Insurance giant Allstate (ALL) has been a very fashionable trade lately, running up about 28% since Jan. 1 compared with 20% for the S&P 500, on optimism that rising rates will benefit its bottom line.
Insurance stocks typically invest their premium payments in short-term, interest-bearing assets until they need to tap into their cash stockpile to pay for claims. So if the Federal Reserve ticks up interest rates — or even if Treasuries just keep moving higher on their own like they have lately — that will benefit ALL stock.
But this optimism has been baked in with recent outperformance, and it’s time to see some actual results. Revenue hasn’t really budged in years, with a measly 3% sales increase projected for this year and a 3% rise projected for next year. To top it off, Allstate is trading for a 20% premium on its book value.
It seems a lose-lose for investors, particularly new money. If the impact of higher rates is baked in, you’re too late to see upside — and if revenue misses or the Fed delays tightening policy, then it’s only going to result in pain for Allstate investors.