Property and casualty (P&C) insurance is viewed as a necessity with a demand that remains steady regardless of economic conditions, ensuring a stable revenue stream for the companies operating in this space. Furthermore, with rising occurrences of natural disasters worldwide, the need for P&C insurance will most likely skyrocket.
Given the necessity, in this piece, I have assessed the fundamentals of two industry giants, Berkshire Hathaway Inc. (BRK.B) and The Allstate Corporation (ALL) to determine which one could be a more compelling investment choice.
The year 2023 has been labelled as the year of natural catastrophic events due to the increasing frequency and severity of disasters such as earthquakes, wildfires, droughts, floods, landslides, cyclones, and storms, surpassing previous years' statistics.
This surge in natural disasters is likely to fuel the growth of the P&C insurance market in the foreseeable future. Additionally, the upward trend in urbanization is contributing to the expansion of the P&C insurance market, given the higher concentration of properties and businesses in urban areas.
As more individuals move to cities and urban infrastructure expands, there will be a heightened demand for insurance coverage on properties, homes, and vehicles. In 2023, the P&C insurance market reached a staggering $1.80 trillion, and it is projected to experience a CAGR of 5.5% between 2024 and 2032.
Moreover, the P&C insurance industry’s future hinges on technological advancements. Emphasizing proactive risk management, they deploy technologies such as generative AI to access more information and talent with emerging capabilities. This technological leverage enables insurers to transition from a reactive stance on risks to a more preventive approach, aiming to minimize losses.
Furthermore, Fitch Ratings anticipate the industry's performance to enhance in 2024, driven by improved results in personal auto segments due to the implementation of rate increases, moderation in claims severity trends, and growth in investment income resulting from higher yields.
Given the optimistic industry prospects, both BRK.B and ALL stand to benefit. However, in terms of price performance, ALL appears to have outshined BRK.B by surging 29.4% over the past nine months compared to BRK.B’s 18.1% gain during the same period.
Likewise, over the past six months, ALL soared 27.4% versus BRK.B’s 6.4% gain. In addition, ALL’s shares have gained marginally over the past month to close the last trading session at $138.39. In contrast, BRK.B’s shares plummeted 1.2% during the same period to close the last trading session at $365.95.
To that end, let us dive deeper into the comparison of the featured Insurance - Property & Casualty stocks to understand which one is the better pick.
Recent Financial Results
BRK.B’s total revenues for the fiscal third quarter (ended September 30, 2023) amounted to $93.21 billion. Its net loss came in at $12.57 billion and $5.88 per share, worsening 365.7% and 362.9% from the prior-year quarter, respectively. Moreover, during the same period, the company’s cash and cash equivalents stood at $25.57 billion, down 20.7% compared to $32.26 billion as of December 31, 2022.
For the fiscal third quarter, which ended on September 30, 2023, ALL’s total revenues increased 9.8% year-over-year to $14.49 billion. Its net loss amounted to $4 million and $0.16 per share compared to a net loss of $674 million and $2.55 per share in the same period last year, respectively.
Additionally, as of September 30, 2023, the company’s cash balance stood at $860 million, up 16.8% compared to $736 million as of December 31, 2022.
Past and Expected Financial Performance
BRK.B’s revenue has grown at a CAGR of 12.3% over the past three years. Street expects BRK.B’s revenue and EPS for the fiscal 2024 first quarter (ending March 2024) to increase 3.1% and 21.4% year-over-year to $88.08 billion and $4.28, respectively.
Conversely, ALL’s revenue has improved at a CAGR of 9.6% over the past three years. Analysts predict ALL’s revenue for the fiscal 2024 first quarter (ending March 2024) to increase 4.9% year-over-year to $14.46 billion, while its EPS for the same quarter is expected to come in at $3.37.
Profitability
ALL’s trailing-12-month asset turnover ratio of 0.56x is higher than BRK.B’s 0.36x. However, BRK.B’s trailing-12-month gross profit and levered FCF margins of 27.99% and 18.29% is higher than ALL’s 9.75% and 11.48%, respectively.
Valuation
In terms of the forward EV/Sales ratio, BRK.B’s 2.10x is 162.5% higher than ALL’s 0.80x. Furthermore, BRK.B’s forward Price/Sales ratio of 2.18x is 240.6% higher than ALL’s 0.64x.
Thus, ALL is more affordable.
POWR Ratings
BRK.B has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, ALL has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BRK.B has an F grade for Growth, justified by its poor financial results in its last reported quarter. While ALL’s B grade for Growth is in sync with the solid third-quarter results.
Moreover, BRK.B’s D grade for Value is consistent with its stretched valuation metrics. In terms of forward non-GAAP P/E, BRK.B’s 20.11x is 85.8% higher than the industry average of 10.83x. Furthermore, its forward Price/Book multiple of 1.45x is 18.7% higher than the industry average of 1.22x.
On the other hand, ALL has a C grade for Value, justified by its mixed valuation metrics. The stock’s forward EV/EBIT multiple of 19.45x is 62.9% higher than the industry average of 11.94x. Meanwhile, its forward Price/Sales ratio of 0.64x is 76.6% lower than the industry average of 2.75x.
Additionally, BRK.B has a C grade for Stability in sync with its 60-month beta of 0.86. In contrast, ALL’s B grade for Stability is consistent with its 60-month beta of 0.54.
Among the 54 stocks in the B-rated Insurance - Property & Casualty industry, BRK.B is ranked #50, while ALL is ranked #5.
Beyond what we’ve stated above, we have also rated both stocks for Momentum, Sentiment, and Quality. Click here to view BRK.B’s ratings. Get the ratings for ALL here.
The Winner
While both BRK.B and ALL should benefit from rapid technological integration in the insurance sector, coupled with the increased frequency of natural disasters potentially bolstering the industry’s customer base, ALL’s superior financials and lower valuation, could make it a better investment candidate for your portfolio over BRK.B.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Insurance - Property & Casualty industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
BRK.B shares were trading at $357.55 per share on Thursday morning, up $0.60 (+0.17%). Year-to-date, BRK.B has gained 15.75%, versus a 26.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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