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Allstate Corp. (ALL - Analyst Report) has been accused of violating the terms of a contract to purchase online auto insurer Esurance from White Mountains Insurance Group Ltd. (WTM - Snapshot Report) in a lawsuit filed by the latter, according to Reuters. The lawsuit, which was filed in a U.S. district court on September 17, also accuses the insurance company of failing to meet the deadline for a post-closing balance sheet audit required in connection with the acquisition.

Allstate completed the acquisition of Esurance in October 2011. The $1 billion purchase deal also included the takeover of Esurance’s subsidiary – Answer Financial.

The purchase consideration was calculated using the tangible book value of Esurance. However, the contract contained an adjustment clause related to the amount, which required adjustment of the purchase price to account for the differences between the actual and estimated book value of Esurance.

However, White Mountains alleged that Allstate missed the deadline for Esurance’s post-closing balance sheet audit by 5 months, during which the acquired company incurred litigation settlement expenses of $5.2 million. Allstate adjusted this expense against the purchase price.

White Mountains claims that the purchase consideration cannot be reduced by the amount of litigation settlement since it was incurred after the audit deadline. It noted that the purchase agreement has separate provisions for indemnification, designed for the allocation of such subsequent expenses. Thus, the adjustment is alleged to be a breach of the contractual provisions.

Allstate had acquired Esurance and Answer Financial in order to gear up its Property-Liability segment, particularly the online auto sales where the company has been underperforming since the past 3 years due to loss of clients. The deal has already started to boost the company’s online auto sales, thereby generating cost synergies. The acquisition is expected to break-even by the second full year of ownership and be accretive to earnings in the future.

Allstate carries a Zacks #3 Rank, implying a short-term Hold rating. We maintain a long-term ‘Neutral’ recommendation on the stock.

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