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Allstate Maintained at Neutral

ALL WTM

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We maintain our Neutral recommendation on Allstate Corp. (ALL - Analyst Report)-based on its industry-leading position, agency expansion plans, dividend increment and acquisitions. However, these positives were partly offset by higher operating expenses and cost of debt.

Allstate Corp.’s first-quarter 2012 operating earnings per share of $1.42 outpaced the Zacks Consensus Estimate of $1.12 and the year-ago quarter earnings of 93 cents. Operating income spiked 43.7% to $710 million from $494 million in the year-ago quarter.

Allstate is well positioned to gain from personal lines over the long term, given its scale, pricing sophistication and product design. In order to boost its Property-Liability segment, particularly the online auto sales where the company has been underperforming over the past 3 years due to loss of clients, Allstate acquired the third largest online auto insurance seller in the U.S., Esurance, and Answer Financial from White Mountains Insurance Group Ltd. (WTM - Snapshot Report) in October 2011.

Moreover, the company aims to achieve 13% operating return on equity by 2014 on the back of consistent auto profitability, higher growth in the homeowners and annuity businesses, improved insurance premiums and efficient investment and capital management. Additionally, management’s proactive risk mitigation and return optimization programs continue to enhance shareholder value.

However, as Allstate deals with property and casualty business, it is significantly exposed to catastrophic events. Escalating losses from catastrophes have been weighing on the company’s claims and benefits expenses, while also significantly deteriorating the company’s combined ratio, bottom-line results and cash flows.

As pricing pressures continue to escalate, spreads between premium growth and loss cost inflation are expected to remain negative, while claims and operating costs continue to pose a rising trend, leading to further compression in the underlying margins.

Allstate’s investment portfolio has been witnessing a rough patch due to the ongoing equity market declines and sluggish returns. Moreover, the company has been pursuing strategies to narrow its product offerings under its Financial Segment as a result of the volatility in the capital markets. The company has reduced concentration in spread-based products, which has led to a drop in sales in this segment.

Allstate has also wound down its banking operations and expects to obtain regulatory approval so as to terminate its banking charter status by June 30, 2012. While such efforts are expected to relieve the business operations of stringent regulations, it also restricts the scope of diversification along with costs related to restructuring.

Currently, Allstate carries a Zacks #2 Rank (short-term Buy rating).

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