Yesterday, the board of
The Allstate Corp.
) announced the sanction of a new share repurchase program worth
$1.0 billion, commencing immediately. While the share buyback
will be made through open market operations, it is scheduled to
culminate by December 31, 2013.
The US auto and home insurer plans to finance the share
repurchases by raising funds from subordinated hybrid debentures,
which will be sold over the year. The company plans to issue
these debentures as per the requirements. Repurchasing shares by
borrowing debt at low interest rates will help reduce the cost of
capital, according to the company's management.
Meanwhile, the latest extension of the share buyback also
indicates Allstate's decade-long tradition of deploying $19.3
billion through share repurchases and dividend payouts. The last
share buyback program - worth $1.5 billion - was authorized in
November last year with an expiry date of March 31, 2013.
Under this authorization, the company repurchased stock worth
$53 million during the third quarter, while recently completing
the remaining $166 million worth of stock buyback that was
available at the end of September 2012, thereby executing the
buyback before schedule.
However, the current buyback authorization of $1.0 billion has
been contracted from the last sanction of $1.5 billion, which
points out the company's wariness over the escalated catastrophe
losses of over $1.0 billion from the recent Hurricane Sandy amid
the consistent low rate interest environment, which compels low
yields on investments.
We believe that the catastrophe losses amid marginal price
improvements and continuing low interest rate through 2014 leaves
little scope for insurers to deploy capital for expansion
purposes. Hence, most insurers are deploying their surplus
capital to increase share repurchases and dividend payments,
thereby retaining investors' confidence in the stock. For the
Prudential Financial Inc.
) expanded their share buybacks in September and June this year,
Fitch Shares Similar Thought, Affirms Debt
Last week, Fitch Ratings avowed the insurer financial strength
(IFS) of Allstate with a stable outlook. The ratings agency
maintained the issuer default rating (IDR) of "A-" and IFS of
"A+" on Allstate and Allstate Insurance Group - its
property-casualty subsidiaries. Meanwhile, an IFS rating of "A-"
was pegged at Allstate Financial and Allstate Life Insurance
Although the catastrophe losses are expected to erode most of
the profit of Allstate in fourth quarter of 2012, it still
remains a leading brand of personal lines writer and the
second-largest leader in both private passenger auto and
homeowners insurance business, with a market share of 10% by
vis-à-vis premiums written. Moreover, Allstate's improved
financials and operating leverage generated in the first nine
months of 2012, should be able to provide cushion to 2012
Meanwhile, a modest capitalization with a statutory surplus of
$16 billion, a debt-to-capital ratio of 26% against Fitch's
benchmark of 28% and operating cash flow of $2.62 billion as of
September 30, 2012 validates the company's sound liquidity.
However, Fitch believes that Allstate's statutory surplus lags
behind the pre-financial crisis levels of $19.1 billion at
Moreover, the ratings agency remains assertive of Allstate's
ability to redeem its next debt of $250 million, scheduled in
July 2013 given an annual interest expense and common dividends
of about $800 million against deployable assets of $2.3 billion,
at the end of September 2012.
Overall, with an operational strategy that enables
acclimatizing to changing market regulations, Allstate is well
positioned to benefit from an improving economy. While Allstate's
capital and liquidity levels are impressive and we anticipate
continued benefits from its industry-leading position,
diversification, underwriting and pricing discipline, we
apprehend that the uncertain economic environment will continue
to affect its premium writings and investment risk in the
Currently, the stock carries a Zacks Rank #3, implying a
short-term Hold rating.
ALLSTATE CORP (ALL): Free Stock Analysis
PARTNERRE LTD (PRE): Free Stock Analysis
PRUDENTIAL FINL (PRU): Free Stock Analysis
To read this article on Zacks.com click here.