Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Allstate is Auto Insurance Still a Value Investment?

Allstate (NYSE: ALL) is demonstrating that auto insurance might not be the safe value investment we thought it was. The most recent earnings report; and planned rate increases, indicate that the iconic insurer is losing money.

Georgia residents are upset because Allstate is planning premium increases of 25% to 58% in that state, The Atlanta Journal Constitution; and CBS News, reported. The reason for those rate increases becomes clear when you take a look at Allstate’s most recent earnings report; the one for first quarter dated March 31, 2016.

That report indicates Allstate’s net income fell by $1.187 billion; between first quarter 2015 and first 2016. Data supplied by ycharts indicates that Allstate reported a net income of $2.927 billion in March 2015, and $1.74 billion in March 2016.

This shows that the rate increases alone might be not be able to sustain Allstate’s business. It also indicates that Allstate might be losing serious market share to competitors like Berkshire Hathaway’s (NYSE: BRK.B) GEICO and Progressive (NYSE: NYSE: PGR).

Auto Insurance is not as Profitable as it once was

Progressive’s income also fell over the past year. The smaller insurer reported a net income of $1.255 billion in March 2015 and $1.23 billion in March 2016. This indicates that auto insurance is not as profitable as it once was.


In March 2015, Progressive reported a progressive profit margin of 6.04% that fell to 4.65% a year later in March 2016. Allstate’s profits took an even greater fall, the Good Hands people reported a profit margin of 7.56% in March 2015 that fell to 2.77% in March 2016.

It looks as if the auto insurers are losing money on more of the premiums they issue. One problem here might be churn; client turnover, because people are changing insurers faster and more often. The churn of clients might accelerate if premiums go up.

Churn Threatens Insurers Future

Churn is a problem because the cost of attracting new auto-insurance clients is going through the roof.  Insurance Business America reported that the nation’s 10 largest insurers now spend around $6 billion in advertising a year. Insurers spend around 8% more on advertising than other industries.

Allstate spent $900 million or about 5.7% of its budget on advertising in 2013 and GEICO spent around $1.2 billion or 6% of its budget on ads, The Consumer Federation of America estimated. Progressive spent around 8.6% of its budget; or $600 million, on advertising.

Numbers from the SNL Financial report were a little lower, but still eye-dropping. Analysts at SNL estimated that GECIO spent $935.1 million on advertising; Allstate spent $654.8 million on advertising, and Progressive spent $608.1 million on advertising in 2013.

The advertising might be creating a vicious cycle. Advertisements; and rate increases, convince drivers to switch insurers which creates churn. The churn eats up the profit from the new premiums, forcing the insurers to spend more advertising to attract more customers; and more churn.

Churn is eating up Allstate’s Revenue

Allstate may have no choice but to spend more on advertising this year; because its revenues are falling. Allstate reported a TTM-revenue of $35.72 billion in September 2015; that fell to $35.65 billion in December and $35.57 billion in March 2016.


Progressive on the other hand saw its revenue increase by $1.94 billion over the past year. Progressive reported a TTM-revenue of $19.58 billion in March 2015; that rose to $21.52 billion a year later.

These figures are a clear sign of churn; Allstate customers are simply switching to Progressive to get lower rates. That churn; and Allstate’s revenue, losses will probably accelerate in the upcoming quarters as rate increases kick in.

A major reason for this churn is the falling number of drivers, which means the insurers are competing for a smaller customer base. Younger people in particular are not driving which spells bad news for auto insurers in the near future.

Declining Customer Base

The Atlantic reported that just 24.5% of 16-year olds had a driver’s license in 2014. Back in 1983; when Ronald Reagan was in the White House, 46.2% of American 16-year olds had a driver’s license.

Even more worrying for insurers is The Atlantic’s revelation that 31% of America’s 19-year olds lack driver’s licenses. A study by the University of Michigan’s Transportation Research Institute found that the percentage of 19-year olds without driver’s licenses increased by 21% between 1983 and 2014. Back in 1983 87.3% of 19 year olds possessed a driver’s license.

A significant percentage of Americans under 40 lack driver’s licenses (and presumably car insurance), the Institute’s figures reveal. In 2014; 16.5% of those aged 20 to 24, 11% of 25 to 29 year olds, 10.3% of 30 to 34 year-olds and 7.4% of 35 year olds have no driver’s license.


These figures indicate that demographics are clearly against the auto insurance industry. The younger Americans are – the less likely they are to drive. In 2014 23.6% or two of 10 Americans between 16 and 44 years of age lacked driver’s licenses. In contrast 7.9% of those between 45 and 69 years in age lacked driver’s licenses.

The demographics clearly indicate that Millennials; persons aged 18 to 34, are far less likely to drive than their parents the Baby Boomers – persons aged 51 to 69. This should scare auto-insurance executives to death because the Millennials are now America’s largest generation; with 75.9 million members, according to the US Census Bureau.

Major Drops in Allstate and Progressive Share Prices Coming Soon

These figures reveal another major problem auto insurers will face in coming years. Their customer base is shrinking as Baby Boomers; who are more likely to drive, either die off or become unable to drive because of age. Statistics reveal that their replacements the Boomers; and Generation X (35 to 50-year olds), are less likely to drive.

This means more rate increases; and premium churn, is likely in the years ahead. Add such potentially disruptive developments; as self-driving cars, Uber, Hyperloop and new algorithm or blockchain-powered online insurance products, to the mix and the future looks pretty bleak for auto insurance companies.

It might not be long before we see major revenue and share-price drops throughout the auto insurance sector. Expect Allstate and Progressive’s share prices to take a major nosedive in the near future if these trends continue.