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Will Allstate (ALL) Q3 Earnings Suffer From Weather Loss?

The Allstate Corp. ALL is scheduled to report third-quarter 2017 results on Nov 1, after market close.

Last quarter, Allstate beat the Zacks Consensus Estimate by 53.3% and grew 122.6% year over year on higher revenues. The upside was driven by premium growth as well as an increase in net investment income. The customer base rose to 75 million policies in force.

The company has an impressive surprise history. It surpassed estimates in each of the last four quarters, with an average positive earnings surprise of 36.9%. This is depicted in the graph below:

Allstate Corporation (The) Price and EPS Surprise

Let’s see how things are shaping up for this announcement.

Q3 Flashback

Allstate’s earnings have been exposed to catastrophe losses. The first half of 2017 bore the brunt of cat losses and the same is expected in the third quarter, which was shaken by massive catastrophes – Harvey, Irma, Maria.

The company has provided preliminary estimates of cat loss of $774 million on a pre-tax basis, owing to weather-related destruction in July and August.

In the first quarter, the company closed the acquisition of SquareTrade, a protection plan provider for consumer electronics and connected devices. Allstate previously said that the deal would dilute earnings for three years.

Therefore, the effect of the same will be felt in third-quarter results. During the second quarter, Allstate Insurance Company executed a 100% quota share reinsurance agreement with SquareTrade’s largest third-party insurer, which should result in higher underwriting and investment income.

The company’s customer-focused strategy and a wide variety of products and services sold through an extensive distribution network will likely result in higher policies issued, thus driving top-line growth.

We also expect to see improved auto insurance margins, reflecting broad-based profit improvement plans initiated by the company over two years ago.

A large component of the company’s operating income results from investment income so despite the continuation of historically low interest rates, the company has managed well on this front. The portfolio is proactively managed and is primarily a high-quality fixed income portfolio, which generates predictable earnings with modest growth.

In the second quarter, the company reported an increase in net investment income and we expect superior performance in the third quarter.

Allstate’s capital strength and financial flexibility enables it to manage shareholder capital. The company returned $903 million to its shareholders in the first six months of 2017, which reduced outstanding debt at the beginning of the year by 2.1%. Continuing this trend, shares bought back during the third quarter will push up the company’s bottom line.

Earnings Whispers

Our proven model does not conclusively show that Allstate is likely to beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Allstate has an Earning ESP of 0.00%. This is because the Most Accurate estimate of $1.09 per share is in line with the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank:  Allstate carries a Zacks Rank #4 (Sell). We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Lincoln National Corp. LNC will report third-quarter 2017 earnings results on Nov 1. The company has an Earnings ESP of +0.55% and a Zacks Rank #2 (Buy).  You can see">the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Voya Financial, Inc. VOYA has an Earnings ESP of +2.22% and a Zacks Rank #3 (Hold). The company is expected to report third-quarter earnings results on Oct 31.

Aetna Inc. AET has an Earnings ESP of +2.91% and a Zacks Rank #2. The company is expected to report third-quarter earnings results on Oct 31.

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