The coronavirus pandemic exposed the whole world to a variety of risks and motivated individuals to secure financial protection and prepare for a host of uncertainties. Consequently, the U.S. insurance space could be shaping up as a massive investment opportunity over the coming decade.

Allstate Corporation (ALL) and Lemonade Inc. (LMND), two of the nation’s prominent insurance companies, have been receiving greater attention as health has now become a priority for many. Insurance underwriting margins have been rising, reflecting strong life insurance demand, coupled with robust homeowner’s insurance demand resulting from low mortgage rates and with it a boom in home purchases.

Both the stocks have generated decent returns over the past six months. But while ALL returned 19% over this period, LMND has surged 96.5%. However, in terms of their past month’s performance, ALL is a clear winner with 5.2% returns versus LMND’s 35.9% loss. Evidently, LMND has been on a downtrend. Let’s find out what is driving LMND’s momentum and why ALL is a superior choice.

Business Structure and Latest Movements  

ALL is the nation’s largest publicly held insurer for personal lines. It  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 redeploying 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. In line with its  progress, ALL recently assembled six Mobile Claim Centers (MCCs) across Texas  to help assist customers affected by the winter storms.

ALL  recently agreed to sell Allstate Life Insurance Company (ALIC) to entities managed by Blackstone for $2.8 billion. It also recently closed a $4 billion acquisition of National General Holdings Corp., a specialty personal lines insurance holding company that serves  a network of approximately 42,300 independent agents for property-casualty products. The deal is designed  to advance ALL’s strategy of growing personal lines insurance and delivers  an increase of 1% in its 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 but was listed only last July.

LMND  recently hit its  one-million active customer milestone, some  1,500 days after its initial launch, which is decades quicker  than America’s leading insurers. The company is on an expansion spree. It 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 renters insurance.

Recent Financial Results

In the fourth quarter, ended December 31, 2020, ALL delivered revenues of $12 billion, an increase of  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.  , ALL reported an adjusted EPS of $5.87, surging 87.5% from the prior-year value.

LMND’s fourth quarter (ended December 31, 2020) total revenue declined 12.8% year-over-year to $20.5 million, due primarily to lower net earned premiums and net investment income. In force premium came in at $213 million, surging 87%year-over-year, driven by a 56% rise in number of customers and 20% improvement in premium earned per customer. However, the company reported a net loss of $33.9 million, compared to the prior year loss of $32.7 million.

Here ALL is in an advantageous position.

Past and Expected Financial Performance

ALL’s revenue and total assets grew at a rate of 4.7% and 3.9%, respectively, over the past three years.

Analysts expect ALL’s revenue to increase 15.2% in the current quarter (ending March 31, 2021), decline 8.1% in the current year, but improve 2.4% next year. ALL’s EPS is expected to grow 10.5% in the current quarter, decline  15.4% in the current year and then rise 0.6% next year. Furthermore,  its EPS is expected to grow at a rate of 2.6% per annum over the next five years.

In comparison, LMND’s revenue and total assets grew at a rate of 240.1% and 165.7%, respectively, over the past three years.

Analysts expect LMND’s revenue to fall 13.1% in the following quarter (ending June 30, 2021), but increase in 21.8% in the current year and 57.8% next year. Its EPS is expected to rise 58.8% in the next quarter, 17.6% in the current year, and 2% next year.

Profitability      

ALL’s trailing-12-month revenue is nearly 475 times  LMND’s. In addition, ALL is the more profitable with a net profit margin of 12.5% versus LMND’s negative value.

Moreover, ALL’s ROE and ROA of 20% and 4.3%, respectively, compare favorably with LMND’s negative value.

Valuation

In terms of trailing-12-month p/s, ALL is currently trading at 0.78x, 97.6% less expensive than LMND, which is currently trading at 33.12x. Moreover, LMND is more expensive compared to ALL in terms of trailing-12-month p/b (9.75x versus 1.20x).

ALL looks much more affordable here.

POWR Ratings

While ALL has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system, LMND has an overall rating of F, which represents a Strong Sell.

ALL has a Growth Grade of B, consistent with its improving financials over the coming years. In comparison, , LMND has been graded C, in line with its unprofitability and declining revenues.

In terms of Stability Grade, ALL has a B grade, reflecting that it is less risky than its peers. LMND has a D grade here.

Moreover, of 61 stocks in the B-rated Insurance – Property & Casualty industry, ALL is ranked #4 and LMND is ranked #60.

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

The Winner

The historically low interest rate environment kept the bond market unattractive last year, severely impacting insurance companies’ operations. However, the U.S. insurance sector looks poised to generate market-beating returns going forward following the steepening of the yield curve. While ALL is a traditional insurance company, LMND is leveraging AI and fintech to gain market share. However, ALL appears to be a better buy based on the factors discussed here.

LMND was one of the hottest IPOs of 2020. The stock has run too far too fast as it benefited immensely from the IPO boom. But the stock has been on a downward  course since January this year after being targeted by famed short-selling fund Citron Research. The firm stated the LMND’s technology is no different from insurers like Progressive Corporation (PGR) or State Farm, and “they’ve been lying to their customers and their shareholders.”

ALL is a better long-term investment considering its unique offerings and continued expansion. ALL’s total policies in force have increased 20.5% over the last 12  months, reflecting strong growth in  Allstate Protection Plans and modest growth in Property-Liability policies. In fact, its  Property-Liability underlying combined ratio has been excellent over the past year.

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ALL shares were trading at $114.96 per share on Monday afternoon, up $3.34 (+2.99%). Year-to-date, ALL has gained 5.35%, versus a 3.10% 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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