Allstate shares recover after lawsuit hits National General subsidiary

Shares in The Allstate Corp. largely recovered from a brief dip that followed news that one of its subsidiaries was being sued for fraud by the US Department of Justice.

Allstate's stock fell 4.03% from July 24 to July 25. It has since recovered, rising 7.3% from a low of $165.40 per share on July 25 to $177.49 by the close of trading on Aug. 1, buoyed by second-quarter earnings.

While the DOJ complaint appears serious, it is too early to assess potential losses, Piper Sandler analyst Paul Newsome said.

"It is important to note the DOJ complaint does not necessarily mean that Allstate is liable," Newsome said.

The broader S&P 500 rose 0.36% and the S&P Insurance Index rose 3.19% from July 24 to Aug. 1.

Allegations

Allstate's National General Holdings Corp. is accused of defrauding customers by "force placing" unnecessary collateral protection insurance on vehicles financed by Wells Fargo between 2005 to 2016, according to a lawsuit filed by the DOJ in the US District Court for the Western District of Pennsylvania.

"National General knew its deficient systems regularly resulted in a failure to adequately track borrowers' outside insurance, yet it continued force-placing insurance, knowing that it was force placing insurance on borrowers that already had insurance," the complaint reads. "In fact, from 2008 to 2016, National General knew that it falsely force-placed insurance between 56 and 93% of the time."

These improper force placements harmed borrowers, the complaint says, causing them to pay money they did not owe and to default on their loans, and triggering vehicle repossessions and negative impacts to borrowers' credit scores.

The lawsuit targets a lender-placed insurance program sold through agents and differs from Allstate's program, Allstate CEO Thomas Wilson said during a Thursday earnings call.

"Our program was transparent, borrowers were treated fairly and we're confident that we will prevail in this and that the lawsuits will have no impact on our ongoing business," Wilson said.

Even if Allstate is found fully liable for the alleged wrongdoing by its subsidiary, the potential fines are likely well within Allstate's capability to pay, Newsome said.

Allstate declined to comment on the lawsuit, citing ongoing litigation.

William Blair's Adam Klauber was upbeat about the company's prospects in a research note released after the company's second-quarter earnings call.

"Bottom line is that results are improving at a faster rate and higher extent than originally expected," the analyst said.

Wider market

From July 24 to Aug. 1, most property and casualty insurers fared similarly to Allstate, seeing modest increases in their stock values as second-quarter earnings figures were released.

Pet insurer Trupanion Inc. had one of the most significant increases among property and casualty insurers, rising 13.9% from July 25 to midday on Aug. 1, despite being the most-shorted insurance stock in the first half of 2024.

Root Inc.'s stock fell 14% from July 25 to Aug. 1., the largest drop. The oft-embattled insurance technology company was also among the most-shorted insurance stocks in the first half of 2024 and its stock value has fluctuated throughout the year.