Allstate Beats on Both Earnings and Revs - Analyst Blog
Allstate Corporation 's ( ALL ) third-quarter 2013 operating earnings per share of $1.53 comfortably outpaced the Zacks Consensus Estimate of $1.37 and the year-ago quarter figure of $1.46, primarily on lower share count.
However, operating net income dipped 0.6% to $713 million from $717 million in the year-ago quarter. Including extraordinary items, Allstate's reported net income stood at $310 million or 66 cents per share, down from $723 million or $1.48 per share in the prior-year quarter.
Results for the quarter reflected higher premiums, lower catastrophe losses and benefits of changes made in employee benefit plans, all of which boosted operating income across segments, operating cash flow and book value per share. However, lower investment income, loss on disposition of Lincoln Benefit Life Company (LBL) along with higher claims and operating expenses deteriorated the bottom line and return on equity (ROE).
Property-liability insurance claims and claims expenses climbed 3.1% year over year to $4.43 billion, while operating costs and expenses dipped 7.2% year over year to $937 million. Particularly, catastrophe losses for the reported quarter declined 37.9% to $128 million from $206 million in the year-ago period.
Allstate's net revenue grew 4.1% year over year to $8.47 billion. The results also topped the Zacks Consensus Estimate of $7.38 billion substantially.
Quarter in Detail
Property-Liability earned premiums were $6.97 billion, up 4.1% from the prior-year quarter, primarily driven by modest performance across the Allstate, Encompass and Esurance brands as well as modest growth in standard auto, homeowners' and emerging businesses.
Moreover, net written premiums grew 4.1% year over year within the Allstate brand, while total policies dipped 0.4%. Additionally, the Encompass brand witnessed an increase of 10.8% in net written premiums and 7.2% growth in policies. Esurance posted 27% growth in net written premiums and 32% in policies.
The segment's combined ratio improved to 90.0% from 90.2% in the year-ago quarter, reflecting lower catastrophe losses.
However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 86.9% in the reported quarter, 0.9 points stronger than the year-ago quarter. Nonetheless, this was well below management's outlook of underlying combined ratio of 88% to 90% for 2013.
Meanwhile, underwriting income improved 5.8% year over year to $697 million. Growth was driven by higher premiums, partially offset by higher claims expense and operating costs.
Subsequently, lower catastrophe losses along with higher underwriting income drove Property-Liability's net income to $656 million from $639 million in the year-ago quarter. Operating income for this segment also ascended to $685 million against $667 million in the year-ago period. The Property-Liability expense ratio for the reported quarter deteriorated to 26.5 from 26.1 in the prior-year quarter.
On the other hand, operating income for Allstate Financial grew 30.9% year over year to $127 million. The increase reflected higher premiums and contract charges, stable investment income, slightly lower operating expenses, lower crediting rates and liability reduction in spread-based business. These were partially offset by higher contract benefits.
Moreover, improved mortality on life insurance and 4.4% growth in underwriting products also drove results. However, net loss amplified to $360 million against net income of $131 million, primarily due to the loss of $472 million related to the disposition of LBL.
Corporate & Other segment reported a net income of $14 million, significantly improving from a loss of $47 million in the prior-year quarter. The rebound was primarily due to gain on post-retirement benefits curtailment of $118 million. However, total operating cost and expenses stood at $159 million, as opposed to $90 million in the year-ago quarter.
Investment and Capital Position
As of Sep 30, 2013, Allstate's total investment portfolio decreased to $80.48 billion from $97.28 billion at 2012-end, reflecting investment returns of 1% driven by lower valuations, primarily in fixed income portfolio. It also reflects the reclassification of $12.24 billion of investments due to the pending sale of LBL and decrease in net unrealized capital gains worth $2.72 billion, driven by the significant rate hikes since 2012-end.
Allstate's net investment income decreased to $950 million during the reported quarter, primarily attributable to lower reinvestment rates and continued focus on reduction in Allstate Financial's liabilities. However, portfolio yields stood higher than the prior-year quarter at 4.5% as of Sep 30, 2013.
Book value per share increased 2% year over year to $43.49 in the reported quarter. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, improved 8.2% to $40.37 at the end of Sep 2013. Conversely, annualized operating ROE deteriorated to 12% against 15% in the year-ago quarter.
Operating cash flow surged 17.3% year over year to $3.07 billion at the end of Sep 2013, while cash stood at $1.07 billion against $806 million at 2012-end. Long-term debt increased to $6.23 billion and total equity increased to $20.78 billion, while total assets declined to $122.29 billion at the end of Sep 2013. The company's statutory surplus, at the end of Sep 2013, stood at $17.3 billion, higher than $17.2 billion at 2012-end.
During the reported quarter, Allstate raised $800 million from 5.75% fixed-to-floating rate subordinated debentures, due to mature in 2053, and another $385 million from 6.75% non-cumulative perpetual preferred stock.
Stock Repurchase Update
Allstate bought back shares worth about $491 million through open market operations during the reported quarter. At the end of Sep 2013, Allstate had shares worth $589 million available for repurchases under the total authorization.
On Feb 6, 2013, the board of Allstate sanctioned a new share repurchase program worth $1.0 billion, commencing immediately and set to expire by Mar 2014.
Additionally, Allstate held $2.8 billion as deployable assets as of Sep 30, 2013, higher than $2.06 at 2012-end.
On Oct 1, 2013, Allstate paid a regular quarterly dividend of 25 cents to shareholders of record as on Aug 30, 2013. In Feb 2013, this was hiked by 13.6% from the prior payout of 22 cents.
Management expects to maintain the profitability of the auto business as well as improve homeowners' profitability, resulting in an underlying combined ratio outlook of 88% to 90% for 2013.
While Allstate carries a Zacks Rank #2 (Buy), other strong insurers include Markel Corp. ( MKL ), CNA Financial Corp. ( CNA ) and The Hanover Insurance Group Inc. ( THG ). All these stocks carry a Zacks Rank #1 (Strong Buy).
ALLSTATE CORP (ALL): Free Stock Analysis Report
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