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Pension Costs to Hurt Q4 at Allstate

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Home and auto insurer, Allstate Corp. (ALL - Free Report) announced that its pre-tax catastrophe (CAT) estimates for Nov 2013 has been within limits. However, pension obligations are projected to hurt the fourth-quarter 2013 earnings.

In order to generate greater transparency, since 2011 Allstate has always disclosed its quarterly and monthly CAT loss estimates if the amount exceeded $150 million in any month. The CAT losses for Nov 2013 were well within this limit.

Nonetheless, the lump sum pension obligations toward staff retiring this year are estimated to pinch the fourth quarter’s earnings between $100 million and $120 million. Allstate also bore a post-tax pension settlement charge of $49 million (pre-tax $76 million) in third-quarter 2013.

Previously, management estimated net periodic pension cost to be $333 million in 2013 based on current assumptions, including settlement charges. This is likely to be higher than $266 million in 2012 and $304 million in 2011. Meanwhile, Allstate already recorded $29 million of net periodic pension cost in the first nine months of 2013, up 43.3% over the prior-year period.

The pension costs are charged to the ‘corporate and other’ segment of the company. An increase in voluntary activity amid the historically low level of interest rates tends to amplify the company’s payout obligations in order to make contributions to the pension plans. This, in turn, hampers financials and negates growth from core fundamentals.

Nevertheless, Allstate has chalked out a new cash balance formula to calculate the pension benefits of its retiring employees in future. The re-measurement replaces the existing formula and takes in to account the current market dynamics. The amendment also supported an accretion of $599 million to Allstate’s book value in third-quarter 2013 and is expected to reduce expenses in future as well, thereby reflecting Allstate’s prudent risk management.

Allstate presently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the insurance sector include HCI Group Inc. (HCI - Free Report) , The Hanover Insurance Group Inc. (THG - Free Report) and Hallmark Financial Services Inc. (HALL - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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