ALL Allstate Corporation

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.

 
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