ALL Allstate Corporation

Allstate Corporation’s (ALL) fourth-quarter 2011 operating earnings of $1.48 per share came in substantially higher than the Zacks Consensus Estimate of 94 cents and the year-ago quarter’s earnings of 50 cents per share.

Results for the quarter reflected lower catastrophe (CAT) losses, which further led to reduced claims expenses coupled with higher premiums. These were offset by lower investment income and policies-in-force in Property-Liability insurance.  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.

Allstate’s net income for the reported quarter came in at $724 million or $1.43 per share, compared with $296 million or 55 cents per share in the prior-year quarter, reflecting a radical ascent.

Operating income, which excludes realized net capital gains and losses and deferred acquisition costs (DAC) and DSI related to them along with valuation changes on embedded unhedged derivatives, gains and losses on disposition of operations and accruals on non-hedged derivative instruments, spiked up to $750 million from $271 million in the year-ago quarter.

Allstate reported total net revenue growth of 1.8% year over year to $8.24 billion but substantially exceeded the Zacks Consensus Estimate of $6.9 billion. Besides, property-liability insurance claims and claims expenses declined 13.3% year over year to $4.2 billion while operating costs and expenses jumped 20.1% year over year to $1.0 billion.

Particularly, catastrophe losses for the reported quarter plunged to $66 million from $537 million in the year-ago period. During the reported quarter, Allstate witnessed catastrophe losses of $216 million from 19 events,  substantially offset by favorable reserve re-estimates of $150 million.

Quarter in Detail

Property-Liability net written premiums were $6.43 billion, creeping up 2.9% from the prior-year quarter. The segment’s combined ratio also improved to 90.7% against 100.8% in the year-ago quarter, reflecting decreased catastrophe losses.

However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 90.5% in the reported quarter, 1.5 points better than the year-ago quarter. This was also within management’s outlook of underlying combined ratio of 88% to 91% for 2011.

Besides, Allstate brand standard auto premiums written for the reported quarter inched down 0.8% from the prior-year quarter as a result of a reduction in units, fall in policies in force in Florida and New York along with a 14.3% decline in new issued applications, although retention improved slightly. However, the Allstate brand standard auto combined ratio improved 4.2 points year over year to 95.5%.

Nevertheless, Allstate-branded homeowners’ written premiums for the quarter climbed 2.8% year over year, reflecting a 7.1% uptick in average gross premium that was partially mitigated by lower policies in force. During the reported quarter, rate increases averaging 7.8% in 17 states were approved as Allstate continued its initiatives to improve homeowners’ profitability.

Property-Liability net income spiked to $638 million against $260 million in the year-ago quarter. Operating income for this segment also surged to $661 million from $206 million in the year-ago quarter. However, the Property-Liability expense ratio for the reported quarter weakened to 27.2 from 25.6 in the prior-year quarter.

However, operating income for Allstate Financial escalated 32.7% year over year to $138 million. The increase reflected improvement in the profitability of investment spread products along with expansion of underwritten products sales through Allstate agencies and growing Allstate Benefits, which were partially offset by higher operating expenses. Meanwhile, net income came in at $140 million against $76 million in the year-ago quarter, primarily driven by higher net realized capital gains.

Corporate & Other segment reported a net loss of $54 million, deteriorating from a loss of $40 million in the prior-year quarter. Total operating cost and expenses stood at $88 million, as opposed to $86 million in the year-ago quarter.

Full-Year 2011 Highlights

For full year 2011, Allstate recorded operating net income of $689 million or $1.32 per share as compared with $1.54 billion or $2.84 per share in 2010. However, operating earnings per share came in substantially ahead of the Zacks Consensus Estimate of 81 cents.

Reported net income also declined to $788 million or $1.51 per share from $928 million or $1.71 per share in 2010. The plunge in the bottom line was primarily attributable to catastrophe losses that jumped 72.9% over 2010 to $3.82 billion. Consequently, total combined ratio weakened to 103.4% from 98.1% in 2010, although the underlying combined ratio improved by 0.3 points to 89.3% in 2011. 

Allstate reported total net revenue growth of 4.0% year over year to $32.65 billion, although it exceeded the Zacks Consensus Estimate of $31.34 billion. Total costs and expenses increased 4.6% over 2010 to $31.68 billion.

Investment and Capital Position

As of December 31, 2011, Allstate’s total investment portfolio decreased to $95.6 billion from $100.5 billion at 2010-end, reflecting reductions in the Allstate Financial portfolio and its fixed annuity business along with the voluntary winding down of Allstate Bank.

However, the pre-tax net unrealized capital gains jumped to $2.9 billion at the end of 2011 from $1.4 billion at the end of 2010. The upside reflects the benefit of lower interest rates on fixed income valuations that was marginally offset by widening credit spreads and realized gains due to sales of fixed income securities. Meanwhile, pre-tax net realized capital gains totaled $503 million in 2011 against $827 million in 2010.

Allstate’s net investment income came in at $4.0 million in 2011, down 3.2% over 2010, although portfolio yields were stable at 4.5% as of December 31, 2011. The reported book value per share climbed up 4.5% over 2010 to $36.92 in 2011. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, inched up 0.4% to $34.40 at the end of 2011.

Operating cash flow totaled $1.93 billion at the end of 2011, significantly down from $3.69 billion at 2010-end, while cash stood at $776 million against $562 million in 2010. Long-term debt stood at $5.9 billion and total equity was $18.7 billion, while total assets were recorded at $125.56 billion at the end of 2011.

Capital Deployment

On November 8, 2011, the board of Allstate sanctioned 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. No repurchases were made during the reported quarter.

The company returned about $1.4 billion through share repurchases and dividend payouts in 2011. Moreover, the company has deployed about $20 billion of capital through share repurchases over the last 17 years.

On January 3, 2012, Allstate paid a regular quarterly cash dividend of 21 cents per share to shareholders of record as on November 30, 2011.

Outlook

Management expects to maintain the profitability of the auto business and improve homeowners’ profitability, resulting in an underlying combined ratio outlook of 88% to 91% for 2012.

Meanwhile, Allstate aims to generate long-term shareholder value and an operating return on equity (ROE) of 13% by 2014. As a long-term growth strategy, management also plans to reposition products and distribution platforms to meet changing needs of consumers. Besides, the company’s near-term priorities include maintaining standard auto margins, improving returns in homeowners and Allstate Financial besides managing capital aggressively.

Allstate is taking strategic actions to reduce losses for Allstate business from catastrophes through enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuance of selected lines of coverage, including earthquake.

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) 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.

 
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