The Allstate (ALL)

Q2 2012 Earnings Call

August 01, 2012 9:00 am ET

Executives

Robert Block

Thomas J. Wilson - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Member of Equity Award Committee, Chairman of The Allstate Insurance Company, Chief Executive Officer of The Allstate Insurance Company and President of The Allstate Insurance Company

Steven E. Shebik - Chief Financial Officer and Executive Vice President

Matthew E. Winter - Chief Executive Officer of Allstate Financial, President of Allstate Auto, Home & Agencies and Executive Vice President of Allstate Insurance Company

Don Civgin - President of Allstate Financial, Chief Financial Officer of Allstate Insurance Company and Executive Vice President of Allstate Insurance Company

Judith Pepple Greffin - Executive Vice President and Chief Investment Officer of AIC

Analysts

Robert Glasspiegel - Langen McAlenney

Vinay Misquith - Evercore Partners Inc., Research Division

Jay Gelb - Barclays Capital, Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Alison Jacobowitz - BofA Merrill Lynch, Research Division

Ian Gutterman - Adage Capital Management, L.P.

Alan Straus

Joshua D. Shanker - Deutsche Bank AG, Research Division

Paul Newsome

Brian Meredith - UBS Investment Bank, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to The Allstate Corporation Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Block, Senior Vice President of Investor Relations. Mr. Block, you may begin.

Robert Block

Thanks, Matt, and good morning, everyone. And thanks for joining us today for Allstate's second quarter 2012 earnings conference call. As usual, we will begin today with some prepared remarks from Tom Wilson, Steven Shebik and me, followed by a question-and-answer session. Don Civgin, Head of Allstate Financial and Insurance; Judy Greffin, Chief Investment Officer; Sam Pilch, Controller; and Matt Winter, Head of Auto, Home and Agencies are here as well.

Yesterday afternoon, we issued our press release and investor supplement as well as our 10-Q for the second quarter. We also posted a slide presentation to be used in conjunction with our prepared remarks. These are all available on our website.

Referring to the first slide of the presentation, this discussion may contain forward-looking statements regarding Allstate's operations. Actual results may differ materially from these statements, so please refer to our 10-K for 2011, our 10-Q for the second quarter 2012 and our most recent press release for information on potential risks. This discussion will contain some non-GAAP measures, for which there are reconciliations in our press release and on our website. I will be available after this call to answer any follow-up questions you may have.

Now, we can begin the discussion of our results with Tom Wilson. Tom?

Thomas J. Wilson

Well, good morning. Thanks for your interest in Allstate. My remarks will focus on our performance relative to our 2012 priorities within the context of our consumer purpose strategy, and then Bob and Steve will cover their quarter's results in greater detail.

So let's begin on the top of Slide 2. As you know our strategy is to provide unique protection products to each of the 4 consumer segments in the marketplace. The Allstate brand, which is in the lower left serves those customers that want local advice and assistance and prefer to purchase competitively differentiated brand of products. In this business, we're successful in introducing new differentiated products such as our Claim Satisfaction Guarantee, Good Hands Roadside, and House & Home, for support of Allstate agencies and marketing programs continue to be expanded with good results, premiums written though were flat for the Allstate brand as our efforts to raise returns in homeowners, negatively impacts retention of home owners, and we have lower new business sales of auto insurance. We did increase the emerging businesses and Allstate Financial products sold through Allstate agencies.

The lower right customer segment is served by Esurance, which we acquired in October to give us a growth platform for self-serve customers that prefer our brand of product. We continue to believe our capabilities will make us a more powerful competitor and policies in force are up this year. The results of Encompass and Answer Financial also improved this quarter. Our 4 2012 priorities are to create shareholder value by: one, maintaining auto profitability; two, raising returns in homeowners and annuity businesses; three, growing insurance premiums; and fourth, proactively managing investments and capital.

So moving to Slide 3. We had another very good quarter with financial results showing progress in our priorities. On a consolidated basis, we reported net income of $423 million and $432 million of operating income, both significant improvements for the net and operating loss posted last year in the second quarter. The improvement was driven by lower catastrophe losses and a favorable reduction in the underlying combined ratio. While catastrophe losses this quarter were reduced from last year's record second quarter, this quarter's losses were still high versus our long-term average. It reaffirms our 2008 decision to focus on improving returns in our homeowners line.

Book value per share has increased 9.8% this year reaching almost $40. Return on equity for the last 12 months increased 11% on a net income basis and with 11.4% on an operating basis, getting closer to the 2014 goal of 13%. Good progress is made on our 2012 priorities as well. We maintained auto profitability with the Allstate brand standard auto combined ratio of 95.5, which is better than last year's second quarter. Esurance's combined ratio increased, largely reflecting higher advertising expenses, acquisition cost, amortization and catastrophe. There was modest upward pressure on auto loss cost, but this is well within our pricing parameters. Homeowner returns continued to improve with an underlying combined ratio of 64.6, which was 4.8 points better than last year's second quarter. This reflects both our long-term effort to raise prices and improve underwriting selection as well as the moderation of loss cost. We're pleased with the results but recognize there is more work to be done until returns are adequate and sustainable.

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