Allstate Corp (ALL) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Allstate Corporation fourth 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.

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Block, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Matt.

Good morning, everyone, and welcome to our fourth quarter 2004 earnings conference call.

This morning, Ed Liddy and Dan Hale will give their thoughts on our performance for the year.

Following that, we will take as many of your questions as time allows.

As always, we ask that you keep to one question and a follow-up, that allows us to hear from as many people as possible during the call.

Following the call, you can contact Phil, Larry or me to get any further clarification on our results.

Last night, we issued our press release, and the majority of our investor supplement document.

If you need a copy of these materials, they can be found on our web site under investor relations.

Please note that 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's section in Allstate's 10-K for the year 2003 in our notice for the annual meeting and proxy statement dated March 26, 2004, and in yesterday's press release.

In this call, we will discuss some nonGAAP measures.

You can find the reconciliation of those measures to GAAP measures in our press release and in our quarterly investor supplement in the investor relations section of our web site, allstate.com.

This call is being recorded.

Your participation in the call win 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.

And a replay will be available following the conclusion of this call.

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

Now, let me turn the call over to Ed Liddy.

Ed?

Thanks, Bob, and good morning everyone, as always, thank you for your time.

In a nutshell, I am very pleased with our performance in 2004.

Our results mark another impressive year for Allstate as they reflect a tremendous dedication and hard work of our employees and our distribution partners.

And I believe they once again validate the strategic path we have chosen to become better and bigger in property casualty and broader in financial services while maintaining capital discipline.

We are executing on that strategy extremely well.

A summary of the year.

We grew net income to 3.18 billion, that was an increase over 2003 of 17.6 percent.

Our operating earnings rose to a record 3.09 billion.

And, that's despite almost $2.5 billion in pretax catastrophe losses during the year.

Our earnings per diluted share on a net and operating income basis of $4.54 and $4.41, respectively, were all-time highs.

And our net income return on equity improved to 15 percent, while the operating income ROE rose to 17 percent, both results meeting our long-term expectations.

From a capital management perspective, we increased our dividend in 2004 by 22 percent.

We bought back almost 29 million shares of stock completing our $1.5 billion authorization a year earlier than planned, and we announce another $4 billion program to be completed in 2006.

We've already begun to repurchase shares under that $4 billion program.

Our stock finished the year at an all-time high, generating a total shareholder return of just under 23 percent, more than doubling the return of the S&P 500, and in fact, since our IPO, Allstate has produced total shareholder returns of 17.7 percent annually, or 380 basis points, greater than the comparable return for the S&P 500.

Operationally, we continue to execute on our theme of profitable growth.

Leveraging the efficiencies of our tiered pricing structures, expanding our Allstate distribution system by over 600 Allstate agencies, and that's the third year in a row we've been able to increase the number of agencies, and flexing our marketing muscle, we've begun to achieve the type of profitable growth we desire.

Allstate brand standard auto and homeowners unit growth reached 5.5 percent and 6.4 percent respectively.

These increases represent the fastest unit growth rates we've had in many, many years and were driven by both strong new business production and, equally important, improved retention trends.

And, these results came, despite a significant number of rate decreases by some of our competitors and significant increases in marketing expenditures by others in the personal line space.

We competed very, very well.

When you couple our growth with the very favorable loss cost trends we've enjoyed, the margins for the Allstate brand continue to improve.

The overall combined ratio for the Allstate brand was 90.2, that's a 1.3 percentage point improvement from 2003.

But that figure included 9.8 points of catastrophe losses versus only 6.2 points in 2003.

So the underlying combined ratio improved almost 5 full points for the year.

The efficiency of our pricing structures on a local market level continues to reap benefits.

And we continue to seek rate increases when and where indicated, and have received approval in many states this year without incurring undue regulatory pushbacks.

I remind you of my comment I make to you frequently, this is a local market business, you must be sensitive to and aware of conditions in each and every local market.

Our independent agency business written through Encompass and Deerbrook, increased slightly to 2.07 billion, but the margins improved dramatically, producing a combined ratio for 2004 of 93.7.

That's an 8.2 percentage point gain over 2003.

We have fixed the profitability of this business, and we can and will now proactively grow this franchise.

We're looking for very good things from Doug Went(ph) and the entire Encompass team, it is their time.

Allstate Financial made solid progress in 2004, advancing our strategy to become an operationally excellent product manufacturer.

I would like you to consider the following, all of which is covered in our press release.

We achieved record total sales of some $15.9 billion, and record sales through our distribution partners in Allstate agency, financial institutions, and institutional markets.

New sales of financial products by Allstate exclusive agencies totaled $2.27 billion, that is an increase of 24 percent from 2003, and I would point out that in the last five years, Allstate agencies have increased new sales of financial products at a compound annual growth rate of over 46 percent.

That is ample evidence of this distribution force's ability and willingness to provide for our customer's needs beyond property casualty products.

We created a focus on our largest, most productive and profitable accounts, while adding new significant strategic partners, like Wells Fargo.

We improved our operating and competitive position going forward to regain traction in the broker dealer division, independent agencies and the work place division.

We established a more focused product portfolio with fewer, more competitive products that can be leveraged across multiple channels.

We enhanced variable annuity competitiveness, including new funds and a new withdrawal benefit in January 2005 to go along with our accumulation benefit, providing more options for the customer.

Finally, we generated $551 million of operating income.

That's a 23 percent increase over 2003.

So, where does that leave us as we go into 2005?

If you think back to this time last year, the issues were pretty similar.

There were worries about competition heating up, about the pricing cycle having peaked.

There were fears of irrational pricing taking hold and the return of auto and homeowner lost cost increases compressing the margins.

Those issues we deal with every day all across America.

I've always said, this is the local game, played in local markets, and won or lost based upon execution of local market-based strategies.

Our results over the last several years suggest that we are, in fact, winning.

And we intend to keep on winning.

We have many strengths upon which to build.

An aligned and growing distribution force, an evolving, efficient, highly sophisticated pricing structure.

A better focused marketing machine.

An expanded portfolio for both property casualty and Allstate Financial.

Improving point of sale technology.

A claims organization that is absolutely second to none.

And the financial strength and discipline to thrive in this market.

We look forward to the opportunities that face us in 2005.

As many of you know, we've been soliciting feedback on the pros and cons of continuing to give annual earnings guidance per share, based on your input and the admittedly limited analysis available on this issue, there simply doesn't appear to be any definitive best practice or any right answer.

Based on one study, approximately 80 percent of public companies provide some sort of earnings guidance.

But for banks and insurance companies, that rate drops to little more than 30 percent.

I think that's an interesting comment on major factors influencing our industry.

There is a wide range of practices, all of which seem to be effective.

And, you would expect, if you have, or if you changed guidance practice, if that were to be perceived as negative, it could be viewed as reinforcing a negative market reaction.

So, given that fact alone, we decided to continue providing annual EPS guidance this year.

If for no other reason than to dispel any potential concerns about our confidence in the future and/or our expectations for very solid underlying operating performance trends.

We expect to be able to produce operating earnings per diluted share within a range of 540 to 580 for 2005, assuming the level of catastrophe losses included in our pricing structure.

That represents somewhere between a 22 percent and 32 percent increase over 2004, which should continue to drive solid gains in book value per share.

We're highly confident that for 2005, Allstate's strong performance will continue to differentiate us from the competition, as we expect to generate record operating earnings per diluted share for the third year in a row in 2005.

Now, let me turn the mike over to Dan to add color on our results, and then we'll be glad to answer your questions.

Okay.

Thanks, Ed.

First, a few comments on our net written premium growth of 4.8 percent for the quarter.

As shown in the footnote on page 11 of our press release, written and earned premium growth rates were both, negatively impacted by reinsurance transactions and accruals for premium refunds.

Without those items, premium growth rates would have been 5.6 percent or about the same as last quarter on an apples-to-apples adjusted basis.

But, more importantly, for our core standard auto and homeowners lines, we continued to see very solid PIF growth and increased retention rates which will translate into market share growth going forward.

Allstate brand standard auto written premium was up 5.7 percent.

New business premium written 5.5 percent.

Policies in force also grew at a 5.5 percent rate, and retention was up 4/10 of a point year over year up to 90.6 percent.

Homeowners' premium grew at a 9.8 percent rate.

New business premium written was up only 4.3 percent, partially due to risk management actions primarily in Florida, but homeowners PIF grew at a 6.4 percent rate, and there was more than a 4-point gain in retention to 88.7 percent.

And while there's been a lot of talk about rate reductions and potential rate reductions, our tiered pricing approach and overall strategic risk management processes, as Ed mentioned, with that, we continue to obtain approval for moderate rate increases where they were needed.

For Allstate brand standard auto, approval was obtained in 11 states for rate increases averaging 4.6 percent and 3.7 percent in 6states for Encompass.

For homeowners, the rate increases averaged 4.4 percent in two states were Allstate brands, and 5.3 percent in 8 states for Encompass.

As we continue to stress, our approach is to file for increases as soon as we have indications of need, and then to expedite the filing process.

Along with our best in class claims processes and our strategic risk management underwriting, that's the approach we have been, and will continue to follow in order to maintain our margins and returns.

For those who closely monitor frequency trends, as we obviously do, you may have noted in our supplemental material that standard auto bodily injury and physical damage frequencies increased slightly for the fourth quarter of 2003.

That was purely weather related and the last two weeks of the year.

Prior to the last two weeks, frequencies were below the prior year for the entire quarter.

In fact, the total all coverage frequency for standard auto was 1.1 percent below the prior year, because both collision and comprehensive coverages experienced favorable variances in the quarter.

And the favorable frequency trends continued for both nonstandard auto and homeowners.

Our message here is, that while there will always be seasonable fluctuations, like the January snow and ice storms, for instance, while there will always be seasonal fluctuations, still, our underlying frequency trend remains favorable.

A few additional comments on catastrophe losses for the quarter.

Of the 412 million of (inaudible) losses, 367 million were a result of reserve reestimates for hurricane Charley, Frances, Ivan and Jeanne.

As you know, our initial estimates for these storms were developed in the third quarter, shortly after the unprecedented hurricanes crisscrossed Florida and the southeastern seaboard.

They were developed at a time when very few losses had been paid, and without being able to gain access to a substantial percentage of damaged properties because of the extensive devastation and massive scale of these overlapping storms.

During the fourth quarter, a significant amount of losses were paid, and our claims personnel were able to complete inspections and refine severity estimates including estimates with potential supplemental claims.

Now, as shown on page 18 of our press release package, you can see in Florida, Allstate Floridian losses exceeded our 312 million retention level for three of the hurricanes and the fourth is within 33 million of that level.

As you may recall, 90 percent of qualifying losses above the retention level are recoverable from the Florida hurricane catastrophe fund.

So, if there were additional increases in qualifying losses going forward, approximately 90 percent of them would be recoverable from the fund.

As we mentioned on our last call, the events of this past hurricane season are resulting in a new round of examinations of the insurance market within Florida and several other states and we are participating in that process.

Since hurricane Andrew, we've reduced our modeled, single-event, 100-year PML by 75 percent after reimbursements from the fund.

But given the events of the past hurricane season, clearly, 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.

In addition to the reserve strengthening for the Florida hurricanes, we also recorded favorable prior year reserve reestimates and Allstate protection totaling $188 million.

Those favorable prior year reserve reestimates were principally due to continuing, favorable severity developments across the board in all lines.

Shifting gears now.

A brief update on our capital management activities.

During the fourth quarter, we repurchased 8 million shares of our stock at a cost of $369 million or $49.29 per share.

That completed our $1.5 billion program, and brought total year 2004 repurchases to 28.9 million shares.

For the year, we repurchased $1.4 billion worth of stock at an average cost of $46.79.

And as announced in November, a new $4 billion program began in January of this year, and we anticipate completing that program by the end of 2006.

I should also point out that, as we usually do, we'll be discussing our dividend policy and practices with our board of directors at our regular meeting scheduled for later this month.

Some years, as with last year, the February board meeting comes before our earnings announcement date.

And, some years it's later, as with this year.

Turning now from capital management to a couple of balance sheet ratios.

Our net income ROE for the year was 15 percent, compared with 14.2 percent last year, and that's with unrealized capital gains and losses included in the shareholders equity denominator.

Our operating income ROE, excluding unrealized gains was 17 percent.

That compares with 16.5 for 2003.

Our debt to capital ratio at year end was 19.6 percent, and that includes about two points as a result of prefunding 650 million of 900 million in debt that comes due in May.

Our book value per diluted share at year end was $31.72, which is up 9.2 percent from the previous year end, up 11 percent, excluding the net impact of unrealized capital gains of fixed income securities.

Finally, a few comments on guidance for 2005.

To go along with the operating income EPS range of $5.40 to $5.80, assuming the expected level of (indiscernible) and pricing, you may want to consider the following.

We anticipate that our combined ratio will not increase significantly from the underlying run rate experienced in 2004.

And by run rate, we mean average cats and no prior year reserve reestimates.

Top line growth will be consistent with our objective of maintaining margins, and our operating income ROE, excluding unrealized gains, will be in the 18 percent plus range.

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

Bob, before we get into questions, I think I misspoke before.

Since our IPO, we've produced total shareholder returns of 13.7 percent annually.

I think I juxtaposed those numbers and said 17.3.

It's a great return at 13.7.

Okay.

Bob, you want to take questions?

Okay.

Matt, can you start the q&a session?

Thank you, sir. [Operator Instructions] Our first question comes from Thomas Cholnoky of Goldman Sachs.

Your question, please.

Good morning.

Dan, just wanted to clarify something on the frequency trend, just to make sure I understood it, are you saying that absent the last two weeks of December that frequency we would have seen kind of a down 3 percent kind of number?

If it would have continued to be favorable, would have been negative, yes.

Negative in that kind of 3 percent range?

I'd have to look at the numbers, but the continuing trend that you had been seeing is basically where we were for the entire time.

Okay.

Terrific.

Two other quick questions.

In terms of the accident, in terms of the favorable reserve development, you mentioned it was severity, what accident years did those primarily come in, if you could kind of allocate it by accident year roughly?

That's hard to do.

We really don't have that handy.

I mean, was any of it out of '04?

Was it mostly out of '02 and '03 or you going to go back to '01?

All of those reserve reestimates were from prior years, so it wouldn't be out of '04.

Oh, would not be out of '04?

All prior year.

Okay.

And then, the last question.

In terms of, you've obviously been doing a lot more promotional advertising and things like that.

Can you give us some idea of maybe what you spent last year, what you may think about spending this year in terms of just getting your name out more into the public?

Tom, I can't quote you chapter and verse on what we spent last year, but let me try to get at your issue.

We'll probably spend about the same in '05 as we spent in '04.

Joe Capoti(ph) and the marketing folks are really getting sophisticated at this, so you may see less national advertising and more cable TV advertising where we can pitch specifically at an audience that we think is more responsive with ads that extol the totality of Allstate.

So, I don't see a large increase in that area.

I don't see much of an increase in the area, but I do see a different (indiscernible) where we spend it.

Okay.

All right.

Great.

Thanks.

I may come back.

Hey, Tom, thanks for not asking me a turtle question about setting a bar so low that a turtle could get over it.

I forget what your comment was last year but it stuck with me.

It was the turtle hurdle comment.

Yeah.

The turtle hurdle.

I was going to say it again, but I think if things go well, the turtle will have a good vertical leap this year. [Laughter]

Our next question is from Greg Peters of Raymond James.

Your question, please.

Hi, Greg, how are you?

I'm well, thank you.

I was looking at a couple things on, I think it's on page 23 of your statistical supplement.

I was looking at the new issued application trends, and I noticed that there's a deceleration in the growth in the standard auto line, and then in the nonstandard line, it seemingly stabilized in the third quarter and then dropped again in the fourth quarter.

I was wondering if you could just comment briefly on those trends in the context of PIF growth?

And also, tie in, at least on the nonstandard side, how that might trend with the rollout of subsequent versions of SRM.

Bob, you want to do the first part of that?

Yes.

In terms of the trend, obviously, there's seasonal fluctuations in how the business is being produced.

I wouldn't read too much into one particular quarter.

And remember, we're also comparing, in the second half of the year, we're comparing to a California that, in 2003 that had a new class plan put in place.

Hey, Greg, as I think you know, SRM 4 rolls out on a country-wide basis, pretty much to most states, all states in 2005.

We think it is another advancement in the sophistication of pricing technology, so we think we're in pretty good shape in that regard.

With respect to nonstandard, we haven't shrunk that business as much as we have ignored it.

We think that there is so much to be gained by concentrating on those customers that have greater lifetime value to us, the lower ISS tiers, the tiers, one, two and three because they stay with us, they buy more product, we get higher we tension rates.

But, the nonstandard book has really got -- really kind of shrunk, where it's not going to shrink a lot more beyond where it is right now.

But, our primary emphasis will continue to be on those ISS tiers one, two and three.

That's where the model that we have is most effective.

The PIF growth rate did increase from the third quarter for both standard auto and homeowners.

Right.

With the nonstandard, given the results that you're posting in there, it just seems like a natural pickup to start growing that business along the way.

I also wanted to ask, just briefly in the guidance that you provided for 2005, given the experience of last year, what should we think as being an average level of catastrophe losses on an annual basis at this point?

That's a really good question.

It's probably in the -- I'm going to give you a range, Greg.

It's probably in the what, 4.4 to the 6.4 range.

There's some really good information in the supplemental stuff that Sam Filton(ph) and the accounting team put together, which I would encourage you to read.

It's difficult to reduce it to a single point estimate, because there's such variability around it.

I would use something in that range.

Just saying 4.4 to 6.4 of earned premium, correct?

Correct.

Depends on which big catch you decide to exclude from your averages.

So, if you put them all in it's up above 6, or you can modify that and be below 6.

Great.

Thanks very much for your answers.

Sure.

Our next question is from Bob Glasspiegel of Langen McAlenney.

Your question?

Good morning.

Quick question on contingents.

Surprised to sort of see your name pop up in the top five in one study on contingent rates.

I assume that probably relates to Encompass.

Given that you have such a great advantage, sort of, in the new world with your Allstate brand of not having the distribution system that's conflicted at all.

How do you grow Encompass without using commission rates as a lever more aggressively in the new world?

Is that a wise strategy?

Perhaps might it be smarter just to go back to the Allstate brand in the new world where you really have an advantage potentially?

Bob, there's about five questions buried in that question.

Let me see if I can respond to what I heard.

First, you fill out a statutory blanket, and there's a line on there called contingent commissions and you make a decision as to what goes in there.

We put some of our pay for performance in that category.

Our primary distribution method is through Allstate agencies.

They are agents not brokers.

They are independent contractors, not independent agents.

It, for the most part, if it says Allstate on the door, they sell our product.

So, our situation is remarkably different from many others in the industry, and certainly different from March/May.

What we have is a basic pay for performance strategy that's similar, it's kind of the bedrock of American capitalism, where an agent who brings in more business and helps us to grow our business and spread our cost over more policies so the customer can benefit from it, that's good.

The customer who does his or her homework and gets the right information on the applicant, so we can get the right price matched to the right risk, which helps us to reduce our costs and pass it on to the consumer, that's good.

So first, I would make that comment.

Second, with respect to Encompass, we do think, we are growing in the Allstate channel as rapidly as we can, and we think prudent.

We're doing it by adding customers.

We're doing it by adding agencies.

We're doing it with ad spend.

We really are going after that business.

I think our results in '02 and '03 and '04 have reflected that.

But, we do think there is an opportunity in the independent agent channel.

That still is somewhere between 28 and 34 percent, depending upon how you cut the numbers of the marketplace.

And we offer combined products and a full array of property casualty products.

So it's not just auto where some other companies, really had, pretty much had that marketplace to themselves.

We don't think the key is commissions.

We think the key is good service, good technology, staying power, the right products, the kind of SRM pricing efficiency that we use in the Allstate brand, using that in the independent agency brand.

So, we do think there's an opportunity.

And believe me, we can do both and we are prepared to do both.

Okay.

That's a great answer.

So, but, I hear you saying you don't really want to, in the new world, sort of trumpet the fact that you've got a -- your bedrock of your company is a totally nonconflicted distribution channel?

Bob, I didn't understand that.

I'm just saying with all -- you have a direct distribution model that's a real competitive advantage.

Oh, it's a huge advantage.

Yes.

And I think it's even a greater advantage in potentially the new world.

Yeah, I think it is, Bob, I would agree with that.

Sorry, to interrupt you.

But that does not mean that there's not opportunity in that independent contractor world, and you don't get added simply because you modify commission structures.

It's much more of a complete world than that.

You really have to have a complete product offering.

Okay.

Thank you very much.

Thanks, Bob.

Our next question comes from Ron Frank of Smith Barney.

Your question, please.

Ron, how are you?

Good, thanks, and you?

Good.

Couple of things if I could.

One, I wanted to follow up a little bit on the new issued aps and the policies in force.

If we look at the trends in year over year growth and policy in force for Allstate brands during the course of the year.

If you just blindly connected the dots and did nothing else, it would certainly point to a near term plateauing or even rolling over of the number.

I was wondering if you could give us a little color on where you see consecutive quarter trends going based on what you are seeing now?

Second, I was a little bit surprised to see the comment that fixed annuity sales were up.

It hadn't seemed to me that the rate environment, the interest rate environment has become particularly more conducive to profitable sales, and I was wondering if you could comment on that as well?

Sure, Ron.

We'll comment on both.

With respect to the quarterly trends, no, I can't provide too much color on what the quarter's going to look like.

We are growing our business.

Dan mentioned the numbers of standard auto and the 5.5 --- yes, standard auto and 5.5, and homeowners at 6.4, so we're going to continue to grow our business.

Those are phenomenal growth rates, you know they're applied against a very large base of business.

As you know, we are a behemoth in this industry and we're going to continue to seek profitable growth.

I'm going to keep those numbers -- those concepts connected every time I get a chance to chat with any of you on the phone.

It's profitable growth that we are after.

We like where we are from a standpoint of trends in standard auto and homeowners, and we think that we can continue it.

With respect to fixed annuities, Larry, I'm going to ask you to dive in there on some of the analysis we've done.

Yeah, Ron, on fixed annuities it's true, we're up 97 percent over the fourth quarter last year, but with respect to recent trends, we're up only 6 percent from the third quarter of this year.

Last year's fourth quarter was somewhat depressed, being at 16 percent below the prior year and 26 percent below the sequential quarter.

But what I will say, what we're seeing in the marketplace is that we've been very effective in our bank distribution and that's where the bulk of the growth is coming from.

So, our wholesaling has been outstanding.

Our senior management in relationship building we've been doing with our most profitable and productive accounts, which is part of our strategy and has been working very well.

We are meeting, or exceeding in many cases, our pricing target.

So, it's really been primarily because of that.

Okay.

Thanks very much.

Ron, this is Bob, just to add some color on the PIF.

If you go back and check the sequential growth of the standard auto and the homeowners, for the last six quarters, each quarter has averaged between 1 and 1.5 percent.

So, it's just a constant, as Ed mentioned, we're a large behemoth that is just continuing to grow.

So, it's not as though it's plateauing and turning over.

And, Bob, was the most recent quarter in line with that average?

The most recent quarter, standard auto was up 1.2 percent over prior quarter and homeowners was up 1.5 percent over prior quarter.

Great.

Thanks very much.

Our next question is from Bill Wilt of Morgan Stanley.

Your question, please.

Thank you.

Severity related question, I guess both homeowners and auto.

In homeowners, couple of quarters now was fairly strong positive severity trends.

It's actually the converse in auto.

Negative, if I'm not mistaken, negative (inaudible) severity trends for a couple quarters in a row.

Any thoughts you can add to those statistics?

Well, when you look at, those are two different an animals.

When you look at homeowners, you have to take into account several things.

One, frequency effect.

Frequencies have been very, very good as a lot of the smaller claims that dropped off , which helps frequency but hurts the paid severity.

Because you are losing a lot of small dollar claims in that vein.

You also have inflation on the values, which tend to push up the cost on homeowners.

We have just done a remarkable job in our claim function, in terms of managing our severities relative to the cost drivers.

Our pay severities in auto have been significantly better than what the CDI(ph) benchmarks would tend to indicate, and we've been actually better on the homeowner side as well.

That's helpful, thanks.

The second one, I just wanted to check in.

I'd noticed in the call the word local has come up, I think, more times this call than it has that I recall in previous calls.

I wonder if that reflects a more nuanced strategy?

And if that's the case, share any thoughts as to specific gains that you hope to realize by shifting that strategy?

Well, Bill that's interesting.

Don't read too much into it.

It wasn't an intentional repitching of where we are.

Tom Wilson, as most of you know, runs Allstate protection, and they have operating teams in each region.

So, the operating team is self contained and then draws on the resources that we have here at home office.

We started that, oh, five years ago.

Tom's taken it to an even greater level of sophistication when he moved into that role.

It just takes a while for that to really work, where you have an emphasis on local issues but you also have the power of national scale and a national company.

And it really hit its stride in 2004, and we can see as we review our operating committee plans on local operating committee plans just a real buy-in to that as a concept.

So, we have a great fellow who runs the New York region force.

Doing business in the city of New York is a whole lot different than doing business in Rochester or Buffalo.

That group now has really gotten so deeply involved into local issues in all three of those cities that I just mentioned that we can see it really coming alive.

So, using the power of our national scale is very important to us.

It's the way we generate the growth.

It's the way we generate the earnings and the very high level ROE's at that 17 percent level.

But, we need to concentrate on business on a local basis.

Because, there's 1200 companies out there, there's a little farm company that we compete with in Rochester or a similar type company in Arkansas.

Understanding what they're doing and being in a mode where we can compete against them and take business from them, that's what's going to sustain us and help us grow and maintain the kind of performance that we have.

Don't read too much into our use of the word local.

Maybe it's just as we were preparing for our call, maybe it is just my increasing confidence and pleasure with how well we've taken this concept and integrated national scale with local flavor.

That's helpful.

Thank you.

Our next question is from Al Copasino(ph) of Columbia Management.

Your question, please.

Thanks, very much.

I know this question is little premature, given that there very well may be a political solution in Florida, but would you ever consider exiting Florida just given the tremendous cat load there?

Al, we want to stay in business in Florida in all lines.

It's a big state.

It's a growing state.

People want to live where it's warm, so, we really want to stay in the state of Florida.

But we cannot lose on an after-tax basis a billion and a half dollars every ten years.

That is just not a viable proposition.

So I tend not to look at it as an either or proposition.

We need a much more effective public/private partnership.

We like what the governor is doing.

We like what Tom Gallagher, who's the chief financial officer is doing.

We like what the insurance commissioner down there is doing.

And, I think there as a range of Solutions which we would find acceptable and they stop short of exiting the state of Florida.

If you want to grow your business, you have to be where people live.

We love the citizens of Iowa, but there aren't enough of them to make up for getting out of the state of Florida.

So, we want to craft a solution that provides better protection to the consumer, at the same time as it provides better return possibilities for our company and other insurers.

And we think that's out there and we like the trend line of the discussions.

Great.

Thanks, Ed.

Our next question is from Dave Sheusi of J.P. Morgan.

Your question, please.

Good morning, everyone.

Just a couple questions following up on the EPS guidance.

First, I just wanted to get some clarity in the development of the reserves.

First, the expectation contemplate positive development into 2005?

Our expectation is that our reserves are appropriately and accurately stated at the end of 2004.

Great.

And secondly, on the asbestos side, this has got to come up, I guess, in every conference call, but it looks like your paid claim activity tends to be, a little bit better than the peers.

Is it something unusual in your portfolio that we should be thinking about?

And/or just in the greater claim payment patterns you're seeing in the industry?

Is it having any influence on that?

Could you add a little color there?

Sure.

Dan, you want to?

When you look at our situation overall, as you know, we've added about, well actually a little north of $1 billion in the last two years, and we have a 28-year survival ratio based on a three-year payout payments adjusted for computations and settlements.

We continue to look at all of the issues, in terms of the companies that we are -- have policy holders of ours.

We're not saying anything that we need to do anything about.

As you know every year in the third quarter we do our in-depth bottoms up review, ground up analysis.

We take what actions are appropriate at that point in time.

But, looking what other companies are doing, we're not seeing anything really unique from where we are today in terms of payment and payment pattern.

All right, as far as the broader legislation environment, any change in view on that side in terms of optimism or pessimism?

You know, I would say on class action, I've become very optimistic.

I do think that it looks like something will happen there.

I think it's on the White House's agenda.

I think both sides of the aisle recognize that something has to happen with class action.

But, I'm not as optimistic when it comes to asbestos.

I do think eventually something will happen because the condition we're in right now, it's just not right.

It's absurd.

People that need money because they are legitimately ill are denied that.

Too many dollars go off in other places.

So, I think eventually something will happen on the asbestos front.

I worry a little that if we get class action that people may say, well, that's enough for the business community, let's not push as hard on asbestos.

I suspect that asbestos legislation could well be one of those things that just kind of materializes quickly with the rush because maybe some other things have been slowed down.

Eventually, there has to be legislation that will help us.

There's a great bill in Ohio that was passed and then survived several attempts to overturn it from a legislative standpoint that has strict medical criteria and tends to focus most of the cases in one court system.

The passage of time could prove that that's a great model, and therefore, if there is a great model that could be adopted on a federal basis, maybe it makes the potential for the passage of legislation even greater.

Thank you.

Okay, Dave.

Appreciate it.

Our next question comes from Michael Lewis of UBS.

Your question, please.

Mike, how are you?

Very good.

Very good, Ed.

Just a few quick questions here.

Could I have some clarification to start with?

You said in your guidance that the combined ratio is not going to increase significantly, x abnormal cats, and excluding any reserve development -- positive reserve development.

What would that be?

In other words, what's the combined ratio that you're using as a base?

That's number one.

Number two, could you go into a little more detail in the Encompass business?

You said you fixed it up, you showed the combined ratios, and it's ready to grow.

When will we see the growth?

What kind of growth do you think we'll see?

How did you fix it up?

And going forward, how do you comp the independent agent?

Okay.

Mike, our goal is a combined ratio in the low 90's.

That's probably about as specific as I'd like to be in this regard.

I'll go back to an answer to a previous question.

Profitable growth 17, 18 percent ROE.

That's what we want in this business.

We can clearly see that we can achieve most of those in '05, just as we did in '04 and '03.

Independent agency business.

That business is a little smaller today than when we purchased the bulk of it from C&A.

Remember we purchased the C&A personal lines business at the end of 1999.

It had a combined ratio and we purchased it of about 113 or so.

I could be a little off on that.

It's taken us a few years.

We thought we could get it in great shape in three years, it actually took us four years.

Last year we got the combined ratio in 2003, we got the combined ratio down below 100.

We did it with more pricing disciplines.

We did it by using claims practices and our leverage in the procurement process.

We think that we can keep it there.

As I mentioned earlier, a third of the insurance business is done through independent contractors, and of course they want to be paid appropriately and properly, but they want more than that.

They want good technology and we have some great technology being introduced into the independent agency world.

It's easy for a customer service representative in an IA's office to understand our system.

It is more intuitive.

We offer a full array of products, not just auto.

In some cases we offer packaged products where they are both kind of linked together and priced together.

We can handle a complete demographic range of customers in that catagory.

We also have more of a nonstandard offering through our Deerbrook product line, which opens up some categories that we haven't been pursuing with much rigor or vigor in the Allstate brand channel.

I like what we can do there.

I think you will see growth in that channel, a good combined ratio performance and growth in that channel in '05.

I think you'll see begin to accelerate end of '05 and '06.

Quick follow-up.

You haven't mentioned.

In other words, things are going so well that I haven't heard -- maybe I'm putting words in your mouth.

Are you at all concerned about Progressive's drive program, or is it really a nonevent when you are running north of 90 percent retention rates and not much change in pricing structure?

You know, Progressive's a great company.

I would never say that something they do is a nonevent.

We are a very formidable competitor, Mike, for anybody in this industry.

The advances we've made in our pricing technology, the fact that we can offer a full array of property casualty products.

Most people don't want to have to go to a different place for their homeowners policy than they go for their auto policy.

And, in fact, I think the separation of the direct business and the independent agency business may actually cause some distraction and could be good for us.

The last thing I would say is, as we have, as our nonstandard business has shrunk, and there's not much more to the (indiscernible) off from us I think it's -- I think it makes the growth probability for other companies a little bit more difficult.

Thanks very much.

You want to add something?

Mike, let me just add to your original question about the combined ratio.

You look at page 14 of our press release.

You can see the effective pretax reserve reestimates on the combined ratio both for the quarter and the year.

Then, obviously, in the supplemental package, there's plenty of information on what you may want to use in terms of the cat losses.

I knew it was there.

I was just being lazy.

Thanks a lot.

[Laughter] Thanks for being honest, Mike.

Your next question is from Jay Gelb of Prudential.

Your question, please.

Thank you and good morning.

I want to touch basis on the new SRM rollout ,and get your thoughts on what kind of opportunities for PIF growth that presents?

If you can also talk about the profit trend in the SRM business versus the nonSRM?

Okay.

SRM 4 is a -- we've been in the SRM business now for probably six years.

Ron McNeil started it back in '99 and 2000.

We correctly -- and Fred Price, we correctly assumed that to be successful long term in this business you have to be able to price it properly.

To simply add customers who you churn makes no sense.

And, so, we like where we are in SRM.

I think the fact that we keep revising it and getting better at it each iteration gives us more opportunity.

I think SRM 4 and Your Choice Auto and a few other things that we have going into protection business gives us a great chance to sustain the growth rates that we've seen in 2004.

I think it clearly gives us an opportunity to weather what some people in the marketplace view as an increasingly competitive world.

If you are just an average pricer, if you have a good, better, best philosophy in pricing and you take a rate decrease that has one effect, because of our sophistication, the number of price points, the number of boxes into which we can assert a specific kind of risk, we have a lot more latitude and a lot more flexibility.

I think it drives continued new business application.

I think it drives continued retention.

Remember, growth, you need both.

You need both new business and you need to retain at increasing rates those which you have.

So SRM 4, which is primarily auto driven will help us do that.

There's an SRM 3 that takes homeowners pricing and risk management and risk assessment to new levels.

And, we've been testing that and rolling that in states.

So, I'm thinking very, very positively about that.

And the second part of your question, Jay, which I just forgot.

The profit trends on the SRM versus the non.

I think the best way to answer that is, I have -- I haven't checked these numbers lately, but I think somewhere between 35 to 40 percent of our business is probably on SRM now.

Remember, SRM applies to new business.

The business that we have had for two, three, four, five years it is seasoned business to the extent we made bad picks, we've made administrative adjustments or rate increases, so it performs very well.

What SRM enables us to do is to grow and not jeopardize the performance of the existing book of business because we select mispriced or bad risks.

Then to switch gears, we saw two major transactions this week of sales or spinout of a life business.

Does that make you rethink your strategy in terms of manufacturing versus distributing the products?

Jay, it does not.

We're always looking at that issue.

In some cases, we manufacturer our own Allstate financial products, but when it comes to mutual funds and long term care, I think in some cases variable annuities, we rent that.

We use somebody else's.

So, there's never a right answer as to how much do you want to manufacturer?

How much do you want to distribute other people's products?

I think it's very much a function of keeping your eye out for where the opportunities are.

I think those two transactions are interesting.

I think in Travelers' case it is simply changing parents from City Corp to Met, and my sense is it's probably a good transaction for Bob Benmoshae(ph) and the Met people.

But then, if you look at American Express, there you're creating a new company with a spin-off much like GE did.

So, I'm always intrigued by when do you have enough pickets to have a sense that you have a picket fence?

We aren't there by a long shot.

It's interesting to see the ebb and flow of strategies in this marketplace.

I think what people generally doing is recognizing that, like Allstate, you've got to have some real size, scale and marketing muscle in the marketplace in order to be successful.

So, I think a lot of smaller companies are looking around saying, you got to be in Allstate's league in terms of sophistication and scale, in order to be successful.

Whether we're at the start of new era of consolidations and spin-offs, too soon to declare.

Okay, thank you.

Our next question is from Alain Karaoglan of Deutsche Banc.

Your question, please.

Good morning.

Congratulations on really great results, given the catastrophes that you had last year.

I have a question related to strategy and follow-up on questions that were asked earlier.

A nonstandard data on the Florida homeowners business.

Ed, you've done a remarkable job turning around the nonstandard auto business.

It is extremely profitable producing half a billion dollars of underwriting profit.

Wouldn't you have the resources not to ignore it anymore and then try and grow it, given the remarkable profitability?

It's only 10 percent of the auto business, but 10 percent growth would add another point to your overall growth rate.

Alain, its time will come.

Right now, we have so much opportunity on that, what historically has been referred to as standard auto, but, yes, you are correct.

There will be a point in time when we want to work the lower tiers a little bit more effectively and a little bit more aggressively, but right now, given our cross sell opportunities, our retention opportunities, which has an incredible impact of the economics of our business, we think our time, effort and energy is better spent there.

Now, in response to one of the previous questions on the independent agency channel.

There's some opportunities there that may get it into the nonstandard business in a more aggressive way so that we can begin to tap into that market.

I guess the rally positive thing about this conversation is we don't lack for opportunities.

In this marketplace, even though it may be competitive, as it was in '04, there are opportunities for us to grow our business, increase our profits and increase our return.

And we are very encouraged by that.

And related to the Florida homeowners insurance market, when do you expect something to happen to allow you to make a decision on whether you want to commit capital to that market?

And where does Allstate's Floridian capital position stand on a statutory basis at year end 2004?

We'd like to have a very clear sense of direction in place before we get to the hurricane season.

Hurricane season starts June, July.

I know the legislature in Florida is thinking about this and are working on it.

It's a heck of a problem for the state of Florida.

They can't ignore it.

They have to do something about it.

So, I would like to tell you that there will be some solutions in place by the time the next hurricane season rolls around.

Now, what that solution looks like?

I just do not know now.

I'm encouraged by the willingness of the administration down there to look at this as a problem, which we jointly need to solve, as opposed to simply demagog out of that.

I really complement the them for understanding that it's the key to their economic vitality.

I'm encouraged that an improved situation will arise in Florida, and I -- we're working very hard on it to try to get that done by the time '05 hurricane season begins to roll around.

And the capital (indiscernible) is Floridian?

It's at a level where we probably have to make a decision about how much more to put into it and when.

We don't want to make that decision so we -- until we're able to see what solutions come out of Florida.

We have a, of course, Allstate Floridian with a separate management team, and a separate board, and we are their sole shareholders so we monitor that situation carefully.

Thank you.

Our next question is from Jay Cohen of Merrill Lynch.

Your question, please.

Good morning.

How are you?

Good, good.

Three questions.

Jay, you are violating the rules, you only get one, so only ask one, a, b and c.

[Laughter] All right.

I got it.

Only one question.

The first part of my one question is, I assume your '05 guidance, you're assuming share repurchase in there?

Oh, yes.

Okay.

The 4 billion -- the comments that Dan made earlier, the continuation of the $4 billion program.

Okay.

Secondly, in the Florida business where you have a moratorium, I guess, on new homeowners policies, is that impacting your auto sales or would you expect it to impact your auto insurance sales?

No.

It is not impacting our auto insurance sales at all.

That's a question we ask ourselves and we look -- we monitor very carefully.

I think the fact that it's not is probably a comment about and a testament to our strategic risk management and our marketing muscle.

Last question.

It might be a dumb question, but, what's an accrual for premium refund?

You guys haven't talked about that in the past.

Why is that impacting the numbers?

You know, from time to time, given the fact that our rating plans, some regulatory filing processes can be very complex and quite involved.

There are times when adjustments need to be made, and there are some times result in a relatively small provision for potential refund.

It's that kind of a -- it's not a major number as you see.

That number could continue, right?

Reinsurance costs is a large piece of that adjustment that we talked about.

There's all -- that it was a little higher.

I agree with what Dan just said. (indiscernible) thing.

It was a little higher fourth quarter than we normally see.

Don't think it continues at the level that it does or that it has now.

Great.

Thanks for the answers.

We're going to wrap up.

Again, thanks for your time.

I know it's a busy schedule for all of you.

Couple of points just to make sure that we walk out with a common understanding.

Our core lines are growing. 5.7 percent net written premium and standard auto and 9.8 in homeowners.

We have not seen slower growth rates in the fourth quarter as some of our competitors have referred to.

Our PIF growth is in the mid single digit range for our core lines.

That's 5.5 for standard auto, 6.4 for homeowners.

And, it's at record levels and we're feeling we can keep charging forward at those levels.

Our retention rates are at or near record highs.

I think validating the SRM strategy that we have, our underlying frequency trends are still very favorable.

I reflect back on the comments Dan made about the last two weeks of winter weather.

Believe me, we look at this business on a local basis, and we go back and we look at what is frequency like in those states that have had tough weather versus others.

We like the trend on frequency.

I was stunned by General Motors announcement.

I mean, if the people who want to try to decide where the long term frequency improvement [inaudible] back to [inaudible] industry, if you look at General Motors announcement, where, over the next couple of years, they are going to make standard on all their cars things like stabilization, anti-lock brakes, traction control, the on-star system, other auto makers will follow.

Those things have an enormous impact on frequency and severity in our industry.

So to the extent GM is pursuing something like that, and other manufacturers do the same thing, frequency trends over time should continue to be good.

Severity is clearly not a problem for us.

My hat's off to our claims organization.

They do a great job.

We're getting modest rate increase where's they're needed.

We like our position in the competitive environment, and with normal cats, we'll have another record year in operating EPS in 2005, and we look forward to telling you all about it at our next quarterly conference call.

Thank you for your time.