Trian Fund Management, activist hedge fund led by Nelson Peltz, has built a stake in Allstate Corporation (ALL), one of the insurers struggling to cope with the fallout of natural disasters, Reuters has reported.
According to the news agency, the move could increase pressure on Chief Executive Tom Wilson to turn the company around following five quarters of losses. For the second quarter of 2023, the insurer saw a net loss applicable to common shareholders of $1.4 billion.
Allstate has argued that natural disasters, sometimes amplified by climate change, have been the main driver for its poor performance.
People familiar with the matter said that the company has hired investment bankers to develop a response. Trian’s exact stake and plans for Allstate are still unknown. Allstate and Trian did not immediately respond to requests for comment, Reuters added.
Allstate shares jumped 6% on the news, to $127.46 in Monday trading in New York. Prior to news of Trian’s involvement, Allstate’s stock price had dropped 9% year-to-date, significantly underperforming a 4% rise in the S&P 500 Property & Casualty Insurance index (.SPLRCINPC), due to its exposure to losses in property and auto insurance.
According to KBW’s (Keefe, Bruyette & Woods) Melissa Roberts, historically, financial stocks in which Trian has invested have outperformed both the S&P 500 (SPX) and SPX Fins on the day of the investment’s announcement, and over both the week and the month following the announcements of Trian’s investments.
If Reuter’s report is accurate and Trian plans to push for changes, KBW analysts commented, there could be at least two (non-mutually exclusive) key opportunities.
1. Divesting the non-Property Liability segments (i.e., Allstate Services and Allstate Health and Benefits) to simplify ALL’s operations and boost its capital; and/or
2. Improving ALL’s execution – and consequently its underwriting profitability – to more closely resemble PGR’s and GEICO’s.
“We think that ALL is very unlikely to issue equity capital, especially as Hurricane Season 2023 winds down and as the combination of accumulating auto rate increases and apparently stabilising personal auto claim cost inflation implies near-term capital generation, rather than erosion, from earnings. Still, capital adequacy (most recently reflected in ALL’s suspended share repurchases) remains a key investor focus,” KBW stated.
Analysts estimate that selling Allstate Services (which includes Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside, Arity, and Allstate Identity Protection) and Allstate Health and Benefits, could generate at least $3.6-4.3 billion of pre-tax proceeds.
Assuming a consolidated multiple – businesses do not need to be sold together – of 10-12x implies total proceeds of $3.6-4.3 billion, which should largely address concerns over ALL’s capital needs, according to the report.
“We believe that ALL management is very committed to these businesses, but we believe that very few of ALL’s current or potential shareholders are as invested in keeping them as part of ALL; we encounter virtually no questions about these units,” KBW said.
According to analysts, an activist investor could also help ALL improve execution. Over the long term, ALL’s private passenger auto premium growth has trailed both PGR’s and GEICO’s, KBW explains.
Adding: “To be sure, PGR and GEICO benefit from significant exposure to direct-to-consumer distribution, for which demographics represent a considerable tailwind, while the much slower-growing captive agency channel still accounts for a significant majority of ALL’s Property-Liability premiums. On the other hand, ALL’s private passenger automobile book hasn’t really produced the superior underwriting results that should stem from a stickier but slower-growing customer base.”
Even ignoring the particularly unprofitable 2022 results, ALL’s statutory PPA combined ratio averaged 97.3% between 1996 and 2021, versus PGR’s 94.1% and GEICO’s 95.6% over the same period.
“To some extent, we think ALL suffers unfairly from the “obvious” comparisons to the uniquely phenomenal PGR; the rest of the industry’s consolidated average 1996-2021 combined ratio was 101.5%. Still, we think it’s very reasonable for an activist investor to contend that considerably more value could be extracted from ALL’s various businesses than has actually been the case,” KBW analysts concluded.
