Allstate Corp. paid $700 million in cash plus approximately $310 million tangible book value of the acquired entities to acquire Esurance and Answer Financial Inc. The company paid goodwill of around $368M for a business that spent $1.02 for each dollar premium collected. Also, the company has incurred huge costs in the process of integrating Allstate and Esurance. As a result, the company spent about $1.22 and $1.20 for each dollar premium collected in 2011 and 2012 through Esurance.
Although critics would argue that Esurance is a failed acquisition, I see this as a strategic alternative that would pay off in the long term. Allstate's core business, which is the standard auto, is not expanding - written premiums were flat at $15.7M for 2012 and 2011. GEICO and Progressive took the majority of the auto share through their decade long online platforms, which attracted the young customers who don't value agent interaction. Hence, Esurance fills this gap for Allstate by having an online platform that would not only help in gaining new customers, but also prevent the existing customers from switching to other brands. Esurance is indeed generating faster revenue growth for the company - the auto premiums written have increased from $181M in 2011 to $1B in 2012 and already $342M generated in Q12013. So, Esurance acquisition is helping boost the top line growth in auto for Allstate. Also, the company plans to offer homeowners lines (such as renters insurance) online by bundling the auto and home products.
But, the key challenge for Allstate is to improve the combined ratio of its Esurance division. The expense ratio is about 43% for 2012 and 2011. The majority of the costs incurred by the company in integration are the marketing expenses in promoting Esurance as an Allstate company. These costs will have to reduce in the near future. Moreover, administrative expenses of running online division are way lower compared to those of exclusive agencies where the agents' commissions takes up significant portion of overall expense. So, we could expect the expense ratio to be at par or even lower than the Allstate brand ratio of 25%. By sharing the superior underwriting capabilities of Allstate, Esurance could also improve its current loss ratio of 78%. Importantly, I believe that Allstate could increase the premium pricing of Esurance once it establishes enough customer base, just like its competitors (Progressive) who have increased the online premium rates. (Rising customer churn rate due to increased online premium prices could be a risk in this strategy). So, in the long term, I expect Esurance to make narrow profits and contributing to the bottom line growth as well.