Allstate Corporation’s (ALL) fourth quarter operating earnings of 50 cents per share came in dramatically behind the Zacks Consensus Estimate of 86 cents and $1.09 per share recorded in the year-ago quarter.
Results for the quarter deteriorated primarily due to high catastrophe losses and increased frequency of auto insurance claims in the Property-Liability insurance segment, coupled with low investment income. However, prudent capital management and strong liquidity were quite impressive during the reported quarter. This is reflected from growth in book value per share.
Allstate’s net income for the reported quarter came in at $296 million or 55 cents per share, compared with $518 million or 96 cents in the prior-year quarter, reflecting a decline of about 43%. Operating income, which excludes realized net capital gains and losses from the sale of investments as well as accruals on unhedged derivative instruments, for the reported quarter decreased 54.2% year over year to $271 million.
Allstate reported total net revenue growth of 0.4% year over year to $8.09 billion and also came in about 16% higher than the Zacks Consensus Estimate of $6.98 billion.
Quarter in Detail
Property-Liability net written premiums were $6.44 billion, down 1.2% from prior-year quarter. This segment’s combined ratio deteriorated by 7.6 points year over year to 100.8%.
The underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 92.0% in the reported quarter, higher than 88.1% recorded in the year-ago quarter.
Besides, Allstate brand standard auto premiums written for the reported quarter declined 0.4% from the prior-year quarter as a result of a 1.5% decline in policies in force, reflecting a 0.4 point decline in retention to 88.4% that was partly offset by a 7.8% increase in new issued applications.
Average premium was consistent with year-ago levels. Nevertheless, the combined ratio increased 6.0 points year over year to 99.7%, primarily due to growth in higher claim frequencies and advertising expenses.
Allstate-branded homeowners’ written premiums for the quarter increased 2.2% year over year, reflecting a 7.1% increase in average premium that was partially offset by a 4.1% decline in policies in force. The combined ratio deteriorated to 102.0% from 89.0% in the prior-year quarter, reflecting higher catastrophe losses and lower favourable prior year reserve reestimates.
Catastrophe losses for the reported quarter came in at $537 million, substantially higher than $328 million in the year-ago period. Property-Liability net income came in at $260 million, dramatically down from $707 million in the prior-year quarter.
Operating income for this segment was $206 million, down from $554 million in the year-ago quarter. The Property-Liability expense ratio for the fourth quarter of 2010 was 25.6 compared to 24.9 in the prior year third quarter, primarily due to higher marketing expenditures.
However, operating income for Allstate Financial increased 9.5% year over year to $104 million. The growth reflected higher benefit spread and lower amortization of deferred acquisition costs (DAC), partially offset by higher operating costs and expenses. As a result, net income came in at $76 million compared with a net loss of $137 million in the year-ago quarter.
Corporate & Other segment reported a net loss of $40 million, compared to a net loss of $52 million in the prior-year quarter. Total operating cost and expenses were $86 million, down 20.4% from $108 million in the year-ago quarter.
Full Year 2010 Highlights
For full year 2010, Allstate reported operating net income of $1.54 billion or $2.84 per share as compared with $1.88 billion or $3.48 per share in 2009. This also came in lower than the Zacks Consensus Estimate of $3.21 per share. However reported net income increased to $928 million or $1.71 per share from $854 million or $1.58 per share.
Total revenue declined 1.9% year over year to $31.40 billion but was higher than the Zacks Consensus Estimate of $28.17 billion. Property-Liability business recorded combined ratio of 98.1% that deteriorated by 1.9 points over 2009. The segment’s underlying combined ratio was 89.6% for 2010, within the company’s 88%-90% outlook range for full year 2010, but higher than 88.1 in 2009.
Investment and Capital Position
As of December 31, 2010, Allstate’s total investments modestly increased $650 million from 2009 to $100.5 billion, reflecting strong investment returns that more than offset the impact from risk reduction actions and reductions in Allstate Financial’s contractholder funds. The investment valuations helped pre-tax unrealized net gains to climb to $3.7 million as on December 31, 2010 from a net unrealized capital loss of $2.3 million at the end of 2009.
Allstate’s net investment income for 2010 came in at $4.1 billion, down 7.7% from 2009, reflecting the declining yield. As on December 31, 2010, reported book value per share increased 14.5% year over year to $35.32. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, increased 5.0% year over year to $34.26.
Statutory surplus as on December 31, 2010 was estimated at $15.3 billion for Allstate Insurance Co., comparing favourably with $15.2 billion at September 30, 2010 and $15.0 billion at December 31, 2009. Operating cash flow totalled $928 million at the end of 2010, up from $854 million at the end of 2009.
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.
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. Further, with the successful completion of ‘Focus to Win’ restructuring initiative, Allstate Financial also intends to wind down Allstate Bank.
We anticipate continued benefits from Allstate’s diversification, superior financial strength rating, improved cash flow 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-A (BRK.A) 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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