Is Allstate in Good Hands?

Ed Liddy is gunning the engine, but potholes loom

When Edward M. Liddy took over at Allstate Corp. (ALL ) in 1999, the insurance giant was so out of touch with the times that it didn't even have customer toll-free numbers. The Internet? It didn't have a clue about how to use it as a marketing tool. And some 40% of the outfit's agents were salaried employees, whose lackluster efforts were far outpaced by Allstate's own commission-driven independent agents--not to mention those of the independents who pitched policies for rivals. "You can't ignore the signs of change. My task was to understand where the marketplace was moving and get in front of that," says the low-key CEO.

So Liddy, a turnaround artist who had reorganized the financial subsidiaries of Sears, Roebuck & Co. (S ) as chief financial officer, set to work giving the 70-year-old Allstate a makeover. He fired all 6,200 employee agents last year and offered them contracts to work as independents--which 3,800 accepted. He slashed an additional 4,000 jobs across the board, or 10% of the workforce, cutting costs by $600 million, and channeled those savings into technology. He set up systems that let customers buy policies over the Net or by phone. And he began recasting the company from a plain-vanilla property-and-casualty insurer into a full-service financial-services provider that offers annuities, mutual funds, and even banking.

ROILED. But will it be enough? The hurdles are high. First, Liddy is going up against top-ranked State Farm Insurance, whose bargain-basement--and money-losing--rates are roiling the industry. Even Warren E. Buffett, who owns another rival, GEICO Corp., complains in his latest annual report that "the willingness of the largest player to tolerate such a cost makes the economics difficult for other participants." As he diversifies, moreover, Liddy is competing with a bevy of other players--from Wall Street brokerages to banks--that can now sell insurance and lots more, thanks to financial-services deregulation. Making matters worse, he has to contend with legal headaches and morale problems born of his restructuring.

Those legal hassles are a big worry. Allstate, which had never seen layoffs as extensive as Liddy has engineered, is fighting lawsuits from dozens of former employees. Even the Equal Employment Opportunity Commission may sue, after finding in September that the company violated federal laws when it shifted employees to independent agents. The complaint contends that Allstate forced the agents into surrendering their rights when it asked them to sign waivers agreeing not to sue the company. Says an Allstate spokesman: "It's not uncommon that a major restructuring effort like Allstate has undertaken would result in litigation. Allstate worked very hard to make this transition as smooth as possible."

IMPLACABLE? Such suits are corroding morale just as Liddy is asking the agents to master and cross-sell his broader array of financial-services products. "I can't imagine agents being too excited about selling more products," says Rod Guilmette, spokesman for the National Association of Professional Allstate Agents Inc., a group that represents some of the agents that complained to the EEOC about the waivers.

But if he can placate the agents, Liddy's approach may have a fighting chance. It's already showing some signs of success. In the first quarter of this year, Allstate's new business was up 13% from the closing quarter of 2000. And Wall Street has applauded, hiking Allstate's stock 75% since the beginning of last year--a rise that has outpaced both the Standard & Poor's 500-stock index and the S&P property-casualty index. The company's operating income in the first quarter rose 19%, to $552 million, and money managers continue to be smitten with the stock. "People won't stop paying insurance [premiums] during a slowdown," says A. Lanny Thorndike, chief investment officer at Boston's Century Capital Management Inc., an Allstate shareholder.

Liddy's operational changes are bringing in business, too. Four new phone centers taking 1-800 calls from customers are logging sharp growth: In the first quarter, they recorded an 85% increase in calls, to 650,000, over the previous quarter. And while online insurance sales are still in their infancy, the Internet is expected to be the sales vehicle that clocks the fastest growth in the next two years. At the same time, sales of policies by agents are expected to decline 10%, according to New York's Insurance Information Institute.

BRANCHING WAY OUT. Allstate's potential for success as it diversifies into other financial service products is uncertain, considering how competitive the arena already is. But, its financial division's performance so far has been promising. Its revenue grew 20% last year, hitting $4.8 billion, and accounting for 26% of Allstate's operating income, up from 18% in 1999. Agents can offer customers investment products such as annuities and are also able to sell mutual funds from the likes of Fidelity, Oppenheimer, and Van Kampen, among others. In addition, Allstate is awaiting Federal clearance to start a bank where consumers will be able to buy certificates of deposit and money-market accounts and apply for loans.

Still, Wall Street's confidence in the company may boil down to a belief in the CEO's record. Back when Liddy he was chief financial officer at Sears, he orchestrated a winning spin-off of Dean Witter. In 1993, he helped take Allstate public and oversaw the sale of subsidiary Coldwell Banker Real Estate Corp. from Sears. "Ed has participated in some major decisions involving tremendous change at Sears, and he has a feel for how much an organization can take," says Philip J. Purcell, CEO of Morgan Stanley Dean Witter & Co., who headed Dean Witter in the early 1990s, working closely with Liddy. If Allstate can manage the changes Liddy is putting it through, its future may be ensured.

By Pallavi Gogoi in Chicago

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