Allstate is All-star

In an earlier post (3/20/06), I commented that the "good hands" people at Allstate (ALL) seem to be in Good Hands themselves. ALL's good fortune continues as illustrated by the following graph:

The graph illustrates that an investment in ALL would have produced results superior to the property and casualty insurance industry and the market overall no matter when the investment was made. This is a stunning result. While certain years produced better results than others, the ability to achieve superior returns through an investment in ALL was not dependent on picking the right year.

It appears that ALL's results were due to three factors. First, ALL has a generally low expected return because its enormous market share means slow growth. This low expected return shows up by its average valuation being 60% of the stock market's metrics. Second, ALL has not squandered its returns by reinvesting in "growth opportunities." Instead, ALL has returned 68% of its earnings to shareholders over the last ten years. Third, ALL has not followed Wall Street's siren call to compete aggressively. ALL has focused on profitability by discontinuing new homeowners coverage in California, Connecticut, Delaware, Florida, New Jersey and eight coastal counties in New York.

Of course, one payoff for ALL's unwillingness to lose shareholder money is consumer and political outcry. But ALL's discipline actually contributes to a more sensible assessment of risk in catastrophe-prone zones.