Allstate Weathers the Storm.

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Author: Smart, Tim

STRATEGY

Many CEOs consider it a catastrophe if their companies miss a quarterly earnings target by a penny. Ed Liddy knows what it's like to suffer a real catastrophe.

Liddy, chief executive of giant insurer Allstate Corp., witnessed firsthand what the barrage of Florida hurricanes in 2004 did to his firm's bottom line. Then he got to watch again last year as the triple whammy of Katrina, Rita, and Wilma struck the Gulf Coast and Florida. Just how bad those three hurricanes were will become evident when Allstate reports its earnings in the next few weeks, but already the insurer has recorded a $1.55 billion loss for the third quarter after posting pretax losses of $4.7 billion for hurricanes, including Katrina and Rita.

Even with all the losses, Fox-Pitt Kelton analyst Gary Ransom likes the stock and has a $65 price target on it--about $10 a share above where it has been trading of late. Ransom says Allstate has done a good job of controlling its exposure to losses: After Hurricane Andrew in 1992, for example, it largely avoided writing new homeowners insurance in southern Florida, which will have the effect of limiting somewhat the amount of claims it receives from Wilma.

"Bailout"? Liddy would like some more protection against what he views as an abnormal cost of doing business in an industry whose very raison d'être is protecting people's cars and homes from damage. Not only is Liddy pushing for double-digit increases in premiums for homeowners insurance in Florida and other southern coastal states, but he is at the forefront of a drive to get some kind of federal relief for the industry from future catastrophic events. "It is not a matter of the insurance industry looking for a bailout," insists Liddy. He favors state reinsurance funds, similar to the one Florida established in 1993 after Andrew, and a federal umbrella for the most extreme events.

If it weren't for the storms--a big if, of course--Allstate would be sitting pretty right now. The Northbrook, Ill., company ended 2004 with revenues of $33.9 billion, a 5.6 percent increase over 2003 and a record. Net income per share surged, meanwhile, 18.5 percent. Liddy and president Tom Wilson were well on their way to moving Allstate away from a historic reliance on proprietary agents to being a diversified insurer that could compete with low-cost providers like Geico in direct retail channels such as the Web and with premium carriers who operate with independent agents. "The property and casualty business is relatively slow growth," Liddy says. "But you can take market share in a rational and economic way."

Allstate's strategy is anything but slow growth in the staid property and casualty industry, where more than 1,000 companies compete for the premiums of homeowners and drivers. As the No. 2 player behind State Farm, Allstate is engaged in an aggressive move to build market share while also delivering profitability that's above average for the industry. It is mining its treasure-trove of historical data--including credit reports--to more finely price automobile insurance risks while also streamlining its claims processing to slice costs.

Tailored policies. As part of its ongoing attempt to further segment the auto-insurance industry--grouping drivers into finer and finer categories of risk based on driving records, credit history, age, and address--Allstate last year began rolling out its "Your Choice" program. The company is offering drivers essentially a variety of auto insurance tailored to their needs and personal characteristics: standard policies at normal rates, with reductions for safe driving history; a policy with a 5 percent discount if you agree to pay through a debit to your bank account; a policy that costs about 7 percent more than normal but allows you to wipe out your deductible over time if you are accident free; and a premium policy costing about 15 percent more that includes credits for every six months that the driver goes without a claim. "It's an innovative product in an industry that doesn't have a lot of innovation," Liddy says.

And he is hoping Allstate can piggyback on its relationship with customers, especially those in the key marketing demographic of the aging baby boomer, to market financial service products such as annuities and life insurance. Allstate Financial, as the business is known, brought in $550 million in operating income in 2004, and while some analysts have suggested the unit is a valuable asset that the company might want to sell at some point, Liddy gives no hint of that. "We think the financial marketplace is a good place to be," he says, adding, "We have a great advantage in that business--we can stay with them from teenagers on."

Of course, if they happen to grow up to be safe drivers who live far away from hurricane zones, so much the better.

Founded: 1931, as part of Sears, Roebuck; became independent in 1995

Headquarters: Northbrook, Ill., a Chicago suburb

CEO: Edward M. Liddy

Net Loss: $1.55 billion for the third quarter of 2005, after $4.7 billion in pretax hurricane losses

PHOTO (COLOR): INNOVATOR. Allstate CEO Ed Liddy has introduced new ways of pricing auto policies.

PHOTO (COLOR): Storms also hit the bottom line.

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By Tim Smart

Edited by Tim Smart