Divestiture Of $325 Billion Businesses Will Enable Focus On Core Services For Future Success

Key Takeaways

• Divesting non-core businesses allows Allstate to focus on core segments, enhancing growth potential through streamlined operations.
  
• Strategic initiatives in new insurance products and improved customer access aim to increase market share and drive revenue.
  
• Increased catastrophe losses and retention challenges could significantly impact Allstate's profitability, market share, and revenue growth in the insurance market.

Catalysts

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

• The divestiture of the group health and employee voluntary benefits businesses for expected proceeds of $3.25 billion, at attractive valuation multiples, unlocks capital and allows Allstate to focus on its core property-liability and protection services, potentially enhancing future revenue and earnings growth.
  
• The transformative growth strategy, including the introduction of affordable, simple, connected auto insurance in 31 states and a new homeowners product in four states, aims to increase market share, which could drive revenue and improve net margins through operational efficiency.
  
• Enhanced customer access through improving agent productivity, expanding direct sales, and increasing independent agent distribution are initiatives that could contribute to future growth in policies and premiums, potentially boosting revenue growth and net margins.
  
• Investment in higher-yielding, longer-duration assets and a proactive approach to portfolio management has already increased net investment income by 37.9% year-over-year, indicating potential for continued earnings growth driven by investment performance.
  
• The planned rollout of monthly disclosure of property-liability policies in force provides transparency and indicates a proactive approach to delivering consistent growth information, potentially positively influencing investor confidence and ultimately earnings per share.

Allstate Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allstate's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 7.8% in 3 years time.
• Analysts expect earnings to reach $6.0 billion (and earnings per share of $23.02) by about March 2028, up from $4.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $5.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

Allstate Future Earnings Per Share Growth

Risks

• Increased catastrophe losses, such as those from California wildfires, could pose a significant risk to Allstate's net income and margins if disaster frequencies increase, impacting future profitability and financial stability.
  
• Despite new product launches, price adjustments, and marketing efforts, the decline in auto policies in force due to retention challenges, particularly in states with significant rate increases, could continue to hinder Allstate's revenue growth in the auto insurance market.
  
• Persistent difficulties in improving pricing competitiveness and customer retention in key markets, like New York and New Jersey, may stifle Allstate's ability to grow market share and premium revenues in the future.
  
• The reduction in business within high-risk states, such as California, and the ongoing need to navigate complex state regulatory environments might depress expected growth in Allstate's property liability coverage, thereby restraining revenue potential.
  
• The sale of lower-margin Health and Benefits businesses, although strategically aligned, results in a decrease in adjusted net income return on equity, which could negatively affect future earnings unless effectively offset by gains in other operational areas.

Valuation

• The analysts have a consensus price target of $225.059 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 $279.0, and the most bearish reporting a price target of just $149.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $77.0 billion, earnings will come to $6.0 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 6.3%.
• Given the current share price of $205.34, the analyst price target of $225.06 is 8.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.