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Allstate's Profit Rockets in 1Q

Zacks Equity Research

Allstate Corporation’s (ALL) first-quarter 2012 operating earnings per share of $1.42 outpaced the Zacks Consensus Estimate of $1.12 and the year-ago quarter’s earnings of 93 cents.

Operating income, which 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, spiked up 43.7% to $710 million from $494 million in the year-ago quarter.

Allstate’s net income for the reported quarter came in at $766 million or $1.53 per share, compared with $524 million or 98 cents per share in the prior-year quarter, reflecting a steep ascent.

Results for the quarter reflected lower catastrophe losses, which further led to reduced claims expenses coupled with higher premiums. Expansion in the underlying margin for Allstate brand homeowners and other personal lines along with higher investment income and realized capital gains benefited results. These were offset by higher operating expenses. 

However, prudent capital management and liquidity were quite impressive during the reported quarter. This is reflected from considerable improvement in book value per share and combined ratio, excluding the effect of catastrophes.

Allstate’s total net revenue edged up 3.3% year over year to $8.36 billion, but it substantially exceeded the Zacks Consensus Estimate of $7.1 billion. Property-liability insurance claims and claims expenses reduced 3.1% year over year to $4.34 billion, while operating costs and expenses climbed 13.0% year over year to $1.02 billion. Particularly, catastrophe losses for the reported quarter plunged 22.2% to $259 million from $333 million in the year-ago period.

Quarter in Detail

Property-Liability net written premiums were $6.63 billion, which crept up 2.8% from the prior-year quarter, primarily led by the Esurance acquisition and modest growth in net premiums written and units. The segment’s combined ratio also improved to 92.1% against 94.9% in the year-ago quarter, reflecting decreased catastrophe losses.

However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 88.1% in the reported quarter, 1.8 points better than the year-ago quarter. This was also within management’s outlook of underlying combined ratio of 88% to 91% for 2012.

Allstate brand standard auto premiums written for the reported quarter inched down 1.2% from the prior-year quarter. Consequently, the Allstate brand standard auto combined ratio deteriorated 0.2 points year over year to 95.2%.

Nevertheless, Allstate-branded homeowners’ and other personal lines as well as Encompass contributed to premiums written growth in the reported quarter. Alongside, Allstate continued its initiatives to improve its auto profitability and homeowners’ returns in Florida and New York.

Property-Liability net income spiked 48.5% year over year to $695 million. Operating income for this segment also surged 40.7% year over year to $601 million. However, the Property-Liability expense ratio for the reported quarter weakened to 26.7 from 25.5 in the prior-year quarter, although claims expense ratio improved to 65.4 from 69.4 in the year-ago period.

On the other hand, operating income for Allstate Financial escalated 32.7% year over year to $150 million. The increase reflected improvement in the profitability of investment spread products along with the expansion of underwritten products sales through Allstate agencies and growing Allstate Benefits, which were partially offset by higher operating expenses.

Moreover, consistent with shifting the focus to underwritten products from spread-based products, contractholder funds were reduced by $729 million in the reported quarter from $5.2 billion as of March 31, 2011. Meanwhile, net income came in at $112 million against $102 million in the year-ago quarter, primarily driven by higher net realized capital loss against gains in the prior-year period.

Corporate & Other segment reported a net loss of $41 million, slightly improving from a loss of $46 million in the prior-year quarter. Total operating cost and expenses stood at $86 million, as opposed to $91 million in the year-ago quarter.

Investment and Capital Position

As of March 31, 2012, Allstate’s total investment portfolio increased to $97.0 billion from $95.6 billion at 2011-end, reflecting solid investment returns and operating cash flow that more than offset the expected reduction in the Allstate Financial portfolio.

However, the pre-tax net unrealized capital gains jumped to $3.6 billion at the end of the reported quarter from $2.9 billion at the end of 2011. The upside reflects the benefit of tightening credit spreads and strong equity markets that was marginally offset by rising interest rates and realized gains. Meanwhile, pre-tax net realized capital gains totaled $168 million against $96 million in the year-ago period.

Allstate’s net investment income increased to $1.0 million during the reported quarter, while portfolio yields were stable at 4.6% as of March 31, 2012. The reported book value per share climbed up 8.0% year over year to $38.57 in the reported quarter. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, climbed up 2.5% to $35.31 at the end of March 2012.

Operating cash flow increased 11.2% year over year to $807 million during the reported quarter, while cash stood at $577 million against $776 million at 2011-end. Long-term debt stood at $6.06 billion and total equity was $19.2 billion, while total assets were recorded at $125.93 billion at the end of March 2012. The company’s statutory surplus, at the end of March 2012, stood at $16.1 billion, up from $15.6 billion at 2011-end.

Capital Deployment

On November 8, 2011, the board of Allstate sanctioned a new share repurchase program worth $1.0 billion. While the share buy back program will be executed through open market operations, it is scheduled to complete by March 31, 2013.

Under this authorization, the company repurchased stock worth $300 million during the reported quarter, while $594 million of stock remains available for repurchases. Allstate held $2.7 billion as deployable assets as of March 31, 2012.

On February 21, 2012, the board of Allstate hiked its regular quarterly cash dividend by 4.8% to 22 cents per share from the prior 21 cents. The hiked dividend was paid on April 2, 2012 to the shareholders of record as on March 5, 2012.


Management expects to maintain the profitability of the auto business and improve homeowners’ profitability, resulting in an underlying combined ratio outlook of 88% to 91% for 2012.

Meanwhile, Allstate aims to generate long-term shareholder value and an operating return on equity (:ROE) of 13% by 2014. As a long-term growth strategy, management also plans to reposition products and distribution platforms to meet changing needs of consumers. Allstate is meticulously making efforts to maintain its standard auto margins, improve 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.

The outcome of these efforts was noticeably witnessed in the positive results of the reported quarter. 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.

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