Allstate shifts to autos
Home policies dumped, profits jump
CHICAGO - When a series of killer hurricanes walloped the Gulf Coast in
2005, costing Allstate Corp. a record quarterly loss of $1.55 billion, the
company tied to make sure its bottom line would never be hit so hard again.
The nation's largest publicly traded personal-lines insurer pulled back aggressively
from areas susceptible to expensive storms. It did not renew many homeowners'
policies. It dramatically increased its own insurance, or reinsurance.
Two years later, despite the continuing risk of a consumer and regulatory backlash,
the strategy is paying off: Allstate, which reports third-quarter earnings
Wednesday, is on a pace to exceed last year's record annual profit of $5 billion.
Not only has the company reduced its exposure to catastrophic events, it is benefitting
from a calculated shift away from the riskier homeowners' business into the increasingly
profitable auto line. Automobile insurance now accounts for 67 percent
of its property-liability premiums and more than double the revenue from homeowners.
"Allstate has come a long way in becoming more sophisticated in understanding
the risks that it underwrites, and it's had very, very good financial results
because of that," said Donald Light, an analyst at research and consulting
firm Celent. "They've clearly made a management judgment that they'll
take the lumps that they have to take, public relations-wise, in order to insulate
themselves from the shock losses."
Criticism has been harsh.
The Consumer Federation of America says the Northbrook, Ill., company favors
investors at the expense of consumers and has engaged in price-gouging. Sen.
Trent Lott, R-Miss., has repeatedly assailed Allstate and other big insurers
for what he claims is negligence since Katrina, and he even sued State Farm for
related claims, eventually settling the lawsuit. He is pushing to crack
down industry through various legislative initiatives.
"It's OK to make a profit, but they are ripping people off," said J.
Robert Hunter, the consumer group's insurance director. "Why are
they so risk-averse? If they're not going to take on risk, what do we
need insurance companies for?"
Allstate declined to make an executive available for this story, citing the mandated
quiet period before its earnings announcement. But the company has been
very public, if not blunt, about its intentions.
Less than two months after Hurricane Katrina devastated the Louisiana and Mississippi
coasts and four weeks after Rita struck along the Texas-Louisiana border, Allstate
executives told analysts the more than $3 billion in catastrophe losses in the
third quarter of 2005 were "unacceptable."
"We will continue to take our (homeowners') coverage and exposure down because
we have no moral or legal obligation to provide this kind of coverage to people," current
CEO Thomas Wilson, then president and chief operating officer, said in an Oct.
20, 2005, conference call.
That strategy accelerated with Katrina but it reflects a more hard-nosed approach
toward pricing that began years earlier.
Source: The Associated Press
