Meeting Mayhem

Allstate’s Mr. Mahem ads are ironic considering the mayhem at the company since Thomas Wilson became CEO of the country’s second-largest auto and home insurer nearly five years ago.

According to Crains Chicago, part of the problem was that Allstate did not follow as rivals begain using new direct-sales techniques that grabbed most of the growth in the $164-billion U.S. auto insurance market. Customers are defecting, premium revenue is falling and the stock price is down by half since Mr. Wilson took the helm. 1 in 3 shareholders voted against his re-election as board chairman, the highest percentage of “no” votes for any CEO of a Standard & Poor’s 500 company this year.

Ignoring New Growth Models

Geico and Progressive Corp. found a new formula for growth in the relatively mature business by crafting 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.

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.

Allstate’s second-place share of the auto insurance market fell to 10.4% from 11.3% over the past five years, while Geico jumped two points to 8.7% and Progressive climbed to 7.9%

Late Counter Measures

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.

Esurance to the Rescue?

Mr. Wilson has now dramatically changed course with a $1-billion deal to acquire San Francisco-based online auto insurer Esurance Insurance Services Inc. Formed in 1999, Esurance outsells Allstate’s 10-year-old Internet platform. Esurance will sell policies at lower prices than Allstate agents offer,  another break with the past.

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. Jeffrey Lewis, an Allstate vice-president from 1999 to 2004, who helped launch the effort feels that was a mistake:

To me, that was the fatal flaw from the get-go. [Customer] expectation was ‘If I did all the work myself, I was going to get a better price.’

During the ensuing 11 years, Allstate’s annual online sales reached only $700 million, while Geico’s surged by $10 billion.

Mr. Wilson says things will be different with Esurance. But the new online unit will need a large budget for ad spending, which already is soaring.

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” and “Mayhem” ad campaigns. Mr. Wilson told investors this month:

We’ll expand (advertising) appropriately, but it will be at a reasonable return.

While Wall Street generally approves of the Esurance acquisition, Allstate stock got no boost from the deal, since some question Allstate’s ability to execute, given past missteps. Greg Peters, an analyst at Raymond James & Associates in Chicago wonders:

Given their track record, what happens (to Esurance)? It may grow in the short term, but if history repeats itself this will be a shrinking book of business over the long term.

Creating More Mayhem

In doing so, 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%.

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.

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.

The Takeaway

It appears that the inability to make hard strategic decisions at pivotal times caused the company to misread the changing market and react too late, losing important momentum, resulting in declining sales, market share and, finally, the loss of a sales force. The lesson of the Hartford shows that a sudden and reactive withdrawal of support from a sales force channel causes mass defections – bleeding that hastens the decline of an enterprise. Had the hard decision been made to shift resources from the captive agency side to online sales operations sooner, the company would have been more profitable, and this would have also been beneficial to its captive agent channel. A desperate scramble to stop the bleeding could have been avoided by proper market intelligence and vision.