Allstate's Profit Surges Amid Hurricane Worries

Strategic Insights -

As the Northbrook-based auto and home insurer digs out from the aftermath of Hurricanes Katrina and Rita, its profit for the first quarter has exceeded expectations, reaching $1.42 billion, or $2.19 a share, up 26% from the same period in 2005. Despite this, the company's shares are trailing those of its biggest rivals, Progressive Corp. and Safeco Corp. Analysts say that this disparity makes Allstate's stock "very, very cheap," but concerns about hurricane losses and pricing competition weigh heavily on investors' minds.

Key Takeaways:

  • Allstate's profit for the first quarter of 2006 was $1.42 billion, or $2.19 a share, up 26% from the same period in 2005.
  • The company's shares are trading at less than nine times estimated 2006 earnings per share, compared to Safeco's 10 times and Progressive's 14 times.
  • Analyst Eli Rabinowich of Pzena Investment Management LLC estimates that Allstate's stock should be trading much higher, citing the company's ability to remain profitable despite big payouts for Katrina and Rita.
  • Allstate has taken aggressive steps to mitigate its exposure to hurricane losses, including hiking homeowners' premiums in vulnerable regions and increasing its reinsurance protection coverage to $4 billion.
  • CEO Edward Liddy claims that the company is in a better position today than it has ever been, but analysts remain concerned about potential losses from a bad hurricane season.
  • Investors are weighing the risks of hurricane losses against potential price cuts for auto policies to compete with rivals.
  • Pzena Investment Management LLC has recently increased its holdings of Allstate stock, adding 5 million shares to its existing 12.5 million shares.

Statistics:

  • Allstate's profit for the first quarter of 2006 was $1.42 billion.
  • The company's shares closed at $56.39 on Friday, down 1% in the past year.
  • Progressive's stock has risen 17% in the same period, while Safeco's shares have increased by 5%.
  • Allstate's stock trades at less than nine times estimated 2006 earnings per share, compared to Safeco's 10 times and Progressive's 14 times.
  • The company's reinsurance protection coverage has been increased to $4 billion from $2 billion.

Sources:

  • CRain's Chicago Business, "Allstate sees profits rise despite Katrina, Rita"
  • A. G. Edwards & Sons Inc., "Allstate's Earnings"
  • Pzena Investment Management LLC, "Allstate Corporation: Pzena Insights"