Allstate Upped to Outperform

We have promoted Allstate Corp. ( ALL - Analyst Report ) with an ‘Outperform’ recommendation from ‘Neutral’ based on the significant improvement in its operating leverage given the radical reduction in catastrophe losses, claims and operating expenses.

Allstate reported second-quarter 2012 operating earnings per share of 87 cents, which substantially exceeded the Zacks Consensus Estimate of 52 cents and the year-ago quarter’s loss of $1.24. Reported net income came in at $423 million or 86 cents per share, against a net loss of $624 million or $1.19 per share in the prior-year quarter.

Allstate is well positioned to be a long-term gainer in personal lines, given its scale, pricing sophistication and product design. The company’s disciplined underwriting approach and efficient operating expense management has led to a more consistent profitability compared to many of its peers such as Ace Limited ( ACE - Analyst Report ) and The Travelers Cos. ( TRV - Analyst Report ) . Moreover, the acquisition of Esurance and Answer Financial from White Mountains Insurance Group Ltd. ( WTM - Snapshot Report ) is boosting online auto sales, thereby generating cost synergies.

Increased agency distribution has also enhanced unit sales at Allstate Financial. Moreover, Allstate’s Property-Liability segment –the primary revenue producing segment – continues to be profitable, despite above-average catastrophe costs, based on careful pricing discipline and strong claim management.On an immediate basis, Allstate is working vigorously to maintain standard auto margins, improve returns in homeowners and Allstate Financial and manage capital aggressively.

Further, proficient expense management, coupled with enhanced premiums, have improved the combined ratio, return on equity (ROE) and book value per share so far in 2012. Additionally, consistent profitability, efficient capital management, strong pricing discipline and claim management inject optimism for steady growth in the future. A healthy debt and capital position have also supported Allstate’s proactive risk mitigation and return optimization programs, while continuing to enhance its shareholder value.

The above-mentioned operating and business positives have also helped Allstate sustain healthy credit and debt ratings, all of which reflect a stable outlook. With an operational strategy that enables acclimatizing to changing market regulations, Allstate is well positioned to benefit from an improving economy.

On the flip side, Allstate’s property and casualty business is consistently exposed to uncertainty related to weather-related events, which has resulted in severe catastrophe losses in the past. Moreover, the ongoing capital market volatility and low-interest rate environment adversely affect the company’s investment portfolio.

As well, the company is experiencing deterioration in the Allstate brand homeowners and standard auto policies, given the negative impact of raising returns in homeowners insurance. These downsides have also hindered the growth in operating cash flow.

Based on these pros and cons, theZacks Consensus Estimate earnings for Allstate is currently pegged at $1.08 per share, about 575% higher than 16 cents in the year-ago quarter. For 2012, earnings are projected to be $4.45 per share, drastically higher than $1.33 per share reported in 2011. In the last 30 days, 19 out 24 firms have revised their estimates upwards, while no downward revision was witnessed.

Additionally, the quantitative Zacks Rank for Allstate is currently “2”, indicatinga short-term Buy rating. Aslight upward pressure on the shares is expected over the near term.