Wednesday, February 13, 2008


New Allstate CEO vows to hold the line as competitors slash Auto insurers engage in price warfare

No rate cuts: That's Allstate Corp. CEO Thomas Wilson's stand.

As its fiercest competitors begin reducing auto insurance prices in earnest, Mr. Wilson and Allstate are sticking to their guns, vowing they won't join a price war. Instead, Mr. Wilson, who succeeded Edward Liddy this year as CEO of the Northbrook-based insurance giant, continues to insist that better products and service will trump price cuts in the notoriously boom-and-bust insurance business.

That has been Allstate's position since the last round of industry price-cutting sent its profits plunging eight years ago. But it is about to face its greatest test from surprisingly deep cuts, backed with heavy marketing, by competitors like Bloomington-based State Farm Insurance Cos.

The latest marketshare battle, which industry experts expect will continue at least through next year, hasn't given Mr. Wilson, 49, the luxury of growing into the CEO job. He's already in the tricky position of defending his company's robust profit margins while still coaxing growth from auto insurance premiums even though his product in many cases will be more expensive than his competitors'.

"It's clearly more competitive now than it was last year," Mr. Wilson acknowledged to analysts on a conference call last month. But, he added, "we're not going to trade off profits for growth. We're going to try to get both."

Indeed, Allstate has raised prices an average of 3.8% in the 15 states where it changed rates in the first half of 2007. By contrast, State Farm has cut rates this year in every state except Rhode Island. In four states, those cuts exceeded 9%. Illinois, where State Farm reduced rates by 6% in May, is one of 12 states where prices were trimmed by 6% to 9%.

What's more, Illinois-for decades dominated by State Farm and Allstate, which together insure two of every five drivers here-is getting new attention from the nation's third- and fourth-largest auto insurers, Ohio-based Progressive Corp. and Washington, D.C.-based Geico Corp. Both have dropped their rates here by about 6% in the last few months. Geico recently blanketed train stations with ads and has flown giant banners along the lakefront on weekends. State Farm, too, is running Chicago television and radio ads touting the rate cuts.

"Every insurance company is trying to create value for consumers, but price is clearly a part of that," says Mark Gibson, State Farm assistant vice-president for advertising. "There's just no doubt about it."

The Insurance Information Institute, an industry-funded information clearinghouse, projected a 0.5% decline in annual car insurance expenses this year, the first decrease since 1999. President Robert Hartwig says the organization underestimated the price-cutting and will publish a revised, lower projection for 2007 soon. He expects to project a further decline in 2008.

Mr. Hartwig says the price cuts thus far largely reflect insurers' healthy underwriting profit margins, but notes that past price wars have wiped out profits altogether. The last such war resulted in most insurers paying out more in claims and expenses than they were collecting in premiums. "The $64,000 question for all insurers today is: Will this be different from the past?" he says.

Mr. Wilson is determined that it will be, at least for Allstate. He has maintained that Allstate's innovative products like Your Choice Auto, which allows drivers to pay extra for services like keeping their rates steady even if they have an accident, will continue to win new customers even as competitors' rates fall.

Others are skeptical that Allstate can ignore the price cuts. Insurance "is a commodity," says Tim Wagner, Nebraska's insurance director. "You can disguise it with a lot of bells and whistles. The reality is people are buying insurance based on price and service."

Wall Street seems dubious as well. Allstate's shares have fallen 18% this year. If competitors keep dropping their rates, it could force Mr. Wilson to cave on price cuts.

"Allstate will eventually have to follow the crowd," says Adam Klauber, analyst with Cochran Caronia Waller in Chicago.


[Thomas Wilson, CEO, Allstate]

standing pat: While other top auto insurers have cut rates in Illinois in recent months, Allstate has not

Geico                            -5.7%
State Farm                  -6.0%
Progressive                -6.7%
Source: Companies

pieces of the pie: Marketshare in Illinois: Auto liability for top four national insurers in 2005

Other                           54.1%
State Farm                 29.7%
Allstate                        10.1%
Progressive                 3.6%
Geico                             2.5%
Source: Illinois Division of Insurance


By Steve Daniels