Allstate Corp (ALL) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate second-quarter 2014 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. (Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Pat Macellaro, Director of Investor Relations. Please go ahead.

Thanks, Jonathan. Good morning, everyone, and thank you for joining us today for Allstate's second-quarter 2014 earnings conference call. After prepared remarks by Tom Wilson and Steve Shebik, 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 a slide presentation to be viewed in conjunction with our prepared remarks. We also posted an update to the description of our reinsurance program. These are all available on our website at allstateinvestors.com.

As noted on the first slide, 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 2013, our 10-Q for the second quarter, 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 on our website. We are recording the call today, and a replay will be available following its conclusion. I, along with Steve Shebik, will be available to answer any follow-up questions you may have after the call.

And now, let's begin with Tom Wilson.

Well, good morning. Thank you for investing your time to keep updated on Allstate's progress. In addition to Pat and Steve, with us today in the room is the team that delivered these great results. Matt Winter, who leads Allstate Personal Lines; Don Civgin, who is responsible for Allstate Financial and Insurance; Kathy Mabe, who leads Business-to-Business; Judy Greffin, our Chief Investment Officer; and Sam Pilch, our Corporate Controller.

Let's begin our slide 2. Allstate's second-quarter results demonstrated our ability to concurrently grow the business and generate attractive returns. Our strategy to create unique new customer value propositions for each consumer segment is working, and it's helped us compete in new and different ways.

So in the last 12 months, we have added almost 750,000 property and liability policies into force. In addition, we added another 900,000 relationships through our Good Hands Roadside and Allstate Benefits offerings. Positive growth momentum is building, particularly in the Allstate brand.

Secondly, we made good progress on all of our 2014 operating priorities. Third, we recorded very good financial results. Net income was $614 million for the quarter -- which you can see in that bottom table -- which was higher than last year, since there was a loss on the extinguishment of high-cost debt in the 2013 results. Operating income was $1.01 per share. Excellent results in light of incurring $936 million in catastrophe losses.

Strong underlying profitability, lower expenses, and good investment results all contributed to the positive operating results. The decline in operating earnings versus the prior year was due to higher catastrophe loss.

Lastly, we improved our financial strength while returning capital to shareholders. The 18-month, $2.5 billion share repurchase program approved in February is now 40% after four months. Open market purchases were made throughout the quarter to accelerate the stock repurchase program and the Company's share repurchases, which are alongside that program.

I think when you look at the supplemental -- a number of people didn't understand the fact that the Company's repurchases are in addition to the open market purchases made under the ASR. Overall, we are executing well. And we are poised to grow with attractive returns and further leverage our capabilities to create shareholder value.

Go to slide 3. This visually combines our strategy and our current operating results for each customer segment. So overall, the 750,000 increase in property-liability policies represents a unit growth rate of 2.2%. Increased average premiums for our Allstate Protection net written premium growth at 5.5% over the prior year.

The reported combined ratio of 97.4 reflects 13 points of catastrophe losses; therefore, the underlying combined ratio for the quarter was 84.7. Let's walk through each of the customer segments, starting with the Allstate brand, which represents 91% of written premiums.

As you can see in the lower left quadrant, auto policy growth increased again this quarter and was 2.3%. Working across the growth line, the decline in homeowners continues to shrink. It was now down to 0.5% this quarter. Other personal lines are growing, bringing total policy in-force growth in this segment to 1.5% and net written premium growth to 5%.

We are also pleased with the profitability in this segment, with a reported combined ratio of 95.4, which you can see in the third line on the far right there. If you go back to the left, the auto reported combined ratio was also 95.4, which results from a disciplined and precise set of operating processes, focused on matching price to risk and cost.

We continued to have modest increases in auto prices, which were up 0.5% this quarter, excluding Canada. A few analysts called about the investor supplement, which shows no increase in total because it impacted a large mandatory reduction in Ontario auto pricing. Another measure of auto pricing discipline is average gross written premium, which is 2.6% higher than a year ago.

Moving to the next column, the recorded homeowners combined ratio was 98.6 despite almost 39 points catastrophe losses. An underlying combined ratio of 60.2 for this product gives us confidence that we can create shareholder value and improve our competitive position by growing this line.

Esurance, in the lower right, had another quarter of strong growth, with policies in force up 17.5%, although this is more than last year, as expected. The combined ratio of this brand reflects the immediate expensing of acquisition costs has improved from last year due to profit improvement actions taken to ensure we get acceptable economic returns.

Encompass, in the upper left, also continued to grow policies, but at a slower rate than last year, also as expected. With an underlying combined ratio of 94.8, there is still more work to be done to raise returns.

Answer Financial sells nonproprietary policies -- that's in the upper right -- through the Web and call centers. Nonproprietary premium increased 12.6% over the prior year.

Our five operating priorities are shown on slide 4. So we just covered the second-quarter results on growth and profitability, so I'll give you a chance to just read the bullet points; then I will move on to the next three priorities.

Investment returns were favorable in the quarter as higher Limited Partnership income more than offset the expected decline in interest income. You will remember the risk and return trade-out we made in shortening the duration of the property-liability portfolio, which resulted in capital gains but lowered investment income by over $100 million annually. Our efforts to modernize operating model showed up in lower operating expenses at Allstate Financial, reflecting actions taken because of the sale of Lincoln Benefit.

The benefit plan changes made in 2013 also led to lower expenses. Long-term growth efforts include expanding our Allstate agency capacity in underserved markets. Allstate agencies are also investing in growth alongside the Company, and collectively we're working to improve the effectiveness and efficiency of this powerful local model.

Esurance continued to expand its business, and it offers auto insurance in 43 states; renters insurance in 18 states; motorcycle insurance in 9 states; and homeowners insurance in 7 states as of the end of the quarter. And we continue to expand that product portfolio throughout the year.

The breadth of this set of underwritten products is designed to give us a competitive advantage by better serving customers and lowering acquisition costs in comparison to other direct providers. We are also investing aggressively in telematics and are achieving rapid growth in utilization of the Allstate-branded Drivewise and Esurance DriveSense offerings. We are testing additional features which extend the benefits being connected beyond more accurate pricing.

In summary, halfway through the year we have made very good progress on our 2014 priorities. Steve will now cover the operating results in greater detail.

Thanks, Tom. I'll begin by reviewing the second-quarter financial highlights on slide 5. Beginning with the upper left, property-liability earned premium was $7.2 billion, and the second quarter was 5% higher than the second quarter of 2013. The recorded combined ratio of 97.4 increased 1.3 points versus the comparable 2013 quarter, driven by $936 million in catastrophe losses, which were 45% higher than the prior year.

The underlying combined ratio was an 84.7 for the second quarter, and 86.6 year to date, which is below our full-year outlook range of 87 to 89. Net investment income for the property-liability segments increased 2.3% from the prior-year quarter, driven primarily by Limited Partnership income.

Property-liability operating income in the second quarter was $364 million, 15.9% lower than the second quarter of 2013. The property-liability combined ratio on a recorded underlying basis is shown in the chart on the upper right-hand side of this slide. You can see that while the recorded combined ratio rose in the second quarter due to catastrophe losses, the underlying combined ratio was very favorable, as we did not experience a repeat of the adverse weather encountered in the first quarter.

The table below this chart provides a view of the underlying combined ratio trends by brand for the past six quarters. We have also broken out the Esurance underlying loss ratio to remove the impact of investments in advertising and expansion, which are immediately expensed, and provide greater transparency to our ongoing profit improvement actions. As Tom mentioned earlier, you can see the Esurance loss ratio is starting to benefit from the actions that we have taken to date.

Allstate Financial, on the bottom half of this slide, had a 10.5% decrease in premiums and contract charges in the second quarter resulting from the sale of Lincoln Benefit Life.

Operating income of $165 million was a 5.1% improvement over the second quarter of 2013, driven by higher investment and benefit spreads and lower operating expenses. Net income of $145 million for the second quarter includes an additional $13 million after-tax loss on sale of Lincoln Benefit Life.

Excluding LBL's second-quarter 2013 results, operating income increased by 31%. Net income declined by 10.5% in the second quarter of 2014.

Our second quarter 2014 10-Q and investor supplement both contain estimated historical results from Lincoln Benefit Life to provide you with further context. Allstate Financial is now a smaller but more focused Company, but still capable of producing meaningful operating income.

On slide 6 we show net written premium and policies in force growth rates for Allstate Protection and by brand. For Allstate Protection, in the upper left chart, the red line shows the continued trend of policy growth that began in second quarter of 2013. Policies have grown by 735,000 or 2.2% from last year's second quarter and 407,000 or 1.2% from year-end 2013. Each brand where we accept underwriting risk achieved growth in the second quarter in both written premium and policies compared with the prior-year quarter.

Moving over to the upper right chart, Allstate brand policies ended the quarter 1.5% higher than the second quarter of 2013, growing 463,000 policies. The Allstate brand grew net written premium 5% in the second quarter versus the prior-year quarter, driven by continued favorable trends in new business, retention, and higher average premium.

Allstate brand auto net written premium increased 4.9% from the prior year, while policies rose 450,000 or 2.3% in the second quarter of 2013. Allstate brand homeowners net written premium grew 4.3%, while the rate of decline in policies in force slowed to 0.5% or 28,000 policies compared with the prior-year quarter.

On the bottom two charts, you can see the growth trends for Encompass and Esurance. Encompass policy in force growth continues to slow, reflecting actions taken to ensure acceptable long-term returns. Net written premium growth of 8.3% in the second quarter compared to the second quarter of 2013 reflects higher average premiums due to rate increases that are earning in over time.

Esurance's rate of premium and policy growth continues to slow due to its increasing size as well as the ongoing pricing and underwriting actions underway to ensure long-term profitability. Total Esurance premium has grown over 65% and policies in force over 80% since its acquisition in October of 2011.

Slide 7 highlights Allstate brand auto and homeowners underlying margin trends. The charts on the left side show Allstate brand auto and home combined ratio trends, while the charts on the right show quarterly change in earned premium and underwriting loss trends. As you can see, while there is volatility in the trends in the charts on the right, the longer-term underlying combined ratio results on the left have been fairly stable and demonstrate the success we experienced with maintaining auto margins while improving homeowners.

For Allstate brand auto in the upper right-hand chart, we experienced frequency results that performed within historical ranges in the second quarter, as the adverse impact of severe winter weather in the first quarter was not repeated. Severity results showed only modest increase over prior year, resulting in a decline in the average underlying loss in the second quarter of 1% compared to the second quarter of 2013.

We continue to earn previously approved auto rate increases, as average earned premium increased 1.6% in the second quarter compared to the prior-year quarter. For Allstate brand homeowners in the lower right-hand chart, we also experienced more favorable underlying losses in the second quarter compared with first quarter. Average earned premium continued to increase, although at a slowing rate as we approach rate adequacy in total.

We continue to take rate increases as needed in both lines to keep pace with loss trends and maintain our underlying combined ratio.

On slide 8 in the top left graph, you see the composition of the investment portfolio and the impact of the sale of Lincoln Benefit Life, which reduced the size of the portfolio by $12 billion. Over time we are shifting the portfolio composition to an asset mix we believe will have higher returns, relying less on interest-bearing assets and more on equity and other assets, where the return is derived from idiosyncratic operating performance.

Our total portfolio return, presented in the top right, was a strong 2.2% for the second quarter, reflecting increased fixed income valuations and positive equity market performance. You can see, however, the devaluation impact is highly variable, while the income yield has been relatively constant over the last five quarters.

Our second-quarter investment income before expenses was $932 million with a total portfolio yield of 4.7%. The lower half of the slide provides the investment income and yield for the property-liability and Allstate Financial portfolios, each of which now comprise approximately half of the portfolio.

For the property-liability portfolio, in the lower left graph, the interest-bearing yield has stabilized after the 2013 rate risk reduction actions Tom mentioned, while the total yield illustrates the variability in income that may result from equity investment, including our Limited Partnership investments.

The Allstate Financial portfolio, in the lower right graph, trends more consistently. However, you can see a decline in our second-quarter income driven by the sale of Lincoln Benefit Life.

Our capital position is strong. Turning to slide 9 on the left side, you can see the change in the composition of our capital structure over time from senior debt to hybrid debt and preferred stock. A pro forma view of our capital mix, adjusted for the expected repayment of $650 million senior debt in August, is also shown on the far left bar.

We took advantage of favorable market conditions in the second quarter, issuing an additional $250 million of noncumulative perpetual preferred stock, providing further financial and strategic flexibility. So in a quarter we repurchased. During the quarter we repurchased $142 million of common shares through open market purchases and paid $125 million in common stock dividends, for a total cash return to common shareholders of $267 million, bringing total common shareholder cash returns to $1.370 billion year to date. We completed the accelerated share repurchase program announced in March on June 29 with the receipt of 1.77 million additional shares.

Book value per common share reached a record $47.97, increasing 5.9% since year-end and 15.2% since June 30 of last year. Our estimated statutory surplus at June 30 was $18 billion. Allstate Life distributed $700 million in a return of capital to its parent, the Allstate Insurance Company, during the quarter.

Our operating income return on equity was a strong 13.7% in the second quarter on a trailing 12-month basis, but lower than the full-year 2013 return of 14.5%, reflecting the impact of higher catastrophe losses in the first half of this year along with higher equity. The increased equity is the result of our 2013 benefit and plan assumption changes.

As you can see in the table in the upper right, average trailing equity is essentially flat from year-end 2013 to June 30. The impact of benefit changes will enter into the calculation in the third quarter.

Overall, we continue to make good progress on the execution of our customer-focused strategy and our operating priorities in the second quarter. Now let's open the call up for your questions.

(Operator Instructions) Jay Gelb, Barclays.

The underlying P&C combined ratio of 84.7 -- if my data is right, that's the best of any quarter in the past six years. So first, that's a great result.

Second, just wanted to see if there was any lack of non-cat weather or other factors that would cause that to be lower than you might think on a go-forward basis?

Jay, make sure I get the second part of that question. So the question was whether weather had an impact on growth?

No. I'm sorry -- on the underlying combined ratio, non-cat weather or any other factors.

First, thank you. We feel like we've made a lot of progress. Matt can talk about the underlying combined ratio.

Good morning, Jay. There was nothing out of the ordinary this quarter from an underlying standpoint. As you know, we just had a lot of rate earning in. We had a fairly careful management of claims continuing, and we had an underwriting expense ratio that was down.

And as a result, all of the discipline that's been put into the business over the past many years is just starting to show through. Frequency improved, trends were broad-based. Paid severity was pretty much in line on the P-I side of the PD. Actually, we had some claims that shifted over from first quarter to second quarter because of such a high claim volume in first quarter.

So some third-party subro demands came in in the second quarter. So that just changed quarter over quarter a little bit on the PD side. But overall, there was nothing extraordinary there. Nothing out of the ordinary. We think it's just a continuation of the hard work that's been put into the business.

All right. And then the pace of share buybacks slowed pretty meaningfully in 2Q relative to 1Q. And as you mentioned in the prepared remarks, the accelerated share repurchase program probably had a fair amount to do with that. But I'm just trying to get a better sense of what a normalized buyback pace might be on a go-forward perspective.

So as I said, we concluded our accelerated share buyback program; when we started in March, I think Tom noted -- I meant -- instead of June 29, it was actually July 29 till they had completed it. When we enter into a program like that, effectively we give the buyback program for that piece to another party -- in this case, it was Barclays.

So they buy over a period of time -- in this case, four months. So we buy alongside them, but we effectively get a fair amount of the shares from the money we provide to Barclays upfront. So we record all of that in the first quarter, so we had such a strong buyback number in the first quarter.

And the second quarter is really open market purchases alongside the program, and that program has now ended this week. And we are back in the market ourselves, buying. So if you think we are -- we have announced we are going to do a $2.5 billion buyback over 18 months, essentially. You do some division, that's about $150 million a month is kind of the ongoing rate we go.

And there are times when we accelerate that, generally earlier in the program. Over the summer we generally go a bit slower than $150 million. Now, we do have a strong capital position, clearly, so we have probably have more flexibility than we've had in prior years, when during the hurricane season -- you know, probably July to September, we would slow down our program.

Jay, let me build on Steve's answer there. So we are 40% of the way done in 20% of the time. So there should be no confusion as to our commitment to do this aggressively. I think what you just see is it's the way that the numbers get accounted that makes it look like we are not active in the market. We are active in the market, and we're aggressively buying back as much as we think is prudent, given the flow.

That's great. Thank you.

Bob Glasspiegel, Janney Capital.

I want to pyramid into your bullet point on modernizing operating structure at Allstate Financial. Just to get a sense of where the cost structure is on a go forward basis, you have a program to reduce expenses. You are absorbing a little bit more of corporate overhead without Lincoln in the mix. When are you sort of at your right run rate of expenses? And how much lower can it go from the current rate?

Bob, let me make a comment about general corporate expenses, and then Don can address all Allstate Financial. So we've always been about reducing expenses, whether that be the benefit plan changes we talked about last year, which would reduce expenses and you see rattle through the P&L; or just our normal, continuous improvement simplification.

The benefit we now have is by growing revenues, you will see more of that flow through the bottom line. So in the past, when revenues and PIF counts were going down, it's hard to get ahead of that in terms of your expense ratio. So that you should begin to see is our growth create a little more incremental margin for us. Don can talk specifically about Allstate Financial, because they are doing a great job of getting ahead of the downsizing there.

Thanks, Tom. So the strategy for Allstate Financial has been the same for a number of years. That's been to simplify our focus so that we are all about the Allstate customer and the Allstate agency. The Lincoln Benefit transaction obviously was an important step in that, because it not only reduced the size of the balance sheet, allowed us to free up some capital for the parent Company; but also, then, allowed us to focus all of our efforts on one distribution channel, which is the Allstate channel.

There has been a lot of hard work -- and thanks for noticing it -- that has taken place to try and get our cost structure down, because we are a smaller company. I think we've made good progress; you see it in the numbers.

At the same time, we're taking costs down. We're simplifying what we do so that we can be more effective at serving the Allstate customers and the Allstate agencies. We're not through the transition yet with Lincoln Benefit Life. We still have a good year or so of work to do to get that behind us, but I expect to see us continue to work hard to manage our expenses so that we can continue to deliver really strong operating results.

And Bob, I would just add one other point: as part of corporate overhead, I prefer to call it corporate value-add.

Thank you. Tom, you sort of anticipated my follow-up and gave a partial answer to the question I was going to ask, which is on the PC side, you are seeing a solid expense ratio improvements. Going forward, are we likely to see any underwriting improvement more likely to come from the expense ratio than the loss ratio, given that you are saying you are trying to move rates up in line with loss cost growth?

I will let Matt answer it for, of course, our biggest business, which is the Allstate agencies. I would just point out, as it relates to Esurance, the expense ratio is dependent on how aggressively we want to grow the business and how much advertising we are doing.

Bob, it's Matt. Thanks for your question. We try to manage both components. I wouldn't say that we are trying to use one lever over the other lever.

I think we have to be conscious of, and monitor, and manage both the loss cost and the expense side of the house. As Tom mentioned, now that we are in growth mode, it gives us the flexibility of making some investments for the long-term. It gives us the ability to leverage our scale and efficiency.

It gives us the ability to do some things, some of the work we are doing now in continuous improvement, to really go through some of our processes -- really make sure they're as efficient, effective, and customer-focused as possible. That will help us leverage our scale and size. That will help us be more efficient. And so my expectation and the team's expectation is that we will be diligent on both components of the combined ratio and not look to just use one lever versus the other.

Thank you.

Josh Stirling, Bernstein.

So, listen, I wanted to switch gears a bit and talk a bit about growth. You guys have come out of a number of years of sort of stabilizing the business and shrinking the volumes in some of your lines you've been growing for the past year.

Longer-term, really interested in what you guys can do to get more leverage out of your core Allstate agency platform. It sounds from what you're -- your presentation this morning, it sounds like you are starting to add agents again. I'm kind of curious if that's new headcount in agencies? That's new principals?

And also, you've done a lot, I think, to reposition the organization to focus more on cross-selling and try to leverage, like, the benefits package and things like that. I'm wondering if you can give us a sense broadly what you are doing?

And then for a big picture, whether these are the sorts of things that can kind of help you maintain share, or whether any of them are sort of material to allow you to actually begin to grow unit volumes, say, in excess of household formations or something like that?

Let me start with the last part, and Matt can give you the specifics on the Allstate agency piece. So our overall plan to increase share of the business is really focused on having unique customer value propositions for each segment. So Matt has a unique customer value proposition for those people who want local advice and a branded product? He can talk about the things he's doing to make that resonate, which includes many of the things that you mentioned.

At the same time, we look at both share of revenue and policies as well as share of profits. So as you know, the overall industry return in the property-casualty business -- broadly defined, including commercial and personal lines -- is about 7%. We'd like to continue to maintain our attractive returns and have a greater share of that than we do the top line.

We believe we can grow both with our differentiated proposition. And Matt will talk about specifically what he is doing. And he is -- that business is building momentum. I feel good; the flywheel is turning on that one.

As you noted, there has been a fairly strong emphasis on getting the Allstate agency force growing again and getting the entire Allstate brand business growing again. So we look at it in a couple of different categories, and we refer to capacity building, capability building, and activity creation.

So on the capacity building, we are in fact increasing points of presence -- points of distribution presence, both EAs and licensed sales professionals. So we do have a fairly significant and aggressive campaign to grow the Allstate agency force, but it is not just putting on numbers. It's putting on quality agencies in strategically deployed areas, where we are underpenetrated and we believe that there is extra market potential.

And we will continue to do that fairly aggressively, because it's working for us. We are doing that in areas where we have not historically been able to penetrate. And we are using new and fairly creative methods of doing that, including the Allstate auto dealer program, where we place Allstate agencies in car dealerships-- which, in the Heartland, especially, is enabling us to service a very wide geographic area in a very efficient way.

We are also using what was formerly the Allstate Direct group in a support mode for the Allstate agencies. We call it Extra Hands. So we are deploying that large call center force to create additional capacity for the agencies, both after hours, weekends -- and then, additionally, for overflow when they are capacity constrained during the day. So in the capacity creation, lots of things going on that we think create long-term, sustainable growth capacity.

On the capabilities side, Tom has mentioned, I think, on several calls our push to create an advisory capability within the Allstate agency and grow that. So we refer to it as Trusted Advisor. It is our initiative to focus the Allstate agency force on more advisory and service functions and less transactional functions, where we believe their differentiation stands through to the customer base, where we think that they provide extra value; where we decommoditize insurance and do not accept the fact that auto or homeowner insurance is merely a pricing play that's truly just a commodity.

We don't believe that. So we are spending a lot of energy and effort building the advisory capability within our Allstate agency force from a technology perspective, from a service perspective, information perspective, process, and marketing perspective. You'll see a lot of our recent marketing and our agent recruiting materials are very focused on the Trusted Advisor piece.

And on the activity side, we have spent a lot of energy and effort improving our close rates, improving quote activity, improving retention through customer-focused experience work, and other things to improve our relationships with our customers and retain them for a longer period of time. So on the activity side, we think we've been quite successful, with our broadening the target, with our cogeneration -- and you'll see, you have seen, how that has flowed through in the auto results.

On the home side, as Tom mentioned, the deceleration in the decline in homeowners is just accelerating. So we are flattening out and positioning to grow there as well. And as Tom has mentioned many times, our goal there has been to grow in a very disciplined manner so that the volatility of that line is still acceptable for our shareholders, our customers, and for the Corporation.

And we think we've been pretty successful in that. If you just look at the last eight quarters, we've had eight consecutive quarters with a recorded combined ratio under 100. During that time we had $2.1 billion of underwriting income at a combined ratio of 83.1 despite $2.5 billion in cats.

That's a fairly significant event. That's a fairly significant accomplishment. And that has given us the confidence to begin growing the homeowners line again in a thoughtful and disciplined manner.

And when we look at that, and we look at the underlying combined ratio during that same eight-quarter periods was 63.2. And as we've said multiple times, our goal is to deliver low 60s combined ratio in the homeowners business. And we did that in a period that included Superstorm Sandy and some of the worst winter weather we've seen in quite a while.

So the last part of your question, which was the ability to cross-sell -- you've seen an uptick in our other personal lines business. You saw that in 2013 that line was declining. In 2014 we began growing again in that.

Most of that growth is driven by renters and condo, which we think are very important to creating long-term relationships with our customers and enabling cross-sell of other products, including auto. It probably would have been faster had it not been for the decline in the involuntary auto piece of that line. As you know, the involuntary auto is what we get, depending upon whether other auto carriers -- specifically in New York and New Jersey -- accept higher-risk customers.

Lately they've accepted more customers. We've had less involuntary auto. And so that has slowed down the growth in other personal lines. But overall we feel quite good about our ability to serve all the needs of our customers.

We have stopped really referring to it as cross-sell and refer to it as providing household solutions to meet the needs of our customers. So we're not so interested in trying to acquire a customer and then push another product on them, but to acquire a customer and meet all of their needs and the needs of their household with our full product portfolio. So we feel quite good about our positioning for growth and our ability to sustain that growth over the long term.

Thank you, Matt. That's really pretty comprehensive. I appreciate it. I guess maybe sort of a high-level question for Tom -- you have increasingly given more visibility in your communications to all of us, talking about telematics. You mentioned the strategic investments here today. I'm wondering if you can give us some color on how your thinking about your go-to-market strategy is evolving in Esurance and Allstate.

And big picture, is this something that's going to be a growth engine for you guys? Or is it more an opportunity to increase your connectivity with customers, and something we should basically look for as a benefit to, say, retention, for example?

It's a good question. I would say that the connected car space is developing rapidly. We are right in the middle of it, and it's hard to determine exactly where it will come out. But I can give you the three components that we're working on.

So first and most importantly, being able to be connected with our customers helps us get more accurate pricing on their behalf. And as we've talked about in the past, we are making estimates as to what an individual customer should have. We've been very good at that, and that's given us a competitive advantage. You can see that in the homeowner result that Matt was talking about.

Knowing how a specific person drives gives us the ability to do an even better job, and we can provide them a 10% to 30% discount if, in fact, they connect with us. And it's every bit as powerful as credit, so we are actively and aggressively working to expand that portion of our business.

Secondly, we are working to improve the driving experience. So we have a number of features that we are developing which improve somebody's driving experience, which takes their relationship with us potentially beyond auto insurance.

We don't know where that will exactly come out yet. We are investing aggressively in it, to Bob Glasspiegel's point. And what Matt said was: we invest where we want to invest, and we cut costs where we think it's not really adding customer value.

In that component of our telematics offering, we are investing aggressively and trying to decide what are the number of alternatives. We've launched some new features last quarter on teen driving, and we'll continue to roll out new features to better the driving experience.

The last component of our offering is: how do we best utilize and monetize some of the data that will be created from that connection on behalf of our customers? We are collecting billions of miles of traffic data and all kinds of other data -- how cars work, what they work, what they are like in different weather conditions. And that is the most nascent of our efforts.

It's not an area where we have a traditional source of expertise in monetizing data. We are obviously very good at using data, and we make a lot of money by monetizing it on behalf of our shareholders. But how we help other people use that data and how we capture that revenue source on behalf of the Company is yet to be determined.

So it is both more accurate pricing and better experience, which leads in part to retention, but we also think may lead to other revenue streams; and then just solely new revenue streams. So it's really all three of those components.

Cool. That's a lot to watch for. So thank you, guys. Good luck for the summer.

Michael Nannizzi, Goldman Sachs.

I guess one question I had, sort of bigger picture -- homeowners, trending well; underlyings are good. PIF trends moving in the right direction. Auto underlying -- it was nice, and it doesn't seem like -- or from your comments, it doesn't sound like it was a one-off.

Other personal lines, growing; looks like low 80s underlying there. And then Esurance is improving. So I guess I'm trying to understand your 87 to 89 combined; as a target, it would seem that we're on a glide path to come in below that, unless I'm missing something. Can you comment on how we should think about that? Thanks.

Sure, Michael. First, we -- of course, as you point out, we give an operating range of a couple of points for the year at the beginning of the year, because we want you all to have some confidence that this is where we think the business will come out. This year we picked 87 to 89, which was 1 point lower than the range we had last year, which was reflective of our team here's confidence in all the metrics you just talked about.

Right.

So for the first six months, I would point out we're -- you are right; we are slightly below that in terms of the underlying combined ratio towards the lower end. But as you also know, frequency can bounce around a good point in any period of time.

So we don't feel any need to change that range. We don't do it to try to help people do operating EPS calculations; we do it to give you a sense for how good we feel about the business. We still feel good about the business. We think 87 to 89 generates really attractive returns, and we can grow in that range.

So we don't have any plans to change it at this point. I would take the opportunity to do a sales message, because all the things you had talked about, that means the valuation should be a much higher multiple of book. (laughter)

That's fair. (laughter) I guess the other question I had was just -- so do you guys calculate an industry loss estimate for 2Q across the country? Because it looks like you guys are at about 900, just over that. I look at some industry loss estimates that show that 2Q was a relatively light quarter.

Can you try to help us try to square that? Is it where you are located, or maybe just a conservative view of where losses may end up? I'm just trying to square up.

Are you talking about auto and home?

Yes. So I mean, some cat losses for the second quarter, 930. It looks like industry loss estimates are somewhere in the $6 billion to $7 billion range, and that's commercial, personal, across the board domestically. So I'm just trying to square that versus your sort of market share.

I think I would make two comments. One, it's a little early to find out where exactly the industry is, because people are just reporting now, and it takes a while to get the information.

Secondly, we do obviously look externally at how our results compare to everybody else. But we break it down. We look in total book, but we're really more concerned about what happens locally.

So this is a local business. We underwrite price -- to our agencies everything is local. So we would really look and say, how are we doing in Colorado relative to other people in Colorado on all fronts? That would be not just catastrophes; it would be BI. It would be physical damage.

We have a number of tools we use to do that, obviously starting with pricing, but going all the way through to claims or some industry databases we use on claims.

And I think the summary, I would say, of all of that is the machine that we have in place, which is a set of business processes, disciplines, rewards, recognition, analytics to help us maintain our profitability in the zones we talked about is working. We think it's working well.

We see -- you know, Matt's team is adjusting where they need to adjust, and that has obviously been true for a long time on auto insurance. You are now seeing that same discipline and set of practices being applied to the homeowners business. So we feel good about where we are at relative to the industry.

Great. Thanks. And then just really quickly, Esurance. As your actions continue, it looks like you took mid-single-digit rate. PIF is still in the high teens.

What do you expect or what are you hoping to kind of get that to? Or when were you hoping to get that to sort of underlying profitability, or at least getting that loss back down as close to zero as possible?

I will let Don talk about the specifics that they are doing in Esurance. I would tell you, though, from a capital allocation standpoint, the conversations that Steve, Don, and I have about that business are: it should grow as fast as they can, assuming we are earning above our cost of capital on business that we write.

If we are not getting the right return on it, then we are not interested in growing. The returns on the business we write are well above our cost of capital, slightly below what we would make in a large existing business like Allstate, which has a huge legacy book associated with generating a lot of profitability, but it's got to be profitable what we do.

Got it.

Yes. There's probably a little I can add to that. The reality -- it's our goal is to run Esurance in a way that we are economically profitable. What you are looking at is the GAAP profitability, which, of course, is impacted by the fact that we are expensing the advertising upfront. And there's also a couple of points of investment in other products and expansion that doesn't necessarily pay off in the quarter, as well.

I'm really pleased that the work that Gary and his team have done over the last year or so on the loss ratio is beginning to pay off. You are beginning to see it in the numbers, the loss ratio coming down again.

So I feel good about where they are. We would just like to see them continue to grow. And I don't think we want to put an artificial target of a GAAP combined ratio, because I think that will stifle the growth that we are seeing in economic terms right now.

That's fair. Great. Thank you for all the answers. I really appreciate it.

Kai Pan, Morgan Stanley.

Just first question is on the loss cost trend. If you are looking at slide 7, it looks like both from auto and homeowner, the underlying loss trend have been taken down from recent aggregate levels. So could you give a little more color on that? And how do you think about in general the economy -- the inflation as the economy covering?

Yes, good morning, Kai. It's Matt. I'm looking at that -- I look at those same two charts on 7, and I look at it as kind of reverting more towards the norm. I don't see it as that much of a directional change. I think we've had an aberration on the auto side for a couple of quarters.

It looks like it's stabilized where it should be and where it has been historically. And the same on homeowners.

So we feel very good about the underlying margin trends in both of those businesses. As we've been saying, historically we managed this very disciplined. We keep on top of loss costs, and we keep on top of expense costs.

And we manage it on a micro basis for the benefit of the overall system. So we manage those in each geography and each micro geography, and the result of that is a systemic result that looks the way you see on these charts, with positive long-term trends.

From the overall economy, you know, if you look at our current severity, we haven't seen that much of an impact from the inflationary trends. Obviously there's some, but really it's been relatively mild and relatively benign.

Most of the severity fluctuations that we've seen have been a result of age of closures, geographic mix, policy limit shifts -- and things like I discussed earlier, about just backlog of third-party subro demands and things like that. So so far the trends have been relatively benign.

That being said, it's one of the reasons that we have to stay on top of taking rate. It's one of the reasons we thought it so important to point out that we have continued to take rate on the auto side, even though it was masked a little bit by the Ontario rate decrease.

We believe it's essential that we take rate as needed, on a moderate basis, consistently across the business. It's less disruptive to customers. It's less disruptive to the agency force. It improves retention, and it allows us to stay ahead of any inflationary trends that might occur.

Let me provide a point of clarification on these two charts on page 7 as well. Obviously, two drivers of profitability are price and loss cost, and we show them to you because we think they are relevant.

Unfortunately, I think sometimes it shifts the focus to just price as a tool to manage profitability. And let me expound on what Matt just said and give you the example of homeowners. So risk selection, product design, claims performances are all equally important to profitability. So if you look at homeowners over the last five years, and you look at our cumulative price increases relative to our competitors', they are not really that much different at the end of this five-year period.

That said, we took a whole bunch of other actions which give us the confidence that what we've done is made it sustainable. So for example, we used to have at its peak 7.8 million policies. We now have a little over 6 million. That's 1.8 million down. We are down 1.2 million just since 2009.

What we did was went through, re-underwrote the book, decided that those riskier, underpriced pieces of business we were no longer going to insure. We moved those to somebody else.

We improved -- Matt's got a whole new set of inspection processes going on in terms of the way we look at new business. We obviously use sophisticated technology in claims. And then they have redesigned the product in house and home. I think you are in -- what percentage of the country is --?

31 states.

31 states, and it's a growing percentage of the book of business.

It's about 12% of our overall book. 85% of our new business ratings.

So all of that stuff is underneath that story. So I would encourage you to think about -- we have to look at these charts and show you price, but price is not the only tool we have to manage profitability. Matt was talking about that system -- it has all of those tools available to it. And the strength of our execution is in being able to have a leadership that knows how to manage that well.

That's very comprehensive. Thank you for that.

The second question is on Encompass. It looks like that's the only segment you have year-over-year deterioration in terms of underlying combined ratio. I see that you are taking pricing action, as evidenced in the PIF growth slowing down. Could you talk a bit more about the competition in the independent agency channel?

Sure. Thanks for the question. In Encompass we are focused, as you know, on the mass affluent. So we continue compete day-to-day with Met, Hanover, Chubb, AIG, and Crestbrook.

Right now we see that as competitive, certainly, but it's not irrational from a pricing perspective. We are still seeing really solid growth in our package policy; we had 10% quarter over quarter in our package policy growth, which now makes up the majority of our book.

And we see more room -- more elasticity in auto. So if you look at auto, quarter over quarter we are up almost 2 points in retention. That tells me we have more room to increase margin in the back half of the year, and we plan to do that to get our underlying in line.

With regard to the deterioration you are seeing on the overall underlying of 2 points: you have some non-cat coded weather in there. We had a really tough quarter in terms of weather. You have non-cat coded weather. And you see the impact of a one-time, rather sizable premium refund that's driving some of that, too. So all of those things combined are driving the underlying.

But overall, we still see room for margin expansion in the back half of the year. And if you look at the investor supplement, you will see that we take most of our rates in the back half of the year Encompass. So you will see us earn in even more rate on auto and home as the year progresses. And we think we have room to do that.

Why don't we do one more question?

Certainly. Our final question comes from the line of Josh Shanker from Deutsche Bank.

Back to Allstate Financial, the results are just excellent, and it's not just on expenses. I noticed the spread of net investment income to interest credited, after I take out the impact of Lincoln Benefit -- it's also growing, and the benefits to premium ratio has been declining.

There's a lot of good stuff going on there. Can you talk about not just the efficiencies, but actually the underlying profitability of the business, I guess, being generated? What's happening?

Yes. I'm happy to do that. I do feel good about the overall results at Allstate Financial. Operating income, obviously, at $165 million, given the size of our business today, is a terrific result.

We're getting on a lot of cylinders, as you pointed out. It is interest expenses. I think benefit spread continues to be nice and stable, and we are seeing good results on that year over year. Where we are seeing a really great result year over year is investment spread.

So if you just look at the reported numbers, we are up $12 million in investment spread. If you take out LBL, it was actually $68 million. And so we've talked about that in the past with the investment strategy we've taken. We are hoping for higher returns. We are expecting higher returns.

It will come with some volatility. We are prepared for that. But at the moment, the investment income, benefit spread, expenses -- everything has worked well for us, and that's why you see the results you are seeing.

Okay. Thank you all. I know there's a number of calls today, so I will close it off where we began. This quarter's results show the benefits of both having a focused strategy and solid execution. The net is growth at attractive returns. Thanks very much. We'll talk to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.