Allstate, the nation's second largest home and auto insurer, has been improving profitability by getting out of catastrophe insurance.
The clear message from Chairman, President and CEO Tom Wilson as he spoke at the Goldman Sachs Financial Services conference Tuesday, is that weather patterns are getting more extreme, and catastrophe losses are harder to cover.
In an effort to reduce catastrophe losses from hurricanes and earthquakes, Allstate has shrunk its homeowners exposure in California, and along the Eastern and Gulf Coasts. Allstate has exited earthquake coverage in all states except Kentucky. The company has reduced the number of homes it insures by 1.2 million since 2008, in part by selling the policies to reinsurers. Its market share in homeowners and property insurance has shrunk as a result.
Through restructuring its catastrophe business, Allstate managed to keep its losses from Hurricane Sandy to $1.075 billion, less than 5 percent of the company's capital and about what it earned in 3Q 2012, Wilson said.
The loss rate was double that of Tropical Storm Irene, but a third of the losses from Hurricane Katrina. Sandy will be among the top 10 U.S. catastrophes when all the losses are assessed, according to Wilson. (Read More: Scenes from Sandy)
"We believe the weather will be more severe," Wilson said to a roomful of investors at the Conrad Hotel in New York. "Achieving sustainable growth in storm season is a big deal."
Allstate reassessed its catastrophe strategy in 2005, as it identified a rising trend in catastrophe losses after Hurricane Katrina. The company questioned whether it should sell any homeowners insurance, Wilson noted.
The three main causes of claims were the "mega" catastrophes - hurricanes and earthquakes; severe weather such as wild fires and tornadoes; and the more mundane homeowner issues.
The homeowners business made a little money if the weather was benign, and lost a lot of the weather was bad, Wilson pointed out. "The trick is to make some money when the weather's bad, and coin money when it's good."
Allstate decided to get out of its earthquake and hurricane exposure, manage its exposure to severe weather, and stay in the profitable mundane homeowner business, said Wilson. Allstate has emphasized customer service to keep the profitable segment of the business. The company has also taken the lead in pushing for rate increases. (Read More: Scenes from Japan's Earthquake)
Allstate caught a lot of flak for being the first to reduce its catastrophe exposure, Wilson explained. "The market now agrees with our assessment of the weather." (Read More: Apocalypse 2012)
In addition to pruning its less profitable homeowners business, Allstate has pushed to grow auto insurance. Offering products with declining deductibles, and 100 percent satisfaction guarantees has helped Allstate stop a five year decline in its auto customer retention rates, Wilson said.
On the investment side, Allstate has become laser-focused on risk/return ratios. It has cut its municipal bond portfolio to about half of 2006 levels because the risk isn't worth the reward, according to Wilson. (Read More: Stormy Weather, Complete Coverage)
Also, Wilson noted, the company has shifted toward bonds with less than 10 year maturities, because longer dated bonds are too risky. This has meant giving up yield. To offset that decline, Allstate has increased its investment in corporate bonds, which make up fully half of Allstate's portfolio.
With the restructuring of its homeowners business, the rebalancing of its investment portfolio and the improvement in auto insurance retention, Wilson said Allstate should meet its target of sustainable 13 percent return on equity by 2014.
-By CNBC's Margaret Popper; Follow her on Twitter: @popperm