Allstate Plummets as Dividend Is Threatened by Loss (Update4)

By Erik Holm
Bloomberg News
January 30, 2009

Jan. 29 (Bloomberg) -- Allstate Corp., the largest publicly traded U.S. home and auto insurer, dropped 21 percent in New York trading after a quarterly loss raised concern the company may end its 14-year streak of boosting its dividend.

Chief Executive Officer Tom Wilson said yesterday he's cutting 1,000 jobs at the life insurance business and reviewing the products sold by the unit after it caused Allstate to lose $1.13 billion in the three months ended Dec. 31. The Northbrook, Illinois-based company had a net loss of $1.68 billion, or $3.07 a share, in 2008, its first unprofitable year as a public firm.

The life operation, which typically provides less than one- fifth of the firm's revenue, may force Wilson and Allstate's board of directors to go a step further and reconsider the practice of raising the dividend, said analysts including Jim Ryan at Morningstar Inc. and KBW Inc.'s Cliff Gallant. Allstate called a halt to a half-completed share buyback program in October to shepherd cash.

"When you start eating into the capital of a company, one of the first thoughts you have is, how do I preserve it?" said Ryan. "One of the easiest ways you have to preserve it is to start looking at the dividend. It has to be on the table."

Allstate fell $6.14 to $23.50 at 4:01 p.m. in New York Stock Exchange composite trading. Shares slipped about 55 percent in 12 months. Fourth-quarter profit excluding investment losses was 97 cents a share, missing the average analyst's estimate by 38 cents, according to a Bloomberg survey.

Prudential, Genworth

Competitors Harford Financial Services Group Inc., Genworth Financial Inc. and Prudential Financial Inc. all slashed their payouts to shareholders last year after unprofitable third quarters.

Allstate declared its first dividend in August 1993, two months after Sears, Roebuck & Co. sold 20 percent of the company to the public in what was, according to the insurer, the largest initial public offering in U.S. history at the time. The board raised the payout every February since 1995, the year Sears spun off the rest of the firm. The current quarterly dividend of 41 cents a share cost more than $850 million in the past 12 months.

Wilson, who is also Allstate's chairman, told analysts and investors on a conference call today that no decision about the next dividend had been made. Based on today's share price, the yield would be about 7 percent if the payment is unchanged, the highest ratio in the firm's history.

"We look at that dividend every quarter," he said. "We will look at it again in February. As the chairman of the board, I reserve the right for the board to decide whatever they want to do every quarter."

'Taking Big Hits'

Life insurers guarantee minimum returns for some customers, and adjust profit assumptions when investment returns don't meet the company's targets. They also invest more aggressively than property insurers because they hold policyholder premiums for longer periods of time before paying claims.

"It's the life insurance business that's hurting them," said Ryan, who is based in Chicago. "They're taking big hits on their investments, which has become the fate of all the life insurers these days."

Allstate's credit rating was cut two grades today by Standard & Poor's to A- on the "potential for continued losses and capital strain" at the life unit. Fitch Ratings and Moody's Investors Service downgraded Allstate in October, citing earlier investment losses that contributed to a $923 million third- quarter loss. That same month, Wilson suspended a $2 billion share repurchase to preserve capital.

New Leadership

Wilson last month removed the president of Allstate's life insurance business after injecting $1 billion of capital into the unit in October. Wilson told investors at a conference in December that "we needed new leadership" for that business. A successor hasn't been named.

The job cuts and review of the business will take place over two years and are designed to save $90 million annually, the company said. The cuts represent about 2.6 percent of the staff, based on 38,000 employees at the end of 2007, according to the firm's most recent annual report. North American insurers including Genworth and Principal Financial Group Inc. have slashed more than 6,000 positions in the past two years, according to Bloomberg data.

'Not Like Hartford'

Life insurers including Hartford and Lincoln National Corp. have agreed to buy regional lenders in order to convert their holding companies to banks and become eligible for government funds under the $700 billion federal bailout. Allstate, which is already a regulated lender, is "not like Hartford," Wilson said. "we are not out actively working" to get bailout money.

Hartford slipped $2.31, or 13 percent, to $15.40, while Genworth declined 26 cents, or 9.2 percent, to $2.56. Principal and Prudential both fell more than 12 percent and Lincoln plunged 18 percent. All have lost more than 60 percent in the past year.

Book value per share, a measure of Allstate's assets minus liabilities, fell 25 percent in three months to $23.51 because of the quarterly loss and a $4.7 billion decline in the value of securities the insurer doesn't intend to sell. The drop includes about $1.6 billion on corporate debt, $1.2 billion on commercial mortgage-backed securities and about $900 million on asset-backed securities.

"It would not surprise me if we did not see an increase," in the dividend, Gallant said. "Given the company does have decent cash flow, I would expect them to pay something, but certainly they've reached a point where the decision to raise it should be examined a bit more carefully."

LBO, Hedge Funds

Allstate's private equity, real estate and hedge fund investments produced a $101 million loss in the fourth quarter, compared with an $88 million profit a year earlier. Hedge fund losses of $96 million dragged down results in the so-called alternative investments, while real estate funds lost $30 million and private equity earned $25 million.

The insurer is also investing in securities with shorter terms to increase liquidity, Wilson said on the conference call. The change in strategy "resulted in substantially lower investment income," he said.

Allstate kept 3.6 cents of every dollar collected in premiums at its property-casualty units in the fourth quarter, compared with 4.1 cents in the same period a year earlier.

"The cornerstone and bedrock of our company is making sure we earn good insurance profits," Wilson said. "That business continues to generate capital and be a strong source for us. We also have plenty of capital."

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