Allstate Corp (The) (ALL) — Q2 2016 Earnings Call Transcript

Thank you, Jonathan. Good morning and thanks, everyone, for joining us today for Allstate’s second quarter 2016 earnings conference call. After prepared remarks by our Chairman and CEO, Tom Wilson; Chief Financial Officer Steve Shebik, and myself, we’ll have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q for the second quarter, and posted the results presentation we’ll use this morning along with an update to our 2016 countrywide reinsurance program to reflect the replacement of our Florida program. These documents are all available on our website. As noted on the first slide, our discussion today will 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 2015, 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 our investor supplement. As many of you know, this will be my final earnings call as the leader of our Investor Relations team as I transition to leading our Encompass team. I’m leaving Investor Relations in the capable hands of John Griek, who will be a great partner for all of you going forward. John and other members of our senior leadership team will be able to answer any follow-up questions you may have after the call. And now I’ll turn it over to Thomas.

Good morning. Thank you for investing your time to keep up with Allstate. I’ll provide an overview of results, and then you’ll hear from Pat and Steve. We also have Matt Winter, our President, here with us. The second quarter results highlight really how our proactive approach to external conditions helps us achieve our objectives and create long-term shareholder value. We earned $242 million despite seasonally high second quarter catastrophe losses, a record hailstorm in Texas, continued increases in the frequency of auto accidents, and the impact of Brexit on the investment markets. While we did not predict all of these would happen, we considered the possibilities when we executed our business plan. Operating income was $0.62 per share for the quarter, reflecting a reported combined ratio of 100.8% and an underlying combined ratio of 88.6% for the quarter and 87.9% for the first six months, which is in comparison to our full-year forecast of 88% to 90%. Allstate’s financial strategic repositioning is working, with operating income up slightly to $120 million. Investment returns were strong at 1.9% for the quarter, about half of which is from current income and the other half is from appreciation of the bond portfolio. Let’s go to slide three, which provides an overview of the second quarter operating results for our core property/liability customer segments. As you know, we have a consumer-focused strategy and have over 40 million policies outstanding, of which 34 million are for property and liability protection. The results of each of the four segments of the property/liability market are shown in the diagram on the bottom of the page. Allstate’s agencies provide local advice on a broad range of branded products. It represents about 90% of total property/liability premiums. Total Allstate brand policies in force declined from the second quarter of last year by 1%, as we intentionally reduced new business levels until we improve returns on capital for auto insurance and the impact of these programs on customer retention. While auto policies declined, net written premium increased by 3.9%, which has essentially offset the impact of continued increases in frequency and severity.

Thanks, Tom. I’ll start by reviewing the property/liability P&L at the top of slide six. Property/liability earned premium of $7.8 billion in the second quarter of 2016 was 3.5% higher than the same period last year. Through the first six months of 2016, earned premium grew by 3.8%. Catastrophe losses through the first six months of 2016 meaningfully impacted underwriting income. Second quarter catastrophe losses of $961 million were 20.6% higher than the prior-year quarter, while catastrophe losses of $1.8 billion for the first half of 2016 were almost $700 million higher than the first six months of last year. These higher catastrophe losses drove recorded combined ratios of 100.8% in the second quarter of 2016 and 99.6% for the first half of 2016. When we exclude catastrophes and prior-year reserve re-estimates, the underlying combined ratio of 88.6% in the second quarter and 87.9% in the first six months of 2016 were both below their respective levels in 2015.

Thank you, Pat. Slide 12 provides an overview of Allstate Financial’s results for the second quarter of 2016. We have refocused Allstate Financial over the past several years primarily on business written through the Allstate agencies and on voluntary workplace products for customers of Allstate Benefits. The annuity product line is closed to new business and is effectively in run-off. Premium and contract charges totaled $564 million in the second quarter of 2016, an increase of 5.2% in the quarter versus the prior year. The solid growth in premium and contract charges was driven by Allstate Benefits, which grew 9.6% in the second quarter, with an increase of 468,000 policies over the prior 12 months. Allstate Financial operating income decreased to $120 million in the quarter from $139 million in the prior year. Across the top of the slide, we show net and operating income for each business. Life business operating income of $64 million in the second quarter increased $9 million compared to last year, driven by favorable mortality experience and premium growth.

Good morning, everyone, and congratulations, Pat, on the promotion. I wanted to focus on two areas, one on the rate change in your auto, and then secondly on your distribution platform. In addition to the comments you made on rate change, I was looking at slide 14 in your supplement. And the auto for Allstate brand was up 3.2% in the second quarter. That’s a noticeable change from previous quarters, and I’m curious if there was some geographic concentration with the rate change, or is it broad-based. I think the annualized pace of that is in excess of 12%, so I’m also curious about any regulatory pushback or competitive issues there too.

Greg, do you want to give us your distribution question too, so we can maybe link together? I’m not sure, but we can handle both of them that way.

Good morning, Greg, it’s Matt. Thanks for the questions. I think as Pat said during his opening remarks, some of the quarterly rate change was driven by the fact that we took rate this past quarter in some extremely large states, and that impacted it disproportionately when you look at it on a countrywide impact. So you are correct, it is disproportionately high to what you had been seeing, and I certainly wouldn’t extrapolate out that number for the rest of the quarter or for the rest of the year. However, I would be remiss if I didn’t say we’re going to continue to monitor rate need and rate indication and take appropriate levels as we have. When it is primarily in smaller states, it has a smaller impact on the countrywide average. But when it’s in larger states, it will have a larger impact. And so it will fluctuate because it’s based upon need and indication in particular geographic areas as opposed – which has a countrywide impact, but you can’t think of it as a countrywide rate increase.

Greg, let me add a longer-term view to that as well. So we have 10% of the overall auto market. We have a bigger share of the lower left, but not such a big share that we don’t think there’s plenty of room to grow.

Hi, good morning. I was just hoping to talk a little bit about the expense level. It did rise a little bit in the quarter. And I know you can look at it year over year, but it rose from how it had been trending in the past few quarters on a sequential basis. Can you just comment on what’s driving that? And I know last quarter you guys had spoken to some advertising programs rolling out in the later stages of this year. Is that still the case as we continue to see the elevated frequency trends?

As you noted, we did decide we would reduce those expenses related to growth when we were not in the market for new customers. So Matt just mentioned, for example, not adding many new agency owners. That costs money to do that because we have to help them get started and get supported. We did launch our new advertising program already, and so you’ve started to see that uptick that portion of expenses. So the expense reductions are not as great as they were in prior quarters and the year-over-year comparison. So we manage it both on a short-term and long-term basis. We try to control our expenses in total to make sure we’re achieving our target returns. On the other hand, we’re not willing to give up our long-term growth. So I would just say it’s balanced. It’s hard to predict where your expenses and your frequency and severity will be in a quarter obviously on a forward-looking basis. So we manage it on a rolling 12-month basis.

Elyse, it’s Matt. I’ll try to answer both of those. I think just the graph, the side-by-side of gross and paid is informative because we’ve tracked both and reported on both. They serve different purposes, as Pat described, and they show up differently. Clearly in gross, it’s a leading indicator. So you’re reporting on and showing everything that’s coming in that might be a claim. In fact, this is subject to every single change in potential opening practice in claims, how we think about it, how we capture information, and clearly there are some segments of this that close without payment. But for these, and especially in the most recent difficult frequency environment, we’re trying to capture as much information as possible with as much granularity as possible and predict claims need, claims staffing need, so that we can provide our customers with the absolute best service in the time that they need it.

Yes, it is. I would say, if you look at where we operated the auto insurance business with flat severity, we have been able to operate that business at a combined ratio below where it is today. We see no change in our capabilities relative to our competitors, no change in the overall competitive environment that tells us we can’t be back in that space. It will take us some time given that those frequency numbers have been headed up and we price on a lag basis, but we see no reason why we can’t get there.

Hi, good morning. Thanks for taking the call and congratulations on the quarter. I was hoping you guys can – we’re all sitting here trying to figure out how to model your earnings going out over the next couple of years and balancing basically frequency trends, severity trends you’re talking about, as well as the very active pricing campaign you’re managing. And I was wondering if you could help us. I’m not asking for guidance per se, but help us understand. Remind us a bit at the business segment level what the underlying combined ratio targets you guys are trying to get to are. Because we can do our own math about judging how long you’ll get there, but I think it’s been a while since we’ve had that conversation.

Good morning, Josh. Let me go way up for a minute and I’ll come down. So we expect all of our businesses to earn a current return on the business they write over our cost of capital. So we start there, and that’s true with all of our businesses today. But then what we do is we adjust it for what our strategies and the volatility of earnings are. So when you look at the underlying combined ratio for homeowners, for example, it’s lower than you would see for the other businesses because it utilizes more capital because it’s more volatile. We have a very sophisticated process of allocating economic capital, not just to those lines of business, but then Matt and his team push it down by state.

Thanks and good morning, and thanks for fitting me in. Just two quick questions, if I may. First of all, again, going back to slide seven, could you perhaps give us more color as to what exactly are these types of claims that are being closed without payment, and has that percentage increased?

The percentage on it bounces around a lot. For example, let’s say somebody called us and they had a claim and their deductible is $1,000, and the damage was $700. We close that claim without payment. There are lots of reasons. It could be they called us, and the other person was at fault. And so there are lots of things that happen where we don’t have to actually pay money. But we want to know that somebody has a claim so that we can respond proactively and do what we get paid for, which is help them at that time of trouble.

On a macro level, it fluctuates a lot, but the trend hasn’t changed.

Thank you and good morning. The first question is on the inflection point on your core loss ratio in the auto book. You’ve been starting raising price actively the second quarter of last year. Given the short-tail nature of your business, I was wondering when do you think that will eventually earn through above your loss cost trends.

The answer to the first one is it all depends what you think is going to happen to frequency. And we can’t predict that. So as Matt indicated, as long as it’s going up, we will continue to adjust our pricing to reflect the cost that we have to cover for our customers. When it will go through will be when it exceeds the growth in frequency and severity. It didn’t happen this quarter versus the second quarter of next year, but we don’t price just to hold even.

Let me just close with we take a proactive approach to the current environment, making sure we invest for the long-term strategic growth opportunity. So we’re adapting to the higher cost of socio and auto insurance, as most of you have asked us about. But I want to be clear. It’s comprehensive in a multi-faceted approach. It’s not just about raising price. So we’re taking a more segmented approach to that. We are managing risk-adjusted returns to create shareholder value. That’s like what we did in homeowners, where we got smaller to get better. We are focused on growth, whether that’s Allstate Benefits, Allstate agencies and their relationships with the 16 million households, Esurance, or our telematics offering. We are investing for long-term growth and will continue to do so.