Investing in insurance stocks is a good strategy for long-term gains, as the industry has proven itself to be strong and anti-fragile even in the midst of the global healthcare crisis and uncertainty. Insurance companies make money primarily by selling insurance policies and bringing in more money as premiums, than they pay out as claims, known as underwriting profit. They also earn by investing the premiums before it is paid out for claims, known as the float.

The historically low interest rate environment kept the bond market unattractive last year, which severely impacted the insurance companies that are required, by law, to carry on safe debts on their balance sheets. But the recent uptick of the long-term bond yields bodes well for insurance stocks.

Allstate Corporation (ALL) and Lemonade Inc. (LMND), two of the nation’s prominent insurance companies, have been receiving greater focus as health has become a priority for everyone since the onset of pandemic last year. Additionally, insurance underwriting margins continue to rise, reflecting fewer auto accidents due to the stay-at-home culture and rising homeowner’s insurance because of low mortgage rates.

Both the stocks generated decent returns over the past six months. While ALL returned 13.3% over this period, LMND has surged 163.8%. In terms of past month’s performance as well, LMND is a clear winner with a 22.4% return versus ALL’s 0.9% loss. But which of these stocks is a better pick now? Let’s find out.

Business Structure and Latest Movements  

ALL is the nation’s largest publicly held insurer for personal lines that also provides property and casualty, and other insurance products in the United States and Canada. The company operates through Allstate Protection, Service Businesses, Allstate Life, and Allstate Benefits segments.

ALL is deploying capital out of lower growth and return businesses while continuing to execute its strategy to grow market share in personal property-liability and expand protection solutions for customers. As a result, ALL has recently agreed to sell Allstate Life Insurance Company (ALIC) to entities managed by Blackstone for $2.8 billion, while it has recently closed a $4 billion acquisition of National General Holdings Corp., a specialty personal lines insurance holding company serving a network of approximately 42,300 independent agents for property-casualty products. The deal aims to advance ALL’s strategy of growing personal lines insurance with an increase of 1% in market share.

LMND offers renters, homeowners, and pet health insurance in the United States and Europe. Powered by artificial intelligence and behavioral economics, LMND set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything. The company was founded in 2015, however, the company got listed as recent as July 2020.

LMND has recently hit the one-million active customers milestone, about 1,500 days after its initial launch, decades faster than America’s leading insurers. The company is on an expansion spree. It has recently announced upsizing and pricing of a follow-on public offering worth $544.5 million. Moreover, in December, LMND entered its third European country, France to offer its renters insurance.

Recent Financial Results

In the fourth quarter that ended December 2020, ALL delivered revenues of $12 billion, increasing 4.8% year-over-year, reflecting strong performance-based investment income and realized gains. Property-Liability insurance premiums earned came in at $8.88 billion, relatively compared to the comparable period last year. ALL reported an adjusted EPS of $5.87, surging 87.5% from the prior-year value.

LMND’s third quarter (ended September 2020) total revenue was $17.8 million, compared to the year-ago value of $19 million. In force premium was $188.9, nearly doubling year-over-year, primarily due to a 67% increase in the number of customers, as well as a 19% increase in premium per customer. However, the company reported a net loss of $30.9 million, compared to the prior year loss of $31.1 million.

Here ALL is in an advantageous position.

Past and Expected Financial Performance

ALL’s revenue and EPS grew at a rate of 3.7% and 102.6% year-over-year, respectively, over the past twelve months.

Analysts expect the company’s revenue to increase 12.3% in the current quarter, but decline 4.5% in the current year. ALL’s EPS is expected to grow 15.3% in the current quarter, but fall 13.6% in the current year. Moreover, its EPS is expected to grow at a rate of 5.5% per annum over the next five years.

On the other hand, LMND’s revenue grew at a rate of 88.4%, while its EPS declined at a rate of 33.5% year-over-year, over the past twelve months.

Analysts expect LMND’s current year revenue and EPS to increase 19.7% and 23.1%, respectively.

ALL has an edge over LMND here as well.

Profitability      

LMND’s trailing-12-month revenue is 2.2 times of what ALL generates. But ALL is the more profitable with a net profit margin of 10.7% versus LMND’s negative value.

Moreover, ALL’s ROE and ROA of 17.7% and 3.8%, respectively, compare favorably with LMND’s negative value.

Valuation

In terms of trailing-12-month P/S, ALL is currently trading at 0.78x, 97.7% less expensive than LMND which is currently trading at 34.29x. Moreover, LMND is more expensive compared to ALL in terms of trailing-12-month P/B (14.91x versus 1.31x).

ALL looks much more affordable compared to LMND.

POWR Ratings

ALL has an Overall Grade of B which equates to a Buy rating in our proprietary POWR Ratings system. However, LMND has an Overall Grade of F which represents a Strong Sell rating. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree.

ALL has a Value Grade of B, given its lower-than-industry P/E ratio. LMND’s Value Grade of D is consistent with its stretched valuation multiples.

In terms of Stability Grade, ALL has a grade of B, reflecting that it is less volatile than its peers, compared to a grade of D for LMND.

Moreover, out of 62 stocks in the Insurance – Property & Casualty industry, ALL is ranked #7 and LMND is ranked #60.

Beyond what I stated above, our POWR Ratings system has also rated both ALL and LMND for Growth, Momentum, Sentiment, and Quality. Get all the ALL ratings here. Also, click here to see the additional POWR Ratings for LMND.

The Winner

The U.S. insurance sector looks poised to generate market beating returns in 2021 following the steepening of the yield curve. While ALL is a traditional insurance company, LMND is leveraging AI and fintech to gain market share. Hence, both ALL and LMND are good long-term investments considering their unique offerings and continued expansion. However, ALL appears to be a better buy based on the factors discussed here.

Though LMND was one of the hottest IPOs of 2020, it is not the only insurance technology company in the industry. Furthermore, it was recently targeted by famed short-selling fund, Citron Research.

ALL’s total policies in force have increased 20.5% over the last twelve months, reflecting strong growth of Allstate Protection Plans and modest growth in Property-Liability policies. In fact, the Property-Liability underlying combined ratio has been excellent over the past year. As a result, the company’s focus on transformative growth will further increase its market share as it expands customer access and improves customer value.

Click here to learn about other Buy-rated P&C insurance stocks.

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ALL shares were trading at $108.00 per share on Thursday morning, down $1.00 (-0.92%). Year-to-date, ALL has declined -1.76%, versus a 2.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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