Allstate Earnings Call Insights: Perspective on Growth and Underlying Combined Ratio Guidance
Perspective on Growth
Jay Gelb – Barclays Capital: First, I want to point out that, I believe it’s the first time that Allstate brand’s premiums were in positive territory on growth for the first time in 11 quarters. So, I want to get your perspective on whether you feel a trend could continue in light of PIF growth still being negative.
Thomas J. Wilson – Chairman, President and CEO: This is Tom. I’ll give you a perspective; then Matt might want to just jump in as well. First, you’re right, premiums have gone up. That is, as we point out, largely result of higher average premiums in the homeowners business. The actions we’ve taken over that period of time that actually began before 11 quarters ago was really to reduce our catastrophe exposure by getting smaller homeowners – you know were down like 1.2 million homeowner policies in the last four years. That has obviously had an impact on our auto business as the actions we took in New York and Florida, which we’re proactive in that, and we went at that one hard, which hit both of our – also hit auto growth. Matt has a number of plans going on to try to term that around and maybe he wants to make a few comments about the strategy to (moving) both – I think which are really after items in (force of) policy as opposed to premiums.
Matthew Winter – President, Allstate Auto, Home and Agencies: Jay, it’s Matt. Thank you for pointing that out first. Look, the way we look at this is, the last several years have been a stabilization year as we – couple of stabilization years, as we wanted to ensure that we were charging in appropriate rate and getting the appropriate returns in the business. We are continuing to focus on topline and if – and we will continue to do that as long as we’re able to do that in an economic manner. We look at a couple of indicators. We look at on the homeowners side, we look at new business, and we look at retention, and as you see in Page 28 of the supp, new business was up 5.8, above prior year, in the fourth quarter, and the trend was extremely positive; we started first quarter minus 11.4, second quarter was minus 5.7, third quarter flattened out, and the fourth quarter we were at positive 5.8. Add to that the retention side of it and as we’ve slowed down the non-renewal actions and as we focused more intensively on the customer experience, we’ve seen the gap to prior year in retention improving each quarter and it improved in the fourth quarter to just minus 0.6. So, on the homeowners side you take that boost in new business, retention getting better, non-renewals actions declining, greater focus on customer experience, the impact of House & Home which we rolled out to 17 states in 2012 and we have another 12 additional states planned for this year and in those states production is up extremely strong. So, we have a good story on the homeowners’ side. Not only does that help homeowners’ revenue (and if), but it helps auto as well due to the bundling. If you look at the same two factors on the auto side and although new business continues to run below prior year, the gap got smaller in the second half of 2012. If you look at the first half versus prior year versus second half versus prior year, it’s dramatically different. First quarter, I think we were down almost 11%; second quarter down 3% and then in third and fourth, it was down 1.3%; so clearly moderating on the new business side. And retention improved. So, as you can see on Page 28 of the supp, the retention trends has been pretty stable at 89 the past three quarters. We got a boost from Florida in the fourth quarter where their retention improved and we’ve stabilized in Florida and New York, as Tom said, so, we think we’re pretty well positioned to change the momentum and change these trend lines. We’ve been moderating a lot in the last quarter and we’re cautiously optimistic.
Jay Gelb – Barclays Capital: I also wanted to touch base on the comment about expense management. The P&C expense ratio was 26.5% in 2012. That’s up around 25% in the 2010 timeframe. Is that a good way to think about it in terms of where Allstate wants to get the expense ratio back to?
Thomas J. Wilson – Chairman, President and CEO: Jay, a better way to look at it is by segment. So look at the expense ratio for Esurance. You’ll see that’s substantially higher than net average, and that’s because of course it’s all front-end loaded with advertising expenses. Then you can look at the Allstate Agency piece, and then you can look at the Encompass piece. And our goal is to have a highly competitive expense position in each of those segments which is relative to the way in which you go to market and the services you provide to your customers. So, for example, in the Allstate Agency channel, our agencies provide ongoing service and counseling for our customers, which is why they get a renewal commission. You don’t have that in the Esurance business model, because those customers don’t want that. So you have to really look at it by segment.
Underlying Combined Ratio Guidance
Michael Zaremski – Credit Suisse: First question in regards to the 88 to 90 underlying combined ratio guidance. So that’s – I believe this year, it was lower than 88. You guys are hoping to maintain auto or the goal is to maintain auto and drive continued improvement in homeowners. So that would – so I guess basically as the delta there kind of the – you guys don’t expect the lower non-cat weather to recur, and if so, could you size up what benefit you guys have from that in the full year?
Thomas J. Wilson – Chairman, President and CEO: Yeah. It’s a good question Mike. Let me address it. So, 88 to 90 last year, we had 3 point spread; this year, it’s a 2 point spread. That’s largely based on our confidence that the actions that Matt’s team is taking in New York and Florida are working and we like what we see there, so we can have a nearer range. Secondly, then (indiscernible) range is still above where you are this year. I think you really have to – it is the weather. It’s a reflection of a return to more normal frequency in the auto and homeowner business. December was an incredibly strong month for us. If you look at the underlying combined ratio in homeowners, for the fourth quarter it was like 62 unchanged. I don’t think the business is operating at this point at that big a delta versus where it was last quarter – fourth quarter of last year. So, some of that’s weather. Doing variance analysis on weather; it’s possible, but there’s some (arch) to it. And so, our range is a range we expect to be in. That’s why we established it to give you some confidence that’s where we’ve gone and we typically are in there and so we made an estimate as to what weather would be and said we’ll be in the 88 to 90.
Michael Zaremski – Credit Suisse: And in regards to the investment portfolio, it sounds like Steve talked about preparing for higher interest rates, but then so shifting – reducing interest rate sensitivity. So, what kind of new money yields are you guys expecting in the near-term versus the existing portfolio yields?
Thomas J. Wilson – Chairman, President and CEO: Let me give you an overview from corporate risk standpoint and then Judy will talk about what she is doing to implement that. So, overall, when we look at the corporate risk profile, we look at interest rates, cats, underwriting risk, inflation; a whole variety of things. And from a risk management perspective, we’re assuming that rates will rise. We don’t think they’re going to run away tomorrow, but we think they will go up over time. And so, as we usually do, we try to get out ahead of these things and be proactive about it. We’re not – we don’t have sort of moderate level of concern about inflation, so – which is another thing; of course, I can – (heard) insurance companies. So what we’re doing is reducing our interest rate risk, we started that in the fourth quarter, we will continue it throughout this year. That means basically taking capital gains on the portfolio and pulling operating income forward. So, you can take capital gain today or you can get the higher interest rates. We believe the economic smart thing to do is to pull those gains forward and so we run the Company economically, not just for operating EPS. Judy can talk about what she’s done to the portfolio and what she is reinvesting in.
Judith P. Greffin – EVP and Chief Investment Officer, Allstate Investments, LLC: So, when you look at the portfolio currently just looking at the fixed income yield on the property and casualty portfolio, it’s around 3.8 and that’s a good estimate of what you should think about in terms of where the portfolio is in some of the activities that we’re doing. The reinvest that we are looking at is, as Tom said, shorter duration; a good proxy would be three to five-year maturities; investment-grade corporates probably yields around 1.5% to 2%, is a good way to think about it.
A Closer Look: Allstate Earnings Cheat Sheet>>