InvestorPlace Blogs is powered by Marketocracy. Marketocracy has authorized Investor Place Blogs as an official registrar for voting through Marketocracy's Investment Research Rating service. Registered members of InvestorPlace Blogs are linked with a Marketocracy account to establish voting power based on their performance of trading and posting on stocks.
Allstate is a household name in the Insurance business, selling mostly personal auto & homeonnwers policies. At the current 55.21, it is selling at a P/E of 6.62, which I feel is a bargain, and pays a 2.75% dividend. Sharecounts have decreased steadily for the past 10 years as ALL uses its strong cash flow to buy back shares.
Property & Casualty insurance companies have been making excellent profits for the past few years. Operating profitability in the industry is normally determined by computing a combined ratio, which combines the loss ratio and the expense ratio. Allstate expects to finish 2007 with a combined ratio of 84-86%, well below historical averages. The insurance industry is cyclical and as price competition sets in, the combined ratio should increase, reducing profitability. I expect this to occur less rapidly than in previous cycles, because it has become more popular to buy back shares than to spend profits cutting prices to buy business. Also, insurance companies have a large investment income, typically from bonds, and given the uncertainty of values and income in that area most of them should continue to be motivated to earn an operating profit rather than relying in investment returns.
Allstate had substantial losses from Katrina in 2005, which were worse than they had to be because they had elected to forgo reinsurance. They now carry it.They had a bad year for catastrophes in 2004 also. However, ALL is trading at 10X its 5 year average EPS, which includes the large catastrophe claims, so any discount to compensate for catastrophe risk is already in the shares.
Allstate just reported its 3rd quarter, which was less profitable than the same quarter last year, when hurricane losses were negligible. The company owns 4.5 billion of investment grade securities backed by sub-prime mortgages issued in 2006 & 2007, and took a mark to market loss of 304 million but the company believes these impairments are temporary and they will be paid in full. Shares were down by 2.00 or more, which I felt was an over-reaction and provided a buying opportunity.
I bought 1,000 shares at 55.21, using a third of my available cash.
| 
RSS 2.0
