Allstate Seals Esurance & Answer Deal - Analyst Blog
October 12 2011 - 12:09PM
Zacks
On Friday, Allstate Corp. (ALL) announced the
completion of the acquisition of Esurance and Answer Financial from
White Mountains Insurance Group Ltd. (WTM) for
$1.0 billion.
This marks the next biggest acquisition for the company since 1999,
when it bought American Heritage Life Investment Corp., a life
insurance company specializing in the workplace, for $1.1
billion.
The impact
of the acquisition on earnings is expected to be break-even by the
second full year of ownership and accretive thereafter. While
Answer Financial was acquired by Esurance three years ago, Esurance
was acquired by White Mountains in 2009.
Esurance is
the third largest online auto insurer that has more than doubled
its policies-in-force and grown premiums on an average of 20% per
year over the last five years. Meanwhile, Answer Financial is an
independent personal insurance agency and provides quote
comparisons from among 20 insurance companies, including
Progressive
Corp. (PRA), Esurance and
Safeco.
Through
these acquisitions, Allstate aspires to boost its online auto
insurance services. The deal is expected to expand Allstate’s
online sales, whereby it will be able to tap a large consumer group
and offer a good brand with a wider choice of products.
Additionally, the acquisition of Ensurance and Answer Financial
also bodes well for enhancing the company’s competitive leverage
since arch-rivals Progressive Corp., Travelers Co.
(TRV) and Geico of Berkshire Hathaway Inc. (BRK.B)
are already exploring growth opportunities through online auto
sales, a segment where Allstate has been underperforming for the
past 3 years due to loss of clients. Moreover, the acquisitions
will also help Allstate to save cost and time otherwise spent on
marketing.
Hence, through the aforesaid acquisitions, Allstate will be not
only be able to limit its rivals’ pace of growth but also create a
long-term growth strategy of building business through the most
accessed medium such as the internet.
However, we believe that the risks of the deal continue to
persist and it will take a long time before success from the deal
can be fully enjoyed. These have based on the fact that off late,
Allstate’s core business has been in a dangling position given the
consistent decline in property-liability premiums and
policies-in-force.
Nonetheless, excellent underwriting margins, prudent capital
management and strong liquidity continue to be impressive. This has
also helped the company to expand its agency concentration in its
operational areas, thereby revitalizing its distribution channel by
having stronger market presence.
Separately, last week, Allstate settled a longstanding patent
suit that was filed by another auto insurer– Progressive
Corp. (PGR). The dispute rose over the usage of a
technology that helps insurers in charging the drivers according to
their driving magnitude. Progressive had accused Allstate of breach
of some of its patents and trademarks of its usage-based
insurance.
However, both the parties have now settled down with an
agreement that will help the co-existence of their various
trademarks, and consequently use the device required in the cars to
measure the client’s driving skills and accordingly offer discounts
on such premiums.
ALLSTATE CORP (ALL): Free Stock Analysis Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
PROGRESSIVE COR (PGR): Free Stock Analysis Report
PROASSURANCE CP (PRA): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
WHITE MTN INS (WTM): Free Stock Analysis Report
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