Allstate Corp (The) (ALL) — Q1 2015 Earnings Call Transcript

Thanks, Jonathan. Good morning, everyone, and thank you for joining us today for Allstate's First Quarter 2015 Earnings Conference Call. After prepared remarks by Tom Wilson, Steve Shebik, and myself, we'll have a question-and-answer session. Yesterday, we issued our news release and investor supplement, filed our 10-Q for the first quarter, and posted the slides we'll use this morning. We also posted a document describing our 2015 country-wide, excluding Florida, reinsurance program. These are all available on our website at allstateinvestors.com. Our discussion today may contain forward-looking statements regarding Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2014, the slides, and our most recent news release for information on potential risks. Also, this discussion will contain some non-GAAP measures for which there are reconciliations in our news release and in our investor supplement. We are recording the call, and a replay will be available following its conclusion. And I'll be available to answer any follow-up questions you may have after the call. Now I'll turn it over to Tom.

Good morning, thank you for investing your time with us. I'll begin with an overview of our results on Slide 2. Then Pat and Steve will go through the results in detail. Also here to engage with you are Matt Winter, Allstate's President, also the leader of our Allstate branded operations; Don Civgin, the President of Emerging Businesses; Kathy Mabe, who leads Business to Business in Encompass; Judy Greffin, our Chief Investment Officer; and Sam Pilch, our Corporate Controller. So let me begin, with the strength of our strategy is really evident in this quarter's results. We have a broad-based business model that serves a wide range of customers with a broad range of products. What that does is it enables us to generate profitable growth, despite a changing economic and competitive environment. Our results reflect progress on all 5 operating priorities for 2015, which are to grow while maintaining the underlying combined ratio, practically manage the $80 billion investment portfolio and invest for sustainable value creation. Our position in multiple customer segments, insurance products, geographies, and investments enables us to continue meeting our short and long-term commitment to shareholders, our customers, our agency owners, and employees, as well as local communities. If you turn to Slide 3, you can see the financial outcomes of our performance in the first quarter of 2015. We continue to build growth momentum by adding 875,000 policies over the last 12 months, and now reaching $34.4 million. When combined with price increases, this resulted in net written premium growth of 4.8%. The benefit of a segmented approach to the market was evident as growth continued to accelerate in the Allstate brand, which gave us room to slow growth in the Esurance and Encompass businesses, given our economic targets for those 2 businesses. The recorded combined ratio was 93.7, which was better than last year. This decline reflected lower catastrophes, which also shows the benefit of having a diversified product portfolio, as an uptick in the Allstate brand auto combined ratio to 96.8 in the first quarter was offset by an Allstate brand homeowners combined ratio of 78.7. Esurance and Encompass; they're still making progress on improving value creation and the results still need to improve. When you take out the volatility associated with catastrophes and reserve changes, you can see that the underlying combined ratio deteriorated slightly, but within the full-year range of 87 to 89. This level of profitability does include expenses, which build long-term value, such as growing Esurance and investing in long-term growth platforms, and I'll talk about that in just a minute. Investment results were good when adjusted for the reduction of assets due to the sale of Lincoln Benefit Life in the second quarter of last year. Our proactive approach to investing to achieve attractive risk-adjusted returns, not just operating income, continues to benefit our overall results and we had strong results from limited partnerships, which offset the impact of reducing interest rate risk in the fixed income portfolio. We also had really good results from a more focused but smaller Allstate Financial. Total net income was $648 million in the quarter, $1.53 a share as you can see in the box at the top of that slide. Operating income was $1.46 per share, which was 12.3% higher than the same quarter last year, which reflected both higher income and fewer shares outstanding. The first quarter Property-Liability results for each customer segment are shown on Slide 4. I'm just going to comment on the circled numbers in each segment, starting with the Allstate brands in the lower left, which serves, of course, customers that prefer local advice in a branded offering. Policy In Force growth accelerated across all products as Matt's team pursues a comprehensive and fully integrated growth plan. The underlying combined ratio for this business, which represents 90% of our total premiums written, was 87.4 in the quarter. Esurance in the lower right focuses on customers who prefer a self-serve approach, but want a branded offering. Policy growth slowed to 8.9%. The underlying combined ratio of $116.5 million included advertising expenses, which are being made to grow share and the costs associated with expanding the product offering and the geographic reach. As a result, we look at the underlying loss ratio, which was 78.2 in the first quarter, which still needs to be lowered. Moving to the customer segment that prefers local advice but is brand neutral, which is in the upper left, that's the segment that we serve with our Encompass business. This business got marginally smaller in the first quarter as we seek to improve profitability. So as a management team, we're committed to both delivering these current results as well as investing in sustainable value creation as shown on Slide 5. While these items on this page all had a negative impact on current quarterly earnings, they are an important driver to shareholder value. So therefore, we're completely committed to them. We made good progress in modernizing our operating model. We also continued laying the foundation to reduce low-value-added activities handled by Allstate Agencies, while increasing their ability to provide trusted advice to customers. Since acquiring Esurance in 2011, we've grown market share by repositioning the brand, expanding its geographic footprint and its product offerings, and supporting this with advertising investments that are higher than justified by current premium levels. We continue to invest in share growth as long as lifetime returns on new customers exceed our cost of capital. We are also seizing the opportunity that comes with connecting customers to telephony by expanding our telematics offering. We now have over 750,000 customers using Drivewise and DriveSense. We are also innovating our roadside service operating model, which has over 3 million members under the Allstate brand and many millions more under our weight label offerings. So in summary, our goal is to both deliver today and build for tomorrow. And now let me turn it over to Pat to go through the Property-Liability results in more detail.

Thanks, Tom. I'll begin by reviewing our Property-Liability results on Slide 6. Starting with the chart on the top of this page, Property-Liability had earned premium of $7.4 billion in the first quarter of 2015, 5.1% higher than the first quarter of 2014. Recorded combined ratio of 93.7 was 1.0 lower than the prior year quarter driven by catastrophe losses of $294 million, which were 33.9% lower than the prior year quarter. The underlying combined ratio of 89 was 6/10 of a point higher than the first quarter of 2014. Net investment income for the Property-Liability segment increased 14.7% from the first quarter of 2014, due primarily to strong limited partnership returns in the quarter. As a result, Property-Liability operating income in the first quarter was $555 million, 18.6% higher than the first quarter of 2014. The Chart on the lower left shows Net Written Premiums and Policy In Force growth rates for Allstate Protection. The red line representing Policy In Force growth shows the continued positive policy growth trend that is being driven by the Allstate brand. Policies In Force grew by 875,000 or 2.6% from the first quarter of 2014. The Allstate brand accounted for 86% of policy growth in the first quarter of 2015, based on the strength of Auto, Homeowners, and Other personal lines. Total premium grew 4.8% in the first quarter of 2015 compared to the same period last year, reflecting the combination of policy and average premium increases. Exhibits to the right of this chart displays the Property-Liability recorded and underlying combined ratio trends. You can see the recorded first quarter combined ratio was lower than the historical first quarter average and below the first quarter of 2014, due to lower catastrophe losses. Total underlying combined ratio of 89 was more in line with the historical trend and was impacted by higher auto losses in the first quarter of 2015 versus the prior year quarter. Page 7 highlights Allstate brand Auto growth and margin trends. Growth trends are highlighted in the top or in the chart on the top. Policies increased by 623,000 in the first quarter of 2015 or 3.2% higher than the first quarter of 2014, driven by continued broad-based increase in new business and stable retention trends. Auto items In Force grew in 42 states in the first quarter of 2015. Net written premium grew 5.7% as average premiums increased by 2.3% over the prior year quarter. The chart on the lower left shows the past 3 years' quarterly recorded and underlying margin performance for Allstate brand auto. The recorded combined ratio was 96.8 in the first quarter of 2015, 3.4 points worse than the first quarter of 2014, and the underlying combined ratio was 95.6 in the first quarter, 1.8 points higher than the prior year quarter. Further details are shown in the chart on the bottom right. Annualized the average earned premium per policy, shown by the blue line, continues to increase over the prior year in the first quarter. Average underlying losses and expenses per policy, shown by the red line, increased 4.1% in the first quarter compared with the first quarter of 2014 and was impacted by 3 separate drivers. First, Allstate brand prior year auto reserve re-estimates were unfavorable. About half of the impact is due to litigation settlement accruals on older cases, while the rest is driven by variations in reserving. Second, bodily injury frequency increased 6.8% compared with the first quarter of last year. The increase is explained partially by comparisons to a very favorable quarter of BI frequency in the first quarter of 2014, but it also reflects higher frequency experience across our book of business. Third, property damage frequency increased 2.1% in the first quarter compared with the prior year quarter. This increase is due in part to adverse winter weather in the eastern part of the country. However, we're also seeing higher PD frequency this year than we did for most of last year. You may recall that we did experience elevated property damage frequency in last year's first quarter due to widespread winter weather. When we look at bulk coverages over a multiyear period, the trends across BI and PD are very consistent. As you'd expect, we've continued to dig into the drivers of increased frequency since the trends began to emerge in the fourth quarter of last year. Leverage our data and analytic capabilities to continuously analyze our business from the macro level down to the micro segments that our local teams used to underwrite and price. Some examples of items we've been investigating include the impact of new to renewal loss ratio relativities, often referred to as the new business penalty for writing higher volumes in new business, state mix and geographic mix within states, higher growth books of business versus stable or moderately growing books, monoline versus multiline, liability only versus full coverage, and quality characteristics such as insurance score, driver age and household composition. Based on our analysis, we continue to be comfortable with the quality of both our new and renewal business. This analysis also reinforces our conclusion that recent frequency fluctuations are due primarily to macroeconomic trends in weather. And that while we believe industry-wide auto frequency will continue its long-term downward slope over time, there will be periods of variability within that trend that are driven by external factors. Our regional teams have been quick to identify these developing trends on a local market basis and have taken and will continue to take appropriate underwriting and pricing actions to achieve our targeted returns. Given current trends, we expect the level of underwriting changes and rate increases to accelerate. Improved rate increases in April 2015 exceeded that of the entire first quarter of 2015. The result of our regional teams adjusting the timing and the amount of rates that were already planned in the year. We do not believe these actions to maintain margins will materially impair current policy growth trends. Moving to page 8, let's discuss Allstate brand homeowners. Growing homeowners in parts of the country that are adequately priced and have acceptable exposure to catastrophes. Policy growth is being driven by both increased new business and improved retention. The chart on the bottom left shows the continued strength of homeowner profitability and the earnings benefit we experienced in the first quarter of 2015 from having a diversified product portfolio. Recorded combined ratio was 78.7 for the first quarter of 2015 and the underlying combined ratio of 64.5 improved by 1.3 points from the first quarter of 2014. Moving to the lower left, annualized average premiums shown in blue continue to improve the slowing rate versus recent history, reflecting improved returns. Average underlying losses and expenses per policy were essentially flat to the prior year quarter. Non-catastrophe frequency in the first quarter of 2015 was 7.9 points below the prior year quarter, and the 6.6% increase experienced in paid severity was due to the claim count mix. Individual homeowners severity parallels are performing within expected ranges. Page 9 provides an overview of growth and profit results for Esurance and Encompass. Starting on the upper left of the slide, Esurance's rated policy and total network and premium growth continues to slow due to ongoing pricing and underwriting actions underway to ensure long-term profitable growth, as well as the increasing size of the business. Total Esurance premiums grew by 8.9% in the first quarter, policies in force grew 8.6% compared with the first quarter of 2014. Esurance profitability shown in the upper right chart was impacted by higher claim frequency and higher severity on collision and property damage. Esurance's expense ratio decreased 10.7 points in the first quarter of 2015 compared with the prior year quarter, given last year's first quarter spend to reposition the brand. Spending on expansion initiatives contributed approximately 2.8 points to Esurance's expense ratio in the first quarter compared with 2 points in the first quarter of 2014. Encompass policy in force growth, illustrated by the gray line in the chart on the bottom left, fell to negative 2/10 due to lower new business and lower retentions, the result of ongoing profit improvement actions. Decline in policies also impacted net written premiums which is 1.4% lower in the first quarter of 2015 compared with the first quarter of 2014. Encompass' first quarter recorded combined ratio of 95.6 improved by 7 points, primarily driven by lower catastrophe losses. And now I'll turn it over to Steve to cover Allstate Financial investments and capital management.

Thanks, Pat. Slide 10 provides an overview of Allstate Financial. As we've discussed previously, we strategically repositioned Allstate Financial over the last several years to focus its business on Allstate brand customers. The most recent action was to sell Lincoln Benefit Life and further integrate the life business into the Allstate brand value proposition. Allstate Financial results for the first quarter are highlighted in the bottom of the slide. Premiums and contract charges increased 2.9% when compared to first quarter of 2014 results, excluding LBL. Growth was driven primarily by increased additional life insurance renewal premiums, Allstate benefit accident and health insurance business. Allstate Benefits now has 3.2 million policies in force, making it a major player in the voluntary workplace benefits business. Operating income for the first quarter was $134 million, 13.5% lower than the first quarter of 2014 after adjusting for the disposition of Lincoln Benefit Life. This reduction in operating income was driven primarily by lower investment income related to prepayment fees and litigation settlements, and higher life mortality and expenses than the prior year first quarter. Moving to investments in the chart at the top of Slide 11. Our portfolio total return was 1.7% for the first quarter. The components of the total return continue to show that the income yield remains consistent while the valuation impact varies from quarter to quarter. Most recently, being driven by reductions in interest rates since year end 2014. Our portfolio valuations have not been materially impacted by lower energy prices, as the majority of our assets with exposure to the energy sector are investment-grade corporate bonds, which are currently in an unrealized gain position. The lower half of the slide provides the investment income in yield for the Property-Liability and Allstate Financial portfolios. The Property-Liability interest-bearing yield in the lower left graph reflects the impact of prior duration shortening and ongoing investments in a low-interest-rate environment. The interest-bearing portfolio's yield is close to current market yields and is expected to respond more quickly to changes in interest rates as a result of its shorter maturity profile. Moving to the Allstate Financial portfolio in the lower right. The interest-bearing portfolio yield is higher and more stable than the Property-Liability segment due to its longer duration and its cash flows being used largely to fund annuity reductions. The drop in investment income primarily reflects the LBL disposition and the aforementioned reduction in annuities. Total first quarter limited partnership income was 39% higher than the same period last year, helped by a strong quarter for our real estate investments. Economic conditions and high liquidity levels have contributed to favorable market performance, which is reflected in strong limited partnership results in both portfolios. As you can see from the charts, limited partnerships and other equity investments bring a higher degree of variability to our income, while more volatile, we expect these investments to increase returns in both portfolios over the long-term. Slide 12 provides an overview of our strong capital position and excellent shareholder returns at the end of the first quarter. During the quarter, we returned $1 billion in cash to common shareholders through a combination of common dividends and share repurchases. We completed our 2014 $2.5 billion common share repurchase authorization in February by initiating a new $3 billion authorization. A $500 million accelerated repurchase program was executed in March, which should be completed by mid-June. As of March 31, we had $2.4 billion remaining on our current repurchase authorization, which is expected to be completed by July 2016. We provide additional information on our share repurchase activities this quarter in the chart on the right. In the table under the chart, you can see the impact of accelerated share repurchase initiations and settlements for each of the past 9 quarters. We have also posted an explanatory document on ASRs on our Investor Relations website this morning. Yesterday afternoon, we communicated the details of our 2015 catastrophe reinsurance program, excluding Florida. We rolled our expiring nationwide contract in a similar to lower-cost agreements and added approximately $300 million of coverage for growth in our business. As in prior years, I challenged our team to push the envelope a bit. You will see this year's program race through the historic 3-year duration of traditional reinsurance with 2 7-year, 2 limit multi-pillar reinsurance covers to provide further stability in our business for our customers. We expect to place our Florida program in the second quarter and will communicate details at that time. Now let's open up the call for your questions.

So I wanted to start off with a question about growth. You guys have nicely increased your production coming from the core agency channel over the past few years. And there are a bunch of different things that have been going on. You talked about new younger agents coming in to sort of freshen the footprint, also investing in developing agency management strategies and in cross-selling. Now you're talking a bit about sort of evolving how you run agencies to focus more on higher value-added advisory relationships. I was trying to go through an exercise in my mind of mapping the improving production that you're actually seeing with some of the things you've been trying to do. I was curious if you could help us sort of walk through if these are your initiatives playing out, or is this more a function of your willingness now to write more homeowners and basically, having gone through a period of re-underwriting and now kind of having easy comps?

Good morning, Josh. Thank you for the question. Matt will take you through some of the specifics. It's a good question because it really gets to the substance of that, which we are doing; which is our strategy is comprehensive, but it's designed to support profitable growth in any environment. Oftentimes, we might get into an environment where costs are going up and we have to raise prices; everybody thinks that it's all about price. And it is, currently price is obviously very important, but Matt has a much more comprehensive program than that.

Good morning, Josh, and thanks for the question. As you correctly pointed out, we have seen some nice growth overall in the business, both on the auto and the homeowners side. We've also seen growth in the consumer household goods, and we're beginning to see some growth in the life and retirement space as well. We don't believe that it's any one particular item that's led to that. As Tom mentioned, the entire team views this as one complex system, and we try to pull multiple levers on that system and have multiple influences on it that feed off of each other, as most self-generating systems do. So what we're doing now is a function of trying to improve—we use the phrase bandwidth and efficiency—so we're trying to lay more pipe and improve the efficiency and productivity of that pipe. So we're adding a lot of agencies and we're adding agencies in a strategic manner. Not just allowing them to grow and develop wherever they want, but to thoughtfully pick geographic areas that have been under-penetrated in the past, and attempt to recruit in a more targeted way. So that would include some areas that historically we have shied away from; some of the more non-urban areas, some of the heartland, the middle of the United States, some of the rural areas. We're approaching that in a fairly thoughtful way using a bunch of different tools, including our regular agency system. We're also using our Allstate auto dealer program, which enables us to put Allstate Agencies inside of auto dealerships. We're also using selective independent agency expansion in some of those rural areas to maximize our points of presence around the United States. We're doing a tremendous amount of work to improve the productivity, efficiency, and effectiveness of those agents once they are there, including the Trusted Advisor work you referred to, where we're trying to take away some of the low-value-added work that distracts them, doesn't add value to the customer, and just eats up agency time. We're trying to use data analytics, emerging technologies, as well as centralized support services to pull those out of the agencies, freeing them up for more value-added advice, consultation, and service on coverage options; and enabling them to really do what we think that we have as our competitive advantage, which is to have a local advisor in the community, who actually knows about those customers, can counsel them appropriately, and form a relationship-based business, not just a transactionally based business. The last thing I'll point out on our growth is that while Tom said, and correctly, it's not all about price, it is to some extent driven by our competitiveness and the way we approach the market. That’s not just agent behavior; that’s not just our points of presence, but that includes the rest of the system—our marketing effectiveness, our lead generation capabilities, our ability to offer all the products those customers need; not turning any customers away and letting them go to other companies for one of those products. So that's where the homeowners—opening up homeowners and expanding our product portfolio, including life and retirement comes in. It allows us to serve the customers holistically, say yes to more customers, and not turn many away. It's where our new rating plans, which provide a—through broadening the target—allow us to offer a more competitive price to a broader group of customers coming in. I would say that the growth that we've achieved is a product of all of those factors, not any one in particular, not any one in isolation. It's one of the reasons that we feel confident that this sustainable growth will continue, because it's not based upon one lever; it's based upon the system really functioning very effectively as a system.

Okay. That's great, Matt. Maybe just a quick question on margin expansion in Encompass and Esurance. I'm wondering if you guys could talk and give us a little bit more of the color, the back stories sort of what's creating the opportunities here? And then, help us understand to sort of, to what long-term sort of goals you're trying to drive these 2 businesses to? I mean, when you look at public comps, people make more money and attract business if you're larger and more mature and people make more money at a high net worth business than you do. I’m wondering if you could long-term drive for these 2 franchises to have profitability to be in line with the core Allstate channel?

Let me make an overview comment, then Don and Kathy can say something. What gives the opportunity, as you appropriately classified it, is that it's not good enough. So we have some work to do there. But they're different stories, right? So Esurance, we would like to continue to pick up share in that segment. So we continue to invest ahead of where other competitors would invest in terms of advertising as a percentage of revenues. We could obviously make that business profitable by shutting down advertising and growth, and we're choosing not to do that because we want to grow in that segment. The Encompass segment is a different story. It's much more competitive because you're inside the agency. So you have to be more careful as to how you grow there and so it's a different set of stories. We're not explicitly seeking to invest in growing share. We're investing to get profitable growth. So Don and Kathy, maybe you can give a quick answer to those two.

Yes, Josh. As far as the Esurance goes, I think we've been very consistent since we put the company together, that our goal is to run the business in a way that's economically attractive over the lifetime value of the business we're writing. That then tends to take out this accounting anomaly of the advertising, which because of the direct model gets expensed immediately in the quarter it's spent, even though it's designed to build value over the lifetime. So when you look at that equation of running the business on economic value, I think you have to breakout loss ratio, and I'll say advertising expense separately. On the loss ratio, we still have room to grow. That's what I said last quarter too; we saw similar trends to the Allstate brand in the first quarter. We are also accelerating rate increases and taking underwriting actions, and there is a need to improve the loss ratio in the Esurance brand over the course of this year. On the advertising side, it's a little bit more complicated. As Pat pointed out in his opening comments, there tends to be volatility from quarter to quarter. Part of it is cyclicality, but part of it is what we're trying to accomplish. Last year in the first quarter, we spent a lot of advertising dollars because we were repositioning the brand. This year, we spent less. You see this in the expense ratio going down a little over 10 points. We still ran the awareness ads in the Super Bowl; in fact, we ran two of them but we didn't heavy-up afterwards, like we did last year because of repositioning. When we talk about running Esurance on an economic value basis, including advertising; on a year-over-year basis, we continue to look at what the right amount is to make sure that the business we're writing is profitable. But you'll continue to see some variation from quarter to quarter.

Josh, this is Kathy Mabe. Thanks for the question on Encompass. You can see from the investor supplement that we're starting to really lean into rates; you can see it on Page 13. But keep in mind, a lot of our rate actions will come mid-year and in the fourth quarter for Encompass. Part of what you're seeing, the best way to tell the story is on Page 18 of the investor supplement. You can see that we made progress on the underlying combined ratio by about a point, but there is a lot more work to do. From a policies in force perspective, we're about flat with where we were a year ago. What's driving the net written premium change is the change in mix, as we really put strong action in a couple of highly unprofitable states, which have high average premiums, and redirect growth to more profitable states, which have lower average premiums. These actions combined will allow us to position Encompass for long-term success. So we're not looking at just short term measures, but at how do we reposition, as Matt talked about—to reposition the channel for long-term profitable growth.

I remain pretty confident that you guys know what you're doing on pricing, and will keep the margins within your targeted level on auto. I'm less confident that you could continue to grow PIF at the current rate. In fact, you said, I think in your script that you don't think the PIF growth will be materially negatively impacted. Where are we in the environment on pricing at Geico's commentary in Q1? I think it's helpful they're going to be taking rate actions. Do you feel like you're with the field at the rate actions you're taking? Or maybe pushing ahead a little bit and may lose some PIF momentum?

Bob, I think in terms of your level of confidence and the level of our confidence, the first thing you have to get through is this: is this our problem or is this everybody's problem? If it's our problem, then obviously the actions we take will be different, and the impact on shareholder value and long-term value creation is different than if it's everybody's problem. If it's everybody's problem, then the actions we take and the impact on both growth and profitability, customer satisfaction, and the ability to expand agencies is completely different. So we feel like this is, at this point, everybody's problem. Matt can help you understand why we believe that's the case. If you look at the relative amount of increases necessary to account for increased cost of auto insurance, and that's all that we're talking about in this particular case is auto insurance, not the broad portfolio we have. If you're just talking about auto insurance, it's relatively small dollars when it comes to amount per customer per year.

Yes. Bob, it's Matt. Let me expand a little bit on what Tom just said. As we talked about last quarter, actually, the frequency pressure is a combination of miles driven and weather. I believe I said last quarter we thought that miles driven was about three times as influential as the weather, and that pattern seems to have been pulled up again this quarter. However, we want to validate that and verify it. As Pat referred to in his opening remarks, we did a very intense deep dive into our business to ensure that the increases in frequency we're seeing are proportional and consistent across multiple segments of the business, no matter how you cut it. We wanted to ensure that these weren't our problems, but were, in fact, external. We looked at new and renewal business, higher growth states versus lower growth states, and across quality characteristics. Based on our analysis, we continue to be comfortable with the quality of both our new and renewal business. We also believe that recent frequency fluctuations are due, primarily, to macroeconomic trends in weather, and that, while we believe industry-wide auto frequency will continue its long-term downward slope over time, there will be periods of variability within that trend driven by external factors. Our regional teams have been quick to identify these developing trends on a local market basis and have taken and will continue to take appropriate underwriting and pricing actions to achieve our targeted returns. Given current trends, we expect the level of underwriting changes and rate increases to accelerate. Improved rate increases in April 2015 exceeded that of the entire first quarter of 2015. The result of our regional teams adjusting the timing and the amount of rates that were already planned in the year. We do not believe these actions to maintain margins will materially impair current policy growth trends.

Let me make sure you really focused on it. There was a statement Matt made in there, which I want to make sure you're really focused on, which is from a shareholder value standpoint, our auto business generates really good returns, both over time and even this quarter. So 96.8 was higher than we would have liked in the quarter. But if you look over the last 12 months, it's 95.6. That's a recorded number, that's not an underline, that's not anything. That is a really good return on auto insurance. We wanted to make sure we continue to earn that return for our customers—give that product to our customers at the right price so we earn a good return for our shareholders. We don't feel like we're in a position where we have to react expeditiously because there is something that is our problem.

Great, that's very comprehensive. My follow-up is on your reinsurance strategy. It looks like you maintained your retention of $500 million. I just wonder, like, with the reinsurance environment being as it is, what’s your strategy to further lower your volatility, possibly reducing your current retention level? What about the coastal market? If you can afford to buy long-term affordable reinsurance, will you be more interested in expanding into these markets?

I'll address that in this way. As you noticed, we effectively placed the same program we did last year, $500 million retention. The nationwide coverage rolled over the expiring contracts. We brought $300 million more of coverage as our business is growing. As you noted, 2 of the contracts above the nationwide program, we placed for 7 years in the additional reinsurance market. We think this was a major breakthrough in terms of our coverage because we need 7- to 10-year coverage to provide stability in our capital base and for our customers. In terms of buying below, making that $500 million less, we look at that, and given our capital base, we don't think we need to do that. We're in business to make good returns, and we don't think that economically it makes sense to really bring that down much further. As for the coastal business, Matt's talked about the optimization of our exposure on the coast. We continue to work on that in terms of agency placements. In addition to just getting reinsurance, we want to have the people in place; we want to have a spread of risk, not only the coast but the central part of the country, which provides the most optimal reinsurance buy and the optimal economics for the business.

Just a follow-up on the reinsurance program. A part of it goes out 7 years; does that have positive implications for capital or is that layer just too small?

The implication—this is Steve, again—is that we have bought at a high enough level to appropriately meet the capital tests that the rating agencies have. The 7 years is really for us because it provides stability in our capital base and for our customers.

Another quick follow-up for Steve, just on the reinsurance program. Could you guys give us a dollar amount or even just, directionally, what you expect to save on your reinsurance program over the next 12 months?

If you look at what we placed in the rollover of our nationwide program, it's one-third of our program, and market pricing today is 10% to 12% better than it was a year ago. We reinvested a good part of that in buying this other $300 million of coverage at the top. So you shouldn't see a whole lot of savings. If you remember, most of it actually just goes through our rates on a little bit delayed basis. But more than 80% of our reinsurance cost are baked into the rates. So if the reinsurance costs go up, the rates go up; as they go down, and they have the last handful of years, our rates actually go down.

Got it. That's helpful. And then, I guess just shifting gears to the Allstate brand, just a little more color on the 8/10 of a point of unfavorable reserve development in the auto. It sounded like about half is ascribed to litigation settlement accruals. I know that segment has been that redundant for a while, I think, because of the severity-related reserve releases. Just curious what drove the rest of the noise there?

Let me do it—look at it in a couple of ways. First, our reserves are appropriately stated in the balance sheet, and they are subject to multiple internal and external reviews on a regular basis. I just want to make sure we get that out of the way. Second, we do stay that way because we use a variety of reserving methods, and they react quickly to the underlying changes in the data we see. So on the first point, I want to reiterate: the reserves are established by a team under Sam Pilch, our controller, and under myself. That is separate from our business units. We have independence in terms of within the company. They are independently evaluated by both our auditors and on an annual basis by our appointed actuaries. So that is the process to ensure the integrity of the reserves. In terms of the changes, which is the second point: when we use a variety of methods to enable the accuracy of our reserves—when we have changes made in the underlying data, we react quickly. For instance, this quarter, as you noted, about half of the unfavorable prior reserve adjustments related to litigation accruals, which really were from many years ago. Secondly, it has to do with an increase in case reserves for our major medical claims. Those case reserves were increased earlier than our past patterns because of changes we've made in our claim processes to both improve our customer experience and better manage the claims. While we believe that acceleration of what we think would ultimately have been upward development in the claims, we increased our reserves for both last year—so the last 2 or 3 years—and also this year's severity given the long duration of the settlement of medical claims. So this increase was determined using a variety of methods. We continue to look at those, and as the period of time goes along, we believe that the methods will come together as we do the final payouts and the cases are settled.

Yes, that's helpful. And I guess, I had one more. It sounds like you guys are of the view that some of the frequency blip might be an industry issue in general. I'm just trying to understand, why might we have seen this more at Allstate now and perhaps not in a lot of peers? I'm not sure if it's geographic or anything along those lines. Also, just drilling down within the customer base, where are you seeing above-average increases in miles driven versus below-average?

I think as it relates to competitive, it's hard to answer that question, right? You saw Geico's Q; you can look at Progressive's numbers, but it's always a question in part of like when you start, like you're looking at percentage ups versus absolute levels. There is obviously some state mix in there; there is weather-related mix. There is how you grew your business. We can't answer the question as it relates to the other people. We can answer the question which Matt talked extensively about, which is we don't see anything in the way we have done our business—and we have the ability to slice and dice our data, as if we were our own competitor, right?—so we can slice and dice it in a whole bunch of ways, and we do think it's comprehensive. Matt, do you want to take the second piece?

The second piece was—I'm sorry, where we're seeing miles driven? Miles driven is essentially— I think Tom in the last call referred to it as an indicator of economic activity. That's really a way to view it. It's been very consistent when you look at miles driven in those regions of the country that have seen an increase in overall economic activity, lower unemployment rates, or higher investments or higher home construction. There are a whole bunch of different ways of looking at it, but economic activity has spurred miles driven, which has spurred frequency.

So just a couple of questions here. How important are channels? If we look at captive versus the independent agency channel, and your ability to push for pricing to offset the impact of these loss trends that you're seeing. It seems like, in retentions, looked pretty good in the quarter; new applications were higher. I'm just trying to get an idea— is it really just a timing difference in your ability to kind of right-size, or do you expect to start seeing some pressure from a ceiling on pricing?

Mike, I would start with; it's really about best value for the customer based on what they want. If you look at the Allstate agency segment, they want local advice, they want a broad set of products and services, and they obviously want a good price as well. And so, it is price-sensitive. But if you sell them two cars and a house and a boat and all kinds, raising their price by $15 or $20 a year isn't going to change that relationship or that value equation in a substantive way. So we tend to look at it in terms of what's the customer value proposition and how you give them best value. That's what the quality of the service and the product is as it meets their needs. And then, what is the cost of it? Obviously, the channel then subjects that value proposition to different levels of competition. When you're in the Allstate channel, you're not really subject to competition from a whole bunch of other people because you've got that local relationship. If you're in the independent agency channel, there is more competition around that value proposition, so it tends to be a little bit more price-sensitive up there. Those people in that segment tend to value brands a little differently; they would sort of if I know the company that's good enough as opposed to I really have a long-standing relationship and I've been part of Allstate for a long time. That person tends to be less price-sensitive. There tends to be more price competition in the upper left of our four quadrants, that's the independent agency channel. There also tends to be a little more competition on the right-hand side of the page, which is the self-serve segment, because the relationship is not as strong. They're doing a lot of the work themselves, so they can go out and get it. There still is in the branded segment where Esurance is highly focused, a fair bit of focus on am I getting the right kind of product and service, and is it easy for me? So it's not just how do I go get another $5 off on this price? But I would say the lower left tends to be the least price-sensitive segment out of all of them.

Got it. I guess for Matt. So taking that into consideration, you've obviously taken some rate action in Q4 that you talked about, and you took more in Q1, then you took more in April. Where are we in the process in terms of kind of getting us back to where we were before we saw this change in trend? Have those actions now sort of addressed the issue at this point? You mentioned pulling rate forward; should we expect that you will continue to balance an opportunity for rate in the captive channel to sort of get yourself back to where you want to be? Is the environment at this point conducive to that?

We are earning good returns. We're doing a great job for our customers. Our customer Net Promoter score is up. We're growing the business, we're getting good returns in the auto insurance business. I don’t want the conversation to be too— I mean, we are reacting to what is normal in any market place in any business, which is as you have your cost go up, you work to make sure that you're maintaining the returns where you want them to be. First quarter was a slight blip up. But we're doing what we normally do, which is, what we're trying to explain is; we look to see is it our problem or everybody's problem? If it's everybody's problem we'll just keep compete and keep growing. So I don't think this is about getting back to some place versus being at a place we don't want to be. We had a good profit this quarter. We made really good returns on our homeowner business in part because of low caps, but we didn't make as much money in auto insurance this quarter, in part because of weather and in part because we have to adjust prices reflecting economic activities. The strength of what we got going is we have lots of levers we can pull, whether that's by product, by channel, by customer segment, the way we think about it to help us achieve what we're supposed to do for our shareholders, which is to get a good return. Last 12 months, we've had a 13% return on equity, and we just gave back $1 billion in cash. So we think that's a pretty good offer. There is a couple of tailwinds as the country continues to grow, and given where we are, we will continue to grow with it. The other part to that is in the investment portfolio; we are basically long U.S. growth; the way we positioned our portfolio being shifting into more performance-based investments and keeping our duration short in the investment portfolio. So as growth goes up, then you would expect to be able to earn higher returns in your fixed income portfolio at some point of time, and that would be a huge tailwind for us.

I was trying to get your perspective on the underlying combined ratio. The guidance for this year was 87% to 89%. The first quarter was 89%. I'm just trying to gauge your level of comfort to stay within the outlook for the full year.

Jay, if we wanted to change, we would've said we wanted to change. I would point out it's a full year number, we are committed to that full-year number. We see no reason to change that number at this point. Obviously, you would prefer to start a year at the low end of your range rather than outside your range, which we did not. Being at the high end of the range just means we have to continue to work to get our commitment done. I would also point out that 90% of our business had an underlying combined ratio of 87.4—that's the Allstate brand piece. So we feel like we're in good shape for running the business the way we want to do it. Let me close it off because I know you have other things, and we are appreciative of the time you give us. We had good results this quarter, good balanced results. You can see the strength of the broad base of our business model, which is not just one product, not just one customer segment, not just one investment offering, and investment strategy. We have a lot of levers we can continue to pull to earn good returns for our shareholders. We continue to generate not only good returns on equity, but also good cash returns for our shareholders. We expect to continue to do that as we go forward. Thank you very much, have a great quarter.