The Allstate Corporation

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Allstate is a major U.S. insurance provider offering a range of policies, including auto, home, and life coverage, and is known for its distinctive “You’re in Good Hands” slogan.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Allstate’s business primarily revolves around writing insurance premiums and generating an underwriting profit, but the company’s investment portfolio also plays a role in its income.

Business Overview

  • Revenues Distribution: Allstate generates revenue primarily from premiums on policies for property and casualty insurance, auto insurance, and life and health insurance. The company operates through three main segments: Allstate Protection (primarily auto and homeowners insurance), Protection Services (extended warranties and roadside assistance), and Allstate Health and Benefits (individual and group health insurance, life insurance).

  • Industry Trends: The insurance industry is facing several trends, including increasing weather-related losses due to climate change, changing regulatory landscapes, and increasing competition from digitally-native insurers, which are making the industry more competitive, and also less predictable. There is a significant shift towards data-driven insurance policies and personalized premiums. There’s an increasing focus on tech-savvy solutions, and many companies are trying to go digital.
    • The current interest rates affect income on invested assets, but because insurance companies generally have longer durations on assets than liabilities, higher interest rates also increase the liability discount rates, and thus are a net positive on insurance valuations. Also, it is essential to understand that because insurance companies often invest in corporate bonds (with a term of maturity that is generally 3-5 years) while their obligations are sometimes for 30+ years, the higher interest rates can negatively affect prices of their longer term assets.

  • Margins: Allstate’s profit margins depend on its ability to accurately predict risk and manage claim payments efficiently. The combined ratio, which measures the percentage of premiums that the company pays out as claims and expenses, is a critical metric for evaluating an insurance business. When the combined ratio is below 100%, it means the company is generating an underwriting profit. Achieving low combined ratios is what makes a company successful in this industry.

  • Competitive Landscape: The insurance market is competitive, featuring a mix of large established players like State Farm and Progressive, as well as newer entrants. Many insurers face competition on pricing and features, but established brands benefit from customer loyalty and entrenched distribution networks. The industry is highly regulated, which means there are barriers to entry, but those are not insurmountable.

  • What Makes Allstate Different: Allstate is a well-established brand, especially known for its advertising slogan “You’re in Good Hands.” It relies on a multi-channel distribution approach, including its own agents, independent agents, and direct-to-consumer channels, which gives them some additional edge, compared to peers. But it is worth noting that these distribution networks may not be as effective as digitalized and innovative channels.

Allstate is heavily regulated, and it faces competition from many different angles, but it is a very well-recognized brand with multiple distribution channels, which is a key advantage it has compared to many other competitors.

Financial Analysis

  • Income Statement
    • Allstate reports its financial performance in segments. The main driver is premium revenues (insurance policies), but some revenue also comes from investments, and other activities. For Q2 2023 premiums written were $13.796 billion versus $14.063 billion from Q2 2022, with an adjusted income of $58 million versus a loss of 702 million from previous year, showcasing a significant improvement in profitability. They report that the net premiums written increased by 2.5 percent on the first half of 2023, primarily due to increase in property-liability premiums, partially offset by a decrease in life and benefits premiums.

The company has continued to prioritize disciplined underwriting and rate adequacy, which are expected to have more positive effects on the income statement. * The reported net income for the six months ended 2023 was $1.349B versus a net loss of $1.032B in the same period in 2022, highlighting a large fluctuation in profitability. * In the last earnings call, the company noted that in the previous quarter it was particularly affected by unfavorable weather and high catastrophe losses, but in this quarter they were impacted by lower auto policy frequency, mainly caused by inflation. * Allstate continues to have issues with claims costs and related expenses. They report a combined ratio of 104.1 for the second quarter of 2023, which includes a severe weather impact of almost 7 points, implying that their underlying business is doing fairly well. * It is worth nothing that for 2022 The Allstate Corporation had an earnings per share of -$3.90, which is way lower than 2021’s $16.83, because of weather losses and rising insurance costs.

  • Balance Sheet Health: The company’s assets mainly consist of fixed income securities and equity investments. A sizable part of its liabilities are formed by unearned premiums and claims reserves.
    • Total Assets stood at $184.5 billion in Q2 2023 which is a slight decrease from $186.7 billion in 2022, while liabilities decreased from 165.1 billion to $159.2 billion. These fluctuations are mostly caused by market valuations of their investments portfolio.
    • The company’s credit profile is rated by major agencies as A and A+, meaning they have a stable outlook and investment grade. While not an immediate risk, the company’s credit rating may be downgraded if their financial performance is not improved.
    • The total debt is around $8 billion, and they have $87.3 billion in investment grade securities. Overall, they seem to be in a decent situation, but their financial leverage has been increasing.
    • Allstate has some large unrealized losses on their bond portfolio, that do not translate into an immediate loss, but those losses may be realized if they are forced to sell the bonds before maturity. These unrealized losses create a somewhat elevated financial risk for the company.
  • Cash Flow: While operating cash flow is usually relatively high at Allstate, they can be very volatile due to natural disasters and other unexpected events that require large payouts for claims. Therefore the company has large cash positions, mainly in liquid instruments. For the nine months ended September 30, 2023, the company’s net cash from operations was around $3.003 billion compared to $4.151B for the first 9 months of 2022, highlighting a major decrease in cash flows. Also, cash used in investment activities was around $4 billion, so the company had to make a net cash used of around $1.19B in financing activities.

The company has stated that the effects of weather and interest rate volatility, paired with decreasing sales are putting a strain on their financials. The company also notes that a potential increase in regulatory activity in areas such as “climate change” may increase future expenses.

Moat Assessment

  • Intangible Assets (Brand): Allstate has a strong brand recognition and is generally viewed as a leader in the insurance industry. While the “Good Hands” slogan is very well-known, this may not fully translate into pricing power. This is a moat, but it has a limited reach because of brand imitation.

  • Switching Costs: It is often difficult to change insurance providers because of the hassle of the process and the difficulty of choosing a new provider, and some customers tend to stay with Allstate if they have a good experience. However, the rise of online comparison sites makes it easier for customers to assess and switch providers. This has created narrow moats, but these are not very strong.

  • Scale Advantages: Allstate has a national scale, giving it access to a large number of customers and allowing it to spread its operating costs over a larger base. The company also has more data, which gives it a slight advantage on pricing. However, there are competitors who have similar scale advantages. This creates a moat, but it is quite narrow.

  • Network Effects: Network effects are not generally applicable to insurance companies.

Based on the above, the overall moat rating is: 3/5, given that Allstate has a relatively narrow moat that is mostly based on brand and switching costs, plus a little on scale.

Legitimate Risks

  • Weather Events and Natural Disasters: As a major insurance provider, Allstate is highly exposed to the risk of large payouts in case of extreme weather events, natural disasters or catastrophic events. These losses are usually hard to predict and may severely impair profitability and financials.
  • Economic Downturns: The company’s revenue streams are tied to people’s ability to pay for their policies. Therefore, economic downturns might influence the company’s ability to retain customers, and create new ones.
  • Technological Disruption: Newer companies may disrupt traditional insurance business models with new and cheaper offerings or products. Allstate needs to continuously improve their online systems, and may have trouble attracting customers if they don’t adapt well to tech.
  • Competition: The market is very competitive, and newer companies may underprice Allstate in order to capture new customers, or just have more attractive products, which would lead to market share loss.
  • Investment Losses: The company’s earnings are affected not only by insurance performance but also by their investment performance. Any major losses in their investment portfolio may lead to reduced profits or losses.
  • Regulatory Changes: The Insurance Industry is highly regulated and any potential changes in laws or regulations could adversely impact the company’s business.
  • Losses of Senior Leadership and Key Talents: The quality of the managers matters in insurance. Loss of senior managers may negatively affect future performance.

Business Resilience

Allstate has many different lines of business, so their performance is not reliant on a single segment of insurance. They also have a relatively large customer base and long history of operations which will help it survive bad periods. The company has a long history of adjusting to changing environments and has proven to be adaptable. They are also a large player in the market, which means they might have more ability to influence the industry.

The company’s main goal is to build a more profitable and resilient business model, and therefore they are taking a number of actions, which aim to reduce expenses and improve revenues.

Understandability Rating: 4/5 The insurance business, at a conceptual level, is easy to understand, but the details behind how they generate profit (claims vs. premiums, investment income, and effects of many financial mechanisms, such as debt, leverage or derivative hedging), and balance sheet and their impacts in profit or loss statement, may be a little hard to grasp for new investors. Therefore, a 4/5 is a good rating for Allstate.