EUR 850.00 For Business Accounts Only

Morningstar | Allstate Reports Strong 2Q, but Long-Term Growth Is Still an Issue

Allstate reported strong profitability in the second quarter, and profitability remains on the rise, with the firm generating a 16% adjusted return on equity over the past 12 months, which is the best level the firm has seen over the past decade. However, we think the insurer is in something of a sweet spot in terms of the personal auto pricing cycle, and that this tailwind will fade over time. Additionally, we see a lack of profitable growth opportunities for Allstate, given its dependence on the fading captive-agent channel. We retain our $82 fair value estimate and no moat rating.

Allstate's core auto insurance business continues to churn out strong results. The combined ratio for the business declined to 93.0% from 95.6% last year. While this was in part due to lower catastrophe losses, the underlying combined ratio remains at an attractive level. Net earned premiums grew 5% year over year, suggesting the company continues to benefit from recent pricing increases. However, policies-in-force growth remains weak at 1% year over year, and we think Allstate will struggle to expand its core business in the longer term, as we expect market share to continue shifting away from the captive-agent channel.

The company's Esurance platform performed fairly well during the quarter, with 7% year-over-year growth in net earned premiums. More importantly, the combined ratio declined to 98.9% from 103.2% last year, a significant feat for a business that has  historically struggled to avoid underwriting losses. Still, we hesitate to make too much of one quarter, and in the long term, we think Esurance is in an unfavorable competitive position.

Allstate's homeowners business continues to perform reasonably well, with net earned premium growth of 3% year over year, driven mainly by price increases. The combined ratio increased slightly to 98.3%, versus 97.2% last year. Catastrophe losses in both quarters were relatively high, but underlying results look adequate, in our view.

Allstate continues to see strong growth in its services segment: including the contribution from the SquareTrade acquisition, this segment saw premiums increase 28% year over year. However, this segment is not yet profitable, and it remains uncertain whether the pursuit of growth outside of the company's core legacy operations will prove value-creative over time, especially as the firm's historical moves in this direction have not worked out well, in our view.