Allstate Corp (ALL) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation fourth quarter and year end earnings conference call.

At this time, all participants are in a listen-only mode.

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

As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference, Mr. Robert Block.

Please go ahead, sir.

Thanks, Jason.

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

I know there are several calls going on today.

So we will try to keep this call to an hour.

Joining me are Ed Liddy, and our newest member of senior management, our CFO, Dan Hale.

We will cover our results for the fourth quarter and year in our prepared remarks, and take your questions.

When we get to the Q&A, please keep to one question and a follow-up.

We want to hear from as many of you as time permits.

We issued our press release last night after the market closed, along with the majority of our investor supplement.

Included in the supplement was a new exhibit containing most of the operational numbers I normally provide during the call.

We would appreciate any feedback you might have on this additional disclosure.

If you need a copy of the release or the supplement, they are on our website.

Now it is time for our legal disclosure.

The following discussion may contain forward-looking statements regarding Allstate's 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's section in Allstate's latest report to the SEC on form 10-Q for the third quarter, 2003, 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 prior 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, web cast, broadcast, and use of your name by Allstate.

If you do not agree with these terms, please disconnect now.

Now I'll turn it over to Ed Liddy, who will share his views on the quarter, year, and outlook for 2003..

Ed?

Thanks, Bob.

And thanks, everyone, for joining us.

The first thing I'd like to do is welcome our new CFO, Dan Hale, to our call.

Dan has really a terrific background in a variety of industries, which particularly about 8 to 10 years in the property and casualty business, so once he's up to speed, I think he'll be a very strong addition to our team.

Dan?

Thank you, Ed.

And I'd just like to say I'm pleased to be a member of the Allstate team, an outstanding team, and a great company.

And for the analysts on the call, while I'll probably be acting more like a giant sponge today than a participant, I want you to know that I'm looking forward to renewing relationships with many of you, and I'm looking forward to meeting and getting to know many more of you in the coming months.

Thanks again, Ed.

I occasionally get questions about how John Carl is doing.

I saw John last week.

His health is good and prognosis is good.

What I'd like to do for a couple of minutes is provide my perspective on the quarter.

Then I'd like to talk about the full year 2002 strategies and tactics, and finish with guidance for 2003.

First, with respect to the quarter, my overall assessment, it's a very strong quarter, with net income of $447 million, which is up about 69%.

Our operating income of $618 million essentially doubled last year's.

And if you exclude our restructuring expenses, operating income was $633 million, up about 67% from last year.

The operating earnings per diluted share that results from those numbers, excluding restructuring expenses, 89 cents for the quarter, or $1.03 for the year, exceeded the high end of our guidance of $2.82 up to $3.00.

Some of the details behind the numbers.

As you all know, catastrophe losses can play a large part or have a large impact on how we report our numbers, what our numbers are.

Our cat losses for the quarter were $237 million; that's about normal or expected for fourth quarter.

I would point out that these losses were $104 million higher than last year's fourth quarter, and that they were more than twice the level of third quarter 2002.

Yet despite this, we were able to report pretty good earnings improvement relative to those periods.

Our combined ratio for the quarter was 97.8, which was an improvement of 6.7 points over the fourth of 2001.

The Allstate brand combined ratio at 95.7 improved by 6.4 points.

The i-vantage of 108.5 improved by 20 points.

And even with a normal level of catastrophes, the Allstate brand homeowners combined ratio would be below 90, a level we have not approached in more than two years.

The Advantage homeowners line enjoyed similar trends.

Another good note.

Incurred losses related to our Texas mold slowed dramatically.

There were only $14 million in the fourth quarter of this year, versus 78 million in the fourth quarter of last year, and versus 119 million in the first quarter of '02.

Our expense ratio, excluding restructuring, declined by half a point, and the actual dollars of noncapitalized expenses increased by only $4 million from last year's fourth quarter.

We continued to implement rate increases as appropriate in all of our lines of business, albeit at lower levels than the last several quarters.

In the quarter, we benefited from a $100 million positive adjustment of prior year tax liabilities; but at the same time, strengthened our reserves by $131 million pretax, including $60 million for nonasbestos discontinued reserves.

Allstate Financial performed really well in a difficult environment.

Our realized capital losses resulting from sales and writedowns slowed this quarter, but still totaled $165 million after tax.

And we completed our share repurchase program during the fourth quarter, as we said we would do.

All in all, it was a very solid quarter and strong capstone to the year.

Let me make a few comments on the year, and put these in the context of our overall strategic intent.

As I've shared with you all many times, our strategy is to get better in the property casualty business, as well as bigger.

And to get broader in financial services, to generate more consistent earnings growth and returns in excess of our cost of capital.

We've made good progress on each of these during 2002.

Our results for the year demonstrate our ability to successfully execute this strategy in a very challenging environment.

We're able to correct our short-term imbalances in the operations, as well as establishing the foundation for long-term earnings growth.

Now, in terms of the strategy getting for getting better, our loss ratio for the year improved substantially. 4.3 points for Allstate protection.

And for most lines of business, it improved.

The exception was our nonstandard business in i-vantage, which is small but growing.

Only about one point of the overall improvement is due to the lower catastrophe losses than last year.

The Allstate brand homeowners loss ratio at 75.8 for the year and 62.8 for the quarter is beginning to approach our targeted return range for acceptable returns on capital.

We're delighted to see that.

We continue to learn and refine our pricing models on marketing programs as we gain market based experience.

It's a critical element in our strategy to grow our units profitably in the future.

Our auto frequency trends have been excellent all year.

And homeowners frequencies have declined as well, easing the pressure on loss cost.

We are a personal lines, short-tail business.

We strengthened prior-year's reserve's by a total of $685 million over the entire year, offsetting by a wide margin the benefit we enjoyed from less catastrophe losses, which were about $163 million less than last year.

We successfully completed a reorganization of the field claim footprint, with no apparent adverse impact on loss cost trends.

A tremendous effort and tremendous accomplishment by our claims of activity.

The Allstate protection expense ratio fell by 6/10 of a point, and non capitalized expense dollars were slightly less this year than last year.

Our rate increases were implemented swiftly and appropriately with Allstate brand standard auto increases of about 6%.

Nonstandard increases of about 11%.

And homeowners increases of almost 17%.

I-vantage premiums grew 4 1/2% for the year, while the underwriting loss was reduced by $145 million.

The impact on losses from Texas mold appears to be waning after costing us $326 million pretax in 2002, an increase of over $140 million from 2001.

We refinanced a portion of our debt during the fourth quarter, taking advantage of low interest rates to lock in savings on future interest costs.

During the year, our annual reviews with the rating agencies led S&P to affirm our current rating.

And as you probably saw just recently, A & Best also affirmed our rating, but with a change in outlook to positive.

For the timing, Todd completed a reorganization of our senior staff, which now has Tom Wilson taking over the Allstate protection business, Casey Sylla leading Allstate financial, And Dan Hale as out new Chief Financial Officer.

In terms of getting bigger; our written premium increased 5.8% for the year, slower in the back half of 2002 than the first half.

All of it was result of rate activity.

Our standard auto policies in force fell 3.5% year-over-year.

This was driven largely by our actions to improve profitability in the three states of California, Florida, and Texas.

When our margins are where we want them to be, we will again begin to grow in these states.

Our homeowners policies in force, or PIF, was down five tenths of a percent year over year, but up sequentially, and nonstandard auto PIF continues to decline.

Our retention levels behaved as expected, down less than a point, despite aggressive rate activity.

And cash flows accelerated throughout the year, adding much-needed fuel to our investment portfolio.

In terms of becoming broader, Allstate Financial statutory premium deposits increased to 11.6% during the year.

Business produced by our Allstate agency channel hit a record $1.6 billion.

That is more than the sum of that business generated over the last three years combined.

Our treasury link annuity was introduced in February, and was readily accepted in the marketplace, with sales of over $700 million.

Our fixed annuity business was strong, generating over $5.2 billion during the year, as equity market fears led buyers to choose the relative certainty to fixed annuity products versus variable annuity.

Operating income for Allstate Financial rebounded in the first quarter, and completed the year at $556 million, an increase over the prior year and good result, considering a rather difficult investment climate throughout the year.

Finally, our outlook for 2003.

We see operating earnings per diluted share in the range of $3.20 per share to $3.40 per share.

An increase of roughly 10 to 15%.

As always, this assumes average expected catastrophe activity, and excludes restructuring expenses, which right now, we think will be minimal for '03.

Our goal was to grow operating earnings per share every year in that range.

Rate increases will continue at a reduced rate, probably in the mid-single digit range, with a slightly greater pace for Advantage.

Our strategic risk management, or SRM, will continue to produce excellent results.

We believe that policies and force declines in standard auto and homeowners will cease, and growth will become evident in the latter part of 2003 and into 2004 and 2005.

At normal catastrophes, the i-vantage business will achieve a 100 combined ratio in the fourth quarter of 2003.

We believe our asbestos and environmental reserves are adequate as of the end of 2002, given current facts and circumstances.

As I think you all know, we just completed our annual ground-up review of this area during the third quarter of 2002, and we will plan to do the same thing in the same time frame in 2003.

I feel very good about what we've done during 2002.

I think the market recognized our accomplishments with shareholders receiving a total return of 12% during the year, compared to the broader market decline of about 22%.

And as you probably saw just this past Tuesday, we announced an increase in our quarterly dividend and authorized another share repurchase program.

I think we enter 2003 with an excellent leadership team, a very strong balance sheet, and a strategic intent that remains intact, to become better and bigger in our property casualty business, to become broader in our financial services, and to generate consistent earnings growth over time.

Bob, I'll turn it back over to you.

Thanks, Ed.

To put the operating earnings trends for the year and quarter into context. let me offer this analysis.

In th third quarter, we reported operating earnings per diluted share of 87 cents, exceeding analyst estimates.

In attempting to get to the underlying rhythm of the business, start with the 87 cents.

Then add back into earnings the restructuring expense impact of 2 cents and strengthening of prior year's reserves, worth about 12 cents.

Finally, you remove the favorable effects of adjustment to prior year's tax liabilities, worth 14 cents.

So you get back to the same place: 87 cents.

This was an increase of 14 cents per diluted share from the third quarter of 2002, and double that of the fourth quarter 2001.

Now, let me go through a quick-reconciliation of those numbers.

Starting with the sequential increase from third quarter to fourth quarter of 14 cents, the primary drivers of the increase were margin expansion in Allstate protection, worth about a dime.

And the absence of a [INAUDIBLE] locking [INAUDIBLE] business that occurred last quarter, worth 6 cents.

Some of the other noise in the comparison were a greater amount of catastrophe losses in the fourth quarter, offset by less reserve strengthening of prior year reserves, and the favorable effects on the adjustments of prior year tax liabilities.

Looking at the prior year comparisons for the quarter, you get much the same thing.

Allstate protection margin improvement generated about 29 cents additional earnings, with less restructuring expenses worth about 8 cents, less strengthening of prior year reserves about 9 cents, and the favorable adjustment of prior year tax liabilities worth about 14, more than offsetting the increased catastrophe losses expense.

As with every quarter, there's always some noise with the results.

However, as you look at the larger picture, our strategy is designed to improve our core line profitability work exceedingly well in 2002.

Fueled by increases, and benefited by excellent frequency trends that more than offset increases in severity, our overall loss ratios, excluding catastrophes, dropped from prior year by 6.3 points to 70% in the fourth quarter.

The strengthening of prior year's reserves was concentrated primarily in two areas: Homeowners, primarily related to Texas mold, and the discontinued lines and coverages.

The adjustment made to auto and other personal lines reserves were immaterial.

Similarly, our focus on expenses created a drop in our expense ratio for the quarter of 5/10 of a point, excluding restructuring.

The underlying run rate of the business remains very healthy, indeed.

Now let's look at the operational results of the business, start ing with discontinued operations.

As you saw in our press release, we strengthened prior year's reserves during the quarter for other mass [INAUDIBLE] exposures by $60 million, pretax.

We also added to our asbestos disclosure by breaking out reserves into several categories.

Direct policy holders, split between primary and access, as well as assumed reinsurance and IB&R.

We outlined briefly the process we employed to evaluate the appropriateness of our reserve levels.

As you know, we just completed our comprehensive review of asbestos and environmental reserves during the third quarter, and made some modest adjustments at that same time.

We continue to follow these same procedures in the future, as they have served us well over the years.

I know several companies that dramatically increased their disclosure and their reserves in the last few weeks.

The review processes the describe are similar to those we have employed for the past several years.

Suffice it to say, we are comfortable with our processes and the appropriateness of our [INAUDIBLE] levels at this time.

Switching to Allstate protection.

Normally at this time, in previous calls, I would go through a detailed discussion of the facts and figures by line of insurance.

I'm not going to do that today because we put many of those numbers in the investor supplement.

But I will try to add some color to the trend, evidence for the quarter and the year, beginning with comments on the Allstate brand.

Standard auto grew only 3.6% in the fourth quarter after a healthier 6.4% increase in the third quarter.

Policies in force fell by 3.5%.

But the impact of rates of average premium more than offset the decline in PIF.

The lack of opportunity for unit growth in California, Florida, and Texas in the last several quarters has led to the majority of the PIF decline.

As these markets are repaired, profitable unit growth can be achieved over time.

To put this into a larger perspective, the decline in PIF this year follows a three year period of 2.5% of annual unit growth.

We continue to successfully implement rate increases as needed.

For the year, about 80% of the states are operating at or better than our targeted return levels.

Lost cost trends continue to be excellent with frequency for BINPD, as well as other auto coverage declining again in the fourth quarter.

This helps offset the modest stability pressure exhibited primarily in the physical damages coverages.

On the investor supplement page that breaks up the loss trends by line and by quarter, you may have noticed an increase in standard in standard auto loss ratio from the third quarter to the fourth quarter of about 4 points.

That is entirely attributable to prior year reserve actions taken.

In the third quarter, we experienced a small release, but in the fourth quarter we had a small increase from prior year results.

However, if you compare the fourth quarter of 2002 to last year's fourth quarter, you get a drop of over three points, as the impact of rates and reduced frequencies offset increases in severity, driving in improvement in the margin.

Switching to homeowners, the top line continued to grow in high teens as rates worked their way into the book.

PIF showed a slight decline from last year, but experienced a sequential increase from the third quarter to fourth quarter .

New business trends were better in the quarter; and retention, while down, was stabilized and remains above our expectations, given the rate actions we have taken.

Our rate needs are diminishing, bringing us closer to our targeted profitable levels.

We took about 10% in annualized rate increase this quarter, a significant amount, but less than in previous quarters.

Homeowners lost cost trends are moderating,d with continued declines in frequency, offsetting the reduced level of severity increases.

As Ed mentioned before, the loss ratio for the fourth quarter adjusted for expected catastrophes, and was an appropriated expense ratio, added to [INAUDIBLE] a very acceptable sub-90's combined ratio.

For the year, homeowner's combined ratio improved relative to 2001.

Further improvement will get this line to our goal of sustained profitability by mid 2003, a target we previously stated.

Nonstandard auto remains in a state of decline, with the top line falling another 12.4% in the quarter.

Trends in new business are not sufficient to replace the natural attrition characteristics of the nonstandard market.

Complicating the situation are issues of potential profitability in several major markets, such as New York, Florida, California, and Texas, that keep us from pursuing unit growth aggressively.

From a profit perspective, though, we will be diligent with pricing actions to protect the bottom line.

We will monitor this situation as we move through 2003.

For i-vantage, the top line rose 7.7% in the quarter, as rates favorably impacted the trend.

Overall loss ratio improved to 76.7%, about the same as third quarter, but significantly better than fourth quarter of last year.

We will make better progress during 2003.

Property liability investment income at 400 million for the quarter was down 2.7% pretax, but only three-tenths of a percent after tax.

Effective tax rate of investments was 15.8%.

And on a per share basis, investment income was up a penny.

Obviously the declining yields are more than offsetting the acceleration of new money from operations.

There were no major changes to the portfolio allocation made during the fourth quarter.

Now, turning to Allstate financial, total statutory and premium deposits grew almost 20% in the quarter, 11.6% for the year.

The growth of our distribution systems and product offerings were evident again this quarter, with 1.6 billion of fixed annuities produced, a large portion of that figure coming from our new treasure length annuity.

Year-to-date sales through the Allstate agency system, another 6 billion, more than the last three years combined.

A 6% increase in life products, offset by 78% decline in our institution market sales, an area that we have always depicted as opportunistic.

We will not write this business when we are unable to make our target returns.

Having a broad spectrum of products allows our customers to choose appropriate products to satisfy their particular needs and risk tolerances.

It allows us to select and market only those products where we can achieve our targeted returns depending on the economic environment.

Operating for the quarter jumped to 158 million.

The favorable adjustment to prior tax liabilities more than offset an unfavorable movement in mortality margin.

In terms of a quarterly run rate for operating income, Allstate financial ends the year around the million level.

Now I think it's time to open it up for questions.

Jason, could you start the process?

Thank you.

If you have a question, please press 1 on the touch-tone telephone.

To remove yourself from the queue, please press the pound key.

Once again, if you have a question at this time, please press the one key now.

One moment, please, for our first question.

And our first question is from Brian Rice of Bear Stearns.

Please go ahead.

Good morning.

Given that rates are approaching adequacy, how much improvement in the combined ratio does that imply?

That's a tough question to answer, Brian.

We can continue to make improvement in the combined ratio.

Midsingle digit pricing suggests that we will stay ahead of our inflationary pressure and improve the margin.

I would also point out, people need to recalibrate their thinking just a little.

In order to generate acceptable returns on equity, if you're getting less on the investment side, you need to make more on the insurance side.

So we still see several points of potential improvement in our combined ratio, resulting from a combination of price increases, good risk selection, and proper expense management.

And you said that that does imply the current low-interest rate environment?

Yeah.

We need to keep -- the industry needs to keep driving down the combined ratio, because you're going to make less money on investments, you know, with yields down where they are and interest rates down where you are.

If you want to generate an acceptable R.O.E., you have to do it on the insurance side of the house, not on the investment side of the house.

Okay, thank you.

And our next question is from Alan Karaoglan of Deutsche Bank.

Please go ahead.

Yes.

Good morning.

Question, Ed, regarding the rate increases that you're putting through in both the standard auto for Allstate brand and in i-vantage, the rate increases in the fourth quarter for both are around the same level, yet the performance of i-vantage is much worse.

And I know we keep asking you that question probably ever quarter.

Shouldn't the price rate increases be higher for i-vantage?

And on the Allstate brand, if we add the expense ratio, basically the combined ratio is around 96.7, similar to last year, so why aren't you putting the same price increases as you did last year?

Alan, let me see if I can break that pricing down into its component parts.

Rate increases on the i-vantage brand, as I mentioned, were higher in the back part of the year than the increases for Allstate.

And that will continue.

So in 2003, you'll see greater rate increases on i-vantage than you saw in Allstate.

We got out in front of it sooner in the Allstate brand than in i-vantage.

I will point out, the i-vantage business made a lot of progress.

That underwriting cost was cut almost in half year-over-year.

And that business will get down by the end of '03, should get down to about a 100 combined ratio.

I'd also point out, the i-vantage policy is a one-year policy.

It's a combined policy, for the most part, package policy that combines both auto and homeowners.

The Allstate policies, automobile policies are six-month policies, so you see the flow-through a little bit more quickly.

You know, with respect to the second part of your question, we are very focused on taking appropriate rate increases.

We monitor our relative pricing against our competition very carefully.

And in those segments where we want to be competitive, we are very competitive on a national basis.

And that will help us nicely in 2003 as we begin to grow our units and force profitably.

I think we and perhaps Progressive were the two companies to recognize the need for rates sooner and to take those rates as appropriate, we're glad we did it, because I think the companies that may find delayed rates less acceptable in terms of large rate increases that we still see many of our competitors having to take.

And Ed, you had success in reducing expense ratio of the Allstate brand.

What about the i-vantage brand, the expense ratio for the full year went up by a point, what are your expectations going forward?

It will come down.

The short answer is it will come down.

Much of the increase in the expense ratio is the plan in New York that has to do with the assigned risk pool.

We think we've made some progress in that.

And I think in 2003 you'll see that come down.

We'll get the i-vantage business down to a 100 combined ratio in the back part of '03.

Thank you.

And our next question is from Jeff Thompson of KBW, Incorporated.

Please go ahead.

Thanks.

I wanted to focus on premium growth and in particular, policy count growth.

We thought you had reached rate adequacy maybe in the third quarter, and I had expected that to pick up sooner.

And you're guiding us to maybe the second half of '03.

Is this driven by a change in key states, I know you talked about, or is there something else going on more broadly in the market?

I'd say it's driven more by key states.

California, we don't have our margins yet down to up to where we want them to be.

And growing policies in force, if you don't have the margins where you want them to be, doesn't seem like a healthy proposition to us.

But we think progress, it's gotten better.

And what you'll see is the policies in force, reductions will slow.

And it will abate and begin to grow at the back part of the year.

I will encourage -- I know you all know this.

But let me just say this.

Substituting a higher net income policy for a lower-net income policy in force is a good thing to do.

So one of the things that strategic risk management has enabled us to do well, is get the appropriate rate for the appropriate risk in many more locations around the country.

So as we substitute, and as you see the nonstandard PIF be reduced, be reduced and on a 2-1 basis, maybe we're adding an increase in standard auto policies, that's good news from an earnings standpoint.

And that's much of what we have been trying to do.

You will see policies in force begin to grow towards the back part of the year.

Okay.

That makes sense.

And as a follow-up on the investment income, pretax, it was a little lower than what I was looking for.

And I was trying to understand in Bob's comments, did you shift to more tax-exempt investments?

Or is there something else going on there?

No.

There's two things that drive investment income.

And I'm sure you've heard this in all the conference calls.

Yields are going down.

As yields go down, you have a couple of things you can do to offset it.

You can change your risk profile, which we're not anxious to do and won't do, and/or you can generate more cash and have more dollars working for you.

We had a slight difference in our EMA, or private partnership, income in the fourth quarter of this year versus the third quarter and maybe the same periods last year.

But that's really a very minimal mus amount.

We haven't made a wholesale shift or reallocation of our investment portfolio.

And so what was the average year this quarter versus the third quarter?

You know, I do not know if -- we'll come back to that and look it up and give you an answer in just a moment.

Okay.

Thank you.

And our next question is from Adam Clobber of Cochran Corrania.

Please go ahead.

Good morning.

Can you talk about the sustainability of the loss ratio, ex-catastrophes, homeowners and standard auto.

Homeowners at 46 seems pretty low.

Standard auto, if you take out the reserve increases at around 72, seems like that's where it's been running.

Is there potential improvement in the standard, I guess is the question?

And is homeowners a little lower than average for this quarter?

I would say there is still improvement on the horizon in the standard auto.

The loss ratio.

And we're delighted with homeowners loss ratio for the fourth quarter.

We want that number to stay there and get better.

That number is the combined ratio for standard auto, for homeowners, and the loss ratio.

It is so susceptible to what happens with catastrophes that you need to run that at a pretty low number in order to make sure that over some continuous period of time, you're generating returns in that 13 to 15% range.

So in both categories, we're not quite where we want to be yet, but we sure like the direction.

I would also hearken back to my comment to, I think it was Brian who asked the question --

I think people have to get used to seeing lower combined ratios because companies have to make more of their returns and income on the insurance side, as yields continue to drop on the investment side.

You know, if our -- if the yield on a portfolio went down by some 35 basis points net after tax, that will continue for a couple of years, because the stuff that's invested at 7% and 8%, that's expiring and running off and being reinvested at much lower rates.

So we need to -- if the industry wants to continue to generate acceptable returns, you're going to see lower combined ratios than we have been used to over the last period of time.

Thank you.

Bob, you got the answer on the average yield?

Yeah.

The portfolio pretax yield in the fourth quarter was 5.3% and and third quarter, 5.7%.

And one other comment on the loss ratio for homeowners quarter for the fourth quarter.

Fourth quarter tends to be the best quarter.

So it typically is lower than the others.

Thank you very much.

Sure.

And our next question comes from Greg Peters of Raymond James.

Please go ahead.

Good morning, everyone.

I have one question and one follow-up.

Can you talk about the advertising expenditures in 2002 versus 2001?

And also what you're budgeting for 2003?

Yeah, they were -- advertising and expenditures were up modestly in '02, largely in the back part of the year, versus '01, as we got the margins in many of our local markets, where we wanted them to be.

And you will see us increase that in '03.

We like the margins in many of our states and in many of the local markets within those states.

And we will take advantage of advertising in order to help grow our policies in force.

Now, advertising, as you know, Greg, is a big word.

It is national advertising that you may see and compared to others, it is direct marketing.

It's support for our agencies, as they attempt to market to customers that we already have in force.

But you will see us spending more money on marketing and on advertising in '03 than we did in '02.

And '02 was up over '01 with much of the increase in the back part of the year.

Okay.

The follow-up question would be dealing with the combined ratio.

I guess it comes in two parts, unfortunately.

But your old target was 95 to 98 at expected cats.

You seem to be suggesting by your comments, given the low-interest rate environment, that that target may have changed.

Could you give us guidance there?

And on the 2003 guidance, is that at-expected cat comment, is that a 4 to 4 1/2% of earned premium?

Yeah.

I think cats typically are about 4.8 or so. 4.8 points of earned premium.

And that's what we would refer to as normal.

Yeah, I do think the -- to the first part of your second question, we typically have looked for in 96 to 98 combined ratio.

We're probably going to look on balance, weighted to reflect the fact with the homeowners, we're going to look at a slight improvement on that.

Which we need to get in order to generate returns on equity in the 13 to 15% range.

Thank you.

And our next question is from Paul Lusom of AG Edwards.

Please go ahead.

Good morning.

I had a little bit of a broader question.

In the past, Allstate has talked about trying to get ahead of some of the mold claim type stuff, I think the example being arsenic and pressure treated wood and such.

And I just love to have an update as to whether or not we are -- you're seeing any of these kind of specific problem-type claims emerging any other place, now that the mold seems to have been kind of fixed?

No.

I would say we are not.

We don't see mold cropping up in any meaningful way in other areas.

I would remind everyone that Texas was somewhat of a unique state because of the policy form required by the department of insurance, which excluded the words "Sudden and Accidental."

Those words are in the policy form in most other states.

And we are changing our policy forms to have mold exclusions in them in most places.

So, you know, if -- Paul, if your question is, are there mold-type things, not mold specifically, but mold-type things that we see cropping up in the numbers, I have to tell you we don't see anything like that.

That's good.

Thanks.

And our next question is from Nancy Benichi of McDonald Investment.

Please go ahead.

Good morning.

I apologize if you covered this in the first couple of minutes, I wasn't able to log on.

Could you give us a little more sense of the California environment and how you're dealing with that today?

Some litigation has been out there against your firm; and also, if you're not getting the rate adequacy there, how much do you intend that you're going to be shrinking your book?

Nancy, whatever is out there is really diminutive There is no issues in California that we are worried about.

Rate adequacy, we want to keep working on it.

We are talking to the state of California, perhaps, about a separate -- about a separate company, which helps the regulators in the state to understand that, you know, there's only a finite amount of capital that we're prepared to devote to California.

California is a big state, you know.

You have to make it in that state.

If you can't make it in California, there aren't enough North Dakotas and South Dakotas, and Nebraskas to offset it.

So we have to work hard to make it work in California.

I don't know that the book will shrink much beyond where it is.

Maybe a little.

It's a complicated state because it is essentially a modified take-all comers state.

So I would liken it, not as severe, but maybe where we were in New Jersey four or five years ago, where we were hard-pressed to make a buck.

And we've done very well in the state of New Jersey over the last few years, indicating our resolve to take that problem.

And we think we can do it in California.

I think your comment on litigation, maybe it was a Department of Motor Vehicle issue we had with an employee calling up -- claims employee calling up a file that he shouldn't have.

We believe that's a relatively minor issue.

We are cooperating with the Department of Motor Vehicles and should have that behind us quickly.

Okay, and just sort of a broader question, your assumption that you're at near rate at this point, and the ability to pick up units in the markets where you want, what's your overall sense of where you see your major competitors out there with their rate activity as you move through the year?

You certainly indicated where you think Progressive is versus what you're doing.

But some of the other bigger players?

Can you just comment there on what you're seeing?

You know, I think there's a number of the larger competitors who still have a fairly large move to make in order to get the combined ratios down into acceptable levels, and in order to generate acceptable returns.

We are pleased that we saw some of the trends early and that we moved aggressively.

And we think that with the use of strategic risk management, and as our competitors now have to raise rates more dramatically, we think it's going to put us in a very strong competitive position.

One reason why I always make the comment on the expense ratio, that expense ratio is very low, particularly in the Allstate brand.

It's right on top of, let's say, where Progressive is, it's got a different model.

So as long as we continue to make progress driving our expense ratio down, and we have good, strategic risk management working for us that enables us to get the right rate on the right risk, we should be competitive with anybody in the marketplace.

And we think that is exactly what will develop over 2003.

But your overall scenario and your rate forecast, per se, or guidance for '03, does imply the fact that your major competitors will still be putting through significant rate increases?

Oh, yeah.

I absolutely think they will be.

Yes.

Our next question is from Ken Zuckerburg of Razard Asset Management.

Please go ahead.

Yeah, good morning.

And welcome back, Dan.

Thank you.

Thank you, Ken.

I was just thinking the price of D&L coverage has got to be better than the last time around.

Maybe you could help us out with that.

Certainly.

Greenburg would tell you that.

I actually wanted to talk a little about the life company if I could.

Sure.

Appreciate the disclosure on the guaranteed minimum death benefits, but I know the GMIB income benefit is an issue that seems to be emerging kind of slowly.

So I wanted to get your thoughts on where you are on that.

And importantly, what is the process both in terms of internal and external controls that you guys are using to continue to gauge in the money income and death benefits?

Second question is, if you could also just comment on American Heritage a little bit, the health of the goodwill asset and update us in specific sales or other trends at that subsidiary?

The -- perhaps the most relevant statistic in relationship to your first question, I think the death benefits in the second half of the year were maybe 30 million dollars and the first half of the year were maybe 20 million dollars.

I think those are good looking numbers.

We don't see any numbers escalating here.

As you know, there are SAFC requirements that starting in '03-'04 that you book reserves for these kinds of things.

We're hard at work, trying to figure out exactly what that all means.

We don't see escalation in that whole area, Ken.

It's been relatively calm.

We, like many of our competitors have modified I think appropriately what we're offering in terms of guaranteed minimum death benefits and income benefits on current current sales and products.

I think this is really in hand at Allstate.

With respect to AHL, our sales of the product continue to do well.

The Allstate agency force has taken to the product nicely and recognize that it say product that is in many cases particularly suitable to the kinds of customers we have.

So we feel pretty good about the prospects of that business.

We need to improve the margins and profitability of that business.

And that can be done partially through rates, and partially through expense control.

But we're very optimistic about the prospects of that business in our hands.

Thanks very much, Ed.

And our next question is from Peter Monacle of Tudor Investments.

Please go ahead.

Good morning.

Thank you all for your time.

Bob, you characterize the underlying trend of the business as 87-88, 89 cents a quarter.

Also on the call, you folks said you expected some further combined ratio improvement.

And notwithstanding the fact that there may still be some reserve additions for discontinued businesses in the future.

If I can put it simply, you think of a further combined ratio improvement, perhaps driven mostly by homeowners on the one hand, yet some reserve additions for the discontinued on the other as offsetting each other, we're annualizing at 350-ish, why the 320 to 340 guidance?

I think the operative word there may be the simplistic, the multiplying times 4.

And Peter, I don't mean to insult you with that comment.

You know, 320 to 340 is what we're comfortable with right now.

We'll wait to see as the year unfolds, wait to see what happens with catastrophes.

There is nothing on the horizon that we aren't fully reserved for as much as we did last year.

As we got more comfortable as the year unfolded, we raised the increase.

Raised the estimates.

If that's appropriate, we'll do it throughout 2003.

Would it be fair to ask, Ed, do you have a level of confidence that, of course, is always subject to cats, given what you just said, it would be ore likely than not that as the year unfolds, there might be a bit of a bump to what you expect to earn in '03.

I have an extraordinary level of confidence that normal cats will be between 320 and 340 this year.

Separately, if I may.

On share repurchase, 500 million was what was announced.

Refresh my memory, please, on the time frame in which you expect to complete it.

Three years.

If top-line growth is a bit of a challenge, you know, given the constraint the in the bigger states, given the level of cash generated by the company -- and frankly, free cash -- can we expect the 500 to be completed well inside the time frame outlined with a follow-on shortly thereafter?

Peter, I'm going to stick with the three-year forecast.

But your question is a really good one.

Let me see if I can break it down.

The reason the share repurchase program that the board authorized was, quote, only $500 million, was that as we looked at the landscape, we are more confident about our ability to grow our company right now than we have for quite a while.

Our company over the couple of years has repurchased 7 plus billion dollars of its shares because we were generating good cash and didn't like the prospects for outsized growth.

I believe that situation has changed.

So what we wanted to do with the $500 million share repurchase program was to say, listen, there may be times of period of weakness, depending on the market, and war with Iraq, God forbid if there would be another terrorist event.

You need to have dry powder that you could respond to the [INAUDIBLE] of the moment.

We want to be in the position to do that.

That's the message with the $500 million, the repurchases.

That's one of them.

Second message is, it is smaller than what you've normally seen us do, because we think the growth prospects for our company in this industry are better than what they have been.

If that turns out not to be the case,sure, then you revise things and make adjustments as you go.

Thanks so much.

Sure.

And our next question is from Don Taylor of Royal Tutta.

Please go ahead.

Yeah, my question had to do with your nonstandard business on the Allstate side.

Your loss ratio was very impressive.

And yet, you say you don't expect the business to grow.

And in fact, it declined a little.

Could you talk about the three states, and that in the environment you see in Texas, Florida, and California?

And also, is there enough business elsewhere to enable you to grow that business?

Yeah.

Florida, New York, has some PIF issues that can be a little more intense on a nonstandard book than they are in some of the other books.

And you're right.

It's a big country.

You know, we operate in 49 states, everywhere except the Great Commonwealth of Massachusetts.

But boy, if you're got the brakes on in California and Texas and parts of New York, you know, that's where all the people are and that's where all the cars are.

So it's very hard if you have the brakes on in those states to make it up in some of the smaller locations.

Second, what we are trying to do is attract to our company, those people who value what we are.

We're a company that sells multiple property casualty products.

We want to be able to sell a customer multiple products over time.

That's generally easier to do and more profitable to do in the various tiers of the standard business than it is in the nonstandard business.

Now, we like the nonstandard business.

And you'll hear us talk in the future about growing the Dear Brook business.

It is nonstandard.

It's in the I-Vantage channel.

We think there's opportunities there, but it's going to take a while before we have everything lined up to where we want it to be.

You should not assume that we do not want to take advantage of it.

But we want to get the pricing right and the margins right, and to attract the standard customer to our business who tends to stay with us longer, renew at a higher rate, and buy multiple products from us.

But we'll get back into the standard business at the right time and in the right way.

Are you saying in the Allstate side of it that your appetite for non standard isn't that great or do you think it pales by comparison in the standard?

It pales by comparison.

You know, Don, we want to have a price and a product for anybody who walks into an agent's office.

That's what we want to do, and that means we've got to take care of the non standard things.

But we think the opportunity on the standard side, particularly for a full-service provider, is much greater.

Okay.

That's very helpful.

Thank you.

Jason, in order to keep to our time frame, we're going to take one more question.

Thank you.

And our final question today is from Michael Lewis of UBS Warburg.

Please go ahead.

Finally.

I'm just going to follow-up on the last question.

I'm still at a little bit of a loss of a growth in the number of factors.

Can you break out what percentage of your business comes from California, Texas, Florida, and New York?

What's your growth in PIF, excluding these four states?

Where do you stand in these four states as far as getting to rate adequacy and what's's been the trend of these rates in these states growth-wise, and why aren't you getting more business, if some of the other major competitors are pushing for rates aggressively and you write homeowners and auto and some of your competitors write auto?

Shouldn't there be a spillover in your business?

And shouldn't there be better growth here?

Michael, that's a heck of a question.

Let me see if I can take it in its parts.

California, Texas, and Florida probably accounted for the bulk of the PIF reduction.

I'm going to think we're about flat without those three states.

We will grow in those states, Mike.

And this is kind of the second quarter in a row you've asked me a similar question.

Our mix of business will look a lot like the population mix.

California is probably 15 to 17% of our overall business, and New York and Florida and Texas would be about proportionately equal to it the population of business, which is a convenient way of thinking about it.

We will grow in those states, particularly as our competitors in those states have to take what we think are substantial increases.

State of California, we want to be prudent.

Our margins are not what we want them to be in California.

We have a new rate plan pending before the Department of Insurance.

When and if that gets improved, we think it will give us more opportunity to grow in the segments that we want to grow in.

We recognize that to grow our business, and we do want to grow it, we will grow it, we need to be competitive in those three or four major states.

We have marketing plans that are being put in place.

We have some risk management plans, rating plans, which should enable us to do that.

Okay.

And just as a quick follow-up, then, if you're being so prudent and not growing in places you can't get the margins, to tell you the truth, I'm a little disappointed in your Allstate standard auto underwriting results.

I mean, quite frankly, in the past, you used to run those at 80, 90, 91% combined.

And if you're being prudent in these four states, I'm surprised you're only doing 96 right now.

There is the opportunity to drive it down.

I mean, we will get better on those combined ratios.

I guess that's all we can ask for.

Thanks so much, guys.

Thank you.

Should we wrap up, Bob?

I think so.

Thanks for joining us today.

As always, Phil, Larry, and I will be by the phones to answer any of your follow-up questions.

Have a great day, and we will talk to you next April.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

And you may disconnect at this time.

Have a good day.