Allstate Protection Growth Strategy

McKinsey & Company | Allstate Protection Strategy

Student International Business Council | Fall 2017

2

Agenda

Introduction

Allstate Protection Brand Analysis

Auto Insurance Analysis

Recommendation

Brand Consolidation

Partnership Strategy

Impact

Risks

Implementation Timeline

Appendix

3

McKinsey & Company SIBC Analysts

Miles WoodShawnee, KSClass of 2020Business & ACMS

Marcela BertiniSão Paulo, BrazilClass of 2019Business Analytics & Economics

Dominic BozzoPittsburgh, PAClass of 2020Computer Science

Godsee JoySilver Spring, MDClass of 2020Economics & Peace Studies

Andrew HerbstColumbia, SCClass of 2020Finance & PLS

Mackenzie NolanWinnetka, ILClass of 2019Political Science & Arabic

Gabby BiltzGarrettsville, OHClass of 2021Business

Mariana QueirozSão Paulo, BrazilClass of 2020Business Analytics & Economics

Carlos Ariza MatosSanto Domingo, DRClass of 2021Business

Luis BigottMiami, FLClass of 2020Finance & ACMS

4

Despite sustained revenue growth since 2010, Allstate is struggling to maintain margins in a highly competitive industry

Sources: Allstate 10-K

36,769

29,394

32,013 31,40032,654 33,315

34,507 35,239 35,65336,534

29,744

32,039

30,240 29,919 31,277

29,620 29,495 30,588 32,043

33,460

4,636

(1,679)854 911 787

2,306 2,280 2,850 2,171 1,877

($5,000)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Reve

nue

($m

m)

Total Revenue Total Operating Exp. Net Income

5.1%6.1%8.1%6.6%6.9%2.4%2.9%2.7%

-5.7%

12.6%

5

Allstate should consolidate key brands to enhance the customer experience and partner with Waymo to hedge shifting auto trends

Brand Consolidation Auto Insurance Partnership

Objectives

Enhance Distribution Strategy Maintain Allstate Brand Hedge Risk with Auto Insurance

Impact

Ecosystem Improve Profitability Defensive Strategy

To maintain focus on the customers, Allstate should constantly adapt to trends

Build on Allstate’s current brand perception by offering high quality service across the board

Avoid and counter threats that have the potential to disrupt Allstate’s business model

Create a true one-stop-shop insurance provider and reinvent the customer experience

Growing direct-to-consumer lines, while eliminating inefficiencies, will drive profits

Investment in future markets positions Allstate to remain an industry leader

$

6

Agenda

Introduction



Recommendation

Brand Consolidation

Auto Insurance Partnership

Impact

Risks


Appendix

7Sources: Bain & Company, IBM

As technology empowers convenience and customization, the P&L insurance industry must adapt to meet consumer expectations

Historical

Trend

Impact

P&L insurance companies have traditionally targeted an older demographic through an agent-focused strategy

Traditionally low customer interaction

P&L insurers tend to focus on traditional service lines

Increasing importance of digital presence

Millennials are twice as likely to buy their policies online

instead of with a local agent

Transition from a resource based economy to a shared

economy

Exponential growth of data

Transformation of offerings

Tailored products based on customer data

Explore adjacent markets

Digitization in response to a younger customer base

Online platforms and services improve experience and add

customer value

Increase high-quality interactions with consumer to monetize brand loyalty

Rise of consumer interaction as a key factor of brand

loyalty

Direct interaction may increase the Promoter Score

by 20 percentage points

Millennials Brand Significance Product Mix

8

Allstate Protection’s highest potential brands are well-positioned to capitalize on the digital economy’s customer-centric trends

Sources: Allstate 10-K, Squaretrade.com

Value Proposition

Coverage

Distribution Strategy

“You’re in Good Hands”Customer relationship is personal, respectful, and

meaningful

Cater to individual preferences and utilize

different capabilities for distinct customer segments

Provide independent warranties for consumer

electronics and major appliances

One stop shop for personal insurance lines

Growth Potential

Protection for computers, home entertainment,

smartphones, cameras, appliances, and more

Direct-to-consumer strategy with hassle-free, 24/7

customer service and record satisfaction ratings

Excellent growth opportunities in niche

insurance markets

Affordable, direct-to-consumer insurance is

increasingly more popular

Premium insurance will remain relevant as it

maintains relationships with affluent customers

Independent agents offer personalized customer service and elicit high

satisfaction ratings

Direct-to-consumer strategy with convenient, speedy, and easy user experience online

and by phone

Primarily vehicle and property insurance with

select alternative offerings

9

However, as subsidiaries consistently underperform, Allstate’s bottom line is also increasingly pressured by DTC channels


$(1,000)

$(500)

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2011 2012 2013 2014 2015 2016

Net

Ope

ratin

g In

com

e ($

mm

)

Allstate Esurance Squaretrade

10

Meanwhile, Allstate’s trustworthy name continues to earn high consumer satisfaction ratings relative to other industry giants

Sources: J.D. Power Rankings

891

886

874

867 867863 862 861

858 857853

833

800

810

820

830

840

850

860

870

880

890

900

The Hartford ErieInsurance

Nationwide Allstate Farmers Progressive Travelers LibertyMutual

GEICO 21st Century State Farm Esurance

Cons

umer

Sat

isfac

tion

Ratin

g

Average

11

Agenda

Introduction



Recommendation

Brand Consolidation


Impact

Risks


Appendix

12Sources: PWC, McKinsey Insights, KPMG, Deloitte

Looking ahead, as automation disrupts mobility trends, existing personal auto insurance premiums will decrease 60% by 2040

• Accident proof technology will decrease accidents by 90% .

• Driverless vehicles might force auto insurers to shift the core of their business model, from protecting private customers to insuring car manufacturers.

• Vehicle ownership is declining as50% of 18-34 year old drivers already use shared mobility models

• Product and premium mix for passenger vehicles shift from individual to commercial buyers

• Increase in shared mobility models results in an increase in commercial lines.

• Commercial lines will represent 49% of market premiums by 2030 and 67% by 2040

Autonomous Car Shared Mobility Commercial Lines

$0

$50

$100

$150

$200

$250

2015 2020 2025 2030 2035 2040

Prem

ium

Nee

d ($

bn)

Personally owned driver-driven Shared driver-driven Personally owned autonomous Shared Autonomous

Expected Premium Need in Personal Auto

13

These trends, due to new technology in auto manufacturing, seriously threaten Allstate’s dependence on personal auto lines

Sources: Allstate 10-K, McKinsey Insights, Waymo, KPMG

Allstate’s Premiums Earned for Auto Insurance is Prone to Dramatic Decline

Risk Reduction Factors

LiDAR Sensors

Telematics

Technology Impact

Liability Shift

68% of Premiums

Earned

Tesla crash rates have dropped 40% since Autopilot was introduced in 2015

Recent Crash Rates

Vehicle manufacturers and tech companies are aiming to introduce

driverless cars in 2020-22

Driverless Concept

McKinsey estimates self-driving cars could eliminate 90% of auto accidents

Driverless Crash Rates

Auto insurance accounts for 42% of Property and

Casualty insurance

80% of auto claims are collision claims

Personal auto insurance could

shrink 60% by 2040

$21,264

$8,506

$-

$5,000

$10,000

$15,000

$20,000

$25,000

2016 2040

($12,758)

14

Agenda

Introduction



Recommendation

Brand Consolidation


Impact

Risks


Appendix

15

Allstate can improve operations and hedge auto by consolidating major brands and partnering with the future of transportation

Days

65%

Solution: Forward-looking Ecosystem

Distribution: Underperforming Brands Product Mix: Dependence on Auto Lines

Problem: Threatening consumer trends and disruptive technology

Brand Consolidation Auto Insurance Partnership

Brand Loyalty Distribution Strategy Waymo

Brand consolidation will produce an additional $200 mm in annual profits by 2021

Allstate can successfully integrate and consolidate independent brands by 2020

2020$Cannibalization, agent recoil, and customer trust riskshave been addressed

Impact Risks Implementation

“You’re in Good Hands”

Allstate name is associated with trust and customer satisfaction

Expand brand loyalty to lower-end services

Ecosystem that incorporates products for all consumer bases

More organized expansion strategy, allowing for acquisition flexibility

Decrease advertising expenses

Rideshare taxi service

Offer software, vehicle fleet, and passenger per ride insurance

Allstate offers crucial data sources for human driving habits

16

Agenda

Introduction

Recommendation

Brand Consolidation


Impact

Risks


Appendix



17

Allstate needs to consolidate key independent brands to improve organization, adapt to evolving trends, and allow room for growth

Product Diversity & Consumer Choice

Consolidated Services

Primary Brand Trust Allstate Corp.

Allstate

Agent-based

Allstate Digital

Direct-to-consumer

Allstate Technology

Niche

Economic Spectrum $$$ $

18

The consolidated brand concept creates an ecosystem that will drive organic growth and eliminate subsidiary inefficiencies

Sources: Allstate 10-K, NY Times, Bain Report, Squaretrade

Organic Growth Operational Enhancements

Advertising and Other G&A CostsEcosystem Advantage Cross Selling Strategy

An ecosystem reinvents customer relationships in the insurance industry

Build customer brand loyalty by offering convenient digital and traditional

distribution channels

Diversify product offerings and making product selection more accessible across

subsidiaries

Net Promoter Scores jump 20 to 30 points in an ecosystem

Ecosystem framework integrates a comprehensive and diverse customer

base

Over 525,000 Esurance customersOver 238,000 Squaretrade customers

Potential to move this expansive customer base to premium policies in

the long term

Brand recognition and respect is key to attracting and retaining policy holders

Transfer of resources boosts Allstate marketing efforts by 31% instantly

Allstate Advertising 2017: $59.7 mmEsurance Advertising 2017: $18.6 mm

Following brand consolidation, Esuranceadvertising costs can be redirected to

bolster Allstate’s presence

Allstate’s advertising dollars have recently declined relative to competitors

in the P&L insurance industry

Impact

More convenient and personalized insurance packages will boost satisfaction

Timeline offerings will maintain relationships with customers, ensuring lasting revenue growth

Organic growth of direct-to-consumer policies will boost margins significantly

More effective use of capital will improve margins and solidify Allstate’s reputation

A wider breadth of offerings will bring valuable millennials into the Allstate family

Allocation of advertising dollars to a single organization will improve brand loyalty

$$ $

19

Agenda

Introduction

Recommendation

Brand Consolidation


Impact

Risks


Appendix



20

Partnering with Waymo to offer “backseat” insurance quells consumer fears in a rapidly advancing transportation atmosphere

Sources: AlixPartners, AAA, Business Insider

By 2020, Tech and Motor companies will implement self driving technology in one of two

manners: rideshare or direct

55% 84% 78%Unlikely to consider a driverless car

Fear “dropped call” phenomenon or other software malfunction

Would trust the technology more if developed by a software giant

Stiff Customer Segmentation Issues are Faced Across Generations

Partner to Mitigate Consumer Fears: Backseat Insurance

Google’s autonomous car project

Trusted organization with competent engineers

Rideshare taxi service

Insurance partnership with Waymo

Insure the software, vehicle fleet, and passengers on a per ride basis

Allstate’s brand builds trust“You’re in Good Hands”

21

• Shift from personal to commercial lines for Allstate

• Data on human driving behavior• DriveSense• Arity

• Brings light to data on human errors

• Completes image of the driving experience

This strategy hedges Allstate’s exposure to personal auto, while improving Waymo’s rider experience and algorithm development

• Sensory awareness

• Algorithms are enhanced through machine learning

• Computers learn from mistakes

• Neural Network: vehicle “minds” learn from each other

Inputs to Autonomous Vehicles Critical Value-Adds from Allstate

What’s Insured Data TransmissionCost Structure

• Software• Vehicle fleet• Passenger

22

Agenda

Introduction

Recommendation

Brand Consolidation


Impact

Risks


Appendix



23

Successful consolidation will net an additional $216 mm in annual underwriting income by 2021

Sources: Allstate 10-K, Bloomberg

Projected Operating Income ($mm)

Scenario Current State Base Case ($mm) Recommendation ($mm)

Premiums Earned $30,377 $32,957 $38,560

Losses and Expenses $29,085 $31,794 $37,181

Underwriting Income $1,292 $1,162 (-$130) $1,378 (+$86)

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Base Case Recommendation

24

Agenda

Introduction

Recommendation

Brand Consolidation


Impact

Risks


Appendix



25

5 11 11 5 14 54

Low price expertsUnivolveds

Price-conscious advice hunters

Self servicers

Active shoppersNon-price conscious customers

Price conscious customers

Allstate can mitigate the risks of consolidation by emphasizing diversity of services and improving agent-carrier relations

Sources: EY

Risks Mitigation Strategies

Price and Brand Conscious Customers

The Agent Problem

Highlight diversification of

services

Ensure advanced coverage for higher

price

Allow customization of insured products

10 32 44 12 1

Agent Perception of Direct-to-Consumer Future

No threat at all

Little Threat

Some Threat

A Lot of Threat

Full Threat

80% would consider giving up a role in servicing to focus on sales and growth

Incorporate Agent into Sales

and Growth

40% question their preparedness to meet the needs of the next generation

Prepare agents for the transition

34% want the carrier to have better communication with the agent or broker

Ensure better carrier-agent

relations

26Sources: NCSL, PWC, MIT, Self Driving Coalition for Safer Streets

Allstate can mitigate risks of consumer distrust and emerging market conditions by publicly addressing the strategy

Risks

Consumer Distrust

Market Restrictions Due to Government Regulation

Mitigation Strategies

Advertising

Lobbying

Autonomous Vehicles

Promote autonomous vehicles in states with legislature

Self Driving Coalition for Safer Streets

Partner with other interested companies

Use data of states with legislature to prove benefits and safety

Build trust through relatable advertisements

Increase customer awareness of the technologies benefits

Use successful data to improve consumer confidence

Partner with Waymo to give customer a “Test Drive”

23 22

5

Not yet considered Enacted Pending Executive Order

States with Autonomous Vehicle Registration

Allstate’s Intentions

54%

28%

of consumers say that autonomous cars are dangerous

of consumers say autonomous vehicles are susceptible to hacking

53% of consumers say they are scared of self-driving cars

Sensitivity

Bene

fits

to c

ompa

ny

Self-Reported

Digital Exhaust

Profiling Data

Sell to 3rd

Parties

Targeted Marketing

Improve Product

or Service

Use

DataType

27

Agenda

Introduction

Recommendation

Brand Consolidation


Impact

Risks


Appendix



28

Continue exploration of

adjacent markets

Officially introduce the

product alongside

rideshare taxis

Launch marketing

campaign to inform the

public

Secure formal partnership

with Waymo

Establish team dedicated to

product development

Within three years, Allstate can effectively consolidate its existing brands and begin repositioning for impending auto disruption

Short Term: Brand Consolidation

Long Term: Auto Insurance Partnership

2018Conduct market

research to discover consumer

sentiment

Gauge internal sentiment and calm resistance

Integration of management

teams

2019Launch marketing

campaign to introduce strategic

initiative

Educate market of the change’s implications

Begin integrating policy holders into

the Allstate infrastructure

2020Fully integrate

major independent

brands

Utilize technology to drive direct-to-consumer growth

Continue exploring

innovation strategies

Phase 1: Market Research and Preparation

Phase 2: Official Launch

Phase 3: Comprehensive

Integration

29

Allstate’s brand consolidation offers immediate tangible impact, while the auto segment transformation defends its position

Brand Consolidation

Observed Issue


Objectives

Solution

Impact

• Major independent brands, primarily Esuranceand Squaretrade, are not profitable

• Esurance performs poorly and lacks brand recognition relative to other low-cost insurers

• Automated vehicles and the sharing economy threaten traditional auto insurance

• Allstate’s annual revenue and income are heavily reliant on auto lines

• Improve profitability by eliminating cost inefficiencies and expanding cross selling

• Eliminate sources of confusion • Increase consumer satisfaction

• Hedge risk associated with Allstate’s dependence on personal auto insurance

• Innovate to remain competitive in the insurance industry

• Consolidate brands under Allstate• Offer both low cost, direct-to-consumer policies

and premium, agent-to-consumer policies• Implement cross-selling strategies

• Partner with Waymo, Google’s autonomous driving project

• Alleviate concerns with “backseat insurance”• Support tech development with driver data

• Consistent growth over Allstate Protection’s base case

• Net additional ~$200 mm in annual underwriting income by 2021

• Repositioned to capture future markets• Defend position as industry leader

30

Agenda

Introduction

Recommendation

Brand Consolidation


Impact

Risks


Appendix



31

Appendix A: Historical Financial Performance


Historical Loss and Expense Ratios

2012 2013 2014 2015 2016

Allstate Loss Ratio 0.683 0.636 0.658 0.687 0.703

Allstate Expense Ratio 0.255 0.263 0.257 0.247 0.246

Allstate Combined Ratio 0.938 0.899 0.915 0.934 0.949

Esurance Loss Ratio 0.772 0.785 0.768 0.751 0.758

Esurance Expense Ratio 0.427 0.390 0.409 0.352 0.317

Esurance Combined Ratio 1.199 1.175 1.177 1.103 1.075

Squaretrade Loss Ratio 0.725 0.660 0.654 0.647 0.710

Squaretrade Expense Ratio 0.761 0.567 0.440 0.415 0.392

Squaretrade Combined Ratio 1.486 1.227 1.094 1.061 1.101

Consolidated Financial Performance ($mm)

2012 2013 2014 2015 2016

Total Premiums $ 25,699 $ 26,570 $ 27,873 $ 29,289 $ 30,378

Total Policy Benefits $ 17,641 $ 17,086 $ 18,493 $ 20,209 $ 21,455

Total Selling General & Admin Exp. $ 6,742 $ 7,179 $ 7,421 $ 7,443 $ 7,630

Underwriting Income $ 1,317 $ 2,304 $ 1,959 $ 1,637 $ 1,292

32

Appendix B: Consolidated Income Statement (Base vs. Model)


Base Case ($mm)

2017 2018 2019 2020 2021

Total Premiums $ 30,937 $ 31,682 $ 32,298 $ 32,776 $ 32,957




Recommendation ($mm)

2017 2018 2019 2020 2021

Total Premiums $ 30,937 $ 31,816 $ 33,621 $ 35,848 $ 38,560




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Appendix C: Projected Premiums Earned


Projected Premiums Earned ($mm)

2017 2018 2019 2020 2021

Allstate Premiums $ 28,955 $ 29,621 $ 31,191 $ 33,156 $ 35,576

Esurance Premiums $ 1,697 $ 1,867 $ 2,054 $ 2,259 $ 2,485

Squaretrade Premiums $ 285 $ 328 $ 377 $ 434 $ 499

Total Premiums $ 30,938 $ 31,816 $ 33,622 $ 35,849 $ 38,560

Assumptions: Premiums

5Y CAGR 1Y CAGR Base Growth 2018 Growth 2019 Growth 2020 Growth 2021 Growth

Allstate Premiums 1 2.9% 1.8% 2.3% 2.3% 5.3% 6.3% 7.3%

Esurance Premiums 2 11.4% 2.2% 4.0% 10.0% 10.0% 10.0% 10.0%

Squaretrade Premiums 3 44.5% 4.7% 4.0% 15.0% 15.0% 15.0% 15.0%

1. We expect Allstate Premiums to increase over the next 5 years as the brand consolidation enable cross-selling strategies and theecosystem attracts younger generations.

2. We expect Esurance Premiums to grow at an accelerated rate due to their incorporation under the Allstate brand as well as the expansion of the Direct to Consumer market as a whole.

a. Nike recently expanded Direct to Consumer channels, which grew sales at 30%. Considering Nike operates in the retail space, we took a percentage of their growth to use as a proxy.

3. We expect Squaretrade Premiums to grow at a higher rate due to the reasons listed in 2, as well as the growth of the niche insurance market.

34

Appendix D1: Projected Loss and Expense Ratios

Projected Loss and Expense Ratios

2017 2018 2019 2020 2021

Allstate Loss Ratio 0.711 0.714 0.717 0.717 0.716

Allstate Expense Ratio 0.246 0.247 0.248 0.248 0.248

Allstate Combined Ratio 0.957 0.961 0.965 0.965 0.964

Esurance Loss Ratio 0.762 0.746 0.731 0.717 0.702

Esurance Expense Ratio 0.301 0.240 0.245 0.250 0.255

Esurance Combined Ratio 1.061 0.986 0.976 0.966 0.957

Squaretrade Loss Ratio 0.744 0.759 0.774 0.789 0.805

Squaretrade Expense Ratio 0.381 0.240 0.228 0.217 0.206

Squaretrade Combined Ratio 1.122 0.999 1.002 1.006 1.011

Assumptions: Loss and Expense Ratios


Allstate Loss Ratio 0.6% 1.2% 0.4% 0.4% 0.4% 0.0% -0.1%

Allstate Expense Ratio -0.7% -0.2% -0.3% 0.5% 0.5% 0.0% 0.0%

Esurance Loss Ratio -0.4% 0.5% -2.0% -2.0% -2.0% -2.0% -2.0%

Esurance Expense Ratio -5.8% -5.1% -5.0% 2.0% 2.0% 2.0% 2.0%

Squaretrade Loss Ratio -0.4% 4.8% 2.0% 2.0% 2.0% 2.0% 2.0%

Squaretrade Expense Ratio -12.4% -2.8% -1.0% -5.0% -5.0% -5.0% -5.0%

35

Appendix D2: Projected Loss and Expense Ratios

Assumptions: Loss and Expense Ratios2


Allstate Loss Ratio 1 0.6% 1.2% 0.4% 0.4% 0.4% 0.0% -0.1%

Allstate Expense Ratio 2 -0.7% -0.2% -0.3% 0.5% 0.5% 0.0% 0.0%

Esurance Loss Ratio 3 -0.4% 0.5% -2.0% -2.0% -2.0% -2.0% -2.0%

Esurance Expense Ratio 4 -5.8% -5.1% -5.0% 2.0% 2.0% 2.0% 2.0%

Squaretrade Loss Ratio 5 -0.4% 4.8% 2.0% 2.0% 2.0% 2.0% 2.0%

Squaretrade Expense Ratio 6 -12.4% -2.8% -1.0% -5.0% -5.0% -5.0% -5.0%

1. Relatively consistent with the 5 year CAGR and adjusted for the expected decrease in risk in the auto industry as automation prevents traditional collisions.2. An initial increase reflects expenses associated with the integration of Esurance and Squaretrade. Subsequently, the growth rate levels between the elevated growth rate and the base growth rate.3. Relatively consistent with the 5 year CAGR and adjusted for the expected decrease in risk in the auto industry.4. Consistent with the 5 year CAGR and 1 year CAGR.5. The growth of the past five years will taper and will be further reduced by Allstate’s risk management resources.6. Balanced between the 1 and 5 year CAGRs with the assumption that expenses will be reduced by synergies with Allstate brand.