Allstate Corp. (ALL), the largest publicly traded U.S. auto insurer, agreed to buy Esurance and Answer Financial for about $1 billion from White Mountains Insurance Group Ltd. (WTM) to expand sales of coverage through the Internet.
Chief Executive OfficerThomas Wilson is seeking to add customers through direct channels such as the Internet as younger consumers shun agents. Allstate has lost auto-insurance customers for most of the past three years as online shoppers opt for coverage from smaller rivals Progressive Corp. (PGR) and Berkshire Hathaway Inc. (BRK/A)’s Geico Corp.
“They wanted to do it because they see their core business stable to flat,” said Paul Newsome, an analyst with Sandler O’Neill & Partners LP. “The direct channel over time is going to be the industry’s growth engine.” Newsome has a “hold” rating on Allstate.
Allstate plans to fund the deal with available cash, according to a presentation on its website. The transaction is expected to be completed by the end of the year, Northbrook, Illinois-based Allstate said in a statement today. After a full year of ownership, the deal won’t reduce the insurer’s earnings, the company said.
Answer Financial, which allows clients to compare quotes and buy insurance through its Web site, and Esurance will maintain their brands, Wilson said today on a conference call with analysts. The Allstate brand will appeal to customers who want a relationship with an agent, he said.
Allstate fell 17 cents to $32.25 at 9:47 a.m. in New York Stock Exchange composite trading. White Mountains surged $40.25, or 12 percent, to $383.88.
Allstate’s overall standard auto policy count dropped 0.7 percent in the 12 months ended March 31, the insurer said on April 27, when it announced its first-quarter results.
Progressive’s total personal auto insurance policies climbed to 11.9 million on March 31, a 5.8 percent increase from a year earlier. The gains were led by a 9.6 percent rise in the number of customers who signed up through direct channels such as the Internet and telephone.
“Esurance will expand our ability to serve customers that are more self-directed but still prefer a branded product,” Wilson said in the statement today. Allstate was advised by Goldman Sachs Group Inc. (GS), according to an e-mail from Maryellen Thielen, a spokeswoman for the insurer.
Esurance has been spending more money on claims and expenses than it has brought in through premiums, Wilson said on the call. Allstate’s expertise can limit Esurance’s claims costs and make the underwriting profitable, he said.
White Mountains will increase adjusted book value by about $80 a share, from $447 at the end of the first quarter, by parting with what CEO Raymond Barrette called a “unique business” in Esurance.
“Allstate agrees, and can now take it to a new level,” Barrette said in a statement issued by Bermuda-domiciled White Mountains.
Barrette is focusing on property-casualty coverage through OneBeacon Insurance Group Ltd. (OB) and backup protection for primary carriers through its White Mountains Re Ltd.
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