The Allstate Company (ALL) provides a range of insurance products to clients, including auto, homeowner, and life insurance. A Fortune 100 company, with $133 billion in total assets, Allstate sells 13 major lines of insurance, including auto, property, life and commercial. In order to maintain margins in increasingly competitive insurance markets such as auto insurance--where major competitors Geico and Progressive (PGR) offer rate reductions to "switchers"--Allstate has pushed its bundled offerings, hoping to serve as a one-stop insurance provider to its customers. Bundled products may be especially important to build relationships, as "switchers" engender little customer loyalty; after all, customers who switch from one provider to another are likely to leave again.
The insurance business is synonymous with risk, and Allstate has managed its risk to varying degrees of success. The company is a market leader in the auto insurance sector, and it has increasingly pursued higher-risk, higher-profit drivers.
As with most insurance businesses, a significant portion of Allstate's operating profits come from investing premiums paid by customers before paying out claims (called the float). Some insurance businesses such as auto have minimal float, as the time between receiving monthly premiums and paying claims is relatively short. On the other hand, Allstate's life insurance business runs basically like a mutual fund, with the invested premiums paid upon the death of the claimholder. Investment income from long-cycle insurance is an important part of Allstate's business. In fact, all float incomes are a crucial part of Allstate's business and last year, the company would not have had positive operating margins if it were not for its float investments. Dependence of profit on investing activities exposes Allstate to fluctuations in the equities market as well as changes in interest rate.
First Quarter 2010 Results
Allstate reported net income of $120 million for the quarter compared to a net loss of $274 million in the first quarter of 2009 primarily due to the absence of one-time charges incurred in 2009 reflecting the decline in investment valuations. Operating income was $375 million in the first quarter of 2010 compared to $454 million in the same period of 2009. Total revenues for the first quarter of 2010 were $7.7 billion, a decline of 1.7% compared to the first quarter of 2009, primarily due to lower net investment income.
Allstate Protection Segment
The Allstate Protection segment accounted about 93% of Allstate's consolidated insurance premiums and contract charges during the year ended December 31, 2009. In this segment, it sells principally private passenger auto and homeowners insurance, primarily through agencies. The Allstate Protection segment also includes a separate organization called Emerging Businesses which is consisted of Business Insurance (commercial products for small business owners), Consumer Household (specialty products including motorcycles, boats, renters and condominium insurance policies), Allstate Dealer Services (insurance and non-insurance products sold primarily to auto dealers), Allstate Roadside Services (retail and wholesale roadside assistance products) and Ivantage (insurance agency). It also participates in the involuntary or shared private passenger auto insurance business in order to maintain its licenses to do business in many states.
Allstate Financial Segment
The Company’s Allstate Financial segment provides life insurance, retirement and investment products, and voluntary accident and health insurance products. Its principal individual products are fixed annuities, interest-sensitive, traditional and variable life insurance, and voluntary accident and health insurance. Its institutional product line consists primarily of funding agreements sold to unaffiliated trusts that use them to back medium-term notes issued to institutional and individual investors. Banking products and services are also offered to customers through the Allstate Bank.
Allstate Financial primarily sells life insurance, which work like a mutual fund: claim holders make regular payments which the insurance company invests in stocks, bonds, etc. When the policy holder passes away, Allstate pays out the principal investment and a portion of the returns to the beneficiary.
Other Business Segments
The Company’s Corporate and Other segment consisted of holding company activities and certain non-insurance operations.
The 2005 hurricanes season was so devastating for Allstate that, regardless of investment income, the company lost 25% of its assets and was forced to change its basic operating strategy. Other insurers fared better because they had reinsurance, which insurance companies use to guard against catastrophic situations. Allstate, on the other hand, had much less reinsurance coverage. Since then, the company has taken on significantly more reinsurance, increasing coverage from $200 million to $880 million by premium.
Allstate was especially vulnerable to hurricanes because of its relative geographic concentration in Florida, Texas, Alabama, and Louisiana, where 10% of the state’s premiums were paid to Allstate. The company has tried to cancel policies in vulnerable states as they come up for renewal, but state governments have taken action to prevent or discourage this strategy, especially in Louisiana and Florida, where the government has forced Allstate to insure all policy holders for 100 days or until they can find a new insurance provider.
Yet another factor affecting Allstate's home insurance business is asbestos contamination, which the company is liable for removing. Asbestos is an increasingly important source of high claims for Allstate. In the United States, some 30 million homes, schools, and other public buildings contain asbestos which could need removing.
Allstate's auto insurance business, which makes up the majority of Allstate Protection’s revenue, assesses client risk using a variety of demographic and biographic variables. On average, young male drivers with two speeding violations are more likely to get in an accident than a middle-aged woman with a clean record. The risk trade-off is that the riskier male driver is also the higher value customer, since he is paying higher premiums. An auto insurance company can choose to take on more risk—-and potentially higher profits-—by acquiring these high-value, high-risk drivers. This is exactly what Allstate has pursued in the last few years, and high-value drivers have grown from 29% of auto premiums to 48% recently.
Allstate intends to grow and retain customers by employing a bundling strategy. Because the company provides so many lines of insurance—homeowners, auto, house, commercial, fire, etc.—Allstate can sell multiple lines to the same client. Customer retention and bundling insulate Allstate from the intense price competition that is beginning to characterize much of the insurance industry, especially auto insurance. Progressive (PGR) and GEICO both increasingly offer rate reductions to auto insurance customers who switch to them.
In retaining customers, Allstate's network of agents is a critical asset. Allstate depends on its agents, many of whom work only with Allstate (but retain their independent status), to drive its sales. Allstate expects customers will develop a good long-term relationship with their local agent and, as a result, will pay slightly higher premiums in exchange for the comfort of knowing they will always have someone to call in the event of an emergency.