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Allstate: “Good Hands” and Lots More

18 September 2013


But Crawford doesn’t think that price reflects the company’s prospects and believes they can gain another 50% over the next few years. “Good performance will come from continued pricing power,” he says.

August 31, 2013  (Robin Goldwyn Blumenthal)

Allstate is getting hip. With its edgy “Mayhem” television commercials featuring a strangely disaster-prone character, a growing online business, new consumer-centric technologies, and bundled products, the staid property-casualty outfit has become a real 21st-century venture.

The nation’s No. 2 personal insurer (ticker: ALL) behind State Farm (and the largest publicly traded one, with a market value of $22 billion) is still seeking customers who want to feel they’re in “good hands,” but it’s also after those who prefer a little less attention. Begun about six years ago under CEO Thomas Wilson, the transformation gained momentum in 2011, with the purchase of the Esurance online platform. The acquisition has given Allstate new tools to compete with price-guided rivals like Geico and Progressive (PGR), whose lower-cost business models have made inroads on Allstate’s agency-dependent business.

Allstate’s progress is attracting notice from investors such as Ken Crawford of Argent Capital Management and John Buckingham of Al Frank Asset Management. Like many financial-service stocks, Allstate has risen sharply since the financial crisis, more than tripling since 2009 to $47 and change last week. But Crawford doesn’t think that price reflects the company’s prospects and believes they can gain another 50% over the next few years. “Good performance will come from continued pricing power,” he says.

“We’re in a much stronger position now than in 2007,” agrees Allstate CEO Wilson. The process has been prolonged, he tells Barron’s, because “along the way we got caught in two storms,” unusually severe weather that caused big insurance payouts and the financial crisis, which necessitated a review of Allstate’s investment portfolio.

Allstate has been reorganized into four segments to try to better address the needs of the various consumer segments in the 16 million households it serves. The largest group is made up of Allstate brand products that are sold primarily through its traditional network of more than 11,000 exclusive agencies. Their customers want local personal advice and service. In all, this group kicks in 92% of premium revenues.

To pursue the self-directed insurance market via the Internet and call centers, Allstate now has the Esurance platform, which it bought for $1 billion, getting an online insurer, Answer Financial, as well. Previously, the company’s online sales were part of the Allstate-branded product group. The new business is growing at a 30% annual pace, albeit from a much smaller base.

Allstate’s Encompass group, which bundles its own branded auto and home insurance, is aimed at a more affluent population that typically buys insurance through independent agents and isn’t as brand sensitive. The company was purchased from CNA Insurance in 1999 and, as its name reflects, tries to meet an individual’s full range of insurance needs. The fourth segment, Answer Financial, is an independent auto and homeowners insurance agency that sells products from other carriers to online customers who want a menu of choices.

The organization has not only broadened its distribution but has changed its approach in other ways. It’s streamlined, closing 1,000 agencies, and changed its compensation structure to pay more to high performers. It recently announced the sale of its Lincoln Benefit Life insurance company for $600 million, and Wilson says he plans to use proceeds to add new products.

It’s tightened up in other ways as well. It substantially shrank certain regional efforts to address more extreme weather. It reduced homeowner policies by about two million, sharply curtailing that business in the high-cost states of hurricane-challenged New York and Florida.

Despite a weak economy, it went ahead with nearly 40% price increases in homeowners insurance. To offset the expected loss of customers, Allstate added products underwritten by other companies to its suite.

THE CRISIS ALSO PROMPTED Allstate to revamp its investment portfolio. It got caught in the financial crisis with $2.1 billion of subprime mortgage debt. It has since reduced its ownership of real-estate securities and municipal bonds and added more corporate credits. This year, to lower interest-rate risk in its $97.3 billion portfolio, it shortened maturities, sacrificing some income for safety. It posted a 1.5% loss on its investment portfolio in the second quarter.

“We’re not that comfortable with how the [Federal Reserve’s quantitative easing] unwind will work, and we like to own things that generate more cash,” Wilson says. As such, Allstate recently bought timber, oil, and gas partnerships, and invested directly in real estate.

In 2012, Allstate’s revenue rose 2% to $33.3 billion, while earnings jumped to $4.36 a share, on positive comparisons to 2011’s catastrophe-hit results. Wall Street expects Allstate to earn $4.81 a share this year on revenue of $33.9 billion. Premiums written are up and loss ratios are down.

The stock remains cheap. It trades at just 1.1 times book value, less than half that of Progressive and 9.3 times estimates of $5.14 a share on 2014 earnings, a multiple that is below its competitors and well below its five-year average of 14.4. Moreover, the company, which offers a 2.1% dividend yield, has $1.1 billion left in its share repurchase program.

Technology plays a bigger role at Allstate these days. One new product, “Drivewise,” monitors a driver’s performance in areas like braking and calibrates premium rates accordingly. It offers suggestions on how to improve performance and, possibly, lower the cost. Wilson envisions more of these advances as Allstate gradually shifts toward the prevention of accidents, rather than just restoring damaged property. “People will want additional help in protecting things, and they will pay us for it,” he says. That should put more money in the good hands of shareholders.