 12 months. Likewise, rates have jumped 4.8% for Esurance customers across the country. Rate increases simply haven't kept pace with losses, however. Allstate's second-quarter results are giving investors pause on whether the company has the pricing power necessary to increase rates at a faster pace than its losses and expenses going forward.

The article Why Allstate Stock Dropped 10% at Market Open originally appeared on Fool.com.

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