Allstate Insurance Corporation Preferred Stocks: Opportunities and Risks

Allstate's five income securities are providing about triple the yield as the company's common stock.

May 2, 2014 at 8:00AM

Allstate Insurance Corporation (NYSE:ALL) has a $25.5 billion market capitalization and offers four traditional preferred stocks and one Exchange-Traded Debt (ETD) security for the consideration of preferred stock investors.

ETDs are very similar to preferred stocks, and are often labeled as such on brokerage statements. But ETDs are recorded on the company's books as debt, rather than equity, and are actually bonds that trade on the stock exchange (rather than the bond market). As debt, ETDs are often considered to represent lower investment risk than the same company's preferred stocks.

Allstate's ETD carries a Baa1 Moody's rating (two notches into investment grade territory) while the company's four traditional preferred stocks are rated Baa3 (bottom of the investment grade scale).

Market strategy and performance
Allstate delineates their market along two customer-focused characteristics, creating four distinct market segments: (1) the preference for full-service versus self-service and (2) those that prefer a specific brand versus those who are less brand-sensitive.

Source: Allstate Q4 2013 Investor Presentation,

This strategy, while comprehensive, presents challenges as the company continues to adjust their approach to finding the balance between policy growth and profitability. Policy growth is being primarily realized by the self-service (Internet) segments, with esurance reporting an impressive 2013 policy in force (PIF) growth of 26.7 percent over 2012. But this same segment realized a 2013 combined ratio of 117.5 (the combined ratio is the amount paid out in policy expenses divided by the amount collected in premiums, a value exceeding 100 indicating a loss).

Conversely, the full-service Encompass and Allstate brand segments reported solid sub-100 combined ratios (profitable policies) for 2013, but more modest, single-digit policy growth.

Source: Allstate Q4 2013 Investor Presentation,

In other words, during 2013, Allstate's four-segment business model saw policy growth in the unprofitable self-service segments and stagnant growth in the two profitable full-service segments.

It's hard to tell from company filings and investor information if the self-service segment growth is coming at the expense of branded, full-service products. To the extent that this is the case, the company is effectively converting full-service profitable customers into its self-service unprofitable segment.

Investment performance was a bright spot during 2013 for Allstate as it was for just about every other investor. Surging equity markets and fixed-income yields allowed the company to book about $1.4 billion in investment income, a 3.7 percent increase over 2012.

Despite the challenges of its four-segment business model, however, Allstate still posted a 24 percent increase in operating income over 2012. But this impressive result came almost entirely from a

fortunate reduction in catastrophe claims rather than improvements in its operations or gains in market share. Pure luck delivered a 46.7 percent reduction in losses attributable to catastrophe claims compared to 2012.

By year end, the company's 2013 net income declined by $43 million (1.9 percent) on $34.5 billion in consolidated revenue.

Allstate preferred stock
Allstate issued its ETD and four preferred stocks within a thirteen month period, beginning in January 2013. The return being generated by each of these five securities is roughly triple that being offered by the two percent yield of the company's common shares.

While there are some weaknesses to these securities, they do represent stable, long-term income and a diversification opportunity for preferred stock investors looking to extend their portfolio into the insurance segment.

Source: CDx3 Notification Service database,

All five of Allstate's income securities use the calendar quarter as their dividend cycle. The June dividend for ALL-B, the ETD, has already been declared. Note that the first dividend for the new ALL-E preferred has yet to be declared but is expected to occur in June as well.

With the exception of their coupon rates, Allstate's four preferred stocks (ALL-A, -C, -D and –E) are nearly identical in their prospectus provisions. All offer five-year call protection (from IPO), investment grade ratings, $25 par values and pay quarterly dividends on the same schedule.

But the diversification benefit that these securities offer must be considered in light of their primary weaknesses. Allstate's four preferred stocks have non-cumulative dividends and are offering below-market current yields (the average current yield for high-quality traditional preferred stocks is 6.7 percent) for above-par prices (with the exception of ALL-A).

ALL-A is available for a below-par share price, adding a layer of principal protection and a capital gain in the event of a downstream call. But today's buyers of ALL-A will likely be holding their shares for a very long time since, with a historically low 5.625 percent coupon, Allstate is unlikely to redeem ALL-A shares any time soon.

Even in the face of a changing marketplace, where its primary product is highly commoditized with shrinking brand loyalty and its method of delivery is changing from highly profitable full-service to marginally profitable (or, as yet, unprofitable) self-service, the risk of default is extremely low.

The primary attraction to Allstate's income securities is therefore the stability of the income they can provide over a long period of time and the diversification opportunity they may represent for your income portfolio.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Doug K. Le Du is the author of Preferred Stock Investing, Fifth Edition and owner of the CDx3 Notification Service database that was used for this article. He
has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers