As CEO of Allstate (ALL ), the nation's second-largest home- and auto-insurance company, Edward Liddy often finds himself between a rock and a hard place as he attempts to grow the company. Liddy sees value in expanding the "Good Hands Network" beyond insurance, so the outfit's suite of products now also includes financial services, such as online banking, mutual funds, and life insurance.
The changes, which Liddy started instituting in 1999, led to some layoffs and were seen by some employees as being "too forward." Yet Wall Street has continued to view Allstate as a stodgy company that has been slow to change.
Right now, it looks like Liddy's changes are paying off. As toxic-mold and asbestos claims have dragged down profits in the industry, Allstate's earnings in the second quarter more than doubled, to $344 million, thanks to higher insurance premiums and sales of investment products. Its auto-insurance business grew 6.3%, while net income from financial products grew 20%, to $143 million.
It's not time for Liddy to celebrate, though. Still lingering is a lawsuit from the Federal Equal Employment Opportunity Commission, which in May said Allstate had forced about 650 of its insurance agents to become independent contractors. Indeed, in the move to transform Allstate's 6,200 employee agents into independents, the company required them to sign releases saying they would not sue for discrimination.
Negotiations with the EEOC have been going on for more than a year now. Liddy recently sat down in his downtown Chicago office to talk with BusinessWeek Correspondent Pallavi Gogoi at the historic Wrigley Building about the company and various issues impacting the insurance industry since September 11. Edited excerpts of their conversation follow.
Q: Do you believe the government should provide some relief to insurers from future terrorist attacks?
A:Terrorism is one of those things that an individual company or industry can't protect against. The [bill currently before the Senate] is pretty much what we as an industry were pushing for toward the end of last year. The federal government becomes a backstop -- the industry [absorbs] the first 10% to 20% of [costs related to] a terrorist event and then the federal government [absorbs] the balance. I think it's a good thing.
Q: You're a director of a few companies. How much time do you have to spend on those duties.
A:I'm a director at two companies -- Minnesota Mining & Manufacturing [3M] and Kroger. I'm a good director and I do my homework. I don't think my work has increased dramatically of late because I've been on those boards for a period of time. If you're a new director to a new company today, I think that would [be different].
If you're in a midsize company right now that doesn't have quite as much in the way of resources, I worry about where you're going to get new directors, because [new directors] might not want to take the risk or have the time.
Q: Let's talk about some interesting trends affecting personal lines of insurance. For instance, the toxic mold issue, where hundreds of lawsuits have been filed against insurance companies? What exactly is this mold?
A:Mold is primarily a Texas issue and it exists there because the state-mandated insurance forms didn't define cause as sudden and accidental. So if you have a claim that isn't qualified as sudden and accidental, anything that happens in your house over an extended period of time would apply.
In Texas, where you have a lot of rain and heat, the conditions can produce a lot of mold. And Farmers Insurance company lost a case last year which cost them $32 million. It was more about their treatment of a claim as it was about mold, and they lost that case.
Plaintiffs courted by very aggressive plaintiff attorneys suddenly came out of the woodwork all clamoring "I've got mold." The Center for Disease Control is still studying [mold-related medical issues], and the press has linked disease and mold as if one can't exist without the other. But actually there's very little mold that's injurious to people. We take comfort in the CDC's analysis in their studies.
Q: Asbestos has reemerged as a problem and we are seeing tons of cases. How exposed are you?
A:We were in the commercial business from 1974 to 1986 and wrote general liability policies that have exposure to asbestos. We are pretty well reserved for asbestos and environmental exposure. We take a thorough look at that once a year, and the last time we did that, we felt pretty good about where we were.
The risk is that you have activist courts who keep redefining what the coverage is. No doubt if someone is ill from asbestos, that should be covered. But to claim that if you walked by or passed a box that had asbestos in it, gee, maybe you have the right to some compensation even if you're not ill or don't show any signs of illness, that's where it has gotten to from a litigation standpoint.
Q: What's the leading cause of the nationwide increase in homeowners insurance?
A:The cost to repair homes. In the last three to four years, there has been enormous pressure on the home-building industry. More and more people are building new homes, people are remodeling and renovating, and that puts a trajectory on the cost of lumber, dry wall, flooring, and cost of labor, which goes through the roof. If there's a claim, you get swept up in that tide of rising costs.
Auto insurance is a lot more stable. The average claim doesn't tend to be large.... Rates are going up only 6% to 7% for the average driver.
Also, companies are making less on their investment portfolios. When the capital markets aren't giving you anything and you have a targeted return on equity...you have to make it up through perhaps charging more on auto or homeowners insurance.
Q: Allstate and the EEOC has been going back and forth on the employee lawsuits for over a year now. When do you expect a solution?
A:I don't know. I believe that it will get resolved at some time in the future. The issue is when we reorganized our sales force, we used a release, the same kind of release that everybody uses when they go through reorganization. Our release says: I will give you this, if you agree not to sue. The EEOC says that it was a form of anticipatory retaliation -- we had never heard of such a thing.
The EEOC's province is generally to protect the employer-employee relationship. As much of Corporate America goes to independent-contractor relationships, I think the EEOC would like not to have that trend continue to occur and [our situation] came along. Most of our [13,000] agents were independent contractors. We asked [some who weren't] to convert. We had about 50 agents who objected to it and contacted the EEOC out of its Kansas City office.
Q: What's your strategy at Allstate this year?
A:It's two-pronged: First, to get better and bigger in property and casualty, which is our bread and butter. We want to continue to do very well in that. We even broke even in the underwriting line when the biggest company in the industry [State Farm] lost $9 billion, which tells a lot.
At the same time, we're planning to sell more of our financial-services products. We don't want to be all things to all people. We want to be more things to more people. Our progress has been good. Around half of our agents have gone out and gotten licensed in Series 6 and 63 and can sell the products. We have had as much in financial-services sales in the first six months of this year as we had in all of last year. We're optimistic about 2002.
Q: Allstate has been dubbed by many on Wall Street as a stodgy company -- and you tried to implement a lot of changes. How has the culture of the company affected the implementation of your plans?
A:It's a large company, and large companies are always hard to move. It's a successful company. When things are going well, it's hard to talk about revolutionary change -- you have to talk about evolutionary change. I think if you look at the willingness of our organization to move in different directions, it has been pretty powerful.
For example, we started in May two years ago with zero [reach in financial services] and today, 90% of the U.S. can reach us through an agency, over the Internet, or through a call center. That's a lot of progress.
In October, we had nothing in the Allstate Bank [an online bank] and today, we have $260 million. That's a lot of progress. I think if you look for positive signs of change and a willingness to change, it's there.
Every large company struggles for growth. Think about the food companies, which grow 2% to 3% a year. Our company has $30 billion in annual revenue, and we want to grow another 5%. That's $1.5 billion -- that's another insurance company. Keeping things in perspective, I think we've made good progress.
Edited by Patricia O'Connell