The Allstate Management

The Allstate (ALL) Q4 2012 Earnings Call February 7, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to The Allstate Corporation Fourth 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, Investor Relations. Sir, you may begin.

Robert Block
Thanks, Matt. Good morning, everyone. Thank you for taking the time today to be part of our Fourth Quarter 2012 Earnings Conference Call. We'll begin with some brief commentary on our results from Tom Wilson, Steve Shebik and me, followed by a question-and-answer period. On the call with us today are Don Bailey, Head of Emerging Businesses and Encompass; Don Civgin, Head of Allstate Financial and Insurance; Judy Greffin, our Chief Investment Officer; Sam Pilch, our Controller; and Matt Winter, Head of Auto, Home and Agencies.

Last night, we issued our press release and investor supplement, as well as posted a slide presentation to be used in conjunction with our prepared remarks. These are available on our website. We plan to file our 10-K for 2012 by the end of February.

Beginning with the first slide, this discussion may contain forward-looking statements regarding Allstate’s operations. Actual results may differ materially from those statements, so please refer to our 10-K for 2011, our 10-Q for the third quarter of 2012 and our most recent press release for information on potential risks.

Also, this discussion will contain some non-GAAP measures, which there are reconciliations in our press release and on our website. Recording of this call and a replay will be available following its conclusion. I'll be available to answer any follow-up questions you may have once this call is completed.

Now, let's begin with Tom.

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
Well, good morning, and thanks again for your interest in Allstate. Today, I'll cover our results in relationship to our strategy in 2012 priorities, then I'll cover our priorities for 2013. Bob will cover our business unit results and Steve will cover investment performance and capital management.

But before we go through 2012, let me just update everybody on Sandy and the progress we've made in helping our customers restore their lives. So as you know, Sandy was a huge storm, affected an enormous heavily populated area and of course, many of you, personally. We're one of the first insurance companies on the scene to help our customers. With our mobile units, we often got to customers' homes before they even called us. Now we received about 170,000 claims to date and we've closed 98% of the claims reported. We paid about 95% of our expected net losses. Now we did update our initial loss estimate, which was, as you'll remember, $1,075,000,000 to $1,117,000,000. That's $42 million increase. And our losses, of course, would have been significantly higher had we not taken the actions we did due to catastrophic exposures over the prior 6 years.

And of course, while the numbers are large, the real significance is the fabulous work that the Allstaters had done for our customers, whether that's our claim professionals, our local agency owners or the thousands of other key members across the country that sort of rose to the occasion, helping those people rebuild their lives. We're very proud of what we've gotten accomplished, and we know our customers are happy as well.

Our customer-focused strategy is to provide unique products and services to distinct customer segments, which is based on their preferences for price, service and delivery channel. That's shown on Slide 2. You can -- there's the 4 segments we have there.

AAA Insurance

Within the past year, we've seen at least two major companies launch programs that promise to lower insurance rates for customers willing to give up a little privacy. For better or worse, another has now joined the ranks: AAA.
To recap: you've probably heard about Progressive's "Snapshot" program. The company offers to send a device that plugs into your car'son-board diagnostic port and monitors your driving habits. Drive safely, and your rates go down. Drive carelessly, and, well, you can guess the rest.

State Farm recently launched a similar initiative, the difference being that State Farm uses a smartphone app to give drivers instant feedback -- feedback that, for now, doesn't get reported back to State Farm HQ. Some might find that useful for driver education. Others probably find it a little creepy.

AAA's "ACE Teen Pilot Program"

In the same vein, AAA has launched a pilot insurance program for teens in California and Texas. When parents sign up for the appropriately named "ACE Teen Pilot Program", the company sends them a device for their car's OBD port, which then tracks driving habits.

For the time being, however, the ACE Teen Pilot Program seems slightly less intrusive than its cousins at Progressive and State Farm. For starters, it offers two insurance programs associated with the device:

1. A pay-as-you-drive program that simply measures mileage and charges higher insurance rates for customers who use their vehicle more often; and,

2. A "teen safety" program that monitors the same details that the other companies do -- acceleration, braking, etc. -- but keeps that information on a separate server where parents can log in and check on their kids' driving habits.

AAA says that it will supply data from monitoring devices to law enforcement agencies, if necessary, but the company also says that it has no intention of using data collected in the ACE Teen Pilot Program to set insurance rates -- for now. Still, it doesn't take Michio Kaku to figure out that such a development sits about two feet down the slippery slope.

AAA's defenders could argue that insurance companies are simply taking their cues from consumers. After all, many of us seem more than eager to discuss the intimate details of our lives on social networks, so what's the harm in collecting a little driving data? Like it or not, it seems pretty obvious that programs like this are the shape of things to come.

Progressive data shows 30 percent increase in single-vehicle claims on New Year’s Day

MAYFIELD VILLAGE, Ohio — December 20, 2012 —According to data from Progressive Insurance, single-vehicle claims were up 30 percent on New Year's Day 2012, when compared to the same day of the week two weeks prior to and after New Year's Day. The total number of claims saw a jump of around 25 percent, with the largest increase coming in the single-vehicle variety. A single-vehicle claim occurs when one car has an incident, and no other car is involved. Notable jumps in single-vehicle claims on New Year's Day include:

30 percent increase in single-vehicle claims
76 percent increase in single-vehicle rollovers
59 percent increase in a single-vehicles running off the road and striking an object
29 percent increase in single-vehicles that swerved to avoid something and hit an object
19 percent increase in striking an object in the road
"We've all heard the phrase, 'I'm my own worst enemy,' and that phrase rings as true as ever on New Year's Day," said Maria Cashy, the claims customer service process leader at Progressive. "The large increase in single-vehicle claims could be attributed to a variety of factors such as icy streets, more people out on the roads or late-night driving. Regardless, the best thing you can do to keep yourself safe is stay off the road."

If you are out on New Year's, Cashy recommends getting a cab or having a designated driver.

"For taxi drivers, navigating the icy roads is the norm at this time of year," Cashy continued. "They know the spots to avoid, are accustomed to late-night driving and are used to crowded roadways."

If you do find yourself in an accident this New Year's, Progressive recommends you take the following steps:

Stay calm. Keeping a normal demeanor helps you stay in control of the situation.
Make sure you and your passengers are OK. Move as far off the roadway as possible, but stay at the scene of the accident. Warn oncoming traffic by activating your hazard warning lights and/or setting flares.
Call the police. Call 911 or the appropriate emergency number to report the accident.
Contact your insurance company and report the claim. The sooner your insurance company knows about the accident, the sooner they can start working to resolve your claim. People who are insured by Progressive can file a claim by calling 1-800-PROGRESSIVE, online at progressive.com or through the Progressive mobile app.
Do not discuss the accident. Do not discuss the car accident with anyone other than the police and your claims representative.
If it's a multi-car accident, exchange vital information with the other driver involved in the car accident. Write down the name, address, phone number and license numbers for all drivers and witnesses, particularly those who were not riding in a vehicle involved in the accident. Ask for the insurance companies and policy numbers for drivers involved in the car accident.
About Progressive
Celebrating its 75th anniversary in 2012, The Progressive Group of Insurance Companies (collectively, "Progressive Insurance") makes it easy to understand, buy and use auto insurance. Progressive offers choices so consumers can reach us whenever, wherever and however it's most convenient for them — online at progressive.com, by phone at 1-800-PROGRESSIVE, or in-person with a local agent.

Progressive offers insurance for personal and commercial autos and trucks, motorcycles, boats, recreational vehicles and homes. It's the fourth largest auto insurer in the country, the largest seller of motorcycle insurance and a leader in commercial auto insurance. Progressive also offers car insurance online in Australia at http://www.progressiveonline.com.au.

Founded in 1937, Progressive continues its long history of offering shopping tools and services that save customers time and money, like Name Your Price®, the Snapshot Discount®, and a concierge level of claims service.

The Common Shares of The Progressive Corporation, the Mayfield Village, Ohio-based holding company, are publicly traded at NYSE:PGR.

Mass. Agents Group Says GEICO Failed to Report Some At-Fault Accident Data

The Massachusetts Association of Insurance Agents (MAIA) this week has asked the state’s Merit Rating Board and the Division of Insurance to investigate GEICO for allegedly failing to report at-fault accident data to the Merit Rating Board, in violation of Massachusetts law and regulation.

MAIA vice president of communications Donna McKenna said that the association has provided the Division of Insurance and the Merit Rating Board with evidence that GEICO has on at least one occasion failed to notify the Merit Rating Board of an at-fault accident involving one of its policyholders.

A company’s failure to report at-fault accident information to the Merit Rating Board could result in a fine of not more than $500 for each violation, according to the MAIA.

The association has requested in a formal complaint that the Division of Insurance and the Merit Rating Board investigate not only the specific case the agents association outlined but also require GEICO to provide proof that, with the exception of this case, GEICO is in complete compliance with the reporting requirements.

The MAIA noted that under “managed competition” some companies have an “accident forgiveness” factor where the policyholder does not receive surcharge points for the first at-fault accident. However, the existence of a forgiveness factor in a company’s rate and form filing does not relieve the company from the responsibility of properly reporting at-fault accident data to the Merit Rating Board.

“A driving record which is accurate and complete is the one true picture of a person’s driving history and policy eligibility. At-fault accident involvement and conviction of moving violations are crucial to every company’s rating and underwriting process, and every company has a legal responsibility to report properly,” said McKenna.

The MAIA is one of the largest state or regional associations of independent insurance agents in the country and represents more than 1,400 independent agencies with over 10,000 employees in Massachusetts.

Allstate Sues Florida Neurologic Clinic for $7.6M in False Claims

A Florida neurologic clinic that specializes in treating patients with traumatic brain and spinal cord injuries is being sued by a major automotive insurance company for more than $7 million in false claims stemming from charges it abused patients, failed to provide treatment, and kept them hospitalized without medical justification.

Allstate Insurance Co. has filed suit against the Florida Institute for Neurologic Rehabilitation, Inc., and its owner, Joseph Brennick, in the U.S. District Court for Middle District of Florida under the federal Racketeer Influence and Corrupt Act, for breach of contract, and a variety of fraud charges.

At stake, $7.6 million in allegedly false medical payments for injured drivers insured by Allstate in the state of Michigan.

The Wauchula, Fla.-based FINR advertises itself as the leader in treating traumatic brain injuries, neurorehabilitation, neuropsychiatric disorders, and spinal cord injuries. Its basic services include offering occupational speech physical therapy, and counseling to help injured drivers make the transition from the hospital to their homes.

Although FINR is located in Florida, its largest contingent of patients came from Michigan, where the company has carried out an aggressive and extensive marketing campaign using online resources, circulating print advertising materials, making presentations at conferences, and holding seminars.

No Spending Cap

Unlike most states such as Florida, which caps no-fault automobile medical benefits at $10,000 for emergency cases and $2,500 for non-emergency care, Michigan offers medical benefits with no spending cap. And those medical benefits can be paid out over an unlimited time period.

Allstate charged that Brennick through FINR took advantage of those unlimited benefits in many ways, first and foremost by keeping patients as long as possible.

Under Florida law, FINR is licensed to provide temporary services and all patients are required to have a treatment plan within three days of being admitted and a plan for being returned home or to a longer term facility within 30 days.

Specifically, the law states that “all residents shall use the transitional living facility as a temporary measure and not as a permanent home or domicile.”

Instead of developing those treatment and transition plans, Allstate charged that FINR basically “warehoused” patients so they could charge the insurer a daily per diem rate that is in some cases equaled a $1,000 per day.

For example, a 13-year old who was hurt in a motorcycle accident in 2002, spent six years at FINR at a cost of roughly $1.8 million. Investigators, however, found out the patient rarely received treatment and that the staff neglected to take into effect several other medical conditions that put into question whether he should have been at FINR at all.

Allstate also pointed to other cases where patients received little to no treatment at all.

“With the except of the few hours each day that patients received vocational training, FINR patients were largely confined to their living quarters with no meaningful therapy or rehabilitative treatment,” charged Allstate in the suit.

To hide these facts, Allstate charged that Brennick used a variety of means including falsifying medical documents and demanding per diem contracts to avoid having to itemize bills. Allstate noted that since Michigan law required it to pay FINR’s bills within 30 days of receiving them it offered the insurer little time to question any charges.

“Allstate relied to its detriment upon the presumption of honesty accorded the medical documentation submitted by FINR,” stated the insurer in the lawsuit.

This not the first time Brennick has had a brush with authorities. Previously, he had worked for his father Charles Brennick, who owned the New Medico Health Care System, a chain of 42 rehabilitation facilities.

In 1992, the Federal Bureau of Investigation launched a probe into the operation based on allegations the clinic took advantage of patients and their families by inflating their expectations over a patient’s prospects for a recovery only to discharge them when their insurance benefits expired.

As a result of that probe, the ownership of the company was turned over to Joseph Brennick, who reincorporated it in Delaware and began operating in Florida under the name FINR.

Full Attention Needed

The Consumer Federation of the Southeast reacted to Allstate’s allegations by calling on federal and state authorities in Florida, Michigan, and Connecticut, which is also removing patients from FINR, to investigate the medical facility’s practices

Consumer Federation Executive Director Walter Dartland said the government officials needed to aggressively probe FINR’s care for patients and how they bill insurance companies for those services.

“While we must ensure taxpayer dollars and consumer insurance premiums are being defended, protecting the well-being of FINR’s patients is the top priority,” said Dartland. “These grave new assertions from Allstate deserve the full attention of authorities at the state and federal levels.”

Allstate’s charges has caught the attention of Florida regulators, as the Agency for Health Care Administration, the Department of Health, and the Department of Children and Families made an unannounced inspection trip to FINR’s clinic earlier this month.

Among other things, a review of 98 FINR residents found that 50 patients didn’t even have a diagnosis of a spinal-cord injury or traumatic brain injury and, therefore, did not qualify to be treated at the facility. As a result, regulators are requiring those patients to be moved to other locations.

Regulators also cited FINR for not having initial treatment plans for patients and discharge plans as required from a transitional facility.

Another practice at FINR that is attracting the attention of regulators is the use of the so-called “Brief Assisted Required Relaxation” procedure, or as it is known, BARR.

The procedure calls for three individuals to physical restrain a patient whose behavior could cause harm to themselves or others. The physical restraint can be followed by the use of drugs to calm the patient and secluding the patient from others for an indefinite period.

The BARR procedure is supposed to be used only when all other methods to calm a patient fail. However, patients have complained that FINR was too quick and harsh in using the method and that the staff’s actions may have contributed to two deaths at the facility in the past two years.

It was all part of what Allstate lawyers labeled “a culture of abuse and violence,” which led some patients to describe to their time at FINR as being in “prison.” Since 2005, The Florida Department of Children and Families received 514 complaints of abuse or neglect, with 37 of those complaints being turned over to law enforcement officials.

On the advice of legal counsel, FINR has yet to turn over the BARR documents to regulators.

Florida DCR Secretary David Wilkins said that the three agencies are still pursuing these issues and others to ensure patients are protected.

“We will continue to investigate any allegations of abuse or neglect to this vulnerable population and provide this information to law enforcement and the other agencies involved,” said Wilkins in a statement.

Nationwide Calls Harleysville Deal ‘Fair and Compelling’

Nationwide is brushing off Liberty Mutual’s allegation that Nationwide’s pending acquisition of Harleysville Mutual would unfairly benefit subsidiary Harleysville Group’s stock shareholders at the expense of Harleysville Mutual policyholders.

In particular, Liberty Mutual noted in its comment letter to the Pennsylvania Insurance Department last October that Harleysville Mutual executives, who have stakes in subsidiary Harleysville Group’s stock, stand to make personal profits from the deal.

Liberty Mutual was reportedly also a serious contender to acquire Harleysville. According to a recent Bloomberg report, Liberty Mutual was the other, failed bidder to make a deal with Harleysville Mutual.

Liberty Mutual’s objection to the Nationwide/Harleysville deal has caught the attention of Pennsylvania regulators, who have now retained an external advisory firm, Boenning & Scattergood, to provide an independent assessment of the merits of the proposed combination — with particular focus on the interests of Harleysville Mutual’s policyholders.

The merger was originally expected to close in early 2012 but is now expected by the companies’ managements to close during the second quarter of 2012, pending approvals from stockholders of Harleysville Group; policyholders of Harleysville Mutual and Nationwide Mutual, the Pennsylvania Insurance Department, the Ohio Department of Insurance, and various other regulatory bodies.

‘A Fair and Compelling Transaction’
But Nationwide tells Insurance Journal that “We believe the proposed combination of the two companies benefits all stakeholders and is a fair and compelling transaction. The combination creates a stronger insurance market with more choices for customers.”

“Nationwide remains fully committed to the proposed merger with Harleysville Mutual,” said Joe Case, a spokesman for Nationwide.

“With all due respect to our colleagues at Liberty Mutual, we believe that their letter dated Oct. 12, 2011, is inaccurate in many respects and mistakenly characterizes the combination,” he added.

He said that Nationwide, like Harleysville, has filed an official response letter with the Pennsylvania Insurance Department that details the insurer’s position.

Nationwide spokesman Case continued: “The benefits of the proposed merger to Harleysville policyholders are significant and traditional for a merger of two mutual insurance companies.”

“Regarding the fairness of the proposed transaction, Nationwide believes the interests of the Harleysville Group stockholders differ significantly from the interests of Harleysville Mutual policyholders.”

He said Harleysville Group stockholders have a financial interest based on their investment in the company. Stockholders of Harleysville Group are receiving cash because their interest in the company will cease (unlike that of the mutual policyholders) and they will have no interest in the surviving mutual insurance company after the merger.

Harleysville Mutual policyholders are different because they have an ongoing interest after the transaction, the Nationwide spokesman said. Where a stockholder invested to seek a financial return, policyholders participate in the interest of gaining protection.

Rather than a cash dividend, these policyholders will benefit by becoming policyholders and members of Nationwide, a substantially stronger and more broadly diversified company with higher ratings. Harleysville policyholders will also benefit from Nationwide’s more complete line of products and its national service support, he said.

The official closing date is expected sometime in the first half of 2012, subject to regulatory approvals. “Nationwide continues to cooperate with regulators as they review the proposed merger. We consider the hiring of an outside firm to review the proposal routine and appropriate,” Nationwide’s Case said.

Penn. Regulators Hire an External Advisor for Evaluation
Moody’s Investors Service noted in its report last week that the Pennsylvania Insurance Department has hired an outside firm, Boenning & Scattergood in West Conshohocken, Penn., for an independent assessment of the merits of the merger, a move that is at least partly triggered by Liberty Mutual’s strong objection to the deal.

“It appears that among the considerations given by the Pennsylvania Insurance Department in seeking an outside assessment was a public complaint filed with the Department by a subsidiary of Liberty Mutual,” according to the Moody’s report.

However, the Pennsylvania Insurance Department told Insurance Journal that hiring an outside firm for an independent evaluation of a pending deal is nothing unusual. Retaining an outside firm does not suggest there are any problems or obstacles, according to the department.

Boenning & Scattergood is expected to deliver a preliminary draft of its findings by March 31 and a final report by May 31. Consequently, Moody’s says it expects that the closing of the transaction, should it proceed, will be no earlier than the second quarter of 2012.

Harleysville underwrites small and middle market commercial and personal lines insurance through independent agents, primarily in the eastern and mid-western regions of the United States.

The Moody’s report noted that Harleysville Group is a publicly-traded holding company that is 54 percent owned by Harleysville Mutual. For the first nine months of 2011, Harleysville Group reported net earned premiums of $602 million and net loss of $18 million. As of September 30, 2011 shareholders’ equity was $752 million.

States Probe Allstate Insurance

Janet Jones was blinded in one eye, and her face had to be reconstructed, after a car crashed into her minivan three years ago.

While she was still in the hospital, her husband Terry got a call from a representative of Allstate Insurance Company, the company that insured the driver who hit Janet. Still, Terry was struck by how thoughtful and caring the adjuster was with him. “[It] was really reassuring at the time to know somebody was there for us,” he says.

In keeping with the company’s motto, the Jones family thought they were “in good hands.” But a three-month PrimeTime investigation has revealed a calculated company effort to reduce the likelihood that claimants will hire lawyers.

Claimants Feel Cheated Linda Brown was an Allstate adjuster for 12 years. She tells PrimeTime senior correspondent Chris Wallace that Allstate employees were trained to be empathetic and to treat claimants in a friendly manner in order to prevent them from getting an attorney. Why? She says to save the company money.

Allstate faces more than 50 lawsuits for allegedly deceiving thousands of people its policyholders hit in automobile accidents. Those people could have hired lawyers to sue Allstate. But many now say that after being convinced to work with the company, without an attorney, they signed away rights and settled for millions of dollars less than they should have.

Thomas Moore, one of the dozens of people suing Allstate, spoke with PrimeTime. “Usually in an accident that’s the first, one of the things you think of — an attorney,” he says, “but they put me at ease so much, that I discounted the idea.”

Janet and Terry Jones also sued Allstate saying that after the company convinced them to settle, they learned that limited how much money they could get from the manufacturer of Janet’s defective seatbelt.

The Washington state judge in their case ruled that Allstate engaged in the unauthorized, negligent practice of law — a decision the company is appealing.

Many claimants got a brochure that explains that people hit by its policyholders may not need lawyers because they could settle “more quickly” without them. The document also said attorneys often take up to 40 percent of any payment. They also received a service pledge telling them they were Allstate customers, and an adjuster was their claim representative. In the wake of lawsuits and state investigations, Allstate has stopped using that customer service pledge.

Allstate sent PrimeTime a statement saying it is “committed to resolving all claims fairly and appropriately,” and wants to give claimants “important information” to make an “informed decision” on whether to hire a lawyer. The company refused ABCNEWS’ request for an interview.

Allegations Spur Investigations According to Brown, Allstate’s representatives dealt with claimants according to specific guidance and materials they received from the company. PrimeTime obtained a copy of a confidential 1995 company training manual that says one goal of the program is to reduce the need for attorney involvement. The manual instructs adjusters to make early contact, act as advocates, and establish empathy with the claimants. It even gives them suggested scripts to use in their conversations with claimants.

Brown, an adjuster at Allstate’s Lexington, Ky., office until last year, says she refused to read the scripts. Once a highly rated employee, she says that was one of the reasons why she was fired for poor performance. She in now suing Allstate.

Officials in nine states have opened investigations into Allstate’s practices. Pennsylvania Attorney General Mike Fisher is suing Allstate for violating consumer protection laws, arguing the company’s actions were fraudulent and deceptive. “[They] say that ‘you’re in good hands because you’re our customer.’ [But] the injured party isn’t Allstate’s customer,” Fisher says, “they are adversaries.”

But Bob Zeman, of the National Association of Independent Insurers — a group that lobbies for Allstate and other companies — denies Allstate is misleading injured drivers. He says the company’s efforts are aimed to counter ads by trial lawyers looking for business.

Zeman cites studies done by the Insurance Research Council which found that people with attorneys received an average of $800 less — after paying legal fees — than people without lawyers.

Nevertheless, Allstate’s own 1995 training manual states the opposite, saying that people with attorneys settle, not for less, but for two to three times more money. The company says that figure is no longer accurate.

But Sandra White says that was not true in her case. White, who lost part of her knee in an accident, says Allstate initially offered her $50,000, but after she got an attorney, the company settled for $100,000. Even after legal fees, White ended up with an extra $16,000.

Thomas Moore, however, says that beyond the outrage over the money, there is a lot of heartache. “You hear about different scams and how people have been taken and you always think ‘well, that can’t happen to me,’” he says. “Well, when this was over, I figured ‘wow, boy, I’d been scammed by the best.’”