Allstate Executives Draw Fire From Analysts After Profit Falls Short

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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