The Allstate Corporation (ALL) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Allstate Fourth 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 Mr. John Griek, Head of Investor Relations. Please go ahead.

Thank you, Jonathan. Good morning, and welcome everyone to Allstate's fourth quarter 2016 earnings conference call. After prepared remarks by our Chairman and CEO, Tom Wilson; Chief Financial Officer, Steve Shebik, and me, we will have a question-and-answer session. Also here are Matt Winter, our President; Don Civgin, the President of Emerging Businesses; Mary Jane Fortin, President of Allstate Financial; and Sam Pilch, our Corporate Controller. In December, we announced that John Dugenske will be joining Allstate as Chief Investment Officer in early 2017. John will join the team next month and will be part of our quarterly earnings calls beginning next quarter. Yesterday, following the close of the market, we issued our news release and investor supplement and posted the results presentation we will discuss this morning. These documents are available on our website at allstateinvestors.com. We plan to file our 2016, Form 10-K later this month. As noted on the first slide, our discussion today will contain forward-looking statements about 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. We are recording this call, and a replay will be available following its conclusion. And I'll be available to answer any follow-up questions you may have after the call. And now, I'll turn it over to Tom.

Good morning. Thank you for investing your time to keep up on our progress at Allstate. Let’s start on Slide 2, we delivered excellent results for the year and finished 2016 with another strong quarter as we continue to effectively execute our short-term plans and build on long-term strategies. As a result, Allstate’s well positioned for continued success. Auto profit improvement plans over the last two years have enabled us to begin to withstand growth in 2017, while being able to react further auto loss cost increases. The homeowners business continues to generate attractive returns despite higher catastrophe losses. Investment results for the year was good, but bounced around from quarter-to-quarter reflecting volatile external conditions. At the same time we’re investing growth both with existing businesses and new opportunities. Net income was $811 million for the quarter and $1.76 billion for the year. Operating income was $2.17 per share for the fourth quarter and $4.87 per share for the year. The recorded combined ratio for the year was a touch over 96 and underlying combined ratio was at the favorable end of the range we provided shareholders a year ago. Shareholders received $1.8 billion in cash through a combination of dividends and share repurchases. We also welcome the Square Trade into the fold providing shareholders another opportunity for profitable growth. Going to the back to the bottom, total revenues of $9.3 billion for the fourth quarter reflected 2.8% increase in Property-Liability insurance premiums driven by the continued implementation plan and higher performance based investment income. Net income for the fourth quarter was $811 million and operating income was $807 million. Operating income benefited from favorable underlying loss performance in both, auto and homeowners insurance, lower catastrophe losses, favorable prior year reserve releases and strong investment income. The Property-Liability insurance business performed well as a result of the successful execution of the auto profit improvement plan across the three underwritten brands and continued excellent performance in the Allstate brand homeowners and other personal lines insurance. Allstate Financial had a strong quarter with $130 million of operating income as the newer businesses benefitted from the very high investment income from the performance based portfolio. Moving over to the full year columns at the right, the 12 months operating return on equity was 10.4% and that’s down slightly from the prior year, largely reflecting higher catastrophe losses in 2016. Consolidated Policies in Force declined modestly over the year, as strong growth at Allstate Benefits was more than offset by decrease in Property-Liability business. Looking forward to 2017 on Slide 3, we’re in a position to achieve an improved underlying combined ratio and achieve our five operating priorities both of which have both short-term growth and long-term objectives. We expect to build on last year’s insurance margin improvement, resulting in an annual underlying combined ratio between 87 and 89 in 2017. That range is comprised of a number of key assumptions. First, there will be continued improvement in auto insurance profitability as increases in average premiums and filed rates gives the flexibility to deal with increases in the frequency into various auto actions [ph]. Secondly, we assume the homeowners underlying combined ratio would deteriorate slightly from 2016, but this will be well within our target range of profitability. Encompass and Esurance are assumed to stay on track to improve auto profitability. At the same time, we’ll continue to invest in growth across the company. Our priorities for 2017 remain largely consistent with 2016. The first three priorities, better serve our customers, achieve target economic returns on capital and grow the customer base or [indiscernible] and ensure that corporation has multiple paths to profitable long-term growth. In 2017, we expect to grow our customer base with continued positive growth in Allstate Benefits and Esurance, rapid growth in our newly acquired consumer product protection plan business Square Trade and by reducing the number of policy losses under the Allstate and Encompass brands. As you know, we proactively manage $82 billion investment portfolio to achieve the best risk adjusted return overtime. Net investment income is relatively stable with the large fixed income portfolio and then additional income comes from the performance based investment. The total return on the portfolio will be largely dependent on U.S. interest rates and economic growth. Our fifth priority continues to focus on building long-term growth platforms. The Allstate Agencies platform is being strengthened by rolling up the trusted advisor initiative. Esurance will continue to expand in auto and homeowners insurance. Allstate Benefits will continue to leverage its position in a high growth solitary benefits market. Arity will grow both the telematics business and Square Trade will continue to gain new retail partners. Let’s go to Slide 4 to cover property-liability results. Net written premium grew by 2.3% in the fourth quarter and average premium increases were partly offset by a 2.8% decline in policies in forced. Fourth quarter catastrophe losses of 303 million were 15.4% lower than the prior year quarter. Catastrophe losses for the year, however, were nearly $2.6 billion, which was $863 million higher than 2015. The reported combined ratio for property-liability was 89.9 in the fourth quarter of 2016. When we exclude catastrophes in prior-year reserve re-estimates, the underlying combined ratio for the fourth quarter was 87.7, bringing the full year to 87.9. The four customer segments of the property-liability market are shown in the diagram at the bottom of the page. As you know, Allstate is the only company that provides a differentiated value proposition to each of these customer segments. The Allstate brand, which is in the lower left, comprises 90% of premiums written, that serves customers who prefer a branded product and value local relationships. Underlying margin improvement throughout the year of the Allstate brand was driven by the progress made in the auto insurance business. Homeowners insurance and other personal lines continued a strong profitability. Esurance in the lower right serves customers who prefer branded products that are comfortable handling their own insurance needs. The underlying combined ratio for auto insurance improved the year, but it’s above our long-term target with the fourth quarter being somewhat elevated. The homeowners business is growing rapidly. The loss ratio is within expectation. But the underlying profitability was negatively impacted by start-up advertising costs. Encompass in the upper right competes for customers who want local advice and less concerned about brand experience and are served by independent agencies. We remain focused on improvement of returns in executing our profit improvement plan in this spring. Allstate Financial in the upper right serves brand neutral self-served customers and is an aggregator that does not underwrite insurance risk. We’ll cover the results of these underwritten brands in more detail on the subsequent slides. Now, let me turn it over to John.

Let’s go to Slide 5 to cover the results for Allstate Brand Auto. The recorded combined ratio for the fourth quarter was 95.3, which was 3.3 points below the prior year quarter and benefited from prior year reserve re-estimates. The quarterly underlying loss ratios and combined ratios are shown on the chart on the top left. The underlying combined ratio of 96.1 in the fourth quarter of 2016 improved by 1.5 points compared to the fourth quarter of 2015, driven by a 2.8 point improvement in the underlying loss ratio. This brought our full year underlying combined ratio to 96.4, nearly a 4 point below year end 2015 results. The chart on the top right shows the drivers of the improvement in our underlying combined ratio. Annualized average premium increased to $978 or 7.1%, while underlying loss in expenses increased by 5.5%. This resulted in a favorable gap of $38 comparable to the third quarter. In the fourth quarter, loss trend benefited from favorable current accident year reserve development with 0.7 points. To provide addition insight into our loss trend side coverage, the bottom half of the page shows the paid severity and frequency trends for both property damage and bodily injury. Property damage paid frequency shown by the blue bar continues to show an improving trend. After experiencing elevated levels in the second half of 2014 through the first quarter of 2016, results in the second, third quarter of 2016 were essentially flat and the fourth quarter experienced a decline of 1.2%. Property damage paid severity increased by a modest 1.9% in the quarter and the rate of increases come down throughout 2016. Bodily injury paid frequency decreased 19.2% in the fourth quarter, while paid severity increased by 18.8%. These results are consistent with the trends experienced in the third quarter. Frequency and severity should be looked at in combination to get a sense of the true underlying loss trends. As we discussed in the third quarter call, bodily injury trends reflect payment mix and claim closure patterns that were impacted by changes in claims processes in the second half of 2016. These changes involved requiring enhanced documentation of injuries and related medical treatment and resulted in a reduction in the mix of smaller dollar claims paid. The increases in severity of larger dollar claims are more consistent with medical inflation and we continue to be comfortable with our bodily injury in current severity trends. Slide 6 provides detail on premium and policy growth for Allstate brand auto. The chart on the top left highlights our premium trend. Average premium as shown by the blue bar increased 7% compared to the prior year quarter, a slight deceleration compared to the upward trend beginning in the second quarter of 2015. Average net earned premium shown by the gray line was up 6.8% and continue to increase, reflecting the lag between written and earned premium recognition. Since the end of 2014, auto average premium has increased by over 11% in total. We’ve continued to get approval for higher auto prices where appropriate as part of our comprehensive auto property improvement plan. In the fourth quarter, approved rate increases totaled 1.3% for the Allstate brand, bringing the full year approved rate increases to 7.2%. While our comprehensive auto property improvement plan has improved margins, it’s also reduced growth as we anticipated. New business applications shown on the top right were down 21.9% for the full year. However, we are flat to the prior year quarter. Additionally, auto retention shown on the bottom left was down 0.8 points in the quarter and for the year. The combination of these two factors resulted in a decline of 2.9% in auto policies in 2016. However, both trends have stabilized in the quarter. Slide 7 highlights the continued strength of Allstate brand homeowners. The top part of the page provides detail on our profitability results, showing that we continue to generate attractive returns with the recorded combined ratio of 68.7 in the fourth quarter, benefiting from lower catastrophe losses despite Hurricane Matthew and the Tennessee fires. For the full year, the recorded combined ratio was 83.7, generating an excess of $1 billion in underwriting income. The underlying combined ratio of 59.1 for the quarter and 59.5 for the year continues to reflect strong underlying profitability. While our underlying combined ratio results for the year have been excellent, our long-term target for this line remains in the low 60’s. The bottom half of the page provides detail on our growth trend which follow the auto lines since many of the customers in this segment preferred to bundle their purchases. New business and retention levels declined leading to a 1.2% decline in policies in force. Slide 8 provides a holistic view of our Esurance results. We continue to remain focused on improving auto profitability while investing in product and geographic expansion. The recorded combined ratio of 105 in the fourth quarter was 2 points below the prior year quarter and through the year the Esurance combined ratio was 107.5 lower than the prior year period by 2.8 points driven by lower expenses. The lower expense ratio for the year reflects reduced advertising expense. The underlying loss ratio of 76.3 is higher than long-term target, primarily due to higher auto claim frequency and severity and we will continue to take actions to enhance Esurance returns. Esurance growth trends are highlighted on the bottom of the page. Net written premiums continue to grow on increased rate actions, while policies in force were slightly higher than the prior year end. Slide 9 highlights results for Encompass. Encompass remains focused on improving returns, which continues to adversely impact policy growth trends. The recorded and underlying combined ratios of 90 and 90.7 in the fourth quarter were better than the fourth quarter of 2015. For the full year, the underlying combined ratio was 90.3, a 2.3 point improvement compared to prior year. Policies in force declined by 13.4% from the same quarter a year ago, reflecting both continued lower new business and retention. The majority of decline in policies in force was in six states. And now I’ll turn it over to Steve.

Thanks, John. Turning to Slide 10, Allstate financial premiums and contract charges totaled $574 million in the fourth quarter of 2016, an increase of 4.9% when compared to the prior year quarter. For the year, premiums and contract charges increased 5.4% as Allstate benefits surpassed $1 billion in premium with an increase of 442,000 policies. Allstate Financial operating income of $130 million in the fourth quarter of 2016 was $32 million higher than the fourth quarter of 2015. Net and operating income trends by business are shown in the chart at the bottom of the page. Allstate Life net income was $58 million and operating income was $56 million in the fourth quarter of 2016. Operating income was consistent with the prior year quarter and higher premiums and improved mortality were offset by lower net investment income. Allstate Benefits’ net income was $22 million and operating income was $23 million in 2016’s fourth quarter. Operating income was flat to the prior year quarter as higher premiums from policy growth were offset by higher benefits, decamization [ph] and technology related expenses. We expect to make additional investments in technology as this business grows. The $33 million increase in operating income in Allstate Annuity business compared to the fourth quarter of 2015 is a result of higher returns and performance based investments. The chart on the top right highlights the growth in carrying value and in annualized yield for Allstate Financials performance based investments, which primarily back the immediate annuity business. Net investment income of $101 million on these investments in the fourth quarter was very strong and was almost $30 million higher than the average of the preceding seven quarters. We anticipate continued variability given the timing of investment origination and disposition and market condition. Let’s go on to Slide 11 and our investment results. The chart at the upper left shows the shift we made in the risk profile of $81.8 billion investment portfolio. The portfolio remains largely in corporate fixed income securities. To support long-dated liabilities, we are replacing market risk with idiosyncratic risk through an emphasis on ownership over lending. The conservatively positioned high yield portfolio is being used in part as a bridge to fund performance based strategies that will be used as this portfolio increases. Performance based investments now comprise $6 billion or 7% of the portfolio. These assets require higher economic and regulatory capital and we expect them to deliver attractive long-term economic returns for our shareholders. In the upper right, total return for the quarter was a negative 0.7%, reflecting the decline in fixed income investment values due to the post-election increase in interest rates. The full year return was a strong 4.4%. As you can see in the chart, solid investment income from both our market base and performance based portfolios has delivered a consistent contribution to return of approximately 1% each quarter. Net investment income and investment yield by business segment are shown in the bottom two charts. Property-liability investment income reflects interest-bearing yields closer to market yields and the portfolios low to the short duration. Allstate Financials’ investment income and yields reflects portfolio’s longer duration based upon its liability structure, the impact of last year’s immediate annuity portfolio to reposition. Performance based investment results are the primary source of variability income and yields between quarters and you can see the numbers above the chart in the bottom left. Performance based investment returns in the fourth quarter were above our long-term target as we had strong results in the quarter, which included income realization on direct real estate investments and substantial appreciation on our coupons [ph]. Slide 12 illustrates the continued strength of our capital position and highlights our financial flexibility. Shareholders' equity of $20.6 billion at year end, increased $550 million over year end 2015. The debt to capital ratio of 23.6% reflects the issuance of $1.25 billion in senior unsecured debt in December to help fund the acquisition of Square Trade, which closed January 3rd. We have $2.4 billion in deployable holding company asset at year end, which excluded the funds utilized with the Square Trade acquisition. Book value per share of $50.77 increased by 7.2% over year end 2015, primarily due to net income and increased unrealized gains in the investment portfolio, partially offset by capital return to shareholders. We returned $1.8 billion of cash to common shareholders in 2016 with a combination of $486 million in shareholder dividends and the repurchase over 5% of our shares outstanding at the beginning of the year. As of December 31, 2016, it was $691 million remaining on the $1.5 billion repurchase authorization. Now, I’ll ask Jonathan to open up the line for your questions.

Certainly, [Operator Instructions] our first question comes from the line of Elyse Greenspan from Wells Fargo, your question please.

Hi, guys. Good morning. My first question, what are all the favorable development within your auto book in the quarter and did that come from some of the most recent accident years?

Steve, do you want to take that?

So, what we - it’s Steve. The results that we look at, as you know, from our reserving processes is we do a quarterly review, bottoms up. We have - the reserving department reports to me, I’m separate from our business unit and we look, as you indicated, year-by-year we look at virtually every states. We have a very specific program, methodology both mathematically and quantitative, qualitatively as we walk through the results. We look at by line of business. We look at tremendous amount of details. So, the actual results that you are seeing are based on across multiple lines and across multiple of our prior years. You will see in the 10-K that we filed, we have some additional information. It would give you a little more details of the specific years. But quarterly it’s not just like 2015 or ‘14. It goes back to the full year, which is the nature of our business and the length of the tail of our bodily injury type coverage’s in addition to the short tail you might see that we generally would report earlier in the year.

Okay, but some of it should relate I guess to the more recent accident years and we were seeing some of the higher frequency trends like ‘14 and ‘15?

The frequency shows up immediately, right, because we do it based on count. Some people do target loss ratios. That’s not the way we do most of our reserving. We do it with some lines of business, but what happens is, of course, some people say, well, we think we are going to get 70 loss ratio, so they take 1000 a premium and they book 700 of loss and that’s not the way we do it in our business, because of the short tail nature of it. So, what you see is what you get. There is also a little bit of movement between quarters. So, as we - which doesn’t show up in the triangles in the 10-K but we adjust as we go throughout the year to reflect what we are seeing in the specific year.

Okay. Thank you. And then as I think, as we see the frequency trends got a lot better again in the fourth quarter and you guys reported a pretty good improvement within your auto margin and now on the commentary, some of your commentary points that you’re looking kind of to pursue growth, can you just provide some more color. I mean, is this you are looking in certain states I guess that are showing better trends than other or is this broad-based and how do you think about both new business which I did see flattened out in the quarter, new business growth from here as well as just pursuing growth and higher retentions across overall auto book of business?

I’ll make the one overall perspective and then Matt will give you some specifics. I would not interpret this quarter as that was then and this was now. That was going back to where we were. Miles driven were still up to the quarter. People continue to drive more than they have in the past. Accidents tends to be more frequent distracted driving [ph]. I would not want you to take away from the fourth quarter that we are headed back to where we were. Matt can talk about where we are in pricing and we are up almost a $100 for a policy in auto insurance premiums which is quite substantial, which gives us more flexibility to pursue the growth you are talking, but Matt can talk about that.

Good morning, Elyse. It’s Matt. Let me follow on to Tom’s comments. First, I think about this in three different components. First, the rate environment, the way I would describe it is that we have completed some of the work necessary to kind of catch up to that spike in auto frequency that we saw over the last 18 months and so you saw a fairly dramatic increase in rate taken in order to catch up quickly and try to get that to appropriate margins. And we believe with some exceptions in a few states, but in the vast majority of places we have not caught up and now we are in the mode of keeping up with emerging trends. So, we don’t know what this year will bring or next year, but we are now positioned very well in order to be able to react quickly and to keep up with trends as they emerge. Having caught up, it gives us a little freedom to do something that we were unable to do over the last couple of years. One of which is to begin adding agencies again and points of presence is extremely important for us to enable growth and that point of presence not only agencies but the licensed sales professionals and financial specialists that go along with them, it is hard to do when you are focused intentionally on taking rate and dealing with disruption that causes but now that we are in a slightly more stable environment. We are able to focus on that strategic deployment once again. The second thing that we are hoping to do is to stem the retention losses and declines that we had growth, overall growth in items in four says you know there is a combination of new business growth and retention and it is a vicious treadmill if retention keeps declining since very hard to add enough new business to make up for that loss. We saw slight stabilization in the decline in this last quarter that makes sense to us since we took huge amount of rate in the second quarter of 2016 and so most of that has burned through already in customers and dealt with disruption already. To the extent we are able to keep more moderate rate increases at this point in time we believe customer disruption will be mitigated, will be able to hold on to more customers and I am in this business die. The third component is the competitors environment and well we took fair amount of predecessors and we are questioning for reacting quickly about 18 months ago, I think that has been to our benefit I think most if not all of our competitors and recognized some increased frequency and many chases are reacting only recently from a rate taking perspective. That type of rate taking from our competitors create, shopping behavior in their customers and to the extend we are better positioned, we have increased agency capacity and our agents are ready willing enable to serve those customers, we should be in a very good position to pick up more of those customers from a new business perspective. So it is really a combination of all those items of improving retention, being in a position to capture more new business and hopefully in a more stable rate environment disrupting fewer customers.

Okay great, thank you and then one last quick question.

Let's go to next question because we got like about 12 people on line here okay. We will come back to you if we have time.

Certainly, thank you. Our next question comes from the line of Greg Peters from Raymond James, your question please.

Thank you for the call and taking my questions, I will keep it to two questions I guess. This is a follow up Matt; you were talking about agencies and points of presence. I was wondering if you could provide some demographics around your agencies, how many are closed to retirement and should we infer from your comments that you're as because your - you took pricing actions earlier than many of your peers, that your product and price decision should improve throughout 2017 and then I have a one follow up to that.

Okay Greg, well let me try - I don’t have the actual agency demographics in front of me and I don’t want to go based upon memory but I can tell you that we have over the last several years engaged in a different type of recruiting and selection process for agency owners, both in terms of geographic and in terms of demographic. I think as you know we have historical presence on the coast and that has served us well and we have been able to grow well there. We have not done as well in terms of strategic deployment and some of the heart land states in the lower premium stage and we have a concentrated effort to do that. In terms of the people that we are bringing on, I would say that we've done an what I considered an excellent job of using data analytics and some of the projective tools available to us to better select people who will thrive in our new environment and we talk a little bit about our shift to trusted advisor mode but the type of agency owner and licensed sales professional that would have thrived maybe 10 or 15 years ago will not be the same type of person that we are looking to now because to drive in the next 10 to 15 years. The trusted advisor model is much more relationship and advisory oriented, it is much more technology driven. It requires people who really want to get out there and use data analytics and technology themselves to serve customers to be able to really advise them about the risk that they take on in their lives and how to mitigate those risks. It requires somebody who is to more sophisticated about money management, so that they help our customers manage their cash flows as well as manage their risks. So the type of agency owner we were bringing on and licensed sales professional will bring you on - I feel very confident is one designed for the future and we had a decline in most of 2016. We saw a pickup in the last quarter about 200 licensed sales professional and that is really key for us and when you look at our agencies, we will be shifting - we always had a focus on increasing the number of agencies because we believe physical points of presence are important, but agency capacity is just as important so the number of licensed sales professionals and their specialization, their ability to sell life and retirement, commercial insurance all of the different customer household lines, homeowners, their ability to specialize segment of licensed sales professionals so that they can really focus on serving customers is going to be key and so I think from a demographic perspective we are certainly creating a type of feel towards better way of serving customers in the future.

Thank you. I guess the follow up question to all that, I just go back to the product positioning for 2017, in light of your comments about your early actions on price versus some of your peers, obviously the focus will be going forward for wall street, some of your investors will be growth and improvement in retentions, just to clean up on that, thank you very much for your answers.

Sure Greg, well first I am going to ask you to resist the natural tendency to think that growth is only a factor of price. Certainly rate and price competitors as a component but it is certainly not all of it and some of things I just talked about with trusting advisor, better serving our customers and better famous process and more focused advisory system, the ability to do enforced reviews and annual reviews on their holdings, that’s all a piece of retention and that’s all a part of growth. But you are correct shopping behavior is typically triggered by price changes and to the extend our competitors are now taking additional rate and fairly significant chunks because they are catching us as we were about 12 to 18 months ago. That will trigger if it is likely to trigger shopping behavior and their customers and if we have already gone through that and are stable I believe we will be better positioned to potentially add some of those customers and begin serving them as all state customers.

Okay. Thank you.

Thank you. Our next question comes from the line of Randy Binner from FBR, your question please.

Hey, thank you. I just want to follow up on the response to Elyse’s question on reserves and so I guess the way, I heard it was that favorable PYD [ph] was primarily from Auto BI over last three to four years and what do you think caused that is it a change in your claims approach that you have mentioned earlier? Is there some other aspect that caused that favorable development? It was notable and it is not really the pattern we've seen from others?

While, I can't speak that what it means with respect to others. It is as you described mostly auto, it is really not a big percentage by the way total reserves and loss cost, when you look there is a normal variation in making the estimate when you are looking out anywhere from two to four years to get claims resolved strictly in BI which tend to stretch out three to four years. There is nothing unusual about we had reserve related much greater than that over time and so I don’t think you should breath anything into it other than we conservatively estimate what we think are our last costs are and to the extend we wind those years up and not as much cash went out as we estimated and it shows that from P&L.

And then the other question is, I appreciate all the commentary about all said being kind of close to loss trend with all the initiatives you have done over last couple of years and that’s clear, the numbers, what’s your sense of what is actually happening out there form a kind of accident frequency perspective, meaning how are accidents still worse are we still seeing distracted driving impact, the frequency of accidents and I will leave there and I have one quick follow up.

Randy, it is Matt and I will try to answer that. There is loads of data out there about the correlation between miles driven and additional accident frequency but this is also that about increased deaths from increased fatalities, because the seriousness and [indiscernible] and we've talked about and I think we are seeing mounting evidence of the increased influence of distracted driving on that combination and the issue is this. People if we work constantly to that cell phones for many years and so actually cell phone use hasn’t spike up that tremendously but in fact Smartphone ownership in U.S. has spiked up dramatically and when we look at Smartphone ownership statistics and Smartphone use and compare to accident frequency the correlation is great. So when you have increased miles driven due to increased economic driving, lowering gas prices so increase leisure driving. Yeah, the increased number of drivers on the road that means lower margin for error because you used to have maybe 10 cars packed into the space and now you have 15 and so even if there was distraction before you had great reaction time before, now with increased density you don’t have as greatest space to react in and so we are seeing increased accidents. We saw a spike in that, and that’s what we have reacted to so when we say and I think the comment I made a few minutes ago is really important when you said there is a difference between saying things stabilize and saying things will revert to where they were before. We don’t think accident frequency is reverting to where it was in 2012 or 2013 or 2014. What we are saying is the spike is over and it is now stabilized at a new norm and we think at least our belief is and our assumptions for all of our future work is that we are at that new norm and heightened accident frequency due to the greater economic activity, greater density of cars on the road and the greater use of Smartphone’s and distracted driving in the car.

And so then, if that is a new plateaus, it kind of penetration in these cases by the trial bar also at a new high that we should expect to continue?

I'm sorry, could you say that again?

Trial bar.

Oh trial bar, so that’s a - I think more of a severity question than a frequency question. Yeah, you have heard some of our competitors talk about combination of medical inflation and the trial bar influence on severity cost. I think to some extend we have seen, we've seen many of those same things but I would like to think we have been doing work on claims management, claims handling for the last several years as we saw those trends emerging. And that led to some of the work that we talked about - that influenced the BI frequency and the BI severity trends that you see that we reported on last quarter. I will remind you that we did have a process change and we talked about that last quarter. We encouraged you then and I will encourage you now to look at the BI frequency and severity in combination because the claimant frequency had led to the increase in severity. We start really high and I will remind you that our number one commitment is always to take customers and claimants what we properly owe them. That being said there is claims management techniques to ferry out and eliminates fraud and wastage that don’t compromise on that promise and that’s what we have done. We began referring some enhanced documentation of entries and related medical treatment to ensure we were paying properly and that did change the mix of claims paid. In 2015, about 3rd of BI claims page were below the $1000, in 2016 that has dropped to about quarter leaving us with fewer but higher severity claims. So that’s what you see a change payment mix, it is still inline when you move all that around and you rationalize the two. We believe it is still in line with medical inflation, we are comfortable with our incurred loss transfer for BI and Steve said in his response to the reserving question. Don’t confuse some of these operational claims statistics with profitability and reserving, when we are setting reserves, when that team is working on the reserves they know about the claims process enhancements, they take the impact of those changes into account when setting reserves, they are doing very sophisticated segmented analysis and so while the claims process changes will influence those statistics you see on page severity and page frequency they are not influencing the reserves.

Thank you. Our next question comes from the line of Amit Kumar from Macquarie, your question please.

Thanks and good morning. I'll make this quick, two questions, the first question goes back to I guess Elyse’s question on the trends, when you talk about cashing up to the spike and also address miles driven, distracted driving, the distant fatalities, I am curious why shouldn’t I be nervous that these trends will continue at an elevated levels and hence it is too early to start normalizing pricing, I mean we have just caught up to the past trend but it seems to all the indicators point to continued change in the slope of the loss cause trends?

Well thank you for that question, so it's Matt again. Look this is what we do, so I don’t mean to be [indiscernible] about it, but we have really talented teams, people monitoring these trends on a stage and sub-geographies, sub-state level whose job is to watch net trends emerging and look at indications and ensure that we are keeping up with them as quickly as possible, consistent with actuarial standards so that you can file toward the rates and convince our state regulated to prove those rates. And this is what we have always done and we think we are well positioned to do it and in fact coming out of a spike like this one of the benefits is always that a benefit of going through something like this, it hyper focused us and those troubling segments of the business and allowed us to take segmented rates on those parts of the business so that we can improve our loss ratios as quickly as possible. So, we believe that we have a high quality book at this point. We believe that we know the segments that we need to keep an eye on or we believe we’ve gotten those headwinds rate adequate at this point. And so, we feel very comfortable with being able to manage some continued inflation and some continued rise in escalation in some of these costs. I will remind you that if we go through that, we will not be going through that alone. Our competitors will be going through the exact same thing and we think that we have an advantage with our skill in reacting quickly. We have an excellent relationship with the state regulators. Our teams have their respect. And so, when we do a filing, it’s a complete thorough filing and we have an extremely high approval ratio and the ability to get rates into the book as quickly as needed.

Amit, this time let me add. So, from our standpoint in pricing, it’s only the now. It’s like we look at what the frequency and severity is. We think - we look at it at that moment. It might be March, April, May, it might be August and whatever it is, we look at the previous [indiscernible]. And so we don’t have a fixed assumption toward the year on frequency and severity that is used in pricing. As Matt’s explaining it’s very organic. So, when you are doing your models, of course, you are looking and saying what’s the frequency and severity assumption looking forward and you have to put something in and then you have to put in something for price. We do that continuously by state, by some piece of the state every day. And so, if frequency is 2 points higher, then we’ll take 2 points more for rate. If it’s 2 points lower, then we will decide whether we think that’s reasonable or not. Unlikely we will lower our rates, but we may choose to invest more in expenses to begin to grow the business and that’s why our range is what it is. With the 87, 89 range we’re completely comfortable with. There is, as you know, obviously a 1 to 2 point variation if you add up frequency and severity over the course of the year. And so, - and to an extent, but we don’t want you to think, so we lowered the range from where it was in 2016. This does not mean that we think you should take 2016 numbers and lower that by the same amount. That’s just not the way we do it. It’s not the way we run the business.

I guess I’m just a glass half empty kind of guy. The other question I had, and switching topics here, the broader discussion on corporate taxation. If the taxes were to go down, does that get reflected in your pricing actions and I know it’s a hypothetical or should we anticipate that netting down to your bottom line? Thanks.

Taxes are, of course, complicated thing as it relates to Allstate. The first and probably the biggest impact is when it relates to taxes, that drives economic growth that’s good for the company, because we’re low on U.S. growth and that’s our investment portfolio for the growth in auto and homeowners - auto ownership and home ownership. So, both of those could be very good for us. As it relates to - you’re at one component of it, if you look at our P&L, I’ll go way up now and get back to pricing. We are a full taxpayer. We don’t have - our industry does not have all kinds of special deductions. We think U.S. taxes should be based and corporations should pay based on what they use, not some centralized party control the economy. We know centralized timing doesn’t work and using the tax provided by centralized plan and drive certain industries doesn’t make sense to us. As a result of that, there are a number of industries and companies that pay a lot less tax than us. We think it should be more relieving playing field and so we think our tax pay should be low. That would obviously immediately be good for our earnings, because we would have less cash. We have to pay out every year in taxes. What happens surprising then, it really depends on the individual state you’re in, where you are in pricing that piece. I would make a couple of comments. One, I would reiterate what Matt said. While price is important, we don’t look at price as the only leverage of growth. We think price is what we have to charge relative to the value we provide that Matt is working hard on providing more value rather than just we’ve achieved this in town and then it also depends - there is a variety of other facts, which would rattle through the pricing, the size shift the tax rate used in determining how return on capital and what happens to interest rate, what happens to inflation in that scenario, so there is a whole bunch of other, I would say, secondary and tertiary [indiscernible] pricing. Net, net, I believe a lower tax rate would be good for Allstate in short-term.

Thanks for the thorough answer and good luck for the future.

Thank you. Our next question comes from the line of Jay Gelb from Barclays, your question please.

Thanks. Good morning. The first question I had was just on expectations for share buybacks in 2017. Should we be thinking about the 2016 page of 1.4 billion as a reasonable run rate?

Well, Jay, it’s Tom. So, I think you should think about - we still have $651 million yet to go, so you can put that in the bank that we fully expect to get it done by the time its authorization is up which is late in 2018 based on the pace we are going, it looks like it will be done sooner than the authorization. And then we look at where we are in terms of capital and we’ll make the same judgment that we make every other year, which is between net and the dividend, how much cash can we return to shareholders, if we don’t have a use for it, we’ll return it. So, share repurchases will continue to be part of what we do, but we don’t have a set number that we are ready to tee up because we still got ways to go on the existing share repurchase program.

Okay. And then on the Allstate brand auto rate increases, I believe the expectation now is for those rating - the pace of rate increases to moderate in 2017. How much do you think that could slow?

So, how much do you think the pace of rate increases in Allstate brand auto insurance could slow? It’s on the extremely successful 75% you had this year. Sorry, Jay, I was just helping out.

With the editorial comment, thank you.

I wish I could tell you. I can only tell you that we’ve done catching up as I stated earlier. So, when you are in catch-up mode, you are sprinting and you are taking as much as you can in order to get rate adequate and to clean up the booking and get to where you are earning in appropriate return on the business and it feels like in about probably three quarters of the states we will be reducing that level of rate we will not be taking the kind of rate we took in 2016. That being said, if we see additional pressure, we are going to take that. So, I keep coming back to the same thing that both Tom and I have said during this call, we do have some assumptions about where loss costs are going to go next year, but they are just that. They are just assumptions and they are not a plan. Our plan is to keep up with loss costs as they emerge and take rate necessarily in order to do that. So, to the extent the reality meets our forecast and we have a stabilization of frequency trends and severity trends where they are now. I will expect us to see moderated rate need as we are keeping up with what is more normal inflationary trends at that point.

That makes perfect sense. Thank you.

Thank you. Our next question comes from the line of Sarah DeWitt from JP Morgan, your question please.

Hi, good morning. On the auto insurance margins, just to clarify, are you at your target auto margins on a GAAP basis now or is there still room to improve? And then the reason I ask is because the Allstate brand auto margin would have been 97%, the 2 points of favorable development.

Yeah, Sarah, thanks for the question. I was hoping Tom would have asked this so we would have asked it differently. - We still have room to improve, I think we feel really good about the progress we have made and we feel like we are earning under appropriate return on our investment at this point, but it is not our target return yet and we will continue to and that’s makeable levers that’s the claims management, that expense sufficiency that is additional rate, additional work on quality as a book, it is correct class work, it’s underwriting work, all of the things that we did really, really strongly to get that to profitability, but all of those levers at the same levels as we need to continue to pull or just - now we can dial them instead of pulling them really hard, we can dial them carefully and thoughtfully to get that targeted returns but a lot closer than we have been for a while to where we wanted to be but our work is not over.

Okay great thanks. And then just on the auto severity, I apologies if I you addressed it but the defect in using, I sense you encouragements are consistent but we heard one of your competitors saying you are seeing much higher severity from more occupants for vehicle, more fatalities, higher legal cost, sounds like you acknowledged some of those but it doesn’t seem like you are seeing any of this in your encouragement and you just clarify that.

I think you are over reading into what we said about, there are normal inflationary cost embedded in our BI. So I'm not - other people there might they are saying they got lots of stuff in its driving, ours just is normal like and we incur it that way. We show you page, but that’s not the way - we used space to help and think about how we reserve but it is not the way we are trying to P&L. We are trying to P&L on what we think is going to happen using it is normal and it may answered you question on the slight of the longer perspective on the combined ratio so we had great returns in the auto insurance business group, twelve plus year, we showed that the market was going to give us the economic rent based on the value we provided and then in 2015, we had a huge spike in frequency in severity and as Matt said we don’t like, we like to always turn better and so we had to move quickly, our team did, they executed well and we moved those returns up. Are we back to the return we had for that period of time like, no but are we fundamentally different position today, where we feel like what we should be thinking about how we get there or what period time we get there and then whether we can and that’s the process, that’s Allstate brand. Esurance is a slightly different position, it's had a good movement throughout the year picked up mostly in the first half of the year, we are watching the fourth quarter because it bumped up a little bit and if its frequency and severity trends increase, it does the same think that Matt described, it is now, that’s whatever happens. We feel like we have had some good success this year as one of you pointed out, we finally managed to get some underwriting income out of that business and we are happy that now position well and so we got - it is in the same place. We are feeling good about the process and the way the machine works here, they help us manage whatever comes our way and that’s what you are buying. You are buying the machine, not somebody's projection and frequency and severity.

Great thank you.

Okay maybe we'll take one last question and then we will close.

Certainly, our final question comes from the line of Bob Glasspiegel from Janney, your question please.

Thanks for squeezing me in Tom, two quickies, on square trade increased disclosure, turning more color on what the goodwill going to be and second to be excluded out of Esurance or included in per earnings?

We just bought it as you know Bob, last month, we don’t have any update on numbers. We are obviously working hard at - coming up with what’s the split between goodwill and intangibles are. I missed your second question.

Is it going to be included or excluded in core earnings, the good will piece?

The good will, only intangibles are amortized and they are excluded from operating income, that’s definition of operating income.

Got you, one another quickie, the life earnings were up by more than sort of the partnership delta, Mary Jane was there anything unusual or recurring in that bump up in the earnings level in the quarter?

So profit financial Bob, really for the annuities, we had the benefit of the format based investments that Steve alluded to that was at 13.8%, we also didn’t have favorable mortality as well in both the annuity business and the life business. So we did have a favorable quarter from a mortality perspective impacting our result.

That’s what she was saying [indiscernible].

No, I knew the plump up in partnership income was not recurring but it was more than that, it was 20 million to 30 million more than just increase in partnerships, but mortality could explain some of that, thanks.

Yeah, most of it was the partnership recurring Bob, the mortality was worked about fixed after tax on the annuity.

Okay, I will go through it with John, appreciate it.

Yeah, okay.

Let’s do that. Thank you all for participating if you go to slide 13, there is good reasons as to why this is good investment, why it should continue to hold Allstate, we are positioned with profitable growth and we know how to move in our market place well and we are building long-term growth platforms along the way as well. Thanks so 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.