Allstate Share Price Rises After Customers are Exiled

Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Allstate Corporation (NYSE: ALL) shares have climbed to their highest levels in almost four years. At last friday’s market close, the share price was $37.04, up 7.36% for the week. Allstate CEO, Tom Wilson, expressed confidence in the company’s ability to achieve its goal of a 13% operating return on equity by 2014.

But while Allstate shareholders may be rejoicing at the company’s better-than-expected operating profits and subsequent share price increases, the Northbrook, IL-based insurance carrier’s customer base is anything but pleased. Policyholders have been riding the proverbial roller coaster for several years while the company struggled to find new ways of increasing profit and reducing expenses.

Beginning with Allstate’s decision to stop writing new homeowner’s insurance policies in New Jersey, Connecticut, Delaware and California as of 2007, the company’s “good hands” turned to fists that pummeled policyholders across the nation. Citing what was characterized by Maryland Court of Appeals Judge Glenn Harrell as an “unsubstantiated fear of a hypothetical force of nature,” Allstate chose to simply stop providing coverage to customers in areas that are at an increased risk of weather-related damage. Harrell described Allstate’s rationale for ceasing to write new homeowner’s insurance policies as “The Godzilla Argument” and compared the company’s use of outrageous improbabilities to the likelihood of Godzilla attacking the Maryland coastline.

Apparently, the Allstate execs are deathly afraid that the northeastern part of the country is highly likely to be hit by a massive hurricane, Category 2 or higher. Even though the NOAA “does not make seasonal hurricane landfall predictions,” they have stated in their 2012 Atlantic Hurricane Season Outlook that they expect “a near-normal season is most likely.” However, the Tropical Meteorology Department at Colorado State University has made their own predictions available and believes that there is less than a 0.1% possibility of an intense hurricane making landfall in New Jersey, Delaware or Maryland within the next 50 years.

Allstate’s fear of a catastrophic hurricane along the east coast was further evidenced by their decision at the beginning of this year to drop all homeowner’s insurance policies in North and South Carolina belonging to customers who didn’t also have an Allstate auto insurance policy. Approximately 185,000 customers between the two states will need new coverage.

Considering the fact that in 2010 Allstate raised homeowner’s insurance premiums by an average of 9.4% in 26 states, then again in 2011 by an average of 10.5% in 37 states, it’s not surprising that policyholders have reacted with shock and outrage and begun seeking coverage elsewhere. Could it be possible that Allstate was expecting, and actually hoping, a certain percentage of its customer base would jump ship and find protection with another carrier? And then, when too few customers remained loyal and didn’t switch their policies to a competitor, Allstate simply canceled their coverage.

So what does all this mean for Allstate stockholders and policyholders? Keeping in mind the company’s actions over the past several years, it seems plausible that Tom Wilson’s plan to prevent another stock price landslide like the one in September 2008 is to raise prices on less profitable policies so high that customers leave on their own, and then simply cancel those policies that still remain.

Indeed by ignoring consumers in potentially risky geographical areas, regardless of how statistically insignificant that risk might be, the company can reduce their exposure to otherwise detrimental weather-related losses. With a preference for and focus on insuring low-risk homeowners in landlocked states, and avoidance of properties in states that touch the ocean, Allstate’s stock price will probably rise. However, with so many hundreds of thousands of exiled customers giving their money to other insurance companies, how long might it be before Allstate’s market share diminishes to a near-imperceptible level? While it may take decades before the ramifications of the insurance giant’s recent actions become uncorrectable, don’t be surprised if one of Allstate’s less conservative, less skittish competitors scoops up the masses that were left out in the cold. 

Despite the fact that State Farm, historically positioned as Allstate’s nemesis, has often taken advantage of Allstate’s decisions and actions that either stranded or angered customers, it is unlikely that any new marketing or solicitation will occur in this case. State Farm is a privately held mutual insurer, which means that the policyholders literally own the company. But even though State Farm doesn’t have a share price to worry about, nor droves of antsy stockholders, they must still remain competitive. More than likely, State Farm will follow suit and also drop hundreds of thousands of homeowners policies and raise premiums by double digits for those that remain.

Perhaps GEICO, a wholly owned subsidiary of Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A), will take advantage of the opportunity to court disgruntled Allstate policyholders. Traditionally an automobile insurance company, GEICO has come to represent a formidable competitor in the industry. GEICO does not offer any proprietary property insurance products and simply behaves as a pass-through entity through which customers are offered products by several other carriers. This function could actually benefit GEICO, as they are not limited to their own small assortment of products. Among the list of nearly two dozen insurance companies are Chubb, Fidelity National Insurance Company, Liberty Mutual and Travelers. 

Regardless of which competing insurance company, if any, chooses to step away from the apparent trend of canceling policies and handing out double-digit premium increases to everyone else, it is inevitable that homeowners insurance policies across the nation will continue to get more expensive and less comprehensive with each passing year. Allstate’s aggressive reduction in risk exposure combined with exponential premium increases should temporarily help the company’s share price maintain a bullish trend. However, such behavior cannot continue if Allstate wants to remain in business; over the past several years the company has already lost significant market share to an increasing number of competitors, so unless a more reasonable, sustainable action plan is devised the company is seemingly heading down a path of self-destruction. 


Gambone has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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