Will Allstate (ALL) Miss Q2 Earnings on Higher Cat Loss?

The Allstate Corporation ALL is set to report its second-quarter 2014 results on Jul 30. Last quarter, the company delivered a 14.4% positive earnings surprise. Let's see how things are shaping up for this announcement.

Factors Influencing This Past Quarter

Second-quarter underwriting results will be marred by higher cat losses that totaled $936 million ($608 million after tax). As a result, combined ratio is also expected to deteriorate. This in turn would weigh on company's claims and benefits expenses as well as cash flow. A higher cat loss will also result in unfavorable reserve development.

Pricing pressure due to a highly competitive landscape, higher operating costs as well as sluggishness in Allstate brand home ownership are expected to limit margin expansion.

Investment returns are also expected to remain low given the soft interest rate environment.

Earnings Whispers?

Our proven model shows that Allstate is likely to miss earnings estimate this quarter because it has the right combination of two key ingredients.

Zacks ESP:  Allstate has an Earnings ESP of -11.25%. That is because the Most Accurate Estimate stands at 71 cents while the Zacks Consensus Estimate is higher at 80 cents.

Zacks Rank: Allstate has a Zacks Rank #4 (Sell) which lowers the predictive power of ESP. Also, we should never consider a Zacks Rank #4 or 5 going in to an earnings announcement, particularly when the company is seeing negative estimate revisions.

Other Stocks to Consider

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

Arch Capital Group Ltd. ACGL, earnings ESP of +5.10% and a Zacks Rank #2 (Buy).

RenaissanceRe Holdings Ltd. RNR, earnings ESP of +1.71% and a Zacks Rank #2.

XL Group plc XL earnings ESP of +1.20% and a Zacks Rank #3 (Hold).

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