Allstate Continuing to Move in the Right Direction

Allstate’s first-quarter operating EPS came in at $1.30, compared with our estimate of $1.14 and consensus of $1.19. The beat versus our estimate was mainly driven by better investment income and Allstate Financial performance, offset partially by less favorable development and higher catastrophes. More importantly, the quarter showed signs that Allstate has the ability to continue improving its core earnings run-rate with improving top-line figures, stable loss trends (excluding weather), and substantial capital returns to shareholders (more than $1 billion combining dividends and share repurchases).

We believe the stock remains one of the better names to own among large-cap P&C insurers, and remains a good value at 1.2 times book value and 11 times our 2014 operating EPS. Despite the strong stock performance over the last 12 months, the potential for multiple expansion and $6.00-plus of core earnings by 2015 suggests that significant upside is still possible over the next 12 months. Estimate Revisions We are increasing our 2014 estimate from $5.00 to $5.20 to account for the first-quarter earnings beat. We are maintaining our 2015 estimate of $5.70.

Key Factors Allstate Showing Strong Sales Momentum. The biggest positive from the quarter was acceleration in policies in force (PIF), which increased 2% year-over-year. PIF for the standard auto and homeowners’ lines had been in decline for several years dragging down overall corporate PIF for the last several years. The two key contributors this quarter were Allstate auto, which continued its sequential improvement and grew 2.1% year-over-year during the quarter, and Allstate homeowners’, which was down 1.2% year-over-year versus 5.4% in the prior-year period. As the company looks to expand its homeowners’ book, we expect that figure to hit zero by the end of the year, which should further strengthen standard auto PIF through bundling. This effect can already be seen to some extent with the increases in retention in both lines of business, as the company is being less aggressive with rate increases and more selective in re-underwriting existing policies.

Overall P&C premium written growth of 5.2%, versus our expectation of 5.0%, was driven by another strong quarter at Esurance and stronger-than-expected growth in homeowners’ and other personal lines. This quarter is another clear indication that top-line growth continues to be robust and should remain within the 5% to 6% range over the next two years.