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Yesterday, the board of The Allstate Corp. (ALL - Analyst Report) announced the sanction of a new share repurchase program worth $1.0 billion, commencing immediately. While the share buyback will be made through open market operations, it is scheduled to culminate by December 31, 2013.
The US auto and home insurer plans to finance the share repurchases by raising funds from subordinated hybrid debentures, which will be sold over the year. The company plans to issue these debentures as per the requirements. Repurchasing shares by borrowing debt at low interest rates will help reduce the cost of capital, according to the company’s management.
Meanwhile, the latest extension of the share buyback also indicates Allstate’s decade-long tradition of deploying $19.3 billion through share repurchases and dividend payouts. The last share buyback program – worth $1.5 billion – was authorized in November last year with an expiry date of March 31, 2013.
Under this authorization, the company repurchased stock worth $53 million during the third quarter, while recently completing the remaining $166 million worth of stock buyback that was available at the end of September 2012, thereby executing the buyback before schedule.
However, the current buyback authorization of $1.0 billion has been contracted from the last sanction of $1.5 billion, which points out the company’s wariness over the escalated catastrophe losses of over $1.0 billion from the recent Hurricane Sandy amid the consistent low rate interest environment, which compels low yields on investments.
We believe that the catastrophe losses amid marginal price improvements and continuing low interest rate through 2014 leaves little scope for insurers to deploy capital for expansion purposes. Hence, most insurers are deploying their surplus capital to increase share repurchases and dividend payments, thereby retaining investors’ confidence in the stock. For the same reason, PartnerRe Ltd. (PRE - Analyst Report) and Prudential Financial Inc. (PRU - Analyst Report) expanded their share buybacks in September and June this year, respectively.
Fitch Shares Similar Thought, Affirms Debt
Last week, Fitch Ratings avowed the insurer financial strength (IFS) of Allstate with a stable outlook. The ratings agency maintained the issuer default rating (IDR) of “A-” and IFS of “A+” on Allstate and Allstate Insurance Group – its property-casualty subsidiaries. Meanwhile, an IFS rating of “A-” was pegged at Allstate Financial and Allstate Life Insurance Co.
Although the catastrophe losses are expected to erode most of the profit of Allstate in fourth quarter of 2012, it still remains a leading brand of personal lines writer and the second-largest leader in both private passenger auto and homeowners insurance business, with a market share of 10% by vis-à-vis premiums written. Moreover, Allstate’s improved financials and operating leverage generated in the first nine months of 2012, should be able to provide cushion to 2012 results.
Meanwhile, a modest capitalization with a statutory surplus of $16 billion, a debt-to-capital ratio of 26% against Fitch’s benchmark of 28% and operating cash flow of $2.62 billion as of September 30, 2012 validates the company’s sound liquidity. However, Fitch believes that Allstate’s statutory surplus lags behind the pre-financial crisis levels of $19.1 billion at 2006-end.
Moreover, the ratings agency remains assertive of Allstate’s ability to redeem its next debt of $250 million, scheduled in July 2013 given an annual interest expense and common dividends of about $800 million against deployable assets of $2.3 billion, at the end of September 2012.
Overall, with an operational strategy that enables acclimatizing to changing market regulations, Allstate is well positioned to benefit from an improving economy. While Allstate’s capital and liquidity levels are impressive and we anticipate continued benefits from its industry-leading position, diversification, underwriting and pricing discipline, we apprehend that the uncertain economic environment will continue to affect its premium writings and investment risk in the upcoming quarters.
Currently, the stock carries a Zacks Rank #3, implying a short-term Hold rating.