Auto Profit Plans And Digital Initiatives Will Impact Future Margins Despite Competition

Key Takeaways

• Auto profit improvement and Transformative Growth initiatives drive revenue and margin growth through customer retention and digital insurer development.
  
• Expansion in homeowners insurance and Protection Plans boosts revenue and earnings with higher bundling rates and enhanced mobile protection capabilities.
  
• Increased competition and rising losses could pressure Allstate's market share growth, profitability, and earnings stability, amid retention and operational challenges.

Catalysts

Provides property and casualty, and other insurance products in the United States and Canada.

• The execution of the auto profit improvement plan has restored auto margins, setting up Allstate for growth in auto insurance policies by focusing on improving customer retention and increasing new business levels. This is expected to positively impact revenue and net margins.
  
• The Transformative Growth initiatives aim to develop a low-cost digital insurer with affordable, simple, and connected protection for customers, ensuring sustainable growth and enhancing future earnings. This could lead to increased revenue and net margins as operational efficiencies grow.
  
• Allstate has made proactive investments, including a timely decision to lengthen portfolio duration, resulting in higher fixed income portfolio yields and increased net investment income, which will likely contribute to earnings growth.
  
• Growth in the homeowners insurance segment, driven by better returns and higher bundling rates, presents a significant growth opportunity, which is likely to impact Allstate's revenue positively and maintain attractive net margins due to the low 90s combined ratio target.
  
• Allstate's expansion in Protection Plans, including a small acquisition to enhance mobile device protection capabilities, supports profitable growth in this fast-growing segment, anticipated to positively affect revenue and earnings as Allstate expands its insurance offerings.

Allstate Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allstate's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.6% today to 4.8% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $13.09) by about December 2027, down from $4.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2027 earnings, up from 12.5x today. This future PE is greater than the current PE for the US Insurance industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.1%, as per the Simply Wall St company report.

Allstate Future Earnings Per Share Growth

Risks

• Increased competition, particularly from major players such as GEICO and State Farm, may put pressure on Allstate’s ability to grow its market share, potentially impacting revenue growth in the near term.
  
• Rising catastrophe losses and the challenge of pricing adequately in vulnerable regions, such as Florida and California, could adversely affect Allstate’s underwriting profitability and financial margins.
  
• High auto insurance rates, necessitated by recent profitability challenges, have led to a decline in policy retention, which may hinder growth in policies in-force and slow down the recovery of revenue levels.
  
• The transition of operations, such as the integration of legacy Esurance books into National General, can distort retention metrics and hinder growth performance, reflecting operational risks that may impact margins.
  
• While Allstate’s Protection Plans segment shows promising revenue growth, the segment faces performance volatility and integration challenges that could affect earnings stability if not managed efficiently.

Valuation

• The analysts have a consensus price target of $223.18 for Allstate based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $285.0, and the most bearish reporting a price target of just $138.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $67.8 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 6.1%.
• Given the current share price of $193.4, the analyst's price target of $223.18 is 13.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.