Allstate Corp (ALL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation second-quarter 2013 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time.

If anyone should require assistance during the conference please press (Operator Instructions).

As reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Block, Senior Vice President investor relations.

Sir, you may begin.

Thanks, Matt, and good morning everyone.

Thanks for joining us today for Allstate second-quarter 2013 earnings conference call.

After prepared remarks presented by Tom Wilson, Steve Shebik, and myself, we will have a question-and-answer session.

Last night, we issued our press release and investor supplement, filed our 10-Q for the second-quarter 2013, and posted a slide presentation to be used in conjunction with our prepared remarks.

We also posted a document describing our current reinsurance program.

All of these are available on our website.

This presentation may contain forward-looking statements regarding Allstate's operations.

Allstate's results may differ materially from these statements, so please refer to our 10-Q for 2012, our 10-Q for the second quarter, and our most recent press release for information on potential risk.

Also, this discussion will contain some non-GAAP measures for which there are reconciliations in our press release and on our website.

We are recording this call, and a replay will be available following the conclusion of the call.

I will be available to answer any follow-up questions you may have after the call.

Now I will turn the program over to Tom Wilson.

Tom.

Good morning, and thanks for investing your time with us.

I will start by covering the second quarter results as they relate to our strategy and our 2013 priorities.

Bob and Steve will cover the business performance and capital actions that we are taking in the quarter.

The performance this quarter is driven by a strong management team who is familiar, of course, too many of you.

And they are here as well to provide additional perspective in the question-and-answer period.

So Matt Winter, who leads our Allstate agency business; Don Civgin, who has responsibility for Allstate financial and insurance; Judy Griffin is our Chief Investment Officer; Don Bailey leads the emerging businesses; and Sam Pilch is our corporate controller.

We generated solid results in the second quarter, reflecting the successful execution of our strategy, which is to offer unique products and services to distinct customer segments.

This strategy distinguishes us from the other personal lines companies who focus on either one customer segment or just using different methods of distribution.

We believe that a focus on the entire value proposition will lead to longer-term growth and profitability.

You can see positive outcomes from this strategy this quarter, particularly as the impacts from restructuring the Allstate brand homeowners business becomes less severe.

On slide 2, we show the four customer segments and our property-liability results for each one.

There is three brands where we underwrite the risks -- Allstate, Encompass, and Esurance all grew in net written premium; and Answer Financial also increased non-proprietary premium.

The Allstate brand, which serves customers for local advice and assistance and a branded experience -- units declined from the prior-year quarter but increased in the first quarter of 2013.

Auto policies were flat versus a year ago while homeowners declined by 4.4%, reflecting the actions taken to improve returns.

As these profit improvement actions are successful, we believe the negative impact on growth will be reduced.

The Allstate agencies did a great job this quarter.

They had very strong results with higher customer satisfaction; improved retention for standard auto and homeowners; strong new business growth reflecting both Company marketing and local agency initiatives.

The actions taken over the last three years to position high-performing agencies for success by concentrating on supporting them and restructuring compensation is working.

This segment maintained profitability at a combined ratio of 94.6% and an underlying combined ratio of 85.4%, as rate increases essentially offset modest loss cost increases.

The Encompass brand in the upper left serves customers who want local advice but a choice of products and services -- continue to show positive growth with units up 6.8%.

Strategically, we remain focused on household penetration with a unique package policy that represents about 75% of Encompass's volume.

The combined ratio in the quarter was 102.4% with an underlying combined ratio of 92.7%.

Pricing and underwriting actions continue to be taken to improve margins.

The Esurance brand serves a self-directed brand-sensitive customer segment, and continues to generate significant premium and unit growth as it successfully leverages the benefits of being part of Allstate.

Increased advertising that is more effective, sophisticated pricing for preferred-risk auto customers, and improved claim practices are designed to acquire and retain profitable lifetime value customers.

The combined ratio remained high at 119.7%, reflecting the high levels of marketing expense and the expensing of acquisition intangibles.

The loss ratio did increase over the prior-year quarter, however, reflecting increased bodily injury severities and higher than expected discount utilization.

Gary Tolman and Esurance team are working closely with Don to adjust pricing and underwriting to ensure we maintain the long-term profitability of this growth.

Overall, our customer focus strategy is strengthening our competitive position.

On slide 3, we provide a progress report on the five operating priorities for 2013.

I have already covered the [grow] insurance premiums priority for property-liability.

Allstate Financial increased premiums and contract charges 3.6% over the second quarter of 2012.

That growth in premiums and contract charges for underwritten products is 4.8%, with Allstate Benefits growing 11.9% compared to the prior-year quarter.

We maintained auto profitability in the quarter with a standard auto combined ratio of 97% for the three underwriting brands, comparable to the second quarter of last year.

The Allstate brand, which represents about 90% of the earned premium, had a combined ratio of 94.9%.

That's 0.6 points better than last year's second quarter.

And an underlying combined ratio of 94.2%, which is slightly higher than the prior-year quarter.

We continue to make progress on raising returns and homeowners, with a combined ratio of 95.3%, a 9.1 point improvement from Q2 2012.

Allstate brand homeowners had a combined ratio of 95.2% and an underlying combined ratio of 62.7%, 1.9 points better than the prior-year quarter.

Annuity returns did increase in the second quarter, but the long-term outlet is -- outlook is still challenged by low interest rates.

Our fourth goal is to proactively manage investments.

In the second quarter, we continue to mitigate the impact of rising interest rates on the property-liability portfolio by selling long bonds and investing in shorter maturities.

If you look over the last year and a half, the percentage of bonds with maturities longer than seven years decreased from 46% to 20% of the property-liability portfolio.

If we had not taken this approach, investment income, of course, would have been higher, but the value of the portfolio would have declined by more than it did this quarter.

If you just measure it over the last nine months, the portfolio would have declined by an additional $400 million as interest rates rose in the second quarter.

The total return for the quarter was a negative 1.5%, as the unrealized gain position declined in value by $2.7 billion in the quarter.

The fifth priority is to reduce our cost structure so we can give customers great value with a differentiated offering.

We announced the closing of a call center and introduced employee benefit changes that are effective at the beginning of 2014.

That will equalize benefits amongst employees and reduce costs.

We are also eliminating some retiree life insurance benefits starting in 2014, up through 2016.

In the quarter, our property-liability expense ratio did increase primarily due to technology and marketing investments to support profitable growth.

Over time, we expect this ratio to decline.

As you know, we also took another step to improve shareholder returns from Allstate Financial by entering into an agreement to sell Lincoln Benefit Life to the Resolution Group.

Lincoln Benefit primarily serves customers that want local advice and the choice of life and annuity products, which is the upper left-hand quadrant on the foursquare.

It also manufactured life and annuity products that were sold through Allstate agencies.

Strategically, we did not have a differentiated offering, corporate capability, or size that generated attractive returns serving life and annuity customers through independent agencies.

As result, we chose to exit this business, as we do with variable annuities, the bank broker-dealer distribution channels, and payout annuities.

This will enable us to redeploy capital into high-return activities.

We will retain the life insurance risks written through the Allstate agencies via a reinsurance agreement.

We also announced Allstate Financial's decision to stop writing fixed annuities, but we will provide Allstate agencies and exclusive financial specialists with similar non-propriety products so they can fully meet customers' needs.

Now let me turn it back over to Bob.

Thanks, Tom.

On slide 4, we provide financial highlights for our consolidated results as well as property-liability in Allstate Financial.

Referring to the top half of the slide, on a consolidated basis we generated net income of $434 million, or $0.92 per common share, in the second quarter.

The increase over the prior-year quarter was primarily driven by higher after-tax realized capital gains and operating income, more than offsetting the $312 million after-tax loss on the repurchase of $1.83 billion debt as part of our capital management program.

Operating income of $529 million, or $1.12 per common share, increased 22.5% from Q2 2012, driven primarily from lower catastrophe losses in the second quarter 2013 compared to the prior-year quarter.

Net income return on equity was 11.6% and 12.3% on an operating income basis, both increases from the second quarter 2012.

Details underlying these overall results are shown on the bottom half of the slide.

Property-liability reported $617 million in net income for the second quarter, a significant increase compared to the prior-year quarter.

Earned premium of $6.9 billion through 2.9% from Q2 2012, with a combined ratio of 96.1%, an improvement of 1.9 points.

Catastrophe losses in the second quarter were $647 million, down $172 million from the prior-year quarter.

The underlying combined ratio for the quarter was 86.9%, below the full-year outlook range and 0.6 points higher than the second quarter of 2012.

Now, before the question about updating the outlook range, for the underlying combined ratio of 88% to 90% set earlier this year can be raised in the Q&A.

I want to say that we are not updating the range at this time.

Should the first-half trends continue for the second half of 2013, we could finish the year a little better than or at the lower end of this range.

The combined ratios on a recorded and underlying basis for each brand are shown on the lower right-hand side of the exhibit.

The Allstate brand continued to generate solid profitability as positive effects of rate changes essentially offset the modest increases in loss costs on an underlying basis.

Encompass recorded combined ratio results for the quarter were comparable to the prior-year quarter, while the underlying combined ratio improved by 4.3 points.

Esurance combined ratio of 119.7% remained elevated, reflecting the impacts of increased new business volume, higher bodily injury severities, and increased utilization of price discounts.

Allstate Financial posted net income of $190 million in the quarter, an improvement of $58 million from Q2 2012.

Operating income benefited from favorable results in the benefit and investment spreads, partially offset by a small increase in operating costs.

Realized capital gains were higher than second-quarter 2012 by $32 million after tax.

Premiums and contract charges increased 3.6% in the quarter compared to the second quarter 2012, helped by 11.9% increase for Allstate Benefits.

On slide 5, we provide net written premium and policy-in-force trends by brand and in total.

For property-liability, net written premium increased 4.2% from the second-quarter 2012, and overall units were essentially flat with the prior-year quarter and grew 177,000 from the first-quarter 2013.

Our strategy to provide unique products and services to distinct consumer segments is working, as net written premium grew compared to the second-quarter 2012 for each brand.

And units also increased from the first-quarter 2013.

Within the Allstate brand, which serves customers who prefer local advice, assistant, and a branded experience, standard auto net written premium of $4 billion increased 2.8% from the prior-year quarter, while units increased sequentially that were flat year over year.

Allstate brand homeowners net written premium of $1.7 billion grew 3.3%, and unit volume declined at a slower rate than the prior quarter.

Results for both of these lines reflect favorable trends in new business and retention.

On the bottom two charts, you can see the growth trends for Encompass, which serves customers who want local advice but a choice of products and services; and Esurance, serving self-directed brand-sensitive customers.

Both continue to grow compared to prior year in net written premium and units.

And we have been able to maintain margins as net written premium trends improved.

On slide 6, we have combined the margin trends for Allstate brand standard auto and homeowners on one side.

The charts on the left-hand side of the slide show the earned premium and loss trend per policy.

While the chart on the right-hand side show the combined ratio trends.

For standard auto, losses per policy increased at a rate just slightly higher than the earned premium per policy.

Essentially flat frequencies and moderate increases in severities were partially offset by increases in rates.

The combined ratio for standard auto remained at a consistently profitable level.

For Allstate brand homeowners, shown on the bottom half of the slide, loss-cost increases per policy remained at very low levels, running below the increase in earned premium per policy.

This resulted in an improvement in the underlying combined ratio of 1.9 points to 62.7%.

The recorded combined ratio for the quarter was 95.2%, a 9.7 point gain from prior year.

Now let's go to Steve.

Thank you, Bob.

Second-quarter investment results reflect continued interest rate risk reduction action in our property-liability portfolio, maintaining alignment with Allstate Financial's changing liability profile and continued repositioning of our public equity portfolio to a more targeted strategy.

The carrying value of our portfolio declined $5 billion to $92.3 billion compared to $97.3 billion at year-end, reflecting the reduction in Allstate Financial's spread-based liabilities as well as lower fixed-income valuations due to higher interest rates.

We continue to increase the equity and owned component of our portfolio, from which we expect to generate high returns over time.

However, earnings from these assets will be more variable.

On slide 7, you can see net investment income totaled $984 million in the second quarter, slightly ahead of the prior quarter, but lower than the second quarter of 2012.

The decline in core debt income was mitigated somewhat by prepayment fees as well as litigation proceeds, which added an aggregate $37 million net investment income for the quarter.

Total portfolio yield was 4.6%, slightly ahead of the prior quarter and consistent with the second quarter of 2012.

Turning to total return on the bottom-right graph.

Lower fixed-income valuations resulting from significant increase in treasury rates led to a negative total return of 1.5% for the second quarter, despite a consistent contribution from net investment income.

An attribution of the change in unrealized capital gains is provided on the bottom-left of the slide.

The increase in rates, along with somewhat wider credit spreads, drove a $2.4 billion decrease in our unrealized capital gains compared to year-end 2012, $2.2 billion of which occurred in the second quarter.

While the decrease in unrealized gains during the quarter was significant, we estimate the valuation decline on property-liability portfolio was mitigated by approximately $400 million through the repositioning of the portfolio that began in the third quarter of last year.

Additionally, Allstate Financial's assets and liabilities are more effectively matched on an economic basis.

If you move to slide 8, depicts trends in our property-liability and Allstate Financial business units.

As you can see in the graph in the top-left, the earned yield trend on our property-liability core debt reflects four quarters of risk reduction activity.

Through our risk reduction actions, we position the portfolio to be less adversely impacted by an increase in interest rates and pulls forward future income through realization of gains and the sale of longer-term securities, as shown in this Scheduled Maturity graph in the upper-right.

The current yield on intermediate corporate, our targeted reinvestment proxy is approximately 1.75% to 2%.

Given this shortfall relative to the portfolio yield, maturity and sales activity have and will continue to result in a decline in net investment income for the core debt portfolio.

For Allstate Financial, you can see at the bottom of the page, the net investment income has declined as a result of the managed reduction of spread-based liabilities, a trend that will be accelerated with the sale of Lincoln Benefit Life.

Over the past few years, Allstate Financial's investment cash flows have been used largely to fund liability outflows, rather than being reinvested.

So the portfolio yield has not declined as much as the property-liability portfolio.

Future investment income will continue to be impacted by the pace of the liability outflows and reinvestment activity.

Slide 9 provides a recap for the recent transactions we have announced.

In May, we initiated a capital management plan designed to increase our capital flexibility to take advantage of the low interest rate environment.

We purchased $1.83 billion of debt, recognizing an after-tax loss of $312 million in the second quarter.

We issued $500 million each of 10-year and 30-year notes, and $287.5 million of perpetual preferred stock.

We expect to issue an additional approximately $2 billion of perpetual preferred stock and subordinated hybrid debt to complete the debt refinancing, pre-fund our $950 million of 2014 maturity, and complete the current share repurchase program.

After the quarter closed, we announced changes to our pension and life insurance benefits, as well as the pending sale of Lincoln Benefit Life.

The impacts will be reflected in our financial statements beginning in the third quarter.

The table at the bottom of the slide summarizes the estimated impacts of each on a pro forma basis as if they had occurred at June 30, based on the midpoint of the ranges we have announced.

Our pension and post-retirement liabilities will be re-measured effective July 15.

And the impact of the changes in benefits and a higher discount rate, given the rising interest rates during the year, will be recognized for the most part in accumulated, other comprehensive income as a component of equity.

A separate curtailment gain related to the changes in retiree life will be recognized income.

The impact of the ongoing retirement and benefit expenses is currently being calculated based upon assumptions as of July 15.

As Tom mentioned, the sale of Lincoln Benefit Life exit the business, for which we did not have a competitive customer market position.

The transaction reduces our financial risk and is expected to free up approximately $1 billion in employable capital.

This capital will be freed up in the Allstate Life Insurance Company.

And as you know, a number of steps will be necessary for us to move that ultimately to the parent Company.

Lincoln Benefit Life will be treated as held-for-sale beginning in the third quarter, with its assets and liabilities collapsed in the separate lines in the balance sheet.

The estimated loss and sale will be recorded and adjusted in future quarters until the sale is closed.

We remain in a strong capital position at the end of the second quarter.

Slide 10 shows our capital position at various points in time.

We have split up the long-term debt between senior debt and hybrid debt, so you can see the change in the makeup over time.

When our capital plan is fully completed, we expect the split between senior and hybrid debt to be approximately 60% to 40%.

Our estimated statutory surplus at June 30 at $17 billion in total, with $13.6 billion estimated for the property-liability companies.

Holding company level assets were $2.4 billion.

As Bob noted, our net and operating returns on equity were consistent with the last few quarters in the 11% to 12% range.

Overall, a solid quarter.

We made good progress on the execution of our customer-focused strategy and our 2013 priorities.

With that, why don't we open it up to questions.

Okay, Matt, if you can, start the Q&A.

(Operator Instructions).

Michael Nannizzi, Goldman Sachs.

So just one question on standard auto.

It looks like -- so sequentially, PIF grew.

The year-over-year decline was the lowest it has been in a while.

If we were just to roll forward that sequential growth, you could be looking at PIF growth for the first time in a long time later this year.

Is that something that you are thinking about?

Is that something that you are moving towards, just given where the profitability is there are now?

Or just love your thoughts on that.

Thanks.

Mike, I assume you're talking about the Allstate brand, which --?

Correct, yes.

I will throw it to Matt's way.

Thanks, Michael.

Certainly we are looking at that and focused on that.

And our goal is to do what we have been -- what we've been working on for many years, which is to position ourselves so that we can get in a position that both new business and retention are improving, and we retain the strong muscle of auto profitability at the same time.

And so a lot of effort has gone into that.

A lot of that was influenced by actions that we had to take in the homeowners' market.

As you know, now that our decline in the homeowners PIF has slowed and the new business has picked up there, that has also assisted in the standard auto line.

80% of our homeowners new business comes with at least one auto.

And so that, in combination with all of the work that the team has done and the agency owners have done to drive new business and improve retention, has put us in a position where we are looking forward to continuing to make momentum on the new business and the retention.

And we believe that, over time, that will yield favorable results for us.

So looking at that 2Q to 1Q sequentially, is that something -- is that fair to think about extrapolating in terms of your -- internal, your own goal to say, hey, look, we are here.

We can start turning this into actually positive growth this year.

Well, it's always dangerous to extrapolate from one quarter.

We think we've seen a lot of positive trends.

We think we are doing a lot of things that have long-term sustainable impact, and we believe as long as we're diligent they will have long-term, favorable results.

Great, thanks.

And then just one quick one on the life business.

Is there anything in there for the second quarter that is nonrecurring?

Do we want to think about what the economics are there excluding the transaction the you guys just completed?

Is there anything else we need to peel out from those results to have a clean number?

Yes, I will let John answer that, but you should not expect the operating income to stay at its level it is at for -- obviously, there is some one-time items Don can talk about.

But secondly, remember that business keeps getting smaller.

So as it gets smaller in size, obviously, it is going to generate less operating income.

Mike, it's Don.

I would say there is nothing, strictly speaking, that is nonrecurring.

Nothing from the sale of LPLs reflected in there.

But there is a lot of volatility in the investment income line.

And we had really good quarter.

Got it.

Great.

Thank you.

Josh Stirling, Sanford Bernstein.

Thank you for taking the call.

So a couple of years ago, you guys identified 13% ROE by 2014 as a -- sort of the primary operating goal that the firm was going to be positioned around.

You have made a lot of progress to that.

You're coming close to -- I think you are regularly sort of hitting at 12% on an operating basis.

Should we still think about that as a 2014 -- as the firm's 2014 objective as you are now starting to work through your annual planning process?

Morning, Josh, this is Tom.

Good memory.

So, of course, two years ago, we established the goal of 13% by '14 when we are operating at about a 9% return, which is a 400-basis-point improvement.

And at that point, it was really to show that we had conviction that we can make substantial improvements in returns.

It was not an indicator that 13% was the exact right sweet spot on creating shareholder value.

Now there were some assumptions underneath that 400-basis-point improvement.

One was, we had to make sure we maintained our profitability, which you see we have continued to do.

Second, about 70% of that increase was related to improving returns at homeowners.

And we are well on our way there.

I expect we'll get somewhere -- we will get into that this morning, and Matt can give you an update on that.

There were two other goals.

One was maintain investment income; and rates have moved down by about 250 basis points since that time.

So we are not on track to do -- to maintain that portion of the increase.

And, then, lastly, it was to raise returns at Allstate Financial from about 9% to 10%.

And, as you can see, because of the interest rates and some other things, that are going on that we are not at that point either.

So we're working hard of those last two items, as you know.

At the same time, we have also investing more in Esurance than we thought we were because we like the growth there.

And we have changed the capital structure.

So there is a bunch of moving pieces in there.

As we get closer to 2014, we will be updating our range, and you will be able to figure out where the capital structure is and where we are; what it will look like for next year.

But we're not giving any indication.

I will tell you, though, our goal, of course, is just to get as attractive a return as we can while driving growth in the business and the environment we're in.

But I don't want to blindly chase a number that is an accounting number as opposed to an economic number, which ultimately drives shareholder value.

So we're working hard on driving it up.

But -- so for example, when we shorten the duration and the portfolio, which saved us a bunch of money this quarter -- of course, we're just -- if you just mark it to market this quarter, that was -- took away some of that ROE, but we thought it was a good trait from a risk/return standpoint.

So we're going to always manage to what we think is good long-term value, and then we will update it as we go forward into 2014.

That's really helpful, Tom.

I guess I will just ask the follow-up question that you sort of teed up on, which is on homeowners margin expansion.

Is that -- would you guys still think of that as the primary earnings lever?

Recognizing you are doing a bunch of stuff, expenses and expenses on -- both on the debt side as well as internally.

But is that still sort of the primary lever we should be focused on?

And then the question would be how much more good news do you think you can get out of the various initiatives -- house and home, and things like that you are pursuing today?

Well, I'll let Matt talk about what he's doing.

I will just remind you, we think we have captured a lot of where we were.

We were in the 70s underlying combined ratio at the time.

I don't remember the exact number, Josh, but now we're in the low 60s, which is where we said we thought we needed to go.

Matt is doing a whole bunch of things, though, with his team to take it from what became a competitive disadvantage in the marketplace to a competitive advantage.

And I will let him talk about both that and sustainability of profitability.

Sure, thanks for the question.

You are correct that we have looked at homeowners for several years to improve the overall profitability of the enterprise.

The good news is the underlying profitability continues to improve as we benefit from some of the actions taken in the last several quarters.

It has allowed us to begin growth.

If you look at new business growth and homeowners and retention, both are improved as we have had to take less rate because we are closer to rate-adequate.

And all the house and home that goes in goes in as rate-adequate.

So we continue to make improvement in what we have.

And, at this point, as we put on profitable, high-margin, high-return business, our goal is to figure out how to do more and more of that while remaining in the proper risk profile.

So a lot of the work we are doing now has to do with how we manage that risk, how we manage concentration risk, and how we can manage those two elements and still grow and continue to expand the homeowners business and all the auto that -- and other products that come with it.

Great.

Thank you.

Thank you, Tom, Matt, keep up the good work.

Jay Gelb, Barclays.

In the Allstate brands, premium growth is now at the highest level since 2005.

And my sense is there is a number of numerical drivers to that.

But one of the most interesting would be the recovery in homeowners.

For example, I am hearing in New York and the drive to town in the morning, more advertising.

So maybe you can talk a little bit about the level of comfort of increasing the homeowners exposure.

And then, also, other -- personal lines is showing, by far, the fastest growth among the Allstate brand.

So maybe you can talk a little bit about what is driving that and whether you are getting cross-selling opportunities as result.

Jay, thank you for the compliments.

We like those.

Let me -- maybe Matt can talk about perhaps what -- he already talked a little bit about what he's doing in house and home, but maybe he can talk a little bit about PML optimization, or probable maximum loss optimization.

And then Don Bailey can give you some insight into what we are doing on the other lines.

Which is, of course, focus around -- the strategy that Matt is trying to execute, or is executing with our agencies, is about selling lots of stuff to those customers.

So you're right to think about it as a total package as opposed to a line.

Way too often, people start looking at us and talking about a single product, when really we are talking about the variety -- the breadth and longevity of our relationship.

So, Jay, I'm glad that our advertising spend is hitting you and that you are hearing it.

As I mentioned, I believe that the last call as well, one of the areas that we're spending a lot of time on in homeowners is PML optimization.

And the other is what we will call aggregate risk management, which is really just looking at our homeowners portfolio and figuring out, at a more granular and sophisticated level, how we could use diversification benefit; how we could use various combinations of product sets and features and reinsurance to manage to grow in some areas without increasing, above an acceptable level, our probable maximum loss or concentration risk.

And so what you are seeing now in New York is a very careful and, I think, very disciplined way of thoughtfully growing a little bit within the state in those areas that do not pose undue concentration risk, or PML risk, for us.

So we are doing it fairly thoughtfully.

We are doing it in a way that maximizes the overall number of products that it brings to us.

And so, as Tom mentioned, we are trying to look at this from a household perspective, not a single-line perspective.

So what you'll see is, we may be growing more in those areas where we get multiple products with the home, as opposed to single on a line home.

And with that, I will turn it over to Don Bailey, who can talk to you a little bit about the other personal lines.

Thanks, Matt.

So as Tom mentioned, the other personal lines incorporate a portfolio of additional products.

And we have, if you listen to the language in the hallways here, really changed the language.

Matt certainly led that with us trying to pivot from more of a product-focused organization to a household-focused organization for all the right reasons.

Close rates go up, retention rates go up; profitability improves as a result.

And these consumer household lines, as we refer to them, really are critical in terms of making progress in that effort.

So the language has certainly changed.

But a lot of other things have changed for us, too, over the last several months.

Our training in this regard has changed.

Technology has substantially improved to help enable more of these cross-sales and household penetration.

The product design aspects of these portfolio have evolved to be more agent-friendly to be more consumer-friendly.

And so we have made progress there.

And then our expectations of all of us and everybody in the field and of our agents have changed in terms of what we are seeking in terms of an outcome on this (inaudible).

So the last thing we have done is we have put leadership focused specifically on that.

Let's make progress on that.

Let's hit targets on that.

Let's make sure this is a meaningful piece of our success story as we go forward.

So, yes, you'll see that in there.

It's not by accident.

Thanks.

(multiple speakers) Thanks for that.

I'm sorry, go ahead.

Yes, I would just point out on page 25 of the supplement, we have started to break out the -- how we look at our customers, and trying to help you see that we can't separate where our customer relationships and where we deploy capital.

So you will see iVantage, where we sell other people's products through the agencies.

You will see the non-proprietary premium at the bottom of that, which is almost $1.4 billion.

So that gets to the point that Matt and Don were just making.

And that's what we're doing with the annuities as well, which is we want to sell those to our customers.

We know our customers need them, want them.

It helps our relationship.

But it is not a place where we choose to deploy capital.

So we have been able to separate those by getting more sophisticated.

On the issue of Encompass, one of the larger challenges there appears to be the standard auto and continuing to run well above the 100 combined ratio level.

What is the issue there, and can it be fixed?

So on -- this is Don Bailey -- on the Encompass piece, if you look at the loss ratio, if you look at the underlying loss ratio, you will see that we have actually improved rather substantially on that on a year-over-year basis.

And why is that?

We have had a move from what we probably refer to as a monoline, or segment auto, approach to a package approach.

The auto line performs far better in a package than it does on a stand-alone basis.

So we have made meaningful changes in moving our portfolio forward in that regard, and we're seeing progress in that unacceptable number as result.

We're also taking a meaningful rate in that space as well.

So while the number isn't where we wanted to be today, there clearly is underlying improvement there and there will continue to be as we go forward.

Okay.

Thank you.

Meyer Shields, Keefe, Bruyette, & Woods.

I guess two questions on Allstate Protection.

One, we did see a slight uptick in the underlying loss ratio for Allstate brand standard auto.

Is it fair to attribute that to the improving policy count growth?

And is there -- can you talk about how much more of that increase you'd be willing to tolerate for the sake of policy growth?

Morning, Meyer.

We will let Matt do that.

Yes, I would point out just a slight uptick.

Remember there is -- as you know, there's a lot of variability, and so the frequencies vary on a quarter-by-quarter basis.

Meyer, it is Matt.

You should not think of it as a trade-off between profitability and growth because that is not what we are doing.

We are focused on growing and maintaining profitability.

So it is not a question of that we are letting our combined ratio creep up in order to facilitate growth.

I think most of the uptick that you see is attributable to two pieces of the loss ratio.

The PD paid severity and the BI paid severity, so let me take you through those.

The PD paid severity was elevated in the quarter.

But if you recall, in the first quarter TD severity was below prior year by almost 1 point.

And we attributed that to the [subro] demands that were at significantly lower-than-normal levels.

Those subros typically carry a higher severity than average claims.

And, in the second quarter, what we have seen is a higher than normal subro demand; it is about 25% higher, actually.

And our working hypothesis is that, due to Super Storm Sandy, the other carriers' workloads were such for the fourth quarter of last year and the first quarter this year that they delayed the subro processing and the payments until the second quarter.

So we are seeing that uptick now.

It is merely a delay from the fourth quarter of last year and the first quarter this year.

But on a normalized annual basis, it is right in line with our historical average.

On the BI paid severity, I mentioned last quarter that we were accelerating the closure of older, more complex claims.

And that, in combination with a change in state mix and liability limits, contributed to the increase.

If you take that -- those two pieces out, the remainder was in line with medical care CPI.

And so, that has actually come down off of that peak, as we said, as we work through more of those older, more complex claims.

And we are moving much closer to historical norms, which are around the medical care CPI.

The only place that you can see any, quote, investment in our growth show up in the combined ratio is we pointed out that we did make some targeted investments in technology and marketing this quarter, which have shown up in the expense ratio.

Those were intentional.

We believe this was the right time to make some targeted investments in technology and marketing in order to push momentum and provide our agents with the tools and the stability they need to handle this higher volume.

And it's certainly controllable, and we will continue to monitor when it makes sense to continue to invest in those two areas and when it may make sense to slow down that investment.

Meyer, let me also make one overall strategic comment.

Of course, price is obviously very important, as you point out, as a driver customers' decision-making.

But that is not the only component of our strategy.

Our strategy, of course, is to give a highly focused customer value proposition; that means good price to value.

So price is not the only lever, is what Matt is saying that he can drive growth.

Whether it is better technology, so the agencies can do a better job knowing who their customers are; whether it is new products and launching those.

We have a multi-faceted way that we are seeking to grow, not just -- we don't view it as just a price and profit trade-off for growth.

That was very thorough.

I appreciate it.

On the homeowner side, when we look at the aggregated lower reinsurance spend that you disclosed last night, I guess does that still translate in -- let me ask this differently.

Do you expect to retain the savings or pass them on to customers for -- and is the overall internal CAT provision lower or higher than it was 12 months ago?

The internal tax provision?

I--?

No, catastrophe provision.

Oh, catastrophe provision.

Well, I may take a shot it and see if anyone else wants to join in here because it is a competent question.

If you go way up, we looked at hurricane and earthquake losses and said we don't want to have those losses.

So -- but we don't want to get rid of the homeowners line, so we're going to synthetically divest some significant portion of those by using reinsurance.

And that is how we got started in doing reinsurance.

When we first did that, we were not able to pass that through in our higher rates because it takes a while to get it through the regulators and everybody else.

Since that time, we have made a bunch of changes to our filings.

And most of it, but not all of it, gets passed through.

So, as costs come down, we would expect, over time, that to be factored into our pricing.

That may or may not translate into different homeowners prices because there is all kinds of, as you know -- all kinds of other pieces of loss cost going through there.

And we may or may not be getting it back for that portion of the country where the reduction comes from.

We don't really have an internal way in which you're describing it.

So Matt works with Steve and Sam, and they figure out what the right balance is working with our enterprise risk and return counsel with inside the guidelines they get.

So there's not really -- there's nothing we are doing internally that would confuse the reported results.

Okay, fantastic.

Thank you very much.

Mike Zaremski, Credit Suisse.

In regards to Allstate brand auto rate actions -- so if I look at the 10-Q, it shows 0.4% rate increases on a year-to-date basis in 21 states.

So I was curious is that the level of rate increases we should be thinking about through year-end?

And, if so, does that imply that the you are okay allowing the loss ratio to rise a little bit?

Well, let me start at the end.

No, we're not okay for allowing the loss ratio to rise a little bit.

What you are seeing is a one-month -- one-quarter snapshot in what should be viewed on a much longer basis.

So if you go back historically, and that's long before I took over this role, the Company has been very good about consistently reflecting its experience and what it was seeing in its rates and taking rates as needed.

Not holding back on rate actions, hoping that stuff goes way; not holding back on rate actions in order to capture market share.

But passing those through as they were experienced and as we were seeing them.

And, as a result, sometimes we had what I refer to as a first-mover disadvantage because we took rates sooner than some of our competitors and on a more consistent basis.

And sometimes it is actually to our benefit because we got out ahead of the curve.

I think what you're seeing now is we're out ahead of the curve in many areas.

I would also suggest you go back several years, two or three years.

The vast majority of the rate that you were seeing was driven by a couple of very large states, notably Florida and New York.

If you go back to 2010, somewhere in the neighborhood of 70% of the overall country-wide rate that you saw was driven by those two states.

Now that those two states have returned to profitability and are requiring less rate action, it is the smaller states where we have taken consistent rate as needed that are just vacillating.

And we will continue to monitor closely; we will take rates as needed.

We are not deliberately trying to let loss ratios float up, as you referred to.

We are going to continue to do what we have always done.

It's just that are timing is better because we did the hard work up front and it cost us up front.

If you go back several years, you saw that on the homeowner side and the auto side.

And now we're actually benefiting from that timing.

Got it, that's helpful.

Lastly, in regards to the initiative to issue additional hybrid debt in the coming year, do you expect to take advantage of the debt-to-capital equity credit?

I believe that is provided by the rating agencies for those types of securities and potentially repurchase stock in excess of earnings, taking advantage of that credit?

So our goal -- our first program we announced last December, our share repurchase, was effectively a hybrid debt-from-equity swap.

We said we would issue $1 billion in hybrids.

We would buy back $1 billion of stock.

So we have actually been working on that specific transaction for 2013.

The rest of the program, about $2 billion more, we expect to issue hopefully during the course of the rest of this year; maybe $750 million or so of hybrids and $1 billion, $1.25 billion for preferred.

That is really part of just our capital management strategy we have previously talked about and does not impact any future share repurchase program, which we generally look at once a year towards the beginning of the year as part of our strategic planning process.

Thank you.

Josh Shanker, Deutsche Bank.

Related to what you are talking about, Mike, on pricing.

I did see two very different pricing strategies at Esurance versus Allstate brand.

What are you reacting to at Esurance, which has rather meaningful price increases, versus what you are reacting to at Allstate brand, where you think you can be moderate?

Josh, it's Don.

It's Don Civgin.

Let me talk a little bit about Esurance.

First of all, Esurance obviously was -- is designed for a different customer value proposition.

Different product, different features; and it competes in a different market.

The transaction is a year and a half into it.

You guys have been through this before where you're a year and half into a transaction and lots of things are going wrong.

In this particular case, I am proud of the fact that Esurance has really only one thing that we are focused on right now, and a lot of things have gone well.

The integration has gone well.

Advertising, brand linkage; all of that has worked well.

The combined ratio is high.

Part of it is high because of the advertising expense that we have talked about before.

But the loss ratio in the second quarter was higher than Gary or I were anticipating or would like.

We are taking price increases.

We have taken them -- if you look over the course of last few quarters, we have taken them pretty consistently as well.

Those decisions are independent from what that Matt's doing on the Allstate brand.

What we are trying to do at Esurance is make sure that the combination of the loss results as well as the rest of the expenses result in an economic combined ratio over the life of the product.

So I am less concerned about the advertising expense being elevated than I am -- over the life of that customer, are we having a good economic combined ratio that gives me a good return on capital and creates shareholder value.

So that's why we have taken the price increases in the last quarter.

And I will be honest, I think we're going to continue take some price increases going forward.

In spite of the fact that that might pressure some of the growth we have seen, it is the right thing to do to get the loss ratio to where we want to be.

So, Josh, it's Matt.

Let me just follow on the Allstate brand part.

First of all, as Don explained, it's a different segment and it is a different block of business.

Their historical business has been somewhat different than the Allstate brand, and they started in a different place.

So it somewhat deceptive to look at price increases without knowing where the starting point was.

We experienced that in homeowners over the last several years.

It depends where you start.

It depends upon how much of a price increase -- rate increase you have to take.

And so, as we have different blocks and different starting points, it is not surprising that, in some places, Esurance may have to take more significant rate than Allstate brand.

And it might happen that we are doing just the opposite in some states at some point in the future.

I would think of them as somewhat independent.

That's perfectly appropriate.

Looking at the homeowners, you still bled about 41,000 homeowners between 1Q '13 and 2Q '13.

Where are you in terms of shaping the portfolio to where you want it to be from a catastrophe perspective?

And, two, where are you in the process of trying to win back customers who you lost in the reshaping process and you actually -- if you could have tailor made it perfectly for you, you would have never non-renewed?

This is Matt again.

We're making good progress in our efforts.

Once again, I can't tell you either what inning we are in or what yard line we are.

But I can tell you I feel good about the progress that has been made.

And I think the fact that the [if] decline has slowed dramatically and consistently over the last several quarters is an indication that the we have less work to do and we are taking less severe action there.

That being said, it is all going to depend upon the combination of new business and retention.

So new business was up 35% in the second quarter.

That's great.

It accelerated the improvement seen in the previous quarters.

But retention is going to be one of our core levers there; and retention did take up last quarter, but I still think we have work to do.

And it's not just on the winning back of those customers who we may have non-renewed previously, but it is also keeping those customers we have.

And so we have a fairly concerted effort on the retention front.

New business -- the new business engine is moving, especially with house and home, which the growth in -- new business growth for house and home is about 6 points higher than it is for the country-wide average.

So the house and home initiative certainly is helping us on the new business side.

But the lever that I think we have to pull even harder is the retention one.

And, certainly, as we have less profitability actions to take, as we have less rate to put in and less non-renewals and less strict underwriting guidelines, as we return to a more normalized level, my expectation is we will continue to see improvement on retention as well.

And to what extent do you look at the marketplace and see your competitors also re-underwriting their books?

I am not right now in the market for homeowners insurance, but I imagine everyone tells me it is pretty hard to find a reasonable rate.

I'm surprised retention isn't better, given the lack of options.

Let me move aside to that.

I want to make sure we give people (multiple speakers) time for questions.

Yes, of course, of course.

So just -- I think Matt's view is he has got a long-term plan to start to grow the business, and you will start to see that play out as we go forward.

All right.

Thank you.

Bob Glasspiegel, Janney Montgomery.

It looks like you're giving us an early warning that you may improve your guidance in underwriting, although you didn't go all the way through.

And that's with a little negative wiggle in Esurance.

So what are you seeing and what are the biggest drivers that has come in better than you thought beginning of the year, given that Esurance sounds like it might be a slight negative in your -- versus earlier expectations?

Bob, this is Tom.

I'm a little confused by the sort of early warning on an improvement in one's forecast.

I am still struggling (multiple speakers).

Fair point.

What we do is, of course, you know -- four, maybe five, six years ago, we moved away from guidance.

And we said we will just tell you what we think the underlying combined ratio will be for the year.

We put in at a range -- because, you know, frequency bounces around from year-to-year.

Weather-driven; a whole bunch of things.

You can easily get a point move in a combined ratio just from frequency.

Severity, obviously, can bounce around as well, so we try to put a range on it.

We are feeling good about where we are in that range, particularly since we are below the range and we are six months in.

But you should not expect us to be updating the range because what happens is you update the range.

It eventually moves into a quarterly forecast because you give it for a year, then you give it for nine -- the next nine months, then the next six months.

Then the next thing you know you are doing it for the last quarter.

And because it bounces around a lot by quarter, we think the best way key to communicate to you all is to how we are doing relative to what we expect is the annual rate.

So -- and we think that is the right way to do it on a calendar year basis.

So we're just -- Bob was just making the point that -- so we feel pretty good about where we are at.

We don't see a lot of adverse trends in frequency of severity when you look at the first six months of the year, so we feel good about where we are at the range.

If you just do the math, we would have to have a pretty good bump to be above the range in the second half of the year.

And we are letting you know we don't think that's going to happen.

But we're also not getting into the process of re-forecasting that range every quarter.

So you're saying vanilla-frequency severity trends are contributing to the potential upside?

I think the way in which we do business is contributing to the consistency of the results.

Okay.

And one quick follow-up.

On the life side -- financial services side -- you're going to be discontinuing 20% to 30% of the earnings?

Is that what you were saying?

Before the deal closes?

What is the sort of core running rate of what's left?

This is Steve.

What we disclosed was roughly about a quarter of the earnings, is what is earned by the businesses that we are selling.

As we go forward, that will be out of our earnings next year but will still be in our earnings for this year until the closing date, which we are hopeful, subject to regulatory approval, would be the end of the year.

I missed the second part of your question.

Well, what is the core run rate of -- so you're saying 75% of Q2, which was a little bit high, is --?

Yes, so the --.

Bob, it is Don.

I think but we have disclosed is that the number of about $130 million or so run rate income is going to leave the Company when we complete the transaction.

Okay.

Thank you.

Vinay Misquith, Evercore.

The first question is on the ROE levels that you want to pull right now.

Seems that on both the homeowners and the auto, you are pretty close to where you want to be.

And so just curious, if I'm looking forward to next year versus this year, what ROE levels are you looking to pull?

Vinay, we will be able to figure that out when we get -- do next year's outlook, which will be in the fourth quarter is when we typically give --.

After we report the fourth-quarter results, we give next year's results.

There is a bunch of moving pieces here in terms of what happens in investment income, what happens to the capital structure.

Where we are in frequency and severity the last half of the year.

How much progress we feel.

How much growth there.

So I am not prepared to say what we're going to do next year.

Okay.

The second question is on the pension and life benefits, those reductions.

You have disclosed the impact -- like the net impact on net earnings this year.

But just curious as to what's going to be there the recurring benefit on a quarterly basis because of lower expenses?

So this is Steve.

The we are currently calculating that.

We have to do it on the basis of the date we announced the change of July 15.

So the actual raise, everybody hasn't had time to really calculate that.

What we disclosed was the impact on the balance sheet really and not as -- at a period of time, at an estimated range.

Not the actual income statement impact, which I don't have a handle on it right now.

But it will be a good number.

Okay, all right.

And will you guys let it flow to the bottom line, or are you looking to give it back to the policyholders in the form of lower rates?

We don't -- as I was saying before, we don't look at everything as terms of reducing price to drive growth.

We have a consistent strategy.

So, as we said, we want our expense ratio to come down while we are delivering good, differentiating value.

But, as Matt pointed out, they took -- he took some actions to invest in things like technology and marketing to drive growth.

So we don't specifically target individual actions and put them through to a one-part portion of the value proposition.

Thank you.

Paul Newsome, Sandler O'Neill.

Good morning, everyone.

Thanks for the call.

Could you just review with us what's left in the life insurance financial business?

That's not part of the core -- either as I understand it, the core business of selling traditional life insurance through the agencies and the worksite marketing business.

And what is the operating strategy at the moment for those units?

Good morning, Paul.

This is Tom.

Let me give you an overview, and then Don can talk about specifically that piece.

So, as you will remember, the strategy that we started a couple of years ago when Matt was leading that business was to, one, be focused on the Allstate agencies; and, two, to be focused on the worksite.

So you are correct in that.

We have continued to refine that strategy; and, of course, selling Lincoln Benefit is an outcome of the natural outcome of that.

Don also just recently announced shutting down the fixed annuity business to those agencies.

So that's a continued refinement which narrows it down a little bit.

So it's really life insurance; and from a manufacturing standpoint, it's life insurance through the Allstate agencies.

From a providing coverage for our customers, it's everything.

We sell variable annuities.

We sold that business in 2006, and we're still selling a lot of those.

We sell mutual funds.

We sell -- we will sell fixed annuities.

We sell long-term care.

We sell a whole bunch of things through our agency.

So you have to distinguish between what are we doing for those customers and what are we underwriting.

And -- so, but then, also, there is about a $32 billion block of annuities which are in several different forms that we still have, still will retain when we get done with the Lincoln Benefit transaction.

And Don can talk about what our strategy is there.

Okay, hi, Paul.

You know it is -- let me try to answer it this way.

When Matt first started with this strategy for the life business, this was a 6% return business.

We have gotten that number up to about 8% now, mostly through improvements in operating income.

We have still got some elevated capital levels, and we're working hard to reduce those as well.

I think Tom said it right.

You have to view what's left from a customer point of view and then what the liabilities are.

From a customer point of view, we are fully committed to meeting the customer value proposition that Allstate has to the Allstate customer through our agency distribution -- agencies and exclusive financial specialists.

We are going to manufacture life products.

We have historically had good returns in that business.

We will continue to use our paper to write that product.

But on the annuity side, we're basically out of that business as a relates to putting it on our balance sheet.

The LBL transaction takes with it about $13 billion of reserves.

$9 billion of that is annuities, so that is strategically very important because it continues to reduce our exposure to the spread business.

When you look at it from a balance sheet point of view, we have life blocks and we have annuity blocks.

As Tom said, the annuity blocks are still larger than we would like.

And we continue to work both on the liability side and the asset side to find ways to make that accretive to our income as opposed to a dilutive, which is what it is doing now.

And the life business, we want to grow.

We like the liabilities there.

I think we have had historically good results.

We are good at those products.

But, again, back to the customer point of view.

They will not see a difference as to whether it is going on our paper or something else's paper.

Last question, please.

Adam Klauber, William Blair.

It seems like frequency for the last three years has -- in auto -- been pretty much nonexistent.

Any theories on why that is and what you think is going to happen going forward?

Hi, Adam, Tom.

Matt can talk about it.

I guess I would just characterize it.

We wouldn't say it is nonexistent.

Perhaps it hasn't been increasing rapidly, but it is still there.

But in terms of pressure, on loss ratio, Matt can talk about it.

Yes, I wish it would completely disappear.

This business would be easy.

But we're actually looking at it, and we call it benign.

It is stable, and it's performing within the historical ranges.

And so we are not experiencing pressure from the frequency side.

But that is on a country-wide basis.

And so we have to monitor it on a much more granular basis.

We will continue to look at it on a geography-by-geography basis.

In some cases, it may tick up and we will get on it quickly.

But from a country-wide basis, we have seen it stabilize within the historical range.

And, Adam, this is Tom.

On a longer-term basis, of course, you are absolutely right.

It has been declining.

So whether that is the age of the population, increased sophistication of the car, or the fewer miles driven because of gas prices and the recession, you do see a long-term trend on.

We are paying attention to that, particularly on that second item with safer cars, with machine-to-machine communication, which is why we think our strategy of selling multiple things to the customers is the right way to go.

Because if you carry that trend line out, to Matt's point, if you really had no accidents, you wouldn't need much insurance.

And so we are seeking to try to protect our customers from all of life's uncertainties.

Which is why doing the life insurance piece, having homeowners, doing boat insurance, personal umbrella policies, and in graphing all of our stuff around that customer so they have a circle of protection is why it is important for us.

So, you're right, it has been benign.

And that is why you see basically a very little increase in our average premium.

So customers continue to pay a good price -- pay the right price for what the risk is they have.

Thanks.

And just one click follow-up.

How is the Drive Wise rollout going, and is that helping growth at all do you think?

It's Matt.

Thanks for asking.

It is going well.

We have now rolled out in 20 states as of the end of June; we hope to put on another 8 to 10 through the second half of the year.

Very favorable early results.

I think I talked a little bit of that on the last call.

To date, we have about a little over 600 million miles through the system, 20 million hours driven by the customers.

We are seeing double-digit growth per month in devices installed in the vehicles.

And over a third of the new customers take Drive Wise when offered in those states where it is available.

So the acceptance rate is high.

About 70% of users are receiving a discount.

That discount averages around 10% to 12%.

So they are taking advantage of it.

We are learning from it.

The customers are benefiting from it.

So that's a part of the story all the way around.

Adam, I would point out too, remember there is a difference between our strategy and some other people in the business.

Not everybody, but ours is to stay connected, as Matt talked about.

So we are looking -- as opposed to using it for just pricing, ours is about pricing, but it is also about finding other ways to stay connected with a customer.

So thank you all for participating.

We made good progress this quarter on strategic initiatives including a focus on the customer, raising returns in homeowners, deploying capital in the right places, and enhancing our financial strength.

We have also made great progress on the five priorities.

And we will keep working hard on your behalf as we go through the rest of the year.

Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Good day.