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In an attempt to expand its online home-auto sales, on Wednesday, Allstate Corp. (ALL - Analyst Report) announced the acquisition of Ensurance and Answer Financial from White Mountains Insurance Group Ltd. (WTM - Snapshot Report) for approximately $1.0 billion.

The deal was valued at $700 million along with the tangible book value of the entities acquired at the closing date. The total is broadly summed at $1.0 billion. Subject to regulations, the deal is expected to culminate by the third quarter of 2011. The impact of acquisition on earnings is expected to be break-even by the second full year of ownership and accretive after that.

Esurance sells auto insurance directly to online customers and offers auto insurance quotes through call centers. With 839,000 policies at the end of 2010, it is the third largest online auto insurance seller in the US. Moroever, the firm has more than doubled its policies-in-force and grown premiums on average of 20% per year over the last five years.

Meanwhile, Answer Financial is an independent personal insurance agency and provides quote comparisons from among 20 insurance companies, including Progressive Corp. (PRA - Analyst Report), Ensurance and Safeco.

Besides, Answer Financial was acquired by Ensurance three years ago and Ensurance was acquired by White Mountains in 2009. While Allstate took advice from Goldman Sachs Group Inc. (GS - Analyst Report) and the law firm of Dewey & LeBoeuf, the law firm of Cravath Swaine & Moore advised White Mountains.

The deal is expected to expand Allstate’s online sales, whereby the company will be able to tap a large consumer group and offer them good brand with a wider choice of products.

Additionally, the acquisition of Ensurance and Answer Financial also bodes well for enhancing the company’s competitive leverage since arch-rivals Progressive Corp., Travelers Co. (TRV - Analyst Report) and Geico of Berkshire Hathaway Inc. (BRK.A - Snapshot Report) are already exploring growth opportunities through online auto sales, a segment where Allstate has been underperforming for the past 3 years due to loss of clients. Moreover, the acquisitions will also help Allstate to save cost and time otherwise spent on marketing.

Hence, through the aforesaid acquisitions, Allstate will be not be able to limit its rivals’ pace of growth but also create a long-term growth strategy of building business through the most accessed medium such as the Internet.

On the other hand, White Mountains will also benefit from the business divestment, since its book value is expected to surge by $80 per share, post sale.

The acquisition would be Allstate’s biggest one since 1999, when it bought the American Heritage Life Investment Corp., a life insurance company specializing in the workplace, for $1.1 billion.

However, we believe that the risks of the deal continue to persist and it will take a long time before success from the deal can be fully enjoyed. This is based on the fact that off late, Allstate’s core business has been in a dangling position given the consistent decline in property-liability premiums and policies-in-force.

Nonetheless, excellent underwriting margins, prudent capital management and strong liquidity continue to be impressive. This has also helped the company to expand its agency concentration in its operational areas, thereby revitalizing its distribution channel by having stronger market presence.

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