Market Mad House

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

Long Ideas

Is Allstate Making Money?

Auto-insurance is not what it used to be. Consumer-oriented advertising driven companies have disrupted the business, and new technology like self-driving vehicles threatens to change it beyond recognition.

Against that backdrop, it is a fair question to ask if traditional auto-insurance companies like Allstate (NYSE: ALL) are making money? Allstate offers investors a high-stock price ($100.80 on 5 January 2018), but a questionable financial performance.

The company reported $9.66 billion in revenues and a net income of $666 million on September 30, 2017. Allstate managed to achieve some growth, a rate of 4.76% during 3rd quarter 2017. That was better than 3rd quarter 2016 when the growth rate was 2.14%.

Its cash flow seems to be growing, the operating income increased from $1.858 billion in September 2016, to 2.008 billion in June 2017, to $1.271 billion in September 2017. Revenues also grew slightly from $9.164 billion in September 2016, to $9.666 billion in September 2017, as noted above.

Is Allstate a Healthy Company?

All this points to a healthy company, an example of the health was earnings before tax that increased from $765 million in September 2016 to $971 million in September 2017.

Cash was also good with an operating cash flow of $1.886 billion and a free cash flow of $1.796 billion on September 30, 2017. Both figures represent a tremendous recovery from 3rd quarter 2017. Back then, Allstate reported a free cash flow of $576 million and an operating cash flow of $655 million.

Bottom line, Allstate is still doing what insurance companies are supposed to do for investors: generate a lot of float. Although the cash is still low for my taste at Allstate, just $690 million on 30 September 2017, up from $446 million a year earlier.

Allstate has a Lot of Value

Assets were good at $113.632 billion, and total debt was pretty low at $6.349 billion. Yet those numbers are not the biggest source of value at Allstate right now – that would be its footprint.

Allstate claimed to have 12,200 insurance agencies in the United States and Canada and provide coverage to 16 million households at the end of 2016. It also serviced 2,400 agencies operating under the Encompass brand name and owns the online insurance provider Esurance.

Allstate also owns the insurance retailing operation Answer Financial. Some other subsidiaries include the predictive analytics company Arity and SquareTrade which offers consumer product warranties. Yet another subsidiary called Allstate Benefits provides disability and other coverage for employees.

A resource that is extremely hard to quantify is those goofy “Mayhem” commercial and other advertisements which have become part of American pop culture. The name recognition from such throwaway pop culture might be more valuable than many people think.

Allstate investors will enjoy the dividend; they’re scheduled to receive 37¢ a share on January 2, 2018. That is the same amount paid out last year, Allstate’s dividend has not increased since 2016 when it was 33¢ so investors might be due for a dividend increase soon.

The Future of Allstate

Allstate faces an uncertain future because of a changing media and insurance landscape. A major challenge for the company in the years ahead will be maintaining brand recognition in a changing media environment.

How is Allstate supposed to connect with customers when people stop watching network and broadcast TV. How are they supposed to see Mayhem and the other commercials?

A greater challenge will be a generation or generation of consumers that do all their insurance shopping online. Such people might not know what an insurance agent is, or where to find one.

A fascinating dilemma for traditional insurers is posed by companies like Fair which offers car leases that have all the services Allstate provides bundled with them. Fair leases you the car and provides the insurance, roadside maintenance, and warranty. Fair recently attracted some attention by buying out Uber’s money-losing leasing program Xchange.

New Business Needed at Allstate

That gives rise to the question how is Allstate supposed to sell insurance when everybody gets their coverage when they buy or lease a car.

A related problem is short-term leasing and car-sharing which gives people the benefit of a car without the need for insurance. Some observers such as former GM Vice Chairman Bob Lutz think such services will replace auto ownership in a couple of decades.

Those possibilities point to the need for a radical new business model for Allstate in the future. The billion-dollar question for insurance investors will be which company can successfully create and implement that model first.

A related question will be: how will Allstate traditional policyholders and agents fit into that business model? It might be impossible to create a next-generation insurance company while servicing today’s insurance customers.