ChiefExecutive.net

Personal Business

May 1 1998 by Jennifer Pellet

If emerging unscathed from a childhood spent under the watchful eye of a powerful and prominent parent takes a strong character, then Northbrook, IL-based Allstate Corp. has it in spades. After playing the dutiful child for 64 years, the insurance giant severed the apron strings-some 80 percent of Allstate stock tying it to parent Sears Roebuck and Co. in 1995, and began mapping out a new, independent future.

The task of shepherding Allstate through this transition fell to Jerry D. Choate. Named CEO of the company in August 1994, the 35-year insider immediately launched a systematic attack on the $38 billion company’s risk exposure and claims costs. “We had significant issues to deal with, including a huge catastrophe problem,” recounts Choate, pointing to a lack of synergy between the mass retail and personal lines insurance businesses. “Until 1984, the majority of our agents were in Sears stores, so when Sears opened a new store, we followed. Of course, they went along the coastlines where 50 percent of the population lives and where you’re exposed to natural disasters which left us with a concentration of risk.”

Sprouting outposts in rural and suburban neighborhoods helped offset the exposure, but concentrations in a few high-risk states, namely California and Florida, remained worrisome. “If, for instance, Hurricane Andrew had been 50 miles north, it could have been very serious for us,” says Choate. “We had to solve that.”

Offloading customers proved a direct, albeit unusual, solution in the Florida market. “We found a highly rated firm with no business in Florida and paid them $34 million to take 160,000 of our customers,” says Choate. As renewals were transferred to Clarendon National Insurance Company, the resulting risk dispersal enabled Allstate to reinsure its remaining Floridian customers.

In California, the company lobbied hard with political and regulatory authorities to create the California Earthquake Authority, a privately financed, publicly managed state agency formed in 1996 to provide coverage for earthquake damage. Allstate, which was assessed $150 million in 1996 as its share of the $700 million in launch capital required by the CEA, will eventually benefit from reduced exposure to earthquake losses as policies expire and are rewritten by the CEA. “The CEA provides a responsible way to prefund natural disasters,” says Choate. “There’s no profit in it, but it’s helped manage exposure.”

Next came a sweeping overhaul of claim processes that included taking a hard line on ‘soft tissue’ injuries. “We’ve made huge gains in our bodily injury coverage,” says Choate, who credits the gains to “taking a stronger line on suspect cases,” along with Allstate’s proprietary mechanized underwriting screen that factors in more than 200 variables to score risks.

Another part of the claims initiative involved tackling lawyers head on through an educational brochure. “We want people to understand that you don’t need a lawyer to deal with an insurance company,” says Choate. “Lawyers hate this form.”

But the investment community, which credits this tough stance on claims with reducing loss costs, likes it-and Allstate-just fine. In Choate’s good hands, the company’s stock price has risen steadily from $25 in 1994 to $94 in 1998, and operating income for 1997 saw a 52 percent hike to $2.4 billion. “Jerry Choate has been very creative in the last few years in crafting a new claims process aimed at reducing the number of lawyer-represented automobile claims,” says Harry Fong, an analyst with Deutsche Morgan Grenfell. “The strategy is simple: cut loss costs, share savings with policy holders in the form of lower premiums and with shareholders in the form of better earnings. He’s done an outstanding job in building that into an advantage for Allstate.”

Yet, the strategy’s near-term repercussions may hinder personal property and casualty business growth, already stymied at a sluggish 4.5 percent. “If you don’t write the earthquake business, you won’t get the premiums,” shrugs Fong, “which does negatively impact the top line.” A 1997 repricing plan for nonstandard automotive insurance -geared toward customers with higher than average risk profiles that drove away customers with a boost in premium payments didn’t help matters, he adds.

Acknowledging that Allstate’s “challenge right now is to grow faster,” Choate plans to target brand-loyal, less price-sensitive customers. “In this industry, you lose money on every new business policy you write, because it takes a while to recapture the acquisition cost,” he points out. “This is a business where profits are in renewals rather than new policies.”

To bring new customers into the fold, he’s banking on brand power. “Insurance is not a commodity,” Choate asserts, noting that Allstate beats out even State Farm, the No. 1 player in personal lines insurance, in brand recognition. “We want to drive it home to those consumers what Allstate stands for. Price is important, but it is not the first driver with consumers because when you flip Junior the keys, Junior takes takes all your assets for a ride.”