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Allstate Shines on Low Expenses

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Allstate Corporation’s (ALL - Free Report) second-quarter 2012 operating earnings per share of 87 cents substantially exceeded the Zacks Consensus Estimate of 52 cents and the year-ago quarter’s loss of $1.24.

Operating net income, which excludes realized net capital gains and losses and deferred acquisition costs (DAC) and DSI related to them along with valuation changes on embedded unhedged derivatives, gains and losses on disposition of operations and accruals on non-hedged derivative instruments, spiked up to $432 million from an operating net loss of $647 million in the year-ago quarter.

Allstate’s net income for the reported quarter came in at $423 million or 86 cents per share, as opposed to a net loss of $624 million or $1.19 per share in the prior-year quarter, witnessing a stark improvement.

Results for the quarter reflected lower catastrophe losses, which further led to reduced claims expenses coupled with lower operating expenses and higher premiums. Expansions in emerging businesses and other personal lines along with higher investment income also benefited results. These were offset by lower realized capital gains and underperformance of Allstate Financial. 

Nevertheless, the company’s prudent capital management and liquidity were quite impressive during the reported quarter. This is reflected from considerable improvement in return on equity (ROE), book value per share and combined ratio, excluding the effect of catastrophes.

Allstate’s total net revenue edged up 2.4% year over year to $8.28 billion, but it substantially exceeded the Zacks Consensus Estimate of $7.3 billion. In addition, property-liability insurance claims and claims expenses significantly plunged 24.3% year over year to $4.81 billion, while operating costs and expenses increased 14.7% year over year to $996 million. Particularly, catastrophe losses for the reported quarter nose-dived 65% to $819 million from $2.34 billion in the year-ago period.

Quarter in Detail

Property-Liability net written premiums were $6.86 billion, which crept up 3.8% from the prior-year quarter, primarily led by the Esurance acquisition and modest growth in emerging businesses. The segment’s combined ratio improved to 98.0% from 123.3% in the year-ago quarter, reflecting reduced catastrophe losses.

The underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 86.3% in the reported quarter, 1.2 points better than the year-ago quarter. This was well within management’s outlook of underlying combined ratio of 88% to 91% for 2012.

However, Allstate brand standard auto premiums written for the reported quarter declined slightly from the prior-year quarter. Consequently, policies in force inched down 0.6% from 2011-end. Conversely, Allstate brand standard auto combined ratio improved 2.8 points year over year to 95.5%, led by growth in other personal lines as well as Encompass brand.

Property-Liability net income jumped to $354 million from a net loss of $737 million. Operating income for this segment also surged to $357 million against a loss of 732 million in the year-ago period. However, the Property-Liability expense ratio for the reported quarter weakened to 25.8 from 24.9 in the prior-year quarter, although claims expense ratio improved to 72.2 from 98.4 in the year-ago period.

On the other hand, operating income for Allstate Financial edged up 2.2% year over year to $138 million. The decrease reflected lower yields on fixed income securities, worse mortality in both life insurance and annuities and continued decline in investment spread products. These were partially offset by stable operating expenses, lower crediting rates along with the expansion of underwritten products and sales through Allstate agencies.

Moreover, consistent with shifting the focus to underwritten products from spread-based products, contractholder funds were reduced by $771 million from the prior quarter and $1.5 billion from 2011-end. Meanwhile, net income plunged 18% year over year to $132 million, primarily driven by lower net realized capital gains.

Corporate & Other segment reported a net loss of $63 million, deteriorating from a loss of $48 million in the prior-year quarter. Total operating cost and expenses stood at $107 million, as opposed to $98 million in the year-ago quarter.

Investment and Capital Position

As of June 30, 2012, Allstate’s total investment portfolio increased to $97.3 billion from $95.6 billion at 2011-end, reflecting solid investment returns and operating cash flow that more than offset the expected reduction in the Allstate Financial portfolio.

Allstate’s net investment income increased to $1.0 million during the reported quarter, while portfolio yields were stable at 4.6% as of June 30, 2012. However, excluding the limited partnership results, net investment income and portfolio yield in the reported quarter were lower than the prior-year period, primarily attributable to lower reinvestment rates and continued focus on reduction in Allstate Financial’s liabilities.

Meanwhile, the pre-tax net unrealized capital gains jumped to $4.2 billion at the end of the reported quarter from $2.9 billion at the end of 2011. The upside reflects the benefit of tightening credit spreads, strong equity markets and lower interest rates.

Conversely, pre-tax net realized capital gains aggregated $27 million against $57 million in the year-ago period, driven by lower gains from sales of fixed income and equity securities.

The reported book value per share increased 12.8% year over year to $38.73 in the reported quarter. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, climbed 8.1% to $35.81 at the end of June 2012. Additionally, operating ROE jumped to 11.4% from 3.2% in the year-ago period.

Operating cash flow escalated 40.8% year over year to $1.77 million during the reported quarter, while cash stood at $571 million against $776 million at 2011-end. Long-term debt stood at $6.06 billion and total equity was $19.5 billion, while total assets were recorded at $125.54 billion at the end of June 2012. The company’s statutory surplus, at the end of June 2012, stood at $16.5 billion, up from $15.6 billion at 2011-end.

Stock Repurchase Update

On November 8, 2011, the board of Allstate sanctioned a new share repurchase program worth $1.0 billion. The share buyback program is being executed through open market operations and is scheduled to be completed by March 31, 2013.

Under this authorization, the company repurchased stock worth $275 million during the reported quarter, while $319 million worth of stock remains available for repurchases. Additionally, Allstate held $2.3 billion as deployable assets as of June 30, 2012.

Dividend Update

On July 24, 2012, the board of Allstate announced a regular quarterly cash dividend of 22 cents per share, which will be paid on October 1, 2012, to the shareholders of record as on August 31, 2012.

On February 21, 2012, the board of Allstate hiked its regular quarterly cash dividend by 4.8% to 22 cents per share from the prior 21 cents. The hiked dividend was paid on April 2, 2012 to the shareholders of record as of March 5, 2012.


Management expects to maintain the profitability of the auto business and improve homeowners’ profitability, resulting in an underlying combined ratio outlook of 88% to 91% for 2012.

Meanwhile, Allstate aims to generate long-term shareholder value and an operating return on equity (ROE) of 13% by 2014. As a long-term growth strategy, management plans to reposition products and distribution platforms to meet changing needs of the consumers.

Moreover, Allstate is meticulously making efforts to maintain its standard auto margins, improve returns in homeowners and Allstate Financial, besides managing capital aggressively.

Allstate is also taking strategic actions to reduce losses for Allstate business from catastrophes through enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuation of selected lines of coverage, including earthquake.

The outcome of these efforts was noticeably witnessed in the positive results of the reported quarter. We anticipate continued benefits from Allstate’s diversification, superior financial strength rating and proactive approach to investment.

These factors have helped Allstate gain the second-largest personal lines writer position in the U.S. This also reflects the company’s competitive strength against rivals such as Berkshire Hathaway-A and The Travelers Companies (TRV - Free Report) .

However, Allstate’s exposure to catastrophe risks, capital losses along with volatility in pricing, interest and loss costs will continue to impact the premiums as well as investment portfolio in the upcoming quarters. Hence, Allstate carries a Zacks Rank #3, implying short-term Hold rating and long-term Neutral recommendation.

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