Company Reports

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.

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. However, pricing has improved, and the industry has shown an ability to recover from negative claims trends fairly quickly historically. The magnitude of recent claims issues may make normalization a longer process this time around, but we see signs that underwriting profitability is starting to normalize.

Allstate endured a difficult 2023, but fourth-quarter results were largely positive, in our view. The company saw improvement in auto lines and benefited from a minimal level of catastrophes. A solid profit for the quarter allowed the company to close out the full year with a modest loss of $316 million. We will maintain our $122 fair value estimate and see the shares as materially overvalued. While Allstate is likely on an upswing, we don’t think the company has a moat, and we believe it is challenged when it comes to long-term growth. As such, we think the current market book multiple, which is materially higher than the company's historical average, is not fully warranted.

P&C insurers have had substantial pricing increases across lines recently, but otherwise, commercial and personal insurers are in very different places. For commercial insurers, an extended period of strong price increases has them in a hard market and realizing attractive underwriting margins. Underlying combined ratios have flattened out recently, and we don't expect any significant improvement. Still, this should leave commercial insurers in a strong position over the next couple of years. Personal auto insurers have endured a difficult period in the wake of the pandemic, due to a variety of negative claims trends, and have been pushing pricing to catch up. While they are not out of trouble yet, we think the third quarter could mark the start of a turn toward more normalized underwriting results.

Allstate still faces some significant issues, but overall headwinds appeared to ease in the third quarter. The company recorded a modest $41 million loss in the quarter, largely due to elevated catastrophe losses of $1.2 billion. We will maintain our $122 fair value estimate for the no-moat company and see shares as roughly fairly valued.

The coronavirus boosted personal auto results, as quarantine efforts led to a stark decline in miles driven and claims. Allstate offered rebates to customers as a result, but 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 are now enduring a very difficult period, which has pushed Allstate to significant underwriting losses. However, pricing has improved, and the industry has shown an ability to recover from negative claims trends fairly quickly. That said, the magnitude of recent claims issues may make normalization a longer process this time. Outside of this issue, Allstate has been buffetted by relatively high catastrophe losses recently. These trends have pushed the company into meaningful losses. All in all, while we expect normalization over time, Allstate is enduring a rough stretch.

There have been media reports that activist hedge fund Trian Fund Management has built a stake in no-moat Allstate. We think Allstate’s recent run of poor results stems from unusually high catastrophe losses and negative industry trends within personal auto, and we don’t attribute recent losses to poor management. However, we have long had concerns that Allstate’s management was prioritizing growth over profitability, and its attempts to expand beyond its core captive agent channel have met with little success, in our view.

As expected, Allstate endured a very difficult second quarter, as catastrophe losses and headwinds in personal auto pushed the company to a $1.4 billion loss. Catastrophe losses in the second quarter were $2.7 billion, or 140% higher than last year's level. While we think the company faces a difficult near term, we are comfortable with our $122 per share fair value estimate for the no-moat company, which we will maintain.

A difficult auto insurance backdrop and elevated catastrophe losses pushed Allstate to a $346 million loss in the first quarter. While the no-moat company continues to struggle, we see some signs of improvement in the quarter and believe it is just a matter of time for pricing increases to normalize auto insurance profitability for Allstate and its peers. We will maintain our $122 fair value estimate.

Pricing increases in the prepandemic period restored profitability in auto for Allstate, following a rise in claims driven by a multitude of factors ranging from low gas prices to distracted driving.

Allstate previously announced preliminary fourth-quarter results, and we don’t see any major surprises in the full statements. Allstate continues to struggle with difficult market conditions in auto lines, and this headwind, plus a relatively high level of catastrophe losses, pushed the company to a $310 million loss for the quarter. We will maintain our $125 fair value estimate for the no-moat company.

Allstate expects to take a loss of about $300 million in the fourth quarter, as catastrophe losses and difficult underwriting conditions in auto weigh on results. We recognize the near-term difficulties Allstate faces, but expect results to normalize within a reasonable time frame. We will maintain our $120 fair value estimate for the no-moat company, and see the shares as roughly fairly valued from a long-term perspective.

Allstate had already announced preliminary results for the third quarter last month, but the full release provided some additional detail. The insurer continues to struggle with a very difficult personal auto environment, which pushed the company to a loss of almost $700 million. However, nothing in the full numbers materially alters our view, and we will maintain our $125 per share fair value estimate and no moat rating.

Given the differing states of the pricing cycle across lines and recent capital market movements, property and casualty insurers have a variety of tailwinds and headwinds at the moment. Commercial line insurers have seen strong pricing increases over the past few years, and we think the outlook for that area is relatively bright, as attractive underlying combined ratios create a solid base for strong profitability. Conversely, following a burst of abnormally high profitability in the early stage of the pandemic, personal auto insurers have struggled with a number of headwinds more recently, which has pushed most players into significant underwriting losses. Higher interest rates have reduced carrying value for fixed-income investments but offer the possibility of better investment income going forward. Finally, the bear market creates issues for insurers with an equity-heavy investment approach.

Pricing increases in the prepandemic period restored profitability in auto for Allstate, following a rise in claims driven by a multitude of factors ranging from low gas prices to distracted driving.