Autonomous Shifts And Climate Perils Will Disrupt Future Stability

Key Takeaways

• Rising adoption of autonomous vehicles and shifts in digital expectations threaten Allstate’s traditional insurance products and customer retention.
  
• Intensifying climate risks and lack of geographic diversification heighten loss volatility and challenge long-term earnings stability.
  
• Technology-driven efficiency, prudent risk management, and diversification across products and investments are enhancing profitability, revenue growth, and earnings stability beyond traditional insurance operations.

Catalysts

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

• The accelerating adoption of autonomous vehicles and advanced driver-assistance systems is likely to erode demand for traditional auto insurance products, which could drive a structural, long-term decline in Allstate's auto policy revenues and put sustained pressure on the company’s top-line growth.
  
• Intensifying frequency and severity of climate-related catastrophes—exemplified by this year’s unprecedented wildfire losses—may lead to more frequent outsized claims, higher reinsurance costs, and larger earnings volatility, significantly reducing underwriting profits and ultimately compressing net margins over time.
  
• Persistently heightened consumer expectations for seamless digital experiences, coupled with rapid insurtech disruptor growth, threaten to outpace Allstate’s legacy digital transformation efforts; if Allstate lags in technology adoption, customer attrition and adverse selection could weigh on retention rates and reduce future revenues.
  
• Continued elevated portfolio exposure to catastrophe-prone geographies, combined with insufficient geographic risk diversification, leaves Allstate more vulnerable to severe loss events, threatening long-term earnings stability and making future net income more volatile and less predictable.
  
• Ongoing stagnation or decline in personal auto and homeowner insurance markets as demographic trends shift—including lower rates of car ownership and homeownership—may limit policy growth opportunities, resulting in flat or declining premiums and capping revenue expansion regardless of efficiency improvements.

Allstate Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Allstate compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Allstate's revenue will grow by 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 7.2% in 3 years time.
• The bearish analysts expect earnings to reach $5.5 billion (and earnings per share of $21.13) by about July 2028, up from $3.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Insurance industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Allstate Future Earnings Per Share Growth

Risks

• Allstate's ongoing investment in digitization, automation, and modern technology platforms is reducing expense ratios and enabling faster, more efficient customer experiences, which can strengthen customer retention and provide long-term support to net margins and profitability.
  
• The transformative growth strategy is driving robust momentum in policy growth across Property-Liability, especially with innovative product rollouts and expanded distribution channels, which can lead to sustainable market share gains and support revenue growth over the long term.
  
• The active and prudent use of reinsurance, combined with proactive risk management, has significantly limited exposure to catastrophic losses and reduced earnings volatility, which enhances earnings stability and protects net income going forward.
  
• Diversified investment management, focused on dynamic asset allocation and a resilient portfolio structure, is leading to outperformance and consistent investment income, which is a critical contributor to total earnings, especially in volatile markets.
  
• The expansion of profitable growth platforms, such as Protection Services and Allstate Protection Plans, is providing significant diversification and has already resulted in strong adjusted net income, supporting both revenue and earnings growth beyond traditional insurance lines.

Valuation

• The assumed bearish price target for Allstate is $170.63, which represents two standard deviations below the consensus price target of $228.59. This valuation is based on what can be assumed as the expectations of Allstate's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $286.0, and the most bearish reporting a price target of just $149.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $76.3 billion, earnings will come to $5.5 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 6.4%.
• Given the current share price of $197.61, the bearish analyst price target of $170.63 is 15.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.