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Allstate: The Skies Clear

Investors usually rush for shelter during hurricane season by bailing out of casualty insurers. But now some are braving impending storms by buying into Allstate (ALL), the largest publicly traded homeowner's, auto, and life insurer. Cathy Seifert of Standard & Poor's rates Allstate a "strong buy." Its fundamentals are improving while the price-earnings ratio is depressed at just over 8; comparable insurers have p-e's of up to 25. The stock beat the market last year, she notes, despite hurricane losses of $5.7 billion from Katrina, Rita, and Wilma. Harry Fong of Calyon Securities, who rates it a "buy," says such losses won't be repeated this year. Allstate has cut its exposure in coastal states and raised prices. In Florida, Allstate has just 400,000 policies in force, down from 1.2 million before Hurricane Andrew in 1992, with further cutbacks to come, says Fong. What's more, Allstate now has reinsurance covering stormy states like Florida. This isn't yet fully reflected in Allstate's price, which fell from 63 a year ago to 55.17 on July 12, says Fong, who has a 12-month target of 70. Allstate is a strong cash generator and bought back $450 million worth of stock in the first quarter as part of a $1 billion 2006 buyback plan. Fong sees earnings of $7 a share this year and $7.40 in 2007, vs. $2.37 in 2005. Gabriel Solomon of T. Rowe Price (TROW), which owns shares, says Allstate's profits are more sustainable than the market perceives.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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