Allstate Corporation’s (ALL) third quarter 2011 operating earnings of 16 cents per share came in a nickel higher than the Zacks Consensus Estimate of 11 cents but significantly lagged the year-ago quarter’s earnings of 83 cents per share.
Results for the quarter reflected higher catastrophe (CAT) losses that also led to increased claims expenses coupled with lower average premiums and policies-in-force in Property-Liability insurance unit and lower investment income. However, prudent capital management and liquidity were quite impressive during the reported quarter. This is reflected from stability in book value per share and combined ratio, excluding the effect of catastrophes.
Allstate’s net income for the reported quarter came in at $165 million or 32 cents per share, compared with $367 million or 68 cents per share in the prior-year quarter, reflecting a radical decline.
Operating 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 unhedged derivative instruments, plunged to $84 million against $452 million in the year-ago quarter.
Allstate reported total net revenue growth of 4.2% year over year to $8.24 billion but substantially exceeded the Zacks Consensus Estimate of $6.90 billion. Besides, property-liability insurance claims and claims expenses grew 11.5% year over year to $5.13 billion while operating costs and expenses remained almost flat at $825 million.
Particularly, catastrophe losses for the reported quarter escalated to $1.08 billion, in line with management’s projection, contributing 15.6 point to the combined ratio but were substantially higher than $386 million in the year-ago period. During the reported quarter, Allstate experienced 23 catastrophe loss events including Hurricane Irene and Tropical Storm Lee.
Quarter in Detail
Property-Liability net written premiums were $6.73 billion, inching down 0.6% from the prior-year quarter. The segment’s combined ratio was 104.8% against 95.9% in the year-ago quarter, reflecting increased catastrophe losses.
However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 89.2% in the reported quarter, flat from the year-ago quarter. This was also within management’s outlook of underlying combined ratio of 88 to 91 for 2011.
Besides, Allstate brand standard auto premiums written for the reported quarter declined 0.8% from the prior-year quarter as a result of a fall in policies in force along with a 13.2% decline in new issued applications. Average gross premium also dipped 1.1% from the year-ago period, reflecting slight rate increases offset by reduced volumes in vast markets of New York and Florida. As a result, the Allstate brand standard auto combined ratio increased 1.0 point year over year to 94.2%.
Nevertheless, Allstate-branded homeowners’ written premiums for the quarter improved 1.5% year over year, reflecting a 5.0% climb in average gross premium that was partially mitigated by a 4.2% decline in policies in force. Higher catastrophe losses resulted in Allstate-branded homeowners combined ratio of 131.9%, although underlying combine ratio moderated marginally to 73.3% against 75.0% in the prior-year quarter.
Property-Liability net income sank to $40 million against $331 million in the year-ago quarter. Operating income for this segment was $21 million, decreasing from $394 million in the year-ago quarter. However, the Property-Liability expense ratio for the reported quarter improved marginally to 25.0 from 25.1 in the prior-year quarter.
However, operating income for Allstate Financial spiked 24.1% year over year to $134 million. The increase reflected improvement in the profitability of investment spread products along with expansion of underwritten products sales through Allstate agencies and growing Allstate Benefits. Meanwhile, net income came in at $183 million against $85 million in the year-ago quarter, primarily driven by lower operating costs and net realized capital gains in the reported quarter against losses, in the comparable period.
Corporate & Other segment reported a net income of $165 million, deteriorating from $367 million in the prior-year quarter. Total operating cost and expenses stood at $116 million, climbing from $95 million in the year-ago quarter.
Investment and Capital Position
As of September 30, 2011, Allstate’s total investment portfolio decreased $3.0 billion from 2010-end to $97.5 billion, reflecting reductions in the Allstate Financial portfolio and its fixed annuity business. However, the pre-tax net unrealized capital gains jumped to $2.4 billion as on September 30, 2011 from $1.4 billion at the end of 2010. Meanwhile, net realized capital gains totaled $264 million compared to a loss of $144 million in the year-ago period, primarily due to sales of foreign government and the U.S. Treasury securities, which were partly offset by interest rate derivatives losses.
Allstate’s net investment income came in at $994 million, down 1.1% from the year-ago quarter, although portfolio yields were stable at 4.5%. As on September 30, 2011, reported book value per share inched up 0.2% year over year to $35.56. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, was almost flat at $33.39.
Operating cash flow totaled $1.67 billion at the end of the reported quarter, significantly down from $3.02 billion at the end of the prior-year quarter. Long-term debt stood at $5.9 billion and total equity was $18.1 billion, while total assets were recorded at $127.0 billion at the end of September 30, 2011.
Additionally, during the reported quarter, Allstate repurchased shares worth $308 million, thereby completing the $1.0 billion share repurchase program that was authorized in November 2010. The company has deployed about $20 billion of capital through share repurchases over the last 17 years.
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 2011.
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 also plans to reposition products and distribution platforms to meet changing needs of consumers. Besides, the company’s near-term priorities include maintaining standard auto margins, improving returns in homeowners and Allstate Financial and managing capital aggressively.
Allstate is 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 discontinuance of selected lines of coverage, including earthquake.
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 US, which also reflects its competitive strength against arch rivals such as Berkshire Hathaway-B (BRK.B) and The Travelers Companies (TRV).
However, Allstate’s exposure to catastrophe risks, capital losses and volatility in pricing, interest and loss costs will continue to impact the premiums and investment portfolio in the upcoming quarters.
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