Allstate Corporation (The)

Good day, ladies and gentlemen, and welcome to the Allstate Second Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the program, please press star, then zero on your touchtone telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Greek, Head of Investor Relations. Please go ahead, sir.

Well, thank you, Jonathan. Good morning and welcome everyone to Allstate's second quarter 2019 earnings conference call. After prepared remarks, 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 10Q and posted today's presentation, along with our reinsurance update on our website at AllstateInvestors.com. Our management team is here to provide perspective on these results and cover a special topic. Mary Jean Fortin, President of Allstate Financial Businesses, will provide an overview of Allstate annuities and how the business has been substantially reduced in size over the last 13 years and how we have managed the remaining liabilities to maximize shareholder value. The special topic last quarter was about how we match capital to risk at a granular level to ensure we maximize economic returns. Our first special topic at the beginning of this year was how telematics is being utilized in auto insurance and how Arity, our telematics business, is a leading innovator. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2018 and other public documents for information on potential risks. And now I'll turn it over to Tom. Well, good morning.

Thank you for joining us to stay current on Allstate. Let's begin on slide two. Allstate's strategy is to protect people from life's uncertainties. The strategic objectives are to grow personal property liability market share and expand other protection businesses. So we start with the upper oval. The personal property liability market provides consumers protection by ensuring a wide range of assets, automobiles, homes, motorcycles, boats, other personal assets, and then their personal liability. We use highly recognized brands, sophisticated pricing, differentiated products, claim expertise, and telematics to deliver unique customer value propositions. We're also building an integrated digital enterprise that will lower costs and better serve customers. As shown in the bottom oval, this strategy also includes providing consumers protection plans, life insurance, voluntary workplace benefits, and identity protection. We also have a rapidly growing shared economy and commercial insurance business that serves ride-sharing companies and our telematics provider area. These businesses are enhanced by leveraging our brands, customer base, investment expertise, distribution, claims capabilities, and capital. And it's not just what you see in the oval that's real. So, for example, we're rebranding Square Trade products in the United States to fully utilize the Allstate name, which both leverages and expands our reach since these products are sold to major retailers. Our claims capabilities are helping us significantly grow the commercial insurance business with a ride-sharing company. Collectively, the protection businesses in the bottom oval have a tremendous value that can be overlooked by investors who focus only on the property liability oval. This strategy creates shareholder value through customer satisfaction, unit growth, and attractive returns on capital. It also ensures we have sustainable profitability and a diversified business platform. Moving to slide three, we had a strong first half of the year. We made progress on all five of our 2019 operating priorities. Revenues exceeded $11 billion, with property liability premiums up almost half a billion dollars over last year's second quarter. The service business's revenue was up 26.6%, to over $400 million for the three months. Net income was $821 million, and adjusted net income was $2.18 per share, as you can see on the chart on the bottom. As a result of this strong performance, we improved the 2019 property liability underlying combined ratio outlook by 1.5 points, which is about $500 million of underwriting income, better than the original guidance. Adjusted net income return on equity was 13.5% for the last 12 months. Adjusted net income return on equity is a broad measure of our overall performance, since it includes investments, all state life, benefits, annuities, and the service businesses. Since this represents the returns we generate on all capital, it's the best measure of our operating results. As a result, in 2020, we will establish long-term adjusted net income return on equity targets. Consequently, we will not use the property liability underlying combined ratio to provide annual guidance on operating results, but we will continue to use it in our dialogue on performance. We're making this change since we're committed to being a leader in the amount and quality of our financial disclosures to enable you to assess our performance and investment potential. Turning to slide four, we made quick progress in all five 2019 operating priorities. The first three, better serve our customers, achieve target economic returns on capital, and grow the customer base, are intertwined to ensure profitable long-term growth. Customers were better served as the Enterprise Net Promoter Score improved. As a result of that, policy results increased in the Allstate and Encompass brands, which is a key driver of growth, although the increases in improvement have slowed. Returns remained strong, which we just with all the businesses performing well except one portion of all state annuities, which Mary Jane will cover. Total policies in force now exceed $129 million, an increase of 46.8% compared to the prior year. Square trade policies grew to $84 million, reflecting the substantial expansion last August with a large U.S. retailer. Property liability policies increased by $772,000 from the prior year to $333.6 million. as the Allstate and insurance brands grew 2.2% and 8.4% respectively. Proactive risk and return positioning of the $86 billion investment portfolio resulted in a total return of 7% for the last 12 months and generated $942 million in net investment income for the quarter. Performance-based investment income increased significantly from the first quarter of this year. Shareholder value beyond current earnings is being created through increased telematics usage and greater sophistication at Arity. Square trade is expanding into Europe, and InfoArm's identity protection offerings are being integrated into our strategies. Glenn will now discuss our property liability results in more detail. Thanks, Tom. Moving to slide five, you can see that property liability results remain strong. Net written premium increased 5.9% in the second quarter for almost a billion dollars through the first six months compared to prior year quarter. This reflects policy growth in the Allstate and insurance brands and higher average premium for auto and homeowners insurance across all three underwritten brands. As you can see in the middle of the left table, total policies in force increased 2.4% to 33.6 million. Moving to the bottom of that table, the property liability recorded combined ratio of 95.8 was 1.4 points higher than prior year quarter, primarily due to catastrophe losses. This was partially offset by a reduction in operating expenses due to a combination of sustainable operational efficiencies achieved through focused efforts on streamlining processes and automation and lower incentive compensation given higher growth targets this year. The underlying combined ratio, which excludes catastrophes and priority reserve estimates, was 84.3 for the first six months of 2019, below the annual guidance, which assumed higher frequency of auto insurance claims. Auto physical damage severities were higher than expected. However, this was offset by planned reduction in expense ratio. As a result of this performance, we're improving the guidance range by one and a half points to 84.5 to 86.5 for the full year of 2019. This revised range assumes lower auto claims frequency and higher physical damage severity, as well as investments in growth initiatives, the logic of which we'll cover on the next slide. Moving to the right-hand table, all state brand auto and homeowners insurance net written premium increased 5% and 6.5% compared to prior year quarter, respectively. Auto policies in force were up 2.5% over the prior year, and average premium was up 2.7%, compared to the prior year quarter. Homeowners' policies increased by 1.6 percent, and average premiums grew by 5.6 percent over last year. eSurance's auto insurance policy growth was 8.1 percent, which combined with average premium increases resulted in total net written premium growth of 9.6 percent. Encompass written premium increased 1.1 percent, a higher average premium, sorry, higher average premium, more than offset the decline in policy reports. On the bottom of the table, you can see the underlying combined ratios remain strong across our brands. And this strong performance means that investment and growth will increase shareholder value. Turning to slide six, investments in profitable growth are focused on all state grant property liability insurance. Attractive margins support investment growth for five reasons. Auto and home insurance generates very attractive returns on capital, as you'll see towards the end of our prepared remarks. Allstate has earned an underwriting profit in auto and home insurance for each of the last eight years, reflecting a focus on profitability, operational excellence, and timely response to external conditions. Current results are strong, with a recorded combined ratio of 93.7 in the Allstate brand over the last 12 months. Allstate has operational strengths, including pricing sophistication, branding, and we've expanded total sales producers by 11% in the past two years. We also have successfully tested different combinations of growth levers in six markets over the last nine months to provide us a roadmap to the best local execution. This comprehensive program is highly targeted by geography, product, and customer segment. It will use a wide variety of tools, including advertising, customer experience initiatives, pricing sophistication, telematics, and new agency technology. While we're expanding these initiatives, they won't have a significant impact on 2019 policy and force growth. Unit growth is expected to accelerate in 2020 and 2021. This will slightly increase expenses from the current lower levels and have a small impact on combined ratio, but this is factored into the improved outlook for underlying combined ratio we just discussed. On a longer-term basis, we're working to reduce other expenses that will provide us flexibility to positively impact growth and competitive position while maintaining attractive returns. As always, we'll focus on producing strong returns for our shareholders and we'll react quickly to any market conditions as they emerge. We're building off a position of operational strength to compete both with large, well-known competitors and smaller regional competitors to achieve our strategic objective, which is increasing market share in the personal property liability market. Mario will now discuss results for service businesses and investments in more detail. Thanks, Glenn. Let's go to slide seven, which provides detail on our service businesses. Consistent with the strategy to grow non-property liability protection businesses, the service businesses continued to rapidly grow the number of consumers protected with policies and force increasing 82.8% to 89.7 million. This is largely due to SquareTrade.