Not the right moment to buy Allstate Corporation

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Summary

• Rising inflation will present a big challenge to the property and casualty insurance industry.
• Allstate’s combined ratio, a measure of the money flowing out of an insurance company, has been rising since March 2020.
• Allstate Corp’s stock is primed for a consolidation period, probably until its earnings report that is scheduled for May 4.

About Allstate Corp

The Allstate Corporation (NYSE:) together with its subsidiaries, provides property and casualty, and other insurance products in the United States and Canada. The Allstate Protection segment , which together generated $9,62B in net premiums or 92.5% of total net premiums earned in the last quarter of 2021.

The company has a market capitalization of $39.07 billion, with 278.35 million shares outstanding.

For the quarter ending on December 31, 2021, the company reported earnings per share of $2.73, a 67.03% decline year-over-year; while revenue fell 6.02% to $13.01B vs the year-ago period.

Auto and Property Insurance Industry Outlook

Insurers are increasingly considering the risk associated with persistent inflation when structuring coverage.

An from The WSJ argues that “higher prices for used cars, auto-, and home-repair labor and materials are contributing to increasing severity of losses on auto and claims”.

Also, “as people get back to pre-pandemic driving habits, that can increase the frequency of claims”

Additionally, a from Fitch Ratings establishes that “property and casualty insurance carriers should be concerned as inflation continues to run hot throughout the global supply chain and is likely to increase the cost of claims for auto physical damage, property and catastrophe lines of business for years to come. The insurance ecosystem may be in for a rough ride this year because of the growing threat of social inflation affecting liability lines of business”.

The relevant question is “how much rate increase insurers can push through?”.

For auto insurance, this depends partly on state agencies that oversee rates, as auto insurance is one of the most regulated segments in the insurance industry.

On the other hand, this segment is also one of the most competitive in the industry.

According to, “more commoditized U.S. lines such as private-passenger auto provide fertile ground for industry disruptors to gain market share as they shatter barriers to entry”.

Allstate Corp Valuation Metrics

Return-on-Equity

Return-on-equity measures the income level an insurance firm is generating as a percentage of shareholders’ equity, and the steady decline of Allstate’s quarterly ROE during 2021 is alarming; even more when compared to Progressive Insurance (NYSE:) which has a ROE of 18.4%.

Source: www.macrotrends.net

Combined Ratio

The combined ratio measures the money flowing out of an insurance company and provides a comprehensive measure of an insurer’s profitability, excluding investment income. Its goal is to measure management efficiency in generating profits and is one of the most important measures to evaluate an insurance company’s performance.

A ratio above 100% means the insurance firm is losing money on its insurance operations, i.e., it’s paying out more money in claims than what it’s receiving from premiums. Below 100% suggests an operating profit.

During the last two years, Allstate’s combined ratio has been rising from 84.8% at the end of March 2020 to 98.9% at the end of December 2021, including a reading above 100% during the third quarter of last year.

This means the company is incurring more losses and expenses as a percentage of earned premiums.

 Source:

Again, Allstate loses the comparison to Progressive. The combined ratio for closed in 2021 at 94.1%.

Price-to-Book Value

As happens with banks, an attractive price-to-book ratio for an insurance company should be at 1 or below.

P/B for Allstate has been rising towards 1,5 since September 2020, making its stock less attractive at current price levels.

Source: and TradingView

Debt-To-Equity

Allstate has been increasing its leverage ratio in the last year and a half, increasing its risks in an environment characterized by an expected sharp increase in interest rates.

Source: www.allstate.com

 

The debt-to-equity ratio for has decreased from 24.4% at the end of 2019 to 21.2% in the last quarter of 2021.

Technical Analysis

On March 25, closed above its 52-week closing high to reach a new all-time closing high of 141.80.

Source: TradingView

With the RSI indicator retracing from extreme overbought levels of 77 on its daily observations, and the MACD indicator showing the speed of recent price movement is stalling, the price of Allstate Corp’s stock is primed for a consolidation period probably until its earnings report scheduled for May 4.

If this consolidation implies a breakdown of the 10-day exponential moving average, it could be a signal of a false breakout and could imply a decline toward the 20-day moving average. The ultimate support that will keep the recent uptrend alive is to top of the consolidation range from January 10 to March 16 at 127.

On a longer-term view, even a decline toward its 15-weeks exponential moving average around 121.40, could be seen as a normal price retracement amid a clear uptrend that started in March 2009.

Source: Tradingview

During that period, the price hasn’t spent more than 8 weeks below this indicator, and that just happened in 2020 after the start of the Covid-19 pandemic.

Upcoming events

Allstate is scheduled to report quarterly earnings on May 4, 2021. Analyst consensus points to an estimate of $2.79 earnings per share, a great bounce from a loss of $-4.60 during the same period of 2021.

Revenue is projected to decline 17.3% to $10.29B from the year-ago period.

Conclusion

The stock of Allstate Corp doesn’t look like a good buy opportunity at the moment.

The challenges the property and casualty insurance industry will face with the advent of rising inflation, plus the mounting risk for Allstate with its increasing load of debt on an increasing interest rates environment will end in more unpredictable claims trends and higher cost of debt.

Additionally, technical analysis indicates that right now isn’t the right moment to start a position on this stock due to the vulnerability of its price after a huge runup in the last few weeks.

In the future, the ability of the management to increase premiums will determine the company’s success to navigate this challenging environment. However, its core business, auto insurance, is one of the most regulated segments in the insurance industry.

References