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Allstate's Esurance two-step: Jacking up rates, touting savings
By Steve Daniels May 07, 2014
It's not too often that a company will double its advertising budget for a money-saving pitch at the same time that it's sharply raising prices.
But Allstate Corp. is doing just that with its online auto insurance unit, Esurance.
Esurance, acquired by Northbrook-based Allstate in late 2011 as its primary means of better competing with fast-growing online insurer Geico, doubled its ad spending in the first quarter to nearly $100 million. Simultaneously Esurance raised rates an average of 8.2 percent in 17 of the 42 states it serves in the first quarter in response to demands from Northbrook that it lose less money.
Esurance hasn't turned a profit since Allstate bought it for $1 billion in cash, but Allstate execs have said that's largely due to high ad spending aimed at generating faster growth at Esurance. At the same time, though, Allstate CEO Tom Wilson has acknowledged that Esurance's claims payments are too high.
'WE WANT IT ALL'
Speaking of Esurance on a conference call today with analysts, Mr. Wilson said, "We want it all. We want to grow, and we want to make money."
So far, San Francisco-based Esurance is continuing to grow. Its $404 million in written auto premiums in the first quarter were 18 percent higher than the $342 million in the first quarter of 2013. But the higher ad spending, highlighted by a high-profile ad immediately following the conclusion of the Super Bowl in February, worsened the unit's profit woes.
It paid more than $127 in claims and costs for every $100 of premiums it collected in the first quarter. At the same point last year, its costs and claims were more than $116 for every $100 of premiums.
CHALLENGING THE '15 MINUTES'
Esurance earlier this year introduced a new ad campaign in which it took direct aim at Geico's familiar claim of saving customers 15 percent or more on car insurance in 15 minutes. Esurance's ads scoff at Geico, saying Esurance can give customers a quote in half that time. But other than a general promise of providing savings, Esurance doesn't offer a specific percentage.
Given the rate hikes at Esurance, that might be wise. The 8.2 percent average rate hike in early 2014 followed a 5.5 percent average hike in the fourth quarter of 2014 in 16 states and a 5.2 percent average increase in the third quarter in 14 states.
Mr. Wilson said analysts shouldn't expect that Esurance will keep up the torrid ad spending all year. "When we launch a new advertising program, we invest more heavily upfront," he said.
And Don Civgin, president of Allstate Financial and the senior executive in charge of Esurance, acknowledged that the rate hikes are likely to slow future growth even with the higher marketing costs.
"We still have work to do on the loss ratio," Mr. Civgin told analysts. "It's going to come at some pressure to the top line."
STOCK'S STILL RISING
The Esurance issues aren't holding back Allstate's stock performance. The company's stock price was up $1.29, or 2.2 percent, to $57.86 in early afternoon trading.
Esurance still is dwarfed by Allstate's traditional agent-sold insurance business, and that continued to perform well in the first quarter. Allstate's earnings of $587 million, or $1.30 per share, easily beat consensus analyst estimates for the quarter of $1.20 per share. Earnings were down 3.7 percent from $1.35 per share the year before as unusually harsh winter weather resulted in higher claims payments.