Allstate Earnings Falter on High CAT Loss
Allstate Corporation’s (ALL) first-quarter 2014 operating earnings per share of $1.30 noticeably lagged the Zacks Consensus Estimate of $1.44 by 9.7%. The reported figure also fell short of the year-ago quarter figure of $1.35 by a nickel.
Subsequently, operating net income fell 9.1% to $588 million. Including extraordinary items, Allstate’s reported net income stood at $587 million or $1.30 per share, plunging from $709 million or $1.47 per share in the prior-year quarter.
Property-liability insurance claims and claim expenses rose 6.7% year over year to $4.76 billion, while operating costs and expenses inched down 0.7% year over year to $1.09 billion. Particularly, catastrophe (CAT) losses for the reported quarter soared 24% to $445 million, due to freeze and fire-related losses in the winter.
Allstate’s net revenue grew 2.6% year over year to $8.68 billion. The results also topped the Zacks Consensus Estimate of $7.57 billion.
Quarter in Detail
Property-Liability’s earned premiums were $7.06 billion, up 4.3% from the prior-year quarter, primarily driven by decent performance across the Allstate, Encompass and Esurance brands and modest growth in new business and customer retention across standard auto and homeowners’ businesses. However, policy rates continued to decelerate in homeowners’ segment.
Moreover, net written premiums grew 4.3% year over year within the Allstate brand, whereas total policies inched up 1.1%. Additionally, the Encompass brand witnessed an increase of 7.1% in net written premiums and 5.9% growth in policies. Esurance posted 18.7% growth in net written premiums and 21.1% in policies.
The segment’s combined ratio deteriorated to 94.7% from 93.2% in the year-ago quarter, reflecting radically high CAT losses.
However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 88.4% in the reported quarter, up 0.7 from the year-ago quarter, due to higher underwriting expenses. Nonetheless, this was reasonably within management’s outlook of underlying combined ratio of 87% to 89% for 2014.
Meanwhile, underwriting income fell 18.8% to $372 million owing to higher claims, operating and other expenses as well as higher catastrophe losses. However, the Property-Liability expense ratio for the reported quarter was flat at 27.3% from the prior-year quarter.
Subsequently, higher catastrophe losses along with lower underwriting and investment income weakened Property-Liability’s net income to $493 million from $616 million in the year-ago quarter. Operating income for this segment also declined to $468 million from $556 million in the year-ago period.
On the other hand, operating income for Allstate Financial jumped 31.3% year over year to $162 million. The increase reflected higher premiums and contract charges, stable investment income, lower operating expenses and strong investment spreads. These were partially offset by higher contract benefits and tax expense.
Hence, net income grew 11% to $162 million, and included loss of $16 million related to the disposition of LBL along with lower realized capital gains.
Corporate & Other segment reported a net loss of $69 million, wider than a loss of $53 million in the prior-year quarter. The deterioration was primarily due to preferred stock dividend payout, while other factors remained stable.
Investment and Capital Position
As of Mar 31, 2014, Allstate’s total investment portfolio increased to $81.69 billion from $81.16 billion at 2013-end, reflecting total investment returns of 2.1% driven by increased fixed income valuations due to lower interest rates in 2014.
Allstate’s net investment income dipped 2.4% year over year to $959 million during the reported quarter. This also and included $142 million from limited partnership interests and $41 million related to prepayment fee income and litigation proceeds. However, portfolio yields stood at 4.5% at Mar 2014-end, lower than the prior-year quarter and 4.6% at 2013-end.
Book value per share increased 7.5% year over year to $46.70 in the reported quarter. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, jumped 12.5% to $42.98 at the end of Mar 2014. Additionally, annualized operating ROE improved to 14.4% from 11.9% in the year-ago quarter.
Operating cash flow plunged 36% year over year to $474 million at the end of Mar 2014, while cash stood at $1.17 billion against $675 million at 2013-end. Long-term debt remained flat at $6.2 billion and total equity increased to $22.11 billion from 2013-end, while total assets rose to $124.29 billion at the end of Mar 2014.
The company’s statutory surplus, at the end of Mar 2014, stood at $17.7 billion, lower than $18.2 billion at 2013-end. Further, total debt to capital ratio improved to 21.9% at Mar 2014-end from 22.4% at 2013-end, primarily driven by appreciated equity.
Stock Repurchase Update
On Feb 19, 2014, the board of Allstate approved a new share repurchase of stock worth $2.5 billion, the largest one since 2006. The buyback is projected to be executed by Aug 2015.
Allstate bought back shares worth about $348 million through open market operations during the reported quarter. Additionally, shares worth $750 million were bought back under an accelerated share repurchase agreement with Barclays Plc (BCS) in Mar 2014.
At the end of Mar 2014, Allstate had shares worth $1.65 million available for repurchases under the current authorization. Additionally, Allstate held $3.4 billion as deployable assets as of Mar 31, 2014, higher than $2.6 at 2013-end.
Dividend Update
On Feb 19, 2014, the board of Allstate increased its regular quarterly dividend by 12% to 28 cents per share from the prior 25 cents, now shelling out $1.12 per share annually. The raised quarterly dividend was paid on Apr 1, 2014 to shareholders of record as on Mar 3.
Previously in Feb 2013, the company had hiked its dividend by 13.6% from the prior payout of 22 cents.
Others
Currently, Allstate carries a Zacks Rank #3 (Hold), while Barclays bears a Zacks Rank #5 (Strong Sell). However, some top-ranked insurers include OneBeacon Insurance Group Ltd. (OB) and Aspen Insurance Holdings Ltd. (AHL). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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