Allstate to Acquire Esurance, Expand Online Operations

Posted on May 19, 2011 by Sergio Ulloa (G+)

Allstate Corporation, the largest publicly traded U.S. home and auto insurer, announced Wednesday that it had agreed to purchase auto insurer Esurance and Answer Financial, an affiliated online insurance agency, from White Mountains Insurance Group for about US$1 billion. The boards from both companies approved the deal, which is expected to close later in the fall this year. The purchase price at closing will be a combined total of US$700 million for the two companies, plus the tangible book value of Esurance and Answer Financial when the deal is completed. Allstate will fund the deal entirely with available cash and has expected the transaction's total price tag to be about US$1 billion. Through the acquisition of White Mountains' two holdings, Allstate is looking to broaden its business model and expand sales of coverage through direct channels such as the Internet. Allstate has largely relied on captive agents for sales and has been consistently losing auto-insurance policyholders over the past three years as online customers opt for coverage sold through their more web-savvy rivals Progressive and Geico, the two market leaders in online auto-insurance sales in the United States. Allstate's 2011 first-quarter results revealed that their number of overall standard auto policies in force dropped 0.7 percent in the 12 months ending March 31. Exceptional catastrophe costs have further weighed on Allstate's recent financials. Earlier this month, the company warned investors that it had almost US$1.4 billion in catastrophe losses recorded for April, making the second quarter of 2011 Allstate's costliest period for disaster claims since hurricane-hit 2008. By picking up San Francisco-based Esurance, Allstate acquires the third-largest provider of online auto insurance quotes in America with 545,000 policyholders, and a company whose premium volume has grown 20 percent on average over the past five years, totaling US$836 million in premiums for 2010. Allstate also obtains Esurance's exclusive web-based technology resources that have been specifically developed to meet the needs of self-directed online consumers. Currently Allstate and Esurance each control around 2 percent of the market share in direct channel auto insurance sales. In comparison, market leader GEICO maintains a 38 percent market share with over 10 million policyholders throughout the United States. Esurance was one of the first companies to begin selling car insurance online but has now found itself spending more money on claims and expenses than it has been able to bring in through premiums. According to Allstate, the acquisition will enable them to share market expertise that could limit Esurance's claims costs and make their underwriting profitable once again. Answer Financial, meanwhile, is an online broker that links insurers to self-directed customers who are seeking a choice among auto or property insurance. Customers are provided with quote comparisons and support with Answer Financial collecting a commission on every successful match it makes. The company has around 350,000 customers. Speaking at the announcement of the deal with Esurance and Answer Financial, Allstate's President, Chairman and CEO Thomas J. Wilson recognized that the shifting consumer preferences for premium online insurance shopping options have necessitated this transaction. "Consumers today expect to have their specific needs met by their insurance companies. Our strategy is to focus on individual preferences and utilize different value propositions for distinct consumer segments," Wilson said. Wilson went further on to explain each company's unique attributes and how they would continue to function under Allstate's management. "Our Allstate agencies do an outstanding job of serving customers who want a local personal touch and prefer to purchase a branded product. Esurance will expand our ability to serve customers that are more self-directed but still prefer a branded product. Answer Financial will strengthen our offering to individuals who want to be offered a choice between insurance carriers and are brand-neutral." Allstate will maintain both acquisitions as separate functioning businesses and utilize their brands to promote synergy and growth across different consumer segments. Esurance has traditionally been more successful in attracting the young driver demographic. Allstate, meanwhile, has generally appealed to customers who require more than just auto coverage and who want to speak with an agent to plan their insurance options. Allstate management is confident the two companies can now share expertise moving forward and will be able to develop a solid growth platform across multiple market disciplines. "Our strategy is to focus on individual preferences and utilize different value propositions for distinct consumer segments½Esurance will expand our ability to serve customers that are more self-directed but still prefer a branded product," Wilson said in a statement, adding that "This is a great opportunity to take what they've built, put the imprimatur of Allstate on it, and attack the market competitively from two sides." Allstate have planned to increase spending on Esurance's marketing and promotion efforts to drive more customers to the website. Allstate will also institute its own macro claims-handling process for Esurance policyholders. Implementing more cost-effective intra-company operational advantages would be "substantial and worth a lot of money," according to Wilson, and would go far in justifying the billion dollar purchase price. "It's economically attractive because we will improve the marketing effectiveness of the Esurance operation and then there are great benefits for Esurance from utilizing Allstate's pricing and claims expertise," Wilson concluded. While establishing a greater presence online can significantly improve your business, it is not without risk. According to a new report issued by global insurance broker Lockton, online hackers are fast becoming the greatest threat to business today. As commerce continues to move online, the gap between technological innovation and the ability to protect data offers criminals an opening to launch attacks and steal sensitive industry information. The warning comes in the aftermath of several recent high-profile security breaches. Last month, Marks & Spencer, Best Buy, and other clients of email marketing company Epsilon, had data on thousands of their customers stolen. Japanese electronics giant SONY has suffered a similar fate and is looking to its insurers to help cover the cost of cleaning up a continued data breach that has exposed the names and potentially even credit details of more than 100 million of its customers, an amount that analysts claim could exceed US$2 billion. According to Lockon, fewer than 2 percent of all businesses in the UK are currently insured against losses resulting from hackers obtaining customer data and shutting down information networks. The insurer is expecting the proportion to rise to almost 50 percent within the next five years. Indeed, despite its substantial investment in an internet direct-sales platform, Allstate also remains committed to its agency network. In February, Allstate announced that it would open 140 agencies in Texas and 120 throughout California. Companies Mentioned Allstate Allstate is the second largest personal lines insurer in the United States. Its Allstate Protection segment sells motor, property/casualty, home-owners, and life insurance products. Allstate Financial offers life insurance through its subsidiaries: Allstate Life, American Heritage Life, and Lincoln Benefit Life. Allstate customers can access Allstate products and services through more than 13,000 Allstate agencies and financial reps throughout the US and Canada. Esurance Esurance offers quote comparisons and sells auto insurance policies through its website and pre-approved online agencies to customers in 30 US states, with California and Florida its leading markets.