Taking advantage of the ongoing low interest rates, auto and home insurer – Allstate Corp. (ALL) announced its intention to prepay some debt, which was previously taken at higher rates, by raising funds at lower rates.
Accordingly, Allstate aims to retire about $1.2 billion of debt that it was scheduled to mature in 2013 and 2014. At the same time, the company also intends to buy back some part of its $4.3 billion debt at a premium. In all, Allstate will redeem about $3.0 billion of debt.
Additionally, funds for the debt repayment will be raised through existing cash coupled with the issuance of some hybrid securities and long-term debt. The issuance of new securities will contain low interest rates, thereby reducing the cost of capital.
Moreover, the refinancing of debt will increase the portion of equity in the capital, which will further strengthen the balance sheet. The new finance arrangement will not only increase capital flexibility but also expand the debt maturity profile to more than 20 years. This leaves ample scope for investment in growth activities in the near to intermediate term.
However, Allstate projects to incur some debt refinancing charges in the second quarter of 2013, which may have some adverse impact on the earnings, although an accurate range remains undisclosed. Overall, the debt refinancing is expected to have insignificant impact on earnings in the upcoming quarters. The share buyback plan is also expected to remain intact.
Apart from debt refinancing charges, Allstate projected pre-tax catastrophe loss of $216 million for the month of April, as announced last week. Catastrophe losses had surged 38.6% to $359 million in the first quarter of 2013 as well. Such expenses weigh heavily on the bottom line and negate the improvement in premiums growth, thereby adversely impacting underwriting results. Hence, management is focusing on proactive capital and risk management processes.
Allstate carries a Zacks Rank #3 (Hold), while other outperformers in the insurance sector include Platinum Underwriters Holdings Ltd. (PTP), Axis Capital Holdings Ltd. (AXS) and Montpelier Re Ltd. (MRH). All these stocks carry a Zacks Rank #1 (Strong Buy).
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