Allstate’s Billion-Dollar Comeback:

Allstate.

Allstate was founded in 1931 as a part of Sears, Roebuck & Co. (Sears), the company started by selling auto insurance through direct mail. This was a very disruptive model during its beginning years, by 1993 Allstate was spun off and became a publicly traded company. Allstate operates within the property and casualty insurance industry, over the decades it has evolved into one of the largest insurers in the U.S. The company is known for its auto and homeowner insurance products, Allstate also competes in protection services like warranties and roadside assistance. Allstates tagline is ‘Are You in Good Hands’ and its mission is to protect people from life's uncertainties with its broad array of products.

Since 2019, Allstate has been in growth mode, aggressively pursuing digitization and expanding its distribution through direct, independent, and branded agents. Recently, Allstate has sold its ‘Group Health’ program to Nationwide for $1.25 billion (cash) and also exited the California market to mitigate its exposure to wildfires. In 2024 Allstate was also able to report an impressive $4.6 billion in Net Income after shitting the bed in 2023 with a Net Loss of $316 million Allstate has also been focused on growing its personal property insurance market share, expanding its protection service product line, and maximizing shareholder value. 

People are always buying stuff, and some stuff needs to be insured. This makes Allstate worth analyzing, along with its impressive shift to digital insurance models that are cost-efficient and position Allstate for sustainable long-term growth. By exiting California and maintaining its robust reinsurance program, Allstate has successfully cut exposure in high-risk regions. With its $72 billion investment portfolio, Allstate has created an insurance superpower that allows it to win the pricing battles. This makes Allstate the most profitable insurance company in the game, with its auto insurance representing almost $2 billion in profit and its homeowner's underwriting income reflecting $1.32 billion in profit.

Allstate’s most recent earnings report reflected not only are you in good hands, but so are they (financially wise). In 2024 they reported a total revenue of $64 billion reflecting a 12% YoY increase as the company was successfully able to capitalize on premium hikes, policy growth, and improved investment income. Allstate’s auto and homeowners insurance are its bread and butter, with premiums skyrocketing to $52 billion. Allstate's underwriting discipline has paid off even though I left Allstate auto insurance last year, in 2023 they reported an underwriting loss of $2.18 in 2023 but turned things around in 2024 with a $3.08 profit. This signaled the company’s surge in pricing power in the competitive insurance market. Its overall net income has also seen a major resurgence from 2023 when it reported a major loss of $316 million, in 2024 it reported an impressive net income of $4.55 billion. 

Despite an impressive turnaround, Allstate remains on ‘sale’ compared to its competitors. The company currently trades with a PE ratio of 10, which is below its competitors like Progressive and Travelers trading between 12-15. Its price-to-book ratio is 1.2x which is slightly below its competitors, reflecting investors are still unsure about Allstates long-term earnings power. Its EV/EBITDA is also below the industry median at 7.8 showing that Allstate is undervalued relative to its earnings potential. With interest rates elevated (for now), insurance stocks with large product portfolios stand to benefit.

Allstate has seen a major rebound in operating cash flow, fueled by its underwriting profits. It reported an operating cash flow of $8.1 billion in 2024, almost doubling from 2023 coming from claims costs and premium growth. Unlike in many industries where cash flow is volatile, insurance companies thrive in high-rate environments. Allstate’s free cash flows are also growing like weeds, generating over $6.5 billion in 2024. This surplus cash flow allows them to strategically deploy funds into dividends, buybacks, and its rainy day fund for future acquisitions and growth initiatives. With truckloads of cash, Allstate can improve margins, create leaner cost structures, and position itself to eat market share while maintaining financial discipline. 

The property and casualty insurance industry is valued at over $800 billion, a recession-proof giant. Covering auto, home, and business insurances, with profitably heavily influenced by claims costs, catastrophic events, and investment income. The current market environment is favorable amongst insures as high interest rates boost returns. Allstate is one of the big four personal insurers among State Farm, Progressive, and Geiko. Allstate has continually been able to improve its pricing discipline while maintaining strong retention, a winning strategy in all markets. 

Allstate’s growth is powered by two main products, its Auto Insurance which accounts for about 65% of its revenue, and its homeowners insurance which is about 22% of its revenue. Auto insurance is Allstate's main nut, generating over $37 billion in written premiums in 2024. Unlike its competitors, Allstate leverages both direct to consumer and agent based sales to maximize reach. Its homeowner's insurance also reflected strong growth in 2024 despite $3.7 billion in catastrophe claims. These two segments are the bread and butter of Allstate’s profitability, with protection services and investment income acting as long-term value drivers.

Allstate operates in a highly competitive market, while not the largest insurer its profitability outshines its competitors. State Farm has a larger market share in both auto and homeowners insurance but they focus on the traditional agent-based model. Geiko operates a similar direct to consumer model as Allstate but also focuses on being a price leader within the auto market segment. Allstate has been able to create a successful sales strategy by operating in the direct and agency space. They have also been able to create pricing power, unlike Geico which has struggled with losses from underpriced policies. Allstate is well-positioned to take market share from smaller regional players. 

The insurance industry has been known for being commoditized, as most customers only care about price and coverage over brand loyalty (Azar Capital Group does not believe in brand loyalty). Allstate has been able to create a strong brand reputation, showing that customers are willing to pay slightly more for better service. Allstate has been able to successfully take advantage of its data with its usage-based insurance programs growing rapidly.  Allstate has been successfully able to mitigate its by exiting high-risk markets like California (some may not like this but game is game) while other insures took much larger hits because of this. 

Allstate’s growth strategy has been driven by three main factors, premium growth rate, expansion into direct digital sales, and telematics-driven pricing. These have fueled explosive double digital revenue growth with its total premiums written jumping 10% in 2024. Allstate is investing heavily into its direct digital sales segment, this will help them position themselves to compete with Geiko and Progressive. They have also invested heavily into Arity (telematics unit) which is a data-driven pricing used to reduce risk, improve underwriting profits, and allow for customized policy segmentation.  Allstate also is hoping to take advantage of AI to reduce claim resolution times by 30%, aiming to boost customer satisfaction and cut costs. Its innovation pipeline ensures long-term revenue growth, cost savings, and high customer retention. 

Allstate has also been aggressive on the M&A front, using strategic acquisitions and partnerships to expand its market research. In 2021, Allstate acquired National General to expand its auto insurance and independent agent distribution. Allstate also acquired SquareTrade and Infoarmor to expand its protection services, adding higher-margin noninsurance product offerings to its portfolio. Allstate has historically used M&A to acquire smaller regional insured, insurtech startups, and partnerships with major realtors. 

Allstate has plans to accelerate its growth in the short term by optimizing its supply chain, continued investment into tech and data-driven pricing advancements, and continued favorable market conditions. Allstate has used AI to reduce fraud, admin costs, and processing delays which has led to higher pricing power and increased margins. Telematics adoption is rapidly increasing enabling precision-based underwriting which attracts low-risk drivers. They have also considered using the blockchain for policy management which could potentially be used in fraud prevention and contract automation.

The TAM for insurance is massive and consistently growing due to new segments being ‘created’ like cyber and identity theft protection services. Allstate has been shifting towards digital sales and usage-based insurance-based models that millennials and Gen Z favor. Machine learning tools are automating risks and speeding up policy issuance that cut down fraud-related losses. Allstate is well positioned for growth due to its hybrid sales model that positions them for long-term dominance. 

As a large insurer, Allstate faces many operational risks that include execution risks, claim costs, and management-related risks. One of the biggest risks to any insurance company is ‘claims inflation’ which occurs when the repost of repairing or replacement assets increases faster than expected. This has happened in sectors like auto repair, home building, and catastrophic events where costs have spiked from supply chain issues, labor costs, and unpredictable events like wildfires and hurricanes. In 2024, Allstate faced almost $5 billion in catastrophe losses, although they have been able to mitigate risks any spike in claims costs could hurt its profitability. Allstate also faces talent retention and digital transformation disks as it begins to modernize its business by transforming to a digital-first business.

Allstate also faces market risks that include regulatory uncertainty, competitive pressures, and consumer demand. Insurance is a heavily regulated industry, and government action could significantly impact the company’s ability to raise rates or control costs. Allstate Arity telematics program is a competitive advantage, but data privacy regulars could restrict how Allstate uses its driver's data. The insurance industry is also highly competitive and Allstate must compete against giants, although its mix of direct & agent-based distribution is a strength competitors are evolving.  Insurance is a nondiscretionary expense, customers may downgrade their coverage, switch to cheaper competitors, or just cancel policies if facing financial hardship.

Allstate faces risks due to its valuation and stock sensitivity along with market expectations. Allstate appears to be undervalued compared to its peers, causing some analysts to wonder if the market is mispricing the company or if there is a structural issue in its value. High interest rates have been favorable for Allstate as they helped fuel the company's profitability in 2024. If and when interest rates fall the company’s income could see a major decrease in profitability. If Allstate can sustain its margin improvement and efficiently manage risks it may be in good hands, but if it fails to execute its valuation could see a major decrease. 

Allstate made moves in 2024, after suffering a major loss of $316 million in 2023 the company rebounded with a net income of $4.55 billion. This is due to its excellent pricing adjustments, cost optimizations, and strong investment income. Its key growth was driven by its auto insurance and expanding protection services. The company has also continued to invest in digital and AI innovation with its Arity program. Although that is a stupid name it is excellent technology as it has helped them build a competitive advantage against its competitors. With its low PE ratio and improving fundamentals, Allstate offers excellent rewards for the risk involved with the investment. 

The bad boys over at Azar Capital Group will be giving Allstate a ‘HOLD’ rating. This is because of its continued operational improvements, cost-cutting success, and strong net income of 2024. The company has multiple catalysts that could drive a higher value including its expansion of direct-to-consumer insurance, stable underwriting margins, and its continued success of telematics-driven pricing. Investors should watch Allstate over the next few quarters if they are successful in maintaining premium growth without losing market share they could be one of the strongest players in the industry. Lastly, we believe that their current CEO should be fired, if that happens we will be happy. 

Disclosure

This analysis is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own due diligence or consult with a financial advisor before making investment decisions.