The Allstate Corporation Is Still a Buy - Even at a Premium Price

The Allstate Corporation (NYSE: ALL  ) is another property and casualty insurance business that deserves the attention of investors focusing on financial investments. With a market capitalization of over $25 billion, Allstate belongs to the larger property and casualty insurance businesses in the country.

What separates Allstate from a variety of other insurance companies, is that the firm trades a solid premium to book value which still is quite rare in the insurance sector.

American International Group (NYSE: AIG  ) , for instance, trades at a 25% discount to book value and The Hartford Financial Services Group (NYSE: HIG  ) at a 14% discount.

While book value centered valuation methodologies have their shortcomings, an insurance company's book value is an accepted proxy of intrinsic value, even though it is likely underestimating the true value of the underlying assets due to conservative accounting principles.

Convincing share performance
Allstate is among a select group of insurance businesses that have managed to rebound nicely over the last couple of years. Allstate's stock price increased 76% over the last two years and 21% over the last twelve month.

Since the beginning of the year Allstate shares have returned almost 9% to shareholders: A reflection of solid underlying business performance.

Operating performance
For the first quarter 2014 Allstate reported consolidated revenues of $8,684 million which compares against $8,463 million in the prior year period, a plus of 3%. For the first quarter the insurance company also posted $445 million in insurance losses which were responsible for lower insurance earnings compared to the first quarter of 2013.

As a result, Allstate's recorded property-liability combined ratio increased sequentially from 88.7 in the fourth quarter of 2013 to 94.7 in the most recent quarter. However, Allstate's underlying combined ratio, which adjusts for catastrophe losses, stood only at 88.4 in the first quarter of 2014 and within management's guidance for a full-year underlying combined ratio of 87.0-89.0.

Moreover, Allstate's underlying combined ratio has been solidly below the 90.0 mark for the last five quarters:


Source: Company presentation.

Although catastrophe losses put a dent into Allstate's first quarter earnings, the insurance company still managed to produce operating income of $588 million ($1.30 per diluted share) compared to last year's $647 million ($1.35 per diluted share). Analysts expected Allstate to earn $1.19 per share on average.

Aggressive share repurchases
One of the most noteworthy, but overlooked, bits of Allstate's first quarter results  relates to the company's ongoing share repurchase program. In the first quarter of 2014 alone Allstate repurchased approximately 18 million shares for a total consideration of $987 million. This compares against share repurchases totaling $651 million in the prior year quarter. Aggressive share repurchases signal that management believes that the company's shares are materially undervalued and ongoing share buybacks provide crucial support for Allstate's share price.

Final assessment
Strong premium development and operating performance has caused Allstate's book value per share to increase by more than 7% year-over-year. In the first quarter of 2013 Allstate reported a book value of $43.46 compared to $46.70 in the most recent quarter. With a current share price of $58.26, Allstate trades at a solid 25% premium to its book value.

While other insurance companies deserve their valuation discounts due to comparatively weak combined ratios, Allstate is clearly leading the pack.

Further tailwinds for Allstate's stock price could come from higher interest rates down the road which should provide a boost to the company's investment income. Insurance companies' investment incomes still remains below their long-run potential after five years of ultra-low interest rates.

With higher interest rates and higher investment returns, Allstate's share price could trading at even higher book value multiples than the ones we currently see in the marketplace.

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