Allstate Insurance Breaks The Mold

Are you in good hands?

Jokes aside, Allstate (ALL) Insurance saw nearly 4x the number of searches of the nearest insurance ticker by financial pros over the last 30 days according to our proprietary data.

Compared to the #3 search, it saw 7.6x more traffic.

Yes, part of this came because of the company’s earnings on February 3rd.

Yet, the company missed earnings estimates while revenue beat them.

Despite that miss, shares closed up that same day by 3.38%…

Which got us wondering what they saw in the company.

Then we started to dig into the financials. And frankly, we liked what we saw.

Allstate’s Business

Insurance isn’t a tricky business. That’s probably why Warren Buffet likes it so much.

The majority of Allstate’s revenues come from property and casualty insurance premiums. Allstate then takes those premiums and invests them in conservative assets, typically bonds and similar investments.

Profitability is defined by the total premiums plus investment income less insurance payouts and administration expenses (more or less).

It’s a pretty straightforward business.

Pay out less claims and you generate higher returns. Plus, when insurers hike premiums, that tends to set the new watermark for costs to consumers.

Now, Allstate is building out a digital business model to provide affordable, simple, and connected protection solutions that leverage its current strengths.

In order to create these affordable products, management has focused on cutting costs, reducing the company’s workforce by 9% in 2020.

Additionally, the company purchased National General, a speciality personal insurance line holding company, to increase its access to National General’s 42,300 independent agents for property-casualty products.

Financials

Like banks, insurers don’t exactly have gross or operating margins.

Calculating these by hand, we’ve seen operating margins increase largely as a result of management’s efforts to control costs.

What’s equally impressive is the consistency of the investment revenue as a percentage of total revenue given the volatility in bond prices and low yields over the last few years.

Additionally, Allstate’s driven consistent shareholder returns with regular buybacks, as seen by the share reduction count, as well as the dividend payouts and free cash flow.

In fact, in 2019 and 2020, Allstate generated ~$15 per share in free cash flow, which as we’ll see in the valuation section, puts shares at under 7x current cash flow.

Valuation

Speaking of valuation, when we break down the different measures, we get a bit of a mixed bag at first glance.

The trailing price to earnings ratios look fantastic while the forward looking ones are more in line with the industry average.

Similarly, the trailing price to cash flow ratio looks great as does the price to sales ratios.

The question is why analysts expect a poorer performance in terms of earnings over the next year.

In the last call, management highlighted a theme we’ve heard many times over – inflation.

The higher costs of payouts is simply rising.

However, the company plans price increases to offset rising costs. So we question whether forward looking estimates may be a bit too conservative.

Our Opinion – 9/10

Allstate’s consistency in delivering profitability and shareholder returns makes it an ideal investment for long-term value investors.

We like the share buyback and dividend programs as well as the focus on cost-cutting and acquisitions. 

Ideally, we’d like to get shares below $110 and as close to $100 as possible.