The number of new customers buying car insurance from Allstate Corp. (ALL) began "rapidly declining" in the second quarter of last year, prompting the company to spend about $80 million on new marketing and growth initiatives, according to an October 2011 slide show prepared for Allstate managers.
The decline came amid a flurry of changes at Allstate, as the company raised prices in several states, spent less on advertising and faced a decline in the number of agents selling its products.
While Allstate has discussed each of those changes publicly, the confidential presentation reviewed by Dow Jones Newswires sheds new light on how quickly and how severely potential customers turned away from Allstate in 2011, and illustrates why the company moved to increase its spending on advertising, direct mail and agent incentives late in the year.
And it shows the company was concerned that another set of initiatives it planned for 2012 wouldn't be able to sustain any sales momentum generated by the $80 million "Grow to Win" effort. Allstate will give a first glimpse at its 2012 results when it reports first-quarter earnings late Wednesday.
Amid a brutally competitive auto-insurance market, Allstate has struggled for years to bring in new customers under Chief Executive Tom Wilson. While it remains the second-largest auto insurer in the U.S., the company has lost ground to several rivals, including Progressive Corp. (PGR) and Berkshire Hathaway Inc.'s (BRKA, BRKB) Geico Corp. The number of cars insured under Allstate's standard policy is at its lowest since 2005. Allstate shares, meanwhile, have dropped by about half in the last five years.
An Allstate spokesman declined to comment.
The slide show said more drivers were shopping for auto insurance last year than in 2010, but that fewer of the potential customers were turning to Allstate for coverage. The company's call center saw a decline in call volume of at least 10% in every month from January to August, the last month displayed in the presentation. The steepest decrease came in July, when calls were off by about 30%. The monthly comparisons were on a year-over-year basis.
At least part of this decline was on purpose: the company had intended to cut its spending on direct-mail solicitations by half in 2011, according to the presentation. But the Grow to Win effort was built in part on a reversal of that spending cut; the presentation says the company planned two national mailings at a cost of $10.8 million to increase call volume at the end of the year.
The October slide show says new sales of its standard auto-insurance product had "been declining progressively since week 13" of 2011, and averaged a drop of 11% below the prior year after week 22. By week 38, the four-week moving average for new business production was down about 20%.
So-called serious price quotes to potential customers began dropping in week 12, the slide show says. That was partly because of substantial price increases in two key states, New York and Florida, but the presentation says that price quotes "remain unfavorable to prior year" countrywide when those two states were excluded.
The October slide show said Grow to Win was expected to increase new business by 22% by increasing the number of price quotes it gave to potential customers.
In February 2012, Wilson described Grow to Win as "our effort to reengage the organization, our agencies, on growth... Earlier in the year, we had not been completely engaging growth." Some of the expenditure on the initiative was a one-time cost, he told analysts and investors on a conference call, while "some of it will be continuing."
Some of the drop in the number of price quotes given by agents came after Allstate executives announced plans to overhaul the company's agent compensation structure at a May 2011 event for top agents. The agents are classified as independent contractors, not employees, and must pay many of their own expenses, including some of their own marketing costs.
The company has said its goal for the changes is to increase rewards for its highest performing agents. The plan is to cut base pay but increase bonuses, so agents that exceed a number of performance targets can see their total compensation rise.
The slide show said "agent investment...[has] been constrained due to anticipated compensation changes" and noted that "quote volume decline is occurring across all agency performance segments, as well as all agency tenures."
Amid an outcry by agents, Allstate partially backed off the proposed changes, saying in December that it planned to cut base pay by 10% instead of 20%. The changes are scheduled to take effect in 2013.
More recently, agents have expressed frustration in online forums about errors in their compensation reports and tax documents distributed by Allstate, and potential mistakes in newly released underwriting guidelines, called SRM 6.
Part of the company's stated goal with the compensation overhaul is to encourage smaller agencies to shut down or sell themselves to larger, more successful agents. The October slide show said the number of agents had dropped by 7.6% compared with a year earlier, putting "increasing pressure on production" of new business.
The number of applications for standard auto policies fell by 97,500 in the second and third quarters, and the slide show said about 30% of the impact was due to the decline in the number of agents. It attributed about half the decline to price increases, and 20% to a decline in spending on marketing relative to rivals.
The slide show says the number of applications fell by 20% in a group of states with large rate increases, including Florida and New York.
A slide with a sampling of 10 states where the company didn't raise prices showed an overall decline in applications of 1.6%. Some individual states in that group fell by more, including declines of 9.8% in Arizona and 7.8% in Texas. In Texas, Allstate had filed with state regulators to lower rates in March 2011.
Allstate has continued to raise prices since the October slideshow. Vinay Misquith, an analyst at Evercore Partners, said in a note to clients in April that his analysis showed Allstate raised prices by 4.6% in 2011, more than the 3% increases at rival Travelers Cos. (TRV) and Hartford Financial Services Group Inc. (HIG), and a 1.9% increase at State Farm Mutual Automobile Insurance Co., the largest home and auto insurer in the U.S.
Several industry analysts predict insurers will push through more price hikes in 2012 as they deal with rising claims costs. Meyer Shields, an analyst with Stifel Nicolaus, said times when insurers are raising rates are challenging periods where market share can shift more rapidly.
Allstate, Shields said, enters the upcoming period with a disadvantage.
"At a time when there are a lot of different moving parts in the industry, to start off a couple steps behind because of a detrimental relationship with your sales force and less access to your customers is a real problem," Shields said. "It's enough to impede their growth for several years."
--By Erik Holm, Dow Jones Newswires; 212-416-2892; firstname.lastname@example.org