Allstate Corp (ALL) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your fourth quarter earnings review for Allstate Corporation.

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.

If anyone should require assistance during the conference, please press star then zero on your touchtone telephone.

As a reminder this conference call is being recorded.

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

Thank you, Adam.

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

Ed Liddy and Dan Hale will join me today.

We'll cover our results and then take as many of your questions as time will allow.

We'll conclude this call in about one hour or so.

As always, Phil Doran, Larry Mays and I will be available for you following the conclusion of this call.

We issued our press release shortly after the market closed yesterday, along with most of our Investor Supplement.

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

Now, it is time for our legal disclaimer.

The following discussion may contain forward-looking statements regarding Allstate and its operations.

Allstate's actual results may differ materially from those projected in the forward-looking statements.

For information on important factors that could cause such differences please see the forward-looking statements and risk factors affecting Allstate's section in Allstate's 10-Q for the third quarter 2003, in our notice of annual meeting and proxy statement dated March 28, 2003, and in yesterday'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 the press release.

This call is being recorded.

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

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

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

All of our remarks are current only as of the date and time of this call.

Now, let's begin with Ed Liddy.

Ed?

Good morning, everyone and as always, thanks for joining us.

We had a terrific year and a terrific fourth quarter.

Our results for 2003 were really remarkable and they reflect the outstanding efforts of our dedicated employees and all of our distribution partners but particularly our Allstate agencies.

We have talked from time to time about our strategic intent of becoming better and bigger in our property-casualty business and broader in financial services.

That continues to be the correct strategy for Allstate and we are executing on all cylinders.

I'd like to put our 2003 performance in perspective by taking you back to our earnings call last February.

So one year ago.

As we came into 2003, we had just completed a tough turn around year in 2002.

One in which we successfully corrected some issues in our core lines of auto and homeowners.

Our operating earnings per share had rebounded from $2.06 to $2.92.

Yet we still had some challenges facing us in 2003, particularly in our largest markets.

So during last year's fourth quarter call, I provided our outlook for 2003.

At that time, we expected to obtain price increases necessary to keep ahead of our loss cost trends, we expected to continue producing excellent results and acquiring higher lifetime value customers, through consistent implementation of strategic risk management, or SRM, as we refer to it.

We expected to fix the problems in our three largest states, California, Florida and Texas, enabling us to begin growing profitably in those huge markets.

We expected to improve our PIF growth trends in Allstate brand auto and homeowners, showing sequential unit growth by the second half of the year.

We expected to achieve a sub-100 combined ratio in our Encompass business by the fourth quarter 2003, and we expected to produce operating earnings per share between $3.20 and $3.40 at normal catastrophe levels and excluding any restructuring charges.

I am delighted to point out that we met or exceeded every single one of those expectations, despite experiencing the third worst catastrophe year in our history, and substantially strengthening our reserves for asbestos exposures.

So for the year just ended, December 31, 2003, we had property liability net premium reach a record level of $25.2 billion, while our price increases kept pace with loss cost trends.

Our expectations for SRM continue to be validated as results for 26 states through the end of 2003 show an even greater percentage of new business being generated for the high value tiers than we anticipated, 48% after strategic risk management, compared with 29% before SRM.

Our combined ratio excluding catastrophes was 88.6, more than a seven point improvement over 2002, and including catastrophes, the combined ratio improved by 4.3 points to 94.6.

We reestablished growth opportunities in our three largest markets, we turned the corner on sequential PIF growth in the second quarter, a little earlier than we had anticipated, and that growth has continued.

The Encompass combined ratio for the fourth quarter was 96.7.

For the full year the combined ratio is 100.5, a 7.3 point improvement from 2002.

Our operating income EPS increased 29% to a record $3.77 which exceeded our previous guidance by about 4 cents, and our net income more than doubled to $2.7 billion.

Our return on equity was superb and the increase in our book value per share was robust.

So in short, the efforts to execute our strategic intent paid off handsomely during 2003.

Now, a few comments on the fourth quarter before I turn it back to Bob.

In the fourth quarter our revenue grew by 9%, net income of $761 million rose 70% and operating income per share at $1.06 exceeded our expectations and our guidance by about 4 cents as catastrophe losses slowed in the back half of the quarter.

For our property-liability business, net written premium for the Allstate brand standard auto and homeowners rose 7.6% and 9% respectively, driven by unit growth as well as average premium increases.

Our combined ratio came in at 92.3, a 5.5 point improvement over the fourth quarter of 2002, despite incurring $412 million in catastrophe losses, which I think was the largest fourth quarter cat losses we've ever had.

The majority of those losses occurred as a result of the devastating California fires.

I am extremely proud of our claims folks and our agencies in their efforts to assist our customers in their time of need.

Auto loss costs, both frequency and severity, continue to perform well.

Homeowners continue to generate a healthy underwriting profit and excellent returns despite the heavy catastrophe experience.

The underwriting expense ratio rose in the quarter, as we expected, due to increases in our agency incentives, marketing costs to help continue the growth of our business and a contribution to the Allstate Foundation, and net investment income increased as strong cash flow and partnership income helped to offset the decline in yields.

In Allstate Financial results were mixed.

Premium and deposits increased almost 20% over last year's fourth quarter, despite a shortfall in fixed annuities as we maintained our pricing discipline.

Our $13 billion for the year, is the highest ever.

Institutional product sales were strong at $651 million, that is an opportunistic area for us.

Variable annuity sales rose 21% in the quarter.

New sales of financial products by Allstate agencies jumped 33% in the quarter to finish the year at over $1.8 billion, that's a 13% increase over 2002's record level.

Our operating income, however, fell to $101 million for the quarter, primarily due to several nonrecurring items.

And Bob will walk you through those in a couple of moments.

It was a difficult year from a profit perspective for Allstate Financial and I expect a much better performance in 2004.

Now, to that end, Allstate Financial has been busy.

They've been emphasizing focussed effective and efficient product manufacturing for our targeted distribution partners.

Allstate Financial made significant progress in strengthening and refocusing our product portfolio by launching a very attractive multi-manager variable annuity called The Allstate Adviser, as well as several attractive fixed annuities.

At the same time, we retired 39 of our lower selling retail products which will help us simplify and standardize our business.

We also decided to exit the direct response supplemental life and health, and the old traditional GIC product lines.

We added five new strategic bank alliances and are refocusing our wholesaling and account management on the key bank, broker/dealer and master brokerage agencies that drive the most profitable new business volume.

We reorganized our service centers and are simplifying our technology platform to better support our life insurance and annuity customers.

As a result of these very intense efforts, Allstate Financial is experiencing better quality growth with improving service levels and lower back-office expenses.

Now, in our press release we issued guidance for 2004 operating earnings per share, as always, at expected level of catastrophes used in the pricing for the year, of $4.30 per share, to $4.55 per share.

This would represent an increase between 14 and 21% over a really exceptional 2003.

When you couple that with the announcement yesterday of our aggressive capital management plans to increase our dividends, and increase our share repurchase program, our commitment to delivering significant value to our shareholders has never been stronger.

I'm very confident that we have the right strategy and the right people to continue delivering these high levels of performance.

Bob, you want to give a little detail on the quarter?

Thanks, Ed.

Net income for the fourth quarter 2003 was $761 million, an increase of $314 million from the fourth quarter 2002.

Two-thirds of the net income increase came as the result of a swing from after tax realized capital losses last year of $165 million, to a small after-tax realized capital gain of $43 million this quarter.

This is the second quarter in a row where we've experienced overall realized capital gains.

The level of investment write-downs has declined and the amount of gains on sales of securities has risen, as the overall markets have improved over the course of the year.

Operating income rose to $752 million, an increase over last year's fourth quarter of $134 million.

Operating earnings per share climbed to $1.06 in the fourth quarter 2003, pushing the total for the year to $3.77 ahead of the guidance we provided.

For the quarter, this was a 19 cent increase from 2002, and a 15 cent increase from the third quarter of 2003.

Let me take a few moments to reconcile these operating earnings per share variances.

The primary driver of the favorable variance remains an improving underlying loss ratio, whether measured against last year or last quarter.

Relative to last year's fourth quarter, this favorable result, worth about 36 cents, coupled with a slightly higher contribution from property liability investment income, was partially offset by an unfavorable swing in the valuation of our current and deferred tax liabilities worth around 18 cents.

Now, each year we do a thorough analysis of these liabilities, based upon a variety of financial information.

For the fourth quarter 2002, this review provided a favorable outcome for both property-liability and life.

For the fourth quarter 2003, the result was unfavorable for the life component, creating a negative swing in income taxes.

Catastrophe losses in this year's fourth quarter were substantially higher than the fourth quarter of 2002.

Yet, were essentially offset by the favorable effect of a swing from $71 million in unfavorable prior year reserve re-estimates in fourth quarter 2002, to $31 million in favorable prior year reserve estimates for the fourth quarter 2003.

This directional change in the impact of reserve re-estimates is consistent with the ongoing favorable loss cost experience we are enjoying today.

Analyzing the favorable earnings per share variance to the third quarter of 2003, the major swing resulted from more favorable impact of reserve re-estimates, worth about 27 cents.

Remember, the third quarter of 2003 included the results of our asbestos and environmental reserve review.

I'm happy to report that there are no additional A&E reserve charges in the fourth quarter 2003.

This favorable result along with the positive effects of an improving underlying loss ratio and better property-liability investment income results were partially offset by higher catastrophe losses, income taxes and expenses.

The combined negative effect of these factors being about 17 cents.

The long and short of this variance analysis is this: We continue to experience favorable loss cost trends in both auto and homeowners.

We continue to utilize strategic risk management processes to identify, acquire and retain customers at the right price in our targeted markets.

All of this has very favorable cash flow implications positively impacting property-liability, investment income.

Ultimately we enhance our ability to grow the business profitably over time.

Normally I go into more detail on the operations, but in the interest of time and the recognition that our disclosure through the press release and investor supplement has improved dramatically, I won't.

Before I turn the microphone over to Dan, just a few comments on Allstate Financial.

Operating income for the fourth quarter 2003 was $101 million, down 57 million from prior year's fourth quarter.

This decline in operating income was primarily due to a few items.

First, there was an unfavorable increase of $23 million in our tax liability in the fourth quarter 2003, versus the favorable $26 million decrease in the fourth quarter of 2002, resulting in an unfavorable swing of $49 million between the two quarters.

This was the result of the annual tax liability evaluation I mentioned previously.

Also, there was a $10 million after-tax accelerated amortization of deferred acquisition costs from a closed block of fixed annuities that were part of the American Heritage acquisition.

Absent these two adjustments operating income would have modestly increased in the quarter relative to 2002, and would have been comparable to that produced in the third quarter of 2003.

With that, I'll turn the program over to Dan Hale.

Thanks, Bob.

First I'd like to make a few comments about our continuing commitment to disciplined capital management, about our dividend increase and the expansion of our share repurchase program.

With respect to dividends, as we've mentioned on previous calls, we've been monitoring the impact of the recent tax law change on companies' dividend actions, as well as monitoring how the market has reacted to those dividend actions.

It should come as no surprise to you that we continue to find the jury is still out on both counts.

While there are exceptions, in general there's been only a moderate acceleration in the amount or timing of dividend declarations.

And the market has not yet made it clear that significant dividend increases will be rewarded with disproportionate stock price appreciation.

In fact, for 2003 in total, non dividend paying stocks outperformed dividend-paying stocks.

Of course case can be made that that was largely a function of the recovery in the tech sector.

At the same time, there can be no denying that long-term investors are looking more closely at higher dividend-paying stocks in anticipation of a slower-growth environment where dividends are likely to represent a greater proportion of total returns.

So after considering a range of alternatives our board of directors approved an increase of our quarterly dividend of 5 cents per share, 20 cents on an annual basis, up to $1.12.

That represents a 22% increase, which is more than double our historical average annual increase since going public in 1993.

Based on yesterday's closing stock price, the dividend yield increases from 2% to 2.5%, which is well above our industry average, and the S&P 500 average.

At the same time, we're announcing a new $1 billion share repurchase program to be completed in 2005, in addition to the 350 million remaining in our current program, which is also scheduled for completion in 2005.

During the fourth quarter, we repurchased 937,000 shares at a cost of 39 million, or $41.45 per share.

That brought our total repurchases under our current $500 million program, which was announced last February, to 150 million.

The additional $1,350,000,000 of repurchases will bring our total share repurchases since 1995 to $9.8 billion, representing the repurchase of about one-third of the number of shares issued at the time of our initial public offering.

The substantial dividend increase and the expanded share repurchase initiative are consistent with our historically disciplined capital management process.

The combined, they represent about a 50% total payout ratio.

Turning now from capital management to a couple of key balance sheet ratios, our net income ROE for the year was 14.2% compared with 6.5 for 2002.

And that's with unrealized capital gains and losses included in the shareholders' equity denominator.

Our operating income ROE excluding unrealized gains and losses was 16.5% compared with 13.7 for 2002.

So anyway you choose to look at the returns, the improvement was noteworthy and we're generating earnings at a rate well in excess of our weighted average cost of capital.

Our debt-to-capital ratio at year-end was 19.8% and that was after consolidating two variable interest entities used as vehicles for a collateralized bond obligation and a collateralized loan obligation.

We've been informed by both S&P and Moody's that amounts recorded as a result of the consolidation of these VIEs will not be considered as debt for rating agency purposes.

So excluding the VIE consolidation, our debt to total capital ratio at year end was 17.6%.

Speaking of the rating agencies, in case you missed it, last Friday Standard & Poor's affirmed it's ratings for The Allstate Insurance Company and related group members including the AA financial strength rating for both the Allstate Insurance Company and Allstate Life Insurance Company.

Our book value of the end of the year was $29.04 per share, compared with $24.75 at the end of 2002, a 17% increase.

If you adjust book value to exclude unrealized capital gains and losses and fixed income securities, our book value per share was up 20%.

If you also adjust for the favorable change in the minimum tension liability, book value per share increased 16%.

The explanation for the 461 million reduction in our minimum pension liability is that it's a result of the combination of the 871 million we contributed to the pension plans in 2003, and to the impact of market appreciation on the valuation of plan assets.

We ended the year with statutory surplus of approximately $15.5 billion dollars, and that was a $1.6 billion increase over the beginning of the year, about a 12% gain.

And our premium-to-surplus ratio improved from 2.2 to 1 at year-end 2002, to 2 to 1 at the end of 2003.

And finally, before opening up for questions, a few comments on our recent performance trends.

As we've been telling you for several years now, our targeted objective, our goal for operating income diluted EPS growth is 10-plus% over the long-term.

Since going public in 1993 we've grown operating EPS at a compound annual growth rate of more than 11%.

We had an outstanding year in 2003 with operating EPS up 29%, following a 42% growth rate for 2002.

Our guidance range for 2004 of 430 to 455 per share, again assuming the average expected cats used in pricing, that range represents growth from 14% to 21%.

I should point out that during the fourth quarter we did not see any evidence of a reversal of the favorable underlying claim frequency trends experienced throughout the year.

We'll have to wait and see how the more severe weather patterns so far this year, compared with last year, will impact frequency trends in the first quarter.

At this point, we can tell you that we're not projecting and are not pricing our products anticipating additional frequency improvements.

Rather, we're focusing on defending the margins that we worked so hard to achieve.

We're comfortable with our EPS guidance for 2004, and as usual, to the extent that the trends and earnings develop differently than we expect, we will adjust our guidance accordingly.

Now, Bob, I think we're ready for questions.

Okay, Adam, I think you can start the Q&A session.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone.

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

Our first question comes from Tom Cholnoky of Goldman Sachs.

Good morning, two questions.

One to follow on to Dan, this last comment about your pricing objectives for 2004 in auto.

If you're not pricing for these favorable trends continuing, what kind of loss cost trends are you pricing for in auto?

And then I'll, if I can, I can followup with a second question.

Well, we anticipate, Tom, that the current favorable trends that we saw in 2003, as I said, would not continue going forward, so if you look at where we are in the fourth quarter, we should be anticipating remaining somewhere in that range, given there are other factors obviously that will affect the loss cost trends.

Okay.

And I guess the second question, maybe this is for Ed.

Ed, if I simply look at your fourth quarter earnings of $1.06, including the restructuring charges, and if you simply annualize that number, which is obviously depressed even further by your nonrecurring life costs, you get to a number that's 6 cents below the low end of your range.

With all due respect, this range appears to be, you've set a bar that perhaps even a turtle could jump over.

Why so conservative?

And what's really driving that?

You know, Tom, I have never believed that annualization of a normalized quarter is a very good way to look at a business.

If you look at the marketplace right now, I think the median for our estimate is about $4.40, the median of our range is above that.

At $4.30, as Dan said, it's a 14% increase.

At $4.55 it's a 21% increase.

To the extent we ought to raise it as the year goes on, we will raise it.

I would remind you there's snow all over the northern parts of the country, you just don't know what's going to happen from a frequency standpoint.

We like that forecast between 430 and 455.

As things unfold, if it's appropriate, we will adjust it.

Okay.

But is it fair to say that you're erring on the side of being conservative on that.

Thomas, I would say if it's appropriate to revise it, we'll revise it.

Okay, great.

Thank you.

Thank you.

Our next question comes from Brian Meredith with Banc of America.

Good morning.

A couple questions.

One, let me just add on to Tom a little bit, take it a different strategy here.

If I take a look at what your accident year ex-cat number was in '03, if I look at your projections here, you're actually projecting an increase in your accident year numbers or else your looking for more development in your reserves.

So I guess that's just one.

Are you expecting an increase in your projections in loss cost trends here going forward?

Maybe that would explain it, then one other quick question.

We would expect to see continued increases in the severity, as have been happening for several years, and we are projecting our earnings at $4.30 to $4.55 expecting some normal weather, we're comfortable with those estimates at this time.

Would at any time you expect that loss costs are going to jump above your pricing assumptions, because that may explain an increase in the combined ratio?

Could that be due to regulatory pushback or just kind of being prudent here, given you guys are making phenomenal profits right now.

Brian, we aren't seeing or anticipating anything in terms of a regulatory pushback.

We have not seen that.

Our frequency levels continue to be very attractive in the second, third, fourth quarter of the year.

Eventually you're comparing yourself against year-over-year frequency levels that are unbelievably good for the entire industry.

Will it begin to not show improvement any more?

Yeah.

Eventually, that will happen.

We aren't projecting that, but just the law of numbers would suggest that eventually that will happen.

Gotcha.

And then could you give us a little sense about competitive pressures out there, any pickup by State Farm or anybody else in the marketplace from a competitive standpoint?

Brian, I would say that we continue to see great discipline in the competitive environment.

I did review some actions that State Farm had taken in New York to decrease their rates.

A decrease is off of a base.

You really have to look at how their rates compare with ours.

We really like our pricing positions right now.

I think the companies that are well down the path in using tiered pricing have a real advantage right now over other companies which are trying to more broadly adjust rates in order to compete.

I have not seen any dramatic change in the competitive environment.

Haven't seen anything dramatic in the regulatory environment that's different than what we've seen over the last 12 to 24 months.

Great and last question, you indicated in your press release you wanted to broaden, I guess, the life insurance or financial area.

Does that mean that you're kind of looking for some nice add-on acquisitions here looking forward?

We have the wherewithal to broaden our company through organic activities.

In both Allstate Financial and then the sale of more financial products through the Allstate agency distribution channel.

We don't need to do acquisitions.

We like where we are.

We always look at stuff.

If we found something that helped us get where we want to be in a little bit bigger or better or faster way, we would clearly entertain it.

We just haven't found anything that suits our purposes right now.

And the moneys not burning a whole in our pocket.

If we need to do this organically, we can and will do it organically.

Great, that's good to hear.

Thanks.

Thank you.

Our next question comes from Jeff Thompson of KBW Inc.

Thanks.

First a numbers question, I didn't see paid losses in the press release.

Do you have that number?

I'll dig it out, why don't you ask your second question, Jeff.

Okay.

If you could just review quickly the impact of the taxes and the reserve release in the quarter, it went by so fast I didn't really get the numbers out.

The tax adjustment in Allstate Financial was an unfavorable swing of 49 million.

Right.

It was negative 23 in the current year, and it was a favorable 26 million in the fourth quarter of last year.

Great.

Paid losses for the quarter were 4.155 billion, which was a decline of 6.2%.

Wow.

Fourth quarter of 2002.

Okay, great.

And the reserve releases in the quarter, what did that do?

I think that's in the press release.

We had a slight release of about 31 million.

31 million basically.

Again, looking at the favorable loss cost trends representing some severity improvement from what we had assumed in prior years.

I thought I heard in your comments a much bigger number than that.

I think Bob's comment was if you move from the third quarter of '03, which had the A&E charge in it, to the fourth quarter of '03, where you don't have the A&E charge, that was the reference.

Okay.

On your ad spending, is it working, what are you seeing maybe in the month of January as far as new business flows and do you think it's going to drive what you would hope for PIF growth this year?

Jeff, it's really too soon to give you a download on whether the advertising is working or not.

I will tell you the initial scoring that we have is very strong.

Personally I like the new ads much better than I liked the old ads.

If you look at our PIF growth in the fourth quarter, sequentially quarter over quarter, for both auto and homeowners, it's looking very good.

We are investing in advertising, we are investing in growing our agencies.

We are helping our agencies to invest in themselves by adding more support staff.

We're making it easier than ever for our customers to do business with us.

We've got really good pricing out there, particularly on the IFS tiers 1, 2 and 3.

At the end of this year we will introduce Strategic Risk Management 4, which will give us even more capacity for tiers 3, 4 and 5.

It's not just the advertising spend, it's all of the things that you have to do in order to grow a very substantial book of business.

We've got all that lined up, we like where it is.

Are you still thinking sort of 3% PIF growth by the end of the year as your target or has that changed?

If you look at what we've been able to do in the second, third and fourth quarter of '02 and you begin to play the annualization game.

Yeah, that would get you above that 3% level.

Okay, great, thanks.

Thank you.

Our next question comes from Ron Frank.

Good morning.

Ed, you'll be happy to know I don't plan to over think your quarterly claims numbers today.

Thanks, Ron.

We appreciate that, Ron.

I'm tired of getting beat up about it.

Could you talk to Tom Cholnoky, for me?

Okay.

A few things.

One, with respect to Dan's comment that you're going to defend margins, I guess sort of a simple but big question, do you think that you can do that and remain as competitive as you are currently in most of your markets?

Yes, we do.

And the reason for that is, again, tying back to strategic risk management.

It's not an average pricing mechanism, it's a very spot-on customer-by-customer pricing mechanism.

That gets to my next question which is we're far down the road with SRM now.

Clearly the industry has been benefiting from favorable pricing and claims trends which makes it difficult for an analyst to look at your loss ratio and say wow, SRM's having thus and thus an impact.

Can you share with us any internal metrics that you look at that indicate to you that you're indeed seeing a tangible benefit from SRM in terms of your margins?

Yeah, I can share it with you conceptually.

The higher life-time value customers, the generally Tier one and Tier 2, are a much larger percentage of our new business than we anticipated or they've ever been.

Second, when we do our competitive pricing comparisons, our prices in those tiers against the national competitors in local markets and/or local competitors, they look very attractive to us.

If we looked at the retention rates and the cross-sell rates in those more attractive tiers they are equalling or exceeding our expectations.

We're liking what SRM is doing for us.

We are aware that more companies in our industry are moving towards some form of SRM capacity.

I think we and Progressive have led the pack on this.

We are multiple years into it, we're on our fourth iteration and we're on our third iteration for homeowners.

I think it will be a long time, possibly never, that other companies are able to close that gap.

Also, access to large data files, which we have on our own customers, is very, very helpful in this regard.

I think the companies that have embraced some sort of a tiered rating system and are investing wisely to continue developing those capacities, are going to win this game.

Two, hopefully, quick questions, if I may.

One, you're exiting the direct response life and health business.

Am I missing something or is that most of what was the former American Heritage Life?

Oh, no, you're missing something.

No, absolutely.

This is tied to our heritage as a part of Sears Roebuck and Company before we were spun off.

We provided accidental life and health to Sears and Discover card customers when they used their credit cards.

When Sears made a decision to sell its credit card business to Citi, which already provides this kind of capacity, we saw the handwriting on the wall so we decided to exit.

It's a relatively small business.

It does use capital.

We'd like to free up that capital, put it to use in better areas.

The American Heritage Life acquisition is very attractive to us, we have good plans, they've achieved good growth, we want to improve the bottom line but we're looking for great growth prospects, both top line and bottom line out of American Heritage Life.

And finally, Ed, you mentioned turning around the three big markets that were a problem.

Florida always seemed to be the stickiest of the three.

Could you specifically update us on what's happened there?

I'll answer a different question but I'll get at yours.

California, Texas and Florida growth rates are all up pretty good.

The situation in Florida was more of a PIF problem, primarily down in South Florida.

That's either priced into the product right now, and/or we made some progress in getting it under control.

In California, with the new rating plan that we introduced in the middle of July, our sales are looking very strong and we like the Texas market.

So we've made progress in all three of those markets.

Okay.

Great.

Thanks a lot.

Thank you.

Our next question comes from Jay Gelb of Prudential Equity.

Thank you.

I want to start off with a broader issue, if I could.

Could you comment on your outlook for a cost action reform at the federal level and while we're on that subject, if you could touch on asbestos as well?

Yeah, I am an optimist when it comes to class action reform.

Let me leave the overall political situation out of it for a minute, but as you, I think you know, there were 59 votes in the senate for (inaudible), if we had gotten one more we would have gotten the class action reform that we needed.

Since that period of time Senators Schumer, Dodd and Landrieu of Louisiana have agreed to some compromise language.

Which means there's 62 if everyone else is there.

Senator Lieberman has been running for president, one of the senators had an emergency appendectomy.

If when Frisk puts this on the floor, all of the right people are in place, I think it will pass.

The risk is that as with the shifting sands of a presidential election, it could be that many on the democratic side try to make it a Christmas tree and hang other spending bills or other revenue bills on it, which could make it not get passed.

But I'm as encouraged now as I have been for quite a while.

I think this is a priority for the White House and a priority for Senator Frist.

What could that mean for Allstate's loss cost inflation.

Could we see some moderation there?

You wouldn't see it in the near term, but over the long term, it's worth, for our industry it's worth billions and billions and billions of dollars.

You think about some of the lawsuits that have been filed against the industry that are, in my judgment, meritless.

We have to defend those.

Every once in while somebody in the industry loses one of those and then you have the cascading or domino effect of payment.

I wouldn't factor it into my model for '04 or '05 but over a longer period of time, literally I think it's worth billions of dollars for the industry and trillions of dollars for the American economy.

I'm not as sanguine when I comes to asbestos reform.

Again, I think Senator Frist is working on this in a material way, there are so many cooks in the kitchen and so many different viewpoints about whether it's a trust fund or just more rigorous medical criteria.

Given that it's an election year and where a lot of the funding comes from, I just have a hard time seeing that we make progress on this one in '04.

Having said that, over time I think there's so much pressure building up on this particular topic that eventually something's got to give.

I'm just not so sure that it happens in '04.

Okay, great.

And then separately could you update us on the agent lawsuit being heard by Judge Fullam?

There's nothing new to report on that, absolutely nothing.

The judge heard arguments, both oral and written, on selected pieces of the case back in September.

I think he initially had a predilection to move more quickly on it.

My sense would be he's probably trying to digest the situation, trying to understand it's complexities.

I would point out that in a federal court in southern Illinois we had the exact same issue and the judge found overwhelmingly in our favor.

To the extent one judge's actions are an indicator of what another judge may be, we feel good about that.

Great.

Separately, could you give us an idea on the SRM, what percentage of your property-casualty customers are now in some form of SRM versus, say, a year ago?

You know, I don't know what it would be against a year ago.

I would say of the overall book, probably in the 35% range, 33 to 37, 38%.

I would appreciate it if you take that range with a grain of salt.

That's going to be.

It's not 50 and it's not 10.

That's going to be up from, what, 20ish a couple years ago?

Oh, yes, the '03 number would be up from the '02 number, absolutely would be up, but I just tend not look at it from year-over-year, I tend to look at it from inception.

Great.

Thank you very much.

Thank you.

Our next question comes from Bob Glasspiegel.

A couple questions on investment income, and then a followup.

What was the partnership contribution in Q4 versus a year ago?

It didn't look like invested assets at cost went up much in Q4.

Was there a dividend out or some seasonality in the cash flow buildup, which in Q3 was much more dynamic?

Partnership income in the quarter was 25 million.

Versus?

Uhm --

Don't have that?

It's in the supplement.

Okay.

And from a cash flow perspective, in the fourth quarter, we dividend money up to All Corp and we also made a contribution to fund the pension.

How much were those two things in aggregate.

Funding of the pension was around $500 million.

Essentially the cash flow that developed in the quarter was either dividend up or funded into the pension fund.

The total of those two were 500 or the pension.

The pension was 500.

And the dividend was how much?

550.

550?

Okay.

Hey, Bob, the general point of very strong cash flow generation in our property-casualty business, don't miss that one.

I didn't miss it, I appreciate it.

That's obviously a big part of the story there.

Your PC tax rate seemed to have gone up.

Was that the dynamics of the life stuff you were talking about filtering through that segment or something else?

Went up from?

The PC tax, the derived tax rate investment income, if you tax your underwriting profits at 35%.

It went up slightly because there's a little bit more partnership income.

Okay.

And the last question, you got sort of PIF growth accelerated in '04 and you got rate increases decelerated.

Who wins the race?

Interesting way of thinking about it.

The PIF growth we think will continue to show good improvement.

Be careful with the conclusion that you have rate decreases decelerating.

We are seeking and getting the rates that we need to keep our margins where they are and possibly even improve them.

It's hard to talk about rates on an average basis.

You really have to get into it state by state, product by product.

We've got greatly enhanced pricing sophistication and early warning signs so that we are able to price the product to keep ahead of our lost costs.

We like what we're seeing in terms of PIF growth, we're going to continue to develop it.

Am I misreading page 20, it look like standard auto average premium gross written is marched down from 93 to 47 pretty steadily over the last four quarters.

Is that not a reflection of rate deceleration?

It has, Bob, but again you've got to relate that to the loss costs that you're covering, not just look at it in absolute terms.

I was just focusing on the top line.

Obviously the implications of the combined ratio will be driven by loss cost growth, but just focusing on the top line, you're not sure who will win the race, I guess, is what you're saying?

We're not sure whether top line accelerates or stays about where it is?

It's too soon to call.

Okay.

Appreciate it.

They both keep growing.

Thank you.

Our next question comes from Bill Wilt of Morgan Stanley.

Hi, good morning.

A couple of quick questions.

First on retentions, the retentions in the Allstate brand auto and homeowners have been a pretty consistent and robust 90% or so.

And I think that's a good 10 points or more ahead of competitors who I believe use similar rating tools.

I wonder if you have any comments on your retention vis-a-vis competitors?

Bill, I would say our retention is good, in fact, in standard auto it was up a little over a point, in homeowners is was down, I think, three tenths of one point.

Those are year-over-year comparisons.

We're encouraged by that.

It would suggest to me that the way we are taking and applying rate increases is being done very, very well.

Retention is a closely guarded secret at many companies.

They don't disclose the numbers.

We do.

I think our retention probably compared to State Farm, we have room to improve but I think against some other folks, we are clearly better.

This is a retention business, as you well know.

Retention is 90% of your revenue stream when you open the door January 1 of each year.

So we spend a fair amount of time on the issue of retention.

We've got some initiatives underway, the good hands promise, as we refer to it, to make certain that customer care, customer contact, giving the customers a reason to stay with us and to never leave us, we are focusing on that because we'd like to try to drive the retention up half a basis point or half a percentage point or a full percentage point.

We like our retention where it is right now.

We think we have initiatives in place and the ability to move it forward, move it up.

Okay.

Thanks.

I've got a second one on the agency force, you commented that you've grow that by, I think is was 600 exclusive agencies.

Wonder if you could just add some color, I guess I'm thinking of the background of those folks.

Are they new people who you've trained, agents, seasoned agents you've brought in from elsewhere, and any comment on the geographic dispersion of those people.

Bill, that group is a very eclectic group.

We try to find people, if they are new to Allstate, who have extensive customer service experience in any one of a number of industries.

It costs a lot to invest in a new agency, it's important that we train that group and we install that group well.

And we'll continue to increase the number of Allstate agencies in the years ahead.

Not by huge numbers but by 3 to 500 to 700 in each year.

A dynamic I want to point out to you that just as important, and I mentioned it a few moments ago, it that we are encouraging our agencies to invest in themselves, and add support staff.

So if we have in round numbers 11,000 agencies across the United States, and each one of those has 1.4 or 1.5 support staff who are licensed to sell product, if they drive that number up to 2 or 2.5, it's more people selling our products.

So it's both a focus on the number of agencies as well as the size, efficiency and sophistication of the agencies that exist right now.

It's both.

Thanks.

And the geographic dispersion, any concentration?

I would say there's no concentration, no.

There are growth markets in Cleveland, Ohio.

There are growth markets in Texas.

So we go where the growth is.

Very good, thanks.

Thank you.

Our next question comes from Jay Cohen of Merrill Lynch.

We've talked a bit about the favorable trends in auto insurance but the homeowners side, as well, has seen tremendous frequency.

Like the auto side, are you assuming that doesn't continue or is there something fundamental that's changed there?

It's a good question, Jay.

We're not assuming that anything changes dramatically.

There's a lot of pundits who opine on this and they suggest that in quote hard markets that people don't file as many claims, I think there's some truth to that.

So that tends to improve frequency.

Although because the smaller dollar claims then don't hit the system, it tends to raise the average severity.

We haven't seen any substantial change in patterns in homeowners over the last 6 to 12 to 18 months and we aren't projecting one.

Okay.

And then secondly, the winter weather that we've seen in the, at least, northeast and in the northern part of the country, what kind of claims activity should this generate?

I don't mean a number, but, at least, qualitatively, what do you expect to see coming out of this winter?

Is this going to be really ugly, is it sort of a natural winter?

What's the activity like?

It's really hard to say.

Jay, I would say right now, I know why you're living through it and it takes you four hours to drive home, it feels like the world's just coming to an end.

I'd say it's got the feel of kind of a normal winter to us.

It may be tough in one area, not as tough in another area.

You just don't know.

We need distance, you need to have ice flows melt in order to see what's there.

But my sense is right now it's kind of a normal pattern.

It reminds me of what we saw in the fourth quarter of 2003, where you had the fires and everything and if you're not careful, you get very exorcised over it.

But it looks to me to have many of the aspects of a somewhat normal winter, if you can use that word in connection with our business.

Great, and the last question.

In the past, you've given sort of goals that you had for overall premium growth in the property-liability area.

Do you still have particular targets or goals for net premium written growth?

We continue to have the same goal, Jay, that we've always had, which is mid to high single-digit growth and that requires a good combination of PIF growth and rate increases.

Which one wins the race, to use, I forget who that was, Bob Glasspiegel's structure, it's different in different periods of time.

We think this is a good opportunity for us to grow our unit growth, we're not going to back off the required rate increases so that our rates keep pace with inflation.

If we can grow our business in the 7 to 8% range top line and maintain or improve our loss cost and our combined ratios, we're going to generate very attractive returns, very attractive income, and very attractive opportunities for our shareholders.

Great, thanks.

Thank you no.

Our next question comes from Ira Zuckerman of Nutmeg Securities.

I've got a couple of questions.

First of all could you give us a little more of a picture?

We've been focusing more on your agency business.

Can we look a little bit as to what's happening at Encompass in terms of the fourth quarter underwriting results being particularly good and what the growth outlook there is?

Yeah.

Ira, our approach has been we think there's good growth opportunity in the independent agency channel, that was the whole idea behind the acquisition of CNA's personal line business.

Our philosophy is let's make sure the business is well-structured and well-strategized as measured by combined ratio, and now that the combined ratio is down below 100 and we see being able to maintain it there, we've been developing over the last couple of years, better technology that we have begun introducing into the independent agency channel.

Like to maybe accelerate of rollout of that activity.

We think the independent agency channel, where about 30% of the property, automobile and homeowners business is done in the United States, represents really good opportunity for us.

And now that we've gotten the pricing and the combined ratios down where we want them to be, we would like to seize the opportunity that exists in that channel.

We have been shrinking the top line in order to get the profitability where we wanted it to be and improving our pricing algorithms.

We use the same SRM technology in the iVantage and Encompass book as we use in Allstate, so we think there's some good prospects there.

The other question I've got is on your marketing effort, the dynamics of competition change dramatically when we go from a period like we've had of rising rates, to a period where right now it looks like rates have fairly well leveled out, most of the companies are saying that they're pretty content with current rate levels.

Do you see that it's going to be more difficult to attract new business for, say, a $50 premium difference when rates are flat, than it's going to be when rates have been going up?

I would say not necessarily, Ira.

I think that plays to the beauty of our model.

You can buy Allstate product over the Internet, you can buy it direct, you can buy it from independent agents in some locations, and you can buy it mostly from our Allstate agencies.

So we don't have to rely upon only the advertising dollar the way some of the companies that we compete with do, because that's the only channel they have.

So keeping our agency force motivated, making certain that they have profitability bonuses where they share in the profitability of our company, making certain that ,particularly in tiers 1, 2 and 3, we are really sharply priced, making certain that they sell the complete array of products, homeowners, life products, POP policies, auto policies.

That all plays to our advantage in the pricing situation that you've depicted.

Okay.

I'll let somebody else ask some more questions.

Thank you.

Thank you.

Our next question comes from Adam Klauber of Cochran, Caronia Securities

Thank you, good morning.

The expense ratio came up from a little over 23 to a little under 25, is that mainly due to the advertising and additional support and will that continue going forward?

It will come down and it is in the fourth quarter, it reflects, I'd say, three things primarily.

We have trued up all of our agency profitability bonuses to make certain that we're - this is the first year that the profitability of the agency's book of business, our good agents were rewarded with a profitability bonus, we trued that up in the fourth quarter.

We did substantially increase our advertising levels in the fourth quarter and we made a contribution to the Allstate Foundation in the fourth quarter.

It won't continue at that high a level, and it will be much more in line with where we were on average throughout 2003.

Thank you.

Also, as far as nonstandard, units continue to go down at a significant clip.

Will that turn around in 2004?

Yeah.

I would say by the end of the year, you'll begin to see that flatten out.

The rate of shrinkage has slowed.

And we like the nonstandard business.

Our strategy is to have a price and a product for every customer who walks in the door or calls us on the phone.

We've just been concentrating more on the standard book of business because there's more profitability to be made there, and that's a group that we can cross sell more products to.

But nonstandard will be a key part of SRM4, which now in the fourth quarter of this year, we should be in very good shape to roll out.

I think you'll like what we're able to do there, but you won't see it until later in the year.

And finally, severities, both BI and PD, showed good trends during the quarter.

Is that more of a quarterly aberration as those do fluctuate?

They do fluctuate on a quarter by quarter basis, but they're pretty much in the same range as they've been for several quarters.

There nothing unusual in there.

Okay.

Thank you very much.

We should take maybe one more and move on.

Thank you.

Our next question comes from Paul Newsome of A.G. Edwards.

Thank you.

I was hoping we could switch it back to the life insurance company and chat a little bit with what the strategy is.

It looks like to me you're trying to shuffle down the various businesses you have to the ones that you have the best scale.

And I think that begs the question.

I've been asked this a couple of times from investors, as well, that you may do an acquisition or some other change, either buy or sell, to gain sale in the life company.

Could you maybe just talk to what strategically you're thinking there?

Yes, I can.

Allstate Financial has two primary tenets to its strategy.

One is to increase the sales and profitability through the nonproprietary channels in which it operates, that's about 85% of it's business.

The other is to sell more financial products through the Allstate agencies, that's about 15% of our business.

In both cases we've had good growth rates, good top-line growth rates, both through nonproprietary sales and proprietary sales.

What Casey Sylla and his team are doing right now is where we have products that simply don't carry their own weight in terms of scale, we are examining them to see what do we need to do to get more scale, and if we don't think we can get there, then we're decommissioning those products.

If you look at the top-line growth we did very well in the third quarter and the fourth quarter and as Bob has explained, absent a change in deferred taxes, the direction of deferred taxes year-over-year, we would have had a much more acceptable level of profitability.

You are correct in that we would like to get more scale in several areas within Allstate Financial.

We can do that ourselves.

We can do that organically with the addition of wholesalers, the addition of additional large banks, those kinds of activities.

If we found something on the acquisition front that would give us scale and it was priced right and you could get the right rate of return over some period of time, we would definitely consider it.

We have not found anything like that in all the things that we've looked at.

Great, thanks.

Okay, whose got the last question?

Our final question comes from Alain Karaoglan.

Good morning.

Do you have an estimate what were the non catastrophe weather related losses for the full year 2003 relative to your expectation, not the actual number?

Was that lighter, higher?

Alain, we don't try to isolate and identify non cat weather related losses like some of our competitors do.

We identify cat losses and noncat losses.

Okay.

So do you have a feel on the frequency of losses?

So what you're saying is both on homeowners and personal auto, basically, there were better than probably we expected?

I think the frequency trends continue to outperform expectations.

With respect to SRM, you mentioned, I believe, 33 to 37%, approximately, of the portfolio with SRM.

If you were to think three to five years from now, what would that percentage be?

I don't have an exact percent.

The way they think about it it's a retention business so 90% of the business retains, 10% of the top line is new business.

All of the new business that comes in goes through the SRM calculation.

In three to four years out, we'd probably add between 20 and 30 points to that, so maybe you get up to, pick a number, 55 to 65%.

And it's a gift that will keep on giving.

Okay.

Thank you very much.

It's past 9:00, you all probably have other calls to go to.

A couple of things in closing.

One, thanks for your interest and your support.

We had a heck of a 2003.

I think it's indicative of what we'll be able to do in 2004 and beyond.

Our better, bigger and broader strategy is really working very, very well.

If you look at our returns on capital, they're well in excess of our cost of capital, and they are improving.

We have excellent underlying profitability continuing during the fourth quarter.

Our frequency and severities are behaving as we expected, possibly even better.

We monitor that very closely to make sure that our pricing stays in front of that.

Top-line growth trends are very positive as a result of the use of SRM.

Our cash flows are very strong.

Allstate Financial, if you look at the premium deposits in 2003, were a record.

We will show improvement in profitability in 2004.

We've increased by a fairly substantial percent our dividends and our share repurchase authorization.

We think it's a very solid story and it keeps getting better.

Thank you all for your time.

Ladies and gentlemen, thank you for participating in today's program.

This concludes the call.

You may now disconnect.