Allstate Corporation
's (
ALL
) third-quarter 2012 operating earnings per share of $1.46
significantly exceeded the Zacks Consensus Estimate of $1.15 and
the year-ago quarter's earnings of 16 cents.
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, surged to $717
million from $80 million in the year-ago quarter.
Allstate's net income for the reported quarter stood at $723
million or $1.48 per share, as opposed to $175 million or 34
cents per share in the prior-year quarter, witnessing a stark
escalation.
Results for the quarter reflected lower catastrophe losses,
which further led to reduced claims expenses coupled with higher
premiums. Expansions in emerging businesses and other personal
lines along with higher investment income also benefited the
results. These were offset by higher operating expenses, higher
realized capital losses 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 down 1.4% year over year to
$8.13 billion, but it substantially topped the Zacks Consensus
Estimate of $7.28 billion. In addition, property-liability
insurance claims and claims expenses plunged 16.3% year over year
to $4.29 billion, while operating costs and expenses increased
13.7% year over year to $1.01 billion. Particularly, catastrophe
losses for the reported quarter nose-dived 80.9% to $206 million
from $1.08 billion in the year-ago period.
Quarter in Detail
Property-Liability
earned premiums were $6.7 billion, which climbed 4.1% from the
prior-year quarter, primarily led by the Esurance acquisition and
modest growth in emerging businesses. The segment's combined
ratio improved to 90.2% from 104.8% in the year-ago quarter,
reflecting substantially reduced catastrophe losses.
Particularly, the underlying combined ratio, which excludes
catastrophes and prior-year reserve estimates, was 87.8% in the
reported quarter, 1.4 points better than the year-ago quarter.
This was well within management's outlook of underlying combined
ratio of 88% to 91% for 2012.
Moreover, Allstate brand standard auto combined ratio improved
2.2 points year over year to 91.9%, led by growth in other
personal lines as well as Encompass brand.
Property-Liability net income jumped to $639 million from $41
million in the year-ago quarter. Operating income for this
segment also surged to $667 million against $22 million in the
year-ago period. However, the Property-Liability expense ratio
for the reported quarter weakened to 26.1 from 25.0 in the
prior-year quarter, although claims expense ratio improved to
64.1 from 79.8 in the year-ago period.
However, operating income for
Allstate Financial
dipped 24.8% year over year to $138 million. The decrease
reflected lower yields on fixed income securities, worse
mortality in both life insurance and annuities along with
continued decline in investment spread products and higher
operating expenses. These were partially offset by lower
crediting rates along with the expansion of underwritten products
and sales through Allstate agencies as reflected in 6.9%
year-over-year growth in issued policies.
Moreover, consistent with shifting the focus to underwritten
products from spread-based products, contractholder funds were
reduced by $722 million from the prior quarter and $2.2 billion
from 2011-end. Meanwhile, net income plunged 31.8% year over year
to $131 million, primarily driven by higher net realized capital
losses against gains in the prior-year quarter.
Corporate & Other
segment reported a net loss of $47 million, deteriorating from a
loss of $58 million in the prior-year quarter. Total operating
cost and expenses stood at $90 million, as opposed to $116
million in the year-ago quarter.
Investment and Capital Position
As of September 30, 2012, Allstate's total investment
portfolio increased to $98.5 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 $940 million
during the reported quarter, while portfolio yields were also
lower at 4.3% as of September 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
$5.7 billion at the end of the reported quarter from $2.9 billion
at 2011-end. The upside reflects the benefit of tightening credit
spreads, strong equity markets and lower interest rates.
Conversely, pre-tax net realized capital losses aggregated $72
million against capital gains of $264 million in the year-ago
period, driven by losses from sales of fixed income and
structured securities.
The reported book value per share increased 22.4% year over
year to $42.64 in the reported quarter. Book value per share,
excluding the impact of unrealized net capital gains and losses
on fixed income securities, escalated 14.4% to $37.31 at the end
of September 2012. Additionally, annualized operating ROE jumped
to 13.6% from 2.6% in the year-ago period.
Operating cash flow escalated 56.7% year over year to $2.62
million during the reported quarter, while cash stood at $642
million against $776 million at 2011-end. Long-term debt stood at
$6.06 billion and total equity was $20.84 billion, while total
assets were recorded at $127.0 billion at the end of September
2012. The company's statutory surplus, at the end of September
2012, stood at $17.0 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 buy back
program is being executed through open market operations and it
is scheduled to complete by March 31, 2013.
Under this authorization, the company repurchased stock worth
$53 million during the reported quarter, while $166 million worth
of stock remains available for repurchases. Additionally,
Allstate held $2.3 billion as deployable assets as of September
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 on 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 arch 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 #2, implying short-term Buy rating and long-term
Outperform recommendation.
ALLSTATE CORP (ALL): Free Stock Analysis
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