We recently compiled a list of the Car Insurance Rates Skyrocketing: 10 Best Stocks to Buy. In this article, we are going to take a look at where The Allstate Corporation (NYSE:ALL) stands against the other car insurance stocks.
Ever since the coronavirus pandemic, a wide variety of industries, ranging from technology to energy and finance have been dealing with a changed economic environment. When it comes to auto insurance, the immediate aftermath of the pandemic’s outbreak was a boon for auto insurance companies. It saw them bathe in money as the number of drivers on the roads significantly dropped and they had fewer claims to process. Data from the Consumer Federation of America shows that in 2020, auto insurers earned a whopping $29 billion in profit at a time when their premium claims percentage dropped to 56.1% from the average of 67.4% between 2016 and 2019.
Yet, just like their peers in the homeowner insurance industry would find out, the rising inflation after the pandemic made the next year one of the hardest for the auto insurance industry. Along with economic inflation, ‘social inflation’ which is a term that the industry uses to describe a harsh view of companies among jurors, would disrupt the auto insurance industry. After the pandemic, used car prices jumped by as much as 40%, and since insurance premium increases require regulator approval, the companies could not increase their prices to keep pace.
In fact, in 2021, all of the top auto insurers in the US saw their loss ratios rise. A loss ratio measures the ratio of payouts to premiums earned and a lower ratio is naturally preferred. According to the S&P, some insurers whose ratios were as low as 49.8% and 51.7% in 2020 saw these jump by tens of percentage points to 60.7% and 67.3%. For some insurers, these were the worst ratios since at least 2017. As they struggled to raise premiums, with some regions such as California having two year moratoriums on rate increases, 2022 ended up being the worst year on record for the auto insurance industry since 2000. Another key metric to evaluate insurance companies is the combined ratio, which adds payouts to expenses and divides them by premiums. A value lower than 100 indicates profitability and vice versa.
As per the S&P’s data, the net combined ratio for US private auto insurers was 111.8% in 2022 as it crossed the 2000 high of 110.4% by more than a percentage point. Their loss ratio also further deteriorated. From its 2021 value of 67.6%, the loss ratio jumped by 12 percentage points to sit at 79.8% the next year. Auto insurers responded to this challenge by cutting their costs, as their expense ratio dropped to 21.7% in 2022.
Just as the auto insurance industry’s fate rapidly changed between 2020 and 2021/2022, the same happened in 2023. According to the Labor Department’s data for May 2023, auto insurance premiums shot up by 17.1% over the past 12 months, with rising medical bills, claims, and repair costs coupled with a dropping auto inventory contributing to the jump. This wasn’t the end for soaring auto insurance costs, with the March 2024 Consumer Price Index showing that car insurance premiums were 22.2% more expensive in America. This was more than 6x the inflation rate of 3.5%, and the pricier auto insurance costs were due to the usual culprits of repair and repair and maintenance costs. These surged by 11.6% and 8.2%, respectively, during the same time period.
At the same time, since the world opened itself up again after the coronavirus pandemic, car accidents have also grown. These are also to blame for high car insurance costs since more accidents mean greater payout frequency, and as the insurers would argue, social inflation contributes to higher payout severity as well. These trends were already in play last year, with crashes and claim severity jumping by 14% and 36% in July 2023 according to the American Property Casualty Insurance Association (APCIA).
In addition to inflation, accidents, and severity, other causes are also responsible for soaring auto insurance costs in America. In a report that covered 34 cities, the Council on Criminal Justice revealed that car thefts had grown by 29%. These figures are corroborated by the National Crime Insurance Bureau, which believes that 2023 was the second consecutive year for more than one million car thefts in the US. Finally, auto insurers, like homeowner insurers, are also suffering from more climate catastrophes. Hurricanes, floods, and tornadoes all lead to property damage, and if they increase in frequency, then auto insurers will naturally increase their premiums to create room for the rising payouts.
Our Methodology
For our list of the best auto insurance stocks, we ranked property and casualty, diversified, and specialty insurance companies by the number of hedge funds that had bought their shares in Q1 2024. The specialty and diversified firms were chosen to ensure completeness, and each firm was analyzed to ensure that it offered auto insurance.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A financial advisor giving advice to a couple, illustrating the personal finance and insurance products the company offers.
The Allstate Corporation (NYSE:ALL)
Number of Hedge Fund Investors in Q1 2024: 59
The Allstate Corporation (NYSE:ALL) is one of the most diversified auto insurance companies on our list. Its policies cover a wide variety of vehicles including cars, off road vehicles, recreational vehicles, boats, and snowmobiles. Due to coverage of vehicles such as boats and snowmobiles, The Allstate Corporation (NYSE:ALL) is exposed to climate related risk, and like other auto insurers, it also took a beating in the auto industry in 2022 with a painful combined ratio of 110. This underperformance is also key to The Allstate Corporation (NYSE:ALL)’s auto insurance hypothesis moving forward. Back then, management responded by sharing a four tiered approach of selective underwriting, improved claims practices, premium increases, and expense reduction to bring this division back to profitability. The plan appears to be working since The Allstate Corporation (NYSE:ALL) reported an improved auto insurance combined ratio of 96 during Q1 2024 for a sequential reduction of 8.4 points. Business diversification also means that the firm can bundle its homeowners and auto insurance products.
The Allstate Corporation (NYSE:ALL)’s shared the latest details for its auto insurance improvement during the Q2 2024 earnings call when it revealed:
These higher growth investments led to a 17% increase in Personal Auto new business applications in the second quarter, as you can see at the top of the chart on the left. The green bars show the components of that growth in new policy sales. The first two bars reflect the drivers of the 23% increase in new business volume in the Allstate brand. Higher productivity per exclusive agents drove a 9% new business increase compared to prior year and advertising investments and enhancements to direct operations resulted in a 92% increase in the direct channel compared to the prior year. The last two green bars reflect national general growth in both the non-standard auto business and higher sales volume from the Custom360 middle market offering that we continue to roll out.
On the right, you can see that total protection auto policies enforced decreased by 1.6% compared to prior year as the Allstate brand decrease was partially offset by growth at National General. Allstate brand auto policies in force decreased by 4.5% compared to prior year as policies lost from customer defections more than offset the increase in new policy sales.
Overall ALL ranks 3rd on our list of the best car insurance stocks to buy. While we acknowledge the potential of ALL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ALL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
