Allstate Slips to Underperform - Analyst Blog
November 14 2011 - 7:45AM
Zacks
We have downgraded our
recommendation on Allstate Corp. (ALL) to
Underperform from Neutral based on its consistent weak operating
performance in the third quarter of 2011, which raises a question on the
current sustainability factor.
Allstate’s third quarter operating
earnings per share of 16 cents 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. Operating earnings plunged
to $84 million from $452 million in the year-ago quarter.
The company’s net income for the
reported quarter came in at $165 million or 32 cents per share,
compared with $367 million or 68 cents in the
prior-year quarter, reflecting a radical decline.
Results for the reported 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, 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.
As pricing pressures continue to
escalate, spreads between premium growth and loss cost inflation
are expected to remain negative, while claims and operating costs
continue to pose a rising trend, leading to further compression in
underlying margins. Particularly, a weak P&C cycle continues to
narrow down the growth prospects in the Property-Liability
segment.
As a result, premium growth
remains stunted
and the company is experiencing a decline in underwriting results,
policies in force (PIFs) and new issued applications.
Additionally, given the
consistent occurrence of weather-related events, catastrophe losses
surged to $3.75 billion in the first nine months of 2011, already
exceeding 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 combined ratio, bottom-line results and cash
flows.
Operating cash flow reduced
substantially to $1.7 billion from $3.0 billion, during the first
nine months of 2011 and 2010, respectively. The ongoing sluggish
and volatile economic dynamics besides weakening Allstate’s
operating leverage even undermined its cash and balance sheet
position.
Reduced cash flow also
restricts the company’s scope for acquisitions or returning
shareholder value. This is also evident from the latest $1.0
billion share repurchase program, which will be funded from
the planned issue of preferred stock offering and senior unsecured
notes, all worth $1.25 billion, rather than the company’s free
cash. These factors could weaken its competitive
leverage against arch rivals such as Berkshire
Hathaway-A (BRK.A) and The Travelers
Companies (TRV).
Nevertheless, Allstate is well
poised to be a long-term gainer in personal lines, given its scale,
pricing sophistication and product design. Moreover, the
acquisition of the third largest online auto insurance seller in
the U.S. – Esurance and Answer Financial from White Mountains
Insurance Group Ltd., in October 2011 for $1.0 billion, will most
likely boost online auto sales, and thereby generate cost synergies
in the Property-Liability segment.
Allstate is also repositioning its
product and distribution portfolio in order to enhance long-term
growth. Also, the company initiated an active role in reducing
future CAT losses through the establishment of an Enterprise Risk
and Return Management (ERRM) system.
Besides, on an immediate basis,
Allstate is working vigorously to maintain standard auto
margins,
improve returns in homeowners and Allstate Financial and manage
capital aggressively. We expect these initiatives to support the
bottom line in the upcoming quarters. Even a healthy ratings
outlook bodes well for Allstate’s long-term growth.
Overall, though continued
synergies are expected from Allstate’s industry-leading position,
diversification and pricing discipline, we believe that the current
volatile economy will continue to impact its fundamental growth
until the markets regain momentum.
Consequently, the Zacks
Consensus Estimate for the fourth quarter 2011 earnings is
currently pegged at 93 cents a share, drastically up from 50 cents
in the year-ago quarter, expecting a reduction or elimination in
CAT losses. For 2011, however, earnings are estimated to be 79
cents per share, radically down from $2.84, given the
overall yearly impact of CAT losses.
Additionally, the quantitative
Zacks Rank for Allstate is currently #3, indicating no clear
directional pressure on the shares over the near term.
ALLSTATE CORP (ALL): Free Stock Analysis Report
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
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