Better Times Ahead For Allstate - Barron's

Insurance giant Allstate (ALL) was hit hard by the credit crisis but appears to be making a recovery as it shifts focus back to writing auto and homeowners policies. Barron's says the shares deserve a better premium.

Allstate posted a $1.7B loss for 2008 and a $274M loss in the first quarter this year, in large part because of heavy asset write-downs. The credit crisis took an even greater toll on Allstate's shareholder net worth, or book value. Equity-per-share fell by over 40% between year-end 2007 and Q1 '09, and Allstate's stock has fallen from nearly $60 to a recent $25. The quarterly dividend was cut in half, and a $2B stock buyback program was suspended.

The worst of Allstate's problems appear to be in the past, however, and the company is now on the mend. It has cut back risk in its $59B investment portfolio and is starting to cut back on its life and financial products to emphasize what it calls its "protection" business - auto and homeowners' policies, which are carried by around 70M Americans. This is a smart move, as Allstate's property-and-casualty business historically earned a near-15% return on equity and accounts for more than 80% of company revenue.

As some of its bond holdings have improved in price, investors are less concerned Allstate will have to dilute its stock to boost capital. Allstate even turned down TARP funding last month. Plus, credit spreads have started to compress so Allstate's $9.4B in unrealized losses has dropped by $1.5B. The company has reduced its exposure to commercial real estate by more than $1B, and shortened the duration of its bond portfolio by half a year to decrease its exposure to a rise in interest rates.

It will take time for Allstate to recover its old earning power, but the future looks bright. Analysts forecast earnings per share of $3.91 this year and $4.24 in 2010. That means shares are cheap at less than six times next year's forecast.

• Vinay Misquith, of Credit Suisse, has a twelve-month price target of $32 on the stock. "Allstate is an interesting opportunity, because I believe it was unfairly tarred with the woes of the life-insurance industry, with investors ignoring its highly profitable primary business in auto and homeowners."
• William Yankus, of Fox-Pitt Kelton, has an twelve-month target of $40/share.

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• Allstate: Q1 EPS of $0.84 misses by $0.39. Revenue of $7.88B (-2.5%) vs. $8.16B. Says has statutory surplus of $13B at Allstate Insurance and $3.4B at Allstate Life. Unrealized net capital losses rose by $590M to $9.4B from Q4. (PR)
• The Obama administration wants to tag life insurers with $12.8B in new taxes over the next decade. Industry followers say the changes could hit sales of corporate-owned life insurance.