Allstate Executives Draw Fire From Analysts After Profit Falls Short
February 10 2011 - 3:58PM
Dow Jones News
Allstate Corp. (ALL) is drawing fire from insurance analysts
after fourth-quarter profit, reported Wednesday, fell short of
expectations.
At least three analysts Thursday laid some of the blame for the
lackluster quarter at the feet of the company's executives.
A steep jump in claims costs in two states, coupled with an
increase in advertising spending, eroded profit margins at
Allstate's auto insurance business, which has been losing customers
for about three years. In its home insurance operation, a severe
hailstorm in Arizona caused the unit to lose money in the
quarter--its ninth unprofitable quarter in the last 12.
Results in both lines of business appeared to surprise the
analysts who follow the company. Operating income of $271 million,
or 50 cents a share, dropped by more than half from the same period
a year earlier and missed the consensus estimate of analysts
surveyed by Thomson Reuters by 38 cents per share.
"Allstate now has missed earnings estimates in 13 out of the
past 16 quarters," FBR Capital Markets analyst Bijan Moazami wrote
in a note to clients. "There has been frustration with the company
and management for some time now, and this earnings result clearly
does not help."
Still, Moazami kept an "outperform" rating on the shares, saying
they are undervalued.
So did Meyer Shields at Stifel Nicolaus, who wrote: "We
frustratedly reiterate our 'buy' rating because we still see
enormous unrecognized value in the franchise, although we're losing
confidence in senior management's ability to extract this
value."
Allstate shares have risen about 9% in the past year, compared
with the 16% increase in the Standard & Poor's Property &
Casualty Insurance Index. The shares traded Thursday at about 90%
of the company's book value.
Allstate Chief Executive Tom Wilson, in a conference call with
analysts and investors Thursday, said he too hoped to improve
operating profit. The company had made substantial progress toward
that goal by paring back in parts of the country that have proven
unprofitable, he said.
Wilson and other executives attributed the current problems in
the auto business to New York and Florida, two states the insurance
industry has flagged for a steep increase in fraudulent auto
claims. As claims costs have increased, the company has raised
prices in those states, causing some customers to switch to other
insurers.
The company has also shied away from new business in California
and raised prices there. But customer retention--a metric Wilson
has said is critical to improving results--rose "outside of two or
three large states," he said.
After the hailstorm in Arizona caused surprise losses of $355
million in the fourth quarter, one analyst on the call urged
executives to provide information on disaster claims before the
company formally releases results. Other insurers make a habit of
warning investors about their initial estimates of catastrophe
costs, which helps analysts refine their estimates. But without
that guidance, analysts underestimated Allstate's disaster costs in
several recent periods.
Wilson, on the conference call, said he was open to providing
such information sooner.
Several analysts, including those at Credit Suisse, Bank of
America-Merrill Lynch and Soleil Securities maintained "outperform"
or "buy" ratings even as they cut their price targets on the shares
or reduced their profit estimates for 2011 and 2012.
Raymond James analyst C. Gregory Peters, meanwhile, downgraded
the shares one notch to "outperform" from "strong buy," and wrote
that "management has a growing credability problem."
In an interview late Wednesday, before analysts had weighed in
on the latest results, Wilson said some criticism should be
expected as part of his job.
"There's always a critic, and there are always fans," Wilson
said. "The fans I want to have are our shareholders and our
management team and our baord. And right now, they're all
fans."
Some analysts saw signs of improvement. Deutsche Bank analyst
Josh Shanker, who has a "hold" rating on the stock, said the
company's new advertising campaign appeared to be working, and
Langen McAlenney analyst Robert Glassplegel said the company was
poised to recover as he reiterated his "buy" rating.
"Our buy list is focused on names that are both inexpensive and
are positioned to report improving earnings," he wrote late
Wednesday. "Allstate qualifies."
Allstate shares fell 3.3% to $31.29 in afternoon trading, after
falling as low as $30.68 earlier in the day.
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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