Allstate Corporation’s (ALL) fourth-quarter 2012 operating earnings per share of 59 cents significantly exceeded the Zacks Consensus Estimate of a loss of 7 cents but lagged the year-ago quarter’s earnings of $1.45 a share.
Operating net income decreased to $289 million from $735 million in the year-ago quarter. This 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.
Allstate’s reported net income stood at $394 million or 81 cents per share for the reported quarter, as opposed to $712 million or $1.40 per share in the prior-year quarter, witnessing a stark decline.
Results for the quarter reflected higher catastrophe losses, which further led to elevated claims and operating expenses. Alongside, Allstate brand auto and homeowners’ segments posed retarded profitability, although higher premiums partially offset the downsides. Expansions in emerging businesses and other personal lines along with higher investment income also benefited the results.
Yet the company’s prudent capital management and liquidity were quite impressive during the reported quarter. This is reflected in the considerable improvement in operating cash flow, book value per share and underlying combined ratio, excluding the effect of catastrophes.
Allstate’s total net revenue climbed 3.8% year over year to $8.55 billion, and substantially topped the Zacks Consensus Estimate of $7.26 billion. In addition, property-liability insurance claims and claims expenses spiked 20.1% year over year to $5.04 billion, whereas operating costs and expenses inched up 1.1% year over year to $1.1 billion.
Catastrophe losses for the reported quarter surged to $1.06 billion from $66 million in the year-ago period, reflecting the impact of Hurricane Sandy in the reported quarter.
Quarter in Detail
Property-Liability earned premiums were $6.7 billion, which climbed 2.1% from the prior-year quarter, primarily led by the Esurance acquisition and modest growth in emerging businesses. However, the segment’s combined ratio deteriorated to 101.7% from 90.9% in the year-ago quarter, reflecting substantially higher catastrophe losses.
Nonetheless, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 86.7% in the reported quarter, 4.0 points better than the year-ago quarter. This was well below management’s outlook of underlying combined ratio of 88% to 91% for 2012. The upside was driven by improvements in auto and homeowners’ segments.
Moreover, net written premiums grew 1.9% year over year within the Allstate brand, with an improvement of 1.6% and 3.4% in standard auto and homeowners’ segments, respectively. Additionally, the Encompass brand witnessed an increase of 8.2% in net written premiums, whereas emerging businesses grew 4.6% in the reported quarter. Particularly, Esurance posted 30% growth in net written premiums.
However, higher catastrophe losses and reduced margins in standard auto and homeowners’ segments led Property-Liability’s net income to decrease to $280 million from $631 million in the year-ago quarter. Operating income for this segment also declined to $200 million against $654 million in the year-ago period.
Nevertheless, the Property-Liability expense ratio for the reported quarter improved to 26.9 from 27.4 in the prior-year quarter, although claims expense ratio deteriorated to 74.8 from 63.5 in the year-ago period.
Conversely, operating income for Allstate Financial grew 10.4% year over year to $144 million. The increase reflected higher investment spread products, lower crediting rates, expansion of underwritten products and lower operating expenses. These were partially offset by continued reduction in spread-based business in force.
Moreover, consistent with shifting the focus to underwritten products from spread-based products, contractholder funds were reduced by $3.01 billion from 2011-end to $39.32 billion. Meanwhile, net income increased 23.0% year over year to $166 million, primarily driven by lower derivative and unhedged losses against the prior-year quarter.
Corporate & Other segment reported a net loss of $52 million, marginally improving from a loss of $54 million in the prior-year quarter. Total operating cost and expenses stood at $96 million, as opposed to $88 million in the year-ago quarter.
Highlights of Full-Year 2012
For full-year 2012, Allstate reported operating earnings per share of $4.36, significantly outpacing the Zacks Consensus Estimate of $3.71 as well as $1.27 recorded in 2011. Operating earnings surged 224.5% year over year to $2.15 billion. Including one-time items, GAAP net income escalated to $2.31 billion or $4.68 per share in 2012 versus $787 million or $1.50 per share in 2011.
Total revenue for the reported quarter inched up 2.0% year over year to $33.32 billion, also exceeding the Zacks Consensus Estimate of $29.0 billion. Property-liability insurance claims and claims expenses fell 9.1% year over year to $18.48 billion, while operating costs and expenses increased 10.1% year over year to $4.12 billion.
Investment and Capital Position
As of Dec 31, 2012, Allstate’s total investment portfolio increased to $97.28 billion from $95.6 billion at 2011-end, reflecting solid investment returns of 7.3% in 2012 and higher operating cash flow that more than offset the expected reduction in the Allstate Financial portfolio.
Allstate’s net investment income increased to $1.03 billion during the reported quarter and $4.01 billion in 2012, while portfolio yields were strong at 4.7% as of Dec 31, 2012. However, excluding the limited partnership results, net investment income and portfolio yield in the reported quarter were lower than the prior-year period, primarily attributable to lower reinvestment rates and continued focus on reduction in Allstate Financial’s liabilities.
Meanwhile, pre-tax net unrealized capital gains jumped to $5.55 billion at the end of the 2012 from $2.88 billion at 2011-end. The upside reflects the benefits of tightening credit spreads, strong equity markets and lower interest rates. Further, pre-tax net realized capital gains increased to $204 million in the reported quarter from $86 million in the year-ago quarter.
Conversely, pre-tax net realized capital gains aggregated $327 million in 2012 against $503 million in 2011, driven by lower returns from sales of fixed income and structured securities.
The reported book value per share increased 17.2% year over year to $42.39 in 2012. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, escalated 10.6% to $37.14 at the end of Dec 2012.
Operating cash flow surged 58.3% year over year to $3.05 million in 2012, while cash stood at $806 million against $776 million at 2011-end. Long-term debt increased to $6.06 billion and total equity rose to $20.58 billion, while total assets grew to $126.9 billion at the end of Dec 2012. The company’s statutory surplus, at the end of Dec 2012, stood at $17.2 billion, up from $15.6 billion at 2011-end.
Stock Repurchase Update
Concomitantly,the board of Allstate sanctioneda new share repurchase program worth $1.0 billion, commencing immediately, which is to expire by Mar 2014.
On Dec 17, 2012, Allstate had authorized another $1.0 billionshare repurchase program.It is scheduled to culminate by Dec 2013. While the share buyback will be made through open market operations, the company has a total authorization of $2.0 billion shares repurchases.
Accordingly, Allstate bought back 4.6 million shares for $182 million during the reported quarter, while 26.7 million shares were repurchased for $910 million in 2012.
The last share buyback program – worth $1.5 billion – was authorized in Nov 2011 with an expiry date of Mar 2013.Under this authorization, the company repurchased stock worth $53 million during the third quarter of 2012, and recently completed the buyback of the remaining $166 million worth of stock that was available at the end of Sept 2012. Thus, the company executed the buyback before schedule.
Additionally, Allstate held $2.06 billion as deployable assets as of Dec 31, 2012.
Concurrently, the board announced a 13.6% hike in its regular quarterly dividend to 25 cents a share from the prior payout of 22 cents. The increased dividend will be paid on Apr 1, 2013, to the shareholders of record as on Feb 28, 2013. Earlier, the company had hiked its dividend by 4.8% in Feb 2012 from 21 cents a share.
On Dec 31, 2012, Allstate paid a regular quarterly cash dividend of 22 cents per share, to the shareholders of record as on Nov 30, 2012.
Management expects to maintain the profitability of the auto business as well as improve homeowners’ profitability, resulting in an underlying combined ratio outlook of 88% to 90% for 2013.
Allstate carries a Zacks Rank #2 (Buy). Other strong performers in the insurance sector include The Travelers Cos. Inc. (TRV), First American Financial Corp. (FAF) and RLI Corp. (RLI), all of which carry a Zacks Rank #1 (Strong Buy).Read the Full Research Report on ALL
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