Allstate Corp (ALL) 2002 Q3 法說會逐字稿

Good day and welcome to the Allstate corporation Q3 earnings call.

All participatepts are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

This conference call is being recorded.

I would like to introduce your host for today's conference, Bob Block, Vice President of Investor Relations.

Mr. Block, you may begin.

Thank you.

Good morning, everyone, and welcome to our Q3 earnings conference call.

I know it has been a busy morning.

In fact probably last night was busy for you already.

We expect to take no more than an hour of your time.

Joining me today are Edward Liddy, Chairman, President, CEO, together we will discuss the trends for 2002.

A question-and-answer session period will follow.

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

We tried something different this quarter.

We issued the press release last night after the market closed.

Hopefully this provided you more of an opportunity to view our earnings release prior to this morning's call.

We appreciate any feedback you might have on this change of procedure.

If you need a copy of the release it is available on our website as is most of our investor supplement.

Now, it is time for our legal disclaimer.

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 risk factors affecting Allstate section, in Allstate's latest report to the SEC on form 10Q for the second quarter of 2002, and in today's press release.

This call is being recorded, and the recording is the property of Allstate.

It's not for reproduction, or rebroadacst by any other party without the consent of Allstate.

A replay will be available following the conclusion of this call.

Your participation in the call will constitute consent to the recording, publication, webcast, broadcast and use of your name, voice and comments by Allstate.

If you don't agree with these terms, please disconnect now.

I will turn the call over to Ed Liddy.

Thanks for joining us.

As Bob said we are trying to make this process more effective.

We are trying an earlier release.

We are trying to continue to add to the transparency and completeness of our disclosures.

Hopefully what you read yesterday evening will help in focusing our discussions.

Before I talk about the quarter, it is important to create context and review our intent.

Our strategy is to get better in the property casualty business and today broaden our footprint in financial services.

This will enable us to generate more consistent earnings growth and also returns in excess of our cost of capital.

The actions we have taken over the last several years I believe have positioned Allstate to achieve long-term growth and over the last several quarters and again in the Q3 which we are talking about now, I think our results demonstrate an ability to successfully execute the strategy.

We are correcting short-term imbalances in our operations and are establishing the foundation for long-term earnings growth.

With the release of our Q3 results, as you saw in our press release, we have increased our guidance for the full year to a range of $2.80 to $3 per share.

That excludes restructuring charges and of course is at expected catastrophe levels for the quarter.

My overall assessment for the quarter, it was a continuation of very good results.

In a very difficult external operating environment.

I don't think I need to tell you all that.

The near collapse of the equity markets affected not only the sales of variable products, but also the recognition of profits from the existing book of business, falling interest rates dampened the favorable impact of accelerating new money as new placement yields are below those of instruments that are being retired.

Issues of credit quality in certain segments of the market required write-downs or write-offs of affected assets.

The actions of some of our larger property casualty competitors continued to disrupt some of the major markets around the company.

I think uncertainty in asbestos and environmental loss trends weighed heavily on most of the property casualty sector throughout the quarter.

Despite this parade of horribles, and despite a bit of noise in the quarter, we had very solid performance in all respects.

Specifically -- we reported EPS of 81 cents per share before restructuring charges of 4 cents.

This a strong increase of 24 cents from the Q3 of last year, and it is a sequential increase of 14 cents from the Q2.

Rate actions continued to favorably impact our margins, and we have now caught up to proper rate levels in most states for the Allstate brand.

The rates we have taken will be earned over the next 12 to 24 months, and we will continue to file for all indicated rates going forward, maintaining our disciplined approach to pricing at the local market level.

Our combined ratio is excellent at 97.3, almost 6 points below last year's results.

Virtually all our product lines showed improvement.

Granted it was a light quarter for catastrophes, but only about 9/10ths of a point of the improvement was due to lower catastrophes.

Our homeowners loss ratio which has been a sticking point for us, improved materially.

It declined in excess of 20 points, as loss trends moderate.

Our combined ratio in homeowners was below a hundred for the first time this year.

We continue to make progress in addressing homeowners' profitability and fully expect to reach our objective by mid-2000 as we previously stated.

On the expense side, our property liability expense ratio was almost flat, when adjusted for restructuring charges in the quarter, and despite an in expenses for employee incentive programs and profit sharing taken in the quarter.

We continue to make some progress with Ivantage, although we have a ways to go.

It's written premium was up almost 7.7%, that is good growth in the quarter and the combined ratio improved by 3.5 points.

We are aggressively taking rate and underwriting actions that should help improve the combined ratio in the future.

We have more work to do here.

Our property liability investment income was essentially flat versus last year as declining yields offset the favorable new money trends.

As we reported, realized capital losses were substantial in the quarter, $266 million after-tax.

I think given the market conditions, you probably would expect this to be the case.

Our overall risk management process helps us to minimize the possibility of a major hit in our portfolio.

For example we had $143 million in pre-tax write-downs this quarter, which is a large number.

But it is equivalent to only about 20 basis points on the portfolio, and no one write-down was greater than $26 million.

While the realized losses were sizable, so was the positive change in unrealized gains.

Property liability, fixed income portfolio unrealized position increased over $800 million during the quarter.

Our transformation to a larger financial services organization continues.

As we posted an almost 19% increase in total statutory premiums and deposits over the Q3 of last year.

Sales through the Allstate agency channel through September of this year now exceed those for all of 2000 and 2001 combined.

Allstate financial also continued to perform relatively well during the quarter.

Operating income fell to $112 million, primarily due to the acceleration of DAC amortization, partially offset by favorable resolution of tax items.

But given the market in which this business is operating, I think the run rate for this quarter is very, very good.

I would say in summary, before Bob walks through the details, I like our position in the marketplace today.

I think many of our competitors are taking dramatic actions to repair their books of business, that is true in personal lines and in the life and savings marketplace.

I think the diversity of our offerings and the breadth of our distribution in Allstate financial is a real strength for us right now.

I think we have got opportunities for Allstate to grow selectively and profitably in the markets in which we want to compete.

I think the current situation allows us the opportunity to leverage our size and our scale in serving the personal risk and retirement needs of our customers.

But as I said to you frequently on this call or individually, we will continue to take a very disciplined approach.

We will not grow at the expense of long-term profitability.

What I would like to do is ask Bob to walk through more color on the quarter.

We will open it up for question-and-answer session.

Thank you, Ed.

We reported operating earnings per diluted share of 77 cents for the Q3.

That represents an increase of 21 cents from last year's Q3.

This difference is all due to improved margins in the P & C business.

The drag on earnings caused by the additional charges taken for restructuring accelerated DAC amortization and our annual discontinued lines and coverages study were somewhat offset by less catastrophe losses.

The improved margins in auto and homeowners made up the difference.

On a sequential basis, operating earnings per share gave 13 cents.

Improved margins coupled with reduced catastrophe losses in the quarter more than offset the negative impact of the unique charges taken.

This margin improvement is the direct result of our pricing actions burning into earned premiums, our risk management actions designed to generate profitable growth, and our disciplined efforts to control underwriting expenses and loss costs.

During the quarter we realized pretext capital loss of $419 million caused by write-downs, sales activities and evaluation of derivative instruments.

No one security contributed materially to this result.

It was more of a function of market trends as the equity market fell and credit market conditions deteriorated.

On the flip side, the unrealized gain positions for the whole portfolio increased by over $1.4 billion in the quarter with declines in equity values offset by fixed income valuation.

From a capital management perspective we from a capital management perspective, we repurchased shares of our stock at an average cost per share of $36.14. shares of our stock at an average cost per share of $36.14.

An overall cost of $131 million.

We are now 85% complete, with our current $500 million authorization and expect to finish this program by year end 2002 as we stated in the past.

As in past years, we conducted an in-depth review of our asbestos, environmental other mass tort exposures during the Q3.

As a result of this review, we increased our estimate of prior year incurred losses for asbestos by $72 million, for environmental by $23 million, and for mass torts by $3 million.

The total pre-tax charge for these changes was $98 million or $64 million on an after-tax basis.

Last year, we increased our asbestos incurred losses by a similar amount but were able to offset the majority of the increase with releases in environmental and other mass tort exposures.

Now, let's move on to the business units for a closer look at the trend starting with the property liability segment.

Total net written premium for the quarter increased 7.9% overall over the Q3 of 2001.

An acceleration from the Q2.

The primary driver of this increase was an increase in average premiums as the overall units declined.

In addition, there was a modest impact on the growth rate due to processing differences this quarter compared to the Q3 of 2001.

Earned premium increased at the same rate as prior quarter at 5.5%.

Overall the combined ratio in the quarter was 97.3%, a 3.1 decrease from the Q2 and a 5.7 point improvement from Q3 of 2001.

The decrease sequentially was due to lower catastrophe losses, relative to last year restructuring charges and the additional incurred losses coming from discontinued lines and coverages study added 2.1 points while catastrophes were 9 points less on a percent earned basis.

The improvement in the underlying margin was the primary driver as the rates were earned and the loss trends moderated in the quarter.

Focusing on the expense ratio, this quarter's ratio of 23.7% deteriorated by 7/10ths of a point from last year.

However, 6/10ths of that increase was due to restructuring charges and another 3/10ths was due to a difference in our annual incentives and the profit sharing accruals this quarter compared to last year.

We continue to drive for expense improvements where available.

Total paid losses for the quarter were $4.2 billion, a decline of almost 6% from Q3 of 2001.

In our net reserve position stands at 15.029 billion.

As of September 30th of 2002.

Next, let's go through the results for the Allstate brand beginning with standard auto trend.

Standard auto drew at a 6.8% rate, higher than Q2, as rate actions and market-specific profit improvement tactics continue to work their way into the numbers.

Here are some of the specifics behind that growth rate for the quarter.

Average written premium increased 9.7%.

And average earned premium jumped 8 .2% as rate actions get reflected in the premium numbers.

Both of these factors showed higher growth rates sequentially.

We implemented rate changes with Q3 effective dates in 11 states with an annual effect of 4.9%.

New business production fell 35% in the quarter, heavily influenced by market-specific actions we have taken in some of our larger states, where there are profit challenges to overcome.

Retention for the quarter fell 1.3 points and stood at 89.1%, in line with the expected decline based on elasticity models.

Policies in force fell 2.1% compared to last year.

Nonstandard auto and net written premium continues to decline falling 10.2% in the quarter.

Units dropped 21% as the volume of new business is not enough to replace the naturally high attrition rate for this segment.

Average premium increased 13.2% with averaged earned premium up 11.5%.

We continue to take necessary rate increases, averaging an annual impact of 17.3% in the 13 states in which we took action, with Q3 effective dates.

This line has reached acceptable levels of profitability but it will take time for increase in growths to occur given the retention characteristics of the business.

Allstate brand homeowners net written premium jumped 21.2% in the quarter or Q3 of 2001.

Fueled by the significant rate actions we have taken over the last year or so.

During the Q3, we implemented rate changes in seven states with an annual average impact of 13.2%.

Average written premium grew 21.8%, but average earned premium was up only 13.6%, demonstrating the lag effect for 12-month policies.

Overall, our policies in force were flat in the quarter.

New business production was down about 7% and retentions on 1.1 points below prior year.

These results are slightly better on a sequential basis and are better than we would have predicted given the rate actions taken.

The homeowner market continues to exhibit characteristics of a very hard market.

For Ivantage, including encompass and Deerbrook, overall net written premium increased 7.7% over the Q3 of 2001 on the strength of deerbrook's reentry into the nonstandard market, an accelerated pricing actions to improve profitability.

Shifting quickly to the loss trends for the Allstate brand, for both standard and nonstandard auto frequency results in the quarter were excellent.

In particular, standard auto BI frequency decreased by 3.3% while property damage fell by 5.2%.

For nonstandard auto, bodily injury frequency dropped by 8.4% and property damage also declined 8.6%.

Last year, auto frequencies increased quickly during the second half of the year.

There was plenty of speculation as to the cause of the sudden trend reversal.

Now, this year, the trend has reversed with frequency showing declines from prior year.

Again, there is a speculation for the current trend.

For now, let's just say we prefer this year's trend.

For paid severities, bodily injury increased 3/10ths of a percent legislation than the prior two quarters and property damage severity went up 4.5%.

When you put all these trends together, you get a very manageable consistent trend in auto lost cost in the low single digit range coupled with our rate actions over time you can see why our margins have improved.

For homeowner lost cost trends are continuing to moderate.

In total, frequencies excluding catastrophes fell another 11.9% in the quarter while paid severities grew 13.2%.

While than sounds high, and it is, the fact remains that the trend has improved.

The severity trend is still heavily influenced by water and losses related to mold in Texas.

Excluding Texas, the total paid severity for the rest of the country increased 7.8% over the Q3 of 2001.

We continue to evaluate our prior year loss reserves, in the part for water losses and have increased them in the quarter by $111 million. 35 million of which can be attributed to mold claims in Texas.

The good news is that the incurred losses related to mold claims in Texas have declined sequentially for the second consecutive quarter.

The combination of rates burning into earned premium and loss trends moderating somewhat provides ample evidence that this line will return to acceptable levels profitability by mid-2003.

Wrapping up the property casualty discussion, net investment income declined marginally in the quarter falling 7/10ths of a percent.

Excluding partnership income, which was 21 --27 million this quarter, versus $33 million last year, net investment income increased slightly over prior year.

While yields continue to decline as the portfolio rolls over, cash flow trends are improving.

With an effective tax rate of 17.7% this quarter, the first share contribution increased by 1 cent compared to last quarter and last year.

Shifting to Allstate financial results, operating income was $112 million in the quarter.

Included in this result was the acceleration of DAC amortization, the effect of which was a charge of $42 million.

Partially offset by a positive $21 million impact on taxes due to an adjustment of prior year tax issues.

Netting these two items the underlying operating earnings were $133 million for the quarter, about the same as last yearm, but about $10 million less than the sequential results.

While this result is down, it's still pretty good, given the market condidions.

Satutory premium deposits of almost $3 billion dollars grew 18.7% in the Quarter.

Fixed annuities of over $1.5 billion drove the increase as variable annuities were down slightly from Q3 2001.

The institutional structured financial products fell by almost 2/3rds, as the scarcity of appropriate assets prevent us from achieving our return objectives for new sales.

Persistency continues to trend well for life insurance and fixed annuities.

Sales through the Allstate agency channel remain strong and surpassed production for the full years of 2000 and 2001 combined.

We now have over 6700 licensed producers at the end of the Q3 up from the end of June.

We have added a substantial amount of information on our DAC assumptions in our press release.

So, I won't go into details here, in order to save time for questions.

With that, let's open it back up for questions.

Kara?

If you have a question, please press the 1 key on your touch-tone phone.

If your question is answered or you wish to remove yourself from the queue, please press the pound key.

If you have a question, press the one key.

One moment for questions.

Our first question is from David Havens of UBS Warburg.

First, thanks very much for the useful and comprehensive additional -- or comprehensible additional disclosure in the press release.

I was just wondering what sort of a -- an impact the $4.5 billion or so of guaranteed minimum death benefit value risk would have on your statutory balance sheet at Allstate life insurance company.

The statutory reserves at the ends of 2000 were 25 million, at the end of 2001 were 125 million.

As of June 30th, they were 193 million.

We close our GAAP books before our stat books.

We haven't fully developed the statutory number for the end of the Q3.

Okay.

All right, thank you.

Our next question is from Charles Gates of Credit Swiss First Boston.

Could you elaborate on the current situation in the state of California?

Charlie, I can.

I am surprised this is the only question you have.

You must be turning over a new leaf.

The situation in California, I think it is a difficult situation, it is a take all commers state as most of you know.

If you have a distribution model that is predicated upon primarily upon agencies, take all comers has you've different implication than if you have only a direct model.

We continue to work with the state regulators in order to get the right kind of pricing in California.

Right now, it is borderline profitable for us.

Which is why we are not growing in that state, and in fact we are shrinking to get to the point where we are profitable.

You know, California is a bellweather state, it is a big state, we have to work with them to make it profitable.

We are doing things like looking at possibly setting up a separate company dedicated exclusively to California, much the way we operate in New Jersey and more or less the way we operate in Florida.

The idea behind that is to really get a clear sense in the minds of the regulators what the capital is that we have allocated in that state so that it will facilitate some of our rate discussions.

You know, California is a place you have to be.

We need to keep working to make our business out there more profitable and to be able to grow in the state.

Thank you.

Our next question is from Michael Smith of Bear Stearns.

Good morning.

First of all, thanks for the early disclosure last evening.

It wrecked my evening, but it was worth it.

[ laughter ]

I have two questions.

First of all you suggest that most of the Allstate brand is now adequately priced and this would seem to suggest that future earnings growth has to come from unit growth and I am wondering when you are going to start growing and how much we can expect to see there, and the second question is can you tell us how much the frequency and severity trends are affected by the lighter catastrophe trend this year?

With respect to your first question, I think you added one and one together and got something different than what you should have gotten.

Those rate increases which we have taken, what we are saying is when we look at our rate indications, we are right where we need to be now.

Those rate indications will flow through our P & L over a 12 to 24-month period of time.

There is substantial earnings power yet to come from the rate increases that we have taken.

As you know, in an auto policy which is written over six months it take 12 months to realize those rates.

On a homeowners policy is takes you up to 24 months.

So there is plenty of juice yet to come.

I understand that for the next two years.

At some point in time that Peters out, doesn't it?

Keep your seat belt buckled.

I would also say that we absolutely have to grow the business.

And in states where we are profitable, we are now beginning to invest in our marketing activities, in our call center activities, working with our agents, and I believe you will begin to see some decent policy growth but you probably won't see it until the middle part or so of next year.

What we don't want to do is grow too quickly and abandon the discipline we have which enables us to have good margins and profitable growth.

You will see in the Q4 and probably in the first half of next year, more marketing dollars spent on growing our business, but we the not going to give up the marginals that we have.

The second part of your question was frequencies and severities.

I will give you a 5,000 foot answer and I will ask Bob to give you more details.

We are pleased any time catastrophes are a hundred million dollars as they were in the Q3 this year, versus $140 million in the Q3 of last year.

But if you strip that out, the underlying rhythm of our property casualty business is very, very strong.

Frequencies are down, severities are moderating, particularly on the homeowners side.

We feel really good about the rhythm of that business.

Bob, is there something you would like to add in the way of more specifics?

Just a couple of comments.

In terms of the impact of weather on the loss trends excluding cats, I think it is obvious the Q1 was favorably affect the by the weather.

The speculation as to how much weather can affect the middle two quarters of the year.

On the severity side, I think the reduction in catastrophe losses or storms does tend to help the overall management of homeowner severity in that it doesn't -- you don't get the spikes and claims that puts pressure on the handling of the overall book of claims there.

So that probably does have some benefit on the homeowners side.

That is a good point, Bob.

We have a lot less claims in the system right now than we had last year or have had for quite a while.

That is good news because it allows a claims rep to really handle a claim and meet the customer's expectations and settle it at the right level.

So the absence of increased pressure, because we have less frequency, more favorable weather and less catastrophes is a help to us.

Okay, thank you very much.

Okay, mike.

Thank you.

Our next question is from Alain Karaoglan of Deutsche Banc Securities.

Yes, good morning.

A couple of questions.

The first one is on Ivantage expense ratio.

At around 33, 33.5%.

That seems really uncompetitive.

Is there anything that is unusual that is leaving that number to be high?

What are your expectations going forward with that?

And the second question is on the life side, in terms of profitability going forward, how should we think about it?

Is the margin going to be at this level or the deferred acquisition cost, is it charged this quarter?

And then we get the margins expanding?

Could you clarify a little bit what should we expect going forward?

Let me take a stab at it.

Bob will add some detail.

Expense ratio for Ivantage in the quarter is uncharacteristically high.

The independent agency channel inherently carries a higher expense ratio than the -- let's call it the captive agency channel.

What you have in Ivantage in the Q3 is the effect of the Robert plant in New York, which is their version of the assigned risk plan.

And it goes into the expense ratio and expenses as opposed to in the loss ratio.

And, you know, the -- New York has its challenges right now in terms of an assigned risk plan.

Those that can't get insurance through the private sector, and we get an allocation or a piece of that that comes to us.

That shows up in Ivantage's expense ratio.

Our goal over time is to get that expense ratio down into about the 24 to 25 ratio, range.

At that level, and assuming adequate pricing, Ivantage will be a sub-100 combined ratio business.

With respect to life, the strong part of our strategy in Allstate financial has been to have multiple products sold through multiple distribution channels.

The reason why we think that is important is some products are appropriate for the customers' needs in one market scenario and are not appropriate in another market scenario.

A good example of that right now is fixed annuities and variable annuities.

There is lots of demand for fixed, and we would be happy to meet that, but we want to do it at adequate pricing and returns.

Not too much demand for variable annuities because of the consumers unease and the producers unease with the directions of the equity markets.

Would we need any further DAC unlocking?

I think the S & P 500 is 70 or 80 points above where it was at the end of -- at the end of the Q3.

So, you know, if the marketplace goes sideways to up, no, there wouldn't be any more DAC acceleration.

If the marketplace went down it would be a function of how much it went down and what else happened with other parts of the DAC on the balance sheet.

We like the strategy of Allstate financial a lot.

Unfortunately, the equity markets were so sour in the Q3.

You step up to the plate, you recognize what you have to do in terms of DAC acceleration, you do, get it behind you and move on, which is exactly what we have done.

On the homeowners side, you mention rate adequately by the middle of 2003, what does that mean in terms of combined ratios.

We would like it to operate at a combined ratio.

Let's call it 95.

At that level we could get good return on our required capital and a good return on equity.

Thank you.

Thank you.

Our next question is from Bob Glasspiegel of Langen McAlenne.

Following up on his question, have you changed your targeted combined ratio for oil in light of where interest rates are today, and if so, where do you get to to get to the target?

We started working on that, Bob, back in the latter half of last year as rates went down.

I mean, your logic train is absolutely solid.

When you have lower interest ratings, you have to make up for that if you want to have a reasonable ROE by getting more on the combined ratio.

We probably shaved a half a point to a point is what we need more lower combined ratio on auto in order to get the kind of returns that we want.

I will also tell you, 15% ROEs when real rates of interest are as low as they are are unrealistic.

You know, economic theory as well as the next person does.

You know, I think a range of 13 to 15% returns is probably more appropriate than just a single point estimate of a 15% return.

Okay.

And just to follow up, just on mike's confusion to Mike's Smith's answer, did you explicitly you will stop taking rate on the margin?

I thought his question implied premium growth had to come from units.

It seems to me you said your pricing is where you have to be.

I didn't hear you say you would stop taking rate.

I said the opposite, Bob.

We like where our rates are right now.

We think we have gotten to the point where absent any inflationary costs and new developments we are adequately priced and that will flow through in the next 12 to 48 months.

Where we have rate indications we are going to tale ratings.

In auto, in nonstandard auto and homeowners.

There are plenty of places around the country where the performance of certain of our product lines in certain states is not up to what we want it to be.

We will continue to take rate increases as indicated.

We will not back off that one iota.

The last question, this the first call since Tom Wilson got his assignment.

Congratulations to Tom.

I didn't hear whether he is on the call or not.

He is not.

He is busy running the business.

Okay, I was going to ask what his initial impressions were but maybe, I don't know if you have talked to him yet, but in the first initial steps on low bearing fruit he will go after?

I talked to Tom a couple times a day.

Premature to talk about that.

I would tell you, Bob, there is no low-hanging fruit.

We have been there and we have done that.

What we need to do is to continue to run our property casualty business in a very disciplined way, maintain or expand our margins, and begin to grow our top line.

We have got good plans in place to be able to do that.

Tom is the right guy, inheriting the Mantle of leadership from Rick Cohen who did a terrific job over the last three years.

Tom is the right guy to maintain the margins and get us growing.

Thank you very much.

Thank you.

Our next question is from Steve Shapiro of FS investments.

Good morning.

I think you alluded to the corelation between frequency and severity.

Can you point to any other specifics that might account for the moderating severity, particularly on the standard auto side?

Steve, you know, the trend really on severity is not moderated that much.

When you look at the history of -- that we provide.

Bodily injury has been floating in the very, very low single digits for a long period of time.

And property damage, which is kind of the physical indicator of physical damage claims have been around -- the trend has been around 3 to 6%, it has kind of floated.

Again it has been fairly consistent over time.

There has not been a big change in trend.

It has been consistent which is good for pricing.

Okay.

Thank you.

Sure.

Our next question is from Jay Cohen of Merrill Lynch.

I just have a number of questions, some were answered already.

The first is, the mold issue, which seems to be stabilizing in Texas, if not moderating, have you seen that hit any other states at this point?

And the action you have taken to exclude it or limit it has that been enough given a potential rise in claims there?

Secondly, given the higher reserves for GMDB in the life company have you had to put more money into that statutory entity?

Okay, jay, let me take them in the order you asked them.

We do see the number of mold claims in Texas moderating and the dollars we have to put up for it moderating.

That's good.

We hope that will continue.

You will recall we changed the policy form in the state of Texas in February, and march of this year, we began changing it.

The new form contains the words "sudden accidental" limiting coverage to $5,000, and I believe it is only if it's coincident with another kind of event like water damage.

So those policies are now rolling into force in Texas.

They will be fully implemented in Texas, you know, in February or March of 2003.

So I think that we have got a pretty good handle on mold claims.

We could get a spikeup as the end of that opportunity arises.

I think that damage is now contained.

Have not seen much in any other states at all.

We are, in order to be very precautionary, we are adding new policy form and adding mold coverage, changes to as many states as we possibly can.

I don't remember how many states we have that implemented in, but it is a very high number.

And where we don't have it implemented, we are going to put it in.

Most states by far the overwhelming majority of states, the language in the policy contains the worlds "sudden and accidental," which precludes mold which is something that develops over an extended period of time.

So I think the industry is beginning to get this issue behind us.

I feel comfortable that we are -- we like the trend, but two quarters doesn't a trend make.

We continue to be all over it.

You are absolutely correct with respect to your second question, when you have capital losses in Allstate Financial, or in any life company, and you have a differing reserve requirements it does mean you have to put in capital.

We put in $150 million midway through the Q3.

That business is for the most part capitally self-sufficient.

You may have seen that sp -- S&P confirmed our ratings and our overall corporate ratings at a double-A plus.

That was opposed to what it did with some of the other life companies.

We will probably put more capital into Allstate financial between now and the -- and the end of the year.

So my guess would be for full-year 2002 we will probably have a total of $25 million that we would have infused into Allstate financial in order to keep it -- keep the ratings that we wanted to keep us absolutely humming along.

Great, thank you.

Thank you.

Our next question is from Michael Lewis of UBS Warburg.

Good morning.

I approve of the releasing the night before, it is more difficult for us, but it is better to get evaluation of the numbers.

It is also more difficult for us, Mike.

I can imagine.

You know, it is funny, it is good having the Progressive call ahead of your call.

In a way I am kind of a little bit confused here.

Obviously, you are not an expert on Progressive.

What they were saying was that they were getting surprisingly good retention levels in their auto business as they hit rate adequacy in all states.

Are saying retentions slipped, but it was stronger in the homeowners, I am a little confused, maybe, can you break out where you are intentionally dropping business versus where you want to retain business?

Is there a difference in your policy enforced growth or retentions on a state by state basis that we are missing?

I am a little surprised at the growth numbers that comes out of Progressive versus what comes out of yours.

Profitability is going in the right direction but it looks like you are in two different industries.

Let me see if I can unconfuse you.

If you take a couple states where we don't like our profitability right now we are intentionally shrinking that book of business.

That clearly has an impact on our retention rates.

If you exclude California and Texas we are essentially flat from a retention or a PIFF standpoint.

If you look at all 49 states we do business in, you would draw different conclusions.

That is one part of the explanation.

Second, I would say as you know we write homeowners, progressive does not.

Our retention and PIFF rates are holding or increasing in homeowners.

I think that largely reflects it is a very hard market out there.

When the largest player in the business State Farm says they will not take any new customers in 37 states, that message does not get lost on new customers and existing customers and therefore the PIFF growth beginning to go up and the retention rating stay the same.

So I think Progressive, I didn't listen to the progressive call, I didn't read their release, I would assume they are probably seeing in large measure the same trends that we are overall, but, you know, it is a national business, but it is run on a local basis.

And so doing what is appropriate for us to do in a state like California or Texas, or New Jersey, could produce slight live different spin on the business than where they are, given what their results might be in their businesses in those states.

Okay, and would you just as a follow-up, would you care to venture a guess on what kind of -- as you clear up the states where you want to clear up, what kind of growth we should expect next year as far as policy and force growth goes in your Allstate brand or standard and preferred book of auto business?

Our metric is pretty straightforward.

If we can get growth in the 3 to 5% range and rate increase growth in the 2 to 3% range, depending on what we need, we will take every bit of rate we will need.

We will need some.

That is the metric that we would like to see.

It will take us a while to get to that 3 to 5% unit growth because we want to be profitable in every state in every line in which we do business.

Thanks very much.

Sure, mike.

Thank you.

Our next question is from Jeff Thompson of KBW incorporated.

Most of my questions have been answered.

On the nonstandard auto loss ratio, it was down significantly, could you just elaborate on what you are seeing there?

You know, I can.

The Q3 of last year we would have built reserves in our non-standard business, so that would have been a piece of that.

But our nonstandard loss ratio has come down dramatically as we have shrunk the size of that business.

In many statements, the way you get profitable because they won't allow you to get to the adequate pricing, you need to disgorge the risk.

We have done that in a number of places.

I think that process is essentially bottoming out right now.

And you will probably begin to see that the policies there grow modestly.

That is not a business that we want to go out and solicit.

But we want our agents to have a price and a product for anybody that comes in the door.

Our interest is primarily in those higher value drivers to whom we can sell, not only auto insurance but also homeowners and also tap in to what their financial products might need.

We have worked hard to get the nonstandard loss or combined ratio down into acceptable ranges and it is clearly there right now.

We have had good performance in that business throughout this year.

And I think 2003 is kind of the culmination of some very strong performance.

It is safe to say that business we would expect growth probably sooner than the standard auto?

You know, I don't think you will see growth, because the availables continue to run down.

And it takes a while to turn it honor.

What you will see is a diminution in the rate of shrinkage.

As an unrelated follow-up, can you talk more about the homeowners market and in relation to the combined auto and homeowners, customers that you have, if you reach profitability or targeted profitability for homeowners next year, what can we expect unit growth -- you know, the impact on unit growth for homeowners and auto?

It is a tough one to answer, Jeff, only because it depends upon what the competition does.

Let me start with homeowners.

As I said, in response to mike's question right now, we could sell a whole lot of homeowners insurance right now.

We want to be careful about that.

We want to sell it to the customers that have -- that meet our profile.

And on whom we are going to make money, where it will be good for the customer and good for the company.

I think as some of our competitors continue to look at very, very dramatic rate increases, and combined ratios in the 120 to 130 range on their homeowners lines, it will provide us opportunities to grow.

What we can't do is let that growth opportunity go to our heads.

We have got to be disciplined, take the ride customers.

And I think you are seeing that happening, that beginning to happen fairly strongly in our homeowners business right now.

On the auto business, as I said, we would like to be in the 3 to 5% policies in force growth range.

For that to happen, we have got to get the nonstandard business stabilized, we have to make sure in those states where we don't like our auto profitability, we have gotten to the levels we are comfortable with and we will begin to grow that business.

We are beginning to spend marketing dollars now in the Q4 this year, a little in the Q3, Q4 and into 2003 to grow the business.

We should see policies in force growth, I am not sure if we will get there next year, but the goal would be to have PIF growth in the 3 to 5 Ferris range, to have rate increases of 2 to 3% depending on what is going in the economy, and inflation and medical costs and severities, things of that nature.

In the 2 to 3% range.

That should give us more than adequate opportunity to grow our bottom -- bottom line in the 12, 13, 14% range.

Do you have a PIFF estimate for homeowners as well?

Ya know, I don't.

I would say that it will grow.

I don't have it here with me right now, I don't.

Okay, thanks.

Our next question is from Brian Meredith of Bank of America securities.

The first question on the topic of assigned risk, I believe there is a lag effect there from your assigned risk assessments, can you provide us guidance on what you expect as far as assigned risk assessments going forward?

Will it get larger?

It is a good question.

I don't have those statistics off the top of mine.

It is a frustrating topic for me also, because, you know, you do the best thing you can to run your business correctly.

And a state comes along and they deposit on your doorstep your fair share of risks that can't be absorbed any place else.

It is a real frustration for us.

My instincts are that the assigned risk pools in a couple of states are beginning to get more adequately priced, although they still are not adequately priced.

Many of those drivers are, you know, without political constituency, but regulators are loath to have 50 to 60% increases in some of the auto products but I think in general some of the assigned risk plans are reflecting a little more pricing adequacy, although a long ways away from what we need.

As to whether they will be more or less consumers in those pools, you know, I don't know that there is much pressure for them to either grow at an accelerated rate for shrink.

New York is the largest assigned risk pool.

There are are few other states that have it.

We have been working with the commissioner to get some caps on what goes in to the pool and the rates.

I don't know that I see any monumental change in the way assigned risk works in terms of the number of customers that are in there or the pricing in the assigned risk pool.

Great.

And then two other quick questions here.

One, have you seen any regulatory pushback yet on rates?

There are elections coming up now, you hear talk about it occasionally in states, what's the regulatory front look like right now for auto insurance?

I would say it is more of what you usual lip find, Brian.

In 50 statements at any one point in time some states are benign, some are aggressionive, some are in the middle.

In Texas, where there have been substantial homeowners rate increases because of the mold decision that was put on farmers a few years ago, rate increases and the availability and affordability of homeowners insurance, the two individuals who are running for governor of Texas have made that a policy issue.

And so it is very much in the forefront.

You know, I think once the election season is over, cooler heads prevail.

In the state of Texas, any discussion we -- they want to have with us we are delighted to have but we all start the discussions with let's look at our underwriting losses in homeowners in the state in the last couple of years and, you know, that is a pretty sobering comment.

So I don't know that it has got an appreciably different feel now than it normally does.

I do think, however, that we, and perhaps progressive were well-served to get out early in the rate increase strategy.

I think those companies that are coming after us, who have an even greater need, may find that the regulators are much less liberal or generous in terms of what they are prepared to give.

I think identifying the need ahead of time, or as soon as possible, getting out there aggressively, continuing to take all rate indications is a smart thing to do.

It served us well and it will continue to serve us well.

Great.

The last question, have you seen any tangible benefits yet from any kind of auto insurance fraud legislation that we have seen over the last year or so?

You know, we have seen some -- I think two things help us with fraud.

Although not as much as they should.

One is publicity around it.

So in the state of New York, back a year, year and a half ago, there was a lot of publicity, time and attention on fraud.

If nothing else that causes people who perpetrate the fraud to back off.

That was helpful.

When it comes to legislative changes we have seen some activities in New York, a little bit in Florida, but it is probably too soon to really, Brian, to declare victory and say we can see that now, beginning to be reflected in our numbers.

Having the legislative changes is clearly a step in the right direction.

It takes a while for that to be reflected in our overall financials.

Great, thank you.

Thank you.

Our next question is from Thomas Schulnake from Goldman Sachs.

Good morning.

Most of the my questions ran answered.

I wanted to turn to asbestos for a second.

I realize you went through your study.

There are a number of other studies out there that suggest a much more of a Draconian problem for the industry.

And I guess what I am just trying to understand, as each company looks at their asbestos exposures, where do you figure that your reserves are now relative to some of the Draconian studies that are out there versus the possibility of tort reform at the federal level?

I guess what I am trying to get at is if there were tort reform in a meaningful way, would your reserves actually potential limb come down, or if the Draconian scenario were actually true, what kind of potential hit would you have to have on that?

Give us a little more clarity on the asbestos side.

Tom, that is a fair question, it is a good question.

It is one of those unponderables.

Our reserves are absolutely adequate.

The study, we look at it every quarter, but in the Q3 we look at it from a grounds-up basis.

That is what caused us to take adjustments to the reserves right now.

We are a hundred percent comfortable with it.

Some of the really Draconian scenarios, I am not surely what to make of it.

There are times in the past when a couple rating agencies have had those scenarios, they back off, then they go back into.

I don't know where it is all going to go.

My instincts tell me that there may be more of a chance for some legislative relief on tort reform and asbestos reform right now than there ever has been because there has been so many just egregious cases that people are saying what is this?

I would hazard a guess, it is only a guess that if there were to be meaningful tort reform, and it included asbestos in it, that the insurance companies on balance would probably be overreserved so they wouldn't just be flatly reserved, but there are so many imponderables, it depends on what is a reform, is it retroactive, is it reinsurers, there are so many imponderables, it is hard to give you more assurance or a greater sense of security than what I have.

I will go back and say the analysis we do in the Q3 is very exhaustive.

We feel right now we are fully reserved in both our asbestos and our environmental activities.

If we got some help legislatively or from a tort or court reform standpoint I think it would help.

I have one quick follow-up, is there anything out there on the horizon that could potentially change where the modest increases that you have been adding to on a yearly basis all of a sudden jump up in magnitude?

Oh, there are -- I guess there are things on the horizon.

I don't know that I would predict they would have any kind of a negative impact on us.

There are good things that can happen, Tom, there are bad things that can happen.

This an ongoing cost of doing business for us.

It is a relatively modest one.

We attempt to address the issue and get it out of the way every couple of year, by building a reserve.

It is an imponderable.

We weren't a major writer, we were primarily a secondary writer.

We feel pretty comfortable with our reserve position right now.

Okay, great, thanks.

Thank you.

Operator, we are going to have to cut off the question and answer and keep to our time commitment.

Listen, thank you all for joining us.

We did try, as I said, to make this process more effective by getting the release out earlier.

We are pleased with our performance this quarter.

Like where we are going for the last three, four, five quarters, like the strategy and in fact think some things going on in the marketplace give us an opportunity to shine.

And to grow our business profitably, so more good things to come.

Thank you all.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and you may disconnect at this time.

Have a nice day.