Allstate Corp (ALL) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2004 earnings conference call.

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

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

If anyone should require assistance during the conference, please press star, then 0 on your touch tone telephone.

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

Sir, you may begin.

Thank you.

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

We started a few minutes late to try to (technical difficulty) as many of you switching over from other conference calls as possible and I'm sure there will be people joining us as we go through.

And we'll also try to stay on time because I know it's a very busy day for everyone.

Today, as usual, Ed Liddy and Dan Hale will provide commentary on what has been an incredible quarter, then we'll take as many of your questions as time will allow.

During the Q&A session, when you are identified, would you please keep to 1 question and 1 follow-up.

Then we can hear from as many of you as possible.

Following the call you can always contact Phil, Larry or myself to get any further clarification on the quarter.

We issued the press release last night, along with most of our investor supplement, and if you need a copy of the release or the supplement both are available on our website under investor relations.

Now for the legal disclaimer.

The following discussion may contain forward-looking statements regarding Allstate and it's operations, Allstate's actual results may differ materially from those projected in the forward-looking statements.

For information on important factors that could cause such differences, please see the Forward-looking Statements and Risk Factors Affecting Allstate section in the Allstate 10-K for the year 2003, in our notice of the annual meeting and proxy statement dated March 26, 2004, and in yesterday's press release.

In this call, we will discuss some (technical difficulty) measures, you can find the reconciliation (technical difficulty) to GAAP measures in our press releases, and in our quarterly investor supplements in the investor relations section of our website, 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.

And now I'll turn the program over to Ed Liddy.

Ed?

Good morning all. (technical difficulty) fans, congratulations on exorcising the curse of the Bambino.

And Yankees fans, we feel for you.

Welcome to the world of the Chicago Cubs where you get to say, "Wait until next year".

It was an incredible quarter for us in really so many different ways.

For the first time since the late 1880's 4 hurricanes hit 1 state and, in fact, many other states as well, creating literally a billion dollars of damages along the way.

And yet, Allstate recorded a small net profit for the quarter on the strength of strong underlying trends as we continue to execute successfully on our better, bigger and broader strategy.

Before I get into the numbers for the (technical difficulty) give you a sense for the (technical difficulty) in the rest of the county affected by these hurricanes.

The last few months have really been quite chaotic in Florida and the surrounding region.

And our hearts truly go out to those who have experienced firsthand the devastating impact of these storms.

Tom Wilson, the President of Allstate Protection, and I had the opportunity to tour several impacted areas of Florida.

It is hard to imagine what the people of that state are going through unless you've seen it in person.

We went to 3 areas, Punta Gorda, where Charley hit, and the east coast where both Frances and Jeanne hit, and then the Orlando area.

It's been more than 2 months since Charley struck Punta Gorda and it really is still devastated.

Customers of the Allstate Group alone, have filed over 205,000 claims related to the 4 hurricanes thus far, and we sent over 2,000 claims personnel to the region to help our customers restore their lives.

We are really good at taking care of our customers in their time of need and that's what we're in business for.

You know, at Allstate, we've come a long way at managing our catastrophe exposure since hurricane Andrew in 1992 and I want to put the numbers in a little bit of context.

The estimated cost for these 4 hurricanes is about 1.6 billion on a pretax basis. 12 years ago hurricane Andrew cost us 2.3 billion.

If Andrew struck today, and if nothing else had changed, we estimate that it would cost over $4 billion pretax.

So, in 1992, Allstate posted a significant loss for the year.

Yesterday, we reported a net profit for the quarter.

A lot of hard work has gotten us to the point.

I will tell you from our customer's perspectives, there is an enormous amount to do in Florida yet.

The reality is that there simply aren't enough resources within the state to go around to do the building permits, to do the inspections, and then, do the rebuilding itself, which likely, will take several months if not, longer.

The events of this hurricane season will result in a new round of examinations of the insurance marketplace in Florida, and, perhaps, other states as well.

We look forward to being an active participant in that public discourse.

Now, while hurricanes held center stage for much of the quarter, the underlying rhythm of the business maintains the strong trends evidenced in previous quarters.

The long term initiatives we put in place are proving to be the right ones (technical difficulty) to pay off (technical difficulty) review some of those trends with you.

Allstate Protection growth in third quarter net premium of 5%, (technical difficulty) primarily by growth in units as the flow of past rate activity has run its course.

Allstate brand Standard Auto and Homeowner's grew at faster rates, 6% and 7.9% respectively.

Fav (technical difficulty) trends in (technical difficulty)costs remain very (technical difficulty) and as a result limit our (technical difficulty) large rate increases.

In the third quarter we were able to gain approval for small rate increases in a number of states.

Maintaining our pricing discipline is very important to our strategy.

We continue to experience favorable non-catastrophe frequency trends in both Auto and Homeowner's (technical difficulty) claims function continues to provide excellent (technical difficulty) leading to favorable reserve reestimates primarily in the liability coverages of bodily injury and personal injury protection.

Our underwriting expense ratio for Allstate Protection increased in the (technical difficulty) slightly to 24% due primarily to increases in marketing costs and agent incentives, both of which are designed to drive profitable growth.

And including catastrophe losses on a year-to-date basis, Allstate brand Homeowners posted a combined ratio of 97.8%, and that includes over 35 points of Cat losses.

Encompass continued to run a favorable combined ratio, (technical difficulty) 96.3 this quarter, versus 102 (technical difficulty) third quarter of 2003.

Year-to-date basis, Encompass has recorded a combined ratio of 95.4, that's a 7.6 percentage point improvement or in dollar terms, an improvement in underwriting income of some $106 million.

The overall property liability combined ratio, excluding Cats remains in the mid-80's and reflects the successful execution of all of our strategies.

Cash flow trends remain extremely favorable, more then offsetting the drop in investment yields and leading to an increase in investment income in the quarter.

I want to remind you that the catastrophe losses reflected in this quarter's income statement will be paid out over the next several quarters, which may put a little more pressure on investment income in '05.

Allstate Financial produced encouraging results despite a difficult economic environment.

Premiums and deposits posted another $4 billion quarter as we set a record in retail channel volume.

Allstate agencies continued their strong production results with a 20% increase in the sales of financial products.

Allstate financial operating income for the quarter was $151 million, an approximate 11% increase over the third quarter of 2003 and due primarily to lower operating expenses and increased margins from higher assets under management.

To further improve operating income in the future Allstate Financial remains focused on simplifying and standardizing our business models, making it easier to do business with us, focusing on fewer products that are mass customized from a common platform to achieve greater scale of profitability, and deepening relationships with our most profitable and productive distribution partners.

We continued our capital management practices in the quarter repurchasing some 8.2 (technical difficulty) of stock at a total cost of $387 million, and this leaves us a little less then $400 million remaining (technical difficulty) current repurchase authorization. (technical difficulty) including the 1(technical difficulty) of catastrophe losses in the quarter, we posted a 10.5% in book value per diluted share from the third quarter of 2003, and an operating income return on equity of 16.5%.

Really a remarkable achievement.

And I would point out that on a year-to-date basis, we still have grown operating earnings-per-share by 10.3% over 2003 despite incurring over $2 billion in catastrophe losses.

I think these results just serve to underscore the execution of our business strategy.

Now let me turn it over to Dan to put more color on the quarter.

Dan?

Thanks, Ed.

First, a few comments on our written premium growth for the quarter of 5%.

While we quantify the impact of reinsurance and assign risk pool reductions on that growth rate in our press release, you should also keep in mind, that this is the first quarterly comparison that contains the new California Auto plan in both quarters.

So we've now cycled through that change.

But more importantly, we want to stress that we're continuing to get solid growth in our core lines from impressive unit growth trends and as a result, will be gaining share over time.

While at the same time, we'll continue to maintain pricing discipline.

For Allstate brand Standard Auto, written premium was up 6%, new business premium, 7.7%, policies in force grew at a 5.4% rate, and retention was up 6/10 of a point year-over-year.

For homeowners premium was up 7.9%, the new business premium grew 10.5% with PIFF(ph) growth of 6.2% and gain of retention of 8/10 of a point.

And while our rate increases have clearly moderated we're continuing to obtain increases where they're needed.

During the quarter we received approval for Allstate brand Standard Auto rate increases averaging 3.8% in 8 states and 7.7% in 11 states for (technical difficulty).

For Homeowners the rate increases averaged 5% in 4 states for the Allstate brand and 4.2% in 11 states for Encompass.

Those increases were needed to offset moderately higher projected severity trends and maintain adequate margins.

Our approach is to apply for increases as soon as we have indications of need and to expedite the filing process along with best-in-clients claims processes and SRM underwriting that's how we have been and will continue to maintain our margins and returns.

Now for a little more detail on catastrophe losses.

In total, gross losses related to the 4 hurricanes were estimated at approximately 1 billion 807 million on a pretax basis, before recoverables from the Florida hurricane catastrophe fund.

After fund recoverables of 172 million, our pretax losses were 1.635 billion, and our after tax losses were 1.063 billion or $1.53 per share.

The Florida hurricane catastrophe fund reimburses our Florida subsidiaries for 90% of their qualifying personal line property losses excess of an estimated retention of 312 million per storm, up to an estimated maximum total for this season of 991million.

At this point, approximately 819 million of hurricane fund reimbursement is available for our subsidiaries for the remainder of the season.

The break down in the pretax total estimated losses after recoverables for each stormy is as follows: Charley, 447 million;

Frances, 402 million;

Ivan, 470 million;

Jeanne, 316 million.

Again, for a total of 1 billion 635 million.

And we shouldn't forget our retention for each storm is - - was and it still is, 312 million for Florida personal property losses for this season.

The fund does not cover Auto losses.

As Ed mentioned, the events of this hurricane season should result in a new round of examinations of the insurance market within Florida and several other states, and we're looking forward to participating in that process.

Since 1992, we've managed our number of policies subject to wind peril down 32% and have reduced our single-event 100 year PML by 75%, and that's after the Florida hurricane catastrophe fund reimbursements.

But given the events of the past quarter, it's obvious that other changes need to be evaluated and discussed to provide greater protection to consumers by addressing the financial capacity and long term health of the hurricane insurance market.

Now changing topics, a few comments on the reserve reestimates recorded this quarter.

As shown in the press release, net prior year reserve strengthening for the quarter totaled $84 million.

We reported favorable prior year reserve estimates for Allstate Protection totaling 230 million.

Those adjustments primarily reflect favorable prior year reserve development principally due to lower auto injury claim severity trends and were anticipated in previous estimates.

Also during the quarter, we added 314 million to reserves for discontinued lines and coverages following our annual comprehensive ground-up review.

This included 247 million related to reestimates of asbestos reserves and another 61 million to our allowance for uncollectable reinsurance recoverables.

The reserve additions for asbestos were a result of a continuing level of increased claim activity being reported by excess insurance policy holders with existing active claims, as well as the result of reestimates of liabilities for increased assumed reinsurance sessions, as deeding companies also experienced increased claim activity.

And, of course, increased reported claim activity affected our estimates for future reported claims.

As we've pointed out in the past, as a provider of excess policies and assumed reinsurance, we don't have access to claims that are filed at the primary carrier level until such time as the carrier decides to seek recovery on their excess policy for assumed reinsurance contract.

The trends we saw in our ground-up review are consistent with the trends of other carriers in the industry and we believe they're related to increased publicity and awareness of coverage, to ongoing litigation, potential congressional activity and bankruptcy action.

Our claim count trends have drooped from the level we saw last year in our ground-up review, however, they have not declined as much as we had assumed they would at this point.

As of the end of the quarter, we had a balance of $1 billion, 497 million in our reserves for asbestos and incurred but not recorded reserves represented 63% of the total.

Our 3-year survival ratio after adjusting for commutations and settlements is now 30 years.

Unadjusted it would be 15 years.

And our unadjusted 1-year survival ratio is 22 years.

We also added another 61 million to our allowance for uncollectable reinsurance because of the increase in our gross asbestos reserves.

Our allowance for uncollectable reinsurance now totals $229 million and represents approximately 19% of total discontinued lines recoverable from reassurance.

Shifting gears now, a brief update on our capital management activities.

During the quarter, we purchased 8.2 million shares at a total cost of $387 million or $47.08 per share.

That brought our total repurchases this year, to 20.8 million shares at a cost of $954 million, $45.81 per share.

We have 396 million remaining under our current $1.5 billion program.

Turning now to a couple of balance sheet ratios, our debt to capitol was 20.4% at the end of September.

And that includes a full 2 points as a result of prefunding 650 million of 900 million in debt, that comes due in May of 2005.

Our book value per diluted share at the end of the quarter was $30.33, which was up 4.4% compared with year end, 10.5% over the past 12 months.

Excluding unrealized net capital gains on fixed income securities our book value per share was $27.21, the increase from the year-end 5.5%, from September of last year, 13.7%.

And finally, a few comments on our earnings guidance for 2004.

Before the $1.6 billion in hurricane losses our total year 2004 guidance, was $5.40 up to $5.65 per share.

And now, after losing most of 1 quarter's earnings to cover the unprecedented series of 4 major hurricanes in 6 weeks, we now are reducing our total year guidance to a range of $4.15 to $4.40 per share, assuming normalized Cats for the fourth quarter.

The reduction corresponds to the amount of Cat losses incurred in the third quarter in excess of our expected levels.

At that level of earnings we'd still be growing our operating income by a range of 10% to 17% year-over-year, despite incurring close to a billion more in Cat losses this year compared with last year.

So our underlying operating performance trends are obviously still very strong.

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

Okay operator, if you'd start the Q&A session.

Thank you, sir.

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

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

One moment while the participants queue up, sir.

Our first question comes from Jay Cohen from Merrill Lynch.

Yes, a couple of questions.

And I missed a little bit of the call so if you've covered this before, I do apologize.

But your estimates for the hurricane losses, do they include your - - or any assessments from Citizens Property Insurance Company?

No.

There are no assessments included.

Those are the losses that we gave you pre and post tax.

And we gave you the losses by storm, after pre and after-tax in total.

So assuming there are assessments, I guess they would be fourth quarter.

Is that included in your guidance for the quarter, for the year, I mean?

We have no knowledge of or ability to predict what assessments there may be and nothing is assumed at this point.

Okay?

Okay.

That was one question, I don't want to overuse it.

Does the storm activity impact your decision to buy back stock in the near term?

The amounts and the pace of the buy-back?

No.

We'll continue to complete our existing share repurchase authorization.

We're generating good amounts of free cash flow.

We expect that to continue as I said, to this group many times, a well-run property casualty company, which is what we are, particularly, one running down and then a combined ratio debt to Cats (ph) you know, below 90.

We have more then enough capital to pay our claims and repurchase our shares.

Great.

Thank you.

Our next question comes from Brian Meredith from Bank of America .

Yeah, good morning everybody.

A couple quick questions.

The first one, could you talk a little bit about what you have factored into your losses for the hurricanes with respect to demand surge?

And then, also, is there any anticipation of any potential bad faith claims just because policyholders haven't received checks yet or something like that?

You know, Brian I'll do the last one first.

We don't anticipate or you know, add into an estimate what could happen on bad-faith claims.

You know, we anticipate mold coverages and a whole lot of other things, but we do things right.

And so, to anticipate that you're going to get hit with bad-faith claims when you're doing things right just doesn't seem to me to make a great deal of sense.

There could be some demand surge in higher prices built in.

We think we have conservatively done the right thing in these numbers, but, at this point it's too early to be sure.

And is it also fair to say - - it looks like that you pretty much hit the deductibles on all of the storms?

Is that fair, except for maybe, Jeanne?

Yeah.

That's pretty close.

You know, these storms were interesting in that some got into the deductibles and some were short of it.

So that's a good thing to keep in mind.

Yeah.

On 2, we actually get them on 1.

We're pretty close on another one.

We have a ways to go.

So, okay.

And the last question I have: Nonstandard Auto, I'm still seeing a fairly significant drop in PIFF there.

Could any of that actually be related to your new - - not new, but your SRM and, you know, potentially some of the non (inaudible) things that used to be classified as Nonstandard possibly flowing into the Standard Auto category?

Yes.

Some of it could be.

And I think we've made that point here from time to time.

There will be a point in time where the classification of Nonstandard Auto is just absolutely archaic and we don't use it any more.

And as we introduce - - Fred Price (ph) has done a terrific job continuing to move forward on strategic risk management.

So as we introduce new versions of that, and some that do sweep up more fully what, historically, has been referred to as Nonstandard, it will become less and less of a meaningful concept.

Yeah.

And I guess, one more - - one last question.

Do you have any comments with respect to Mr. Garamendi's (ph) I guess lawsuit or whatever he's been filing in California?

What potential changes there will have to be with respect to conditions?

Obviously, your captive agents is probably not an issue, but the independent agents that you deal with?

Let me answer that question head on.

First, we have no reason to believe we're involved in any respect, in the Spitzer(ph) investigations.

We received no subpoenas, no inquiries, no requests for any information of any sort from his office or any other government agency relative to these matters.

And as you pointed out, Brian, it appears to us, that Mr. Spitzer's investigation relates to a different segment of the industry than in which we participate.

And it seems to be focused principally on brokerage distribution rather then agency distributions.

I think you all know, the Allstate core business model is relatively straight forward.

It involves agents, not brokers, who sell Allstate Property/ Casualty products on an exclusive basis.

So, with respect to Mr. Spitzer, we just don't see that we're involved in it at all.

It's very difficult to speculate what might - - what might other AG's do or what might insurance commissioners do?

We do things in the right way.

We have got a model that is tried and true and works well for us, we're comfortable with where we are.

Great, thank you.

Our next question comes from Bill Wilk (ph) from Morgan Stanley.

Hi.

Good morning.

Good morning, Bill.

A question on asbestos.

The claim payments seem to be slowing in 2004 yet, of course, reserves are up some 40% for the year. (technical difficulty) could you just talk about the apparent disconnect, and I'm guessing you'd suggest that there's something in the pipeline that we're not able to see?

Well, Bill, as you know, (technical difficulty) in the past.

The good news is, we are in a situation where we don't have the kind of exposure that the direct primary insurers have.

On the other hand, the other side of that is being in the direct excess and assumed reinsurance business, we have to rely on others to give us the information we need to estimate our exposures.

And unfortunately, they generally don't provide the information to us until they want their money.

So, at this point in time, as we get the claim information we look at it and we look at the trends and do the analysis, we provide the appropriate amounts.

We make sure we're looking forward to what that might indicate in terms of future losses and that's what you seeing in the provisions that we have recorded.

That's helpful.

Thank you.

The second question, if I may.

Do you think there will be a point at which the favorable frequency trends, and now, at least for 1 quarter apparently, the severity trends as well, that they will be persistent enough that Allstate will begin to - -begin to price for them?

You know, Bill, there was actually a couple of questions in there.

I personally believe that good frequency trends will be with this industry for a while and we've all talked about that from time to time.

If if you take the time to understand population, demographics, the very rigorous enforcement of drunk driving rules and regulations, safer cars, higher gas prices.

Good reason to believe that improved frequency can be with us for a while.

It won't always go straight down.

Things that go down can frequently go down in a sawtooth fashion.

So we think there is reason to be optimistic.

You know, how do you price?

In most states you have to reflect some portion of your history into how you're pricing and also, some portion of what you anticipate to happen.

So, the art, as opposed to the science, is trying to balance those 2.

What we do is price our products to a low 90's combined ratio which us opportunity to earn in excess of our 15 to 16 to 17% ROE.

We see no reason why we can't continue to do that.

Thanks very much.

Our next question comes from Ron Frank from Smith Barney.

Good morning.

Two things, if I may.

First, is it your impression at this point, given that claims trends for the industry don't seem to be as favorable, at least as pronounced favorable, as yours are at this point, that the SRM model is in effect enabling you to allow you to select against your competitors to some extent?

You know, you've mentioned that you're most competitive in the preferred segment on that model, less so in the middle tiers.

And I was wondering if you are convinced at this point that that indeed is a driver of what we're seeing in the claims trends, at least partly, and second - -

Ron, the answer to that is absolutely yes.

That's what SRM is all about.

It's helping us to be price competitive in the better tiers which enables us to keep those customers for longer periods of time, enhance our cross-selling and they have disproportionately favorable impacts on our loss ratios.

Absolutely, yes.

Your second question.

Second question Ed, is the obligatory, are you low-balling guidance question.

And I want to ask it this way.

The guidance for this year with 1 quarter to go, implies fourth quarter earnings well below that of the first half level.

Yet, at least in the second quarter in particular, it seems like you had a close to normal Cat load from what I can see.

So, you know, from that perspective, why would we expect fourth quarter to be significantly less than second, especially with Allstate Financials earning seemingly breaking out on top of that?

You know Ron, this is such a difficult business to give guidance in.

In the third quarter, if you ever needed proof of that, the third quarter is it.

First quarter Cats were very low.

Second quarter of Cats, while in the zone of average, were low.

So first half, either first or second quarter earnings were quite strong because of that.

When we use the guidance numbers and we say, based upon average level of catastrophes assumed in pricing, there's a range on that.

It's not a single estimate.

And it's what makes giving guidance in this business such a very, very difficult process.

You know, what we did, as Dan mentioned, we simply subtracted off of our prior guidance the amount by which actual Cats in the third quarter exceeded what we would have had in our pricing model.

And we're prepared to stick with that guidance.

The range reflects the fact that you can have a fairly substantial range when it comes to the definition of normal catastrophes.

And it also, Ron, underscores why we're really looking hard at this issue of should we continue to give guidance in future periods.

Well then, as a different way of approaching it and to perhaps help us understand your underlying expectations could you share with us what kind of Cat loss ratio range we should build in for fourth quarter that's relevant to the range you're using in your guidance?

No.

But I'll tell you how you can get it yourself.

In our supplement, and in fact, in the basic document itself, we put the range of catastrophes by year and by quarter.

And you could look at those numbers related to the premiums, either Homeowners or total, and construct a range and you can decide whether you want to be at the high end of that range or the low end of that range.

Okay.

Fair enough, thank you.

Our next question comes from Dave Sheusi from J.P. Morgan.

Hey, good morning, everyone.

Good morning, Dave.

I just wanted to switch over to the Financial Services side.

You know, expectations on this side seem to be in ongoing transition mode.

Could you just give us an update on your underlying outlook on that side of the business as you build out the product portfolio and - - you know - - especially on the expense initiatives as we go ahead here.

Sure Dave.

We like that business.

We continue to believe it's a very, very important part of our future.

And I think Casey Snow(ph) and his team are going a great job trying to get that business matched with some new economic reality.

So we are getting more efficient.

That is, taking costs out.

We're getting more muscular in certain product lines where we think we can get closer on the economies of scale calibration, where we want to be, trying to deal with fewer partners but the ones that we deal with, trying to get them larger in size.

And I think the performance for the third quarter is indicative of the progress that we've been making.

Now I will tell you, I think yesterday when I checked the 10-year treasury was sub 4%.

When you look at where the markets are, in terms of interest rates and volatility, and lack of consistency in the equity markets, those 2 things have a huge impact on what kind of progress and what rate we can make progress with Allstate Financial.

We would have never anticipated, and I don't think the Federal Reserve did either, that rates would heading down the way they are in light of some inflationary pressures and higher gas prices and everything else.

We are making good progress on those things that we can control.

But on market, which gives you sub-4% interest rates and choppiness in the equity markets which scares people away from making investment decisions is very hard to contend with, and generates substantially increased improvements in earnings, we're going to do that.

But there are factors there beyond our control.

As we look at the fixed income - - or fixed annuity line, for example, what are we doing differently across that segment to see, you know, the 36 plus percent growth?

Is this just an anomaly or is this something that you're changing on the product side of distribution?

Both.

What's happening on that?

Both, Dave.

It's a good product.

It' a product that current returns are attractive for us.

We have good distribution partners in there.

It's a product we understand well and, the broker's and distribution channels that we use like what it is that we're selling.

You know, can we continue that?

I don't know.

When rates spiked up to 4.5 or 4.7 or 4.8%, I think it was easier to sell fixed annuities.

When consumer believes that they're going to be down in a sub 4% range, you know consumers could put their hands back in their pockets and wait and see what happens.

Great.

Thank you.

Our next question comes from Jay Gelb from Prudential.

Good morning.

I had a question on premium growth in Allstate Protection.

That was 5% in the quarter and if you striped out the reassurance and the New York Assigned Risk Plan it's more like 5.5%.

When will the drag of those affects, along with the California piece, fall off?

And will that boost reported topline growth going forward?

Well, again, you did see this quarter, the first time we really have had apples and apples with the California Auto plan.

And you're right, with those other adjustments it brought it up about half a point.

But what we're focusing on again is what's happening in Allstate brand Standard Auto/Homeowners where you seeing premium - - written premium up and Allstate brand Standard Auto at 6%, 7.9 for Homeowner's.

New businesses is up 7.7 and Standard Auto, up 10.5 at Homeowner's.

Again, we have got to drag down on the average with Encompass and what's happened with Nonstandard Auto.

We're getting importantly, very good PIFF growth.

Standard Auto of 5.4, Homeowner, 6.2.

And as we continue to make those kinds of gains in units, you'll see market share gains over time and we'll be at the level that we anticipate being for topline growth.

You know, Jay, we've talked about this, you and I have and with many of the folks on the phone. 5.4% PIFF growth in Standard Auto and 6.2 in Homeowner's is really strong performance.

This is an industry, you all know the numbers as well as I do, that grows at maybe, 1 percent per year in PIFF, if you're lucky.

So those kinds of ranges suggest that our business model is working, that our advertising spend is drawing more customers into our company, that our risk selection process as driven home through FRM are working because we're getting, you know, really good combined ratios and loss ratios on the product.

So we're liking what we set in motion, you name it, 2, 3, 4 years ago and it's working well for us.

So you're growing faster and getting the highest returns?

Yes.

And then secondly, on the asbestos front.

I know it's very difficult for the insurance company to say that reserves are adequate and it won't be an issue anywhere.

But, maybe on a scale of 1 to 10, with 10 being the high, where do you feel your reserve level is going forward?

And hopefully this won't be a drag on earnings going forward.

The we feel very comfortable with our reserves are adequate.

Again, we provide, based on information we get, if you look at that adjusted 3-year survival ratio of 30 years, even a 1 year unadjusted, without taking out settlements, commutations is 22 years.

We feel that we're doing the right thing and they are adequately stated.

So unless there's an unfavorable shift further in the litigation environment or the regulatory environment, you'd say that this should do it for asbestos, right?

You can never say never with asbestos, the way the trial lawyers continue to open up new avenues and new companies with encapsulated products, et cetera, et cetera, you can never say never.

And as a result, when we get the information we need, we take the appropriate action.

Jay, a Federal solution in this regard, would be just an enormous assist to the industry in general, as you well know.

Either a trust fund, as several of the companies attempted to get in place several months ago and/or much more rigorous medical criteria.

You have to make an assumption about who wins the election in November.

My instincts would be if Bush is reelected maybe there's an additional opportunity - - a window of opportunity to get some Federal relief from what's just a vicious gain(ph).

That would provide you the finality that you're looking for.

Absent that, activist judges, very creative trial bar, you just don't know where this is going.

Sure hope so.

Thank you.

Our next question comes from Bob Glasspiegel from Langen McAlenney.

Good morning.

You spoke about where your reinsurance stands in Florida.

Any thought to changing your overall reinsurance in light of where the markets are, recognition of what happened this quarter, changing your insured risk assessment of what could be a storm of the century type event?

You know, Bob, that's on the table.

There's a whole lot of issues and ideas on the table, including more reinsurance, not just in Florida, but in other places, we did have reinsurance on the 4 of those storms, Ivan, which kicked in for us.

And we purchased the reinsurance earlier in the - - Jeanne, I'm sorry.

We purchased that reinsurance earlier in the year that would have helped us in South Carolina or North Carolina, I could be off on the states.

I don't remember exactly which ones it is.

And I think you'll see reinsurance as, perhaps, a more permanent part of our property reengineering efforts and our - - the economics of our business going forward.

You know, exactly what states, how much coverage, what the attachment points are, what the costs are, to soon to tell.

But that is 1 arrow in our quiver that we're going to be using to, you know, continue to make the Homeowner's business where we want it to be from a return - - equity return on capital standpoint.

Okay, my follow-up.

Do you have numbers that you'd share with us just under use of contingence within either Encompass or the life company?

Just to either quantify a rough magnitude of how significant they are.

No.

No, we don't, Bob.

Okay.

Thank you.

Sure.

Our next question comes from Kelly Nash from McDonald Investments.

Hi.

My question is regarding the PIFF numbers.

Looking at the impressive PIFF numbers as well as the retention numbers that you have, can you discuss how long you believe this kind of growth is sustainable?

And then, what specific, either macro or internal factors is this dependent on?

I think good solid PIFF growth is sustainable for quite a period of time.

I think it reflects the fact that this is a very disaggregated market with some 1,200 companies in the United States that sell automobile and homeowner's insurance.

They don't all have the brand that we have.

They don't have 11,500 points of presence across the United States of America.

They don't have the technology muscle, they don't have the marketing spend that we have.

So, I think good solid PIFF growth is sustainable.

At the current levels, we will see.

We like where we are.

We like what our model represents.

What kind of macro variables could change that?

You know, for the most part growth in the industry is a function of population growth or net new automobiles or net new homes.

It's amazing how on balance the policies in force grow around that 1% number and there's not much variability to that.

You know, the rate of household formations doesn't change.

The rate of immigration doesn't change at a rapid rate, either up or down.

You know, you'll see spikes in net new cars purchased 1 year and then a slight decrease in another year.

So aside - - I just don't see many, if any, major macro economic kinds of things that would either help us or hurt us from a - -from a PIFF standpoint.

It's really our ability to play an increasingly larger roll in a disaggregated diffused marketplace.

And our ability to emphasize all of the positive aspects of our business model that I think gives us the opportunity to grow.

And then just a follow-up, can you just discuss what you're seeing in terms of pricing in both Auto and Homeowners?

And specifically address what kind of impact you think the significant storm activity in the southeast may have on the overall industry or rates in the southeast, but also, with respect to the rest of the country?

You know, pricing trends with relatively moderate.

Certainly nothing like they were 2 or 3 years ago.

We are seeking and obtaining rate increases when we need them to offset state specific cost increases, so we are liking where we are.

A little more pressure on Homeowner's rates and I do think that rate increases, particularly in Florida, again, it's 1 arrow in our quiver.

How substantial they have to be is a function of what - - what does - - where does the state come out on discussions of attachment points or deductibles on a per-storm basis.

What happens with reassurance?

Can you fact that into your pricing mechanism?

But when you see 4 major storm goes through Florida, particularly parts of Florida, that heretofore, I think the industry thought was less susceptible to hurricanes and, in fact, it turns out.

I think you will see some rate increases be a part of the solution.

But it will be one part of the solution not the only part.

Great, thanks.

Our next question comes from Alain Karaoglan from Deutsche Banc.

Good morning.

I'd like to keep on the Homeowner's flurry market.

Post hurricane Andrew you formed the Allstate Floridian to shield a little bit the capital of the overall company from potential catastrophe exposure from Florida if you couldn't get the appropriate pricing.

That subsidiaries capital, I think, was $600 million before the hurricanes and you had to, I think the capital was gone.

You had to add $300 million to that.

What are your thoughts on the Florida Homeowner's market?

What needs to happen for you to be willing to add additional capital in Florida for it to achieve an attractive return on capital, even if you look at the past 10 years, including these storms?

First, Alain, you're understanding of what we've done and how it works and where we are is quite good.

Your numbers are boxcar, pretty accurate.

What has to happen?

First of all, we like Florida.

You know, it's a big state.

It's a growing state and we would very much like to be there in as material a way as we are there today.

But we need to be able to generate adequate returns for our shareholders.

So I think working with legislature and the commissioner, we've got to get a different balance between how much risk does the private insurer take and how much does the State or Federal government take?

I liken it to flood insurance, which, as you know, is not covered on a private basis.

It simply is, it's too variable and subject to too great a severity.

I think that's an interesting model.

In the past, the State of Florida has shown a willingness to be creative and to change things to reflect the fact that it wants to have a dynamic economy and it wants to have available and affordable insurance prices.

So, where do you go?

Attachment points with the State?

Deductibles, pricing, the ability to take reinsurance and put it through the pricing mechanisms.

Perhaps, even a better PML management on the part of all the insurance companies recognizing that, you know, a place like Orlando may be much more exposed then we ever thought it would be.

The bottom line of that long-winded answer for which I apologize, our desire is to be - - is to help consumers protect themselves and protect their lives.

And we want to do that in all the lines that we write and we want to do it in all the states that we currently participate in.

We're looking to craft a good solution, working with the regulators and the legislature in the State of Florida, that helps us and helping our consumers.

It's a complicated item.

There's a lot of pieces to it.

But we are going to devote substantial energy and resources to it near term so that we are ready, hopefully, by the time the next hurricane season rolls around.

And whatever happens Florida could well be a model for what we could do in other states long the Atlantic seaboard and the Gulf of Mexico.

Thank you.

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

Good morning.

I was wondering if you could lead - -respond to some of the recent allegations that there is quite a bit of competition in your (inaudible) to the point where the pricing is not up to an adequate spread in returns on equity.

You know I think there is a lot of competition in the annuity business and I think the - - the choppiness of the equity markets is probably exacerbating that.

We've made some changes to our variable annuity product in particular.

We do not have income benefit riders on it.

Many of the competitors do.

So we are right now, until recently, had a product in the marketplace that, perhaps, wasn't viewed as that competitive.

We've made some changes to it in terms of accumulation benefits or withdrawal benefits the kinds of things we can hedge so we aren't planting bombs in our balance sheet.

We've made some changes as to who the submanagers are and we introduced those late in the third quarter, early in the fourth quarter this year, which we think, will help us.

You know, our goal is not to sell product just to sell product.

We want to take care of the customer's needs.

But we're interested in adequate returns on capital and that means the products that we sell have to be priced right and we have to make money on them and we're interested in profitable growth.

We won't sacrifice those goals simply to chase more volume in any particular market.

We've never done it in the past and we aren't going to do it in the future.

And then to switch to the other side of the house in the property/casualty business.

When do you think Encompass could, you know, catch up with the growth of the primary property/casualty businesses?

And I understand there have been changes in management and there are some efforts to make that business blossom.

Could you give us some thought there as well?

Yeah, I can.

Recognize what - -what we've been attempting to do.

Let me give you a little longer term perspective.

We bought that business at the end of '99.

We wanted to get it down to a sub-100 combined ratio, that is where it's profitable and generating adequate returns.

We thought we could do that in 3 years.

In fact, because of some difficulties in the marketplace, it took us about 3 1/2 years.

As I mentioned earlier in some of my prepared remarks, the combined ration for Encompass on a year-to-date basis is in the 95 to 96% range.

It's a phenomenal turn around from where it was.

And we now have some growth ambitions and Doug went and the people who are running that business, they have some good plans, aggressive plans, achievable plans for us to grow and take more market share in that business.

Homeowner's and Automobile insurance, we understand these markets really well.

We are always in those markets on pretty much a national basis unlike other people in the independent agency channel who sometimes view personal lines as an area of accommodation.

We can be successful in this market (technical difficulty) new technology for us, new SRM pricing.

I believe you'll see some good growth in that marketplace beginning in 2005.

(inaudible) beginning to see some growth there for Encompass.

Standard Auto for the quarter was up about 4% and Homeowner's about 8%, so you are beginning to see some change in trends there.

Is there any possibility that operation grows faster than your - - the Allstate brand, given the relative lack of penetration?

You know, it's possible.

We'd sure like to grow both brands at industry-leading levels.

And so we will be pushing on both, not just one versus the other.

Great, thank you very much.

Our next question comes from Ken (inaudible) from Stadium Capital.

Yes.

Good morning, Ed.

Thank you.

Good morning, Ken, how are you?

Thank for your time.

This is a situation where we all need levity I think, so kudos to you and Jerry for exiting the commercial business.

Any way, Ed, with respect to topline growth outlook --

Hey Ken, we're having a hard time hearing you.

Could you - -

Ed, can you hear me okay?

That's better.

Sorry, head set here.

I'll try to be clearer.

With respect to topline growth outlook for '05, has Allstate provided any formal guidance on that, or is it difficult just given the Florida homeowner's situation you described?

We have not provided any guidance and we're not going to provide any guidance in terms of what that topline growth might look like.

Okay, fair enough.

If Tom Wilson is there, one of the questions that we've been thinking and debating the extent of contingent commissions and/or, you know, again, I hate to bring up the subject, but some of the recent investigations as to bid rigging to the extent that that can be quantified now in the life insurance or group marketplace.

Any commentary there?

No.

Ken, I really don't have any commentary beyond what I said before.

We just, if you look at - - if you wrap where Mr. Spitzer appears to be going and where he's gone.

We just don't have any reason to believe that we're involved in any respect with anything he's looking at.

We don't have subpoenas in hand.

We don't have requests for information or inquiries of any way.

So, it's tough to speculate on where other AG's or where other commissioners might go.

Fair enough.

Ed, also, a point of clarification, I know Bob Glasspiegel mentioned Encompass and contingent commissions.

Can you just clarify, if, in fact, there is something in their business model that, you know, that related to that?

Or is this something tied to, you know, sort of previous - - previous owners?

No.

You know, our core Allstate model, is an agency model, not a broker model.

In the independent agent world there are pay for performance or achievement bonuses that reflect the fact that you reward those agents who help you get the lowest prices for the consumer by growing their agencies in a profitable way.

Servicing the customer well.

Keeping expenses down.

There are those kinds of things, contingent commission is really kind of an ugly and brutal word.

There are, I think, in just about every business model, in most industries, some way of rewarding people who do the right things.

We certainly have those.

I don't know that it's contingent commissions the way you're using the word or the way Mr. Spitzer uses the word.

Excellent.

Thanks for the clarification.

Sure.

Our next question comes from Chris Winans from Lehman Brothers.

Thanks.

You talked about some higher expense ratio and obviously, a big part of that is advertising.

But, can you talk about specifically, what you're doing both in the independent agent channel and also, in your captive channel to drive growth there in terms of commissions?

To drive growth there in terms of commissions?

You know, we have a standard commission process in our - - in our Allstate agency channel.

There's really not much to talk about beyond that.

As I just mentioned.

In the Allstate agency channel we have achievement bonuses, so our very best agents who help us keep our expense ratio's low and get the right customers in the door, and get more customers so we can get economies of scale, we will reward them with achievement bonuses.

They aren't contingent the way you think of them or the way you tend to use the word.

Well are you using - - or are you paying, say - - say I know some companies paying, 5, 15, $20 per applicant reward for just getting a volume of applications in.

Are you doing anything like that in Encompass?

No, we do not.

Thanks a lot.

Operator, I know this is a busy day for everyone, if we could make this the last question.

Our last question comes from Charles Gates from Credit Suisse First Boston.

I guess it's better to be last than not at all.

I think that's probably true for many things, perhaps, but I'm not sure.

I guess two questions.

The first question, probably, 3 times in this call at least you've talked about frequency.

If the economy remains near current levels, could - - could you assess how you think personal auto accident frequency evolves in '05, versus '04?

You know, Charlie, I'll take a stab at it.

Although I'll preface my comments with, you know, my crystal ball is no better then anybody else's.

I think gas prices at the level they are at, to the extent they stay there, I think it has a negative impact on driving habits.

Is that perceptible enough to, to on a cingular basis, continue to drive frequencies down?

I just don't know.

Work we've done in the past suggests that the overall health of the economy may be as large a factor in driving habits as everything else.

While I am an optimist and I think you have to be to run a big, large company, good company like Allstate, you know I think the economy feels cooler to me right now then it did, let's say, earlier in the year.

Don't know what would happen that would make it particularly more robust.

So, you know, I would tend to see frequency levels at kind of where we were in '04, maybe down a little, depending upon gas prices and overall economic conditions.

And it may depend upon who's in the White House too and what's going on in Iraq and a whole host of other issues.

Very hard to divine specific trends from an economic standpoint, that will, on a one to one basis drive frequency.

My - - my - - my only other question, this is my follow-up question.

As I recall, back in '98, you had Progressive and Geico both trying to dominate the American highway from the standpoint of growth.

While - - while seemingly both company's growth engines remain tempered.

Do you see any of that mantle being taken on, for example, by new players, such as American International Group, which I believe in their personal lines business, grew sales some 19% this year's quarter, versus last year?

Charlie, I do not.

There are companies that occupy each - - occupy a position of strength in each of the distribution channels.

So, in the agency world, you know, we and State Farm, we are really good at that business.

In the direct world, you know, we have both the direct and an internet application.

We're getting better and better at those.

Do they rival Progressive or Geico yet?

No.

Could they some day?

Yes.

I'm just not sure that a marketplace that already has 1200 competitors in it, gives much opportunity for someone new to enter it.

I'm always surprised by, you know, how sometimes people just don't do the math.

You have a business that has 10 units and you get a 10% increase to 11, you know, that's a big increase.

When you have a business that's got 1,000 units, you know, you need 100 units in order to get that increase.

So applying some reasonableness to the size of the base that you see a percentage, like AIG has referenced, I think, is a really important part of the analysis process.

I know you would go through and I would encourage everyone to go through.

You know, we are a major player in the Homeowner's and Auto insurance business, we know this business well.

We're getting better and better at it.

We're getting bigger at it.

And we're going to be a very formidable competitor, given the array of products that we offer and the distribution channels that we offer.

We are a formidable competitor for anybody that's is in this business or chooses to come into this business.

Listen.

Thank you for joining us this morning.

As I said earlier, this really has been an incredible quarter.

And I believe the quarter reaffirms the wisdom of our overall strategy of getting better, bigger and broader.

And I think it reaffirms the successful execution of that strategy.

You know, incurring over $2 billion in catastrophe losses on a year-to-date basis and still generating an operating ROE of some 16.5% and a year-to-date increase in operating EPS of more than 10% is truly, remarkable.

I have to tell you the impact of hurricanes on our customers, our employees and our agencies, simply overwhelms anything else in the quarter.

I cannot adequately express how proud I am of the efforts of each and every one of our employees and all our agencies in assisting our customers in this incredible time of need.

That's what our business is all about and this is an opportunity where we shine.

So thank you all for your time.

We will talk to you in February.

Ladies and gentlemen, thank you for participating in the today's conference, this concludes the program, you may all disconnect.