I remember once being at a First Boston Insurance conference and talking to the (now former) CEO Ed Liddy afterwards. I mentioned that we were shareholders and that I thought the stock was cheap (then around $40). He looked at me intently and said that he could not figure out why the market valued Allstate so cheaply. It was an incredible free cash flow machine.
With the hurricanes of 2004 and 2005 after that, one can see that the performance since then has been superb. But now we are in a soft pricing environment; profits will not rise rapidly, if at all. But even if profits remain level, Allstate looks cheap. EV/EBITDA is near 5x.
That should attract private equity. If one can take over Texas Utilities, Allstate should be easier. Here’s why: one can sell the life arm, Allstate Financial for $5 billion to one of the major life insurers. Along with that, the private equity buyers can lever up the holding company balance sheet to a BB- rating, which would leave the operating entities at a marginal investment grade of BBB-. The private equity buyers would use the free cash flow to repay the bank debt incurred, and five years from now, would IPO Allstate at a higher valuation.
Though I am not crazy about all of the increased leverage, a scenario like this could happen. It is just another ramification of interest rates that are too low.
Long ALL (the funds I work for and me personally)
What about Allstate being swallowed up by Buffett? They produce mountains of float.
That deal would probably fly on an antitrust basis, but I’m not sure if Buffett wants more float at present. He has a lot of free cash already… his insurance operations are producing a lot of cash after a “low cat” year. I think that for him to get interested in Allstate, he would need to deploy existing float first.
But I think it would be difficult to integrate the marketing of the two organizations. Allstate agents would not want to be GEICO agents, and Allstate customers like the handholding that comes from having an agent. There are benefits to having an agent. I like my Allstate agent.
Perhaps they could integrate the back office only, and leave the two marketing operations entirely separate.
AIG might be a more logical acquirer, after all, 21st Century Insurance Group [TW] is only an appetizer to them.
Long ALL (and they insure me)