Allstate Corp (ALL) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation's first quarter 2005 earnings conference call.

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

As a reminder, this conference call is being recorded.

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

Mr. Block, you may begin.

Thanks, Matt.

Good morning, everyone, and welcome to our first quarter 2005 earnings conference call.

This morning, Ed Liddy and Dan Hale will give short summaries on their views of our results and the environment in which we operate.

That will be followed by a q&a session, and we request that you limit yourself to one question and one follow-up so that we can hear from as many of you as time permits.

This call should last no more than one hour.

We issued our earnings press release last night, as well as the majority of our investor supplements.

If you need a copy of this material, it's available on our website, under Investor Relations.

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 differences, please see the forward-looking statements and risk factors affecting Allstate's section in Allstate's 10-K for the year 2004, and a notice of annual meeting and proxy statement dated March 25, 2005, and in yesterday's press release.

In this call, we will also discuss some non-GAAP measures, you can find a reconciliation of those measures to GAAP measures in our press releases and in our quarterly investor supplement in the Investor Relation 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.

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

Ed.

Good morning, all, and thanks for joining us to discuss our first quarter performance.

Once again, we've put together a very strong quarter, our strategy, which I think, most or all of you are familiar with, crafted several years ago and executed well continues to demonstrate its effectiveness in today's competitive marketplace.

Profitable growth, coupled with strong aggressive capital management is our philosophy, and I think the results in the first quarter reflect a continuation of really excellent execution.

First, let me give you an overall summary of the quarter.

We reported net income of $1.1 billion, that was in 18.3% increase over the first quarter of 2004 on revenues of 8.7 billion.

Our operating income earnings per diluted share was a record $1.67.

Our operating income return on equity was 17.2%, and remember, this measurement is based on the last four quarters of operating income, so it includes the impact of last year's four Florida hurricanes.

Our book value per diluted share, excluding the net impact of unrealized gains on fixed income securities was $29.44, that's a 9.9% increase.

Over the first quarter of 2004, as well as a 2.9% increase sequentially from year end.

Just to make sure you all noted it, we raised our quarterly shareholder dividend by 14.3% back in February.

And we made substantial -- we've had a substantial start on our $4 billion stock repurchase program during the quarter, buying back 13.4 million shares of our stock, at a cost of about $706 million.

It really was by any measure an outstanding start to 2005, and I'm really very optimistic about our future.

Let me briefly run through the business unit results.

Allstate Protection had another very solid quarter from an underwriting income perspective on good growth.

Overall, the combined ratio came in at 85.2, 85.3, including our discontinued operations where we did not make any changing to our estimates for asbestos and environmental reserves.

That ratio for Allstate Protection improved by 1.1 percentage point, despite higher catastrophe losses.

Our cat losses where 164 million in the quarter, versus a very low 102 million in the first quarter of 2004.

And while 60 million higher than last year, I would categorize this quarter's cat losses as coming in at the low end of average, representing about 2.5% on 8% to earned premium basis.

But I have to tell you, with 6 catastrophes occurring in the last week of March, Mother Nature reminds us how quickly things can change.

On a positive note, we did not make any adjustments to our estimate for last year's third quarter Florida hurricane losses.

We experienced good growth in an increasingly competitive environment for Allstate's Standard Auto business, with 5.3% premium percent net premium written growth over the first quarter of 2004.

In the U.S., our policies in force rose 4.9%, on very strong retention trends, while average premiums were up moderately.

Our new business premium written declined 2.3%, from a very strong first quarter 2004, that saw an increase of 43% over the first quarter of 2003.

As I've said repeatedly to you all, we do not operate in a vacuum and competition does not stand still.

There are plenty of markets where we continue to increase our new business writings.

But there are markets where the competition has cut into the substantial competitive advantage we enjoyed during 2004, and we are and will respond, keeping in mind our goal of profitable growth.

Our pricing discipline remains in place, as we continue to seek and gain approval for small rate increases, where applicable.

Our advertising (indiscernible) is shifting to a more targeted approach to gain more efficiency and effectiveness.

We've begun the introduction of a new, more sophisticated pricing structure, and a new auto product designed to offer consumers more choice than they've ever had in this industry.

We continue to expand our agency capacity through new agency appointments, and additional license support staff within the agencies.

I hope you'll all recall that last year we added about 600 agencies to our roster, and our agencies themselves added approximately 2500 licensed support staff.

We expect these and other tactics to positively impact new business trends in our local markets, as we roll them out, and they begin to gain traction in the marketplace.

Our Allstate homeowner's net premium written grew 8.4% in the quarter, with a 6% increase in policies enforced, and that's despite the negative impact of our previously announced restrictions on new homeowner's business in Florida.

Average premium and retention trends remain very favorable, more than offsetting the impact of less new business premiums.

Strategic decisions related to risk management have affected new business growth rates, in certain markets, and could limit future growth in catastrophe prone areas, but the expected results of these decisions will be more consistent returns, and less required capital.

A result that is very consistent with our profitable growth, and disciplined capital management objectives.

The trends in lost cost remain benign with auto and homeowner frequency trends experiencing further improvement, and severity's increasing at a very manageable rate.

Through a combination of disciplined pricing and outstanding claims handling, we are successfully managing our margins, generating a combined ratio for Allstate Brand Auto of 88.5%, and Allstate Brand Homeowners of 72.7%.

As you can imagine, with these kinds of underwriting results, new money generation remains very strong, though more of the funds have been used to repurchase stock and cover the cost of last year's hurricane losses.

Thus, limiting future increases in net -- in our net investment income.

I would like to point out that Allstate Financial had another solid quarter, in terms of premium and deposits, and made good progress in operating profitability.

Premium and deposits grew over 15% and included double digit growth in several of our distribution systems, including our Allstate Agencies.

Operating income of $149 million rose over 12%, as we continue to make progress towards achieving our objective of becoming an operationally excellent product manufacturer.

I'm pleased with our performance this quarter, and I'm very optimistic about our future.

We have the right strategy and the right focus to win in today's marketplace and we are doing exactly that.

Over the last several years, we've made substantial progress in improving the level and the consistency of our earnings.

In 2005, we'll continue to evaluate actions that will preserve the high level of profitability we currently enjoy, and reduce the volatility of our earnings.

Now, because transparency is very important to us and to you, I had would like to emphasize the fact we added additional commentary in our release yesterday evening concerning initiatives to limit catastrophe risks, and or maintain in increased returns in our already well functioning homeowners business.

Homeowners is an important business for us.

It helps differentiate us from our auto only competitors, we excel in this business and it has excellent growth prospects.

In 2004, despite major hurricanes in Florida, the total of which cost us in excess of $2 billion, we enjoyed a 90.4% Allstate brand homeowner's combined ratio.

As I mentioned previously, in the first quarter of this year, that combined ratio was 72.7%.

Our goal is continued growth in the homeowner's business, in a profitable and prudent matter, with less volatility and perhaps less capital required in the business.

Dan Hale will be discussing our approach to achieving that goal as part of our overall enterprise risk management process in just a minute.

And, finally, before I turn it over to Dan, a word about my absolutely favorite topic of guidance.

At this time, we are reaffirming the guidance we provided you just a short 60 days ago.

And that is annual operating income per diluted share of $5.40, to $5.80.

This assumes a level of average expected catastrophe losses used in pricing for the remainder of the year.

I have to tell you the first quarter was a great start to the year.

As you know, our earnings can be influenced by weather and catastrophe losses, so we'll take another look at the guidance, once we get through the second quarter, a quarter in which we usually experience the most catastrophe events and severe weather.

It was really a good start to the year.

And now, I'll turn the program over to Dan.

Thanks, Ed.

Our result for the quarter were clearly consistent with our emphasis on discipline, execution, as well as on continued enhancements in our underwriting systems, our risk management processes and our capital management actions.

At the top line, we grew net written premium at a rate of 3.9% to 6.6 billion for the property liability business.

That growth rate was about a point lower than in recent quarters, as a result of declines and new business in certain states due to competitive pressures, and the catastrophe management strategies, as Ed mentioned.

In most states, we continue to see growth in Allstate brand new business and overall, we are continuing to experience solid growth in policies enforced for Allstate brand, standard auto and homeowners.

At the same time, the retention ratios for those lines are nearing all time highs.

And once again, despite the talk about rate reductions by competitors, we continued to obtain approval for moderate rate increases where they are needed.

Maintaining margins and returns is still our top priority.

While we could grow new business at a faster rate, we're not going to do so by relaxing our discipline and adequate rates or our discipline on risk management.

Rather, we're focus on delivering increasing sophistication in both pricing and product offerings.

This year, and into 2006, we are rolling out the next wave of auto and homeowners pricing segmentation, along with what we think is an exciting new approach to marking insurance with your choice auto.

At the same time, we'll continue to increase our marketing effectiveness with changes to our mix, media and message.

Early indicators on these products, pricing and marketing initiatives are positive.

As we continue to stress this business as a function of executing local market based strategies.

With our local market operating committees, our strategic risk management approach to appropriately matching rates and related risks, and our focus on maintaining appropriate returns and allocated capital at the local level, we are well positioned to compete in today's environment.

Just as we're bringing more discipline and sophisticated execution to the auto and homeowners marketplace, we are also continuing to enhance our enterprise risk management and capital management processes.

By further integrating a more advanced risk management approach into our discipline capital management fame work, we can further improve our risk and reward trade offs.

We commented on catastrophe risk management in some depth in our press release.

The four hurricanes that hit Florida last year showed the progress we've made in managing our exposure to large events.

But they also served as a reminder of the complexity of catastrophe exposure and the risk return trade-offs the industry faces.

Based on our ongoing analysis of catastrophe risks, we are continuing to develop and evaluate a more advanced risk and return measures to capture this complexity and optimize our financial performance.

For example, we are expanding our traditional single event P&L limits to include measuring and limiting our aggregate annual risk from multiple catastrophic events.

Also, we're adjusting our risk based capital allocation process to reflect these aggregate risks and develop return targets by line and by state.

Given the complexity and interplay among the components of catastrophe management, specific actions are likely to emerge over time.

Some of the areas of action we are evaluating, include increased purchases of reinsurance, increased rates and deductibles, limitations on new business writings, alternative placement of business, and or non-renewal or withdrawal from certain markets.

We'll continue to evaluate all possible options, including continuing to pursue public policies solutions in high-risk areas like Florida.

As an example, as we described in our press release, we are completing arrangements to purchase multi year catastrophe reinsurance covering Florida, Texas, New York, New Jersey, Connecticut, and to a lesser extent, North and South Carolinas.

We expect these contracts to be in place by June 1st of this year.

These contracts are expected to cost approximately $190 million per year or about a million dollars more than we spent in 2004.

We expect to be able to recover these costs in rates over time.

We believe our evolving approach to catastrophe management will support continued growth in our important homeowners business, and do so in a way that reduces earnings volatility and improves our return.

In fact, many markets around the country are currently meeting or exceeding very conservative catastrophe management guidelines, as you can tell from our homeowners combined ratio.

Our goal is to support continued presence and growth in all markets.

Just as a combination of increased sophistication and a track record of discipline execution has helped us win in the marketplace, we believe it can take our management of volatility, returns, and capital to the next level as well.

Also, as part of our enterprise risk management reviews, and as a tactical response to expected increases in interest rates, we're in the process of shortening the duration of our Allstate protection fixed income investment portfolios.

We expect to move from a duration that's been within a range of 5 to 5 1/2 years, down closer to a 4 1/2 year target.

This will have a favorable impact on book value of volatility, and may in fact improve profitability over time in a period of rising interest rates.

For Allstate Financial, we'll continue to use a variety of risk management tools to prudently manage the duration of assets to the corresponding duration of our liabilities.

Now, for a brief recap of our capital management activities this quarter.

We repurchased 13.4 million shares of our stock at a cost of $706 million or $52.58 per share.

We have 3.3 billion remaining on our current $4 billion program, which we plan to complete by the end of next year.

And as Ed mentioned, during February we announced an increase in our dividend of 14%, up to $1.28 annually, and that's a 39% increase over the past two years.

Turning now from capital management to a couple of balance sheet ratios, our net income ROE was 15.6%, up from 15.1% last year, and that 15.6% is not an annualization of the first quarter's results with the light cat losses.

It's 15.6% on the last 12 month basis, including the impact of the four hurricanes in last year's third quarter.

Our operating income ROE, excluding unrealized gains, was 17.2%, and our debt to capital ratio at year end was 20.1.

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

Matt, could you start the question and answer session?

Thank you, gentlemen. [Operator instructions] Our first question comes from Ron Frank of Citigroup.

Good morning.

Two things, if I could.

First, I want to understand a little better, although Dan, you went into some detail about it, the timing of this more intense focus on enterprise risk, and in particular, catastrophe management, I can't recall your devoting as much time and comments to us about this, perhaps, since the time of Andrew.

And I just want to understand a little better since, as you mentioned, your returns, even allowing for the cat losses have been very good, your capital position is certainly not nearly as strained as it was at that time.

What's prompted you to take this intense focus and this possibly more restrictive view on cat exposures at this particular time?

Ron, Ed Liddy, let me start, and then Dan will fill you in on the details.

You know, we were reminded when four hurricanes hit Florida in a 6-week period of time, it's not just a single event you want to protect yourself against, but it's almost an aggregate national view that you want to have.

You can't lose over $2 billion in Florida every 10 or 12 years, that just is not a winning proposition.

Hurricane season is very close, to on top of us, we are working, I think, well, with the Florida insurance regulators and the legislators to try and get a solution there.

As I said, our goal here is to grow our homeowner business, we like that business.

With our SRM-3, that Fred Cripe and his team have been working on, we think we are a leader in this business.

We have the best claims practices in the industry, when it comes to homeowners, so we see tremendous opportunities, so don't read our comments, don't take our comments in the wrong way.

We just don't want to be in a position where we can expose ourselves to a couple of billion dollars a year in losses, every 10 to12 years, that's not a winning proposition.

Dan, you want to put some flavor on it?

I think you said it well, Ed.

But, listen, Ron, as you know, we are in the risk management business, and improving our ability to monitor, measure risk is a key part of our operating strategy.

And as you know, we've talked about in the past, we are using economic capital now.

This is an approach to be sure that we're doing it, not only on a national basis, but to do it as, I said, by line and by state.

We're working with the rating agencies to be sure that they understand that we are using it, using it appropriately.

And, again, as we look at all risk, including the risk from catastrophe losses, we want to be sure that we've risk tolerances on an annual basis that we're all comfortable with, and over time, as we said, we hope to improve the volatility of our earnings, as well as the returns.

Ron, just one last thing.

We are also working on putting in place reinsurance contracts, and as you know, when those things get signed, they get announced.

We wanted to make sure you all had a context for those when you see them begin to come forward.

And, as a follow-up, and by the way, Ed, let the record show I'm not asking about claims frequency this quarter. [Laughter]

Ron, this is a first.

As a follow-up, I wonder if you could give us some color on what's, what seems to be another sequential deterioration in the Allstate brand non-standard loss ratio of some significance, despite the fact that the business isn't growing.

If you'd give us a little color on that?

Ron, I will, and then Bob Block can fill in with, perhaps, more detail.

It's not a business that we're concentrating on right now.

It is an area of opportunity, but it's not at the top of our list.

We have plenty of opportunity in standard, auto and homeowners, and those are the kinds of customers that, by multiple PNC products, as well as multiple financial service products.

So that really is where our focus and our emphasis is, and, if you look at our combined ratios and our frequency trends, it's working really well for us.

There will come a point in time, and it's probably not that far in the future, when we will also have the appetite and the energy to devote to growing the non-standard business, it simply has not been a focus, because we think there's other opportunities in other areas.

Bob, you want to talk about --

If you look on a sequential basis, it's a very substantial jump between the fourth quarter combined ratio, loss ratio in the first quarter, but think of it in terms of year-over-year.

It's up about a point over the first quarter of 2004, and Ron, as you begin to start the year, you set your current year severity target at what we would hope to be at a conservative level, and then if you react to them as they play out during the year.

So it's really, I think, the best way to can look at the loss ratio is look at it at on a year-over-year basis.

It's about a point higher than it was at this point last year.

Okay.

Thanks very much.

Ron, since we bring up reinsurance, on your question there, I should point out that when I mentioned the contracts that we are in the process of finalizing, I should process about 190 million a years.

I think that's about 1 million more -- it's about 100 million more than we spent in '04.

Just want to make sure I got that corrected.

Thanks.

I was wondering about that actually.

Our next question is from Greg Peters of Raymond James.

I had one question and then one follow-up.

My first question is on asbestos.

If you look at the supplement which you put together, it looks like the first quarter claims payment in asbestos was running at a level that is consistent with what you've done in the last couple of years on a full year basis.

I'm wondering if there's anything going on there, and I thought you could use that as a platform also to talk about the asbestos legislation that's being bantered about in Washington?

The rate as you saw there is not that significant, it is not that different.

It's still early in the year for us to get all the information we need.

As you know, we do our in depth round-up review in the third quarter.

But review of all of the facts and circumstances as of the end of the first quarter, as we're in excellent shape, as far as our overall position, and we did have a settlement that was part of those claims payments.

So, when you put that all together, we're right where we should be at this point in time with those reserves.

And there's nothing new or different there, Greg.

Hey, Greg, on the asbestos legislation.

Next to class action legislation, which we are pleased with, and worked hard to effect, asbestos is very important, we think to the industry, and in fact to businesses in America.

We would love to see something come out of the legislature.

As I said before, there are so many cooks in the kitchen, and it's such a complex area, I just don't know whether Senator Spector can get it done or not.

We would support a trust fund which was effectively constructed.

The trust fund that had been proposed, we aren't particular fans of because it doesn't deal, we believe in a very effective manner with, with claims that are already in the court system, and how do you split payments between those that are obviously sick and those that may require something in the future?

If we could get to the point where trust fund effectively addressed those and similar issues, we'd be very comfortable with it.

We will try to support where Senator Spector goes, but we'd like to get something that provides certainty in the marketplace with respect to us and the industry.

We think that would be very good for our shareholders, and this is a topic that we're spending considerable time, effort and energy on.

Okay.

Fair enough.

The follow up question is in the Encompass brand.

If I look at the premium written in the standard auto, it's pretty much flat year-over-year, and yet, if I look in the homeowners portion of the Encompass brand, it was up some 13% or so, and I was a little bit perplexed because I thought the whole concept behind the Encompass brand was the package policy approach, and yet, the numbers seem to suggest that you're selling primarily just the homeowners component and not very much on the auto side.

So, I thought, maybe you could talk about that briefly?

I think that's probably due more to rate increases on the homeowners side, which have been higher, and rate increases have been slower or less on the auto side.

Your understanding of our strategy there is correct.

The profitability of that business is quite strong.

Encompass was in the 93, 93.5 combined ratio for the quarter, and that is an area, unlike standard auto, that is an area that we expect to begin to see some good growth.

To reflect upon conversations we've had about this on the past, when we bought the personal lines business of CNA, we wanted to improve the profitability, we did that at the end of '03, we had a great year in profitability in '04, we have a group of people who've been working on the very best technology in the independent agency marketplace, using the same pricing systems, tiered pricing, that we have at Allstate, plugging the independent agency business into our Allstate claims activity, and we think that we will have a product and an offering that will be very competitive.

We are getting there, and that is a point of emphasis for us, and you should see some projectory in that area as this year unfolds.

Thank you very much.

Sure.

Next question is from Jay Gelb of Lehman Brothers.

I had two questions on the auto insurance business.

First, could you provide some more color on the new auto insurance product, I believe you called it Your Choice?

Yes.

I'll provide a little bit of color, because I don't want to give too much to the competition.

This is an industry that for the most part does not have much innovation in it.

I personally believe that's because of the way we are regulated on a 50 state basis and trying to get new products out is such an arduous task, by the time you do it everyone else has copied it.

But, Tom Wilson and the guys in Allstate protection have come up with a very innovative product called, Your Choice Auto, where it gives the consumer a range of choices other than simply deductibles.

So, it's -- think of it as the way the credit companies segment their marketplace, there's a platinum offering, a gold offering, a value offering, and a standard offering, and they offer different levels of accident waivers, or safe driving deductible rewards.

In one case you can choose, depending upon which category you choose, you can get an immediate $100 reduction in your collision coverage the day you sign on, and you can get further reductions over time of as much as $100, we have safe driving bonuses that can be more or less. depending on which catagory you choose.

We introduced this product first in the state of Oregon at the end of 2004, it's met with great success, in fact, exceeding our expectations.

We've just recently introduced it in Utah and Tennessee.

We are very optimistic about it.

We have found that any time we introduce a new product or provide a new service in one state, we give it such tender loving care, it is, of course, very, very successful, but as we begin to roll this out into more and more states, it looks like it has some legs and some staying power.

So, it will roll out gradually throughout the balance of the year and then will be in most of the states by, oh, fourth -- first quarter or second quarter of '06.

We think it's a -- it's not just a product.

It's a different way of having our agencies explain insurance to the consumers.

So it's innovative, it enables us to have a much different conversation, and we're excited about it.

And, will that be through both of the major Allstate protection channels?

It'll be through Allstate agencies now.

Not the independent agents?

Correct.

Okay.

And then second, the pace of the buyback, similar to past buyback trends, you seem to be ahead of the run rate you were looking at.

Is that something we should expect to continue going forward?

You know, Jay, you'll have to make your own forecast on that.

We do it on an opportunistic basis when the marketplace provides us some opportunity to be more aggressive.

That's exactly, exactly what we do.

We are generating a lot of cash right now, as Dan mentioned, our debt to equity ratio I think is just at about 20%, and may in fact go down from there.

So as we generate excess cash, we want to grow our business, but we want to grow our business profitably to the extent we've excess cash, we're going to use it to repurchase our shares.

That's great.

Thanks, Ed.

Jay, congratulations on the new position

Our next question is from Michael Lewis of UBS.

Good morning, Ed.

I have two questions.

And one just a clarification, again.

I know you hate going over the guidance question, and I hate trying to define it.

But, if you're really working with a stabilized cat loss number in there, that really, only thing that's changed your guidance is operating results are either better or worse or expectations are better or worse, obviously , the first quarter was better, so I'm a little bit perplexed, base on your underwriting margins, based on lost costs trends, based on the underwriting profitability of your business and your expectations on some of your coverages, but you're not a little bit more excited about the guidance number because, again, the second quarter where the cats are large or small shouldn't effect that.

That's just a comment, and you can do with that as you may.

Mike, let me just respond with a simple comment.

Perhaps I'm overly conservative.

But, catastrophes have a range attached to them, it's no a single point estimate, and it's that range that people tend to not to concentrate on.

And then secondly, the catastrophes, Mother Nature just doesn't cooperate, she doesn't give us weather patterns that fall neatly into our economic reporting period.

So, you can get in the second quarter catastrophes that exceed what we would normally expect, so my sense is the smart thing for us to do is we've got a great first picket as we build a fence for 2005, but it's only a first picket.

Let's get through the second quarter and see what happens in the more volatile period and then we'll address the guidance.

Thanks, very much.

And my question now is, and it's hard for us as analysts to fully understand the changes and the competitive environment on the private passenger auto side.

You touch on it, other companies touch on it, how do we get an understanding on the intensity level on a quarter by quarter basis how it's developing?

I know it's state by state, but we are only talking about the major states or the key states.

How is it changing based on what you are anticipating originally, and what you are actually seeing, 3 or 4, months into the year?

That's a good question, Mike.

It's been competitive since, I don't know, the last 7 or 8 quarters.

You'll you recall that it was last April so that State Farm began to take a couple of rate increases, and in some locations they took more than one.

This is kind of a competitive environment which we have anticipated.

I will tell you, I'm pleased by the fact that it's a rationale competitive market.

The major players aren't out there doing anything that's silly.

Our focus on profitable growth, and, in fact, if you listen to some of the other -- read other earnings releases or listen to other calls, there's a lot of people who are mirroring those exact words which we've been saying now for, oh, about five years or so.

So, while things are more competitive, I'm encouraged by the fact that it's rationally competitive.

Mike, I would also point out that you really have to look at the structure of the industry, and you all know this.

Top five companies have a 45% market share, the other 55% market share is in the hands of about a thousand national competitors.

Because we are a national player, we can compete with both the big guys and the little guys, so, with our Tiered Pricing, the money we are putting behind marketing, the professional agencies that we have that are selling primarily only our products, we're liking our chances to compete in a rational way, not sacrificing our margins and not sacrificing our returns.

If you think about where we were five or six years ago, the competition was much more irrational.

I'm encouraged by what I see right now.

Great.

And just one quick one for Dan.

Dan, on the investment income, it seemed a little light to me, was that the true spill-out effect and that's what we should annualize because of your aggressive share repurchase?

Or is it you didn't have the alternative income from year, from your equity investment?

If you just look back a little bit, dividends are a little more significant than the last couple of quarters, and partnership income, that wasn't a big swing there, but as Ed said in his remarks, we are buying considerably more in terms of shares, and as we indicated in press release, we are also working to shorten our duration for the Allstate protection fixed income portfolio, so those all have a little bit of an impact, and the real answer is what rates do over the balance of this year and going forward.

What was partnership income?

And then I'll pass it on.

It's in the supplement.

It's in the supplement.

We'll get it for you.

It's relatively constant with the quarter of last year, Mike.

Thank you, very much.

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

Thanks, good morning, everybody.

Two questions.

The first one, as I look at your average earned premium and your standard auto business and compare it to your lost costs inflation right now, it looks like they are just about equal now, and given kind of what's going on with the competitive dynamics out there, is it fair to expect that the loss ratios, underlying loss ratios will start to deteriorate here going forward?

No, it is absolutely not.

That's not fair to expect.

Why is that?

Well, first, let me concentrate on where you started.

Our premiums continue to exceed our lost costs, and that's really the point, Brian, we've been making over the last couple of quarters.

Where we see the need for rate increases, and there are markets around the country where that is appropriate, we do get out there and attack that.

If you think about what's happening with our frequencies, they continue to behave very, very well, our severities are in good shape, we just don't see a period near term where lost costs begin to exceed our premium capacities.

Bob or Dan, you want to add anything to it?

I think the other issue on that, Brian, is the type of customer that we're attracting with our pricing structures tends to be more in the high lifetime value customers, tendency to have a better profile in terms of matching lost costs and premiums.

So I wouldn't expect, absent a significant shift in the macroeconomic trends to see any major deterioration in the loss ratios.

Great.

And the second question.

On the new auto product, just a quick question there.

Given it sound like you're going to kind of offer expanded coverage granted for more price.

Is it possible that we'll see an increase in frequency going forward, just because as those roll out, just because of the nature of the product?

No, that is not our intent , whatsoever.

You are correct in the way you phrased the question, Brian.

The, you can range at the upper level from a product that's got a 13 to 15% increase to it, down to a product that's got about a 4% decrease.

So, helping a customer select amongst those, and deciding what's best for them is clearly where we're going with that.

But we don't view this as a way to reverse our very, very good frequency trends.

We just don't see that happening.

Okay.

Great.

Thank you all.

Next question from Charles Gates of Credit Suisse First Boston.

Good morning.

I had a question on the sentence that appeared on page 4 of your news release.

Let me read it.

We are experiencing a decline of standard auto new business due to new entrants in the major market.

What is the major market?

Let's see, it begins with new and it's on the east coast.

New Jersey.

Okay.

[laughter]

The second question for you.

Charlie, I'm sorry.

There are some people who get in the state of New Jersey and then they get out, and then they get in, and then they get out.

There are a couple of people right now who are looking at it as an attractive place to enter, as you will recall, because we talked about it many times over the last, oh, 8 to 10 years, we do well in the state of New Jersey.

There was a period of time when we had underwriting losses.

But, Rich, Chris, Denise, and the team we have with Allstate New Jersey, we've probably had a mid 90's combined ratio, I think I'm okay with that number, I may be off a little in either direction, probably for the last 5 or 6 years, Allstate, New Jersey, has been paying a dividend to us.

We know that marketplace well.

And we're prepared for any competition that comes in, but we are rationale in terms of what we are prepared to do.

Our goal, grow, but grow profitably.

Okay.

My second question related to the sentence immediately before that, in the news release.

In talking about the decline in Allstate brand auto and homeowners new business premiums.

You related that primarily due to the declines in certain markets from competitive pressures due to risk selection and pricing strategies.

Could you, one of you speak to, or elaborate on exactly what the last ten words in that sentence mean?

It's mostly in the state of Florida where, certainly from a homeowners standpoint, as we've discussed, we have a moratorium on any new homeowners policies.

And when your product offering is, we can provide all of your insurance needs, and you aren't offering homeowners, it has an impact on your automobile insurance offering.

So, we're still growing auto in the state of Florida, although it's at a slower rate, we are talking about that kind of a situation.

Thank you.

Sure.

Next question is Alain Karaoglan of Deutsche Bank.

Good morning.

Great results.

I have two questions.

The first one relates to Florida.

Ed, did you put any capital in your subsidiary in the first quarter?

And could you update us on what's really happening in the Florida homeowners markets?

Citizens is reported to have a deficit of at least $515 million.

How do you see that playing out, and what do you think is going to happen in Florida?

Someone here may correct me, but I do not think we put any capital into Allstate Floridian in the first quarter..

And our intent is really not to do that, until we see what comes out of the legislature and with the insurance regulators.

Alain, it's such a fluid situation, I just don't know what will come out of it.

Mick McCabe, our general counsel and a couple of his lieutenants, literally spent 12 hours with the legislature and regulators on Tuesday in Tallahassee, making certain they understood our point of view, how we think about the situation.

We went to great lengths in our press release to explain the Citizen situation, where we're nervous and all of the sudden Citizens will give us an assessment, and Dan quantified what that assessment could be in the press release, and that happens between the timing of this call and the timing of our press release, and therefore, we have to do something about that.

Our estimate was that, when and if they approach it, it may be $40 million or so.

We think what will come out of Florida is rationale, but I don't think it will be resolve until 2 hours before the legislature ends its session, which is sometime in mid March.

It's just too fluid a situation.

As I said earlier, we can't have a situation, and I don't think anybody in the industry would argue with this, where every 10 or 12 years, you lose $2 billion in hurricane losses.

That is not a winning proposition, you can't have every 10 or 12 years, the entire amount of profitability you've made in a certain line of business in a state wiped out.

So we are very concentrated on this whole situation.

We made great progress, after hurricane Andrew, getting to the point where we're protected from any one situation.

If you get 2 or 3 or 4 multiple situations, ala 2004, we'd like to have the right protection, not just for us, but for the citizens of the state of Florida, and that's where we are working closely with the regulators and the legislature.

Hoping we can get something crafted before the start of the hurricane season in '05.

My second question, and I hate to bring that up in a quarter where you produced an annualized return on equity on all your capital of 23%.

You guys have been very good capital managers, buying back a lot of shares.

But, Allstate Financial is earning anywhere between 10 and 11% return on equity.

It has $5 billion of capitol, I just did some math, your ROE would have been 27% on the property casualty operations alone.

What do you see happening with Allstate Financial, given its size?

Do you see it's position deteriorating over time?

And that's a good source of capital.

And that will allow you to do more share buybacks and have a probably higher multiple given a higher ROE.

You know, Alain, nothing new from previous conversations we've had on Allstate Financial.

We expect it to improve its return on equity, that's our first priority, then we expect it to increase its earnings, and they did a good job of that in the first quarter.

My instincts are, and I trust most of you will agree with me.

The current debate on social security, one of two things will happen from it, either President Bush will in fact achieve what he is trying to get, which is some portion of Social Security accounts devoted to individual accounts, and or if he doesn't get what he wants, it will increase the awareness on the part of the American public of the need so save, of the fact that we are under saving as a nation.

Either of those outcomes is very good for financial service companies.

And I think Allstate Financial is positioned in the sweet spot of where America is going to go.

We have multiple products, offered through multiple distribution channels, and when you think about how it is tied to our 13,000 agents, who are proprietary to us, it's really extraordinary linkage.

We've taken the sales of Allstate Financial products over the last five years or so, premium deposits from $323 million, to about $2.3 billion last year, it's been an average compound increase of some 45 or 46%.

Our agents have gone out and gotten licensed, we think there's a really good growth opportunity here, no good growth opportunity, nobody comes and gives it to you on a silver platter, you have to work at it.

I like what Casey Silla and his team are getting done in Allstate Financial.

And I think you'll see higher returns over time, and you'll also see improved profitability.

Finally, remember that when you make those calculations, we have no leverage applied against Allstate Financial.

None, whatsoever.

So, when you compare it to a Met or a Pru, or whoever, you've got to put some sort of an average leverage on it, I don't know if that's 20 or 25 or 30%, and the returns look a little bit better, but still, we want them to be even higher.

So, I like where we are in terms of Allstate Financial.

I think it's a great combination 1-2 punch, particularly what's going on in -- with the demographics of our country, and the debate on how do we become more of a saving nation.

Thank you very much.

You're welcome.

Ladies and gentlemen, if you have a question, please press the 1 key on your touch-tone phone.

Our next question is from Dan Johnson of Citadel Investment Group.

Thank you.

A follow up would be on the thoughts on how you free up capital from the enhanced reinsurance programs you're trying to put in place.

Can you give us some sense of the magnitude we could be talking about?

No. [Laughter] But let's just talk about the concept.

Auto business is written at a 3-1 premium to surface ratio.

Homeowners business is written at a 1-1.

To the extent you have less exposure in catastrophe prone areas, maybe you can write that business at a higher ratio.

You really have to decide for yourself, what is the art of the possible, is it 2-1?

I just don't know, and I prefer not to comment.

Our goal, as Alain was poking at before, is to keep driving industry leading returns on equity, to do that, we have to make certain that we have the right amount of capital, not too much, and not too little.

And that's what the whole focus on Enterprise Risk Management is all about.

It's why are -- we have some renewed energy on what do we do in the state of Florida with hurricane?

Or what do we do in the state of California with respect to earthquake?

It probably will result in a freeing up of capital, it's premature to speculate on what that could be.

In terms of the duration of these contracts, is this, this is just a win season, meaning kind of like a June 1 to a June 1 time period?

Either 2and 3 year, depending, they'e multiple year.

And the amounts that you quoted in the press release, the costs were the annual costs?

Annualized.

Yes.

Annualized.

But -- Okay.

Great.

Dan, that's probably worth the conversation.

We have good profitability in our homeowners business now, in fact, great profitability, and our goal is to preserve and protect that, so by putting reinsurance on it, we reserve the profitability, and we can, over time, recover those costs in our future rate increases, and we think still be competitive with our prices.

So, we're at a different place in our evolution in the homeowners business now than we were 3, 4, 5 years ago, so the time is right for us to put multi year contracts in.

Recover the pricing of that through future rate increases, and still have a very competitive offering in the marketplace.

It is a good position to be in.

Thanks very much.

Next question is from Tom Cholnoky from Goldman Sachs.

Two quick questions.

Number one, Dan, could you just give us some sense, the moving of your duration from 5 to kind of 4 1/2 years.

A, how quickly will that happen?

And B, how should we think about the yield give up -- you potentially would give up in a static interest rate environment?

And then I have another question.

We are doing it prudently, gradually over time, but I would think that most of that would be done in the '05 time frame.

It's difficult to say how much yield give up, and again, it depends on the timing and what happens with interest rates as to whether or not overall we improve our yield, but that's part of the strategic risk manage in the process.

Again, looking at probable maximum loss, looking at cat losses, looking at interest rate risk, setting tolerances on our total country wide basis, and then looking at trade-offs from an overall return perspective, and this is one of the trades that makes real sense it to us.

But, clearly in a static interest rate environment, you're going to lose yield.

You would lose some if rates say static.

Absolutely.

In rough terms, can you, if I give you that scenario, would you hazard a guess on how much?

No.

You know, Tom, it's a manageable number, and it will play out, Dan is absolutely correct, as we thought about it'll, we'll probably get most of it done this year, but it will gradually impact the P&L.

We just think it's a smart thing to do with where interest rates are at historic lows.

And we think there's a fair amount of inflationary pressure.

So, it's not a number that we choose to disclose, but it's easily manageable within our overall guidance.

Okay.

And then, just in terms of growth, I mean, clearly, the market is transitioning here, you've gotten a little bit more competition in general.

You are trying to offset some of that competitive behavior with some new product introduction.

How do you see that playing out?

Will you be able to maintain, and I know you are focussed on profitability, but so, from a top line perspective. will the introduction of some of these new products offset the impact of the competitive nature, and at least keep your top line growing at a reasonable rate?

Yes.

That clearly is our intent, and it's a number of things, Tom, it's new products, but it's also SRM-4.

The latest iteration of our tiering processes, as well as SRM-3, which is homeowners tiering.

This not a -- it's not a static world.

So, we're doing those things.

I really have to emphasize the fact that our agencies are investing in themselves is a great find.

And for them to go out and hire 2500 additional support staff, that support staff they don't hit the ground running on day 1, but as they get up to speed, and they can do more out bound marketing and more customer contact and they can help us sell Your Choice auto, I think we have enough tools in our tool chest to help offset some of the competitive pressures.

And the last thing I would say, I really do see rationale competition out there.

I don't see people doing silly things.

I'm liking where we are, I like the tools that we have in our tool chest.

Does it all play out exactly, sequentially the way you want?

I don't know.

But we are really well positioned for '05, '06, and years beyond.

I'm sorry.

One other finally follow up.

How should we think about the favorable reserve development, because typically, if I've got my numbers right, tends to start off light in the year and then tends to accelerate, assuming that there aren't big pick ups in lost cost trends, and if your current lost cost trends continue the way they are throughout the year, is it reasonable to expect that favorable loss development could actually accelerate through the year?

Tom, you should assume that our reserves have adequately stated.

[laughter] Well, you know, you tend to approach things conservatively.

I hear the turtle coming

No, no, no, we'll talk about the vertical leap later. [Laughter] Thank you.

See you next time.

Next question is from Bob Glasspeigel of Langen McAlenney .

I just want to parse Charlie Gates' paragraph with just a little bit finer (inaudible).

And, given you've been talking for four quarters about increased competition in auto and just reported a record underwriting quarter, there's may be some cynicism with your warning about increased competition here.

But you do say that there were competitive pressures in certain markets in the sentence above it, and I'm just not sure how New Jersey, which is, I calculated about 3.5% of your book, how that one state could cause your overall business to decline.

Oh, no, we weren't pinning it on that.

As I said, you also have Florida, where because we have a moratorium on homeowners, there's less demand for auto product, we still have growth, but it's at a slower rate.

It's a modestly more competitive marketplace, not anything more than we expected.

I actually think, Bob, we've been talking about competition in auto and homeowners for about 8 or 9 quarters.

So there's nothing new here, although, when the industry goes through periods of not much in the way of rate increases, it just reduces the shopping, it reduces the churn, there aren't as many opportunities to quote or to close, and that makes it more competitive, and I think that's where we are.

Referring back to my response to Tom Cholnoky, I'm liking where we are in terms of developing various tools that we think will help to continue to grow.

But, it's a moderately more competitive environment.

The quick follow up is in the life area where you seem to have the gas peddle on fixed annuities.

I'm wondering how in the current interest rate environment you can earn a good return with spreads, new products in that marketplace?

Let me provide a brief answer, then I'll ask maybe Larry Mayes to comment.

We priced that product to earn in the 11 to 13% range.

We're pretty rigorous on our pricing allowables, and not assuming that marvelous, miraculous things are going to happen in that future that aren't happening today.

So we had a great 2004 on fixed annuities, first quarter 2005 started out a little slower.

Larry, you want to provide any color on that?

One other thing, Bob, I'll mention is that the crediting rate we have on a new annuity is in the range of 2.8 to 3.2%, with the first year bonus, which most companies have in the 1 to 1 1/2%.

So, we're not out there with huge rates out there, but some very effective wholesaling.

I might add, too, that in the first quarter of last year, our fixed annuities sales were about half what they were in Q3 and Q4 of last year, so we're comparing to a very small, a smaller quarter, relatively speaking.

Thank you very much!

Next question from Ira Zuckerman of Stanford Financial Group.

Thank you.

Just following up, most of the questions have been answered, but, on the homeowners line, you and the rest of the industry are reporting unprecedented combined ratios, it was 110, about three or four years ago (inaudible).

At what point does competition, as in auto, start to rear its head?

And at what point do some of the state regulators start to raise some questions?

Ira, our homeowners is a lot different than auto, because auto is a mandated product and state regulators clearly want to make sure there's availability and affordability of insurance.

I think auto insurance gets a lot more scrutiny and a lot more intensity attached to it than homeowners, so I wouldn't link those two maybe as closely or as directly as you have.

The industry overall, still does not do a particularly good job on homeowners.

Our profitability, I'm not sure if it's industry-leading, but it's probably got to be very close to it.

And there's an enormous surge in new home building, in home remodeling, so people are feeling good about their homes, I think there's not the pressure for them to complain about, gee, what's happening in prices here, maybe as there is in auto.

But it feels much, not easier, but it's not nearly as intense as your question would seem to imply when it comes to automobile insurance.

But the homeowners insurance is sort of also mandated, if you have a mortgage, it's not voluntary, either.

But one is a state mandated product, and the other is if you want to have a mortgage mandated product, they have a much different level of intensity attached to them.

But also, what about the competition for the business?

I assume you would like to write X concentration of risk, all the homeowners you could get at these price levels.

Yes.

I think that's true.

We want to do it in a way that maintains or enhances our margins and enables us to perhaps pull some capital out of our homeowners business.

We're doing just fine on homeowners from a competitive standpoint.

We're doing just fine.

Okay.

Thank you.

Thank you.

Our next question is from Jay Bowen of Merrill Lynch.

Jay Cohen. (inaudible) One practical question, one bigger picture question.

On the practical side, you went down the road of talking about certain states, and I'm wondering if you would give us an update on the California auto insurance market?

And then secondly, the bigger picture question, are you seeing, you sell auto insurance a number of different ways, customers can contact you in different ways.

Are you seeing a change towards, maybe, increased use of Internet or call centers over time?

I guess that's the second question.

Jay, let me start with the auto one, because, with the second one, because we're literally almost out of time.

I don't know that we've seen much of a change, we still have an awful lot of our business starts with people going to the internet or to a call center to get education and get information, but before they actually buy, they want to go see an agent or talk to an agent on the phone.

I don't know that we've seen any either acceleration or slow-down of those overall trends.

Now that may be because we have a pretty fully integrated model.

By far the bulk of our business comes to our Allstate agencies, but you can reach us 24 hours a day on the internet or through the call centers.

And I don't know that I've seen any kind of substantial shift in those kinds of buying patterns.

My personal belief is that it will take a generation or so, but that over time, people will get more and more comfortable with going to some of the non-intimate or non-personal ways of buying a product, but we haven't seen a rush to that in our book of business over the last couple of years.

Listen, we are approaching the end of our hour, so I would like to bring our conversation to a call.

I want to thank you for joining us.

Just a couple of summary points.

We had a strong first quarter, as we've been talking about for the past hour, it was driven by, we think, a sound strategy, well executed, we had record operating EPS, agressive capital management, and really solid ROEs.

Competition has been increasing for the last several quarters, but it's rationale, and it's manageable, and we are very comfortable with our competitive position.

We are enjoying excellent underlying profitability in Allstate Protection, as our sophisticated tiered pricing structure help up to attract and acquire and retain high lifetime value customers.

Our frequencies continue to improve.

We had solid premium and deposit growth in Allstate Financial, and good improving profitability.

We're looking at enterprise risk management to improve the consistency of returns with the appropriate amount of capital.

These are a great starts to 2005.

We are pleased with what we produced in the first quarter, hopefully you are.

And, we look forward to talking to you all in the second quarter.

Thanks.