Company Reports

The pandemic boosted personal auto results, as quarantine efforts led to a sharp decline in miles driven, and Allstate saw a dramatic short-term increase in underwriting margins while social distancing efforts were in effect. Ultimately, though, drivers returned to the road, and the pricing cycle reset at a less attractive point. Furthermore, insurers absorbed higher claims costs due to multiple factors beyond the end of the pandemic. Allstate was also buffeted by relatively high catastrophe losses. These trends led the company to losses for 2022 and 2023.

Allstate continues to benefit from strong industry pricing and better investment income, but we see signs that results could start to come back down to earth.

Allstate continued to exploit favorable industry conditions and maintained strong profitability in the first quarter.

The pandemic boosted personal auto results, as quarantine efforts led to a sharp decline in miles driven and claims, and Allstate saw a dramatic short-term increase in underwriting margins while social distancing efforts were in effect. Ultimately, though, this benefit waned as drivers returned to the road and the pricing cycle reset at a less attractive point. Furthermore, insurers absorbed higher claims costs due to multiple factors beyond the end of the pandemic. Outside of this issue, Allstate was also buffeted by relatively high catastrophe losses. These trends led the company to losses for 2022 and 2023.

The pandemic boosted personal auto results, as quarantine efforts led to a sharp decline in miles driven and claims, and Allstate saw a dramatic short-term boost to underwriting margins while social distancing efforts were in effect. Ultimately, though, this benefit waned as vaccination efforts took hold, and the pandemic restarted the pricing cycle at a less attractive point. Furthermore, insurers absorbed higher claims costs due to multiple factors beyond the impact of drivers returning to the road. Outside of this issue, Allstate was buffeted by relatively high catastrophe losses. These trends led the company to losses for 2022 and 2023.

Allstate has taken full advantage of attractive industry conditions and topped off a great year with a strong finish.

Allstate, along with its peers, has been producing strong returns recently due to industry tailwinds. The third quarter maintained this trend, with low catastrophe losses providing a further boost.

The pandemic boosted personal auto results, as quarantine efforts led to a stark decline in miles driven and claims, and Allstate saw a dramatic short-term boost to underwriting margins while social distancing efforts were in effect. Ultimately, though, this benefit waned as vaccination efforts took hold, and the pandemic restarted the pricing cycle at a less attractive point. Further, insurers absorbed a rise in claims costs due to multiple factors beyond the impact of drivers returning to the road. Outside of this issue, Allstate was buffeted by relatively high catastrophe losses. These trends pushed the company into losses for 2022 and 2023.

Allstate delivered another strong quarter as it continues to benefit from tailwinds on both the underwriting and investment sides.

Heavy losses related to the California wildfires lowered profitability for Allstate in the first quarter, but industry tailwinds kept the company in the black.

The coronavirus boosted personal auto results, as quarantine efforts led to a stark decline in miles driven and claims and the company saw a dramatic short-term boost to underwriting margins while social distancing efforts were in effect. Ultimately, though, this benefit waned as vaccination efforts took hold, and the pandemic restarted the pricing cycle at a less attractive point. Further, insurers absorbed a rise in claims costs due to multiple factors beyond the impact of drivers returning to the road. Outside of this issue, Allstate was buffeted by relatively high catastrophe losses. These trends pushed the company into losses for 2022 and 2023.

Conditions in the property-casualty insurance industry are close to ideal at the moment, as price increases are boosting the underwriting side and higher interest rates are lifting investment results. Much of our domestic P&C coverage is generating outsize returns, and Allstate is no exception. Its return on equity for the full year was 26%, well above our long-term expectations for the no-moat company.

Loss estimates from the fires in the Los Angeles area appear to be increasing. Morningstar DBRS previously estimated over $8 billion in insured losses, but we have seen larger estimates rolling in as the fires have remained largely uncontained. Early loss estimates from natural disasters are often imprecise, but it seems clear that this will be a meaningful loss event for the industry. Still, it appears losses will be manageable and will fall short of the losses the industry sees from large hurricanes. For context, Hurricane Katrina led to about $100 billion in insured losses in today’s dollars, according to Aon.

Allstate, like its peers, is currently enjoying tailwinds on both sides of the business as underwriting conditions grow more favorable and higher interest rates boost investment results. The net effect in the third quarter was an annualized return on equity of 26%, well above the company’s historical average. While we appreciate the strength of the near-term outlook, we see this performance as primarily due to the cycle and temporary. We will maintain our $138 fair value estimate for the no-moat company and see the shares as materially overvalued. We believe the market is overly focused on near-term results and expect returns to normalize over time.

Autonomous vehicles could have profound positive and negative impacts on the auto insurance industry. Self-driving cars could massively reduce accidents by eliminating human errors and, in the long run, could shift the liability from drivers to manufacturers, making personal auto insurance obsolete. We believe that fully autonomous vehicles are closer than most people think from a technology perspective, but the period from technological development to mass adoption is significantly higher than the market anticipates. In our most aggressive adoption scenario, we think most cars on the road could be automated to a level where insurance is largely unnecessary within 20 years. We don't think investors should discount auto insurance stocks based on this risk today. But with the group trading at a hefty premium to historical book multiples, from a long-term perspective, we question whether current valuations are justified for businesses that might become obsolete.

The coronavirus boosted personal auto results, as quarantine efforts led to a stark decline in miles driven and claims and the company saw a dramatic short-term boost to underwriting margins while social distancing efforts were in effect. Ultimately, though, this benefit waned as vaccination efforts took hold, and the pandemic appears to have restarted the pricing cycle at a less attractive point. Further, insurers are absorbing a rise in claims costs due to multiple factors beyond the impact of drivers returning to the road. Auto insurers have endured a very difficult period recently, which has pushed Allstate to significant underwriting losses. Outside of this issue, Allstate was buffeted by relatively high catastrophe losses recently. These two trends pushed the company into meaningful losses for 2022 and 2023.

Allstate announced it has reached a deal to sell its employer voluntary benefits business to StanCorp Financial for $2.0 billion. This is part of management’s plan to sell its health and benefits businesses. We like this move, as we don’t see a good strategic connection between this segment and the company’s core property-casualty insurance operations. The price for this business looks reasonable to us and should result in a gain of $600 million. It will also free up about $1.6 billion in capital, which we see as a positive, since Allstate’s balance sheet is recovering from losses over the last two years. While we like this move, it is not large enough to materially affect our valuation, and we will maintain our $130 fair value estimate for the no-moat company. We see the shares as overvalued at the moment, as we believe the market is overly focused on near-term tailwinds for the business.

Allstate’s results have shown a quick turnaround as market conditions have flipped from adverse to favorable. The annualized ROE of 19% for the first six months of the year is well above the company’s historical average, and we think near-term prospects remain strong as pricing increases and higher interest rates provide dual tailwinds for the business. However, insurance is an inherently mean-reverting industry, and we do not believe this favorable backdrop will persist. We will maintain our $130 fair value estimate for the no-moat company and see shares as materially overvalued. We think the market is overly focused on near-term returns.

Higher interest rates have boosted investment income and have had a material positive impact on overall returns for our domestic property-casualty insurance coverage. While insurers with low fixed-income duration have seen the largest impact, the effect has flowed through our coverage. Interest rates and investment income are only part of the story for insurers, but the outlook for underwriting is strong as well, in our view. Following a few years of solid price increases, commercial insurers have seen underwriting margins stabilize at an attractive level. Personal auto insurers have endured some difficulties recently, but strong pricing increases have improved combined ratios. With both sides of the profit picture already strong or improving, we expect our P&C insurers to generate unusually attractive results in the near term. However, we believe the market has overreacted to these tailwinds, and we see our coverage as generally overvalued. Investigating historical underwriting results for a P&C insurance peer group strongly suggests that underwriting results adjust over time to changes in interest rates, and underwriting margins have improved over the past few decades as interest rates fell. If interest rates stay high, we expect underwriting margins will compress, and returns will normalize. Our fair value estimates hinge on the idea that returns for our coverage will ultimately return to a level roughly in line with historical averages. If the industry does mean-revert over the next few years, investors will pay an overly rich price today for most of our coverage.

Allstate’s first-quarter results were encouraging, as the company continues to move the past the underwriting issues that have plagued it over the past couple of years. The adjusted annualized return on equity of 11% in the quarter suggests the no-moat company has brought returns back to an acceptable level. We will maintain our $130 fair value estimate.