Source: Company
The Allstate Corporation (ALL 0.31%) is steaming ahead in 2014 and continues to make a solid value proposition for investors who want to gain exposure to a promising property and casualty insurance play.
Shares of Allstate have steadily edged higher in 2014 and already returned 13% this year. Compare this, for instance, to a price return of 4% for insurance heavyweight American International Group (AIG +5.41%), and a gain of just 3% for Hartford Financial (HIG 0.73%).
Allstate's latest conference call highlighted a few key areas that could be instrumental in giving shares further boosts in 2015 and beyond.
Premium momentum
Allstate's second quarter results demonstrated our ability to concurrently grow the business and generate attractive returns ... So in the last 12 months, we've added almost 750,000 Property-Liability policies in force .... Positive growth momentum is building, particularly in the Allstate brand. - Thomas J. Wilson, CEO
Allstate has benefited from solid premium growth in the second quarter. Allstate's Q2 2014 premium growth stood at a respectable 5.5%, while Allstate's core insurance segments, auto and home (part of the Allstate brand), saw net written premium growth of 4.9% and 4.3% respectively.
With management seeing further premium momentum in the near term, investors could see positive earnings surprises in the quarters ahead, which in turn could be a catalyst for Allstate's share price.
Stable combined ratios
... While the recorded [Property-Liability] combined ratio rose in the second quarter due to catastrophe losses, the underlying combined ratio was very favorable, as we did not experience a repeat of the adverse weather encountered in the first quarter.
- Steven E. Shebik, CFO
Catastrophes can't be planned and budgeted for. Therefore, Allstate's reported combined ratio will almost always be more volatile than its underlying combined ratio that adjusts for catastrophe losses.
The combined ratio is a metric to gauge the underwriting discipline of an insurance company. Low combined ratios usually indicate disciplined insurance risk selection and underwriting profits. Allstate's underlying combined ratio has improved over the last four years, and decreased from 89.1% in Q2 2010 to 84.7% in Q2 2014. If the company manages to add to this encouraging trend in the coming quarters, combined ratio improvements could further fuel Allstate's profitability.
Source: Allstate Investor Presentation
Capital deployment
During the quarter, we repurchased 142 million of common shares through open-market purchases and paid $125 million in common stock dividends for a total cash return to common shareholders of $267 million, bringing total common shareholder cash returns to $1,370,000,000 year-to-date.
- Steven E. Shebik, CFO
Shareholder remuneration has been a top theme in the insurance industry over the last couple of years and Allstate is no exception.
A combination of strong earnings and premium growth, share repurchases and recurring dividend payments has attracted investors to Allstate. The insurance business has not only achieved a better year-to-date performance compared to its insurance peers, but is also one of the few financial companies that trades at a premium to book value.
With a dividend yield of nearly 2%, supplemental share repurchases supporting the share price, and a premium to book valuation, Allstate clearly stands out in the property and casualty business.
Portfolio shift toward higher-yielding assets
Over time, we are shifting the portfolio composition to an asset mix we believe will have higher returns, relying less on interest-bearing assets and more on equity and other assets where return is derived from idiosyncratic operating performance.
- Steven E. Shebik, CFO
Allstate, like other insurance companies, invests the premiums it receives from clients in assets that produce cash flows. Consequently, Allstate has a high allocation to bonds and other interest-bearing assets.
Source: Allstate Investor Presentation
However, the allocation of funds to certain asset classes and Allstate's return expectations are influenced by the current state and the growth prospects of the economy.
In the case of Allstate, the amount of assets allocated to fixed income assets has declined from $88.2 billion at the end of 2012 to $72.6 billion at the end of the second quarter 2014.
If an insurance company expects stronger economic growth, it makes a lot of sense to invest a larger amount of funds in business cycle-sensitive assets such as equities or alternative investments to boost its investment income.
Investment income
Our total portfolio return presented in the top right was a strong 2.2% in the second quarter, reflecting increased fixed income valuations and positive equity market performance. You can see, however, the devaluation impact is highly variable, while the income yield has been relatively constant over the last 5 quarters.-Steven E. Shebik, CFO
Higher investment income can be achieved by changing the composition of an investment portfolio.
Source: Allstate Investor Presentation
Allstate's portfolio returns have not been too bad so far: The insurance company had two consecutive quarters of extraordinarily strong portfolio returns in 2014 with 2.1% in the first quarter and 2.2% in the second quarter.
If the second half of the year looks as good as the first, Allstate is on its way to achieve an almost 9% investment return, which is respectable.
Going forward, a higher allocation to equities certainly has the potential to provide another boost to Allstate's portfolio return and to its investment income. However, a shift toward equities also increases the volatility of Allstate's portfolio return.
If the U.S. economy continues to grow, and equity indices do well as a result, Allstate could indeed reap handsome rewards in its investment portfolio -- with potentially positive affects for its share price.
Confidence moving on
Allstate's conference call highlighted that the insurance business benefits from good premium momentum in its core business, has a stable underlying combined ratio trend and remains committed to shareholder remuneration. A strategic shift in its investment portfolio could also lead to higher earnings, and share prices, down the road.
