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Diversified Business, Buyouts to Aid Allstate's Growth in 2019

Zacks Equity Research

The Allstate Corp. ALL is all set to have a strong year in 2019, given a broad diversified business that includes Property, Casualty, Service, Life and Benefits, a strong balance sheet and sound capital management.

Although Allstate is exposed to catastrophe losses that have caused high claims, thereby weighing on its margins, strong top-line performance has rescued the company and will continue to do so in the coming year as well.

Allstate’s property and casualty business should continue to grow its premium due to increase in pricing, decline in auto claim frequency, new client growth and higher retention. The company’s use of telematics, analytical expertise, differentiated products and brands should aid the growth of this business. The segment’s written premium witnessed a CAGR of 3.5 in the 2013-2017 period. The figure further grew 5.8% in the first nine months of 2018.

Allstate’s expansion of the Service business also bodes well for overall growth. The recent acquisition of Square Trade, a provider of protection plans for mobile phones, consumer electronics and appliances, should lead to revenue growth in 2019. Last month, Allstate agreed to acquire PlumChoice, a leading provider of cloud and technical support services to consumers and small businesses, in a $30-million deal. The privately-held company will become part of SquareTrade (acquired last year), thus expanding the company’s Service business.

This year, Allstate acquired InfoArmor, a leading provider of employee identity protection, which should aid Benefit business that currently serves nearly 4 million employees. Given the increasing risk of identity theft, this business should continue to see an increase in demand for its products.

Allstate is mulling to sell the Fixed-Annuities business, which causes undue strain on capital because of low interest rates. The sale of this business will allow the company to focus on core growth areas.

Further, an increase in interest rates, resulting in higher yields, has benefited its net investment income. The company has lowered its exposure in growth-sensitive assets, which should improve the risk profile of its investment portfolio. The increasing interest rate scenario should continue to favor the company’s investment income.

Its disciplined capital management through dividend payments and share buybacks has also aided bottom-line growth. Moreover, the trend is expected to continue.

The company’s return on equity, which is the most commonly used profitability measure, is 15.5% compared with the industry’s 6.6%. This shows the company’s superior operating efficiency.

A headwind for Allstate is its exposure to catastrophes, which has imparted volatility to earnings. The company has undertaken actions such as limiting exposure to riskier geographic markets via premium hikes. This, in turn, might cause a decline in the number of policies in force. However, we cannot rule out the possibility of significant losses from cat events and inclement weather incidents.

Having said that, we still believe Allstate is well poised for growth in 2019 and the recent decline in its stock price makes it attractively valued. The stock has lost 11.8% of its value so far this year compared with the industry’s decline of 1.7%. Given its good progress on fundamentals, we expect the stock to gain in the coming quarters.

 

 

Allstate currently carries a Zacks Rank #3 (Hold). Investors interested in the same space might consider some better-ranked stocks like Willis Towers Watson Public Limited Company WLTW, eHealth, Inc. EHTH and Aon plc AON, each carrying a Zacks Rank #2 (Buy).

Willis Towers works as an advisory, broking and solutions company on a worldwide basis. The company managed to beat estimates in the trailing four reported quarters, with the average being 7.13%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

eHealth offers private online health insurance exchange services in the United States and China. It came up with average three-quarter earnings surprise of 7.29%.

Aon offers risk management services, insurance and reinsurance brokerage, coupled with human resource consulting and outsourcing services. The stock pulled off average four-quarter surprise of 4.57%.
 

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