Allstate's Organic Growth Stable, Expenses to Limit Margins - Analyst Blog

On Jun 27, we issued an updated research report on The Allstate Corp. ( ALL ). The company's diversified business-mix and proactive capital management is partially offset by market risks and higher catastrophe (CAT) losses.

This Zacks Rank #3 (Hold) stock maintained an earnings streak in all the last 4 quarters with an average beat of 16.1%. Although the company's first-quarter 2014 earnings topped the Zacks Consensus Estimate by about 14%, it fell short of the year-ago quarter figure by 3.7%.

Allstate's property and casualty (P&C) business is significantly exposed to catastrophic events, as witnessed in the past years. About $445 million (up 24% over prior-year quarter) of CAT losses were incurred in first-quarter 2014 due to severe winter storms and fire-related losses. These also deteriorated the underwriting income and combined ratio during the quarter.

Meanwhile, the company anticipates pre-tax catastrophe losses of about $720 million ($468 million post-tax) for April and May 2014, which is 34% higher than the year-ago period, further weighing on the bottom line and other growth metrics in 2014.

Alongside, Allstate struggles to stay afloat in the highly competitive industry, which is marked by the escalated pricing pressures and selective underwriting standards. The company also faces challenges in the form of higher operating costs, sluggishness in the Allstate brand homeowners and lower investment returns. These factors continue to weigh on the margins and cash flow.

Nonetheless, Allstate boasts of strong statutory capital levels and decent liquidity profile. Consistent debt reduction and refinancing as well as equity appreciation have helped improve the total debt-to-capital resources ratio to 21.9% at Mar 2014-end from 22.4% in 2013 and 22.7% in 2012, consistently below ratings agencies' benchmark of 24%. Higher deployable assets and consistently growing operating return on equity (ROE) and book value per share have also been supporting effective capital deployment, thereby retaining shareholders' confidence.

Overall, an adverse risk-reward balance in the near term has prompted downward estimate revisions for 2014 and 2015 in the past 30 days. The Zacks Consensus Estimate for 2014 and 2015 have moved south by 4.9% and 0.5% to $4.90 and $5.66 per share, respectively. On a year-over-year basis, earnings are expected to fall by 13.7% in 2014 and then grow by 15.4% in 2015.

Key Picks in the Sector

Some better-ranked stocks in the insurance sector include Hallmark Financial Services Inc. ( HALL ), AmTrust Financial Services Inc. ( AFSI ) and Endurance Specialty Holdings Ltd. ( ENH ). All these stocks sport a Zacks Rank #1 (Strong Buy).

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ALLSTATE CORP (ALL): Free Stock Analysis Report

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AMTRUST FIN SVC (AFSI): Free Stock Analysis Report

ENDURANCE SPLTY (ENH): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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