Allstate Corp (ALL) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation first quarter 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 would now like to introduce your host for today's conference, Mr. Robert Block .

Mr. Block, you may begin.

Thanks, Jamie.

Good morning and welcome to our first quarter 2003 earnings conference call.

On hand with me today are Ed Liddy and Dan Hale, and together we will discuss our results for the first quarter and then take your questions.

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

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

Once again, we've included an exhibit in the supplement containing most of the operational numbers I normally provide during the call.

We also are trying out a new format for the press release.

We would appreciate any feedback you might have on this format change.

If you need a copy of the release or the supplement, they are available on our website under "investor relations."

Now it's 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 forward-looking statement and risk factors effecting Allstate section in Allstate's notice of the annual meeting and proxy statement dated March 28th, 2003 and today's press release.

In this call, we will discuss some non-GAAP measures.

You can find the reconciliation of those measures to GAAP measures in today's press release on our website.

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

It is not for reproduction or rebroadcast by any other party without the prior consent of Allstate.

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

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

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

Now let me turn it over to Ed, who will provide his perspective on the quarter as it relates to our overall strategic intent -- Ed?

Good morning, all.

Thanks for joining us.

It's hard to believe we're doing this again already.

It seems like we were just talking about fourth quarter results a few days ago.

But much has changed, in fact, since we last talked to you.

We've all been affected in some way by the war in Iraq.

We have nearly 40 Allstate employee reservists that have been called up for active duty, and I'm sure many of you are in similar positions.

We all hope for a very satisfactory resolution to this conflict and the safe return home for all involved.

It clearly looks like we're heading in the right direction.

There are some things that have not changed at Allstate.

We remain focused on our strategic intent to become bigger and better in our property/casualty operations while becoming broader in financial services.

The first quarter's results are another affirmation of our ability to execute.

In short, we had an awesome quarter.

Our focus on improving the quality of our book of business continues to produce dramatic profitability improvements.

We posted net income of $665m or 94 cents per share in the quarter.

We generated operating income of $673m, or 95 cents per share.

That's a 40% increase over last year.

That improvement was driven largely by a $370m increase in our property liability underwriting income.

Our combined ratio improved over six points to 93.1.

Our actions to improve underwriting profitability are not only on track but in some cases are exceeding our expectations.

We fully expect combined ratio improvements will continue in future quarters.

Back in late 2001, we said that within two years, we would bring the Allstate brand homeowners combined ratio back to our targeted return levels, and we have done exactly that.

With a loss ratio excluding CATs at 47.6%, the combined ratio at an expected level of catastrophes is now below 90%, second very strong quarter in a row for this business.

The acquired business within the I-Vantage book posted a combined ratio just over 100.

It was about 100.5.

Clearly on pace to achieve underwriting profitability by the fourth quarter.

In fact, that last year's first quarter CAT levels, the encompassed business would have been below a 100 combined ratio.

Our core lines of standard auto and homeowners showed signs of improvement in top-line growth trends for both premium and units.

We continue to have pricing power.

We continue to seek and get rate increases as appropriate in order to gain and sustain rate adequacy.

Loss cost trends helped in the quarter as frequency continued to fall and severity increases were modest.

The Allstate brand has achieved targeted profitability in most states, and we plan to increase marketing and advertising expenditures, invest in agency productivity such as new sales and retention, while continuing the implementation of our very successful strategic risk management practices.

Sales of Allstate financial products through the Allstate agency system increased 46% in the quarter after a truly great performance last year.

And from an operating income perspective by resetting the clock on our reversion to the mean return assumptions, we've reduced the likelihood of any future DAC unlocking for Allstate Financial.

Based on our first quarter results, the strong underwriting performance and the improved quality of our book of business, we're increasing our 2003 forecast for operating income.

We are forecasting operating income per diluted share in a range between $3.35 and $3.50.

That excludes restructuring charges and assumes the level of average annual catastrophe losses used in pricing.

Those are just a few of the highlights from the quarter.

I'm absolutely convinced that we are on the right track with our strategies, and our execution has been superb.

We're genuinely excited about our prospects.

I'll turn it over to Bob to fill in some of the details for the quarter -- Robert?

Thanks, Ed.

We reported operating earnings per diluted share of 95 cents for the first quarter, an increase of 27 cents from Q1 2002, and a sequential increase of about 8 cents from fourth quarter 2002.

Of the 27 cent increase from the first quarter of last year, the difference in prior-year reserve re-estimate accounts for about 19 cents.

Increases in average premium in excess of loss cost trends and expenses was worth about 20 cents with an offset in Allstate Financial for the DAC unlocking worth about 8 cents.

On a sequential basis, the increase from last quarter was driven by lower prior-year adjustments to reserves, and average premiums increases in excess of loss cost and expense trends partially offset by the DAC unlocking.

In general, the strategy is designed to improve the profitability of our core lines continues to exert a positive effect on our financial result.

The overall combined ratio for the quarter was 93.1%, a decline from last year's first quarter of 6.1 points.

The loss ratio fell 7.4 points as we had less need for prior-year reserve strengthening this quarter, and the impact of rate increases that more than offset loss cost trends was reflected in our financial results.

The expense ratio rose by 1.3 points, fueled primarily by increased employee-related costs such as pensions and incentives, as well as additional marketing costs and charitable contribution.

We will continue to increase our marketing spend over the course of this year in order to accelerate profitable growth.

All in all, it was a very strong quarter reflecting the solid execution of our strategies.

Now let's turn to Allstate protection and review those trends.

As a reminder, many of the details we use to review on these calls are now contained in the investor supplement available on our website.

I hope you find this helpful in your analysis of our trends.

Let's start with I-Vantage.

I-Vantage, as you may know, is comprised of two separate brands.

Encompass , which is the acquired business from CNA, and Deerbrook , an auto only company, both selling products through independent agencies.

Net premium written grew 7.4% over the first quarter of 2002 on the strength of our expansion into non-standard auto through Deerbrook.

While still small, Deerbrook's growth is impressive and is confined to those states in which we have appropriate technology and rating plans.

The Encompass business, the acquired business from CNA, grew 2.4% over first quarter 2002 as we continued to take the necessary rate action to bring this business to acceptable return levels.

For the quarter, I-Vantage posted a combined ratio of 101.5, an improvement of 3.5 points from last year's first quarter.

Considering that much of Encompass's business is concentrated on the East Coast, where many of you experienced firsthand some significant winter weather, the underwriting results were very encouraging.

We continue to make progress on our goal of underwriting profitability by the fourth quarter 2003.

For the larger Allstate brand, let's review the trends by line to get a flavor for the rhythm of the business.

Standard auto's growth rate accelerated to 4.7% from 3.6% in fourth quarter.

The sequential decline in policies in force was .7%,slightly better than the fourth quarter.

However, there are signs of growth beginning to emerge as 23 states showed positive sequential growth in the quarter.

New business remains down compared to prior year, but was up when California, Florida and Texas are excluded.

More importantly, retention is improving as we expected, up .2 of a point in the first quarter of 2002 and .7 of a point sequentially.

Finally, we continue to obtain the necessary rate increases to achieve our targeted returns.

During the quarter, we received approval for and put into effect annualized rate increases averaging 7.3%.

These actions affected 18 states.

It is this disciplined approach to gaining and sustaining rate adequacy that help us generate profitable growth over time.

From a profitability perspective, standard auto's loss ratio improved in the quarter almost three full points from the first quarter of 2002 to 71.5%.

Frequencies continue to decline and severity increase remain modest, allowing the impact of rates to come through the P&L.

Allstate brand non-standard auto remains in a retrenching position with declines in net premium written continuing while the profitability of this business stays strong.

These trends are not expected to change in the near future.

Allstate brand homeowners trends remain positive with net premium written growth of over 10% in the quarter compared to the first quarter of 2002, and a large improvement in the loss results with an excluding catastrophe loss ratio of 47.6%, almost 29 points better than the first quarter of 2002.

We have put the negative effects of the Texas (inaudible) situation behind us as we now have new policy language on virtually the entire book in that state.

We continue to take rates as needed in order to keep this important line profitable into the future.

In the quarter, we implemented annualized rate increases in 12 states, averaging 8.6%.

Property liability investment income increased about 2% from both the first and the fourth quarters of 2002.

Strong new money trends are helping to offset the impact of declining yields on the portfolio.

The new purchase yields for municipal bonds have not fallen as much as the new purchase yields on taxable fixed income, which has also helped.

The net investment income from partnerships was $11m this quarter, $6m more than the first quarter 2002, but $2m less than the fourth quarter of 2002.

The effective tax rate in the quarter was 16.2%, and the duration on the fixed income portfolio for property liability remains about 5.6.

Shifting to Allstate Financial, total premium and deposits fell 10.5% in the quarter from last year as variable annuities and the sales of institutional products declined.

On the positive side, new sales of financial products by Allstate exclusive agencies increased 46% over the first quarter of 2002, and the overall sales of fixed annuities were up by a similar percentage.

Operating income dropped to $82m as we took a $53m after-tax charge for accelerated amortization of deferred acquisition costs, or DAC, as a result of significantly lowering the future rate of return assumption on funds supporting our variable annuity contracts.

The key outcome of this action is that by resetting this assumption, we have substantially lessened the possibility of additional VA DAC unlocking in the future.

Beyond that adjustment, operating income was slightly less than the first quarter 2002 due to adverse mortality margin offsetting some favorable investment margin.

On a forward-looking basis, we still believe the run rate for this business to be in the mid 140's per quarter.

Now let me turn the mic over to Dan for comments on capital and the balance sheet -- Dan?

Thanks, Bob, and good morning again.

I'd like to begin by repeating some of the comments that I made recently to a number of analysts in response to questions about my due diligence on Allstate before joining the company back in January.

As you can imagine, in an industry where balance sheets and reserve adequacy have been questioned by analysts and rating agencies alike, and particularly in the current Sarbanes-Oxley climate, I made a substantial effort to be as thorough as possible in my due diligence both before and after joining the company.

And I can assure you that the longer I'm here, and the deeper the dive I've been able to make into the details, the greater my comfort level and conviction that Allstate has a very high quality balance sheet as evidenced by our credit ratings, and our reserves definitely pass the adequacy test with flying colors.

I'd like to expand on our comments about the Allstate Financial DAC reset.

I should begin by pointing out that even before the DAC reset this quarter, Allstate Financial had one of the more conservative DAC policies in the industry.

Our Allstate Life Insurance Company DAC to book value ratio was .46, compared with an average ratio of .72 for the 17 major public life companies.

As described in the press release, we perform our annual comprehensive evaluation of assumptions used in our DAC amortization models for all investment products during the first quarter of each year.

During this evaluation, we concluded that the cause of the sustained poor performance of the equity markets coupled with an expectation of only moderate future performance, we then concluded that it was no longer reasonable to assume that variable annuity fund returns would average 3.25% during the five-year horizon used in our reversion to the mean model.

As a result, we unlocked our DAC assumptions as of March 31st for all investment products.

And we reduced the future equity fund return assumption during the five-year reversion period from 13.25% to our long-term assumed return of 8% after fees.

Now, some analysts sometimes refer and use different terminology in referring to the DAC reset.

Sometimes they refer to it as fresh start, as resetting the clock, as resetting assumptions or as starting over, but at any rate, going forward, we will continue to use a five-year reversion evaluation process including two prior periods and five future periods with an assumed long-term return after fees of 8%, a reversion to the mean floor of 0%, and a revised lower cap of 12.75%.

Importantly, as Bob indicated, by resetting the clock on the reversion to the mean assumption, we have significantly reduced the likelihood of future DAC unlocking.

Now turning from DAC to the other side of the balance sheet to prior year reserve development -- in the first quarter of this year, we recorded reserve re-estimates of only $45m compared with $253m in last year's first quarter.

And $34m of those revisions this year represented asbestos reserves for two new bankruptcy situations.

We received new information during the quarter concerning two manufacturers in bankruptcy that have reached agreements to establish trusts to settle their asbestos liabilities.

In both cases, we're now fully reserved up to our limits of exposure.

Our book value at the end of the quarter increased $1.76 or 7% from March of 2002, and it was up 67cents or 3% from year-end.

Our return on equity using a rolling 12-month methodology and without adjusting for unrealized capital gains, that GAAP ROE was 9.8% compared with 4.4% last year at this time.

And the operating income ROE, again using a rolling 12-month approach, but after excluding unrealized capital gains from average equity, that operating income ROE was 14.8% versus 9.2% last year.

We're showing both calculations, the net income GAAP ROE and the operating income ROE in our press release to be consistent with a number of other companies as well as to demonstrate that we're already performing within our targeted return range after adjusting for capital gains and losses.

During the quarter, we repurchased 1.7 million shares of our stock at an average cost of $31.53 per share.

That represented 54m of the 500m repurchase program that was approved by the board of directors in February this year.

As a result of all of our share repurchase programs to date, our outstanding shares now represent only 78% of those originally issued.

Finally, before turning it back to Bob, just a caution that we would not advise banking the favorable impact of the light CAT losses in the first quarter or otherwise annualizing first quarter results for that matter.

The second quarter has historically been the worst quarter for CAT losses, and there have already been a number of declared CATs in the first couple weeks of April.

And as Ed said, we'll be increasing our marketing and advertising expenditures over the balance of the year.

Now I'll turn it back to Bob.

Thanks, Dan.

Jamie, if we could go to the Q and A session now?

Thank you.

Ladies and gentlemen, if you do have a question at this time, please press the number 1 key on your touch-tone telephone.

If your question has been answered or you wish to remove yourself from the queue, please press the pound sign.

One moment for questions.

Your first question is from Nancy Benacci from McDonald Investments.

Good morning.

Wanted to drill down a little bit further on the policy in force numbers that you have in the supplement here, and as we look at the fourth quarter number down a 10th on a sequential bases and down .7 certainly an improvement, but could you give us a little more detail regarding California, Texas, and then the comment on Florida, sort of more the magnitude of how much is really going on with those three states in particular, and then along with that, maybe more clarification of what the impact could be in the second half of the year?

Hi, Nancy, it's Bob.

Hi, Bob.

In terms of isolating California, Texas and Florida, the PIF declines in those two states are beginning to slow down.

Florida continues to decline as we've indicated, that's probably our toughest profitability issue of the major states.

Even excluding those states, the overall PIF was down about .7, as we said, but it's slowing down and actually it was down a little bit less than it was in the fourth quarter, so PIF is kind of a rolling number.

It operates in curves, so it will take time for that to move, and it doesn't make dramatic moves.

But it's going in the right direction.

In terms of looking forward to the second half, we've indicated that we think by the end of the year, we'll see sequential growth in units.

We're making progress in California.

I think you know the DMV issue is behind us, we have a new rating plan and a new company on file in California.

We've had good dialogue with Jerry Mende , the commissioner, and the department, and we're looking for some good things out of California in the very near term.

And what about Florida in terms of sort of - I think that was the one that you pointed out here, and the tax was still continuing to decline.

Has that been a significant drag, even if it's a little bit less, is it still pretty significant?

It’s not significant but it's a big state, as you well know.

It's kind of a tale of two cities in Florida.

We have good profitability and good prospects in the northern part of the state.

We have some PIF and fraud issues in the southern part of the state.

When you put them together, the results don't give us the kind of profitability that we like.

We have steadfastly over the last couple of years stuck to a policy which I think has worked very well.

We're going to grow in those states where we have adequate pricing and we have good margins.

We are not yet there in Florida, although we've had some good dialogue with the commissioner down there also, and we think mid to the end of the year, we should begin to turn that one around as well.

Great.

Thanks very much.

Next question is from Jeff Thompson from KBW Inc.

Thanks.

My first question is just focusing on the Allstate brand non-standard auto.

The premium growth is down 15%, and if you look at the loss ratio comparison year over year, it's the only line that's really flat.

Can you describe the problem there and how it's being addressed?

Yeah, there are, I think, two parts to your question.

First non-standard auto business, we did not like the profitability of.

About 18 months ago, we have been shedding policies in force, trying to get that business profitable.

We now have.

We've set our picks, our severity picks for 2003 at a higher level than we did in 2002,and that's why you see an increase in that loss ratio.

That may or may not prove to be what we need to do.

We just would prefer to be conservative on that line in the first part of the year and not have to make any adjustments later.

What drove that decision?

Looking at some PIF trends in states where we still have a very healthy book of business.

New York and Florida in particular.

We simply don't want to wake up in the middle or end part of the year and find out that we have a reserve issue at that line.

Ok.

Good.

And then the follow-up question, can you give us a view on how you'll spend the advertising dollars, you know, what's your marketing strategy, and I don't know if Tom Wilson is on the call or not, but I'd like love to hear from him as well.

He is not on the call.

Dan, Bob and I do these calls pretty much ourselves.

Not sure yet, Jeff, is the short answer.

It will be comprehensive.

We'll do a fair amount of direct marketing which we have found to be -- to get pretty good response from.

It will be more local advertising as opposed to national in scope because there are some locations around the country, increasingly more and more, where our margins and our pricing are just fine, so we really do want to grow.

We'll probably have some more details for you on that in the second quarter.

The important thing, I think, is -- to take note, is that we did start in the fourth quarter of last year and continued in the first quarter of this year to beef up our marketing and advertising presence, and we'll continue to do that throughout the year.

Ok.

And just a quick follow-up on that question.

Would the expense ratio guide be sort of 24% this year in light of this change, or is it too early to say?

I think it's too early to say.

I think a number roughly where we are right now is probably appropriate.

As Bob pointed out, the expense ratio -- you know, our goal over time is to get that expense ratio down to 20.

But there are times when you have to invest in the business.

This is a great time to invest in the business.

We really like our prospects right now.

You can't get that growth unless you invest in the business, and we want profitable growth, not just any kind of growth.

But that number, that expense ratio also includes some things that we've mentioned in our past calls.

Clearly, our pension expense is up a fairly material amount for the year.

We've begun to reflect in our expense ratio provision for that.

We are expensing our stock options.

We now have a profitability bonus with our independent -- with our exclusive agencies, and as they drive better profit performance, we share some of that result with them.

That shows up in the expense ratio.

So a whole lot of things go into that number.

I'd guide you towards ratios about where we are in the first quarter.

Ok, great.

Thank you very much.

Our next question is from Ron Frank from Smith Barney.

Yes, good morning.

I have a question and a follow-up.

First of all, in the Allstate brand auto frequency and severity, although they're still favorable, at least in one quarter trends they seem to have -- for the time being, I don't know how to put it, peaked or gotten less good or whatever you want to call it, the rate of decline and frequency was less than in the previous quarter, and severity increased although modestly at a slightly higher rate than in the fourth quarter.

I'm wondering you know, if there is an indication here that -- is there some kind of negative inflection point there, and if so, what are you anticipating in your pricing regarding the PIC comment that you made for homeowners?

Ron, I think you're over thinking the various quarter to quarter vacillations of the variances.

You're still seeing frequency decline, you're still seeing severities on the auto side increase very, very modestly in the 1% or so range on the B.I., the 3 to 4% in the physical damage side.

Which we are fully recovering in our pricing.

Absolutely.

In terms of pricing indications, we're building in those kinds of loss cost trends.

We're not anticipating as much as the continued decline in frequency, just because that's a more conservative approach on the pricing side.

Okay.

So you're already anticipating in the pricing some moderation in the frequency gains, if I heard you correctly?

That is what we're looking at in terms of pricing.

Ok.

And on the homeowners -

Our experience continues to be very good on a -- we saw no inflection point.

And the PIC comment was not about the homeowners line, it was about non-standard auto.

Ok.

Sorry.

With respect to the homeowners, the rate of average premium increase declined precipitously by about half from fourth quarter to first.

Does that -- is that a direct reflection of the fact that the profitability has been gotten to your target ahead of plan and the rate needed decline by a similar amount?

One of the reasons that that happens is we're starting to cycle through on some of the very large rate increases we took last year.

The change in Texas with the new policy language also has an impact on the average premium there, and, quite frankly, our customers, as I'm sure they are doing for many companies, are starting to self-insure by raising their deductibles.

All of those things work into it.

What in effect is happening, however, is that we're still getting an increase and the profitability is continuing to improve.

So then it wouldn't an oversimplification to say that the rate of increase in average premium at this point somewhat understates what's going on in rate?

I'm not following you.

Well, I guess what I'm saying is a part of it reflects higher deductibles.

The comparison I made overstates what's happening in the underlying rate per unit of risk, if you will?

I think that's true.

Ok.

Thanks very much.

Your next question is from Robert Glasspiegel from Langen McAlenney .

I got a statement and a question.

The statement is I think your disclosure and new information and format is great, and I would stick with it.

Although again, I would editorialize that if you get up before 6:25, but if you get closer to the Intel, IBM, Microsoft 4:15, I could do a better job of thinking about the numbers, but -

Bob, our goal is to make your life easier.

That's right.

But if you report these sort of numbers, I guess you can report them at 9:00.

The question is, on the invested asset page that you have for P.C., I think you list the numbers at market as opposed to at cost.

Any rough sense as to what the operating cash flow for P.C. was in the quarter?

No, we don't have those numbers available at this time.

Actually we've got the -

The invested assets at cost, I can do the work.

Invested assets at cost are in the investor supplement.

I thought it was - so it's at fair value, I thought it said.

At market and at cost.

Ok.

Bob, the issue you're poking at, we have had and continue to have good cash flow generation in our property/casualty business, as you could expect with a relatively flat claims payment and really good combined ratios.

It's a source of strength for the company.

As your combined ratio gets to the mid 90's, it seems like the cash flow numbers could get to 10% of beginning assets as I model it.

Is that a reasonable sort of thought process?

I will leave your modeling to you, Robert.

Thank you.

Your next question is from Alice Schroeder from Morgan Stanley.

Your line is open.

Alice, are you there?

Hi, sorry, it's Bill Wilt .

Are you able to hear me?

We hear you.

Hi.

I apologize.

Bill Wilt calling.

Could you talk a little bit more about the impact of homeowners?

The impact of the structural changes that you've made, have you attempted to quantify the favorable impact of, for example, deductible changes and other changes that you've made?

We have not, Bill.

You know, our goal there is to in every sustainable way possible get that homeowners line back to an adequate level of profitability.

We've done that sooner than we said we would.

We've gone further than we said we would, and that includes just a whole host of actions that we've taken, not just pricing but underwriting and policy revisions, we've made no attempt to quantify what the effect or impact is of each one of those.

Is it fair to say that most of those or maybe all of those changes require regulatory approval?

I mean, the majority of the most impact full changes?

Oh, yeah.

We don't do much in this industry or any of our product lines without regulatory approval or regulatory review.

Ok.

Great.

One other question on expense.

You mentioned this being a great time to invest in the business.

Could you just expand on that comment?

You've talked about advertising.

Is there more than advertising that you envision as you -- in the term investing in the business?

Oh, sure.

We have 10 to 11,000 producers out there.

They are -- they produce exclusively for Allstate, helping those producers to add support staff, find support staff, train support staff.

That's a very, very important part of it.

Investing in our strategic risk management practice, you know, we started with SRN I, Version I, Release I, whatever terminology you want to use, and then went to II, and now we're up to II, and in some states IV, constantly refining that.

So we have more tiers, we collect more data, we have more underwriting sophistication.

That statement includes all of the above.

That's great.

Thank you.

Your next question is from Brian Meredith from Banc of America Securities.

Brian, you're cutting out.

Can you hear me?

We can now, yes.

Good.

Sorry about that cell phone.

On the life insurance side, was there any adverse mortality or anything in the quarter because X the DAC charge it looks like returns are still pretty low from a historical perspective?

Yes, there was a slight adverse mortality that -- the mortality margin relative to the increases in the investment margin, so the combination of those two were slightly negative.

It looks, Brian, like it's the typical first quarter phenomenon.

There's an analyst out that's really done a very insightful piece, I thought, on what happens to mortality margins every first quarter, and I know we struggle with trying to explain this, and many of our competitors do also, but it looks like it's a typical first quarter kind of -

Gotcha.

Next one, concerns a 120 basis point spread on your fixed annuities.

What does that translate into on return of capital?

The return on capital goal -- I'm going to give you what the goal is -- in that business is to generate about a 12% unlevered return.

Most of our pricing assumptions that we follow are put in place to generate those returns.

I'm assuming that lines up correctly.

Dan, if you or Bob can help me with a better answer on that?

Brian this, is Larry Mays .

The 120 basis points in the press release is the difference between what we credit to the customer and what the underlying guarantee rate is in our policies.

So it's not the spread we're earning.

Oh, I gotcha.

That just tells you, you have 120 basis points more to bring that crediting rate down.

The crediting rate on fixed annuities between what we earn on our assets and what we credit to our customers is about 190 basis points, and that's in the MD and A at the end of the year, and that number has been pretty much steady through the first quarter.

Great.

Thank you.

And last question on the property/casualty side, given the great profitability you're seeing right now in the auto and homeowners side, are you beginning to see any kind of regulatory pushback on pricing?

You know, Brian, we aren't.

Any time you have to go to regulators to justify rate increases, it can be a taffy pull or a tug of war, but, you know, we were both wise and fortunate to get the really large increases out of the way 12 to 18 months ago, so our increases -- we're getting what we need.

They're less substantial than they were a few years ago.

They're probably well below what a number of our competitors still need because they haven't acted as swiftly or as decisively as we have.

Gotcha.

Terrific.

Thank you.

The next question is from Ira Zuckerman from Nutmeg Securities.

I don't know if you have full balance sheet as yet, could you give us an idea of where the debt-to-capital ratio is and how much more capacity you have before the rating agencies put a kabosh on it?

Ira, Dan.

It's roughly 20% where it's been running, and the rating agents are very comfortable, actually the latest number is slightly below 19.

We think we have plenty of room to do what we're doing, and we're very comfortable where that ratio is currently.

Then you don't see any limits at this point?

No concerns expressed by the rating agencies whatsoever.

Ok.

And the other question is, in terms of the stock repurchase, how much capital do you have up at the parent company level, and how much dividend capacity do you have at this juncture?

We have enough dividend capacity to fully execute the $500m share repurchase program that the board authorized five or six weeks ago at the end of our February meeting.

You know, as a company, and Ira, I know you've been a supporter for a long time, if you look at our track record on share repurchases, we don't sit on capital or cash.

We'd much prefer to invest it in our business when we have good growth prospects as we see right now, but over the last -- pick a number -- five years, we've repurchased 7 to $8 billion of our stock including about $3 billion over the last couple of years.

We completed in the fourth quarter of last year a $500m authorization that the board granted us right after 9/11.

We'll complete the existing $500m authorization we've got more than adequate capital at the holding company level to do that, and then we'll evaluate our prospects in total and we'll do the right thing.

Ok.

Thank you, gentlemen.

Your next question is from Chris Winans from Williams Capital.

Just wondering if you could comment on State Farm's behavior in the market right now and how it's affecting your growth prospects relative to growing at the expense of smaller regional players as opposed to your brethren that are more like captive agent companies.

Chris, it's a good question.

It's a complicated question.

I would say, you know, State Farm had a difficult 2002 and a difficult 2003.

If you look at the profitability of their insurance operations, I don't remember the number -- the exact number but I'm thinking they lost on their insurance operations in a range of 18 to $20 billion, which is a pretty sizable number.

We, of course, generated underwriting income as opposed to underwriting losses.

They've had a moratorium on new business in a number of states.

The number of states fluctuates from time to time as their business conditions improve or deteriorate.

We think over time that their more difficult position is an opportunity for us.

I will tell you, State Farm has a lot of tier1 and tier 2 IFS scored customers.

We like those customers a lot.

They do not move easily or readily, but we are getting our fair share of them.

I think you know the industry states are kind of interesting.

This is not a classic oligopoly.

There are in round numbers 14 companies that sell property -- casualty insurance in the United States.

The top five companies have about a 45% market share.

So we have plenty of opportunity with the technology that we have, with SRM, with marketing dollars that we can spend with our brand name, and the fact that you can reach us 24 hours a day, seven days a week any way you want, we have good opportunity to compete with those other top five companies, but we have great opportunity to take some share at the appropriate price level from some of the smaller regional carriers.

And also in your involuntary market, where are you seeing the worst development, is that mostly New York?

Yes, you know, the involuntary market in New York dwarfs everything else.

We need rate increases on the involuntary markets.

It's a constant source of debate between us and the commissioners.

I would say in general, involuntary markets are inadequately priced, and, you know, that's a dialogue.

We get some very healthy increases, but they are not healthy enough to get us to the point where we want them to be.

But involuntary markets and guarantee funds are two of the sore points for us.

You know, we'd like those things to work better than they do right now.

Last question.

On that topic, how do you look at that in terms of a drag on earnings going forward?

In other words, those things come in sort of as a lag from prior years.

Yeah, they do, but you know, it's a relatively small piece of our overall market.

I don't have the dollars tucked away in the back of my head.

But the other things that we're doing just dwarf what's happening in the guaranteed -- in the assigned risk pools, and as I said, we've gotten as a result of our discussions with many insurance commissioners, we've gotten good rate increases, so the losses on the involuntary markets are declining, which is a good thing, but they're still losses.

And the key is to get them into a positive position, not to continue to be in a loss position.

We'll make progress on that, but it's kind of two steps forward, one step back.

Sometimes you feel like it's one step forward and two steps back, but -

Thanks a lot.

The next question is from Jay Cohen from Merrill Lynch.

Couple of questions.

First if you can give us a more specific update on California.

I guess you have a new plan filed with the state, and I'm wondering what the dialogue has been like and when you would expect to hear something on it.

Jay, the dialogue has been very good.

I have found a good course to follow is that when the wine is ripe, you can drink it, and when the commissioner and the department says, yep, all the I's are dotted and the T's are crossed, we will absolutely let everyone know that we're there.

But the dialogue has been constructive.

It is not a difficult dialogue.

There are two pieces to it.

One is an appropriate rating plan, and then two is the probable establishment of a separate company, ala Allstate New Jersey.

We are pushing on both fronts, and we'd like to hear some good news in the very near future.

But you know, it's not done yet, so to go beyond that would probably be premature.

I assume the rating plan is more important than the new company?

Yes, one is short term, the other is long term.

Ok.

Both important, but one has -- rating plan has more short-term benefits.

Longer terms that have a pot of capital allocated to a market as large and as important as California is a very good strategic place for us to be.

Yes.

And then secondly, over the next two or three years, what do you think will happen to the number of Allstate agents?

It seems that in general, it's been shrinking over the past two to three years, and is that an opportunity for growth in the business by simply growing a capable number of agents?

Jay, that's a good question.

It's a two-part answer.

The number of agents will go up over time.

It will not continue to decrease.

It won't go up dramatically, but, you know, maybe it goes up by 500 to 1,000.

But we would like our agencies to get larger and so one of the keys is how much license support staff does an agent have.

So if an agent who's a really good agent and has a good market position, if the business conditions are such in her market or his market that they can go from four support staff to six, we have the same number of agents, but the number of people licensed to sell our product could increase dramatically.

You know, it's a local market business, so having our agencies grow so that they can specialize within their agencies on acquiring new business or retaining old business or cross-line sales to other property/casualty products or Allstate Financial products, that's a really good model.

So it's a two-part answer.

One is stabilizing the number of agents that we have, and then beginning to get it to grow modestly, but the second piece is having the agencies themselves grow in size so that they have more licensed producers and we have more feet on the street, so to speak, even if you have the same number of agencies.

Great.

Thanks for the answer.

Your next question is from Paul Newsome from A.G. Edwards.

Thanks.

Just a quick question.

I would love to know a little bit more about what's going on with your annuity sales on the life side, and it looks like sequentially you had a little bit of a deceleration, and I'm surprised that the Immedia annuities have held up as well as they have over the last quarter.

Wondering what was going on there as well as the Putnam situation.

I'll give you an answer and any of my compatriots can add to it.

The sale of variable annuities is tough right now.

It's a tough market.

We only want to sell that product if we have a reasonable chance of making money on it.

Fixed annuities, boy, you could sell a lot of fixed annuities right now, but at what rate of return?

So we're very careful on the pricing margin.

What we'd like not to do, Paul, is two years from now have an albatross around our neck in terms of a big pot of fixed annuities that we sold at inadequate returns and then we can't get the returns in Allstate Financial that we'd like.

So we tend to be fairly disciplined pricers on all of our products, and particularly true on the annuity products right now.

Paul, this is Larry.

Those immediate annuities, we've got some special estate planning sales that we've done through some of our independent Lincoln benefit brokers that are opportunistic sales, so we've had good sales in that in the fourth quarter and first quarter.

I would not expect that to continue at a rapid pace though.

Just to follow up, why are the -- why is it tough to get at the moment adequate spreads on fixed annuities in your view?

Well, I think in the marketplace, you've got interest rates that keep coming down.

The competitive position is another issue, so we'd like to see interest rates go up somewhat that allows you more room.

Ok.

Thanks.

Your next question is from Alain Karaglan from Deutsche Banc.

Good morning.

First let me echo Bob Glasspiegel's comment.

Thank you very much for the improved disclosure in the supplement, but also in the annual report and 10-K, that was very, very helpful and very comprehensive.

Alain, we are blessed with a very good vice president and controller, Stan Phillips , he's got a great staff, and as soon as the SEC got more aggressive with everyone on making certain everyone reported the same stuff, we're going to lead that charge.

We're going to have good transparent reporting.

Thanks for noting it.

Two questions.

With respect to California, Texas and Florida, how far are you from your target profitability, and if you were to take a guess as to when do you think you will get there, what will your estimate be?

And on the expense ratio, the expense ratio increased to 23.9 from 22.6 last year.

Could you give us what accounts for that one point, two-point increase, how much was marketing or other components?

Let me try to do those in order.

Alain, I'm always reluctant to give guesses.

People forget that they were just guesses.

I would say I like the trend line of our discussions with the California department and the commissioner, and I think we will be sooner rather than later in a position where the California market is a more robust one for us, and we get back to adequate levels of return.

So, you know, that's six to 12months.

Texas, as you know, the legislature is peaking now.

It's a legislature that meets only once every two years.

I think the current session goes through about the end of June.

I could be a little off on that.

Insurance issues have been so prominent in Texas.

We just don't know what to expect is going to come out of that legislative meeting, and it would be folly to guess until we see what happens there.

Florida as I mentioned earlier, it really is kind of a tale of two portions.

We have some PIF issues in Florida, which the whole industry needs some legislative and regulatory help on.

Some of the fraud and PIF-related issues seem to be concentrated more in the southern part of the state than the northern part of the state.

You know, very difficult to hazard a guess when you're talking about legislatures and regulators trying to be more rigorous on the rules that they pass.

Suffice it to say, you know, we need to have good operating performance in those states because they are large and we're not going to let a day pass without working in that direction.

With respect to the expense ratio, you know, I will reiterate what the components of that increase are and I will tell you that it's more or less a planned increase.

We don't break out the specific components of the expense ratio, but that increase of about 1.1 points or so reflects a couple of things.

First, we have higher pension expenses this year than we have had in the last several years.

I think that's a phenomenon that is impacting most of corporate America.

Second, we have a number of incentive pools.

One for our agents, our interests and our agents' interests are much more tightly aligned than they've ever been, so they get profitability bonuses if they continue to drive both growth and profitability, we share a piece of that success with them.

Recording that is in that expense ratio.

When you have a good first quarter compared to the first quarter of last year, we have higher normal incentive accruals.

We try to exercise some leadership back in October and decided that we would begin expensing stock options.

A piece of that, we've begun doing that with all options that we grant from 2003 forward, so some of that is in that expense ratio.

Suffice it to say, we want to get that expense ratio down.

Our goal over time is to get it into that 20 range, but it doesn't go down in a smooth stair step kind of function.

There are periods when you really do need to invest in the business, and we're doing that now, but overtime, we want to continue to drive that expense ratio down.

To the extent we do that and we keep making progress on the loss ratio side.

We've got a business model that's as good as anyone in the business.

Thank you.

Next question is from Ron Frank of Smith Barney.

My question was answered.

Thank you.

And I am showing no further questions at this time.

Then we will close our call.

Thank you, all, for joining us.

I would summarize our quarter by saying it was just a great quarter.

It was an awesome quarter.

We had really excellent underwriting performance.

We're very focused on a disciplined approach to profitable growth.

I underscore both of those words in that comment.

Profitable growth is the key.

I think we've indicated a great ability to execute on our strategy.

Our execution has been superb.

We are very excited about what the future holds for us, so thanks for your support.

We look forward to chatting with you either at several of the investor sessions that we're attending or at our call at the end of next quarter.

Thanks.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect at this time.

Have a good day.