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KWESI ACQUAY - WILLIAM KURINSKAS - CHRISTELLE KHOURI - ALEXANDRA RHEINHARDT. WHY AUTO INSURANCE?. AGENDA. INDUSTRY STRUCTURE. INDUSTRY OVERVIEW. INDUSTRY ORGANIZATION. COMPETITIVE LANDSCAPE. MAJOR PLAYERS. ADVERTISING STRATEGIES. RECOMMENDATIONS. INDUSTRY STRUCTURE. INDUSTRY OVERVIEW. - PowerPoint PPT Presentation
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KWESI ACQUAY - WILLIAM KURINSKAS - CHRISTELLE KHOURI - ALEXANDRA RHEINHARDT
WHY AUTO INSURANCE?
AGENDAINDUSTRY STRUCTURE
ADVERTISING STRATEGIES
RECOMMENDATIONS
INDUSTRY OVERVIEWINDUSTRY ORGANIZATIONCOMPETITIVE LANDSCAPE
MAJOR PLAYERS
INDUSTRY STRUCTURE
INDUSTRY OVERVIEW
PRODUCT SEGMENTATION
QUICK STATISTICS
QUICK STATISTICS
Allstate
Dish
Home Depot
Comcast
Wal-mart
DirecTV
State Farm
Geico
Verizon Wireless
AT&T
$0 $200 $400 $600 $800 $1,000 $1,200
$240 $266 $278 $283
$316 $326 $336
$415 $702
$1,100 Top 10 Brand Advertisers on TV (2011)
TV advertising expenditures ($mm)
ADVERTISING EXPENDITURESAD/SALES RATIO: 1.2
AD GROWTH: 4.7%
SALES GROWTH: 5.4%
INDUSTRY DATA
INDUSTRY PERFORMANCE
HIGHER PREMIUMS
INDUSTRY PERFORMANCE
EXPECTED GROWTH
RECOVERY of AUTO INDUSTRY
INCREASE IN CONSUMER DEMAND
CONSUMERS: WHO PURCHASES?
TECHNOLOGY & PRODUCTION COSTS
UNDERWRITING SOFTWARE
LOW PRODUCTION COSTS
INDUSTRY ORGANIZATION
INSURANCE CARRIER
BROKERS or AGENTSUNDERWRITING SOFTWARE
COMPETITIVE LANDSCAPE
MARKET SHARE & HHI
State Farm18%
All State9%
Geico9%
Progressive8%Farmers
6%Liberty
4%
USAA4%
NationWide4%
Travelers2%
American Family2%
Other33%
Source: IBISWorld
HHI 1170
BARRIERS TO ENTRY
PRODUCT DIFFERENTIATION
MAJOR PLAYERS
LIST OF MAJOR PLAYERS
18.4% MARKET SHARE
ABSENT FROM STOCK MARKET$33 billion REVENUE
CROSS PROMOTION
9.5% MARKET SHARE
70% of PROPERTY & PREMIUMS$17 billion REVENUE
PRODUCT BUNDLING
8.6% MARKET SHARE
Until 1973: FEDERAL-EMPLOYEE-ONLY INSURER $15 million REVENUE
LOW PRICES
ADVERTISING STRATEGIES
CAN YOU GUESS?
CAN YOU GUESS?
CAN YOU GUESS?
CAN YOU GUESS?
CAN YOU GUESS?
ICONIC ADVERTISING
GEICO AD
BRAND RECOGNITION?
SURVEY ON CHARACTER RECOGNITION
INTERESTING RESULTS . . .
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Brand/Character Recognition
Amount of Correct Identi-fications
Firm and Ad Character
Perc
enta
ge o
f Tim
es C
orre
ctly
Iden
tified
N=73
HUMOR
ALL STATE
“COMFORT” ADVERTISING
CELEBRITY ENDORSEMENT
GEICO CELEBRITY
Aaron Rodgers Chris Paul
COMPARATIVE ADVERTISING
“Helping you save even if it’s not with us”
INFORMATIVE vs. PERSUASIVE
“15 minutes could save you 15%”
PRODUCT PLACEMENT
SPONSORSHIP
TELEVISION ADVERTISING
EMPIRICAL FINDINGS
GOOGLE TRENDS
SOCIAL MEDIA
SOCIAL MEDIA
Farmers
American Family Insurance
Liberty Mutual
Geico
Allstate
State Farm
Progressive
Nationwide Insurance
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
46.4%
50.0%
51.7%
56.1%
57.9%
73.1%
76.5%
76.9%
Facebook response rates to insurance ads
Response rate (number of FB posts that received a response/ total)
RECOMMENDATIONS
ADVERTISING RECOMMENDATIONSIndustry recommendations:Continue to promote online and adjust to evolving trends in social media
Have more balance in commercials between building brand and selling product
Emphasize more features in coverage or service attributes for better product differentiation
Ensure commercial characters have stronger tie to actual product of insurance
INVESTMENT RECOMMENDATION: ALLSTATE
Investment Thesis:Strong recent market performance
Superior margins compared to competitors
Solid growth prospects (premium increases have been successful to compensate for low interest rates)
Dividend increase despite Sandy $1.1B hit shows strength
Allstate (ALL) key statisticsPrevious closing price $49.01Market cap $23.4BEnterprise Value/ EBITDA 6.9 xP/ E 10.5 xEPS $4.68Dividend yield 2.0%
Allstate is outpacing competitor and market growth
COMPANY FUNDAMENTALSALL PGR Industry
Market Cap: 23.40B 15.05B 2.78BEmployees: 38,000 25,889 2.10KQtrly Rev Growth (yoy): 0.04 0.09 0.02Revenue (ttm): 33.32B 17.38B 2.46BGross Margin (ttm): 0.23 0.09 0.23EBITDA (ttm): 3.90B 1.62B 351.20MOperating Margin (ttm): 0.11 0.09 0.07Net Income (ttm): 2.31B 953.30M N/ AEPS (ttm): 4.68 1.57 1.75P/ E (ttm): 10.47 15.9 12.72PEG (5 yr expected): 1.24 1.89 1.4P/ S (ttm): 0.7 0.86 0.87
ALLSTATE (ALL) DCF VALUATIONFree cash flows ($mm)
2012A 2013E 2014E 2015E 2016E 2017E TerminalRevenue $27,027 $27,653 $28,387 $28,128 $28,386 $28,954 $29,533
% growth 2.3% 2.7% (0.9%) 0.9% 2.0% 2.0%EBIT 2,458 2,765 2,850 3,324 3,354 3,421 3,490
% margin 9.1% 10.0% 10.0% 11.8% 11.8% 11.8% 11.8%Less: taxes at 35.0% (968) (997) (1,163) (1,174) (1,197) (1,221)Plus: D&A 245 245 245 245 245 245Less: capex 0 0 0 0 0 0
% revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Less: increases in NWC 0 0 0 0 0 0
% revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Unlevered free cash flow for discounting $2,042 $2,097 $2,405 $2,425 $2,468 $2,513
Discount period 0.875 1.875 2.250 3.250 4.250 4.250Discount factor 92.7% 85.1% 82.4% 75.6% 69.3% 69.3%Discounted free cash flows $1,894 $1,784 $1,981 $1,832 $1,711 $24,889
Projections
Present value of explicit cash flows $9,203Present value of perpetual cash flows 24,889Enterprise value $34,092Plus: cash 4Less: debt (6,012)Less: non controlling interest and other 0Plus: unconsolidated investments 0Equity value $28,084Divided by shares outstanding 477.4
Price per share $58.81
SENSITIVITY ANALYSISImplied share price
Terminal growth rate1.0% 1.5% 2.0% 2.5% 3.0%
10.0% $46.44 $49.00 $51.87 $55.12 $58.85Discount 9.5% $49.02 $51.88 $55.12 $58.83 $63.10
rate 9.0% $51.89 $55.12 $58.81 $63.07 $68.048.5% $55.13 $58.80 $63.04 $67.99 $73.848.0% $58.80 $63.02 $67.95 $73.77 $80.75
DCF range: $51.88- $67.99
Valuation represents a 6% -39% premium over Monday’s closing price of $49.01