Allstate CEO Shrugs Off Sandy

Updated with additional comments from Allstate CEO Thomas Wilson, speaking during the company's conference call Thursday morning.

NEW YORK ( TheStreet) -- Allstate ( ALL) late on Wednesday reported strong third-quarter results, and CEO Thomas Wilson said that Hurricane Sandy was "not expected to have a material impact" on the company's financial condition.

Speaking on CNBC, Wilson said that Hurricane Sandy was "about twice the size geographically of Katrina," which hit New Orleans in 2005, killed over 1,800 people, and caused $108 billion in damage, according to the National Hurricane Center's report, which was revised in September 2011.

Wilson said that "the good news" was that Hurricane Sandy's "wind speeds were about two-thirds of what Katrina was and that's sort of an exponential impact so there should be a lot less damage but it's much wider spread... this is just a massive storm and there's a lot of work to be done."

After saying on CNBC that the Hurricane Sandy's cost to Allstate "will be significant, but not material," and that "these types of events are in the normal volatility that we and our shareholders expect," Wilson later said in a statement that "it's too early to estimate the impact of Hurricane Sandy on Allstate's fourth quarter earnings... however, this catastrophe is not expected to have a material impact on Allstate's overall financial condition. Allstate is amply well-capitalized to meet its obligations to policyholders."

While again pointing out that it was too early to estimate losses from Hurricane Sandy, Wilson said during Allstate's earnings conference call on Thursday that "the actions we have taken over the last five years in places like New York, New Jersey, all up along the East Coast have reduced the policy counts we have there in the sort of 10% to 30% range. And that will obviously impact what our losses are relative to what they would have been."

When Credit Suisse analyst Mike Zaremski said that "it looks like insurance regulators and at least a few impacted states are saying the storm won't technically be classified as a hurricane," and that "hurricane deductibles won't apply," Wilson explained that "a hurricane is it gets its energy from the water. The winter storm or northeaster get its energy from the temperature differential in the air. And so that is why it has been classified that way. "

Wilson went on to say that "the tropical cyclone deductible probably will not be triggered up in the northeast and we are prepared for that, and that is what is fair and accurate for our customers," and added that in some southern states, the higher hurricane deductibles may apply, but "but the damage is much less severe down there than when where the hurricane turned in."

A Strong Third Quarter

Allstate reported third-quarter net income of $723 million, or $1.48 a share, beating the consensus estimate of $1.13, among analysts polled by Thomson Reuters. Earnings increased from $175 million, or 34 cents a share, during the third quarter of 2011, even though consolidated revenues declined to $8.128 billion from $8.242 billion.

Catastrophe losses declined to $206 million in the third quarter, from $1.077 billion a year earlier. The company's property-liability combined ratio declined to 90.2 in the third quarter, from 104.8 in the third quarter of 2011. The combined ratio is the sum of incurred losses and expenses divided by earned premiums. It measures underwriting profitability, and a combined ratio of over 100% indicates an underwriting loss.

The company's "underlying combined ratio," which excludes "the effect of catastrophes, prior year reserve re-estimates, business combination expenses and the amortization of purchased intangible assets," improved to 87.8 in the third quarter from 89.2 a year earlier, "reflecting favorable margins in the Allstate and Encompass brands."

Much of the damage from Hurricane Sandy is from flooding, and although Allstate will be adjusting flood claims, the claims will be paid by the federal government, through the National Flood Insurance Program. Deutsche Bank analyst Joshua Shanker on Wednesday wrote that "An Allstate loss of less than $500mm for Sandy may be seen as a triumph."

Shanker rates Allstate a "Buy" with a price target of $47, and estimates the company will earn $4.80 a share in 2013. The analyst said that "by our estimates core homeowners' margins have improved by almost 200bps and 700bps over sequential quarters and annually, respectively," and that "core auto margins improved modestly as well. We believe consensus number need to rise to reflect underlying improved margins."

KBW analyst Cliff Gallant has a "Market Perform" rating on Allstate, and on Wednesday cut his 2012 EPS estimate to $4.35 from $4.60 "due to Sandy," but raised his 2013 EPS estimate to $4.80 from $4.65, "on good underlying trends." Gallant also raised his price target for the shares by five dollars, to $42, "in-line with book." Allstate's book value per share increased to $42.64 as of Sept. 30, from $34.84 a year earlier.

Gallant said that for the third quarter, Allstate's "underwriting results were ahead of our expectations, with a lower-than-expected combined ratio (90.2% versus our 94.3% estimate) and better premium growth (5.0% versus our 3.5% estimate)," was "primarily due to the company's recent acquisition of Esurance, which added $282 million of new written premiums, and an increase in Homeowners premiums."

Allstate closed at $39.98 Wednesday, returning 49% year-to-date. The shares trade for nine times the consensus 2013 EPS estimate of $4.45.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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