Allstate Corp (ALL) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Allstate first-quarter 2016 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, Vice President of Investor Relations.

Please go ahead.

Thank you, Jonathan.

Good morning and thanks, everyone, for joining us today for Allstate's first-quarter 2016 earnings conference call.

After prepared remarks by our Chairman and CEO, Tom Wilson; Chief Financial Officer, Steve Shebik and myself, we will 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 first quarter and posted the results presentation we will use this morning in conjunction with our prepared remarks.

These documents are all available on our website at allstateinvestors.com.

As noted on the first slide, our discussion today will contain forward-looking statements regarding Allstate's operations.

Allstate's results may differ materially from these statements, so please refer to our 10-K for 2015, the slides and our most recent news release for information on potential risks.

Also, this discussion will contain some non-GAAP measures for which there are reconciliations in our news release and our investor supplement.

As always, I will be available to answer any follow-up questions you may have after the call, and now I will turn it over to Tom.

Good morning.

We appreciate you taking the time to stay current on Allstate's operating results.

This quarter shows really why we are in business, which is to protect people when disaster strikes.

Overall operating profit is down largely because of two significant hailstorms in Texas in March.

At the same time, good progress was made in improving the underlying combined ratio for auto insurance, and the homeowners business continued to generate margins that enable us to handle large catastrophe losses like we saw in March and still generate a good return for shareholders.

So as you know, severe weather creates a need for our customers to be protected.

It's an increasing market these days, and Allstate does an excellent job of helping customers when these events happen.

In Texas, we have over 1,100 local agencies, many of whom are close to our customers that are impacted by these hailstorms so that they can help provide initial claim response.

We also have about 1,200 specially trained catastrophe adjusters on the ground in Texas with the expertise, technology and relationships that enable our customers to rebuild after these storms.

If we go to slide 2, I will begin by reviewing the overall results and priorities and then Pat and Steve will discuss the results in greater detail.

As always, Matt Winter, our President, is here as is Don Civgin, who leads the emerging businesses and Sam Pilch, our Corporate Controller.

Net income for the quarter was $217 million and operating income was $322 million, or $0.84 per share.

The largest driver of the variance from last year's first quarter was catastrophe losses, which increased by $533 million to $827 million.

The underlying combined ratio was 87.2 as the auto profitability actions we've put into place for Allstate, Esurance and Encompass all made progress in the first quarter from where we ended 2015.

Allstate brand homeowners' insurance had a recorded combined ratio of 93.4 for the quarter despite the significant catastrophe losses.

The recorded combined ratio was 82.3 for the last 12 months.

From an investment perspective, we had what felt like a whole year of volatility in the first three months of the year and ended up with a 2% total return on the portfolio reflecting three components -- interest income for the fixed income portfolio, good returns from performance-based investments, and a decline in interest rates over the three-month period.

Total return over the last 12 months was only 1.3%, which reflected the low returns in the fixed income investments in the last three quarters of 2015 given the general uptrend in interest rates.

Net investment income declined 14% as a result of our strategy to create additional shareholder value by increasing performance-based investments where risk-adjusted returns are higher, but reported accounting fluctuates in the short term.

Two-thirds of the decline in investment income reflects the performance-based annualized yield of 9.4% in the first quarter of 2016 versus an outstanding 17.5% in the first quarter of 2015.

As a result of the underlying strength of Allstate's businesses, the Board authorized a new $1.5 billion share repurchase program, which is in addition to the 10% dividend increase that was approved in February.

We also made progress on the five operating priorities established for 2016.

Customers, of course, are at the heart of our strategy, and better serving them will create additional growth and profit.

Our internal measures of overall customer satisfaction did deteriorate slightly as we raised auto insurance prices to reflect the increasing number and cost of auto accidents.

That said, we've made progress in some of the underlying drivers through expansion of continuous improvement programs and good expense control.

Overall economic returns on capital improved as the auto profitability plan progresses.

Homeowners stayed strong and we positioned the investment portfolio to align with our liability structure.

While not the same as economic capital, the operating return on book equity was 10% for the last 12 months, and it was 8% on a net income basis.

Growing the number of customer relationships also faces headwinds as we adapt to the increasing cost of providing auto insurance.

Property liability items in force were comparable to a year ago, but were down from where we ended 2015.

We did have great growth through Allstate Benefits worksite business, which added over 0.5 million policies over the last 12 months.

Steve will discuss how we proactively manage the investment portfolio, but progress was also made in expanding the telematics insurance offering, both in terms of customer offering and the number of customers.

At over 1 million active connections, we are amongst the leaders in the connected car space.

Let's go to slide 3, which provides an overview of the first-quarter operating results for our four property liability customer segments.

Starting at the top, overall property liability policies in force were comparable to a year ago as a result of implementing auto property improvement plans in all three underwritten brands.

Net written premiums still increased, however, as we raised average prices.

The recorded combined ratio was 98.4 and the underlying combined ratio for the quarter was 87.2.

We have not changed our full-year guidance for the underlying combined ratio from 88 to 90.

Moving to the lower left with the Allstate brand, this is our largest segment comprising 90% of premiums written, and it serves customers who prefer a branded product and value local advice and assistance.

Allstate brand total policies in force growth slowed in the first quarter to 0.4% -- that's from the prior year's quarter -- as a result of our targeted actions to improve underlying auto profitability.

Auto policies in force grew by 0.5% from the prior-year quarter impacted by the slowdown in new business and a decline in retention.

Auto written premium growth was 4.7% for the quarter driven by the positive average premium growth of 4.8% and that's as the impact of the rate increases continues to flow into results.

Homeowner policies grew over the prior year by 0.6%, and other personal lines grew by 1.8%, both slowing sequentially given the impact that auto actions have had on customers who prefer to bundle their insurance product.

The Allstate brand underlying combined ratio was a strong 86.1 for the first quarter, as shown in the highlighted red box at the bottom.

Esurance in the lower right, it serves customers that prefer a branded product, but are comfortable handling their own insurance needs.

A 1% decline in policies in force was more than offset by a 5.2% increase in average auto premium so that the net written premium increased by 2.5%.

As you know, we intentionally slowed the growth of Esurance last year to better position this business for long-term growth since it was almost double the size it was when we acquired it in 2011.

The underlying loss ratio has come down to 73.1 in the first quarter of 2016, which has improved by 5.1 points compared to the first quarter of 2015.

As a result, the underlying combined ratio declined to 105, which includes about 3.4 points of expenses related to a number of expansion efforts.

We do expect to launch a new advertising campaign for Esurance this year to accelerate growth.

Encompass, in the upper left, competes for customers that want local advice, but are less concerned about the choice of insurance company and they mostly purchase through independent agencies.

We took aggressive action to improve profitability in both auto and homeowners' insurance in 2015, and consequently policies in force declined by 9.6% from a year ago.

The underlying combined ratio was 88.3 for the first quarter, 2.3 points better than the prior year, but, as you can see, the recorded combined ratio was 105.8 and that's because Encompass's performance was also significantly impacted by catastrophe losses in the quarter.

Answer Financial in the upper right serves brand-neutral customers who are comfortable serving themselves and it increased nonproprietary written premiums by 1.3% in the first quarter of 2016 to $151 million.

Pat will now go through the property liability results in more detail.

Thanks, Tom.

I will begin with a review of our property liability results on slide 4. Beginning with the chart on the top of this page, property liability earned premium of $7.7 billion in the first quarter of 2016 was 4% higher than the same period of last year.

Recorded combined ratio of 98.4 increased 4.7 points versus the first quarter of 2015 driven by the $827 million of catastrophe losses Tom mentioned earlier, while the underlying combined ratio of 87.2 improved by 1.8 points.

Net investment income of $302 million from the property liability segment decreased 15.6% from the prior-year quarter driven by a decline in performance-based investment income, which had strong results in 2015.

As a result, property liability operating income in the first quarter was $291 million, which was $264 million lower than the first quarter of last year.

The chart on the lower left-hand side of this page shows property liability net written premium and policy in force growth rates.

The red line represents policy in force growth versus the prior year and shows that policy growth was comparable to the prior-year quarter given the actions in place across all three underwritten brands to improve auto returns.

The blue line on this chart shows net written premium grew by 2.9% in the first quarter of 2016 as average premium continued to increase.

The bottom right-hand side of this page shows the property liability recorded and underlying combined ratio results.

Let's go first to the red line, which shows the recorded property liability combined ratio in the first quarter of 2016 was 98.4.

This was 4.7 points higher than the first quarter of 2015's result of 93.7, but included 6.7 more points in catastrophe losses.

The underlying combined ratio of 87.2 shown by the blue bar was 1.8 points below the first quarter of 2015.

Slide 5 provides an update on our comprehensive auto profit improvement plan, which is comprised of four parts.

First, we are seeking approval for higher auto prices.

In the first quarter, we received approval to increase rates by $335 million annually, which is on top of the $1.1 billion of increases approved last year, as you can see from the bar chart in the lower left.

The impact of these approvals on average premium for Allstate brand auto is shown on the lower right.

Average gross premium per policy increased by 4.8% in the first quarter of 2016 compared to the first quarter of 2015.

Average net earned premium per policy, which lags written, increased by 3.8%.

Keep in mind Allstate brand auto rate changes take six months to be fully recognized in average gross written premium while they take 12 months to fully earn in.

Secondly, we tightened underwriting guidelines in 2015 to reduce new business and underperforming segments.

As we achieve target underwriting results, these guidelines are being modified.

Focus on claims operational excellence and precision is always a priority but Allstate auto property damage severity increased 7.5% in the first quarter of 2016, which is a rate of increase we believe to be higher than what can be explained by inflationary increases.

Continued stress on the auto repair industry from higher industry frequency, the cost of repairing newer, more complex vehicles and a higher total loss volume has caused steadily increasing claims severity.

Our team is working to address these industry challenges and create a competitive advantage for Allstate.

Property liability expense ratio decreased by 1.7 points in the first quarter of 2016 compared to the first quarter of 2015, reflecting lower marketing costs and expense reductions.

Marketing was purposefully reduced given the rate and underwriting actions we were implementing providing the opportunity to enhance our marketing programs.

New campaigns for the Allstate and Esurance will be launching later this year.

Slide 6 highlights the benefits of these profit improvement actions for Allstate brand auto and the continued strength of Allstate brand homeowners.

The chart on the top left of this page provides a view of the quarterly recorded and underlying combined ratios for Allstate brand auto.

The underlying combined ratio of 95.9 in the first quarter of 2016 was 0.3 of a point higher than the first quarter a year ago, reflecting continued higher levels of accident frequency and higher severity.

While property damage frequency in the first three months of 2016 moderated somewhat from prior quarters, it still increased on a paid basis by over 2%.

As we've discussed, frequency is evaluated on a gross and paid basis for a variety of reasons such as managing claims staffing, evaluating cost trends and estimating ultimate losses.

To provide additional transparency into how these measures relate, we added a footnote to the investor supplement that isolates the impact that including fixed objects hit by a vehicle had on gross frequency, which is likely larger than that on a paid frequency basis.

These types of changes are accounted for in our processes and had no impact on pricing or our financial results.

The chart on the top right highlights the drivers of Allstate brand auto underlying combined ratio.

Annualized average earned premium per policy shown by the blue line continued to increase as accrued rates resulted in a 4.7% increase in premiums written in the first quarter of 2016 compared to the first quarter a year ago.

Average underlying losses and expenses per policy in the first quarter of 2016 increased 5.1% compared with the first quarter of 2015 due to higher frequency and severity and was partially offset by lower expenses per policy.

The positive gap between these two trends widened in the first quarter as earned premium growth outpaced the increase in loss costs in the quarter.

On a sequential basis, the underlying combined ratio improved by 1.7 points compared to the fourth quarter of 2015 due mainly to improved loss ratio.

Allstate brand homeowners' results are shown on the bottom of this page.

On the bottom left, you can see the significant impact catastrophes had in the first quarter of 2016 given the gap between the blue column and the red line.

On an underlying basis, continued favorable non-catastrophe frequency and severity and lower expenses resulted in a 59.4 underlying combined ratio in the quarter, which was 5.1 points lower than the prior-year quarter.

The components of the first-quarter homeowners' underlying combined ratio are in the chart on the bottom right.

Average earned premium per policy increased to $1,091, or 2.2% over the prior-year quarter, while underlying loss and expense per policy decreased by 5.8%.

On a sequential basis, the underlying combined ratio rose by 3.4 points from a very favorable 56 in the fourth quarter of 2015.

Slide 7 provides a view of the financial trends for both Esurance and Encompass.

These charts on the top of this page show the component parts of the combined ratios for both brands.

Esurance's recorded combined ratio of 106.2 in the first quarter of 2016 was 11.6 points lower than the same period of a year ago, reflecting decreased marketing investment along with a 4.4 point improvement in the loss ratio due to ongoing actions to improve auto returns.

Encompass's recorded combined ratio of 105.8 in the first quarter of 2016 was adversely affected by catastrophe losses that were 7 points higher than the prior-year quarter.

The underlying combined ratio in Encompass of 88.3 was 2.3 points lower than the first quarter a year ago, a result of ongoing underwriting and pricing changes to achieve target margins.

The charts on the bottom of this page show how growth is being impacted by profit improvement actions in both brands.

In Esurance, policies declined by 1% compared to the first quarter of 2015, while net written premium grew by 2.5% compared to the same quarter a year ago, and Encompass net written premium declined by 6.7% in the first quarter of 2016 compared to the first quarter of 2015 as the 9.6% decline in policies in force more than offset higher average premium from increased rates.

Now I will turn it over to Steve.

Thanks, Pat.

Slide 8 provides an overview of Allstate Financial's results for the first quarter of 2016.

There are three main businesses in Allstate Financial with a total of 6 million policies outstanding -- a life insurance business that provides products sold to outside agencies; Allstate Benefits, which provides life, disability and select health products at the worksite; and an annuity business, which is largely closed for new business.

We began to reposition Allstate Financial in 2006 when we exited the variable annuity business, then accelerated the repositioning post the financial crisis in a low interest rate environment.

The bar chart on the upper left shows how this has impacted the balance sheet over the last four years with total reserves declining by $21 billion due to exiting the broker dealer and bank channels for the (inaudible) annuity and the sale of Lincoln Benefit Life.

Notice that the gray bar representing immediate annuity reserves has been relatively constant.

While these annuities begin paying out benefits immediately upon issuance, they have extremely long lives.

The current financial results are shown in the upper right.

Premiums and contract charges increased 5.4% in the quarter versus the prior year driven by 9.6% growth at Allstate Benefits and an increase in traditional life insurance products.

Net investment income declined to $419 million, or 13.4%, as we sold long-duration fixed income bonds in the immediate annuity portfolio in the third quarter of 2015.

These sales harvested the gain on these bonds given the decline in interest rates.

The proceeds will be shifted over time to performance-based investments, which are expected to generate higher long-term returns.

I will discuss this in more detail on the next slide.

Operating income was $104 million for the first quarter, reflecting the decline in investment income.

As you can see from the chart on the bottom, the decline was concentrated in the annuity business.

Moving on to slide 9, you can see the shift in the investment allocation for the Allstate Financial portfolio.

We have reduced investment-grade fixed-income securities, shown in blue, from 68% to 60%, increased our holdings of investments where asset-specific performance drives more of the return, such as limited partnerships and equities.

The shift to public equities and performance-based investments is expected to deliver increased long-term returns over time.

The chart on the bottom left is based on historical return data from 1800 to 2015.

On average, regardless of the time horizon, equities have historically outperformed fixed income as you can see from the gray columns.

On the right two columns in the table, the risk, as measured by the 99% loss level, for fixed income is lower than that for equities over a one-year time period.

But at 10 years, the risk of loss is the same, but the returns are more than double.

Since we can hold the investments backing the immediate annuity reserves for a long period of time, performance-based assets are expected to generate additional shareholder value.

However, the challenge from a financial reporting perspective is that these returns fluctuate quarterly impacting reported operating earnings.

The chart at the bottom right shows that while our performance-based long-term earned yield and returns fluctuate from quarter to quarter, the 10-year internal rate of return has trended consistently in a range of our long-term return target above 10%.

On slide 10, our GAAP total return on the investment portfolio shown at the upper left was 2% for the first quarter.

The investment income component of returns has been fairly consistent and valuations were positive in 2016 as fixed income marks increased on lower interest rates.

The unrealized gain on the portfolio increased to about $2 billion, as you can see on the upper right.

Overall, investment income of $731 million was 14% lower than the first quarter of 2015.

About two-thirds of this decline reflects a good return from performance-based investments, 9.4% on an annualized basis versus what was a great quarter a year ago.

Investment income and yield by business segment are provided at the bottom of the slide.

To the left is property liability.

We reduced our interest rate risk in this portfolio in 2013 and yield is now increasing reflecting our increased allocation to high-yield bonds and performance-based long-term investment.

As I noted earlier, we took actions last year to reduce interest rate risk in the Allstate Financial portfolio and began to increase performance-based investments backing the immediate annuity portfolio.

While we realized capital gains, the shorter duration lowered the interest-bearing yield to 4.5%, as shown by the black lines in the chart to the right, we are currently well-positioned to shift to performance-based investment, as well as to extend the duration of our fixed income portfolio at the appropriate time.

Slide 11 provides an overview of our capital strength and cash returns for the first quarter of 2016.

Allstate remains in a position of financial strength and flexibility.

We finished the first quarter of 2016 with $20.3 billion of shareholders' equity and deployable holding company assets of $2.9 billion.

During April of 2016, we completed the $3 billion share repurchase authorization that was announced last year, and as Tom mentioned, our Board of Directors authorized a new $1.5 billion program yesterday to be completed no later than November of 2017.

Generally we fund our annual share repurchase activity with net income less any capital we need to retain to grow the business and pay our common dividend.

Our repurchase activity has been enhanced over the past few years by a number of proactive capital and risk management actions.

For example, the actions we undertook to strengthen the balance sheet by issuing hybrid securities and preferred stock have enabled us to return capital in excess of net income over the past three years.

The sale of Lincoln Benefit Life in 2014 freed up an additional $1.2 billion of capital, which was also used to repurchase common shares.

In the last 12 months, we repurchased 9% of outstanding shares, increasing pro rata ownership and earnings-per-share leverage.

Since the beginning of 2010, we've repurchased 36% of year-end 2009 outstanding common shares and have paid $2.8 billion in common dividends representing a total $12.2 billion return of capital to common shareholders.

With that, I will ask Jonathan to open up the line for your questions.

(Operator Instructions).

Greg Peters, Raymond James.

Good morning and thank you for hosting the call.

I appreciate the chart you had in your presentation about the increase in average premium.

In the auto profitability measures slide in your supplement, the loss ratio looks like it has stabilized.

Nevertheless, I'm wondering when should we expect that to start improving in the context of your rate actions that you've implemented over the last year.

As you know, and Pat mentioned that it takes a while, so when we get a price approved, we obviously have to go through the regulators, and then once we do that, we have to program it in and start to roll it out to our customers, and those policies roll out over six months.

And then, of course, it takes another six months before you collect it all.

Matt can talk about the pace of change, but his team has been highly focused on this and aggressive making sure we are ahead of where the industry is going in terms of getting our pricing fixed so that when they catch up with us, we will have an opportunity to grow again at profitable levels.

Thanks for the question.

Everything that Tom just said is true, and that would be true if we were in a completely static environment, but we are not.

So we are in a still moving environment.

So we did see auto frequency moderate in the first quarter compared to the last half of 2015, and as a result, as you said, because of the rate taken, average earned began outpacing loss cost trends in the quarter.

That's a really good thing.

But we are questioning whether some of the moderation of frequency may have been due to weather in the first quarter.

We don't know.

But we are not sure exactly whether or not we've seen the rise, the end of the rise in auto frequency, a stabilization, or just normal fluctuation.

So from that perspective, we continue to execute on our profit improvement plan, and we refine that profit improvement plan as time goes on and we get more information, greater clarity on the trend line.

And that's true not only on frequency, but it's true on severity as well.

As you've seen, I'm sure you've looked at fourth-quarter FastTrack, it showed a clear acceleration across the industry in PD and collision severity.

That's due to total losses up, higher cost to repair more complex cars, greater number of parts replaced, a whole host of different factors.

Allstate has historically outperformed the industry in managing those costs.

It looks like in first quarter we may have given up some of that advantage due to responding to the high catastrophe load and increased frequency, but our goal is to get back to our competitive position there and lead the industry.

But the end result of all of that is that we will continue to execute all four components of the profit improvement plan.

We will continue to monitor the emergence of both frequency and severity trends.

And we will ensure that we are keeping pace with loss cost trends because we know that once you fall behind those trends, it's really hard, due to the timing Tom referred to, to really ever catch up quickly.

Greg, sometimes people are trying to forecast a combined ratio by quarter.

You could do that.

Obviously, what Matt just said is what he's been executing on, which is we've made -- we are getting good returns in the auto business today, but we've gotten much more attractive returns given our competitive position and we are headed to do that.

You could do the math.

You could look at that bottom left-hand chart, you could look at the $1.1 billion or the $300 million and you could forecast about what time you think it'll come in.

You can -- it's not complete dollar for dollar, but we have pretty high effectiveness on getting that through.

And then you could look at just what happened with frequency and severity.

But what Matt is saying is we are just at this.

We know we need to make more money in auto insurance.

We've made great progress, but we are not done yet.

Excellent color.

Thank you.

Just one follow-up.

How should we think about the expense ratio over the next several quarters in the context of -- I guess you've announced a new advertising campaign and it's clear that you've booked substantial improvement in the expense ratio over the last three quarters.

Well, we have.

Obviously, we are always trying to make sure we watch expenses whether that be our marketing expenses, our technology expenses or our general overhead expenses.

Our team has a lot of work going on on that third category.

In marketing, you are right, it did come down.

We took the opportunity -- there's really no reason to continue to bang away and drop lots of money on advertising if your underwriting standards are tight and you don't really want to grow, despite the fact that more people are shopping.

One of the reasons we try to get out ahead of it is with our brand and our marketing, we want to be open for business when other people are raising their rates so we pick up those shoppers.

And so I think you should expect to see our expense ratio go up, but we are going to manage it to make sure we still get the combined ratio targets we are trying to get to.

We did take this opportunity to refresh some of our programs, and we feel good about what we are going to launch.

But it's not like we went dark either.

We advertise all the time.

We look for folks.

We have stuff going on, so it's not like we shut the place down; we just toggled it back a little bit.

Perfect.

Thank you.

And congratulations on the quarter.

Ryan Tunis, Credit Suisse.

Thanks.

Good morning.

Just a question I guess on the capital management.

$1.5 billion buyback.

It sounds like over the next five or six quarters that with the common dividend doesn't seem like it would quite add up to what the Street is thinking of for overall operating earnings.

Just curious if we're at a point now where you think about needing to retain some capital to grow whether it's through M&A or just organic growth?

I know in the 10-K, you mentioned your strategic priority is not to build and acquire long-term growth platforms, not just to build.

So I'm curious if there is any M&A component to that.

Thanks.

We have plenty of financial firepower to do whatever we need to do.

As Steve mentioned, our debt to capital ratio is the lowest it's been I think since I've been here -- I've been here over 20 years -- and we are in a really strong position if we need to do anything.

Steve mentioned that the things that we had done historically, so the last $3 billion program, had over $1 billion in it from Lincoln Benefit Life.

So I think what happened is sometimes the confusion is people get the capital actions and the divestitures mixed up with how much we need to grow in that, and so we think this is the right amount of money, keeps the Company really strong.

We have plenty of capacity to either grow our business; B, handle any kind of large catastrophes that might come our way; or C, if we find something that's attractive to us externally we would want to add to the portfolio, we can do that.

Steve went through the variance.

Was there anything else on the variance how we got to $1.5 billion that you want to hear more on, or are you okay with that?

No, that sounds like it's just largely attributed to the deployment of excess.

That's fair.

And I guess my follow-up is just Esurance and how we should think about the road to profitability from here because, for a while, it seemed like the story there was scale the top line and also improve the loss ratio.

The loss ratio actually looks pretty good now, down near 73, but it doesn't look like it's growing and we are at like a 105 combined.

So I guess what's the path to a sub-100 combined ratio in Esurance?

Thanks.

Let me just give you an overview on that.

First, if you recall we acquired Esurance for strategic reasons, so that we could grow in the segment where customers wanted self-service and a branded experience.

We have, from the very beginning, been running Esurance from an economic value basis as opposed to GAAP.

So with the difference in accounting between the advertising being expensed the quarter you spend it, if you run it for a GAAP-combined ratio, it is hard to drive it.

So we've been looking at economic value.

The business is twice the size it was, roughly, that we bought it.

The GAAP numbers do matter because it's growing to be an increasing size of the Allstate portfolio, so they have spent the last roughly 2 years working to improve the performance of the business on a profitability basis.

They've improved the loss ratio, but they've also had some operational catch up, because, while it is a direct business, it isn't all done online.

We still have claims adjusters.

We still have customers to take care of.

We still have call centers.

I'm really happy with the progress they've made.

The combined ratio is in much better shape than it was a year ago.

The number you are looking at, the underlying of 105, includes, as Tom mentioned, 3.4 points of investment in product expansion and geographic expansion that's not currently paying off in the current period.

Underneath that, the loss ratio improved by over 4 points over last year, so very happy with where it is.

You are right, it's still over 100, but out of that 105, I think you have to look and take that investment of 3.4 points out, and then there's still some room on the expenses for them to bring both advertising and non-advertising expenses down.

So I feel good about where they are.

As far as the growth, yes, they didn't grow this year in the first quarter, but they also spent 36% less on marketing.

That's not a direct correlation, but they are running a better, more effective business.

And as Tom said, we are feeling good about where it is, and it is still our growth vehicle in that segment, but we needed to get some operational things sorted out first.

Thanks so much for the answers.

Josh Shanker, Deutsche Bank.

Good morning, everyone.

Two questions.

One is can we talk a little bit about your rate need in auto going forward and maybe touch on rate need in Texas homeowners on top of that?

And my second question relates to something [Matt] said about two or three quarters ago, but we are getting well ahead of it.

There's always this fourth-quarter seasonality in losses that didn't happen at all last 4Q.

As we start discounting the end of the year into our thoughts, was that seasonality just a coincidence?

I will start with your first question about rate in auto going forward.

You know that we don't disclose our rate plan for the year.

We do disclose the fact that we have every intention of staying ahead of our loss cost trends, and as we monitor those, we continue to take rate as necessary.

We have robust rate plans.

We revise and amend and change them on an almost ongoing basis as we watch the emergence of loss costs.

The only thing I can tell you is that there is some public information available about rate that has already been filed and approved so far this quarter.

You are free to go and search out publicly available information, but I can't give you anything beyond that.

(multiple speakers)

Can we just add Texas onto that specifically whether a cat in Texas is a rate issue or whether it's just a volatility issue?

Well, I will answer it this way.

As we look, we always have a cat load that we take into account as we are looking at rate need overall.

We have to figure out what is normal volatility and normal catastrophe activity and when we are at a new norm and whether weather patterns are changing and non-modeled cats are increasing due to global warming.

We will and are continuing to look at that and if we determine that this is a new norm, we will price appropriately for it, but that's a tough question and I don't think that we will change something based upon a set of cats that took place over a 10-day period, so it will take more than that.

But it's a good point that we have to look at whether or not we are in a new weather environment and a new cat environment and if so, how we react.

I guarantee you we will react to ensure that we earn economic risk-adjusted returns in Texas and every other state where we have cat exposure.

Thank you.

And seasonality of the loss ratio, anything behind that or is that just a magical thing?

Boy, everybody has a theory on this one.

I personally will tell you that we don't believe that there is any historical trend in seasonality that holds true all the time.

There are generalities, but last quarter was one of the warmest first quarters in the last 20 years.

Things change and who knows what's going to happen in fourth quarter in terms of weather, in terms of catastrophes, and so I don't put that much credence into seasonality predictions.

I think they are informative.

They help us plan for things, but there have been more exceptions to the rules lately than the rules.

So as Matt pointed out, he looks at -- and our team really focuses on homeowners by state, in total, which you saw numbers in total -- by state and by territory.

So it's broken down.

What I would say is that severe losses like hail, straight-line winds or tornadoes come through the pricing models faster than severe losses that are caused by hurricanes or earthquakes because of the longer-term nature of the actuarial science on that.

That's a good answer.

Thank you, Tom.

And thank you both and good luck in the rest of the year.

Josh Stirling, Sanford Bernstein.

Good morning.

Thank you for taking the question.

So listen, I wanted to start with sort of a -- kind of a numbers question in a sense.

I want to make sure I understand.

So you said this quarter the weather appeared to be light in auto and home and that's probably driving the frequency benefit.

And so the headwind there would be that the future maybe loss ratios would bounce back, but the upside from an investor perspective is that you are not going to slow raising price increases because you are not ready to declare victory on frequency yet.

So that's sort of my first actuarial question.

My second related point, I'm just looking at your BI severity, which has been negative for a couple of quarters, and I'm trying to understand what's driving that, whether it's the claims initiatives that you've been working through, or if that's more environmental.

And I'm trying to get to do we actually think that those favorable trends persist, and ultimately if the underlying net trend for auto maybe is going to be challenging from here.

Thank you.

Josh, so Matt will answer your question, but just to be clear, we didn't say that favorable weather impacted first-quarter results.

Okay.

Excuse me.

Thank you for correcting.

I just want to be clear.

It just is what it is.

Josh, so on the first, I think your question is really about -- I think you referred to it as actuarial, but I think you were referring to whether or not if we have some uncertainty about some of the causal factors in gross frequency, whether that impacts our ability to price and take rate.

Rate indications are out of paid, not out of gross, and they are based upon your net trends and your indication, and we go to the regulators and the insurance departments with a robust actuarial package that shows net trends, current indications.

And so most of that, quote, uncertainty about telling you what we think weather did to gross frequency trends last quarter is still relevant to the pricing packages that we've put together, which are based upon much more precise information.

As far as the BI severity and why it's down, yes, you are correct.

We have talked to you about our enhanced medical injury handling program.

Part of that is an attempt to get through BI cases quickly, especially those that have enhanced injuries.

And so a lot of the decrease in BI severity that you saw this last quarter was a mix issue because we are paying a lot more current claims.

The more current claims tend to be lower severity claims.

That's one of the reasons you'll see BI frequency up a little this quarter because we handled a bunch more claims and we went through them.

And so you always have that volatility in results and long-tail coverages and there's a lot of complexity in BI, so it's hard to look at BI paid severity on a quarter-by-quarter basis and make any sense out of it.

You have to look at it on a longer-term basis, and you have to look at it in conjunction with the frequency to see how much of that volatility is influenced by mix.

And in this last quarter, we think a fair amount was influenced by mix.

That being said, we think we are making good progress in managing BI severity appropriately.

So that's really helpful color.

And I guess -- I don't want to put words in your mouth -- but I think I'm trying to synthesize what the net take would be from all this, which is I think you are probably going to continue raising prices at more or less the rates you've been because that's -- you are going to look through the severity thing as mix-driven and at the same time, the frequency, you are going to rely on the paid data more than the gross?

Well, that must be a Josh question because both Josh's have tried to get me to predict my rate-taking activity, which I can't do.

Okay.

Well, I thought it was (inaudible) actuarial.

I think (multiple speakers) a period after continue to raise prices.

(multiple speakers)

I can ask an easy one then.

So been happy to see PIF growth has not gone negative in spite of the rate initiatives in the core auto business.

Is there anything in particular you guys are doing to offset that, or is this just more a function of the fact you've got such a long -- you've got such sticky customer relationships that you have an inelastic book?

Well, I would point out actually our items in force were down this quarter from where we ended the year, so when you look at it sequentially, it looked okay, but you really have to -- we are down.

We expected to be down some.

We are growing in other parts of the Company, but this does have an impact on growth.

We knew it was going to happen.

We managed through it.

We spent a bunch of time talking to our customers about policy changes and price increases, and so when you are doing that, you are not out trying to find new customers.

So we're just working our way through it.

Okay.

Thank you.

Jay Gelb, Barclays.

Thank you.

On the Allstate brand homeowners' business, the first-quarter ex-cat combined ratio was slightly under 60%.

That's a pretty big improvement year-over-year, but was actually up relative to the fourth quarter.

I'm trying to get a sense of whether you feel you can keep it at or below that 60% range?

When we started this really, and you'll remember, (inaudible), maybe five, six years ago, we said we felt the business needed to [risk] catastrophes over time, run in the low 80s, and then you can put in whatever kind of cat load you want.

We are running there today.

We are comfortable with it.

The underlying bounces around a lot from quarter to quarter.

We did note in the fourth quarter that we thought that was a pretty low level at 56 and change because cat loads are typically not that high so that you need to be below 60.

So we are just trying to make sure we are competitive in the marketplace to give our customers a good return, handle the volatility, but because we handle that volatility, our shareholders get a good return, which, based on required capital levels we had initially, meant in the lower part of the 80s.

That said, because we've improved the profitability, we now need to keep less capital, and so we manage it -- as Matt said, we manage this stuff dynamically.

We are always looking at what's the right return on capital by state, by territory, and we adjust for it.

So I think you should expect us to continue to deliver good risk-adjusted returns for our shareholders given that we are willing to take down the volatility of quarters like this quarter.

That's great.

And then when I think about scenarios like we have with the Texas floods, I'm sure if it's disclosable, we will hear about it in a couple weeks, but in that type of scenario, is there homeowners' risk of loss there during a flood, or is that really just more focused on auto comprehensive?

Obviously, there's a risk of loss because homeowners will lose stuff when a house floods, but the federal government sells flood insurance.

We do not.

Are there things that could go along with that?

Cars get flooded out, stuff like that?

Sure, but we factor all of that into our pricing.

So the Texas floods largely would not be one of the big elements we'd be responsible for.

That's what I thought.

And then finally on the buyback, the $450 million that was done the first quarter, I'm just trying to score your comments around that with regard to the new authorization, which my sense is typically it gets done earlier than as outlined.

But the $450 million, should we view that as a normalized quarterly run rate, or is there perhaps some upside to that in terms of size?

The $450 million is probably a little higher than we are going to have as we go forward.

That was based on the prior program.

And I think I've said before, what we do is we actually have outside parties perform the share buyback for us on the basis of a grid.

And if you remember, earlier in the quarter, we were lower, our stock prices went down a little bit, so we were at a lower part of that grid and we didn't buy back as much stock -- I'm sorry -- we buy back more stock because our price was down a little bit, which caused us to do the $450 million versus a somewhat lower number, which is why we ended the program in April versus a couple months later.

Understood.

Thank you.

Amit Kumar, Macquarie.

Thanks and good morning and congrats on the quarter.

Two quick follow-up questions if I may.

The first I guess goes back to what Greg was asking about the loss cost trends.

On the last call, we had talked about competitors and spend more time on the industry.

Recently, one of the larger companies had adverse development in their results.

Does that news -- did that lead you to maybe take a pause or recalibrate the growth plans for 2016?

Or did you just feel that, okay, this is others addressing the issues that we have addressed in the past?

It's an interesting question, but let me be clear that we have an Allstate philosophy for both how we reserve, which is very conservatively.

Somebody else's prior-year development is really not that instructive for us.

It's interesting.

We look at it.

It always provides context and information, but we have fairly precise ways that we approach this and that we ensure that we are reserved appropriately.

And as I said when I answered Greg's, I think our level of detailed study as we determine where to take rate, how much rate to take, what the net trends are, what the indications are -- number one, the level of fairness has shown up in our effectiveness in getting rate approved in each of the states.

But, two, it allows us to react to our information as opposed to others.

Everybody is in a different place.

Everybody is in a different place in terms of what their rate is, where their rate is, how much rate they need to take to respond to current trends.

We saw at the beginning of last year very few people talking about any frequency or severity issues, and then later on everybody talking about it.

So everybody's timing appears to be different and we are focused on our own book of business, our own trends and our own math.

Fair enough.

The only other question I had was going back to the discussion on expenses and the marketing campaign.

Did I understand this correctly?

Is it just going back to the usual normalized level, or is this a reboot for Allstate and Esurance brands?

What we were indicating is we are going to put some new creative out that is incorporated into a marketing program, which is becoming more and more heavily digital as opposed to mass media.

And so we are constantly adjusting that one as well.

We don't have an established percentage of premium that we say this is what we want to spend.

We do it the way both Don and Matt have mentioned, like if we think we can write the business economically and it creates shareholder value, then we look at the cost per acquisition and we go out and do it, and we look at that with great precision, whether that comes through online stuff or whether it's through TV ads or radio ads.

What we are just trying to say is, as it relates to expenses, the marketing expenses are down.

They were down intentionally because we didn't really want to grow.

And so now as we are coming through the profit improvement plan on auto, we will want to go back to growing.

It will take us some time to get there, so it's not going to happen in every state, in every market, in every medium or every brand at the same pace.

So I think you should expect to see our expense ratio increase a little bit as we go forward, but I don't think you should see it be a dramatic spike.

Got it.

Fair enough.

Thanks for the answers and good luck for the future.

Bob Glasspiegel, Janney.

Good morning, Allstate.

I really appreciate the disclosure in the bottom of slide 8 on Allstate life decomposition of earnings and hopefully we will get that prospectively and retroactively would be even better.

As we think about the Allstate life ROE progression, Matt, when you took over several years ago, the idea was to go into mortality/morbidity and cut back the spread products, and that's played out well.

And the hope was, even though you had some legacy drains in the annuity block that will run off over time, the higher profit ROE will take charge to drive it forward.

Now you've had lower yields and some pressures, but where are we, Tom, on the ROE progression there?

Can you take capital out of there going forward to help as well?

That's a good question, Bob.

So as you point out, we've been working on improving the returns in that business for some time.

We feel like we've made good progress.

But the other thing I would say is we look at ROE, but we really manage for shareholder value.

So the items, when you look at that lower right-hand side and see what happened to annuities in terms of [operating income], that hurt the current ROE.

But we are okay with that.

It hurt it for two reasons.

One is obviously we harvested I think it was over [$400 billion] of gains on basically front-end-loaded, what would have come through as operating income into book value when we sold the bonds.

And now we are going to put it in longer-term investments.

That obviously takes a while to get invested, so you earn -- as Steve pointed out, we like to try to get about 10% on that stuff.

It takes you a while to get that invested and to actually get the 10% because it doesn't happen on day one.

Secondly, it also makes us put up more capital because, under the regulatory schemes, when you are investing your performance-based investments, you put up more capital than you would put up fixed income.

We believe that's a good trade and in our shareholders' best interest.

So we are willing to take an ROE hit if we believe that it generates long-term shareholder value, which in the end it turns out to be total return-based for that immediate annuity portfolio.

So we continue to work hard on it.

We've been taking capital out of Allstate Financial for, I don't know, Steve --

Three years.

Three years or something, so to the extent we can do that, to the extent we could use financing techniques and a variety of ways to do it, we continue to work on how do we raise the return on capital, particularly as it relates to those annuity businesses.

That said, we haven't come up with any what I would call synthetic approaches to do it.

It's just been -- we've got to work the money hard.

Thank you.

My follow-up is a detour to commercial auto.

You had a mild increase in reserves in the quarter.

Where are you in that book pricing-wise and what drove the reserve increase?

Thanks for noticing.

Yes, we did have some reserve strengthening.

The vast majority of it was in commercial auto and then a little bit in [PUP].

And the same drivers that existed on all the other underwritten standard auto brands, it was frequency and severity trends and, unfortunately, I don't think we were at the proper rate level windows hit and so catching up takes a little longer and we have to be more dramatic, and you have seen that and you will continue to see that.

So we are going to move aggressively to get that business to the point where it's really serving what I think could be a really unique strategic purpose, in addition to bringing in appropriate risk-adjusted returns.

This is a great marketplace for Allstate.

We are Mainstreet USA.

We have a lot of our existing standard auto and homeowner customers own small businesses.

We have natural connections and a natural brand affinity, and my goal and our goal, the team's goal is to get the profitability at an appropriate level, get the returns where they should be and then deploy this as a strategic asset as part of our broader trusted advisor strategy to serve the full range of customers with their full range of needs.

We've seen the commercial auto movie before in the industry over the last several quarters, so the reserve increases have tended not to be cameo appearances, but I've got every confidence you'll get your arms around it.

Matt, will take one more question, please.

Kai Pan, Morgan Stanley.

Thank you so much for fitting me in.

First question is on the guidance.

Looks like the first-quarter 87 is below the [88 to 99] full-year guidance, and looks like the auto book will continue to improve over the coming quarters, so what's holding you back?

It's a 12-month forecast and we are three months into it.

Okay.

So I just wonder is there any seasonality, or maybe the property book is better than what you anticipated?

No.

We've just always said it's a 12-month forecast.

We don't hold ourselves accountable for it.

You'll remember last year we were bumping along towards the top end of the range.

We got to the third quarter, we thought we might actually end up outside the range, so we let everybody know that and we had a great fourth quarter and came in below the range.

So it bounces around.

We see no need to update our outlook there.

Okay, that's great.

Then the bigger-picture question, you have a million cars connected through telematics and we have seen a seemingly quickened pace in terms of technology advancements such as active safety, as well as autonomous driving, as well as the driving behavior like [share of] mobility.

For the auto industry, they tend to be backward-looking using actual (inaudible) determine your rates and the products.

I just wonder how do you actively anticipate these technology changes that position your products and market position.

Well, as you point out, we now have I think it's 1,050,000 or so people currently connected to us on a daily basis.

We pull different kinds of information from them.

That enables us to do a couple things.

You are absolutely right, it enables us to price more accurately because when we are determining what we should charge somebody, we have to put them into groups and actuarially sort that out.

In this case, we can basically put them into different groups because we know how you break, what time you drive.

There is a variety of things that enable us to give customers more accurate price, and often times at a lower price, more attractive price for them.

With that, we can also provide them that connectivity and the one hour a day they spend in their car is where we can add additional value for them.

For example, today, we have the safer you drive, the more rewards you get.

So you get safe driver awards, gives you discounts on things.

Our customers like that.

It improves our value proposition for them, and so that will develop over time.

We have a slightly different model than some of the other people in the business who are doing it mostly for the more accurate pricing, so they can do a one-time shot of people and get a sense that ours is a different model -- I'm not declaring ours is the right one; I'm just telling you we are taking a slightly longer-term customer value look at that.

We still have a lot of work to do to develop that, to build those relationships and figure out how to interact with our customers.

So this will be a lot of work for us that has the potential to generate additional value for our shareholders, but we are investing heavily in doing that.

Okay, this is maybe a summary here.

This is the kind of quarter that our business is built for.

We have to protect people from uncertain things like hailstorms that happened to them.

At the same time, our shareholders can handle the quarterly earnings volatility and as a result of it get attractive returns.

Secondly, we know how to run a property casualty business, and that shows up in the way we executed this year.

Our investment portfolio is thought about on a risk-adjusted return basis, so we try to be thoughtful on both a short-term and long-term basis, again factoring in how we want to drive long-term value creation.

Then the weather has gotten more volatile, which obviously is a growth opportunity for us because to the extent people have more disasters, they need more coverage and we need to get back to growth in our auto and other businesses, but we are having good growth, particularly in our benefits business this quarter.

So I thank you for taking the time, and we will 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.