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We have reiterated our Outperform recommendation on Allstate Corp. (ALL - Analyst Report) based on its steady operating growth momentum from a radical reduction in operating expenses despite the significant catastrophe losses.

Allstate had reported third-quarter 2012 operating earnings per share of $1.46, which significantly exceeded the Zacks Consensus Estimate of $1.15 and the year-ago quarter’s earnings of 16 cents.  Reported net income stood at $723 million or $1.48 per share for the reported quarter, as opposed to $175 million or 34 cents per share in the prior-year quarter, witnessing a stark escalation.

Allstate is well positioned to be a long-term gainer in personal lines, given its scale, pricing sophistication and product portfolio. Further, proficient expense management, coupled with enhanced premiums, have improved the combined ratio, return on equity (ROE) and book value per share in the first nine months of 2012.

Additionally, Allstate’s solid risk-adjusted capitalization, competitive strength, favourable non-catastrophe operating results along with comparably strong underwriting capabilities and investment leverage bode well for future growth. These factors also raise the risk-absorbing capacity of the company, particularly that arising from the catastrophe losses.

Allstate is expected to incur pre-tax catastrophe losses of over $1.08 billion in the fourth quarter of 2012 due to the occurrence of Hurricane Sandy, which hit the Northeast U.S., where Allstate owns about 10.7% of the market share. Yet, we believe that the company’s proactive risk mitigation and return optimization programs will help maintain its buoyancy.

Allstate’s disciplined underwriting approach and expense management has also led to a more consistent profitability compared with 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) has been boosting online auto sales, thereby generating cost synergies.

While risks related to the premium generation, policies-in-force and investment returns does stem from the ongoing capital market volatility, weak property and casualty business and low-interest rate environment, we believe that Allstate is well-capable to tap the opportunities driven by an improved global economy in the future.

Based on these pros and cons, the Zacks Consensus Estimate for Allstate is currently pegged at a loss of 6 cents per share, about 104% lower than the year-ago quarter. However, earnings are projected to surge by 182% to be $3.72 per share in 2012, drastically higher than $1.32 per share reported in 2011.

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

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