Allstate Goes After The Gecko

Allstate Corp. is wasting no time stepping on the gas at newly acquired Esurance.

Auto policies at Allstate's online insurer are up 13 percent through June 30, thanks to an aggressive ad campaign that has Esurance on course to boost its 2011 marketing budget of $100 million by 66 percent this year. Meanwhile, Northbrook-based Allstate's far larger traditional business of selling auto policies through a nationwide network of 10,000 agents has been in decline for five years.

Any offset is welcome. But Esurance's growth is unprofitable, while the shrinking agent-sold business enjoys industry-leading profit margins.

"It's still an open question whether they can compete with much bigger (online auto) companies and still be profitable," says Meyer Shields, an analyst at Stifel Nicolaus & Co. in Baltimore. "(Esurance's) importance is only going to grow."

Allstate, which bought San Francisco-based Esurance for $1 billion late last year, is up against Chevy Chase, Md.-based Geico and Mayfield Village, Ohio-based Progressive Corp., which over the past decade have upended the insurance industry by selling policies cheaply over the Internet.

The good news for Allstate CEO Tom Wilson: Improved financial results, particularly in the second quarter, have led to a relief rally on Wall Street for his company's long-punished shares, buying him some breathing room to pursue his online strategy. Allstate's stock is up 39 percent this year on better earnings due largely to homeowners' insurance rate hikes and fewer catastrophe losses.

"We expect Esurance to keep growing," Mr. Wilson said during Allstate'sAug. 1 conference call with analysts. "We like what we got there." As for the agent-sold business, he said, "I don't think you should expect to see dramatic growth in (policies) there."

Company representatives did not respond to requests for comment.

One reason Esurance is growing and Allstate's traditional business isn't is that Esurance's rates are falling, albeit slightly, while Allstate's continue to climb, as they have since Mr. Wilson became CEO in 2007. In the second quarter, Esurance dropped rates an average of 0.1 percent in 23 states while Allstate boosted rates an average of 4.4 percent in 19 states.

Though Esurance is relatively small and new to Allstate, which had $33.17 billion in revenue last year, some unhappy Allstate agents are complaining that clients are leaving them for Esurance, reasoning that they're getting Allstate-type coverage at far lower prices.

Mr. Wilson has said repeatedly that he thinks the kind of customers who buy from an agent generally aren't interested in buying coverage on their own.

Whoever's right, in the past Allstate risked losing bargain hunters to Geico or Progressive. At least now, the company has a chance to keep them in-house.

Owning Esurance also allows Allstate to be firm on pricing in its agent business, argues Josh Stirling, an analyst at Sanford C. Bernstein & Co. in New York. "Raising margins in the core (business) to pay for growth in Esurance . . . will allow the firm to achieve the sustainably higher margins necessary to satisfy investors while still allowing Allstate to ensure its future in a slowly but permanently changing industry," he writes in an Aug. 1 report.

That won't be music to the ears of frustrated Allstate agents, who have struggled to grow their businesses in the face of relentless rate increases.

In the shorter term, some analysts worry about the costs of Esurance's growth. In 2012, loss trends have worsened at Esurance, as well as at other online insurers. Allstate's heavy ad spending on Esurance, along with the heftier losses, meant that Esurance spent $1.22 for every dollar of premium it collected in the first half of 2012. Under different ownership during the same period last year, Esurance paid out $1.02 for each dollar of premium it collected.

Over time, Allstate will have to hike rates for Esurance customers to bring that ratio in line, as Progressive is doing. But for now, Allstate appears willing to accept losing money on Esurance in order to grow.

"We're watching the loss trends at other companies like ," says Greg Peters, an analyst at Raymond James & Associates Inc. in Chicago. "We're concerned Esurance will experience some of the same pressures."

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