Ladies and gentlemen, thank you for standing by, and welcome to the Allstate Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mark Nogal, Director of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning. Welcome, everyone, to Allstate's Second Quarter 2020 Earnings Conference Call. After prepared remarks, we'll 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 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 further context on our strategy to grow personal property-liability market share. 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 2019 and other public documents for information on potential risks. And now I'll turn it over to Tom.

Good morning. Thank you for joining us today at Allstate. So let's start on slide 2 of Allstate's strategy and our second quarter highlights. Our purpose is to protect people from life's uncertainties and to be a positive personal good. As you know, our strategy has two components: increase personal property liability market share and expand into other protection businesses. This strategy is an adaptation to the coronavirus pandemic, which led to excellent operating results in the second quarter. The enterprise customer experience score increased as employees and agencies did an excellent job of working remotely, and we benefited from leading on the shelter-in-place payback and helping customers in other ways. Profitability was good with adjusted net income of $2.46 per share. We also made progress on our multi-year transformative growth plan by leveraging the direct sales capabilities of Esurance and lowering expenses. Allstate Protection Plans, which we acquired 3.5 years ago for $1.4 billion, reported estimated adjusted net income of $35 million in the quarter and $69 million for the first six months of 2020. The performance-based core losses in the quarter reduced reported net investment income despite solid total loan growth. Adjusted net income for the quarter was $1.2 billion, an increase of 49% compared to the prior year quarter, as you can see from the middle of the table market value in just $380 million in 2019, $2.46 per share, 12.8% of other than repurchase program. With adjusted net income mature line at 17.8%.

Thanks, Tom. Let's go to slide 4, where we'll discuss the strong performance of our Property-Liability segment. Premium and policy growth continued with excellent recorded and underlying profitability. Policies in force were $33.8 million at the end of the quarter, and Allstate brand policies reached an all-time high for auto at $20.5 million. Underwriting income of $904 million increased by $537 million compared to the prior year quarter. The chart on the lower left shows the second quarter combined ratio of 89.8% and the impacts driving the 6-point improvement over the prior year quarter. Starting on the left, the underlying loss ratio improved by 15.9 points on lower auto insurance losses from fewer accidents due to a significant reduction in miles driven. The underlying loss ratio on homeowners insurance also improved due to increased premiums and lower non-catastrophe losses. The underlying loss ratio improvements were partially offset by Allstate's efforts to help customers during the pandemic, including the 15% shelter-in-place payback on auto, which totaled 8.3% of premiums across all lines, plus a 0.5% of premiums from increased bad debt expense related to the Allstate special payment plan. The expense ratio was 23.0, and improved 0.5 points compared to the prior year quarter, excluding the $738 million shelter-in-place payback and bad debt expenses in the quarter. While expenses vary by quarter, the long-term trend has been down, as you can see from this quarter. The features of our transformative growth plan will accelerate growth through three key levers: expanding customer access, enhancing customer value, and investing in technology and marketing. We're expanding customer access and increasing product availability by leveraging Esurance's direct sales capabilities under the Allstate brand. The Esurance brand will be sunset over time, and the advertising spend will be concentrated on the Allstate brand. This also includes improving online and call center sales flows. We continue to enhance customer value through continued cost structure improvements, which will make prices more competitive without reducing underwriting margins. We recently announced changes in the personal Property-Liability organization, including consolidating Allstate brand field operations to further lower costs. We're also expanding telematics offerings and promoting our unique Milewise pay-by-mile product, which is appealing to customers as they're driving less during the pandemic.

Thanks, Glenn. Let's go to slide 6, which highlights investment performance for the second quarter. We take a proactive and holistic approach to managing the investment portfolio. After reducing public equity in the first quarter, we increased our allocation to investment-grade corporate bonds this quarter. The chart on the left shows net investment income totaled $409 million in the quarter, which was $533 million below the prior year, due to a decline in market-based income and losses in the performance-based portfolio. Market-based income was below the prior year quarter by $77 million. We recorded a $211 million loss on our performance-based investments in the second quarter. Given this lag in income recognition, the second quarter improvement in public equity markets did not have a positive impact on this portfolio in the quarter. Let's move to slide seven and review results for Allstate Life, Benefits, and Annuities. Allstate Life generated adjusted net income of $72 million in the second quarter, an increase of $4 million compared to the prior year quarter. Life insurance mortality was elevated in the second quarter, driven by $25 million in identified coronavirus death claims. Excluding these claims, mortality experience was favorable relative to expected levels. Allstate Benefits premiums declined 7.4% compared to the prior year quarter, reflecting the non-renewal of a large underperforming account in the fourth quarter of 2019, lower sales from increased competition, and the economic impact of the coronavirus, including higher employee turnover and business closures. Allstate Benefits adjusted net income of $5 million in the second quarter was $32 million below the prior year quarter, reflecting a $32 million after-tax write-off for software associated with the billing system. We are developing a technology strategy to build an end-to-end digital platform over time that modernizes more than just our billing system and enables us to maintain our strong position in the voluntary Benefits marketplace. Let's turn to slide eight to discuss the results of the Service Businesses. Service Businesses revenue grew 15.4% to $457 million in the second quarter. Policies in force continued to grow, increasing 41.2% to $127.3 million, largely due to growth in Allstate Protection Plans. Adjusted net income improved to $38 million in the second quarter of 2020, reflecting an increase of $22 million compared to the second quarter of last year, driven by growth of Allstate Protection Plans and improved profitability at Allstate Roadside Services. Allstate Protection Plans has exceeded expectations across each acquisition measure of success established following the $1.4 billion acquisition in 2017. Policies in force increased fourfold over the last three and a half years from less than 30 million policies in 2017 to more than $120 million in the second quarter of 2020, representing a compound annual growth rate of 53%. Allstate Protection Plans has also experienced upward trajectory with added scale, generating $35 million of adjusted net income in the second quarter of 2020 and $96 million over the latest 12 months.

As of June 30, Allstate's capital position remains strong due to our diversified business model, substantial earnings capacity, and proactive capital management. We continue to generate strong returns on capital with an adjusted net income return on equity of 17.9% as of the end of the second quarter. We returned $563 million to common shareholders in the second quarter through $391 million in share repurchases and $172 million in common stock dividends. We have repurchased 5.2% of outstanding shares. As of June 30, there was $2.4 billion remaining on the $3 billion share repurchase authorization that is expected to be completed by the end of 2021. This quarter, we also entered into an agreement to acquire National General. This acquisition is financially attractive and will create a platform to drive profitable growth in the independent agent channel. National General will become Allstate's independent agent platform. The deal will increase Allstate's total personalized market share by over one point and create a top five competitor in the independent agent channel personal lines market. It also generates opportunities for growth and expense efficiencies. The transaction will have no impact on Allstate's existing share repurchase program. The second quarter was a busy one, where we addressed the impact of the pandemic and continued to position Allstate for long-term profitable growth. With that context, let's open up the line for questions.

Our first question comes from the line of Yaron Kinar from Goldman Sachs. Your question please.

Thank you very much. Good morning, everybody. My first question is just looking at the expense ratio, adjusted for bad debt and the payback improving by 50 basis points... How much of that is from the transformative growth program? And how much is just simply COVID-driven?

Yaron?

Yes. Can you hear me?

Yes.

Your line is open. His line is definitely not coming through clearly.

Mario, do you want to jump in on that one?

Thanks, Yaron. As we've talked about transformative growth, I'll just remind you there's three core elements — expanding customer access, enhancing the customer value proposition, and continuing to invest in technology and marketing. Improving our cost structure is a key part of how we're going to achieve that second objective of enhancing customer value. We're focused on taking costs out and expect to continue taking costs out over time. Our underwriting expense ratio, as you indicated, is down 0.5 points once you adjust for coronavirus impacts to 23 in the quarter, and down eight-tenths of a point compared to last year.

Okay. My second question, I think in the past, you've said that you're not looking to cut rates, but we are seeing some competitors starting to cut more meaningfully here... Are you holding to your decision?

Yes. So I'll jump in and take that one. This is Glenn, but thanks for the question, Yaron. First of all, while our competitors have been aggressive, it's not an irrational environment. We're managing this on a local level. Our product people have made 180 filings over the last two months. What we do is we're constantly looking at how to be competitive in the environment. It's why we saw sequential growth, and we've continued to grow in spite of a tough environment. While we don't favor a broad base of cutting rates, we favor being very surgical about managing our competitive position and margins in each market.

Thank you and best of luck.

Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please.

Given the strong results that you've been seeing, are there any plans for further rebates within your auto insurance book?

So, this is Glenn. We're looking at sustainable and more sophisticated instruments. The shelter-in-place payback was a necessary response to a significant change in frequency at that time. However, our approach moving forward will likely be more precise on a state-by-state and market-by-market basis rather than a broad-based payback.

Okay. That's helpful. And then my second question, could you give us a sense of how frequency and severity trends have trended in July versus what you saw in the second quarter?

This is Mario. Glenn will talk about the second quarter, but we're not going to talk about July trends at this point.

Throughout the quarter, we saw June being less of a difference in gross frequency than the other months in the quarter. There's a lot more variation by state early on, but we've started to see some normalization.

Okay. Thank you. I appreciate the color.

Thank you. Our next question comes from the line of Greg Peters from Raymond James.

I'm looking for an update on your homeowners business... I would be curious about your impressions about what's driving that.

We've obviously worked hard on our homeowners business over the last number of years, and so we're pleased with the returns we're getting from that business.

We've sustained a strong combined ratio and we are seeing shifts in frequency and severity... I wouldn't necessarily draw a conclusion that there's something driving long-term frequency down that will be sustainable.

Got it. Thanks for that answer. Then I'd like to circle back on your transformative growth plan and the integrated services platform.

We're focused on growing with agencies looking to invest... This has driven the number down a little bit.

We want to grow in all our lines. We want to sell more, and that includes both Allstate agents and independent agents.

We want to sell as much as we can through everybody as we can. You'll see changes as we build out these new models... It's really about the very distribution force.

Got it. Thank you for the answers.

Thank you. Our next question comes from the line of Mike Zaremski from Credit Suisse. Your question please.

Could you discuss whether we should expect auto severity to increase during COVID?

The statistics change rapidly in terms of claims and severity... Look at the overall loss costs to confirm that.

Paid severity was reported at 20% up... It's a mix issue that drives that type of number.

Thank you. And lastly, the services segment, driven by Allstate Protection continues to do better than expected; should we expect the rate of growth to temper?

We're trying to understand why we were into that space, and you can see it's a huge growth. We wanted to provide you an update since we expect continued good performance.

Allstate Protection Plans continues to realize strong returns... The underlying business continues to be quite strong, and we're quite bullish on it.

Thank you.

Thank you. Our next question comes from the line of Paul Newsome from Piper Sandler.

I wanted to ask about bad debt trends within the quarter itself... Just your thoughts on that would be great.

Mario, do you want to take that?

One of the ways we provided additional benefits to customers during the pandemic was to offer them a special payment plan. We recorded $44 million in bad debt for that segment.

This is another cost associated with the pandemic. We factor all this into our future outlook.

Makes sense. Second question, will the regulators take into account the unique circumstances of the pandemic?

It's hard for us to speak for regulators, but we received positive feedback for getting out early... The good news is we have good math to justify rate changes.

I think that covered it well.

Thanks for your help.

Our last question comes from the line of David Motemaden from Evercore. Your question please.

I'm just wondering how you guys are thinking about miles driven and accident frequency over the longer term.

I will start with the macro. Our strategy includes both auto and homeowners... We have a profitable homeowners business that we can leverage.

We're looking at what percentage of the market works in jobs that don't have to commute... The teams work through what the expectations are so we're able to move quickly.

Great. Thanks for that comprehensive answer. I appreciate that.

You should expect overall trend in expenses to keep going down.

Thanks. I want to go back to the frequency benefit issue. Are you confident that you won't see an impact on policy growth?

If you look at homeowners... We don't think that's the right way to build the business.

Got it. And then I just wanted to ask on the National General deal; is there any help that you can give us in terms of what you're building in with respect to cost synergies?

We don't own it yet. We do have cost saves in the middle of it... Glenn and Barry are working hard on what the transition program is.

All right. Thanks, Tom.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the program. You may now disconnect. Good day.