Underlying Growth Expectations For Allstate Are Low For 2021: Morgan Stanley

Morgan Stanley said the underlying growth expectations for Allstate Corporation are low for 2021 as the company balances its top-line goals with a softening personal auto rate environment, a declining Encompass business, and building out its Independent Agent channel with the integration of National General.

Northfield Township, Illinois-based insurance company reported better-than-expected earnings in the fourth quarter of 2020 with profit soaring 87.5% to $5.87 per share from $3.13 per share in the same period a year ago.

The company’s net investment income surged more than 70% to $1.19 billion as performance-based investment income offset a decline in market-based investment income.

However, all is not well for one of the largest publicly held insurance providers in the United States as it posted its worst customer retention in nearly two decades in auto insurance with renewals rate dropping to 87.5% in 2020 from 88% in 2019.

ALL reported very strong 4Q20 results but declining auto premium growth pressured the stock. The Transformational Growth Plan remains a work-in-progress, with management noting the strategic actions taken in 2020 have impacted short term growth but are crucial for building a foundation for sustainable growth over the long-term,” wrote Michael W. Phillips, equity analyst at Morgan Stanley.

“Positives from the quarter include guidance for higher-than-expected share repurchases ($1.45b in 2021), increased demand for its telematics offerings (Milewise sales +35%), and commentary on accelerating growth in the direct channel.”

Allstate’s shares, which declined over 2% in 2020, slumped about 3% so far this year. Morgan Stanley gave a base target price of $126 with a high of $158 under a bull scenario and $80 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the insurance company’s stock.

“We update our 2021e/2022e op EPS to $12.99/$12.07 from $12.71/$12.73 and introduce 2023e op EPS of $12.72. Our updated estimates reflect the exclusion of ALIC from adjusted operating earnings for 2021e/2022e, which we previously had modelled $0.70/$0.80 per share, respectively. Our 2021e reflects higher 1H21 benefits in auto from continued lower driving activity (FY2021e Brand Auto core LR to 64.3% from 67.0%) as well as higher share repurchases, more than offsetting the impact from the ALIC sale,” Morgan Stanley’s W. Phillips added.

“Our 2022e decline is primarily attributed to lost ALIC earnings. We see the competitive rate environment ensuing for at least the bulk of this year, which, combined with a likely return to normal driving levels by 2022, will pressure margins for the year.”

Eight analysts who offered stock ratings for Allstate in the last three months forecast the average price in 12 months at $128.71 with a high forecast of $141.00 and a low forecast of $115.00.

The average price target represents a 20.38% increase from the last price of $106.92. From those eight equity analysts, six rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Other equity analysts also recently updated their stock outlook. The Allstate had its price objective upped by Barclays to $125 from $115. Raymond James lifted their price target to $125 from $120 and gave the stock a strong-buy rating. Bank of America lifted their price target to $149 from $147and gave the stock a buy rating.

Earnings to Watch This Week: Twitter, General Motors, Coca-Cola, PepsiCo and Walt Disney in Focus

U.S. Insurer Allstate to Acquire National General for $4 Billion in Cash

Allstate Corporation, the largest publicly held personal lines property and casualty insurer in America, has announced the acquisition of National General Holdings Corp for approximately $4 billion in cash, or $34.50 per share, expanding its auto insurance business amid the COVID-19 pandemic.

Allstate, which is also one of the largest U.S. auto insurers, said the National General shareholders will receive $32.00 per share in cash, including dividends anticipated to be $2.50 per share, providing $34.50 in total value per share. The auto insurer will also fund the share purchase by deploying $2.2 billion in combined cash resources and, subject to market conditions, issuing $1.5 billion of new senior debt.

National General’s board of directors has approved the transaction, which includes customary terms and conditions, including a breakup fee of $132.5 million. A voting agreement has also been signed with entities controlling 40% of National General’s common shares to vote for the transaction, the company added.

The above-mentioned offering is expected to close in 2021.

Ardea Partners LP was the exclusive financial adviser to Allstate, and Willkie Farr & Gallagher LLP was the company’s legal adviser. J.P. Morgan Securities LLC was the exclusive financial adviser to National General, and Paul, Weiss, Rifkind, Wharton & Garrison LLP was National General’s legal counsel.

Executives’ comments

“Acquiring National General accelerates Allstate’s strategy to increase market share in personal property-liability and significantly expands our independent agent distribution,” Tom Wilson, Chair, President and CEO of the Allstate Corporation said in a press release.

“The acquisition increases personal lines premiums by $4.0 billion and market share by over 1 percentage point to 10%. National General’s business and technology platforms will be utilized to further strengthen Allstate’s existing independent agent businesses. The transaction will be accretive to adjusted net income earnings per share and return on equity beginning in the first year.”

“National General’s operating expertise has enabled us to serve customers and independent agents well as we have grown both organically and through acquisition,” Barry Karfunkel, Co-Chairman and CEO of National General said in a press release.

“We are excited about combining our team’s expertise and commitment with Allstate to become a top-five personal lines carrier for independent agents while offering a broader array of products. National General’s shareholders are also benefiting by unlocking the value created over the last decade.”

Allstate price target and outlook

Eight analysts forecast the average price in 12 months at $118.86 with a high forecast of $138.00 and a low forecast of $101.00. The average price target represents a 28.29% increase from the last price of $92.65, according to Tipranks. From those eight, four analysts rated ‘Buy’, four rated ‘Hold’ and none rated ‘Sell’.

Morgan Stanley lifted their target price on shares of Allstate from $111.00 to $115.00 with a high of $136 under a bull scenario and $67 under the worst-case scenario and gave the company an “equal weight” rating. Deutsche Bank lifted their target price on shares of Allstate from $115.00 to $120.00 and gave the company a “hold” rating.

Credit Suisse Group upgraded shares of Allstate from an “underperform” rating to a “neutral” rating and lifted their target price for the company from $94.00 to $101.00 in a report on Thursday, June 25th. Piper Sandler raised the target price to $112 from $108.

Morgan Stanley’s view on the acquisition

“The acquisition of National General, given its focus on nonstandard auto coverage in the independent agency channel, is likely a surprise to investors. Recent acquisitions have focused away from the traditional personal lines space to diversify Allstate’s offerings, rendering this transaction all the more surprising. In recent years, the direct channel has taken greater share from captive agencies in personal auto than independent agencies,” Michael W. Phillips, equity analyst at Morgan Stanley noted in April.

“As such, National General provides Allstate with another method of combatting the challenge to the captive agency model, given its market share declines in recent years. Likewise, National General has presence in lender-placed homeowners insurance, which benefits during recessions. As such, entering LPI could further insulate Allstate during a downturn, making the deal incrementally more attractive given current challenges in the macro environment,” the analyst added.

Upside and Downside risks

Upside:

Auto loss trends improve further, unit growth drives top-line acceleration, continued strong share repurchase, benign cats, and interest rates rise.

Downside:

Personal auto loss costs turn higher, lack of unit growth, performance volatility, unpredictable losses from catastrophes and investments.