Allstate Corporation’s (ALL) first quarter operating earnings of 93 cents per share came in substantially ahead of the Zacks Consensus Estimate of 68 cents and 69 cents per share recorded in the year-ago quarter.
Results for the quarter improved primarily due to reduction in catastrophe (CAT) losses, lower expenses and increase in standard auto new business, partially offset by lower average premiums and policies-in-force in Property-Liability insurance unit coupled with lower 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 and improved combined ratio.
Allstate’s net income for the reported quarter came in at $519 million or 97 cents per share, compared with $120 million or 22 cents per share in the prior-year quarter, reflecting a substantial ascent. Operating income, which excludes realized net capital gains and losses from the sale of investments as well as accruals on unhedged derivative instruments, increased 32.5% year over year to $497 million.
Allstate reported total net revenue growth of 4.5% year over year to $8.10 billion and also came in about 16.5% higher than the Zacks Consensus Estimate of $6.95 billion.
Quarter in Detail
Property-Liability net written premiums were $6.45 billion, down 0.8% from prior-year quarter. The segment’s combined ratio was 94.9 against 98.9 in the year-ago quarter, reflecting lower catastrophe losses.
The underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 89.9% in the reported quarter, higher than 89.1% recorded in the year-ago quarter. However, this was 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 1.0% from the prior-year quarter as a result of a 0.7% fall in policies in force, reflecting lower customer renewals that more than offset an 11.9% increase in new issued applications.
Average premium also dipped 0.9% from the year-ago period, reflecting rate decreases and customers’ choice of lower coverage. As a result, the combined ratio increased 0.7 points year over year to 95.1%, primarily due to continued adverse loss trends.
Allstate-branded homeowners’ written premiums for the quarter increased 3.0% year over year, reflecting a 5.9% climb in average premium that was partially offset by a 3.7% decline in policies in force. Lower catastrophe losses resulted in Allstate-branded homeowners combined ratio of 91.4% in the first quarter of 2011 against 111.3% in the prior-year quarter.
Catastrophe losses for the reported quarter came in at $333 million, contributing 5.2 point to the combined ratio but were substantially lower than $648 million in the year-ago period. Property-Liability net income came in at $468 million, significantly up from $164 million in the prior-year quarter.
Operating income for this segment was $427 million, increasing from $186 million in the year-ago quarter. The Property-Liability expense ratio for the reported quarter was 25.5 compared with 25.2 in the prior-year quarter.
However, operating income for Allstate Financial decreased 16.5% year over year to $116 million. The decline reflected lower investment income and higher amortization of deferred acquisition costs (DAC), partially offset by lower operating costs and expenses.
Meanwhile, net income came in at $97 million compared with $4 million in the year-ago quarter, primarily driven by realized capital gains in the reported quarter against losses in the comparable period.
Corporate & Other segment reported a net loss of $46 million, slightly improving from a net loss of $48 million in the prior-year quarter. Total operating cost and expenses was $91 million, down 6.2% from $97 million in the year-ago quarter.
Investment and Capital Position
As of March 31, 2011, Allstate’s total investments decreased $900 million from 2010-end to $99.6 billion, reflecting reductions in the Allstate Financial portfolio more than offset by strong investment returns and operating cash flows.
However, the pre-tax net unrealized capital gains climbed to $1.6 billion as on March 31, 2011 from $1.4 billion at the end of 2010. Meanwhile, net realized capital gains totalled $96 million compared to a loss of $348 million in the year-ago period.
Allstate’s net investment income came in at $982 million, down 6.5% from the prior-year quarter, reflecting the declining yield. As on March 31, 2011, reported book value per share increased 13.2% year over year to $36.51. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, increased 7.3% year over year to $35.22.
Operating cash flow totalled $726 million at the end of the reported quarter, down from $964 million at the end of prior-year quarter. Long-term debt stood at $5.9 billion while total assets were recorded at $130.43 billion at the end of March 31, 2011.
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.
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-A (BRK.A) (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.
ALLSTATE CORP (ALL): Free Stock Analysis Report
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
Zacks Investment Research
