Friday, December 31, 2010

Repost: "The State of Allstate's Risks, Rewards" (ALL)

We're having some browser problems, or so I am told. I'll try to do this without all the links.
Here's the latest from Barron's Hot Research:
Allstate (ALL: NYSE)
By Sandler O'Neill + Partners ($32.00, Dec. 29, 2010)
We are maintaining our Hold rating on shares of Allstate and increasing our price target to $32 from $31. We value Allstate shares by applying a price-to-book multiple of 85% to our one-year forward (fourth-quarter 2011) estimated book value of $37.89 to reach our $32 price target.
Allstate (ticker: ALL) is an interesting stock.

First, it is -- perhaps -- the only large public insurer where there is a fundamental story to be told. Not much is really happening in our view at companies such as Chubb (CB), Travelers (TRV), or Ace (ACE). Allstate, on the other hand, should be enjoying an improving personal-lines marketplace. It should be enjoying higher earnings from its pricing efforts in its home-insurance and independent agent channel. It should be enjoying more stable earnings from its life-insurance unit with the more stable financial markets.
Second, it looks inexpensive on a price-to-book value basis. At 90% of book value versus its large-cap public peers at 95%, Allstate's shares look inexpensive versus its peers.
Third, its overall results are not that bad. Its operating return on equity was about 10% last quarter. We expect the company to report about a 9% operating return on equity in 2011 which isn't that bad compared with many other insurers.

Nevertheless, we remain cautious on Allstate's shares.

First, we are unconvinced by Allstate's third-quarter results that it has the fix for its troubled home-insurance and independent agent channel. We have basically given up on its troubled non-standard auto-insurance business rebounding. The non-standard business has been in decline for years. Its life-insurance operation is probably a stable or declining business in the future based upon what little we know of the current strategy.
Second, we think earnings expectations are too high for next year. Our 2011 earnings-per-share estimate of $3.60 is lower than consensus of $3.88. Perhaps this is more a criticism of analysts' expectations, but we think the stock will have trouble moving sharply higher if it keeps missing earnings expectations.

Third, the fourth quarter is not over, but it is not looking terribly good. We know from Progressive's (PGR) results that October was a difficult month for weather-related catastrophe losses. December isn't looking terribly good either.

Fourth, we anticipate investment marks will be negative for most insurers (including Allstate) due primarily to the difficult municipal bond market. To Allstate's credit, the company has been warning of a problem for some time and it has been reducing its municipal-bond investment portfolio.
Nevertheless, Allstate's investment leverage is higher than most of the property-casualty insurers we follow, and that means that its book value will likely be impacted more than most of the property-casualty insurers we follow.

We recognize that most of our concerns are short-term in nature. Fourth-quarter book value marks will be reported in a couple of months along with any potential fourth-quarter earnings disappointments due to weather in the back end of the year. It is also quite possible that analysts' expectations will decline to a more reasonable level soon.
-- Paul Newsome
-- Edward Shields
Also at Hot Research:

December 29
Why Finisar Should Acquire Oclaro
December 28
Cree's Brighter Outlook