Allstate doubles extended warranty profits in Q3 as SquareTrade acquisition pays off

November 5, 2020.
In this photo, Chelsea Wickline, associate creative director at SquareTrade, lowers a phone for testing into a DunkBot, a robot used to measure the sustainability of a phone to water, in San Francisco. (AP Photo/Ben Margot)

In this photo, Chelsea Wickline, associate creative director at SquareTrade, lowers a phone for testing into a DunkBot, a robot used to measure the sustainability of a phone to water, in San Francisco. (AP Photo/Ben Margot)

more than doubled profits in its extended warranty business and increased those policies in force by 50% year over year during the third quarter, amid a surge in consumer electronic sales during the pandemic. 

Executives for the fourth-largest U.S. property and casualty insurer said the company's purchase of extended warranty insurtech SquareTrade in 2017 enabled it to take advantage of the trend. Purchase of the firm was part of Allstate's strategy to remain competitive as fintechs compete fiercely with traditional insurers. 

“This thing is worth a whole lot more than we paid for it,” said Tom Wilson, Allstate’s chairman, president and CEO, of the company's $1.4 billion SquareTrade acquisition.

The San Francisco-based insurtech currently sells extended warranties primarily in the U.S. for consumer electronics, including smartphones, televisions, laptops and appliances. Some of these product categories saw huge sales growth as customers stayed at home during coronavirus-related lockdowns.

SquareTrade took in $36 million in profit during the third quarter -- the division’s most profitable quarter ever, up 140% from the same period last year. Policies in force stood at 126,000 at the end of the third quarter, a 50% increase from the same time in the previous year. 

When Allstate took over SquareTrade in 2017, the company was losing millions of dollars each quarter and had less than 30,000 policies in force.

Northfield Township, Illinois-based Allstate is undergoing a restructuring designed to more fully integrate its direct-to-consumer subsidiary, Esurance, with its traditional exclusive agent-based business. As part of that restructuring, the company is investing heavily in technology and laying off nearly 4,000 claims, sales and support workers. 

Allstate’s Property-Liability President Glenn Shapiro said the insurer was increasing its “connective tissue” between its direct-to-consumer and exclusive agent-based businesses. 

“What we want to be and aspire to be in the near-term is a company that goes to market in both ways,” said Shapiro. 

Allstate faces stiff competition in the auto insurance sector from the insurtech Root, which raised $664 million in an initial public offering last week. 

Root sells auto insurance entirely through a mobile app, which monitors driver behavior. The company writes premiums based partially on a driving score it creates by measuring factors like braking, speed of turns and route consistency. 

Despite losing nearly $150 million in the first half of 2020, Root has generated significant investor interest by arguing that its data collection technology will disrupt traditional insurers like Allstate.

But Wilson took a thinly veiled shot at Root during Thursday’s call.  

“We have 10 times the miles driven of a company that recently went public,” said Wilson, touting the role of Allstate’s in-house data analytics operation, Arity, which Allstate argues will help it fend off challenges from insurtechs like Root. 

The third-quarter investor call came the morning after Allstate reported far better than expected earnings, beating analysts’ earnings consensus by two-thirds with $923 million in adjusted net income. 

 “This was just an exceptional quarter,” said Wilson.

Even as Allstate sustained a surge in catastrophe losses due to a record hurricane season, a reduction of traffic due to coronavirus restrictions made the company’s auto insurance business far more profitable. 

Shapiro said that, while it was unclear how long the reduction in traffic would last, fewer Allstate customers are driving during rush hour. Those who are driving are traveling on less-congested roads, further reducing the number of accidents, Shapiro said. 

Allstate’s auto underlying combined ratio, a key measure of profitability, was down from 93.1% during the third quarter of last year to 84.2% this year. That means Allstate’s auto policies were far more profitable. 

The company's executives said the stock continues to be undervalued and vowed to continue share buybacks. 

The insurer returned nearly $1 billion to common shareholders during the third quarter through $798 million in repurchases and $169 million in dividends. Allstate now plans an additional $750 million in repurchases to be completed by Jan. 12 of next year. 

The insurer’s shares were trading at around $92 on Thursday, down from a pre-lockdown high of more than $125 in February.