We have retained our Neutral recommendation on Allstate Corp. (ALL) following third quarter results.
Why the Reiteration?
Although Allstate’s third quarter operating earnings of $1.53 per share surpassed the Zacks Consensus Estimate and improved over the year-ago earnings, caution is maintained on the company’s weak investment portfolio, loss on disposition of Lincoln Benefit, and higher claims and operating expenses. Revenues fared well on both counts.
Allstate’s operating and competitive strength is reflected in its prudent capital management and modest operating cash flow. The company’s proactive risk mitigation and return optimization programs continue to enhance operating cash flow and shareholder value, while generating stable operating return on equity (:ROE). We believe that Allstate is sufficiently liquid and can continue to deploy capital without putting additional risk on financial leverage and thus retain shareholder confidence.
Allstate is well positioned to be a long-term gainer in personal lines, given its scale, pricing sophistication and product design. Moreover, the impact of acquisitions including Encompass and growth from emerging businesses have started reflecting in the Property-Liability segment’s net income.
Despite above-average catastrophe costs, the Property-Liability segment, which accounts for the majority of Allstate’s revenues, continues to be profitable as a result of careful pricing discipline and strong claim management. This property and casualty insurer, currently carrying a Zacks Rank #2 (Buy), also scores strongly with credit rating agencies.
On the tepid side, Allstate struggles to maintain its position in a highly competitive industry, which is marked by escalated pricing pressure. While spreads between premium growth and loss cost inflation are expected to remain negative, operating costs and claims expenses continue to pose a rising trend, leading to further compression in the underlying margins and earnings. Further, Allstate’s investment portfolio has been witnessing a rough patch due to the ongoing equity market declines and sluggish returns.
Moreover, the volatility in the capital markets has compelled Allstate to pursue strategies to narrow its product offerings under its Financial Segment. As a result, the Financial Segment was a drag, reflecting loss on discontinued operations and lower sales.
As Allstate deals with the property and casualty business, it is significantly exposed to catastrophic events. Given the consistent occurrence of weather-related events, catastrophe losses surged significantly over the last two years. Although so far in 2013 this loss declined slightly, the recent typhoon Haiyan and tornadoes that hit parts of Philippines and Florida are expected to inflate catastrophe losses in the fourth quarter of 2013.
Other Stocks to Consider
Other players in the property and casualty insurance space, which look attractive at current levels, include Alleghany Corp. (Y), Cincinnati Financial Corp. (CINF) and CNA Financial Corp. (CNA). All these stocks carry a Zacks Rank #1 (Strong Buy).