Allstate Outdoes Expectations

Allstate Corporation’s (ALL: 28.74 +0.14 +0.49%) fourth-quarter operating earnings of $1.09 per share were substantially ahead of the Zacks Consensus Estimate of $1.10. This is in contrast to the operating earnings of 96 cents in the year-ago quarter. Results for the quarter benefited primarily from excellent underwriting margins, prudent capital management and strong liquidity. However, lower investment income and decrease in property-liability premiums weighed on the results.

Primarily as a result of lower realized capital losses and improved operating income, Allstate’s net income for the reported quarter came in at $518 million or 96 cents per share, compared to a net loss of $1.1 billion or $2.10 in the prior-year quarter. Operating income, which excludes realized net gains and losses from the sale of investments as well as accruals on non-hedge derivative instruments, for the reported quarter was $592 million, up 14.3% from $518 million in the year-ago quarter.
 
Estimate Revisions Trend
 
There were no estimate revisions in either direction over the last 7 days. Over the last 30 days, one of the 19 analysts covering the stock lowered his estimate for full year 2010, while no upward revisions were witnessed. Currently, the Zacks Consensus Estimate for 2010 is operating earnings of $4.06 per share, which would be up by 16.7% from the full-year 2009 operating earnings of $3.48. In 2008, Allstate’s operating earnings were $3.21 per share.
 
The absence of upward estimate revisions for 2010 indicates a likelihood of downward pressure on the performance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the current fundamentals of Allstate, we maintain a long-term “Neutral” recommendation on the stock.
 
With respect to earnings surprises, the stock has not been steady over the last four quarters prior to the reported quarter, with three negative surprises. The average remained negative at 37.1%. This implies that Allstate has fallen short of the Zacks Consensus Estimate by 37.1% over that period.
 
The current Zacks Consensus Estimates for the first quarter and full-year 2010 are earnings of $1.06 and $4.06 per share, respectively. The upside potential of the estimate for full-year 2010, essentially a proxy for future earnings surprises, currently stands at 2.2%.
 
Quarter in Detail

Property-Liability net written premiums were $6.3 million, almost flat compared to the prior-year quarter. This segment’s combined ratio improved to 93.2% from 96.4% in the year-ago quarter. The improvement in combined ratio resulted from continued margin strength in the auto business and actions taken to reduce expenses, partly offset by the impact of catastrophe losses in the homeowners business.

The underlying combined ratio was 88.1% in 2009, within the company’s 87-89% outlook range for the full year. Management now anticipates that the underlying combined ratio for the fiscal year 2010 will be within the 88-90% range.

Allstate brand standard auto premiums written for the reported quarter increased 0.7% from the prior-year quarter. Total Policies in force declined 1.0% from the prior-year quarter as improved sales and retention were offset by fewer policies available for renewal. The combined ratio declined 5.7 points year-over-year to 93.7%, due primarily to lower average claim costs and lower expenses partly offset by higher loss frequency.

Allstate-branded homeowners’ written premiums for the quarter declined 0.9% year-over-year, as a 6.0% increase in average premium was partly offset by a 3.9% decline in policies in force. The combined ratio deteriorated to 89.0% from 84.6% in the prior-year quarter, reflecting higher catastrophe losses and non-catastrophe claim frequencies, partly offset by lower non-catastrophe claim severities.

Catastrophe losses for the reported quarter came in at $328 million, up 26.2% year-over-year. Property-liability net income came in at $707 million, compared to a loss of $53 million in the prior-year quarter. Operating income for Allstate Financial increased 6.7% year-over-year to $95 million. 

The increase resulted primarily due to lower amortization of deferred policy acquisition costs (DAC) and reduced operating expenses, partly offset by lower benefit and investment spreads. Operating expenses decreased 26.6% year-over-year to $105 million, reflecting the substantial progress made through “Focus to Win”.

In sum, this segment reported a net loss of $137 million, compared to a net loss $1.0 billion in the prior-year quarter. Corporate & Other segment reported a net loss of $52 million, compared to a net loss of $41 million in the prior-year quarter.

As of Dec 31, 2009, Allstate’s consolidated investment portfolio was $99.8 billion, a slight decline from Sep 30, 2009, as net reductions in Allstate Financial contractholder funds and a scheduled debt repayment more than offset operating cash flows. The pre-tax unrealized net loss position as on Dec 31, 2009 improved $180 million over the prior quarter to $2.3 billion.

Allstate’s net investment income for the reported quarter came in at $1.1 billion, steady compared to the prior quarter, but down $253 million from the prior-year quarter. The year-over-year decline was primarily due to lower yields and reduced average investment balances.

Reported book value per share increased 31.4% year-over-year to $30.84 as on Dec 31, 2009. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, increased 8.6% year-over-year to $32.62.

We anticipate continued benefits from Allstate’s diversification, pricing discipline and proactive approach to investment, but the ongoing global crisis and catastrophes will continue to impact the results in the upcoming quarters.