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Allstate Dips to Neutral

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On Jun 4, 2013, we downgraded our recommendation on Allstate Corp. (ALL - Free Report) to Neutral from Outperform based on its consistent high-expense trend, which also weakened the first-quarter 2013 results on year-over-year basis.

Why the Downgrade?

Estimates for this property-casualty (P&C) insurer have not experienced much traction since the company reported its first quarter results on May 1. Allstate’s revenue inched up 1.2% year over year, although earnings of $1.35 per share stood lower than $1.42 a share recorded in the year-ago quarter. However, both revenue and earnings topped the Zacks Consensus Estimate by 14.5% and 2.3%, respectively.

While higher operating expenses and catastrophe losses hindered growth, the latter are expected to be high in the second quarter of 2013 as well. For just the month of Apr 2013, catastrophe lossesare projected to be $216 million. These factors also reduce the operating cash flow that declined 8.3% in the first quarter of 2013.

Nevertheless, Allstate’s premiums, underlying combined ratio, book value and ROE witnessed improvement. Moreover, an appreciated investment portfolio boosted liquidity. Allstatedelivered positive earnings surprise in all of the last 4 quarters with an average beat of 7.3%.

Following the first quarter results, the Zacks Consensus Estimate for 2013 climbed only 0.4% to $4.74 per share in the last 30 days, whereas for 2014, it grew 0.6% to $5.13 per share. Meanwhile, the Most Accurate Estimate for Allstate’s 2013 earnings stands at $4.77, resulting in a positive ESP (read: Zacks Earnings ESP: A Better Method) of 0.63%.

Consequently, with the Zacks Consensus Estimates for both 2013 and 2014 showing no clear directional pressure on the stock in the near term, Allstate now has a Zacks Rank #3 (Hold).

While margin contraction from auto and homeowners’ segments along with higher expenses are a concern, we believe that Allstate’s agency expansions, ratings affirmation, industry-leading position, diversification and pricing discipline augur long-term growth.

Other Stocks to Consider

While Allstate showcases a mixed sentiment currently, other stocks that are outperforming in the insurance sector include Montpelier Re ,Platinum Underwriters Holdings Ltd. and Homeowners Choice Inc. (HCI - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy).

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