The Allstate Corp. (ALL, Financial) reported third-quarter earnings results on Nov. 4. The company's revenue improved almost 4% to $11.5 billion, massively outperforming Wall Street's expectations by $2.1 billion. Adjusted earnings per share increased 3.5% to $2.94. This was also well above what the Street had anticipated as results were $1.18 better than expected.
A good portion of this growth came from realized capital gains on investments, which increased 123.4% to $440 million.
Total revenue excluding realized gains on investments was 1.7%. This growth rate may not jump off the page, but revenue for the year is only up 0.2%, showing that the company's most recent quarter was better than the first half of the year. Property liability insurance premiums were higher by 1.7% to $11.1 billion. Insurance premiums earned grew 1.9% to just under $9 billion. Adjusted net income through the end of the third quarter improved 3.5% to $2.94.
Premiums written were up 0.9% to $9.4 billion. Adjusted net income declined 2.4% to $923 million, but this was primarily due to catastrophe losses spiking 94.1% to $990 million.
The recorded combined ratio of 91.6% matched last year's result due to a combination of lower auto losses and increased premiums earned, but was offset by higher catastrophe losses and a restructuring charge related to a cost reduction program that the company is undertaking. This ratio implies that Allstate earned $8.40 for every $100 dollars in policies in force. Total policies has increased 27.1% to almost 173,000 over the last year.
The underlying combined ratio improved 6.6% to 79.7% as Allstate benefited from fewer non-catastrophe losses incurred and higher premiums.
Allstate brand auto insurance had 1.1% growth in net written premiums and policies in force inched up 0.1%. The recorded combined ratio was lower by 7.7%, reflecting the impact of lower loss costs from reduced miles driven and higher premiums.
The company's brand homeowners insurance had premium growth of 2.6% and a 1.2% increase in policies in force. This business was impacted by higher catastrophe losses, which caused the recorded combined ratio to spike 23.8% to 104.7%.
Encompass brand net written premiums were down 6.5% due to a lower number policies in force, though this was partially offset by higher average premiums. Still, the recorded combined ratio was lower by 23.1% at 82.7%. This improvement was due to lower catastrophe losses and favorable comparison to the previous quarter, which included wildfire settlements.
Net investment income declined 5.5% to $832 million as performance-based growth was more than offset by market-based investment income, which were negatively impacted by lower interest rates. The investment portfolio had a return of 1.8% for the quarter, but is up 4.4% through September. As stated earlier, Allstate did realize $440 million in capital gains as a result of selling certain fixed-income securities and equities.
Allstate's life, benefits and annuities premium and contract revenue declined 0.8% to $620 million, mostly due to non-renewal of a large account and fewer premiums collected due to the impact of the Covid-19 pandemic.
Service business revenue was up 19.1% to $498 million due to a 40% increase in Allstate Protection Plans. Lower losses in Allstate Dealer Services also aided results.
Allstate continues to deliver strong returns for shareholders. The return on equity over the last year has improved 3.5% to 17.7% while the book value has grown 18% to $82.39.
At the same time, the stock looks undervalued using multiple valuation measurements.
Shares of Allstate trade for approximately $92 as I write. Yahoo Finance lists consensus estimates at $11.45 for the year, giving the stock a forward price-earnings ratio of 8. This compares favorably to the stock's 10-year average price-earnings ratio of 12.4, according to Value Line. Excluding 2011, where the valuation was above 21 times earnings, the average price-earnings ratio since 2010 is 11.4.
Using price-book value, the stock also appears cheap. Using the book value at the end of the quarter, Allstate has a current price-book value of 112%. This is lower than the 10-year average price-book of 119%. If the stock were to average this price-book-value for the whole year, it would be the lowest average since 2013.
Finally, Allstate is also undervalued against its own intrinsic value.
According GuruFocus, Allstate has GF Value of $114.97. Using the current price, Allstate has a price-to-GF Value of 0.80. This earns the stock a rating of modestly undervalued from GuruFocus.
If the stock were to trade at its intrinsic value, shareholders of Allstate could be looking at a price increase of almost 25%. In addition, the company currently offers a dividend yield of 2.3%, which is higher than the decade-long average of 2.1%.
Final thoughts
Allstate's third-quarter results came in much better than expected for both revenue and earnings per share. The company had modest growth in most business segments and took advantage of elevated investment prices.
The stock looks undervalued using the price-earnings, price-book value or price-to-GF Value as a valuation measurement. Allstate also offers a decent dividend yield that is above the market average. Given the potential return, I believe Allstate is a solid buy for an investor looking for exposure to the insurance sector.
Disclosure: The author has no positions in any stocks discussed in this article.
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