Allstate Pivots Toward Growth
Now that profitability is back on track, management's focus can shift.
Although a low level of catastrophe losses aided Allstate’s (ALL) fourth-quarter results, we think the finish to the year shows the progress management has made in restoring profitability. In the core Allstate-branded operations, premiums grew 3% year over year, almost entirely from pricing increases. The combined ratio improved to 88.7% from 101.7% last year, but this was because of a dramatic fall-off in catastrophe losses, with comparisons against Hurricane Sandy losses last year. The underlying combined ratio, which excludes catastrophes, ticked up a bit to 87.5% from 86.7% last year, but remained at an attractive level and was basically flat for the full year. Like other insurers, Allstate is feeling the pinch from lower interest rates, although investment income fell only slightly thanks to strong performance in its equity investments. We appreciate the aid these investments are providing, but they do potentially introduce more volatility into results. Overall, the company achieved a 14.5% operating return on equity for the year, a result that supports our narrow moat rating.
In 2011, in the wake of disappointing results, management laid out a plan to restore profitability; it closes out 2013 having largely achieved its goals. With results on better footing, management is content to maintain recent levels of profitability in 2014 and is shifting its focus toward growth. Profitability and growth goals can be somewhat at odds in the insurance industry, and we have a strong preference for companies that focus on profitability, even if it comes at the expense of growth. We would agree that at current margin levels, higher growth would be create value, although Allstate’s reliance on the captive agent channel should limit expectations. Although the company does have exposure to the faster-growing direct channel through its Esurance brand, we think straying too far from its core business model could have negative moat implications. But its Allstate-branded operations still dominate overall results, and we don’t expect that to change anytime soon.
Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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