Allstate Corp (The) (ALL) — Q4 2016 Earnings Call Transcript

Thank you, Jonathan. Good morning, and welcome everyone to Allstate's fourth quarter 2016 earnings conference call. After prepared remarks by our Chairman and CEO, Tom Wilson; Chief Financial Officer, Steve Shebik, and me, we will have a question-and-answer session. Also here are Matt Winter, our President; Don Civgin, the President of Emerging Businesses; Mary Jane Fortin, President of Allstate Financial; and Sam Pilch, our Corporate Controller. In December, we announced that John Dugenske will be joining Allstate as Chief Investment Officer in early 2017. John will join the team next month and will be part of our quarterly earnings calls beginning next quarter. Yesterday, following the close of the market, we issued our news release and investor supplement and posted the results presentation we will discuss this morning. These documents are available on our website at allstateinvestors.com. We plan to file our 2016, Form 10-K later this month. As noted on the first slide, our discussion today will contain forward-looking statements about 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. We are recording this 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. And now, I'll turn it over to Tom.

Good morning. Thank you for investing your time to keep up on our progress at Allstate. Let’s start on Slide 2, we delivered excellent results for the year and finished 2016 with another strong quarter as we continue to effectively execute our short-term plans and build on long-term strategies. As a result, Allstate’s well positioned for continued success. Auto profit improvement plans over the last two years have enabled us to begin to withstand growth in 2017, while being able to react further auto loss cost increases. The homeowners business continues to generate attractive returns despite higher catastrophe losses. Investment results for the year were good but bounced around from quarter-to-quarter reflecting volatile external conditions. At the same time we’re investing growth both with existing businesses and new opportunities. Net income was $811 million for the quarter and $1.76 billion for the year. Operating income was $2.17 per share for the fourth quarter and $4.87 per share for the year. The recorded combined ratio for the year was a touch over 96 and the underlying combined ratio was at the favorable end of the range we provided shareholders a year ago. Shareholders received $1.8 billion in cash through a combination of dividends and share repurchases. We also welcome Square Trade into the fold providing shareholders another opportunity for profitable growth. Total revenues of $9.3 billion for the fourth quarter reflected a 2.8% increase in Property-Liability insurance premiums driven by the continued implementation plan and higher performance-based investment income. Net income for the fourth quarter was $811 million and operating income was $807 million. Operating income benefited from favorable underlying loss performance in both auto and homeowners insurance, lower catastrophe losses, favorable prior year reserve releases, and strong investment income. The Property-Liability insurance business performed well as a result of the successful execution of the auto profit improvement plan across the three underwritten brands and continued excellent performance in the Allstate brand homeowners and other personal lines insurance.

Looking forward to 2017 on Slide 3, we’re in a position to achieve an improved underlying combined ratio and achieve our five operating priorities both of which have both short-term growth and long-term objectives. We expect to build on last year’s insurance margin improvement, resulting in an annual underlying combined ratio between 87 and 89 in 2017. That range is comprised of a number of key assumptions. First, there will be continued improvement in auto insurance profitability as increases in average premiums and filed rates give us the flexibility to deal with increases in the frequency of various auto claims. Secondly, we assume the homeowners underlying combined ratio would deteriorate slightly from 2016, but this will be well within our target range of profitability. Encompass and Esurance are assumed to stay on track to improve auto profitability. At the same time, we’ll continue to invest in growth across the company.

Thanks, John. Turning to Slide 10, Allstate financial premiums and contract charges totaled $574 million in the fourth quarter of 2016, an increase of 4.9% when compared to the prior year quarter. For the year, premiums and contract charges increased 5.4% as Allstate benefits surpassed $1 billion in premium with an increase of 442,000 policies. Allstate Financial operating income of $130 million in the fourth quarter of 2016 was $32 million higher than the fourth quarter of 2015. Net and operating income trends by business are shown in the chart at the bottom of the page. Allstate Life net income was $58 million and operating income was $56 million in the fourth quarter of 2016. Operating income was consistent with the prior year quarter, and higher premiums and improved mortality were offset by lower net investment income. Allstate Benefits’ net income was $22 million and operating income was $23 million in 2016’s fourth quarter. Operating income was flat to the prior year quarter as higher premiums from policy growth were offset by higher benefits and technology-related expenses. We expect to make additional investments in technology as this business grows.

Hi, guys. Good morning. My first question, what are all the favorable developments within your auto book in the quarter and did that come from some of the most recent accident years?

So, what we - it’s Steve. The results that we look at, as you know, from our reserving processes is we do a quarterly review, bottoms up. We have the reserving department reports to me, I’m separate from our business unit, and we look, as you indicated, year-by-year we look at virtually every state. We have a very specific program, methodology both mathematically and quantitatively, qualitatively as we walk through the results. We look at by line of business. We look at tremendous amount of details. So, the actual results that you are seeing are based on across multiple lines and across multiple of our prior years.

First, the rate environment. We have completed some of the work necessary to catch up to that spike in auto frequency that we saw over the last 18 months, and so you saw a fairly dramatic increase in rate taken in order to catch up quickly and try to get that to appropriate margins. We believe with some exceptions in a few states, but in the vast majority of places we have not caught up, and now we are in the mode of keeping up with emerging trends.

Thank you for the call and taking my questions. I will keep it to two questions. This is a follow-up Matt; you were talking about agencies and points of presence. I was wondering if you could provide some demographics around your agencies, how many are close to retirement and should we infer from your comments that you're as because you took pricing actions earlier than many of your peers, that your product and price decision should improve throughout 2017?

I don’t have the actual agency demographics in front of me. I can tell you that we have engaged in a different type of recruiting and selection process for agency owners, both in terms of geographic and demographic. We will be shifting our focus on increasing the number of agencies because we believe physical points of presence are important, but agency capacity is just as important.

I just want to follow up on the response to Elyse’s question on reserves. What do you think caused that favorable development? Is it a change in your claims approach that you have mentioned earlier? Is there some other aspect that caused that favorable development?

It is as you described mostly auto; it is really not a big percentage by the way total reserves and loss cost, when you look there is a normal variation in making the estimate when you are looking out anywhere from two to four years to get claims resolved strictly in BI which tend to stretch out three to four years. There is nothing unusual about we had reserve related much greater than that over time, and so I don’t think you should breathe anything into it other than we conservatively estimate what we think our loss costs are.

The other question I had, and switching topics here, the broader discussion on corporate taxation. If the taxes were to go down, does that get reflected in your pricing actions and I know it’s a hypothetical or should we anticipate that netting down to your bottom line?

Taxes are, of course, a complicated thing as it relates to Allstate. The first and probably the biggest impact is when it relates to taxes that drives economic growth that's good for the company because we’re low on U.S. growth and that’s our investment portfolio for the growth in auto and homeowners—auto ownership and home ownership. So, both of those could be very good for us.