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Allstate: Reappraisal

The second-largest property-casualty insurer is increasing its profitability and cutting its exposure to catastrophes.

The 2005 hurricane season was a wake-up call for Allstate, the largest publicly held automobile and home insurer. The company racked up $5.7 billion in catastrophe losses during the 2005 hurricane season, the costliest in Allstate's 75-year history. But the Northbrook, Ill., company is on the mend and taking steps to control the impact of disasters on its balance sheet. Allstate, which sells insurance to more than 14 million households, is also increasing its profitability by improving auto insurance offerings, say analysts at Friedman, Billings, Ramsey Co. The Arlington, Va., investment-banking firm upgraded Allstate's rating to "outperform" on Thursday.

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Allstate, the second-largest property-casualty insurer (behind State Farm), reported that profits in the first quarter of 2006 rose to $1.4 billion, 26% higher than the same period in 2005. The company also boosted its earnings guidance for the year, to a range of $6 to $6.40 per share, compared with a previously announced range of $5.60 to $6.00 per share. The stock (symbol ALL) jumped 6%, to $55, after the earnings announcement and upgrades by four analysts.

Personal auto and homeowner insurance make up more than 75% of Allstate's sales. During a conference call on Wednesday, chairman and chief executive officer Edward Liddy reiterated the company's plans to continue cutting its exposure to catastrophes by reducing coverage in areas that are at high risk for hurricanes and earthquakes, including California.

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Meanwhile, the company's auto insurance business looks "increasingly more profitable," says the FBR report. A new program called Your Choice Auto looks especially promising, says FBR. The program, which offers more customized insurance options, is currently available in 38 states and the District of Columbia. In the first quarter of 2006, about two-thirds of new policies issued were through Your Choice. Almost half of those customers chose higher-priced coverage than the coverage in standard policies.

Allstate is also aggressively buying back its shares, a sign that the company thinks the market has discounted its share price too heavily. At $55, Allstate trades at nine times estimated 2006 profits of $6.34 per share, according to Thomson First Call. During the first quarter of 2006, Allstate repurchased 8.5 million shares for $454 million, leaving a little over $1 billion left in the current buyback plan. "We view this repurchase program as highly positive for the company," says FBR. Its analysts think the shares are worth $59 to $67. In addition, the stock yields an above-average 2.7%.

--Katy Marquardt

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