I-Folks,
This WSJ story from Friday is so disappointing I take the unsual step of pasting the entire thing below (it’s behind a firewall). Decide for yourselves, if you have a minute.
The subhed reads:
“Cutting Coverage on Coasts, It Eyes Big Opportunity To Insure Boomers’ Lives — Challenges of a Personal Pitch”
The lede says that Allstate Chairman and CEO Edward Liddy didn’t bother asking even his own company to insure his South Carolina beach house because he knew it wouldn’t. I agree, it’s a nice lede.
This isn’t about lit-crit or journalist bashing, God knows. I don’t know Liam, but I do know he’s a fine reporter, and they have the best insurance reporter ever in Leslie Scism, now an editor there. But, I ask you, in the fairest-minded way, could not the Journal, even abiding by all the conventions of a national media outlet, have written a story under this fictional hedline, using the same set of facts:
Flashline: Take Money, Run
Mainhed: Raking Net of $7 billion-plus
Over Five Years,
Allstate Cuts Coastal Coverage.
Subhed: “Disastrous” ‘05 Net: $1.77 billion
Or, how about:
Risk? Reward!
Raking Net of etc.
After all, the higher your rates, the smaller your risk. Even a history major can figure that out. (And those heds are not as hard to write as you think, by the way.)
Here’s a nut graf. And, again, this is all in the name of broadening the discourse beyond the current (dumb) frames:
“On the housing front, Messrs. Liddy and Wilson say Allstate has little choice but to pare exposure to disaster-related losses and look for growth in other areas. The company is one of the top five home insurers in all 15 states curving along the U.S. coastline from Texas to Rhode Island, according to A.M. Best Co., a ratings service. It lost $1.55 billion in the third quarter of last year, largely due to the storms. Mr. Liddy’s annual cash bonus, which is tied to Allstate’s results, fell to $538,351 last year from nearly $3.7 million in 2004.
Allstate’s revenues have been climbing steadily in recent years, from $28.87 billion in 2001 to $35.38 billion in 2005. But its net income has fluctuated, climbing from $1.16 billion in 2001 to $3.18 billion in 2004, but dropping to $1.77 billion last year. This year, the industry is on track to report record profits, in large measure because of a hurricane-free storm season.”
I’m not going to belabor this because I don’t like web-based sniping at newspapers. But, I’m sorry, net income merely fluctuating in the worst-ever year? I mean, what do you expect? You are an i-n-s-u-r-a-n-c-e c-o-m-p-a-n-y. We had plenty of bad years at DJ, believe me. And, again, I apologize, but if you mention the industry is on track for record profits in 2006 ($60b), in large measure because of no storms, you should at least mention that the industry recorded then-record profits in 2005 ($43b) despite storms.
Again, where’s the risk? If Allstate, the most-exposed, least-reinsured insurer on the Gulf, gets hit with a calamity of this scale and shrugs it off, that’s a good thing. Just because they want to pretend it’s bad doesn’t mean you have to go along with it. I mean, right?
Listen, I-Fans, you’re a sophisticated group: check out this stock chart for ALL. Notice how the shares crash before 9/11 and go up afterward ? If you still think insurance earnings are driven exclusively, or even primarily, by insurance “losses,” you have not been paying attention, and you will regret it when we have the quiz/drinking game at the annual ITP party at Last Exit.
http://finance.yahoo.com/charts#chart4:symbol=all;range=my;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
Risk and Reward: Hurricane Losses Prompt Allstate To Pursue New Path — Cutting Coverage on Coasts, It Eyes Big Opportunity To Insure Boomers’ Lives — Challenges of a Personal Pitch
By Liam Pleven
1908 words
24 November 2006
The Wall Street Journal
A1
English
(Copyright (c) 2006, Dow Jones & Company, Inc.)
Even though Edward Liddy’s house in an upscale Chicago suburb is insured by Allstate Corp., he didn’t bother asking the company to cover his second home on the South Carolina coast. In this era of ruinous hurricanes, insurers have balked at protecting waterfront dwellings.
Mr. Liddy’s situation, however, is unusual. He’s Allstate’s chairman and chief executive.
Behind the twist is a big strategic gamble for Allstate, one of the U.S.’s largest insurers, which has been chastened by recent hurricane losses. As he seeks to reduce the company’s exposure to disaster losses, Mr. Liddy also wants his company to be a one-shop stop for middle-income baby boomers’ financial planning, using an army of 14,000 sales agents to push an increased number of life policies, annuities and other products.
Already, in many catastrophe-prone coastal areas, Allstate has stopped writing new homeowner policies and has dropped some existing customers altogether.
Driving the move are Mr. Liddy and his anointed successor, Tom Wilson, the company’s president, who will step into the chief executive’s office next year. Mr. Liddy will remain chairman. The pair has already worked together at a financial conglomerate in the 1990s, when they pried apart Sears, Roebuck & Co.’s loosely linked businesses, which included Allstate.
Persuading consumers to purchase life insurance is a far more personal proposition than selling auto coverage. Allstate will find itself in intense competition with a broad range of rivals. More immediately, Allstate has to persuade customers to consider the company even as it risks alienating policy holders by cutting back coverage in coastal areas.
Allstate, of Northbrook, Ill., insures roughly one out of every eight American homes and one in 10 cars. Together, these two businesses produce 68% of Allstate’s $35 billion in revenues, with the rest coming from the company’s existing life insurance and annuity business and other sources. Auto insurance is profitable but challenging, with competition from Progressive Corp. and the Geico unit of Berkshire Hathaway Inc. keeping prices low and limiting chances for growth.
On the housing front, Messrs. Liddy and Wilson say Allstate has little choice but to pare exposure to disaster-related losses and look for growth in other areas. The company is one of the top five home insurers in all 15 states curving along the U.S. coastline from Texas to Rhode Island, according to A.M. Best Co., a ratings service. It lost $1.55 billion in the third quarter of last year, largely due to the storms. Mr. Liddy’s annual cash bonus, which is tied to Allstate’s results, fell to $538,351 last year from nearly $3.7 million in 2004.
Allstate’s revenues have been climbing steadily in recent years, from $28.87 billion in 2001 to $35.38 billion in 2005. But its net income has fluctuated, climbing from $1.16 billion in 2001 to $3.18 billion in 2004, but dropping to $1.77 billion last year. This year, the industry is on track to report record profits, in large measure because of a hurricane-free storm season.
Earlier this year, Allstate dropped 27,000 customers in coastal counties in New York. In Florida, it shed 120,000 customers, on top of 95,000 customers in 2005. And it’s eliminating earthquake coverage for more than 359,000 homeowners nationwide.
“They showed me no loyalty,” says Isaac Axel. Mr. Axel says he had insured his home near the water in Brooklyn, N.Y., with Allstate since 1986, but was informed this year he was being dropped. Asked to comment, Allstate says it manages its business for the good of the entire company.
Amid the criticism, Allstate is pushing for the government to play a larger role in covering the homeowners it wants to drop. Specifically, the insurer is pushing for the creation of a “federal backstop” that would cover major losses in the case of disasters such as Hurricane Katrina. Mr. Liddy raised the notion with President Bush during a small event at the White House last year, and the company has committed $2 million in seed money to an organization that promotes the plan.
Allstate’s idea has roused critics in the industry, who say insurance doesn’t need more government involvement. Some point to the example of federal flood insurance, arguing that it perversely encourages people to live in risky places.
“There is plenty of capacity in the private sector to handle natural catastrophes,” says Ted Kelly, the chairman and CEO of Liberty Mutual Group, an Allstate competitor.
Allstate disagrees. For Messrs. Liddy and Wilson, the horizon appears considerably brighter for selling financial-planning products. It’s a fast-growing business for Allstate, but one it doesn’t dominate. Roughly 70 million baby boomers are expected to retire over the next few decades and many will turn to annuities to provide a steady income. With an annuity, a retiree makes an upfront investment and receives annual payments in return, along with certain tax benefits.
Financial-services companies have a mixed record of using one business relationship — an insurance contract, a credit card, a checking account — as a leaping-off point to establish another. Last year Citigroup Inc. finished unwinding an earlier effort to meld banking with insurance, selling its Travelers Life & Annuity Co. to MetLife Inc.
Allstate has seen new sales of financial-services products by its agents soar from $334 million in 1999 to $2.8 billion in 2005. Mr. Wilson ran the business from 1999 to 2002. He sees room for growth.
Becoming a one-stop spot for financial and real-estate services was also the aim of Sears in the 1980s, when it bought brokerage house Dean Witter Reynolds Organization Inc. and the real-estate firm Coldwell Banker & Co., and started the Discover credit card. It added those businesses to a stable that already included Allstate.
But while Sears focused on financial services, its core retailing business was flagging. Mr. Liddy and Mr. Wilson had to deal with the consequences. Mr. Liddy came to Sears in the 1980s, when Donald Rumsfeld sat on the retailer’s board. Mr. Rumsfeld had been Mr. Liddy’s CEO earlier in the decade at drug maker G.D. Searle & Co., where Mr. Liddy rose to become chief financial officer. In the same position at Sears, Mr. Liddy set about breaking up the company’s financial-services network. One of the people who helped him was Mr. Wilson, a young and rising investment banker at Dean Witter.
Mr. Liddy, 60 years old, is a gregarious former basketball player. Mr. Wilson, 49, is a runner who completed the Chicago Marathon last year. When the spinoffs were largely complete, Mr. Liddy left to become chief operating officer of Allstate. Mr. Wilson later moved with him.
Both men say what Allstate is doing is less ambitious than what Sears attempted. Sears made major investments in new businesses. “I don’t think we have to do those big bets,” Mr. Wilson says. Adds Mr. Liddy: “We don’t want to be all things to all people.” For example, Mr. Liddy says, it would be a mistake to sell individual stocks or bonds. By contrast, he says life insurance is an “adjacent product.”
Cross-selling life and property insurance has long been a challenge because consumers tend to see them differently. While car insurance is viewed by many people as a routine necessity, life insurance involves intimate decisions about lifestyle and family.
Tom Aromando, 50, of Ocean City, N.J., says that although his house is insured by Allstate, he has turned elsewhere for car insurance and life insurance. He “would consider” Allstate for other types of insurance, he says, but generally prefers to discuss life insurance with someone who’s looking at products from an array of companies. Allstate agents only sell Allstate life insurance, though they do offer some other companies’ annuities and mutual funds.
In a recent research report, William Wilt, an equity analyst with Morgan Stanley, said a consumer’s inclination to buy home and life insurance policies from the same company “seems to be on the decline.” In another report, Mr. Wilt noted that cross-selling rates of car, home and life insurance had “barely budged” in recent years.
“To those still clinging to the belief the rise of the financial supermarket is around the bend,” he concluded, “we say Fuggeddaboudit!”
Life insurance is a more predictable business than property, and at Allstate, its return on equity is lower. For the first nine months of 2006, the return on equity for Allstate as a whole was 23.2%, driven by car and home insurance. It was just 6.4% for the Allstate Life Insurance Co., the key part of the financial-services division.
Allstate considers one segment of the market for financial products sold by its agents particularly alluring: Middle-income Americans with a household income of $35,000 to $200,000, which it says is more than half of U.S. households. Allstate executives believe that part of the population is neglected by many financial advisers, who shoot for wealthier clients.
Allstate agents already sell car and home insurance — as well as some life-insurance products — to those customers it’s now targeting. Only State Farm has a comparable network of agents on Main Street. Many consumers say they prefer to plan for retirement with somebody they can meet face to face.
More than 40% of customers who have Allstate home insurance also have Allstate car insurance, according to a report by Mr. Wilt. “If we can crack this code, that’s going to serve us well in the long run,” says Mr. Liddy.
To build the business, Allstate is trying to boost the profile and training of its agents. Six years ago, few had licenses to sell securities, which are required for many annuity products. Now nearly half do, Mr. Liddy says.
Whether Allstate can succeed depends on how fluidly its agents can move from one product to another. Many in the financial-services industry, from life insurers to mutual-fund sellers, see the same wave of retirees and are preparing their own sales pitches.
Earl Gainey, an Allstate agent in St. Petersburg, Fla., says life insurance and annuities represent about 20% of his business, at least double the level from 10 years ago. Insuring homes has fallen from between 30% and 35%, he says, to less than 20% now, as Allstate has moved to reduce its exposure to hurricanes in the state.
Mr. Gainey says he was one of the first Allstate agents in Florida to get his securities license a few years ago. He says talking with a client about property insurance and life insurance are “two different conversations.” He tries not to sell them at the same time.
But Mr. Gainey says he might approach a customer who already has Allstate car or home insurance and ask if the person wants to know about life insurance or annuities. About 20% of those people agree, he estimates. Of those who do, he says, about two in five ultimately purchase some kind of financial-service product from him.