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Core Growth Drives Allstate's Q2 Earnings

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Allstate Corporation’s (ALL - Free Report) second-quarter 2013 operating earnings per share of $1.12 noticeably outpaced the Zacks Consensus Estimate of 98 cents and the year-ago quarter figure of 87 cents.

Operating net income surged 22.5% to $529 million from $432 million in the year-ago quarter. Including extraordinary items, Allstate’s reported net income stood at $434 million or 92 cents per share for the reported quarter, up from $423 million or 86 cents per share in the prior-year quarter.

Results for the quarter reflected lower claims along with higher premiums and income from Allstate Financial, all of which drove the improved bottom line, book value per share and return on equity (ROE). However, lower investment income and higher operating expenses deteriorated operating cash flow. Although catastrophe losses were lower year-over-year, it maintained a substantial level.

Property-liability insurance claims and claims expenses inched down 1.4% year over year to $4.74 billion, while operating costs and expenses climbed 9.4% year over year to $1.1 billion. Particularly, catastrophe losses for the reported quarter declined 21% to $647 million from $819 million in the year-ago period.

Allstate’s net revenue grew 6.1% year over year to $8.79 billion. It also topped the Zacks Consensus Estimate of $7.38 billion substantially.

Quarter in Detail

Property-Liability earned premiums were $6.86 billion, up 2.9% from the prior-year quarter, primarily driven by modest performance across the Allstate, Encompass and Esurance brands as well as modest growth in standard auto, homeowners’ and emerging businesses.

Moreover, net written premiums grew 4.2% year over year within the Allstate brand. Additionally, the Encompass brand witnessed an increase of 9.0% in net written premiums. Esurance posted 31.7% growth in net written premiums.

The segment’s combined ratio improved to 96.1% from 98.0% in the year-ago quarter, reflecting lower catastrophe losses.

However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 86.9% in the reported quarter, 0.6 points weaker than the year-ago quarter. Nonetheless, this was well below management’s outlook of underlying combined ratio of 88% to 90% for 2013.

Meanwhile, underwriting income escalated 100.7% year over year to $269 million. Growth was driven by higher premiums and lower claims expense, partially offset by higher operating costs.

Subsequently, lower catastrophe losses along with higher underwriting income drove Property-Liability’s net income to $617 million from $354 million in the year-ago quarter. Operating income for this segment also jumped to $433 million against $357 million in the year-ago period. The Property-Liability expense ratio for the reported quarter deteriorated to 27.0 from 25.8 in the prior-year quarter.

On the other hand, operating income for Allstate Financial grew 13.8% year over year to $157 million. The increase reflected higher premiums and contract charges, lower crediting rates and continued reduction in spread-based business in force. These were partially offset by lower investment income and higher operating expenses and contract benefits.

Moreover, consistent with shifting the focus to underwritten products from spread-based products, contractholder funds were reduced by $2.5 billion from Mar 2013-end to $31.7 billion. Meanwhile, net income increased 43.9% year over year to $190 million, primarily driven by gains on realized capital and derivatives against the prior-year quarter.

Corporate & Other segment reported a net loss of $373 million, significantly wider than a loss of $63 million in the prior-year quarter, primarily due to loss of extinguishment of debt of $312 million. However, total operating cost and expenses stood at $106 million, as opposed to $107 million in the year-ago quarter.

Investment and Capital Position

As of Jun 30, 2013, Allstate’s total investment portfolio decreased to $92.32 billion from $97.28 billion at 2012-end, reflecting negative investment returns of 1.5% driven by lower valuations, primarily in fixed income portfolio.

Allstate’s net investment income decreased to $984 million during the reported quarter, while portfolio yields stood higher than the prior quarter at 4.6% as of Jun 30, 2013. The decline was primarily attributable to lower reinvestment rates and continued focus on reduction in Allstate Financial’s liabilities.

Book value per share increased 4.8% year over year to $41.63 in the reported quarter. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, improved 7.4% to $38.47 at the end of Jun 2013. As well, annualized operating ROE improved to 11.6% against 11.0% in the year-ago quarter.

Operating cash flow declined 12.5% year over year to $1.55 billion in the reported quarter, while cash stood at $634 million against $806 million at 2012-end. Long-term debt decreased to $5.48 billion and total equity dipped to $19.87 billion, while total assets dipped to $121.5 billion at the end of Jun 2013. The company’s statutory surplus, at the end of Jun 2013, stood at $17.0 billion, lower than $17.2 billion at 2012-end.

Stock Repurchase Update

Allstate bought back 4.9 million shares for $254 million through open market operations during the reported quarter. At the end of Jun 2013, Allstate had shares worth $1.08 billion available for repurchases under the total authorization.

On Feb 6, 2013,the board of Allstate sanctioneda new share repurchase program worth $1.0 billion, commencing immediately, which is to expire by Mar 2014.

Earlier, on Dec 17, 2012, Allstate had authorized another $1.0 billionshare repurchase program.It is scheduled to culminate by Dec 2013. While the share buyback will be made through open market operations, the company has a total authorization to buy back shares worth $2.0 billion.

Additionally, Allstate held $2.4 billion as deployable assets as of Jun 30, 2013, higher than $2.06 at 2012-end.

Dividend Update

On Jul 23, 2013, the board announced a regular quarterly dividend to 25 cents a share, payable on Oct 1, 2013 to the shareholders of record as on Aug 30, 2013.

On Apr 1, 2013, Allstate paid a regular quarterly dividend to 25 cents to shareholders of record as on Feb 28, 2013. In Feb 2013, this was hiked by 13.6% from the prior payout of 22 cents.


Management expects to maintain the profitability of the auto business as well as improve homeowners’ profitability, resulting in an underlying combined ratio outlook of 88% to 90% for 2013.


While Allstate carries a Zacks Rank #3 (Hold), other strong insurers include MetLife Inc. (MET - Free Report) , Cigna Corp. (CI - Free Report) and Assured Guaranty Ltd. . All these stocks carry a Zacks Rank #2 (Buy).

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