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Allstate Corp: Share Repurchase To Accelerate Despite Sandy

 December 19, 2012 09:26 AM

(By Mani) Allstate Corp. (NYSE: ALL) intends to begin to buy back its shares in accordance with this latest authorization immediately as it will be issuing $1 billion in subordinated debt to fund additional buybacks. The company expects to complete the new incremental repurchase program before 2013 ends.

The insurance company's board of directors has approved a share repurchase program of up to $1 billion to be funded by issuing a like amount of subordinated debentures.

The repurchase comes as it estimated a pre-tax catastrophe loss of approximately $1.08 billion, net of reinsurance, for the month of October. The company said it incurred heavy losses on claims, due mainly to the devastating super-storm Sandy, which was the largest of five catastrophe events in October.

[Related -The Allstate Corporation (ALL): Room For ROE, Multiple Expansion]

Allstate's newest buyback indicates the company may choose to initiate other buyback programs in concert with the one stemming from this hybrid issuance.

"We are modeling $1.4B of buybacks in 2013 and an additional $1.1B in 2014. Our model also forecasts Allstate increasing its quarterly dividend by 3¢ to 25¢ in late February, though we understand the risk that this forecast might be aggressive," Deutsche Bank analyst Joshua Shanker said in a client note

That said, Allstate indicates that it had $2.3 billion of deployable assets at the holdco level as of Sept. 30 before the impact of the upcoming hybrid issuance. Hurricane Sandy may have caused this number to decline marginally in the fourth quarter of 2012, but it is not material to the overall capital position of the firm.

[Related -Allstate Corporation: Tornadoes Remain An Earnings Risk]

There are many reasons to own the stock despite its recent run. Allstate's homeowners' business is experiencing sustained pricing power whose margin impact should continue into 2014 following Hurricane Sandy.

"We expect auto policycount to begin to grow in 2013 for the first time since 2007. The company appears, according to our analysis, to be overly conservative regarding its Sandy loss forecast," Shanker said.

In addition, Allstate seems cheap on both an absolute basis and a relative-to-peer basis in terms of both price-to-earnings and price-to-book relative to its return on equity (ROE). Ultimately, Allstate's manageable Sandy losses represent a catalyst in terms of assuaging concerns about Allstate's riskiness in the face of major catastrophic events.

Finally, Allstate has a transparent business model with strong brand equity. Management's does not need to deliver on the goal of 13 percent ROE for 2014 to have meaningful upside from here, but, if it occurs, expect revaluation.

"We believe the combination of a large buyback announcement in the face of Sandy losses represents the initial impetus for revaluation," Shanker added.



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