At Allstate, A Tornado Of A Turnaround

Slimmer and tougher, the insurer roars back from disaster

For Allstate Chief Executive Jerry D. Choate, 1994 was a year he would rather forget. While Sears, Roebuck & Co. was planning to spin off the property/casualty insurer, Allstate was reeling from the effects of the Northridge earthquake and Hurricane Andrew, causing $4.4 billion in losses. That forced Choate, who has just been promoted to CEO, to rein in his sales agents sharply. While the Northbrook-based insurer backpedaled, lower-cost competitors like GEICO Corp. were gaining share in Allstate's core auto insurance market. "We lost $2.5 billion overnight," says Choate, with a note of disbelief still in his voice.

Today things couldn't be more different. Choate and Chief Operating Officer Edward M. Liddy have engineered one of the more dramatic corporate turnarounds of the '90s by remaking the company. They have sold off commercial insurance and reinsurance businesses and focused on auto and home lines. They have battled with state regulators to reduce risk in their homeowners portfolio. And they've sharply cut costs in claims-processing. "They've done a superb job," says Harry D. Cohen, portfolio manager of the Smith Barney Appreciation Fund. Allstate, one of the BW 50, has been Cohen's largest holding for the last year.

It has also been one of his most profitable. In the past three years, the stock has more than tripled, to a recent high of 96, outperforming both the S&P 500 and the S&P property and casualty insurance index by wide margins. Allstate's profits have soared by an average of 76% in the same period. Last year, the company earned a record $3.1 billion, on revenues of $25 billion.

For Choate, a 36-year Allstate veteran who sold insurance out of a Sears store in Denver, Colo., success is a long time coming. His first priority on taking office was damage control in the homeowner business. While making up less than 20% of Allstate's total written premiums, homeowner policies were generating enormous losses from catastrophes in Florida and California.

CUTTING RISK. Solution? Get out of the business. Allstate stopped renewing thousands of policies in 1993, and eventually paid an undisclosed amount to Clarendon National Insurance Co. to take over thousands more. By laying off extra risk to reinsurers, Choate now says Allstate's maximum expected loss in Florida is less than $1 billion.

He applied the same strategy in California, where Allstate took losses of $1.7 billion from the 1994 Northridge earthquake. The state government has taken over most of the underwriting of earthquake insurance through the California Earthquake Authority, a quasi-public agency to which Allstate has contributed $150 million so far.

Now Choate is concentrating on auto insurance, which accounts for 75% of Allstate's $18.8 billion in property and casualty premiums. In an increasingly price-driven market, Allstate and other agent-based auto insurers, such as State Farm and Farmers Group Inc., have a serious handicap against direct marketers such as GEICO. Allstate spends about 23 cents of every dollar of premiums on agent commissions and administrative expenses. That compares with 14 cents at GEICO, which sells insurance over the telephone.

Choate, however, maintains that most Americans will continue to buy insurance through agents. So instead of developing lower-cost distribution channels, which would have his agents up in arms, Choate has concentrated on cutting the cost of claims: "Seventy-five percent of the money flows through the claims side of the business," he says. "That's where the leverage is."

PLAYING TOUGH. Choate is also in a war with trial lawyers to cut litigation expenses. The company now routinely sends letters to third parties injured in accidents with Allstate customers to try to persuade them not to hire a lawyer. In several states, lawyers have filed suit against the company for "misleading" accident victims about their rights.

Choate makes no apologies for playing tough. "We want to pay what we're liable for, no more, no less," he says. Wall Street loves that attitude, but some consumer advocates don't. "They've always played hardball on claims," says Robert Hunter, director of the Consumer Federation of America. Still, the company continues to retain more than 90% of its customers and has kept its market share of about 12%.

Allstate is increasing its share of the lucrative "nonstandard" auto market: people who have poor driving records or own exotic, expensive-to-repair cars. They incur higher losses and pay higher premiums than standard customers. The $18 billion market has been the No.1 source of growth for Allstate in the last five years. With a 17% market share, Allstate has surpassed Progressive Corp. as the segment's largest player.

Choate is also targeting inner cities for home and auto insurance, a $25 billion market. For years, housing advocates such as Shanna Smith with National Fair Housing Alliance have accused Allstate and other major insurers of redlining neighborhoods. Now Smith is tentatively praising Allstate.

Many insurers don't want the hassle of trying to figure out how to price policies for difficult risks. But Rhonda Woodard, vice-president of underwriting at Allstate, says there are good opportunities for companies "that have figured out there's more to the cities than what appears on the six o'clock news."

In an industry growing at 3%, Allstate needs all the opportunities it can get. But given the way it has taken to flying solo, the revitalized insurer has a very good shot at maintaining the momentum.