Tactical Moves And Digital Innovation Propel National General's Growth Trajectory

Key Takeaways

• Introduction of a competitive, technologically advanced auto insurance product may significantly increase market share and revenue.
  
• Proactive advertising investments aim to boost growth and profitability by focusing on markets with promising returns.
  
• Execution challenges in strategic growth plans and rising competition may strain profitability and dampen expansion efforts across markets.

Catalysts

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

• The successful execution of the auto profit improvement plan, leading to a significant improvement in the auto insurance combined ratio, suggests a potential for increased profitability in the auto insurance segment, impacting future revenue and net margins positively.
  
• National General's 4-year profitable growth trajectory, with expansion into lower-risk customer segments, indicates potential for sustained revenue growth and improved net margins through diversification and effective risk management.
  
• Increased net investment income, up almost 17% over the prior year quarter, suggests a positive outlook on earnings growth driven by strategic repositioning into longer duration and higher yielding assets.
  
• The introduction of a new, affordable, simple, and connected auto insurance product on a new technology platform, available in 19 states, could drive market share and revenue growth by attracting more customers with competitive offerings.
  
• Increased advertising investment, approximately $300 million in the second quarter to support growth efforts in states with attractive returns, indicates a proactive approach to capturing market share and driving top-line growth, which, over time, could enhance profitability and shareholder value.

Assumptions

• Analysts are assuming Allstate's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 5.5% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $14.7) by about August 2027, up from $2.9 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 16.6x on those 2027 earnings, up from 16.4x today. This future PE is greater than the current PE for the US Insurance industry at 13.7x.
• Analysts expect the number of shares outstanding to grow by 0.89% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• Concerns about sustainability of current favorable frequency trends in auto insurance could pose risks if frequency increases, impacting the auto loss ratio and profitability.
  
• The potential for increased competition in advertising and customer acquisition could require higher spending, reducing net margins.
  
• Challenges in achieving rate adequacy across all states to lean in and invest for growth could limit expansion pace, affecting policies in force growth rates.
  
• Execution risk in the Transformative Growth strategy, especially in enhancing multichannel distribution and digital capabilities, could impact growth and expense ratios.
  
• Legal and regulatory risks, including ongoing litigation like the DOJ lawsuit related to the National General acquisition, could result in unforeseen costs or liabilities affecting net income.

Valuation

• The analysts have a consensus price target of $198.24 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 $226.0, and the most bearish reporting a price target of just $130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $69.6 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $180.62, the analyst's price target of $198.24 is 8.9% 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.