EUR 850.00 For Business Accounts Only

Morningstar | Allstate Is a Solid Business but Growth Prospects Are Limited

Recent pricing increases have restored profitability in auto, following a rise in claims driven by a multitude of factors ranging from low gas prices to distracted driving. As a result, the company is generating strong returns and we expect this to continue in the near term. However, long term we expect mena reversion on this front and think the company faces some structural issues. Finally, we find management's recent acquisitions questionable.Allstate's captive agent model is out of fashion, as industry growth has been concentrated in the direct channel. In our view, the customers that Allstate serves are less likely to shop their policies and value the service an agent can provide. As such, we believe any fears that the Internet will make captive agents obsolete are overblown. Allstate occupies a solid position in this mature niche, which management estimates is about half the market, and we think it can generate reasonable returns. But top-line growth will be difficult to achieve absent pricing increases, given the ongoing industry shift, and policies in force growth has been meager in recent years. Further, we have some concerns that management has and will continue to make value-destructive moves to maintain growth. While the agency channel remains Allstate's core, the firm has been hedging its bets somewhat. Allstate has now effectively entered all subsegments of the auto and homeowners markets, although the captive agency channel still dominates overall results. We have some concerns that Allstate is prioritizing growth over profitability, as we do not believe the company has a meaningful advantage outside the captive agent channel. Esurance has benefited from growth in the direct channel, but Esurance's underwriting results have been poor. Given the importance of scale in the direct channel and the large gap in size between Esurance and the top players, we don't see a value creative path for this business. The more recent acquisitions of SquareTrade and InfoArmor show the company moving even further from its strategic core in search of growth.