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Allstate Reaps Financial Benefit Of Limiting Risk

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By DAVE CARPENTER, The Associated Press

Published: October 16, 2007

CHICAGO - When a series of killer hurricanes walloped the Gulf Coast in 2005, costing Allstate Corp. a record quarterly loss of $1.55 billion, the company tried to make sure its bottom line would never be hit so hard again.

The nation's largest publicly traded personal-lines insurer pulled back aggressively from areas susceptible to expensive storms. It did not renew many homeowners' policies. It dramatically increased its own insurance, or reinsurance.

Two years later, despite the continuing risk of a consumer and regulatory backlash, the strategy is paying off: Allstate, which reports third-quarter earnings Wednesday, is on a pace to exceed last year's record annual profit of $5 billion.

Not only has the company reduced its exposure to catastrophic events, it is benefiting from a calculated shift away from the riskier homeowners' business into the increasingly profitable auto line. Automobile insurance now accounts for 67 percent of its property-liability premiums and more than double the revenue from homeowners.

'Allstate has come a long way in becoming more sophisticated in understanding the risks that it underwrites, and it's had very, very good financial results because of that,' said Donald Light, an analyst at research and consulting firm Celent. 'They've clearly made a management judgment that they'll take the lumps that they have to take, public relations-wise, in order to insulate themselves from the shock losses.'

'Why Are They So Risk-Averse?'

Criticism has been harsh.

The Consumer Federation of America says the Northbrook, Ill.-based company favors investors at the expense of consumers and has engaged in price gouging.

'It's OK to make a profit, but they are ripping people off,' said J. Robert Hunter, the consumer group's insurance director. 'Why are they so risk-averse? If they're not going to take on risk, what do we need insurance companies for?'

Allstate declined to make an executive available for this story, citing the mandated quiet period before its earnings announcement. But the company has been very public, if not blunt, about its intentions.

Less than two months after Hurricane Katrina devastated the Louisiana and Mississippi coasts and four weeks after Rita struck along the Texas-Louisiana border, Allstate executives told analysts the more than $3 billion in catastrophe losses in the third quarter of 2005 were 'unacceptable.'

'We will continue to take our homeowners' coverage and exposure down because we have no moral or legal obligation to provide this kind of coverage to people,' current CEO Thomas Wilson, then president and chief operating officer, said on an Oct. 20, 2005, conference call.

That strategy accelerated with Katrina but it reflects a more hard-nosed approach toward pricing that began years earlier.

Insurer Seeks 41.9% Rate Increase

The insurance industry began re-examining its pricing after Hurricane Andrew devastated Florida in 1992. Allstate developed a sophisticated new underwriting and pricing system that it began using in 2000 to manage its risk better and minimize losses.

The company boosted homeowners' rates by double digits for the next two years to revive a line that had suffered losses, and big increases continue in select coastal states today. Allstate Floridian Insurance Co., for example, is asking regulators for a 41.9 percent rate increase, and some premiums in other states along the Gulf Coast have doubled or tripled since 2005.

Allstate also has shed hundreds of thousands of homeowner policies by nonrenewal in Florida and taken a similar approach in other coastal states.

Banc of America Securities analyst Alain Karaoglan said in a research note last week that heavy exposure to catastrophes in its homeowners' business has long been Allstate's Achilles' heel.

He applauded the company's increased pricing discipline, reflecting the prevailing view on Wall Street.

'It's purely model-driven, it's purely risk-driven - it's not like they hate Florida or anything,' Morningstar analyst Matt Nellans said. 'What people don't see is that for 10 years they were writing underpriced insurance and nobody complained about that.'

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