Allstate Corporation’s (ALL - Analyst Report) third-quarter 2012 operating earnings per share of $1.46 significantly exceeded the Zacks Consensus Estimate of $1.15 and the year-ago quarter’s earnings of 16 cents.
Operating net 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, surged to $717 million from $80 million in the year-ago quarter.
Allstate’s net income for the reported quarter stood at $723 million or $1.48 per share, as opposed to $175 million or 34 cents per share in the prior-year quarter, witnessing a stark escalation.
Results for the quarter reflected lower catastrophe losses, which further led to reduced claims expenses coupled with higher premiums. Expansions in emerging businesses and other personal lines along with higher investment income also benefited the results. These were offset by higher operating expenses, higher realized capital losses and underperformance of Allstate Financial.
Nevertheless, the company’s prudent capital management and liquidity were quite impressive during the reported quarter. This is reflected from considerable improvement in return on equity (ROE), book value per share and combined ratio, excluding the effect of catastrophes.
Allstate’s total net revenue edged down 1.4% year over year to $8.13 billion, but it substantially topped the Zacks Consensus Estimate of $7.28 billion. In addition, property-liability insurance claims and claims expenses plunged 16.3% year over year to $4.29 billion, while operating costs and expenses increased 13.7% year over year to $1.01 billion. Particularly, catastrophe losses for the reported quarter nose-dived 80.9% to $206 million from $1.08 billion in the year-ago period.
Quarter in Detail
Property-Liability earned premiums were $6.7 billion, which climbed 4.1% from the prior-year quarter, primarily led by the Esurance acquisition and modest growth in emerging businesses. The segment’s combined ratio improved to 90.2% from 104.8% in the year-ago quarter, reflecting substantially reduced catastrophe losses.
Particularly, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 87.8% in the reported quarter, 1.4 points better than the year-ago quarter. This was well within management’s outlook of underlying combined ratio of 88% to 91% for 2012.
Moreover, Allstate brand standard auto combined ratio improved 2.2 points year over year to 91.9%, led by growth in other personal lines as well as Encompass brand.
Property-Liability net income jumped to $639 million from $41 million in the year-ago quarter. Operating income for this segment also surged to $667 million against $22 million in the year-ago period. However, the Property-Liability expense ratio for the reported quarter weakened to 26.1 from 25.0 in the prior-year quarter, although claims expense ratio improved to 64.1 from 79.8 in the year-ago period.
However, operating income for Allstate Financial dipped 24.8% year over year to $138 million. The decrease reflected lower yields on fixed income securities, worse mortality in both life insurance and annuities along with continued decline in investment spread products and higher operating expenses. These were partially offset by lower crediting rates along with the expansion of underwritten products and sales through Allstate agencies as reflected in 6.9% year-over-year growth in issued policies.
Moreover, consistent with shifting the focus to underwritten products from spread-based products, contractholder funds were reduced by $722 million from the prior quarter and $2.2 billion from 2011-end. Meanwhile, net income plunged 31.8% year over year to $131 million, primarily driven by higher net realized capital losses against gains in the prior-year quarter.
Corporate & Other segment reported a net loss of $47 million, deteriorating from a loss of $58 million in the prior-year quarter. Total operating cost and expenses stood at $90 million, as opposed to $116 million in the year-ago quarter.
Investment and Capital Position
As of September 30, 2012, Allstate’s total investment portfolio increased to $98.5 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.
Allstate’s net investment income increased to $940 million during the reported quarter, while portfolio yields were also lower at 4.3% as of September 30, 2012. However, excluding the limited partnership results, net investment income and portfolio yield in the reported quarter were lower than the prior-year period, primarily attributable to lower reinvestment rates and continued focus on reduction in Allstate Financial’s liabilities.
Meanwhile, the pre-tax net unrealized capital gains jumped to $5.7 billion at the end of the reported quarter from $2.9 billion at 2011-end. The upside reflects the benefit of tightening credit spreads, strong equity markets and lower interest rates. Conversely, pre-tax net realized capital losses aggregated $72 million against capital gains of $264 million in the year-ago period, driven by losses from sales of fixed income and structured securities.
The reported book value per share increased 22.4% year over year to $42.64 in the reported quarter. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, escalated 14.4% to $37.31 at the end of September 2012. Additionally, annualized operating ROE jumped to 13.6% from 2.6% in the year-ago period.
Operating cash flow escalated 56.7% year over year to $2.62 million during the reported quarter, while cash stood at $642 million against $776 million at 2011-end. Long-term debt stood at $6.06 billion and total equity was $20.84 billion, while total assets were recorded at $127.0 billion at the end of September 2012. The company’s statutory surplus, at the end of September 2012, stood at $17.0 billion, up from $15.6 billion at 2011-end.
Stock Repurchase Update
On November 8, 2011, the board of Allstate sanctioned a new share repurchase program worth $1.0 billion. The share buy back program is being executed through open market operations and it is scheduled to complete by March 31, 2013.
Under this authorization, the company repurchased stock worth $53 million during the reported quarter, while $166 million worth of stock remains available for repurchases. Additionally, Allstate held $2.3 billion as deployable assets as of September 30, 2012.
On July 24, 2012, the board of Allstate announced a regular quarterly cash dividend of 22 cents per share, which will be paid on October 1, 2012, to the shareholders of record as on August 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 plans to reposition products and distribution platforms to meet changing needs of the consumers. Moreover, 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 discontinuation 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 U.S. This also reflects the company’s competitive strength against arch rivals such as Berkshire Hathaway-A and The Travelers Companies (TRV - Analyst Report).
However, Allstate’s exposure to catastrophe risks, capital losses along with volatility in pricing, interest and loss costs will continue to impact the premiums as well as investment portfolio in the upcoming quarters. Hence, Allstate carries a Zacks Rank #2, implying short-term Buy rating and long-term Outperform recommendation.