When Allstate’s chief executive officer looks at potential growth opportunities for personal lines insurers, he sees an untapped part of the homeowners insurance market—customers that will buy home insurance online.
Speaking at the Bank of America U.S. Insurance Conference yesterday, Allstate Chair and CEO Thomas Wilson, who spends a lot of time talking about repricing and underwriting actions in auto insurance at investor conferences these days, devoted some of his remarks to homeowners instead.
“In the direct space, very few people sell homeowners,” Wilson said, referring to carriers using direct distribution channels to acquire customers rather than through agency channels. “It doesn’t make any sense to me. People buy houses on the Internet, right? They buy cars on the Internet. There’s really no reason why they shouldn’t buy homeowners on the Internet. Yet, right now very few people buy homeowners insurance on the Internet.”
Wilson made his remarks in response to a question from Bank of America Securities Analyst Joshua Shanker, who prefaced a question about Allstate’s lack of growth over the years with the analyst’s own summary of actions Allstate had taken to radically reduce catastrophe exposures after major events since the 1990s.
Direct homeowners sales, Wilson said, give carriers the ability to geographically target customers. “With direct, you can zoom right into a ZIP code,” he said.
In spite of Shanker’s review of Allstate’s past moves to cordon off or move away from cat-prone business, Wilson set his company apart from personal lines competitors who are wary of catastrophe risk. “I think homeowners is a growth business…Yes, we do have a lot of reinsurance in place. Yes, we might take a big hit someday. But we know the size and the probability of our risks to the extent you can know them,” he said, going on to offer two key reasons to support his contention that homeowners is a growth business. “Homes are getting more expensive, and the weather’s changing. So, with more severe weather, there’s more catastrophes. More catastrophes [mean] more insurance needed. And so you can charge more,” Wilson said.
During introductory remarks at the conference, Wilson asserted that Allstate’s homeowners combined ratio between 2017 and 2021 averaged 12 points better than the industry. Translating that to dollars, he said, his company has made $4.9 billion more than if profit margins had been at the same level as the industry average.
While Allstate’s homeowners policy unit counts grew 1.4 percent in 2022, he suggested that Allstate aims to grow much more going forward—with boosts from both the Allstate agent channel and the independent agents channel. “There are plenty of places where you can grow in independent agents in the middle part of the country that aren’t Florida or California,” he said.
Countering the idea of middle-America growth, Shanker interjected that he imagined Allstate already a lot of customers in Peoria, Ill.
“Yes, but there’s a bunch of independent agents [we don’t have]. Independent agents sell half the business in homeowners, and we should be able to capture some of that,” Wilson said. “And there’s nobody really that good in that space,” he said. “If you look at Progressive, they’ve still got some work to do,” he said, adding that Travelers, however, does do pretty well in homeowners.
It’s All About Price
Shanker’s overarching growth question leading up to the discussion of homeowners insurance was a broader one, which also dealt with challenges Allstate has faced in growing its auto insurance business. When Allstate nonrenewed homeowners business in cat-exposed areas after tornadoes and hailstorms in 2009-2011, “a lot of auto policies were lost as well” in the process, the analyst suggested. Going on to describe distracted driving spikes in 2014-2016 and the inflationary challenges of the last year, Shanker said, “Allstate has never really had the opportunity to show that it can grow” in auto.
Wilson set forth the specifics of a “transformative growth strategy” at the start of the session, outlining—as he has done at many recent investor conferences—a multipart plan launched in 2019. Still, Shanker voiced investor concerns about continued obstacles to progress. “Is there a multiyear period of growth that comes into play following this [current] repricing initiative? Or are we always in a competitive industry where the next thing is going to happen that’s going to make it difficult for Allstate to really stretch out its wings and become bigger?”
Replied Wilson, “It is true that as we had to reshape the company, we had to give up some policies. And I was good [with us] doing that. You should make money in every line, every year, every state. You shouldn’t be trying to subsidize stuff.” But, he added, there was more to the story of why Allstate hasn’t grown market share as fast as others. Essentially, he said, the “old Allstate” in the pre-2019 period had a different model, something he personally didn’t appreciate until later.
Specifically, he said, in 2010-2011, after the financial crisis, leadership viewed the company as a “premium price, high-quality business…We thought we had good margin and we made high returns. And that basically enabled us to hold share,” he said, contrasting the new Allstate.
“This new strategy is basically—it’s about the price,” he said.
“So, you have to cut $4.5 billion out of your [expenses], you have to lower your auto insurance prices…All the stuff we’d done had worked to maintain share but didn’t really work to grow share. When we looked at where our competitors were, we [adopted] a low-price, high-channel [business strategy]. That, I think, is one of the fundamental differences between the old Allstate and this Allstate,” he said.
Wilson went on to describe actions to move Allstate’s direct brand, previously known as Esurance, under the Allstate name, taking $200 million of advertising dollars from Esurance to use for the Allstate direct brand and selling policies 7 percent cheaper because they didn’t come through agents. He also spoke about the independent agent channel blossoming as a result of Allstate’s acquisition of National General. The deal brought a management team to Allstate that had been successful in the independent agent channel—one that Wilson believes can accomplish the growth that prior Allstate management teams could not.
Had Allstate taken some of these actions earlier, it might have grown sooner, Wilson told Shanker.
‘A Pause That Refreshes’
Another question for Wilson from the audience focused on one of the actions Allstate is taking to return the auto line to profitability—implementing strict underwriting actions in 37 states and curbing growth in new business in these states, including California, New York and New Jersey. Again, the gist of the question was how can the company grow if it has to regularly retrench and make adjustments to improve profitability.
Wilson made it clear that, indeed, “raising auto profitability is likely to negatively impact units,” or growth in the number of policies, for a while. But then activities like offering the lowest cost insurance as a result of achieving a low expense structure and telematics pricing sophistication, the utilization of a broad and efficient distribution system, and better technology, will all combine to drive “transformative growth.”
“The timing of when you go from this one to this one” — raising prices to shore up auto underwriting margins vs. lowering prices to grow — “depends on what our competitors do. If everybody else raises their rates at the same time, then we should move into the second one faster. If people wait, then we’ll move into the second phase later,” Wilson said, repeating remarks he made late last year about the biggest competitor State Farm. “They’re not going to lose money forever.”
The underwriting actions are temporary in those 37 states, Wilson stressed, offering the example of California where Allstate still needs more rate. “So, we’ve shut down. You have to give us half the money upfront…That means fewer people come to you because a bunch of people don’t have half the money. [But] when we get our price right, we’ll be happy to sell it with one-month down.”
“It just is a way of restricting the volume,” he said, reiterating that “units are likely to go down in auto insurance in 2023. But we’re OK with that, [since] most of our shareholder value is created through ROE not growth at this point.”
Wilson also spent some time talking about $1.7 billion in prior-year reserve additions that impacted Allstate’s earnings last year, explaining that changes in underlying frequency and severity data drove different outcomes from consistent actuarial methods. Then Shanker asked whether Allstate’s decision to now give greater weight to more recent statistics in reserving might mean that the company conservatively overprices the business.
“How do you brace for the possibility that you might take too much rate and therefore have switched from being too cheap to being uncompetitive in a very short period of time?” the analyst asked.
Wilson said that while that type of problem has occurred in the past, “there’s no way we’re overshooting” in California, New York and New Jersey now. “We need double-digit rate increases in those three states, and that’s a big portion of our underwriting loss.”
In other states, where Allstate is “not badly priced’ considering where costs are today, Allstate is still taking rate. If loss costs don’t continue going up, Allstate “will turn back on some of the temporary expense reductions we’ve made, like advertising,” he said. “We’ve cut our advertising because there was no sense going and finding a new customers, getting them to look at your advertisement and then raising the rates by 15 percent the first time they get the bill.”
Once Allstate starts putting money into advertising again, “the first place we’ll grow is the direct business.”
Said Wilson, “I would call this the pause that refreshes” (using a phrase from an old advertising campaign for Coca-Cola). “We are working hard now so that when we get to this inflection point, we can hit the gas pedal relatively quickly with direct business to grow,” he said.
Overall, Wilson reported early in the session that the company implemented Allstate brand auto rate increases of 16.9 percent in 2022. Later, he revealed some details of rate actions specific to California, when asked how long he thought it would take for regulators to recognize the rate needs in the three big states he referenced. He reported that in California, if you make a filing for anything over a 7 percent rate hike jump, then a consumer advocate comes in and looks at your review, stretching the time line out about a year. “If you’re at 6.9 and the department approves it, it goes right through and you don’t wait a year. So, we did 6.9 and got $130 million a year increase from that. We immediately filed another 6.9 as soon as that one got in. And we’ll file another 6.9 when that one goes in,” he said. “That’s our strategy in California—multiple 6.9s,” he said.