You may have seen the recent news that famed activist investor Nelson Peltz took a stake in Allstate. This is surprising on a number of fronts.
First, activist investing has largely failed in insurance (most prominently Carl Icahn and friends at AIG). Second, Allstate is not an obvious target for a traditional activist playbook.
What do I mean by that? The typical activist strategy is to sell off business units that don’t fit (Allstate has already ditched the life business), cut expenses (Allstate’s ER can improve but it’s not the biggest issue), and maybe juice stock buyback (Allstate can’t do that because of its leverage ratios).
Does that mean there isn’t an activist opportunity at Allstate? Oh, not at all. There is a giant opportunity. But it requires a very different approach.
I have been thinking about what an activist campaign against Allstate would look like for at least ten years. Given current events, I thought I’d share some of how I would go about it.
Let me say upfront, I have a lot of friends at Allstate. Will some of them read this? Probably. Will some of them not like it? There’s a good chance. Might some of them quietly think “you know, he’s kind of right”? I suspect so.
I would also offer they all know me well enough to know I am unfiltered and will speak my mind, so I doubt any of them will be surprised by what follows.
The Agent Albatross
There are a lot of individual issues, but they are all derivatives of the original sin. The captive agents run the company. They are the biggest stakeholder and they act like it.
Captive agents are far past their expiration date. There is no reason any agent shouldn’t be able to sell Allstate product.
Might a captive know the bells and whistles of an Allstate policy better than an IA? OK, but that is more than offset by limiting the customer’s choice to Allstate when there might be a competitor product that is a better solution.
Every bad decision Allstate has made over the last 20 years has been a result of not wanting to upset their agents.
This is why the company has consistently lost market share. They have failed to adapt to a changing market because of fear over how the agents would react.
And they’re not wrong to be afraid. Every time they try something a little controversial the agents go nuts. But if you run your business like this, you end up like Ford and GM selling uncompetitive products because you’re afraid of your workers.
It is management’s responsibility to make the tough decisions to allow the company to thrive, even if they are difficult.
Now that we know the problem, let’s look at how we got here and what can be done differently going forward.
The Four Square
When Allstate bought Esurance, they had a decision to make. Do we fully embrace the direct channel even though it will cause conflict with the agents? Or do we isolate direct in its own silo and not have it reach its potential?
Allstate’s solution to this was the now famous “Four Square“. Allstate would meet customers wherever they happened to be.
If they wanted captive, there was the Allstate brand. If they wanted self serve, there was Esurance. If they wanted choice, there was Encompass (and later Nat Gen). And if they wanted to find the lowest price online, Answer would sell their lead.
The problem with this was twofold. One, it created internal silos that entrenched the Allstate brand as the lead dog focused on captive agents.
In other words, while Allstate presented the square as having four equal quadrants, there was really one giant quadrant and three other tiny ones.
Two, it ignored how customers acted in the real world. Allstate put permanent labels on customers. Joe over here wants captive advice. Mary over there wants an IA. And Sally wants to do it herself online.
This ignores that Sally might want to shop with Esurance when she was 25, but when she was 35 and married and owned a home, she might need more advice.
Because Allstate hived off direct from captive, Sally will never realize she can graduate from Esurance to an Allstate agent. Instead, she shops on her own and ends up at Progressive or State Farm or the local independent agent.
The Quad Cube
Allstate failed to realize that instead of a flat square, where customers arrive once and stay in the same spot forever, they needed to imagine a 3-D world where customers could change lanes over time.
In other words, a cube, not a square. This would require integrating all the channels seamlessly. A customer shouldn’t care whether they initially entered through direct or an IA or an Allstate agent.
They should be able to switch at will and have all their history follow them. The Allstate agent should know Sally was at Esurance for five years before switching over and be able to explain how the Allstate and Esurance policies differ.
I named this strategy the Quad Cube to highlight the more dynamic possibilities it offered relative to the Four Square. I offered to present it to the Allstate board years ago. As you can imagine, there was no interest.
While Allstate did eventually shutter the Esurance brand, they still do not function seamlessly between captive and direct customers.
Instead, they mostly fight with the agents about how much commission a local agent should get when someone buys direct in their territory.
You still can’t buy Allstate online without having an agent call you, sometimes before they even let you quote the policy.
When I first moved to Chicago 15 years ago, I couldn’t believe how many mailers I got from different Allstate agents all trying to get me to switch my insurance.
So I pulled up the agent directory and found I believe it was eight agents within a 10 minute drive of my home. I reported this to Tom Wilson shortly after and advocated for agency rationalization.
Fifteen years later, things have improved. There are now “only” seven agents within 10 minutes! Progress!
You know how many Starbucks are within a 10 minute drive? That’s right…seven! This should not be a 1:1 ratio!
I wrote about this once before. Some Allstate agents got wind of it and got upset. Which totally proves my point!
There should be max two agents in my neighborhood. Why aren’t there? Because agents run the company!
When Joe Lacher joined Allstate many years ago now, he tried to rationalize the agent plant by raising production minimums and encouraging buyouts. There was a huge agent protest and the plans got dropped.
Allstate agents need to accept a small store front family business does not meet the needs of the modern consumer.
Consolidate those seven agencies in my neighborhood into one location. Each agent can still have their book, but the support staff, advertising, and back office should all be centralized.
Lessons From Sears
Not only should independent agents be able to access the Allstate brand in some form, but Allstate agents should be able to offer other brands when Allstate is not the best fit.
If you are truly putting the customer first, this is a no brainer. Not only that, but think about it…
How dumb is it to have a willing buyer in front of you and have them walk out the door with nothing only because you refuse to offer them choice when Allstate isn’t competitive?
Note, this doesn’t mean farming the customer out to another agent. The local Allstate agent should be able to offer non-captive quotes.
And no, choice doesn’t mean offering a Nat Gen product. It means true external options.
While this may sound crazy, it’s really not at all. Think about it. Where did Allstate come from? Sears.
Did Sears only sell Kenmore appliances? No. They offered the house brand and third party options.
But they positioned Kenmore as a better deal for many (but not all) customers. Why can’t Allstate agents do the same thing for Allstate policies?
Learn what the customer cares about and values. Then, decide whether Allstate is the best choice for them or they are better off elsewhere.
The truth is, if Allstate paper isn’t the best choice, most customers will figure that out on their own. In that case, they find another agent and never come back.
If you tell them “right now, Auto Owners is a better option but we’ll re-evaluate that next year”, then they will stay loyal to Allstate brand and, will likely eventually end up on Allstate paper as well.
Reinvent the Brand
Allstate needs to give customers a reason to want to buy specifically from them. I’m sorry but the “good hands” are an empty slogan.
Consumers don’t know what it stands for. If it means you take care of me better after a claim, why doesn’t Allstate finish at the top of the JD Power rankings on claims handling?
They are trying to sound like Chubb without acting like Chubb. It confuses the customer.
If it’s supposed to mean you are going to charge the consumer a price premium for your brand without providing extra value, well, that’s not very appealing.
If it’s supposed to convey you’ve had this slogan since 1942, so you’ve been around a long time, very few consumers care about that anymore.
If you want to convince me I am in good hands, you know how you would do it?
You would follow my advice above. Don’t limit me to just Allstate paper. Because that clearly isn’t always putting me in the best hands. Instead, prove to me you really care about my individual needs regardless of how it is sold.
Note, one other benefit of my proposal. It ends all the fights with the agents over commission levels.
So much energy is lost to arguing with agents about commissions, internal debates over whether to change commissions, benchmarking services provided to try to rationalize payouts, and so on.
It’s a huge mental drain on the system.
The new revenue stream from third party policies makes up for whatever cannibalization may come from customers who want to go solely direct. Enterprising agents will be able to grow their agencies to a lot bigger size than they are today.
The Growth Payoff
While none of this will produce a miracle, it can change Allstate’s trajectory from a slow decline to a slow ascent.
If Allstate can establish themselves as having a true direct business that works like GEICO and Progressive, that will definitely enhance growth.
If the agents can have more options for customers, that should improve overall growth. It may not necessarily grow the market share of Allstate placed business, but it will bring valuable fee income from third party business and expand Allstate’s share of wallet overall.
Given the advertising dollars have already been spent, the incremental margins on this business are extremely high as any third party business converts a prospect from wasted ad spend to a closed sale.
Over time, Allstate would have higher growth companywide and at higher margins. The only cost is the upset agents who don’t want to modernize, but that band-aid needs to be ripped off already.
Oh, and if the agents sell “too much” third party business, you know what that means? The business requires a lot less capital, so Allstate can increase its buyback and dividends which improves valuation.
Just The Beginning
The above is just a small sample of a full plan to reinvent Allstate. I don’t have the space to fully get into the necessary details on the ideas above, and there are many other areas I could address with more space.
But, I also wanted to make sure the main thing was the main thing. Product innovation, investments, capital, expenses. Those are all opportunities but largely distractions.
What matters is reforming the captive agent channel. That’s where all the focus should be.
Activist Shareholders vs. Activist Stakeholders
At the end of the day, it comes down to does Allstate want to respond to noisy shareholders or noisy stakeholders?
They’ve spent the last 30 years as a public company prioritizing the stakeholders. Hopefully what Peltz can communicate is that it is finally time to prioritize the shareholders.