The insurance giant loses its way as rivals Geico, Progressive reinvent the business.Photo by: John Ueland
His dream of a broader financial services empire in ruins, Thomas Wilson is running out of time to revive Allstate's once-dominant insurance business.
Since Mr. Wilson became CEO of the country's second-largest auto and home insurer nearly five years ago, Allstate has stuck to its old ways while rivals using new direct-sales techniques grabbed most of the growth in the $164-billion U.S. auto insurance market. Customers are defecting, premium revenue is falling and Northbrook-based Allstate's stock price is down by half since Mr. Wilson took the helm.
Shareholders seem fed up. Nearly 1 in 3 voted against his re-election as board chairman at last month's annual meeting, the highest percentage of "no" votes for any CEO of a Standard & Poor's 500 company this year.
"I think (he has) probably a year, maybe two at the most," says Meyer Shields, an analyst at Stifel Nicolaus & Co. in Baltimore.
' I think (he has) probably a year, maybe two at the most.'
Stifel Nicolaus & Co.
More than Mr. Wilson's job is at stake. Allstate's long slump casts doubt on the future of an 80-year-old company with deep roots in Chicago and 8,400 local employees. Allstate faces the same fate that befell other stalwarts of corporate Chicago — Motorola Inc. and Tribune Co., to name two — that foundered after missing fundamental shifts in their industries.
If Mr. Wilson, 53, can't turn around the auto insurance unit, Allstate faces a long, painful shrinking process that could add many more layoffs to the roughly 1,000 local jobs it has cut since the financial crisis. With its stock trading well below book value, the company also could be vulnerable to a takeover.
"It is going to have to grow," Mr. Shields says. "It's taking forever to turn around."
The eighth-largest Chicago-area company, Allstate was born during the Great Depression as the in-store insurance arm of Sears Roebuck & Co. It became independent in 1995, when Sears spun it off in a $9-billion deal.
Allstate moved beyond the Sears store insurance counters, building a network of exclusive agents around the country to sell auto and homeowners coverage to middle-class Americans in the postwar era. It remains a behemoth. About $1 of every $10 spent by U.S. households on car insurance goes to Allstate; it serves nearly 16 million households.
During the 2000s, Allstate moved to reduce its reliance on insurance by expanding into banking and retirement products. It expanded in life insurance, too, selling annuities through banks and other outside firms, as well as though its agents.
Mr. Wilson, as chief operating officer under predecessor Edward Liddy and later as CEO, was the architect of the strategy. But his vision of Allstate as a financial superstore for the middle-class clientele of its agents never bore fruit, and it left the company more vulnerable than most property-casualty insurers to the financial meltdown of the late 2000s. Allstate posted a loss of $1.7 billion in 2008, largely due to investment losses. The next year, it cut its dividend in half.
Meanwhile, natural disasters pummeled the homeowners insurance business. Hurricane Katrina caused $3.7 billion in losses for Allstate in 2005, leading the company to curtail homeowners policies in coastal areas. That hurt its auto business in those regions because Allstate's customers tend to buy auto and homeowners policies from the same insurer.
While Allstate was trying unsuccessfully to diversify, rivals were revolutionizing the auto insurance business, which Allstate still counts on for most of its sales. Auto premiums generated 55% of its $31.4 billion in revenue last year.
Geico and Progressive Corp. found a new formula for growth in the relatively mature business. They crafted a lower-cost model combining direct sales over the Internet and telephone with heavy television advertising. Offering lower prices and more convenience, they grew rapidly at the expense of Allstate and other insurers that sell mostly through agents.
Allstate's second-place share of the auto insurance market fell to 10.4% from 11.3% over the past five years, while Chevy Chase, Md.-based Geico jumped two points to 8.7% and Progressive climbed to 7.9%
Meanwhile, Bloomington-based State Farm Insurance Cos., the largest car and home insurer in the U.S. and a mutual company owned by its policyholders, is consistently rated better for claims handling and service than Allstate. Unlike publicly traded Allstate, it can offer lower prices without worrying about Wall Street's reaction to the resulting shrinkage of profit margins. State Farm's auto insurance business is still growing despite an online presence even smaller than Allstate's.
Allstate finds itself in a no man's land — it's not the cheapest auto insurer, and it's not known for providing the best service.
Mr. Wilson, who declined an interview request for this story, isn't the first Allstate CEO who failed to grasp the power of direct selling to reshape the industry. But he appears to get it now.
He dramatically changed course with a $1-billion deal last month to acquire San Francisco-based online auto insurer Esurance Insurance Services Inc. Formed in 1999, Esurance outsells Allstate's 10-year-old Internet platform.
Under Allstate, Esurance will keep its brand name and sell policies at lower prices than Allstate agents offer. That's another break with the past.
Shareholders make their displeasure with leadership known: 'no' votes
Shareholders are turning up the heat on Allstate Corp. directors.
At last month's annual meeting, directors Joshua Smith and H. John Riley Jr. barely cracked the 50% vote mark needed for re-election to the board. Chairman and CEO Thomas Wilson saw a 31% vote against him — the highest percentage of "no" votes for any CEO of a company in the Standard & Poor's 500.
Three familiar local names — former Illinois Tool Works Inc. CEO W. James Farrell, former Transora Inc. CEO Judith Sprieser and former Russell Reynolds Associates Inc. executive Andrea Redmond — attracted the opposition of about 40%. A fourth, former McDonald's Corp. CEO Jack Greenberg, got a thumbs-down from 31.7%.
The votes bode poorly for Mr. Wilson's future and put intense pressure on the board to act if results don't improve soon, says Charles Elson, chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
"You can't ignore it," Mr. Elson says. "You have to make some significant changes."
Proxy adviser Institutional Shareholder Services chided the board for approving $9.3 million in pay for Mr. Wilson last year, despite shareholder returns that lagged an index of comparable companies.
ISS also took issue with the board's response to a shareholder vote calling for Allstate to allow the owners of at least 10% of its stock to call a special meeting of shareholders. Instead, Allstate set the threshold at 20%.
In an emailed statement, Allstate said, "The stockholder support for our board was down this year because our board acted to implement the right for stockholders to call special meetings at a different threshold (20% vs. 10%) than had been part of a stockholder proposal which received majority support in 2009 and 2010."
As for Mr. Wilson, "Ultimately, it's pretty hard for (management) to last with that kind of opposition," Mr. Elson says. "Unless you tell a pretty convincing story next year, it's going to be pretty hard."
When Allstate launched an online sales operation in 2000 under Mr. Liddy, it didn't undercut its agents on price, fearing a backlash from the 15,000-plus salesforce.
"To me, that was the fatal flaw from the get-go," says Jeffrey Lewis, an Allstate vice-president from 1999 to 2004, who helped launch the effort. Mr. Lewis, now retired, says the customer "expectation was, 'If I did all the work myself, I was going to get a better price.' "
Geico and Mayfield Village, Ohio-based Progressive were happy to meet that expectation. During the ensuing 11 years, Allstate's annual online sales reached $700 million, while Geico's surged by $10 billion.
Mr. Wilson says things will be different with Esurance. But his new online unit will need a big dose of ad spending, which already is soaring as auto insurers vie more feverishly each year for consumers' attention.
Esurance spent $100 million on ads last year, badly trailing Geico, the industry's big spender at about $800 million. Allstate's ad budget is around $500 million, concentrated on the familiar "good hands" ads featuring actor Dennis Haysbert and Dean Winters' cheekier "Mayhem" character personifying all that can go wrong in the world. The company plans to advertise Esurance separately, with some sort of tagline identifying it as an Allstate unit.
"We'll expand (advertising) appropriately, but it will be at a reasonable return," Mr. Wilson told investors this month.
More ad spending puts more pressure on profits, a fact not lost on investors wondering how "Mayhem" can garner so much buzz (500,000 Facebook fans and nearly 10 million YouTube views) without boosting Allstate's sales.
Wall Street generally approves of the Esurance acquisition, but Allstate stock got no boost from the deal. Some question Allstate's ability to execute, given past missteps.
A $1.2-billion deal in 1999 for Chicago-based CNA Financial Corp.'s auto and homeowners insurance unit was supposed to expand Allstate's sales through independent agents. But Allstate backed away from the strategy after too many high-risk customers signed up. Its sales through independent agents shrank to $1.1 billion last year from $3 billion just after the CNA acquisition.
"Given their track record, what happens (to Esurance)?" says Greg Peters, an analyst at Raymond James & Associates in Chicago. "It may grow in the short term, but if history repeats itself this will be a shrinking book of business over the long term."
And while Allstate aims to compete more effectively with Geico and Progressive on their turf, they're targeting Allstate's stronghold among older consumers who like to buy auto and homeowners insurance from the same company. Until recently neither sold homeowners insurance. But both have linked up with home insurers to offer a bundled product.
"It's a huge chunk of business we're after," John Sauerland, Progressive's president of personal lines, told investors this month.
In the meantime, Allstate is creating its own sort of mayhem within its captive agent force, which accounted for more than 90% of its $26 billion in property-casualty insurance premiums last year. The company is culling low performers and pushing for consolidation among its 11,500 agencies, hoping bigger operations will provide better service. Executives have said the number of agencies could fall by as much as 25%.
Agents say management is sending out more "threat letters," warning agents that they'll be terminated if they don't start hitting sales targets.
Allstate also is reducing base commissions for many agents and making more of their pay contingent on reaching sales goals set by the company.
"The morale today is probably at its lowest that I've ever seen," says Jim Fish, executive director of the Gulfport, Miss.-based National Assn. of Professional Allstate Agents, a frequent critic of the company over many years.
Some agents are leaving Allstate to form independent agencies and selling their old customers cheaper policies from other insurers. It's not particularly hard to do.
Former Allstate agents John Burgman, left, and Greg Haynes joined forces and went independent, creating Victoria Insurance Group LLC in Texas. Photo: Korczynski's Photography Unhappy Allstate agents hang up their own shingles, taking customers with them
Allstate Corp. put food on the table for Greg Haynes and his family for five decades before he decided he'd had enough. Like his father, who started as an Allstate agent in Victoria, Texas, in 1954, Mr. Haynes sold insurance for Allstate, too, from 1990 to 2009. For the first half of that period, he did well, doubling his father's book of business to $5 million.
Then, in 2005, Hurricane Katrina hit, slamming Allstate with $3.7 billion in losses. The insurer responded by pulling back from areas prone to hurricane damage, and half of Mr. Haynes' customers were no longer able to get homeowners insurance from him. They left in droves, and his $5-million book withered to about $2.5 million. "Those customers would say, 'If you don't want my home, you don't want my auto either,' " he says.
Then the recession hit, and he says Allstate's prices weren't competitive. "They'd say, 'I love you, Greg, but I'm looking for ways to save money,' " he says.
In late 2009, Mr. Haynes, 51, took a $300,000 company buyout and hung up his shingle as an independent agent, joining with another fed-up Allstate veteran, John Burgman, 54. Their firm, Victoria Insurance Group LLC, has $2.5 million in premiums, and Mr. Haynes estimates about 20% of his old Allstate customers are with him.
Mr. Burgman says he and Mr. Haynes haven't had to do much soliciting in their town of 60,000, home to petrochemical plants and a soon-to-be Caterpillar Inc. factory. "You see people at the grocery store," he says. "You cross paths."
Mr. Haynes says he gets a couple calls a month from unhappy Allstate agents picking his brain on "going independent."
"I tell them, 'No. 1, they better start saving their money,' " he says. Then, he says, "My advice: Get out of Dodge."
Agents who leave the company get a one-time severance payment equal to 1½ times a year's commissions. So, an agent with a $1-million client list can receive up to $150,000. There are no restrictions on setting up a competing agency other than locating it at least a mile from the former Allstate franchise and refraining from soliciting former customers for a year.
Greg Haynes started his own agency in Victoria, Texas, in late 2009 after taking a $300,000 buyout from Allstate following nearly 20 years as an agent. He estimates about 20% of his former Allstate customers now are with him and are insured by other companies.
Defecting agents say the power of Allstate's brand — an advantage the company touts in missives to agents — is no match for competitors' lower prices.
"We sell from Hartford, Travelers, Safeco," says Mr. Haynes' partner John Burgman, another former Allstate agent. "When the difference (in price) is 25% on an annual premium, branding takes a back seat. It really does."
Joseph Lacher, Allstate's property and casualty president, told analysts this month that the agency overhaul will take about two years but will create agencies that do a better job of retaining clients and selling other insurance products to auto policyholders. In the short term, though, he acknowledges the company could lose some customers.
"We're convinced that . . . over the couple-of-years transition, (agency performance) will improve," he said. "But inside of a year, we could see a little noise around it."
In a statement, the company adds, "Our growth strategy is to serve customers well and attract new business with effective marketing campaigns such as 'Mayhem.' This is a great time to build an Allstate agency, and we have had no problems retaining high performers or attracting talented entrepreneurs to our company."
Allstate representatives talk to Hurricane Katrina evacuees about claims at a Allstate Insurance Mobile Response Unit. Getty Images photo
Analyst Mr. Shields says Allstate hasn't explained adequately why bigger agents are better. And he believes the risks of the agency-rationalization campaign are higher than the company admits.
"I honestly don't (understand)," he says. "I wish I did."
Allstate is still struggling to rebuild its finances following the crushing hit to shareholders' equity suffered during the financial crisis. Its operating returns on equity hover below 10%, far less than its 14% average over the past decade. Since its $1.7-billion loss in 2008, Allstate has posted modest earnings of $854 million, or $1.58 per share, in 2009 and $928 million, or $1.71 per share, in 2010. Revenue fell slightly last year to $31.4 billion from $32 billion in 2009.
At a recent "investor day" presentation, its first in over a decade, Allstate's top brass laid out a three-year plan for rebuilding its returns to 14%.The plan depends largely on big rate hikes on homeowners policies.
Homeowners insurance continues to bedevil Allstate. Six years after Katrina, a spate of tornadoes and other storms have caused big losses. Allstate suffered $2 billion in losses during April and May alone, nearly equal to all of its catastrophe losses in 2010.
Worries about Allstate's future are reflected in the price of its stock. At $29.43 last Friday, Allstate stock traded at 81% of its book value per share. Progressive shares, by contrast, fetch more than twice book value.
The dividend cut has yet to be restored, and Allstate has just begun repurchasing stock at modest levels — something it was doing aggressively before the crisis. Analysts who saw the company's ultra-low stock price as a buying opportunity are having second thoughts.
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