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3 Reasons to Love the Allstate Earnings Report

The good hands of Allstate (NYSE: ALL  ) reported earnings after the bell Wednesday, with better than expected results. While there were plenty of reasons for investors to love the Allstate earnings report, the stock is down in trading so far today -- with a 0.42% drop just after 1 p.m. EDT. Taking a deeper look than just analyst earnings expectations, here's a list of three reasons to love what the insurer reported last evening, along with one reason investors may be hating it, too.

Reason to Love No. 1: Earnings
Just like every other headline reported, Allstate's profits were down by 7% because of increased losses from catastrophic events. Now this might seem like it should be the bad news, but the insurer still produced higher than expected earnings. With EPS of $1.47 per share, the company handily beat the analyst consensus of $1.30 per share. This all being done in a quarter where the losses were $100 million higher than the year before -- a 38.6% increase.Though both earnings and operating profit both decreased year over year, the company was able to handle a heavier cost load while still maintaining market share and producing a return.

Reason to Love No. 2: Increased premiums
One of the key reasons Allstate was able to manage the bigger catastrophic loss burden was because of increases in the company's policy premiums. Overall property and casualty premiums grew 2.5% year over year, while Allstate Financial (the company's life and annuity business) premiums grew 4.7% during the same period. All of the company's insurance segments reported higher premiums for the quarter:

Segment First-Quarter Premium Growth
Allstate Brand 1.1%
Encompass 7.2%
Esurance 30.5%

Source: Allstate earnings press release May 1.

Esurance, a recently acquired self-directed insurance service also reported a 36.4% increase in policy units for the period. While this is also good news for the growth of the segment, Esurance serves the value sector of Allstate's insurance operations, so the policies will naturally have higher premiums, but also higher anticipated claims payouts. More on that in a minute.

Reason to Love No. 3: Improved combined ratio
In the insurance world, a combined ratio is the tally of losses and costs per $100 of written premiums. Allstate reported an 0.4 improvement in its underlying combined ratio, dropping it from 88.1 to 87.7. So for every $100 in premiums that Allstate brings in, it keeps $12.30. Competitor Traveler's Companies (NYSE: TRV  ) reported improvement with its combined ratio, though its 3.7 point drop keeps it behind Allstate, netting it $11.50 per $100 in premiums.

Each of the company's insurance segments have their own combined ratios, which can show you the difference in their operations and demographics:

Segment Reported Combined Ratio Improvement From Q1 2012
Standard Auto (Combined) 96.1 1.2 points
Allstate Brand 94.2 1.0 points
Encompass 105.8 0.8 points
Esurance 110.3 n/a
Homeowners (Combined) 65.8 1.2 points
Allstate Brand 85.1 (4.9) points

Source: Allstate earnings press release May 1.

As noted above, the Esurance brand is likely to require higher payouts for its policies, as demonstrated by the 110.3 combined ratio. The company has stated it is working on developing long-term customer relationships with the hope that new customers may be able to bring this number down in future periods. Allstate brand homeowners insurance saw a rise in its combined ratio largely due to the continued impact of Hurricane Sandy in the first quarter. The previous year saw an 11.2 point drop from 2011, so investors should be able to expect a decline next year, barring any other huge natural disasters.

One reason to hate
Okay, so here we are -- the top reason to hate Allstate's earnings announcement. It stems from a prudent decision on behalf of the company, but is not something any insurance investor really wants to hear. Because the historically low interest rate environment has been putting increased pressure on insurance companies' investment returns, Allstate has decided to make changes in its strategy. Leaving more traditional investments, the company is focusing on a shift to more cash-generating investments as a means to adjust to the current conditions. While this may be a good idea for the company now, it has already acknowledged that this move will reduce future investment income.

Since the company attributed its 1.2% return for the quarter to increased investment income, this is not a good sign for investors. Since insurance companies rely on their investment returns for a solid piece of their earnings, this is an important factor for Allstate investors to consider.

Going forward
Based on its first quarter, Allstate looks to be in good condition. With some more focus on gaining market share and improved operations, the company will continue to manage any future catastrophic losses like it has this past quarter. But with some pressure on its investment operations, there is plenty of reason for investors to hesitate on a rosy outlook for the company. Keep an eye out for more developments from Allstate, with a focus on its investment strategy. 

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