Insurance

Report
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
Top 10 Brand Advertisers on TV (2011)
$1,100
AT&T
$702
Verizon…
$415
$336
$326
$316
$283
$278
$266
$240
Geico
State Farm
DirecTV
Wal-mart
Comcast
Home…
Dish
Allstate
$0
$200
$400
$600
$800
TV advertising expenditures ($mm)
$1,000
$1,200
AD/SALES RATIO:
1.2
AD GROWTH:
4.7%
SALES GROWTH:
5.4%
RECOVERY of AUTO
INDUSTRY
EXPECTED
GROWTH
INCREASE IN CONSUMER
DEMAND
HIGHER PREMIUMS
UNDERWRITING
SOFTWARE
LOW PRODUCTION
COSTS
INDUSTRY ORGANIZATION
INSURANCE CARRIER
UNDERWRITING SOFTWARE
BROKERS or AGENTS
COMPETITIVE LANDSCAPE
Other
33%
State Farm
18%
All State
10%
American
Family
2%
Travelers
2%
NationWide
USAA Liberty
4%
4%
5%
HHI
1170
Geico
9%
Farmers
6%
Progressive
8%
Source: IBISWorld
MAJOR PLAYERS
18.4% MARKET
SHARE
$33 billion REVENUE
ABSENT FROM
STOCK MARKET
CROSS PROMOTION
9.5% MARKET
SHARE
$17 billion REVENUE
70% of PROPERTY
& PREMIUMS
PRODUCT BUNDLING
8.6% MARKET
SHARE
$15 million REVENUE
LOW PRICES
Until 1973: FEDERALEMPLOYEE-ONLY
INSURER
ADVERTISING STRATEGIES
GEICO AD
Percentage of Times Correctly Identified
Brand/Character Recognition
100%
90%
80%
70%
60%
50%
40%
Amount of
Correct
Identifications
30%
20%
10%
0%
Allstate's
Mayhem
State Farm's
Aaron
Rodgers
Farmer's
Professor
Allstate's
Dennis
Progressive's
Flo
Firm and Ad Character
Geico's
Gecko
N=73
ALL STATE
Aaron Rodgers
GEICO CELEBRITY
Chris Paul
UNIVERSITY OF FARMERS
Facebook response rates to insurance ads
Nationwide Insurance
76.9%
Progressive
76.5%
State Farm
73.1%
Allstate
57.9%
Geico
56.1%
Liberty Mutual
51.7%
American Family Insurance
50.0%
Farmers
46.4%
0%
10%
20%
30%
40%
50%
60%
70%
Response rate (number of FB posts that received a response/ total)
80%
90%
RECOMMENDATIONS
Industry 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
Allstate (ALL) key statistic s
Previous closing price
Market cap
Enterprise Value/EBITDA
$49.01
$23.4B
6.9 x
P/E
10.5 x
EPS
$4.68
Dividend yield
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 $1.1B hit shows strength
2.0%
ALL
PGR
Industry
Market Cap:
23.40B
15.05B
2.78B
Employees:
38,000
25,889
2.10K
0.04
0.09
0.02
33.32B
17.38B
2.46B
0.23
0.09
0.23
3.90B
1.62B
351.20M
0.11
0.09
0.07
2.31B 953.30M
N/A
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Operating Margin (ttm):
Net Income (ttm):
EPS (ttm):
4.68
1.57
1.75
P/E (ttm):
10.47
15.9
12.72
1.24
1.89
1.4
0.7
0.86
0.87
PEG (5 yr expected):
P/S (ttm):
Free cash flows ($mm)
Projections
2012A
2013E
2014E
2015E
2016E
2017E
Terminal
$27,027
$27,653
$28,387
$28,128
$28,386
$28,954
$29,533
2.3%
2.7%
(0.9%)
0.9%
2.0%
2.0%
2,458
2,765
2,850
3,324
3,354
3,421
3,490
9.1%
10.0%
10.0%
11.8%
11.8%
11.8%
11.8%
(968)
(997)
(1,163)
(1,174)
(1,197)
(1,221)
245
245
245
245
245
245
0
0
0
0
0
0
0.0%
0
0.0%
0.0%
0
0.0%
0.0%
0
0.0%
0.0%
0
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
Discount factor
Discounted free cash flows
0.875
92.7%
$1,894
1.875
85.1%
$1,784
2.250
82.4%
$1,981
3.250
75.6%
$1,832
4.250
69.3%
$1,711
4.250
69.3%
$24,889
Revenue
% growth
EBIT
% margin
Less: taxes at 35.0%
Plus: D&A
Less: capex
% revenue
Less: increases in NWC
% revenue
Present value of explicit cash flows
Present value of perpetual cash flows
Enterprise value
Plus: cash
Less: debt
Less: non controlling interest and other
Plus: unconsolidated investments
Equity value
Divided by shares outstanding
Price per share
$9,203
24,889
$34,092
4
(6,012)
0
0
$28,084
477.4
$58.81
Implied share price
Discount
rate
10.0%
9.5%
9.0%
8.5%
8.0%
1.0%
$46.44
$49.02
$51.89
$55.13
$58.80
Terminal growth rate
1.5%
2.0%
2.5%
$49.00 $51.87
$55.12
$51.88 $55.12
$58.83
$55.12 $58.81
$63.07
$58.80 $63.04
$67.99
$63.02 $67.95
$73.77
3.0%
$58.85
$63.10
$68.04
$73.84
$80.75
DCF range: $51.88- $67.99
Valuation represents a 6% -39% premium over Monday’s closing price
of $49.01

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