ALL Allstate Corporation

Yesterday, the board of Allstate Corporation (ALL) announced a 4.8% increase in its quarterly dividend to 22 cents, a penny higher from the prior 21 cents. The hiked dividend will be paid on April 2, 2012 to the shareholders of record as on March 5, 2012.

This marks the second hike since 2008, the last one being a 5% hike from 20 cents in February 2011. In November last year, Allstate had also 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 fourth quarter of 2011.

Allstate 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.

Although the dividend increment came in lower than expected, management aims to generate long-term shareholder value and an operating return on equity (ROE) of 13% by 2014. As a long-term growth strategy, Allstate also plans to reposition products and distribution platforms to meet the changing needs of consumers.

The company’s near-term priorities include maintaining standard auto margins, improving returns in homeowners and Allstate Financial besides managing capital aggressively.

Allstate is also 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.

Earnings Recap

Despite lower investment income, higher operating expenses and policies-in-force in Property-Liability insurance, Allstate generated operating earnings of $1.48 per share in the fourth quarter of 2011. Results outpaced the Zacks Consensus Estimate of 94 cents per share and the year-ago quarter’s earnings of 50 cents per share. The higher earnings reflected lower catastrophe losses, which further led to reduced claims expenses coupled with higher premiums.

Allstate’s net income for the fourth 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. Particularly, catastrophe losses for the reported quarter sharply 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, which was substantially offset by favorable reserve re-estimates of $150 million.

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.

Although Allstate’s investment portfolio has been facing the brunt of the ongoing economic volatility, yet its book value per share improved at the end of 2011.

Our Take

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. Hence, we maintain a Neutral stance on Allstate in the long run, with a Zacks Rank #3, which translates in to a short-term Hold recommendation.

 
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