Underwriting Margins Will Erode As Claims Costs Soar

Key Takeaways

• Rising adoption of autonomous vehicles and advanced safety tech threatens Allstate's core auto insurance segment and long-term revenue prospects.
  
• Increasing catastrophe risks, inflation, and digital competition challenge profitability, with heavy reliance on auto insurance heightening vulnerability to market shifts.
  
• Enhanced digital platforms, diversified distribution, advanced analytics, and disciplined capital management strengthen Allstate's market position, profitability, and resilience amid rising consumer and climate-related challenges.

Catalysts

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

• The ongoing adoption of autonomous vehicles and advanced safety technology is expected to cause a gradual but persistent decline in accident frequency, directly reducing demand for traditional auto insurance, which currently accounts for roughly two-thirds of Allstate's property-liability premiums. This secular decline in a core revenue segment undermines the company's ability to sustain long-term premium growth.
  
• The increasing frequency and severity of extreme weather events, exacerbated by climate change, will continue to drive up claims costs for property and casualty insurers. Allstate's homeowners business, already exposed to volatile catastrophe losses as highlighted by recent quarters, faces eroding underwriting profitability and compressed net margins over the long term.
  
• Allstate's heavy concentration in personal auto insurance makes it particularly vulnerable to shrinking market size as autonomous and semi-autonomous vehicles proliferate, and as consumers seek alternative mobility solutions. This reliance threatens future revenue growth and could result in sustained pressure on earnings as secular shifts take hold.
  
• Rapid advancements in digital-first customer experiences and insurance technology demand large, ongoing investments to maintain competitive parity. Should Allstate fall behind more agile or digitally native competitors, acquisition and retention costs will rise, eroding operating leverage and net income over time.
  
• Industry-wide persistent inflation in auto repair, medical services, and replacement parts is expected to outpace Allstate's premium pricing power, leading to worsening combined ratios and limiting the company's ability to defend current profit levels, especially as regulatory scrutiny restricts the pace and magnitude of necessary rate increases.

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 4.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.6% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach $5.2 billion (and earnings per share of $22.47) by about August 2028, down from $5.7 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 10.6x on those 2028 earnings, up from 9.6x 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 decline by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Allstate Future Earnings Per Share Growth

Risks

• Continued investment in digital platforms, customer experience, and the successful rollout of new Affordable, Simple and Connected products across multiple states positions Allstate to meet rising consumer expectations and may enhance retention and new business growth, which would support long-term revenue and earnings expansion.
  
• The company's diversified distribution strategy-including exclusive agents, independent agents, and direct-to-consumer-has led to robust productivity gains amid agent network optimization, reducing acquisition costs and potentially sustaining net margins even in a more competitive environment.
  
• Sophisticated use of data analytics and telematics (such as Arity and Drivewise) is improving risk selection, underwriting profitability, and pricing precision, which could mitigate loss trends and further bolster long-term profit margins.
  
• Strategic capital management-reflected in share repurchases, increased dividends, and the redeployment of proceeds from non-core divestitures-stands to improve return on equity and drive shareholder returns, potentially counteracting share price declines.
  
• Well-executed investments in advanced claims management, operational efficiency, and proactive reinsurance strategies are enhancing Allstate's resilience to catastrophic events and inflationary pressures, supporting underlying stability in earnings and strengthening its ability to grow market share even as extreme weather risks increase.

Valuation

• The assumed bearish price target for Allstate is $174.48, which represents two standard deviations below the consensus price target of $230.59. 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 $275.0, 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 $5.2 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $206.8, the bearish analyst price target of $174.48 is 18.5% 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.