Allstate Corporation
's (
ALL
) 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.
Outlook
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
(
BRK.A
) and
The Travelers Companies
(
TRV
).
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.
ALLSTATE CORP (ALL): Free Stock Analysis Report
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis
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TRAVELERS COS (TRV): Free Stock Analysis Report
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