Allstate Retains Neutral Rec - Analyst Blog
September 02 2011 - 11:49AM
Zacks
We reiterate
our recommendation on Allstate
Corp. (ALL) based on the current
sustainability factor. The company’s second quarter operating loss
of $1.23 per share came in modestly lower than the Zacks Consensus
Estimate of a loss of $1.53 but lagged the year-ago quarter’s
earnings of 81 cents per share.
Results for
the quarter reflected higher catastrophe (CAT) losses that also led
to increased claims expenses coupled with lower average premiums
and policies-in-force in Property-Liability insurance unit and
lower investment income. However, prudent capital management and
strong liquidity were quite impressive during the reported quarter.
This is reflected in the growth in book value per share and
improved combined ratio, excluding the effect of
catastrophes.
As Allstate
deals with property and casualty business, it is significantly
exposed to catastrophic events. Given the consistent occurrence of
weather-related events, catastrophe losses surged to $2.67 billion
in the first half of 2011 itself from $2.21 billion in 2010 and
$2.07 billion in 2009.
Escalating
losses from catastrophes have been weighing on the company’s claims
and benefits expenses while also significantly deteriorating the
company’s combined ratio, bottom-line results and cash flows.
Though the company is focusing on reducing losses through its
catastrophe management strategy, we cannot rule out the possibility
of significant losses from catastrophes and severe weather
incidents, going forward.
Moreover,
the economic slowdown and a weak P&C cycle continue to narrow
down the growth prospects in the Property-Liability segment. As a
result, premium growth remains curtailed and the company is
experiencing a decline in underwriting results, policies-in-force
and new issued applications.
Besides,
Allstate’s investment portfolio has been witnessing a rough patch
due to the ongoing equity market declines and sluggish returns. As
a result, net investment income has narrowed and is expected to
continue to remain weak until the economy rebounds to its
historical highs and maintains stability.
However,
prudent capital management remains Allstate’s forte. Management’s
proactive risk mitigation and return optimization programs continue
to enhance shareholder value. This is reflected in the company’s
ongoing $1.0 billion share repurchase program and the 5% dividend
appreciation in February 2011 after a sharp reduction in
2008.
Further,
statutory capital levels remain sound and the company continues to
have access to funds of $1 billion from either commercial paper
issuance or an unsecured credit facility expiring in 2012. Looking
ahead, we believe that effective capital management, comprehensive
enterprise stochastic model and modest operating cash flows will be
able to boost the company’s operating and competitive strength
vis-a-vis arch rivals such as Berkshire Hathaway
-A (BRK.A),
The
Travelers Companies (TRV) and
Ace
Limited (ACE).
Additionally, solid
risk-adjusted capitalization, competitive strength, favorable
non-catastrophe operating results along with comparably strong
underwriting capabilities and investment leverage bode well for
future growth. These factors also led the rating agency -- A.M.
Best, to issue a stable outlook on Allstate and its subsidiaries’
credit, debt and financial strength ratings.
In order to
gear up its Property-Liability segment, particularly the online
auto sales where the company has been underperforming since the
past 3 years due to loss of clients, Allstate is expected to
acquire the third largest online auto insurance seller in the U.S.
– Esurance and Answer Financial from White Mountains Insurance
Group Ltd.
The $1.0
billion deal is expected to close by the end of the third quarter
of 2011, it is also projected to boost online auto sales and
generate cost synergies. The deal is also expected to expand
Allstate’s online sales, whereby the company will be able to tap a
large consumer group and offer them a good brand with a wider
choice of products. The acquisition is expected to break even by
the second full year of ownership and accretive to earnings beyond
the second year.
Overall,
weighing all the pros and cons, the Zacks Consensus Estimate of
earnings is currently pegged at 75 cents for the third quarter of
2011, down about 10% year-over-year. For 2011, earnings are
projected at $1.38 per share, down about 51% over 2010, given the
weak global cues and impact of catastrophes on the
results.
Additionally, the
quantitative Zacks Rank for Allstate is currently #3, indicating no
clear directional pressure on the shares over the near
term.
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