Allstate Corp (ALL) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Allstate first quarter 2004 earnings conference call.

[Operator Instructions]

I would like to introduce your host, Mr. Robert Block.

Good morning and welcome to our first quarter 2004 earnings conference call.

It seems like we just finished discussing our fourth quarter results.

As we've done in the past calls, Ed Liddy and Dan Hale will join me to provide some perspective on our results.

Then we will take as many of your questions as time will allow.

Please keep to one question and one follow-up so that we can hear from as many of you as possible in the next hour.

As always Phil Doran, Larry Mays and I will be available for your questions 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, both are available on our Web site under investor relations.

In keeping with our efforts to enhance our disclosure, we have added several new pages to the investor supplement along with some new data for your use.

We'd appreciate any feedback you might have on the changes and additions to this document.

Now it is time for our legal disclaimer.

The following discussions 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-K for the year 2003, in our notice of annual meeting and proxy statement dated March 26, 2004 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 and in the investors supplement posted under investor relations at our Web site www.allstate.com.

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.

In the past conference calls following Ed's comments, I usually provide some color commentary in the trends in the quarter including rather detailed earnings analysis of the changes in combined ratio and operating earnings per share.

In the interest of time and the recognition of the significant amount of information we now make publicly available prior to this call, I will dispense with my normal section of the program.

I will simply state that the strong underlying performance of the property casualty business was the primary driver of our favorable quarterly results.

Now lets begin with Ed Liddy, followed by comments by - from Dan Hale.

Ed.

Thanks, Bob and good morning everyone.

We appreciate you taking the time to join us.

As Bob mentioned we had a truly exceptional first quarter.

In fact, it was another one and what's now become a fairly long string of very good performance each quarter and it follows a great 2003.

It really was a continuation of the trends that we had established over the last few years.

Our results are the byproduct of the strategies and tactics we've employed for the last several years.

Our execution on getting better and bigger in both Allstate Protection and Allstate Financial while broadening our footprints in financial services has been excellent.

It is primarily responsible for the great results we reported yesterday.

Let me take you through a recap of the highlights for the quarter.

First, for the company as a whole we reported net income of $949 million.

That is an increase of $284 million or 43%.

Our operating income exceeded $1 billion, a record level for a quarter and up 52%.

The $1.44 in operating earnings per share was slightly ahead of our pre-announced guidance and it was 49 cents better than last year.

We have continued strong return on equity. 15.1% on a net income basis and 18% on an operating income basis.

Coupled with our very active capital management program of higher dividends and greater stock repurchases we continue to demonstrate our commitment to our shareholders.

And finally, book value per share, which increased to $30.48 grew 5% from year-end and I think increased almost 20% from a year ago.

Now, in Allstate Protection we continue to demonstrate both our commitment and our ability to grow profitably even as rate activity moderates.

I would like you to consider the following.

Net written premium grew by 6.7% while earned premium posted 6.2% increase.

Allstate brand standard auto net written premium grew almost 8% while homeowners increased over 11% for the quarter.

This growth is geographically wide spread as we enhance our competitive position through the continued use and extension of strategic risk management.

Our standard auto policies in force or PIF growth accelerated to 6.3% year over year and our homeowners PIF growth reached 4.6% year over year.

Both of our core lines in protection produced large increases in new business while exhibiting a high quality profile consistent our SRM strategies and as you all know, this bodes very well for future profitability.

And we are retaining more customers in almost all of our lines, a very important component for profitable growth.

Our combined ratio results for the quarter rival or exceed those of any multi-line competitor in the market place, 86.4, an improvement of 6.7 points.

We added 89.4 combined ratio in auto and 71.2 in homeowners, really extraordinary performance.

Catastrophe losses represented only 1.6 points of the combined ratio in the quarter, that was a reduction of six-10ths of a point compared to first quarter of 2003.

The underlying loss cost trends for both auto and property continue to behave well.

As frequencies maintain their favorable trend and severities increase only modestly. iVantage, our independent agency operation againproduced an underwriting profit for the quarter with 97.4 combined ratio.

And the overall expense ratio of 23.8 was down slightly from the first quarter of 2003 despite substantially higher marketing costs.

Our net investment income at $424 million rose 3.9% on the strength of increasing cash flows, more than offsetting the decline in yields.

Now, let me spend a few minutes on Allstate Financial.

This quarter, the first quarter of '04, saw a return to more normal level of operating income while the power of our diversified distribution channel and broad product portfolio contributed to a very strong premium and deposits quarter.

Institutional products generated over 1.1 billion in the quarter as we took advantage of an opportunity in the market to issue funding agreements under our medium-term note program.

Our annuities, fixed and variable combined, grew 10% year over year.

New sales of financial products through Allstate Exclusive Agency system grew a remarkable 36% to $491 million.

That is quite a peak considering the amount of property casualty business that was also generated in the quarter.

The Allstate Exclusive Agencies are performing extremely well for their customers and for the company.

We're proud of them

Profitability as measured by operating income was better in the quarter, but it was about flat with Q1 2003 once you adjust for the DAC on lacking charges that we took last year.

Trends in our Allstate Financial segment are affected by a difficult interest rate environment but much progress is being made on our strategies focused on operational excellence, emphasizing product manufacturing capabilities for our distribution partners and increasing efficiencies to a more simplified operations framework.

There is more progress and continued improvement in returns and profitability in the quarters ahead.

Let me summarize.

It was truly an outstanding quarter.

A quarter where we were hitting on all cylinders as the entire organization contributed to our performance.

I think this quarter represents another data point for the market to measure our ability to successfully execute our strategic intent, which is to grow our business profitably, maintain capital discipline and generate superior returns for our shareholders.

Dan, you can put a little more meat on the bone and we will take questions.

Thanks and good morning again to all of you.

First a few comments about the accounting change reported for this quarter.

The required adoption of AICPA statement provision '03-'01 with a catchy title of Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long Duration Contracts and for Separate Accounts.

That SOP.

As you probably know this statement requires the establishment of GAAP reserves for certain liabilities.

Primarily those related to death benefit and income benefit guarantees provided under variable annuity contracts.

The SOP strongly suggests the application of stochastic modeling techniques when estimating and establishing reserves for these contracts.

We did use stochastic modeling to establish our reserves and the balances of January 1, the required implementation date, was 94 million on an after-tax basis.

To be consistent with the intent of the statement we also applied stochastic modeling techniques to the accounting for deferred acquisition costs associated with those variable annuity contracts.

Prior to adopting this SOP, Allstate Financial like many of our competitors accounted for DAC using a deterministic modeling approach.

And as you know despite changing to a stochastic methodology for deriving the present value of estimated gross profits, a stochastic approach with the approach with the outcome represents a mean or average of large number of scenarios, that approach yields a lower result than a formula driven deterministic methodology.

In other words, stochastic modeling produces a more conservative projection and estimated gross profits.

And we anticipate that it will become the preferred methodology for the industry.

As a result of using stochastic modeling, our accounting change provision includes an $81 million after-tax write-down of DAC and deferred sales inducements, which are also covered in the SOP.

Our variable annuity DAC asset was reduced by 13% as a result of implementing this SOP.

So in total, the accounting change for implementing the SOP as of January 1, was $175 million on after-tax basis.

Turning to the next subject, during the quarter we repurchased 3.7 million of our shares for $167 million or an average cost of $45.22 per share.

That brings total purchases, under the 500 million repurchase program we initiated last year, to 7.9 million shares costing $317 million or $40.15 per share.

The additional $1 billion program we announced this year is intended to be completed by the end of 2005.

Even though we repurchased 3.7 million of shares during the quarter you may have noticed that our weighted average shares outstanding on fully diluted basis actually increased by 2 million shares compared with the fourth quarter of last year.

That's primarily due to higher average stock price that resulted in additional weighted average in the money options.

The actual number of shares outstanding as of the end of March was down to 703.2 million shares.

You can expect to see the weighted average number of shares decreasing for the second quarter.

Our net income ROE for the quarter was 15.1% compared with 9.8 in the first quarter last year and again that is with unrealized capital gains and losses included in shareholder's equity.

I should also point out that our ROE calculations are based on trailing 12-month results.

Our operating income ROE excluding unrealized gains and losses was 18%, and that compares with 14.8 in last year's first quarter.

Our debt to capital ratio at the end of the quarter was 17.9%.

That was after consolidating one variable interest entity used as a vehicle for a collateralized loan obligation.

A second VIE used for a collateralized debt obligation is no longer consolidated after selling down a portion of our ownership position in the first quarter.

Excluding consolidation of the collateralized loan obligation VIE, our debt capital ratio at the end of the quarter was 17%.

That is the leverage ratio the rating agencies have informed us they will be using in their analysis.

Our book value on March 31 was $30.48 per share compared with $29.04 at year-end or an increase of 5% and compared with March 31 of last year, that increase was 19.5%.

Excluding FAS 115, the increase from year-end was 4% and from last March 21%.

We ended the quarter with statutory surplus of approximately $16.6 billion, and that was a about half billion more than we had at year-end.

And finally, a few comments on our earnings guidance.

We told you on the last call that to the extent trends and earnings developed differently than we were expecting, as a result for instance more favorable claim frequency trends, we told you we would adjusting our guidance accordingly.

We are increasing our guidance from the range of 4.30 to 4.55 per share we gave last quarter to a range of 4.80 to 5.10 per share assuming the level of average expected GAAP losses use in pricing for the remainder of the year.

That increase of at least 50 cents per share translates to well over $500 million of pre-tax improvement.

So after taking into consideration the lower cats experienced in the first quarter, it's obvious that we are now expecting better frequency trends than we had anticipated going into the year.

As you know, so far no one in the industry has been able to adequately explain, much less accurately forecast frequency trends over the last few years.

So this is still an area of risk and opportunity for all personal lines carriers.

And once again we remind you to the extent trends and earnings develop differently than we expect we will adjust our guidance accordingly.

Bob, I think we are ready for questions.

Operator, if you could open up the question-and-answer session.

Thank you.

[Operator Instructions]

Our first question comes from Ron Frank of Smith Barney.

Yes, good morning.

Two questions if I may.

First of all Ed, we recently heard from Safeco and they appear pretty delighted with the effects of their multi-tiered model on both sales and profitability of the mix.

Progressive is obviously pretty pleased with their success.

My question and I admit it is kind of a broad one is what's your view of the durability and defensibility of the SRM advantage?

Clearly your main competitors are working to refine their segmentation processes on a daily basis almost.

What is your view of the proprietariness, if you will, of your model, and how long you can sustain a competitive advantage over the other segmentation models out there in terms of that?

My second question, perhaps for Dan, is how you are managing in this environment on the fixed annuity side with 40% of the book down at the minimum guarantee rates?

Ron, we will take the two questions in the order you asked them.

First I think we have a permanently sustainable advantage in our strategic risk management SRM.

We now been at this for four or five years.

SRM 4 for auto, which goes into effect later this year, is a quantum improvement over where we were in SRM 1.

So like any finely trained, finely tuned athlete, you keep getting better at what you are doing.

Us and maybe one or two other companies have an early start in this.

I think it is sustainable.

Ron, I would also point out look at the combined ratios.

An auto combined ratio of 90, 89.4 and a homeowners combined ratio of 71.2, you can kind of look at efficacy of our SRM and compare it to pretty much anyone and I think we compare very well.

Third thing I would tell you, SRM systems are data driven.

We have, because of the sheer size of our company, a lot of proprietary data.

It works really well for us and that's an advantage I think we will continue to maintain.

OK.

Dan, you want to do the or Larry on the fixed annuity?

This is Larry.

Ron, on fixed annuities in this environment, first of all the products we are selling today are clearly reflecting that and the products either have a 1.5% 2% or 0% in the case of registered products interest rate guarantee.

So clearly in this low interest rate environment, that is the strategy we are taking.

On the in-force block we are continuing to decrease the crediting rate as we indicated in our disclosure down to 40% and if interest rates continue low, that 40% will likely increase.

I'm sorry, the 40% refers to the percentage of book that's at minimum crediting rates now, right?

Correct.

When you talk about changing the 40% you mean working that down by further reducing the guarantees on those or -

No, by decreasing the crediting rate on existing products out there that 40% will likely increase if interest rates stay low, meaning we will have more in-force business at the minimum crediting rate.

OK.

All right.

So it is fair to say -- actually the question is not relevant given what rates are doing.

I'll pass on it.

Thanks.

Thank you, our next question comes from Robert Glasspiegel of Langen McAlenney.

I would like to go through what's going on in the non-standard.

You know you had your third straight outstanding combined ratio quarter and you're seeing new business volume continuing to shrink and premiums shrink.

Why would this not be a good time to grow your non-standard business I think Progressive on their call mentioned they are not seeingyou, seeing your strategy playing out in that segment?

Bob, our focus has been on attracting customers to our company that exhibit long-term value characteristics.

We want people who buy multiple products within the PNC business but also financial products, stay with us longer, value an agency relationship and that tends to be customers who fall into the standard category.

If you look at the shrinkage in non-standard I think it is the smallest percentage decline it's been in about 3 to 3.5 years.

SRM 4, strategic risk management 4 begins to address us getting back into on a more aggressive basis, the non-standard market.

That will not come into play until late in the fourth quarter of this year, the beginning of next year.

When we get into the market, we want to do it well and we want to do it profitably.

We do have, within the independent agency channel, in the Encompass world, a company by the name of Deerbrook.

It is primarily a non-standard focus company.

It is getting good acceptance in independency agency channel.

We are getting good premium growth and good profitability.

While that is not a market we are aggressively pursuing; there are opportunities for us there in the future.

We want to do it well and we want it to fit neatly into our goal of profitable growth.

But we won't be into that market in a material way until late this year or beginning of next year.

OK, thank you.

Just a quick follow-up on Dan's earnings guidance.

Embedded in it sounds to me like a belief that frequency is positive or is there some ratcheting down in frequency to a neutral or negative for the balance of the year embedded in the forecast?

We are still assuming that we will have favorable frequency trends over the balance of the year.

Does that mean frequency is up or neutral versus a year ago?

Continuing to be negative versus last year.

OK.

It did get improved.

Gets better from our standpoint.

Favorable.

OK, so continued negative decline in frequency is embedded in your forecast?

Is it embedded in your pricing assumption, too?

Better than pricing.

Is declining frequency embedded in your pricing assumptions --

No, it isn't.

But in our forecast as you rightly picked up, we assume there will be some continued favorable frequency performance.

OK.

Why would you not factor that into pricing if you think that's a trend that is continuing?

We don't think that is required to write the kind of business and SRM tiers we are going after.

So we are continuing to price assuming that it will come back, revert back to a normal area, if you will.

OK.

Thank you.

Thanks, Bob.

Thank you.

Our next question comes from Jay Gelb of Prudential.

Good morning and thank you.

The first thing I want to touch on is, broadly from a competitive perspective; can you give us perspective on how State Farm's actions are affecting the overall market?

Secondly, Ed perhaps you can give us an update on your outlook for asbestos and class action reform?

Sure, Jay.

First I would say I see great discipline in the personal lines marketplace right now.

I don't see people lowering rates or doing things that strike a chord of irrationality.

State Farm has clearly taken rate decreases in 19 or 20 or 21 states.

I don't remember the exact number as we sit here at 9:30 on Wednesday morning.

Rate decreases are - I know it unnerves the market, but we really have to look at the decrease relative to where you started.

So with SRM in place, which to the first goes back to the first question.

It is powerful advantage.

In IFS tiers 1 and 2 and to a lesser extent, 3, we are very competitive with anybody that we write business against.

So when State Farm takes a rate decrease maybe our competitive advantage shrinks from 20% better price to a 15% better price.

We are comfortable with our close rates.

We have seen no effect of State Farm's actions thus far on our close rates.

We feel pretty good about it.

In terms of asbestos and class action, you know, I am one voice in both of these endeavors.

I continue to remain somewhat pessimistic about asbestos.

I think it would be wonderful for our industry.

I think it would be wonderful for our country if Congress could do something there.

I think that there remains so many parties and the parties are so far apart in terms of the establishment of a trust fund and how many dollars would go in the trust fund and what the medical criteria would be for the release of the trust fund and how does the trust fund get allocated between the defendants or the manufacturers and the insurers.

I think there is so much ground that still has to be plowed with respect to that specific piece of legislation.

I just am not optimistic that anything will happen there.

I would love to be wrong in that forecast and to be pleasantly surprised.

On class action, Senator Frisk has indicated that about May 10 or 11, he intends to bring this up for discussion on the floor of the Senate.

The issue there will be whether it becomes a Christmas tree.

And there are many non-germane or non-relevant amendments that get appended to class action and therefore, it either doesn't have enough time to be aired before cloture is called or it has so many items are attached you can't vote for it because it is watered down by other things.

I am more optimistic on class action.

There are reported to be 62 senators, forming a broad coalition, who support the passage of class action.

That is an impressive number.

It's up from the 59 that we had in October, the last time there was a vote on this subject.

There is great support for it in the House of Representatives.

So I'm perhaps little bit more optimistic there.

I think it will very much be a function of how many discussions the Senate wants to have on minimum wage and unemployment insurance and a host of other things that are topical in an election year.

I hope there can be reduction in the partisanship and they can get something meaningful done here.

Thank you for your thoughts.

Thank you.

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

Yeah, good morning.

Two quick questions for you all.

Non-standard auto, is any of the decline in unit volume perhaps because some of the risks that may have been non-standard auto risks now are falling within more of the standard preferred categories or middle tiers, could that have something to do with it, given that profitability is so good?

There is a little of that going on, but it's really not enough to distort the numbers.

But the point you made is a fair one and there will come a point in time when distinction between standard auto and non-standard auto will be meaningless.

And we'll choose a point in time , the end of a year, the end of a quarter to make that point and to simply stop reporting it that way because with a tiered system, it is kind of a throw-back to the old 3 tiers of preferred standard and non-standard.

We are so far past those days with the tiering system that we had that it becomes almost an irrelevant concept.

Got it and the second is given that it looks like Encompass has turned a quarter here and profitability is pretty good there and you have tons of cash comes in, is there any desire to go out and try to increase your distribution in the property-casualty segment?

Any properties out there that may look intriguing?

Not from an acquisition standpoint, Brian.

But again you have put your finger on an important issue.

When we bought CNA's personal lines business, which we call Encompass and we also have theDeerbrook initiative I mentioned a while ago, we are committed to growing in the independent agency channel.

That is still where 30 or 35% of the business in personal lines takes place.

We did not want to grow in that business and grow in that channel until we achieved a sub-100 combined ratio.

We initially said it would take us three years to get there.

It took us three years and six months.

We have got really good profitability trends in that area and we are committed to growing.

We are investing a new technology which will put us state-of-the-art.

We have some great managers.

We have a fellow, Doug Wench (ph), who is running our Encompass brand right now.

He's had phenomenal success with our agencies on an Allstate basis in a broad section of the United States.

That is a seed for us and we expect to do well in that business in the future.

We just want to do well with it on a profitable basis much as we want to do well with non-standard on a profitable basis.

We do not want to sow, today, the seeds of reserve additions 2 or 3 or 4 years down the road.

If I could emphasize one message that I would like everyone to take from this last six or seven or eight quarters of performance, it's profitable growth that is our mantra, it is not growth, it is profitable growth and we're sticking to that.

Great.

Last quick question.

Restructuring charges when do those end?

It's peanuts in terms of dollars.

Some of it goes to when we converted our agents to one contract You have pension costs that stay there, that run off as agents continue to move out of certain programs.

It's probably a nuisance or an annoyance you will have to deal with for a few more quarters.

Thanks.

if you have noticed Brian that we stopped talking about it to help reduce the annoyance factor.

Our next question comes from Dave Souchere (ph) from JP Morgan.

Yes, hi good morning everyone.

Just following up on the capital allocation question from Brian.

Clearly, you have taken M&A off the table on the personal auto side.

You have a high quality program of significant excess cash close.

Are there opportunities on the life side through M&A?

What is the prospect of higher dividend as we go out with the attractive tax environment that we're in or you know, accelerating the buy back, can you give thoughts on that side?

Sure, Dave.

We're a pretty aggressive company.

We look at acquisitions on both the protection side and Allstate Financial on a very regular basis.

If there were things available that would get us where we want to be strategically in a bigger, better, faster way, we wouldn't be shy and we don't lack the financial capacity to do it.

If you look at the things we have done in the past, we have been smart about the acquisitions we have made.

The acquisition in CNA gave us more heft, more distribution capacity in the independent agency channel.

The acquisition of American Heritage Life, which we now refer to the Allstate Workplace division gave us access to the very fast-growing supplemental life insurance medical type products.

The acquisition of Sterling body shops gave us a way to differentiate ourselves from the competition in terms of customer satisfaction in the claims area.

So we don't do anything stupid on the acquisition front.

We like to think we are smart acquirers when it makes sense.

We look at things that would build our distribution capacity or maybe add to our scale in Allstate Financial on a regular basis.

The fact we have not done anything would hopefully suggest to everyone that we are smart about what we look at.

If we could do something that would enhance our scale in a couple of areas where we have scale, but we could use more or give us effective distribution we would probably look favorably upon it.

But we are not a big fan of buying things that are broken or overvalued.

We now have about 1100, just over an 1100 financial specialists who are hooked up with our roughly 11,000 property casualty exclusive agents.

That is a really good relationship.

If we had more of those, we could specialize them and they could specialize on different products and maybe we would get even more trajectory or traction over and above the 36% growth rate that we got in the first quarter.

You know, we look at things, if it makes sense we will do it, money is not burning a hole in our pocket.

From a dividend standpoint, we have increased our dividend per share since we've been a public company by about 12%.

We just increased dividend 2 months ago by 22%.

We were going just take a wait and see attitude on what happens with tax law changes.

We have repurchased with the $1 billion plus addition to our capital program.

When that is completed, we will have repurchased $8 billion or $9 billion of our stock, so Dan corrects me it is almost $10 billion.

So, this is a company, that if you look at our track record we know how to manage our capital.

We very much want to grow our business.

We like the prospects for growth today more than we have in a very long period of time.

If we still have excess capital, we know what to do with it.

Thank you.

Thank you.

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

Good morning.

Homeowners has been very profitable for the last four quarters on average that combines in the low 80s.

Growth was up slightly during this quarter.

Do you think growth will continue to move upwards throughout the year in homeowner's line?

Yeah, you know Adam, I do.

We like our position in homeowners.

There is a lot of bounce-back coming our way.

We very early on identified the inflation in home costs and severity increases to repair a home or to get any work done on it if you want to do some remodeling.

We got our rate increases early and often.

I think that they were appropriate.

I think other of our competitors have been slower to respond to that so I think our prices are looking even better in the marketplace.

Our retention ratio in our homeowners business continues to improve.

It was higher throughout 2003 and it improved in the first quarter of 2004.

That's a key component to getting growth.

The 4.6% policy in-force growth year-over-year in homeowners, we are feeling pretty good about our homeowner's position.

So we are encouraged, don't see any reason to think that will slack off.

Thank you.

One follow-up, non-standard loss ratio just picked up a couple points during the quarter.

Is that more of a quarterly fluctuation?

Yeah, it is more of a quarterly fluctuation and if memory serves, the non-standard combined ratio was about 82 or 83 and it's really low to begin with.

So I would put it in the category of normal fluctuations and pertubations.

Thank you very much.

Thank you.

Our next question comes from Anel Stevens of BAM.

Mr. Stevens, your line is open.

It appears he has stepped away from his line.

Our next question comes from Jay Cohen of Merrill Lynch.

Good morning.

I understand that Allstate may be pursuing buying some catastrophe reinsurance and I am wondering one if that's true and secondly what kind of program might you be interested in and why you are looking at it if it is the case.

I will give you a quick comment and than Dan will, he still have a lot more detail.

You know Jay we look at reinsurance on a regular basis.

When pricing and coverage's get to kind og be things that are attractive for us then maybe it makes sense to do something and we think that, that time may be here.

What we are doing some reengineering of our property business.

We would like the combined ratio to get even better.

We would like the volatility of the product line from an operating income standpoint to be reduced and reinsurance is one of the things we look at.

Dan.

We continue to look at all of our lines on an economic capital basis.

We look at and evaluate reinsurance and do it on a national basis as well as local basis and state by state.

We will continue to look at opportunities to be sure that we are maintaining and optimizing the profitability of that line.

It is in great shape, as you can see now, from a profitability perspective.

We want to continue to do that and we will look for opportunities including the purchase of reinsurance where it makes sense to make sure we can continue to grow and grow profitably.

Thank you.

Thank you.

Our next question comes from Bill Wilt of Morgan Stanley.

Hello good morning, a couple of short and related questions for you.

What percentage of auto policies are six months versus one year roughly?

All of the Allstate brand policies are one year.

The iVantage product, much of that - I am sorry, all the Allstate policies are six months.

All Allstate auto policies are six months.

Much of the iVantage auto policies are 12-month policy.

That's helpful.

All Allstate homeowner's policies are 12-month policies.

Sure.

OK, great.

Any changes, thinking of homeowner's sales.

Any changes either recently or in the works tinkering with commissions or whatever other leverage you might pull to incent -- policy holders by auto and homeowners together?

No, no.

We have some pretty sophisticated programs or ways of thinking about that now but I don't see any changes.

I would ask you to reflect upon this, maybe a slightly different question that you asked.

In 2003 we aligned our agencies' profitabilities with the companies.

So our agencies are paid commissions when they sell automobile insurance or homeowners insurance.

But then depending upon a grid that reflects their growth rates and their sale - their profitable sales, their loss ratios, they can get a profitability bonus.

That has had an enormous impact on the way we collectively think about the business.

In addition to being expert sales individuals, we are also worried about underwriting practices and that's gift I will keep on giving for several years to come.

That is about the only major change, only it is probably not the way to describe it, that's a very substantial change which was put into place in 2002 and really worked very well for us in 2003 and should continue to work in '04 and '05 and '06.

That's helpful, thank.

If I could sneak one more in.

That's comment on auto frequency and expectation for continued favorable trends in 2004.

Any updated views on the underlying rational for the continuation?

Something that is something you are studying, anything you could share as to why the trends continue?

I wish I could give you a definitive answer and we like everyone else struggle for it.

I would simply say break it down into us and break it down into secular things and I will do the secular things first.

There clearly are things underway in America that will continue to drive frequencies down.

If you look at the mix of population, fewer young drivers.

If you look at the institution of graduated driving rules and regulations in many states.

If you look at very rigorous enforcement of DUI laws, you know a third taillight in the back of a car, there is just so much stuff.

The increase in price of gas, which has some sort of an impact on how people think about driving.

Those are going to continue.

When I talk to our very, very good actuaries in our company, you know, 10 years ago, they would have said well they can never get any better and it just keeps getting better.So there are some secular things up foot, which could continue to produce good results for a very long period of time.

But there is also what we are doing with strategic risk management.

We want more of those IFS tiers 1s and 2s and 3s.

They tend to be safer drivers, they maybe have an extra car that's garaged for a longer period of time and not driven quite as much.

Having the right price for the right risk and understanding the risk that you are taking, I think what's happening we are supplementing those secular trends with some powerful technology that we have that going to continue to work for us.

That's helpful.

Thank you.

Thank you.

Our next question comes from David Merkel of Hovde Capital.

Hi, I have two questions.

First, what would you say is the greatest constraint on your continued earnings growth?

What factor, if you could change it, would allow you to grow even faster?

Well, when we had 98 combined ratio, we could see a lot of glide pass down to a lower combined ratio.

When you get down to the combineds that we are operating we can continue to improve them, but you just don't have as much room to improve them.

I think we will continue to grow our top line.

If you look at the net written premiums for standard auto at 8% and homeowners at 11%, those are very good growth rates for us.

I think we can continue to grow at very good rates.

Our primary method of distribution is through our Allstate agencies.

They are adding support staff.

An agency, you tend to think of one individual in an Allstate office, that is not what is there at all.

You have an Allstate agency who has three or four license producers.

To the extent they invest in their business because they like the trend line of what we are doing together, that will be a source of growth.

To the extent we expand the number of Allstate agencies and we will.

Last year we added about 5 or 6000 additional agents, either exclusive financial specialists or our exclusive agencies.

We'll continue to do that.

Each one of those is an opportunity.

On other hand, each one is a constraint.

You have to find new agents.

The agents have to find new support staff.

You have to train them.

I think - the important thing is that there are lot of arrows in our quiver.

We have a lot of seeds planted, which will continue to bear fruit.

It's the fact that we have so many things that we're working on which makes us feel pretty comfortable about our growth prospects both top line and bottom line.

OK.

My other question is for personal property casualty.

Sometimes the states begin to get a little antsy when they see higher profitability at the insurers and they say they've got toroll back rates.

Are you hearing anything to that effect?

David, I would start with a slightly different point of view.

What insurance commissioners want to have in states is availability and affordability.

That is where they start.

There is great availability, particularly in auto insurance right now; there is just great availability.

While combined ratios are lower than what many insurance commissioners are used to seeing, part of that is the offset to the much lower interest income or earnings on the portfolio that also result.

I think the regulatory environment is typical of what we normally see.

We do business in 49 states.

There are places where the regulatory environment is benign.

There are places where we struggle with getting a rate increase in non-standard or standard or homeowners or what have you and there are others where as long as the information we use justifies it, then commissioners and regulators are okay.

I think you really have to start with the availability standpoint and availability of auto insurance and homeowners insurance now is very, very good.

One of the things that is driving our combined ratio lower and lower is the very strong performance on homeowners.

You know, homeowners is not a legally required product.

It may be required to get a mortgage.

But regulators tend to look at that product line differently than they do automobile insurance and I would say the regulatory environment is kind of average with what we normally see.

Thanks.

You are still one of our largest holdings and thanks.

Good quarter.

Thank you, David.

Thank you.

Our next question comes from Ron Frank of Smith Barney.

Ed, I didn't want to disappoint youso I want to obsess on one of the quarterly severity numbers and in particular the BI severity are, I mean 2.1% clearly isn't runaway inflation or anything close.

It was up somewhat from the previous quarter.

What I'm wondering is are you seeing anything underlying that is meaningful in terms of medical or other pressures that you think might move that up a little further going forward?

Also, the overall expense ratio was flat in the quarter.

I wonder if you could comment on some of the elements there and how we might expect that to trend going forward?

Ron Frank, you devil.

You are up to six questions on this call.

Let me see if I can take in that way.

I beeped twice.

Let me see if I can take them in the order.

Don't obsess over the BI severity.

I don't see anything in there in medical or anything else that's going to be a problem in the future and again it's anything that's there can you price for it, we feel good about that.

The expense ratio, as I mentioned in my opening remarks, our expense ratio came down from the fourth quarter of last year.

It is down a little from the first quarter of 2003.

Now, within that we are investing heavily in our business.

Our marketing spend is up.

We are getting really good feedback on the our stand advertising campaign out there right now.

We are attempting to get our market spend back up to where it should be from a share of voice standpoint.

We are doing that and absorbing that and still getting the expense ratio driven down.

We are making technology investments to get better information in the claims handling process.

We are looking at small business kinds of initiatives.

We are doing a lot to permanently put our company on a growth trajectory, which will serve us and our shareholders well.

We are absorbing all of that within the expense ratio.

If the expense ratio were out of control then maybe you want to obsess about it, Ron.

But I think it's very well controlled ,given all that we are attempting to do and we are doing well.

Thanks, Ed.

Thank you.

Our next question comes from Thomas Cholnoky of Goldman Sachs.

Good morning, Ed.

I am glad I don't have to beat a dead hare and the tortoise has some vertical leap.

Most of my questions have been answered.

But I guess the one question I have and you touched on a little bit in terms of the regulators.

But let's say you are dead wrong about frequency and let's say frequency does start to go rapidly the other way.

Given the results that you're still reporting, though, do you really believe you are going to have the flexibility to respond in a quick fashion to rising costs or will you end up having to eat some of that before, you know, the regulators will let you start raising prices aggressively?

You would probably have to eat some of it, but not much, Tom.

It goes back to one of the earlier questions about given the good frequency and the assumption of continued improvement in frequency what are you putting in pricing?

One reason you don't reflect all of that improvement in pricing you may not continue to get it.

I am liking where we are.

We've put in some early warning systems, I think ,that are probably state-of-the-art in the industry to help us identify changes in status quo, either changes in cost, changes in frequency, so that you can move very, very quickly.

And the answer to your question is it's, you know it's really different in different states.

While we have very attractive combined ratios, there are states where we have products that we aren't comfortable with the combined ratios on them.

So if things change precipitously quickly would we be able to get all of it right away?

No.

Would we be able to get some of it or lot right away?

Yes.

Do we have systems in place to be vigilant about any changes so we can jump on a change in direction as quickly as possible?

Yes.

I feel pretty good about where we are in the general category.

OK.

I know I may got to follow up but I know its Joan Steve (ph) wanted to ask a live question.

Right.

A few you can follow up and it relates to this adoption of the SOP-03-01.

But you started using now a methodology of stochastic modeling, all right.

So my question is, since you have written down your DAC with this new accounting change, does that mean going forward your amortization rate of your DAC is going to be lower so you're not going to have the same expense level?

And I guess my question is will that move to offset whatever increases in reserve you are going to have to take on an ongoing basis related to these new DAC reserves for the GMB, BMG and GMIB that are going to be ongoing for new business?

So how should I think about going forward the expense structure and the margin structure of the annuity business?

Hey John this is Liddy and you got a lot in that question.

So I think I will follow-up with you afterwards but let me give you a brief answer.

The, as far as the amortization rate on DAC, long term clearly what you said is true.

We're going to have less DAC to amortize off.

I don't think you will see a lot quarter-to-quarter simply because we do not change our K-factors or our amortization rate as a percentage of our gross profits.

I'm sorry, and just the issue about the effect on margins of having to put up the new DAC reserves on the annuities for the GMIB's, is that, are we going to see that, is that going to be material in the margins?

I don't think you will see it real volatile because, keep in mind payments come out of that reserve and fees that you collect, a portion of that gets added to that reserve going forward.

If that goes up and down that also increases your gross profits up and down which you than in turn apply an amortization rate or K-factor to.

So it's a very complex subject, Joan.

I don't think you are going to see a lot of impact quarter-to-quarter.

Thank you.

There should be generally less volatility as the result on operating earnings.

Great.

Thanks.

Thank you.

Our next question comes from Nick Pirsos of Sandler O'Neill.

Good morning, it's a question with regarding to the increase marketing expenditures.

At this point, is there anything specific that you are emphasizing in the campaign, is it branding or rebranding or targeting a specific consumer group and how would you measure the effectiveness?

You know we are targeting primarily auto insurance with this current fleet of ads.

That will morph or transform over time to be a little bit broader and it also does take advantage of or attempt to market the brand.

It is our stand concept, is marketing the brand.

We have the typical array of effectiveness measures that everybody uses for these kinds of things.

We ramped up this campaign late in the fourth quarter and really got after it in January, February and March of this year.

We are just about at the point where Joe Tripodi and our folks in our marketing organization will be able to do a very analytical and in depth analysis.

As I mentioned earlier, early reads on the campaign are very, very strong.

We like where we are.

If you think about what insurance is, our view is it is kind of a serious product and I think using Dennis Haysbert, we have got on a lot of very good feedback on him as a spokesperson.

It has begun to differentiate us from some of the clutter that's out there in the marketplace with respect to primarily auto insurance advertising but also brands for the company well.

Thank you.

Thank you.

Our next question comes from Michael Lewis of UBS Warburg.

Well I guess there is not too much to add to everything that's gone on.

Maybe just one clarification.

Ed, if you said there are positive secular trends afoot and we are seeing rising interest rate environment, why do you believe the industry isn't more competitive or put another way, is the industry becoming more competitive in the independent agent market?

Is there any change there and would you expect the industry to get more competitive if you have to look out 12 months and again, just your thoughts in those areas?

You know Mike the industry is competitive at all, you know the numbers as well as I did.

There's 1200 or 1400 companies out there that consumers have a choice to go to, to buy automobile and homeowner insurance, so it's always competitive.

I think that there are couple of powerful players in the industry that are distinguishing themselves.

I think that those players are pretty disciplined and have SRM techniques, good technology and good brands which is going to enable them to distinguish themselves even more in the future than we and a few others have been able to do in the past.

It is an interesting industry and the 10 years I've spent in it, I continue to enjoy every single minute of it.

But I'm not so sure that what drove the industry in the past that's going to drive the industry in the future.

I think you know with Allstate products you can reach us 24 hours a day seven days a week.

You can buy a broad array of products from our exclusive agencies, from independent agents, over the telephone, over the Internet.

We have money to spend on advertising.

We are investing in technology.

And I think those and a few others companies like us that are doing it and are going to enjoy a stronger position in the future of this industry than they ever have in the past.

To a certain extent, we are all prisoners of the baggage we have from the past.

I think the future may be different.

One quick follow-up.

Can you break out the partnership income and the investment income?

I couldn't find it in the supplement.

Maybe I missed it.

Mike, it was I think it was about 8 or - it was $11 million this year and it was less this year than it was last year.

If you make that adjustment the improvement in the investment income will be even stronger.

That is about $11 million this year?

Yes.

Thank you.

Who's got the last question?

There appear to be no further questions on the phone lines.

Well than I will finish up.

As always thanks for your time.

I would point out kind of a blinding flash of the obvious, our business is performing extremely well.

We're growing the top line in both our businesses and will continue to do that and we're growing it in a smart and sustainable way.

Our profitability is excellent and we think it can be maintained and improved.

Our returns on equity are very strong and well in excess of our cost of capital and I think we're handsomely rewarding our shareholder.

We have a lot going for us and you'll see more in the quarters ahead.

Thanks for your time.