Allstate Corp (ALL) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Allstate Insurance Company first quarter conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one, followed by the four on your telephone.

As a reminder, this conference is being recorded, Wednesday, April 17, 2002.

I would now like to turn the conference over to Mr. Bob Block, Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning, everyone, and welcome to our first quarter earnings conference call.

Ed Liddy and John Carl join me again today as we discuss our results for the first quarter 2002. A question-and-answer period will follow.

As a courtesy to all who have questions, please keep to one question and a follow up. This allows us the opportunity to hear from as many of you as possible.

And this call will be completed within one hour.

We issued our press release earlier this morning.

If you need a copy of the release, it is available on our Web site. Also, this morning, we posted most of our investor supplement on our IR Web site for your use.

It's important for you to note that the following discussion may contain forward-looking statements regarding Allstate and its operations. Allstate's actual results may differ materially from those projected in the forward-looking statements.

For information on important factors that could cause such differences, please see the Forward-looking Statements and Risk Factors Affecting Allstate section in Allstate's latest report to the SEC on Form 10-K for the year 2001 and in today's press release. This call is being recorded and the recording is the property of Allstate.

It is not for reproduction or rebroadcast by any other party without the express consent of Allstate. A reply -- a replay will be available following the conclusion of this call.

Your participation in the call will constitute consent to the recording, publication, Web cast, broadcast and use of your name, voice and comments by Allstate. If you do not agree with these terms, please disconnect now.

Now, let's begin with some comments from Ed Liddy.

Ed?

Good morning and thank you all for joining us.

Let me quickly review our strategic intent so that we all have the same perspective on the quarter. Our goals, quite simply, are to get better in the property casualty business, to get broader in the financial service area and to generate more consistent earnings growth and returns in excess of our cost of capital.

We've taken a number of actions over the last couple of years that have positioned us well to achieve these goals. And our recent actions to correct the short-term imbalances in some of our operations are beginning to bear fruit and will continue to do so over the next several quarters.

Now, with respect the quarter, overall, I view this quarter as a very solid one. As our press release indicated, we had earnings per share of 70 cents or 68 cents after restructuring items.

And that is after we built reserves for prior periods, primarily related to mold, to the tune of about 20 or 21 cents. We do not want to be caught short in this area.

Our earned premium growth continued to escalate, up 4.6 percent from the fourth quarter. That's up about a full one.5 points.

We are taking rates. They are holding and they are being reflected in our income statement.

Allstate Financial had a very good quarter. We had excellent expense control.

And our Ivantage business continued to show some improvements.

It's always tough in our quarterly calls to take out the effect of weather.

And the last year, in the first half of the year and particularly in the second quarter, weather definitely hurt us. This year, we clearly benefited from good weather.

But when we sort through all of the details, we come to the conclusion that our tactics are having a very positive impact on our P&L.

A couple of things I'd like to highlight.

We continue to take significant rate actions in most markets. And the earned premium in auto and homeowners is beginning to reflect those actions.

Where we can't get sufficient rate relief, our risk management practices and administrative actions are implemented to protect and to improve our profitability. So, reductions in new business and retention ratios have begun to occur in those markets and those lines where profitable growth is more of a challenge.

Our auto frequencies look better than they did in the fourth quarter. And this is clearly beyond, simply, the benefit of good weather.

Our liability severities are increasing at a rate much less than inflation. Our property/casualty underwriting expense ratio improved by a full point over the first quarter of 2001.

And, in fact, our expenses were up less than about $15 million in that area. Allstate Financial posted another good quarter, despite the difficult market challenges.

And our cash flow and property/casualty has turned positive and new purchase yields are higher today than they were at this time last year.

Now, there are a couple of items that I put in the category of they just are. And I comment on one negative item.

First, under the category of items that just are. Our Ivantage business, which is our independent agency business, hosted a better underwriting performance than in the last few quarters.

And we're pleased about that. But the business still has a ways to do to acceptable returns.

Second, our auto physical damage severity increases this quarter were at a higher rate than last year. But, overall, it's a manageable level from a pricing perspective.

My third just are -- our partnership income this quarter, compared to the same quarter last year, was a lot less. We've always said that this type of investment produces lumpy results, but that, long-term, the returns are well worth the lumpiness.

On the negative side, our homeowner loss cost trends continue to escalate. Our frequency is much improved over last year.

But weather-related severity trends show no sign of slowing down, particularly in Texas, where losses related to mold continue to develop. So, we took the opportunity this quarter, we looked at the trends and we put up $125 million in reserves.

As I mentioned, we do not want to be caught short in this area. We also continue to take significant rate actions.

We continue to make policy changes and utilized other risk management practices to address the situation. I'm confident that we'll return this line to acceptable levels of return by mid-2000.

That is now 6 cents quarter away.

In summary, we are taking a number of hard actions in many of our markets, to generate future earnings opportunities.

We are totally focused on execution of our strategies and in driving shareholder value. And I think the first quarter shows good signs of progress.

I'd like to ask Bob to put a little more flavor on our quarter.

Thanks, Ed. Today, as you know, we reported operating earnings per share of 68 cents for the first quarter.

This result was 8 cents less than earnings per share in the first quarter of last year. The difference coming, primarily, in two areas -- more catastrophe losses this year, worth about 3 cents per share and less property/casualty after tax investment income worth about 6 cents per share.

Reduced partnership income accounted for 4 cents of the reduction.

Sequentially, our earnings per share increase 25 cents.

The fourth quarter contained several special charges, such as those arising from the Georgia diminished value litigation, the increase in guarantee fund assessments, restructuring initiatives and some beneficial adjustments in Allstate Financial. Net of these accounts -- net of these, accounts for about 17 cents of the improvement.

And the balance comes from a better underwriting result. This underwriting improvement reflects not only the effects of the mild winter, but also the beginning of improvements stemming from our delivered actions to generate profitable growth.

From a capital management perspective, we repurchased approximately 2.4 million shares of our stock at a total cost of about 85 million -- the average cost being $35.64. This puts us on pace to finish this authorization of 500 million by year-end 2002.

We're about 28 percent complete as of the end of the first quarter. Also, during the quarter, we issued $350 million in debt, bringing our debt to capital ratio to 19.6 percent at quarter's end, below our 20 percent goal.

Now let's take a deeper look at the trends in the business. Total net written premium for personal lines increased 5.1 percent in the quarter.

This increase came from both policy growth in our core lines and average premium increases, as the effective rate actions continue to play out in the numbers. This increase was less than that experienced in the fourth quarter,

the effective market specific actions take hold.

Actions that are designed to improve profitability, while setting the stage for longer-term targeted growth. We are serious about getting to a more consistent level of profitable growth, and are moving more quickly to detect and correct market imbalances.

Total personal lines

grew at 4.6 percent over prior year and that is a sequential increase of 1.9 percent from the fourth quarter of 2001, reflective of the increasing impact our rate actions being earned. This impact should continue to accelerate over the next several quarters as more of the rate increase is earned.

Overall, the combined ratio in the quarter was 99.2 percent, an increase from the first quarter of last year of 1.2 points, seven-tenths of which resulted from an increase in catastrophe losses and restructuring charges. Looking at the expense component, our first quarter expense ratio declined by seven-tenths of a point, a full point excluding restructuring charges.

In the quarter, our underwriting expense level in dollars, excluding restructuring only increased $12 million on a base of almost 1.3 billion.

Compared to the fourth quarter of 2001, the combined ratio was reduced by over 5 cents points.

Again, adjusting out all the noise, you get to an improvement of over a full point in the combined ratio this quarter, over the fourth quarter of 2001. Now, taking the conversation down to the next level, net written premium for the Allstate brand grew by 5.5 percent.

All of the increase came from average premium. Standard auto grew 6.8 percent.

The rate actions we have taken and continue to take, in order to improve the margins in this line are having the desired effect, with the loss ratio showing signs of improvement. These pricing actions as well as additional underwriting and administrative actions, taken in specific markets, are having a negative effect, overall, on the quarter on our new business production -- down 24.5 percent, our retention ratio -- down 1.3 points, in line with expectations based on our elasticity models an occurring the states were profit is an issue, and our PIF, which increased at a slower pace, sequentially, up 1.9 percent.

We continue to take the necessary rate actions to bring this line into our desired profitability range. During the quarter, we implemented rate actions in 16 states with annualized effect of 7.8 percent.

In the quarter, our average premium -- average written premium increase 7.2 percent. Three-quarters of that came from rates taken over the last several quarters.

Average earned premium for standard auto increased 4.9 percent, a rate higher than our loss cost trends at this time. This will continue to increase as the rate actions are earned over time.

Non-standard auto net written premium continues to decline, falling 10.4 percent in the quarter.

fell by 19.3 percent, partially offset by increased average written premium of 11.4 percent.

New business production remains down, off 24.6 percent from the first quarter of 2001. Retention, however, increased slightly, staying at a level of 72 percent.

We implemented great actions in 19 states this quarter, with an annual impact of 10.1 percent. We continue to manage this line down as we improve its profitability.

This quarter, the loss ratio improved almost seven points from the first quarter of 2001 and about 6 cents points sequentially. While we can't declare victory yet, we are winning the war.

Our homeowners net written premium jumped 15.9 percent over prior year, obviously benefiting from rate actions taken over the last several quarters. This quarter, we have implemented rate changes in 27 states plus the District of Columbia, averaging 19.8 percent on an annual basis.

Average written premium in the quarter increased 18 percent, while the average earn premium grew only 6.9 percent, demonstrating the delayed effect of rates in the P&L.

The average earn premium will obviously continue to increase over time, given the size of the rates we've already taken.

Even with the aggressive rate actions put in place to drive this line back to acceptable return levels, new business production is only off by 8 percent in the quarter and our retention ratio at 88.4 percent is only down slightly, both of these factors performing better than expected. Policies in force have declined sequentially, but are up 1.5 percent over prior year.

For Ivantage, which includes our Encompass and Deerbrook brands, overall net written premium is down slightly, as we work to improve the profitability of the business. For Encompass, we have stepped up our rate activity, with auto rate changes implemented in eight states, with an average annual increase of 4.4 percent.

And homeowner rate changes in seven states, averaging annual increases of 38 percent.

Now, moving onto losses.

Any analysis of loss trends is complicated by the decidedly different weather patterns experienced this quarter, compared to the first quarter of 2001. We estimate that, compared to the first quarter of 2001, we had a favorable impact on our combined ratio of approximately 2.6 points, which equates to a 14-cent impact on operating earnings per share.

So, with that as a backdrop, let me provide you with our typical loss statistics. Standard auto frequency results were as follows. Bodily injury increased 1.6 percent and property damage declined 3.5 percent.

For non-standard auto, bodily injury frequency declined 4.6 percent, while property damage frequency fell seven percent. For total auto paid severity results, bodily injury increased only .6 percent, while property damage grew at 4.5 percent.

Regardless of the distortion created by the weather, auto loss costs are still behaving relatively well. There are some pressure points in prior year reserves, so we adjusted the reserve levels by $87 million, primarily in the physical damage coverages.

In homeowners, the trends were also impacted by the differing weather conditions. Frequency, excluding catastrophes, fell 21.9 percent, while paid severity, excluding catastrophes, increased 29.2 percent.

The combination of the two gives you a loss cost trend in the high single digits. Losses related to mold, primarily in Texas, continue to developed upward, placing pressure on our reserve position, so we increased homeowner reserves by 125 million in the quarter to account for this.

For property/casualty net investment income, the first quarter saw a continuation of the trends towards lower income. Pretax net investment income declined 14.4 percent, as the contribution of partnership income this year was significantly lower than last -- only 5 million versus 46 million, when we had one particular investment payoff.

Excluding the partnership income, the decline was only 6 cents percent. With an effective tax rate of 17 percent this quarter, the per share contribution from investment income dropped 6 cents cents from the first quarter of 2001.

On a positive note, however, the earnings per share contribution of the investment income, excluding partnerships, increased this quarter, compared to the fourth quarter of 2001. Cash flow trends are beginning to improve, which, over time, will help investment income.

Shifting to Allstate Financial results, operating income was 143 million in the quarter, an increase of 16 million from the first quarter of 2001. Of that increase, 8 million was due to the elimination of goodwill amortization this year.

The rest resulted, primarily, from favorable mortality trends in the quarter. Compared to the fourth quarter, operating income showed a $4 million decline.

But as we disclosed in our fourth quarter call, last quarter's operating income was favorably influenced by several one-time adjustments.

When you put the quarters on equal footing, the operating income remained relatively flat.

While total statutory premium was below prior year, it was up 17 percent sequentially over fourth quarter of 2001, driven by sales of structured financial projects. Variable annuities were flat with the fourth quarter, but significantly below last year.

The equity markets have not stabilized enough for sales of this product to return to previous levels.

We continue to have some success in broadening our product output from the bank channel, with increased performances seen in VAs, market value adjusted annuities and life business.

We've maintained our focus on widening spreads where the market will allow. And this has not had an adverse impact on persistency.

Steady progress was made in terms of moving the Allstate agency system toward a broader distributor of financial products. We now have 6,250 agencies that have received their

and 63 licenses.

These agencies produce issued

deposits that are rated at more than twice last year's level, an increase primarily due to larger annuity and bank deposits as well as nonproprietary mutual fund sales. We continue to strive to become a much broader personal financial services company, serving more of our customers' protection and retirement needs in the future.

Overall, the first quarter proved to be a solid one for us. The tactics we have employed over the last quarters are beginning to bear fruit.

We received the benefit of mild winter, but still have upward pressures on loss costs, primarily in weather-related severities, including mold losses. Cash flows and property/casualty have improved.

And we continue to make progress on our share repurchase program. Allstate Financial is off to a good start in our overarching strategy of getting better in property/casualty and broader in financial services is on tract.

Finally, with the first quarter now behind us, we remain comfortable with the guidance we provided last quarter -- that being 2002 earnings per share, excluding restructuring, of a range of $2.50 to $2.70. Again, this guidance is based on assumption of normal weather for the year, as well as an expectation that no major negative trend shift occurs in the business.

Now, let's open it up for your questions.

Operator?

Thank you.

Ladies and gentlemen, if you wish to register a question for today's question-and-answer session, you will need to press the one, followed by the four, on your telephone. You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the one, followed by the three. If you are using a speakerphone, please pick up your handset before entering your request.

One moment, please, for the first question. Our first question comes from

with

Investments. Please go ahead.

Good morning, Bob and Ed. Could you talk a little bit about your directives -- what you didn't mention on the call -- in terms of the how much is coming in, either phone or Internet today.

And also, along with that, if you could give us a sense of commission levels for business that's coming in, either -- on the direct side -- either phone or Internet. And, secondly, along with that, you had mentioned before that you're revisiting the total commission structure with the age in force and give us an update as to that.

Yeah. Good morning,

. Let me see if I can respond.

Our direct business continues to do well. It's both a blend of sales and service.

There are some pretty impressive statistics. We had something like 4.5 million unique visitors through our Web site in the first quarter of this year.

There is approximately 750,000 times in the first quarter that people went to the agent locator and then followed up and talked to agents or talked to the folks in the call centers. We continue to see some transfer of work out of agents' offices and into the call centers.

The actual binding on the Internet is a slow process. It continues to grow, but it's a clearly -- it's a slow process.

The activity through the call centers continues to behave pretty much the way we wanted it to. No change in terms of commissions on our products.

You know, the stuff that comes in on the Internet or through call centers, as you know, is a lower commissioned product that is that which is generated through the agent's offices. No change in that area whatsoever.

And I would put a slightly different spin on the last part of your question,

. What we are really trying to do is to make sure that our agents' efforts are aligned very much with our efforts.

So, what we don't want to do is incent agents -- let me just say, for example, in a state like Texas, to go out and sell homeowners policies when we are losing money on them. So, it is less of an initiative to revise downward our commission structure.

And it's more of an initiative to get people aligned properly. So that our agents are rewarded for a high quality book of business.

They're rewarded for growing their books of business where we want them to do that. And they're rewarded for cross selling penetration of their books of business.

Those are the kinds of things that, when they do well with them, we will do well. So, it's -- it is more of an alignment issue that we're working on, as opposed to a cost reduction issue.

Is that alignment taken place already at this point or is that still in the development stage?

No. No. It's very much in the development stages.

You know, we really just kind of started that inquiry beginning of -- at the end of last year, beginning of this year. You know, we're working with our agents.

We're doing it in a very public way. We don't want to surprise cause any disconnect in terms of what we're doing.

So, more to come on that in future quarters.

Great. Thanks, very much. I'll come back on later.

Our next question comes from

-- I'm sorry --

with CS First Boston. Please go ahead.

Hi. Good morning. Two question. The first question -- could you elaborate on the reference to favorable life insurance mortality experienced during the period?

To what extent did that benefit earnings versus the prior year period?

, you want to ask the second one and we'll come back and get them both at once?

Sure. My second question -- could one of you elaborate on the auto physical damage severity that you made reference to?

Sure. Bob, go ahead.

You want to take it, Larry?

Yeah. This is Larry Moews,

. Yeah. For life insurance, you have three things that drive life results -- mortality margin, expense margin and investment margin. And mortality margin was the primary driver of that.

And that's our cost in insurance charges on our products, less the mortality that we have and experienced. So, that's pretty much the driver.

Bob, as you know -- or

, as you know, that number moves around on us on a quarter to quarter basis in balance of the course of the year. We tend to get improvements. We got some descent improvements in the first quarter.

Now, on auto physical damage -- Bob, you want to comment on that?

Yeah. What we saw,

, coming through the quarter, was a little bit of an upward movement from the 2001 report year on auto physical damage.

We're looking at that to see just what the -- you know, what the effects of the trends are. We did boost the reserves associated with that report year, simply because they pay out so quickly, you can peg what the proper reserve levels should be.

So, that's what we did there.

Thank you.

Sure.

Our next question comes from

of UBS Warburg. Please go ahead.

Good morning. Ed, it seems that, you know, you had some pretty good body language or you seem to be pretty pleased with the first quarter numbers, all considered. What I have a hard time understanding is if you're making a comfortable estimate range this year of 250 to 270 -- and looking at the first quarter.

And this is extra restructuring charges. Just annualizing that number is above the upper end of your range.

You've taken -- and if you basically look at the fact that you've taken reserve additions that exceed the weather-related impact, I'm hard pressed to see why you're so conservative your -- with your estimates, based on all of the positives you've just delivered to us. So, maybe you can explain that a little bit better.

And my other question has to do with broadening your financial service business. How and when and how dynamic is that going to be?

And can you give us any timeframe?

, with respect to your first question, one quarter does not a trend make.

We like our performance in the first quarter. The second quarter is very iffy from a weather standpoint. Those of you that have followed this industry for awhile know that it's just too soon to declare victory.

I'm comfortable with that range -- at 250 to 270. When and if it's appropriate to raise it, we will do it. Based on one quarter's results, not appropriate to raise it.

With respect to broadening the financial services footprint. You know, we've been at this for awhile.

This is what getting our agents license to sell 6 cents and 63 products is all about. As Bob Block mentioned, we have about, oh, 6,200 to 6,300 of our agents now fully licensed.

There's a good endorsement and acceptance of that product.

That is what the initial thrust of the Allstate-Putnam alliance is all about.

That's what the purchase of American Heritage Life is all about. That's what establishing the Allstate Bank is all about.

What we want to be able to do is to serve middle America, where many of what would be viewed as competing firms, simply don't have the infrastructure or capability or capacity to serve that market. We can do it because we already have these roughly 12,000 Allstate agents out there, plus a thousand Allstate financial specialists.

The goal, again, is addition to selling copious quantities of our protection products, which we are very good at and we want to get better at -- we want to get broader by serving the needs -- the retirement needs, the financial planning needs, the life insurance needs, mutual funds, variable and fixed annuities, et cetera -- of middle America. And that's what that broadening concept is all about.

You know, I read in your question a hint of, gee, are you on an acquisition hunt or a trail? We are not. We look at acquisitions all the time.

If we found something that would further our strategic goal, you know, and get us where we wanted to be in a better or more quality way or faster, we might look at it. But we don't feel the need to go out and purchase anything.

The fact that we have more than half of our Allstate agencies who, in the last two years, have gone out and become licensed to sell

and 63 registered products, I think, is a strong endorsement of our organic transformation to a broader financial services company.

Again, the goal is sell more property/casualty stuff and get better at that.

And, at the same time, become a broader based financial service company.

OK. Just quickly, Ed.

The fact is we're not talking about weather. Just on your estimates, you said, assuming normal weather, you'll do 250 to 270.

So, really, what my question is -- what has you so concerned that believes you can get hit, you know, going forward -- especially after the reserve hit you just took?

Yeah,

. I'm just not prepared to raise that guidance right now.

You know, 250 to 270 is where we were in February. We like the performance in the first quarter.

We're going to stick with that guidance.

OK, Ed, I tried.

The next question comes from

with Salomon Smith Barney.

Good morning. Just before asking my question, I just wanted to quickly wish John Carl well.

My questions are two. One -- just -- and I'll ask my follow up afterwards.

On premium growth, your 6.8 percent reported for the auto grand -- actually, the auto and the non-standard -- the standard and non-standard both declined significantly, sequentially, from fourth quarter. You've attributed that to new business, primarily, if I was hearing correctly.

And what I'm trying to figure out is we're all hearing about affirming auto market, about State Farm perhaps pulling in its horns a little in reaction to their big losses. I guess, I'm a little bit surprised that your competitors, apparently, didn't see fit to take as aggressive action as you in the states where you needed to take them.

And that, as a result, your new business levels fell so much.

And I was wondering if you could give me some observations on, you know, what we're -- what -- how we should interpret this.

Is the market not quite as hard and

as we thought? Or are you being overly aggressive or what have you?

And, you know, and where the lines may cross. How much should we expect growth to decline in terms of these territorial actions?

Let me start and my companions will chip in as they -- as they feel appropriate. You know, State Farm's results in 2001 were pretty amazing in terms of the size of the losses.

I read that to be that they will clearly begin to take actions if they haven't already. As you know, in a regulated industry, you don't come in on a Monday and simply raise the rates.

You -- it takes a little bit of time to begin to see these.

We continue to believe as you have postulated, that the market is hardening, that rates are being taken more aggressively and that that will, in fact, play into our -- into our strength.

We think we are ahead of many of our competitors. We want to improve our margins. We have a couple of states, though -- California and Florida -- California, in particular, where the auto business is difficult.

We are on top of that and we want to improve our results. But I don't see anything in our results and as I think about the marketplace and talk to people and see what's happening, I don't see anything that suggests that there's not a hardening of the market.

I don't know, John or Bob, if you want to add anything to that?

Yeah,

, it's not all new business either.

Our retention ratios did drop, specifically in those -- in those states, where we're taking a lot of action. So, it's not just new business.

Obviously.

And, actually, the -- and the component of written premium that will be attributable to rates will actually go up as we move through the quarters because of the rate levels that we're taking. You know, and if you want to take it one step further, I agree that, with Ed, that the markets are clearly hardening.

The actions that we're taking are designed to get us and keep us in our targeted profitability ranges, which are significantly lower than where State Farm is operating right now.

But based on what you're saying about new business and retention and what we're seeing in the -- in those -- in those auto lines, it's safe to say or fair to say that, for now, at least, your competitors are not following you up on rate all the way.

I don't think you can say that,

. I -- you know, you're making the presumption that each competitor has the exact same market share relativity in each state and has a similar kind of book of business in each state.

And most of our action is concentrated on four states and we are, as Bob said, talking action in those four states to make sure those states, which are relatively large states, get into that targeted profitability range.

And, actions that we take, you know, are different than actions our competitors would take because they're in a different market position than we are.

OK. Let me move onto my next question, which sort of gets to

's issue, which is -- is there any reason that we shouldn't just take out the four points of reserve strengthening and say, OK, X catastrophes -- you had a 5 cents-point sequential improvement in your loss ratio, from fourth quarter to first. What was -- as opposed to the year over year, was weather significantly better in first quarter than in fourth quarter?

Or was that -- or was that 5 cents points underlying all, really, just the underlying business?

Well, I think if you're going to -- if you're going to make that leap, then you have to while you're taking out the reserve changes, you also have to put back in the different weather.

And, seasonally, the first quarter, believe it or not, tends to, just historically, be a little bit better than the fourth quarter. And this year, it was even better than what the -- what the normal seasonality would be.

So, you know, it's -- to just eliminate the reserve charges and say, OK, you improved 5 cents points and then project that type of improvement forward would probably be a very optimistic way of looking at the numbers.

OK. That's very helpful. Thanks.

The next question comes from

with Morgan Stanley. Please go ahead.

Hi. Yes, I have a follow up to

's question about the actions that you're taking and the rates. Our understanding is that State Farm has already began taking significant underwriting actions, even though it has not yet filed a lot of rate changes.

Which suggests that you could see unprofitable customers moving into the market and that a strategy of not growing would avoid picking up those customers, allowing you expand your margins right now and avoiding taking on other people's losses.

Could you describe whether you agree with that and how that fits into your strategy?

And then second, could you give us a comparison of the Allstate standard

from last quarter and last year? I think this is the first time that you've given that separately.

, with respect to State Farm's actions, I can only speculate. I see much of the same thing that you see.

When you lose -- when you have underwriting losses of $9.3 billion in a year, you need to take action on all fronts. So, I suspect what they will do is they will clearly take rate increases.

But, at the same time as they're doing that, they will slow down their growth. In fact, my guess is they'd slow it down to zero, apply quotas to many of the parts of the country and to their agencies and shrink in some areas.

Now, they'll try to do that, you know, in the right way so that they're able to maintain the right level of customers. I think what comes out of all this is that Allstate and, perhaps, one other company, really are way in front of the industry in terms of the techniques we have for risk selection, underwriting and pricing.

So, we've talked to many of you, from time to time, about strategic risk management. And the fact that we now have much more sophisticated tools that enable us to get the right price for the right product, across a broader spectrum of discrete policyholders.

That's a huge advantage. And if you -- if you wake up and you say, well, I'm going to take some underwriting actions like not grow my book of business or shrink or take rate increases, if you don't have some fairly sophisticated underwriting techniques, I think it's going to be fairly difficult to get the kinds of improvements that they want.

I think what the marketplace is going through right now, as I mentioned before -- plays to our strengths. I think it plays to the fact that we were earlier on the rate increases.

I think it plays to the fact that we have been beefing up and developing more sophisticated risk underwriting and pricing capabilities. And I think it's going to serve us well.

Now,

, the second part of your question. Bob, I don't that -- I don't have anything in front of me that enables me to -- or I can't pull numbers out of my head that enables me to answer that.

OK. Maybe we can just follow up.

Yeah. We'd be glad -- we have the numbers.

I just don't have them.

OK. Thanks.

The next question comes from

with

. Please go ahead.

Yes. Actually, two questions. The first question is that could you break up the 6.8 percent training in volume increase that you had in Allstate brand in standard auto line and tell us how much of that is unit growth work versus price?

Second, I didn't hear

's last question. I don't know if my question is the same or not.

But I want to see how much of the $227 million pretax addition to large reserves was the 2001 accident year.

OK. Bob, you want to ...

Yeah. Let's see. The split between units and average premium -- bear with me one second. Yeah. Our standard auto units went up

.

So, the balance would be average premium of the 6.8. So, it's about two-thirds average premium.

One-third unit growth.

Thank you.

The next question comes from

with Banc of America Securities.

Hold on. Hold on. Let's go back to -- let's go back to the second part of the question. The second part of the question is how much was specifically targeted to -- before year 2001 ...

And prior.

And prior. Is ...

The majority of it.

Yes. By far the majority of it. It's -- the whole thing is 2001 and prior.

By far, the majority of it is the mold claims in Texas.

Does that help?

OK, Operator. I guess we'll go to the next question.

The next question comes from

with Banc of America Securities. Please go ahead.

Yeah. I -- two questions. The first one, hopefully, a quick one.

Of the reserve targets that you took or reserve strengthening that you took, how much of that was Ivantage?

Very little.

Very little was?

Yeah.

Mostly all in the Allstate brand. I'm ...

Eight million, I think, is Ivantage.

Six to $8 million would be Ivantage.

All right. Terrific. My second question -- if I look forward a little bit here and I look at -- first of all, look at your loss ratio that you had in the your standard auto lines and adjust that for the reserve strengthening and the cat losses. And then, I take a look at what your price increases have been or at least your average written premium relative to your average earn premium, it looks like we're going to see a pretty significant improvement here in your loss ratio here going forward to the second half of the year.

And into 2003, you know, maybe down into the 70 percent, maybe high 60s range.

If that is the case, I guess, my question has to do more with what the outlook here is for price increases.

And whether you're going to be able to take price increases the second half of the year. And access of loss costs and whether regulators are going to let you do that, given that you're going to be making a fair amount of money in your standard auto business.

And do you see the rest of the industry having, you know, similar circumstances, excluding State Farm.

OK. Let me see if I can break it down into the eight questions that you had there,

.

Let me just see if I can get at it. We took a heavy dose of rate increases last year in the back half of the year, which are beginning to flow through the P&L now.

Again, an auto policy is a 6 cents-month policy. A homeowners policy is a 12-month policy.

So, they are beginning to flow through now.

Second, we have taken rate increases, so far this year -- I'm thinking, in standard auto, Bob just had a couple of numbers.

I think it was 20 -- in 21 states, we've taken rate increases so far this year. Those will clearly affect the third and fourth quarter and then the year 2003.

You know, we think that puts us -- begins to put us in pretty good shape. But we will continue to take rate increases in those lines and in those states where we still do not have adequate margins.

Remember, from a regulatory standpoint, in many cases, the regulations are written on an ROE basis. Part of the ROE calculation is what are you making on your investment book?

As investment returns are below what they were in prior periods, you have to make that up with a higher -- with a lower combined ratio. So, regulators -- we are educating them.

They, more or less, understand the dynamic. You know, there'll be places where regulators will drag their feet or we won't get what we want.

And in those locations, we move to more aggressive administrative action.

So, I don't see anything on the horizon from a regulatory standpoint that's -- that makes it more difficult than it normally is to try to get some rate increases.

And I also think that, if you look at the performance of the personal lines carriers in the year 2001, you'll see that most of them are clearly in need of having to do the exact same thing that we are. You know, perhaps we, in progressive are out in front, from both a pricing standpoint and a strategic risk management standpoint.

And most of the other players, I think, are behind us.

So, I think this is a dynamic that's not much changed from the last time we chatted or the last couple of conference calls that we've had.

Great. Thank you.

The next question comes from

with KBW, Inc.

Hi. I had two questions. First, a numbers question. Just if you had the paid losses in the quarter.

And then the follow up question is I was wondering what's driving up homeowner severity? Is it -- are other states starting to contribute, like California?

And do you expect the problem to grow before it bottoms?

The paid -- I'll answer the paid losses.

It was $4,281,000 in the quarter.

You know, the issue on severity is you have to look at last year.

We had a high frequency in the first quarter because of the winter storms. And those tend to have low severity.

So, a part of what you've got there is just an issue of high frequency, low severity last year, compared with a more normal mix of activities this year.

Are you talking about homeowners?

Yeah.

Those were the ice damming claims that tend to have a lower average severity.

OK. I was talking more about mold and is that problem spreading to other states and when do you expect to see the severity of that problem begin to bottom?

Yeah. Remember, the mold issue -- I wouldn't want to suggest that it's unique to Texas, but it is more intense in Texas. The Texas Department of Regulations specifies the words used in the policy.

They do not have words of sudden accidental. When you don't have those words in an insurance policy, which we are all forced to use, the insurance policy is tantamount to a deferred maintenance policy.

That has changed and all new policies that we are now writing do have sudden accidental and do have limits on mold coverage.

So, the issue is, again, not unique to Texas.

There are a few other states where the policy forms that we're required to use are a little looser than we'd like them to be. We do not see a wholesale transportation of this issue to other states.

OK. So, the answer -- short answer is you do expect to see it bottom soon.

Yeah, but realize we start writing on those new policies in March.

So it will take you a full year for -- to get off of all those old policies.

You know ...

OK. Great. Thank you.

We don't mean to be evasive. You have to make a decision on, you know, human nature.

Will people, because they know policies are changing, will they rush to try to -- to try to get something that may not be warranted? There's a whole lot of dynamics that go into that question.

But that's also why we built the reserves. We want to make sure that we were adequately protected.

OK. Thanks.

The next question comes from

with Goldman Sachs. Please go ahead.

Yeah. Good morning, Ed. Most of my questions have been answered, but I just want to go back to the issue of the 119 million that impacted your quarter, which, I guess, in part was reserve strengthening.

I thought, in prior calls -- and I just want to understand this, is this mold claims that have just emerged or is this a -- really, a forward-looking reserve -- what you think will emerge in terms of more mold claims. So, in other words, is this kind of -- I mean, should we think about, that at the second quarter, you might actually see some more adverse development on mold or how should we view this reserve strengthening?

, you ought to review that, primarily, as a prior year adjustment. It's looking at the actual development we saw in the first quarter, projecting out how we think that will develop and reserving for that.

Also, though, that impacts the picks that we make this year for our reserving. So, there, you know, there's kind of an ongoing process of updating your picks for this year, but it's more of backward looking issue.

So, should we think that, in the second quarter, that the amount that you have to add to reserves for mold should actually decline then?

You know, we're not -- we're not planning on taking any reserve strengthening in the second quarter, but we don't know the results yet for that,

.

If we -- if we -- if we knew that, we would have taken them now.

OK.

The next question comes from

with Deutsche Bank. Please ...

Yes. Good morning.

A couple of clarification questions. The 2.6 points on the combined ratio, due to weather -- is that -- are you thinking of non-cat weather or both cat and non-cat weather-related losses?

And the question relates a little bit to the prior questions on the accident here. And you have alluded to it in the prior comments.

If we were to take out the reserve additions, in setting your loss picks or your reserves for the business that you wrote in the first quarter, did you take into account the adverse trends that you've seen both the homeowners and the auto line of business?

The estimate that we made on this winter versus last winter, essentially, does not include any distinction in catastrophes.

Which was about $25 to $30 million. It's really trying to gauge what the impact of weather patterns on auto frequencies and homeowner losses would be from season to season.

In terms of your question about did we factor into current year reserves what we're seeing in the -- in prior year reserves? Yeah. That's the -- that's the way, as John explained, that we do -- when we look at the current year, we take a look at what happening in the prior years and factor in that type of experience in making our picks for the current year.

So, if things develop as you have -- as they've developed so far, we shouldn't see additions to reserves in the second quarter?

We have made our picks and have stated our reserves, given all of the information that we have today.

OK. And the expense ratio on Ivantage went up a little bit this quarter versus last year -- to 31.3 versus 30.6. Anything behind that?

I think that may be as much the fact that the premium top line is shrinking, not covering as much as the fixed cost.

That premium volume was down, oh, just a couple of million dollars, I think.

In fact, the shrinkage in the premium slowed over what it has been in prior quarters. But I think it's playing -- it's playing with the percentage.

That's why, when Bob was talking about the expenses in the Allstate brand, the ratio -- the expense ratio going down is clearly helped by an improvement in the top line. But if you look behind that and you look at the level of very moderate increases in dollars, we're pleased with our cost control this quarter.

Thank you, very much. These are very good results.

Thanks.

We'll take one more question.

Our last question comes from

with

Securities. Please go ahead.

Yeah. Just a couple of follow up questions. First of all, in terms of Ivantage, you've given us underwriting results.

Is there any way you can give us an idea of how profitable it is on an overall basis? And how -- where do you expect the premium volume to bottom?

Profitable on an overall basis -- you mean, including ...

Including investment income.

You know, you could probably get there without us providing it to you. You probably could get there is you just make a simple assumption on what the premium

is.

You know, take a 1.8 or 2.1 and it will earn -- that portfolio would earn probably the same amount as your overall portfolio.

I think, in terms of when the -- when the premium shrinkage bottoms out -- we're getting very close to that right now.

If you look at the premium shrinkage, in each of the quarters last year, it was -- in the third and fourth -- in the second and third quarter, it went up, slowed in the fourth quarter. And the premium shrinkage in the first quarter this year, largely as a result of rate increases, really has begun to bottom out.

OK. And the other -- just the other follow up question is on non-standard auto, you've obviously been shrinking the book for the last, almost two years now.

And it's starting to show some impact on the loss ratio. Where do you expect that to bottom, as well?

I think we're getting very close to that. That'll continue to happen, probably, through the third quarter.

And then, I think, the results will be much more stable.

Yeah.

I would -- I would like to end this conference.

But before everyone hangs up, I want to -- I want to pick up on something that

said earlier. I would like to publicly acknowledge John Carl.

In the three plus years that John has been with us, he has made an extraordinary contribution to our company. He served us well.

I believe that he served our shareholders very, very well. And I think those of you that have had the pleasure and the privilege of dealing with John know just how broad-based a business person he is.

As you all know, we've put in an announcement a month ago, that John has decided to retire from the company. That will happen about the end of the second quarter.

I will miss him dearly. He's both a competent professional and a good friend.

And I know this is truly unorthodox, but if you'd quietly give him a hand on my behalf, I'd appreciate it. Thank you all.

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and ask that you please disconnect your lines.

END