ALL Allstate Corporation

Yesterday, the board of Allstate Corporation (ALL) announced the approval of a new share repurchase program worth $1.0 billion. While the share buy back will be made through open market operations, it is scheduled to complete by March 31, 2013.

Accordingly, the auto and home insurer of the US – Allstate plans to fund the share repurchases and another listed debt maturity next year through its debt capital. For this, the board has also approved its preferred stock offering coupled with the issue of senior unsecured notes, all worth $1.25 billion.

Previously, during the third quarter of 2011, Allstate had repurchased shares worth $308 million, thereby completing the $1.0 billion share repurchase program that was authorized in November 2010. However, this share repurchase program had an expiry of March 31, 2012 but was completed well before time. The company has deployed about $20 billion of capital through share repurchases over the last 17 years.

Additionally, the board of Allstate has also declared a regular quarterly cash dividend of 21 cents, payable on January 3, 2012 to shareholders of record as on November 30, 2011.

Although raising funds from the market to return wealth to shareholders might retain the Allstate’s capital strength and shareholders’ confidence, this in turn, poses ample risk on the debt leverage of the company. Additionally, borrowing costs of such funds would further weigh on the financials of the company.

Earnings Recap

Allstate’s third-quarter 2011 operating earnings of 16 cents per share came in a nickel higher than the Zacks Consensus Estimate of 11 cents but significantly lagged the year-ago quarter’s earnings of 83 cents per share. As a result, operating earnings plunged to $84 million against $452 million in the year-ago quarter.

The reported net income came in at $165 million or 32 cents per share, compared with $367 million or 68 cents per share in the prior-year quarter, reflecting a radical decline.

Allstate reported total net revenue growth of 4.2% year over year to $8.24 billion but substantially exceeded the Zacks Consensus Estimate of $6.90 billion. Particularly, catastrophe losses for the reported quarter escalated to $1.08 billion, substantially higher than $386 million in the year-ago period.

Results for the quarter reflected higher catastrophe 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 liquidity were quite impressive during the reported quarter. This is reflected from stability in book value per share and combined ratio, excluding the effect of catastrophes.

Overall, we anticipate continued benefits from Allstate’s diversification, superior financial strength rating and proactive approach to investment. These factors have helped Allstate gain the second-largest personal lines writer position in the US, which also reflects its competitive strength against arch rivals such as Berkshire Hathaway-A (BRK.A) and The Travelers Companies (TRV).

However, Allstate’s exposure to catastrophe risks, capital losses and volatility in pricing, interest and loss costs will continue to impact the premiums and investment portfolio in the upcoming quarters.

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
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TRAVELERS COS (TRV): Free Stock Analysis Report
 
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