Allstate Corp (ALL) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 earnings Allstate conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce your host for today's conference, Mr. Robert Block, Vice President Investor Relations.

Sir, you may begin.

Thank you and good morning, everyone and welcome to our earnings call for the fourth quarter 2005.

Ed Liddy, Tom Wilson, and Dan Hale are with me today and they will provide their thoughts on the quarter and the year, leaving plenty of time to take your questions.

As always we ask that you keep to one question and one follow-up in order that we may hear from as many of you as possible.

Once this call is concluded the IR team, Larry, Phil and myself will be available to handle any further inquiries you might have.

Please be advised that the following discussions may contain forward-looking statements regarding Allstate and its operations.

Actual results may differ materially from those projected in the forward-looking statements.

For information on important factors that could cause such differences see the forward-looking statements and risk factors affecting Allstate section in the Forms 10-K and 10-Q that we filed in 2005 as well as yesterday's press release.

In this call we may discuss some non-GAAP measures for which you'll find reconciliations in our press releases and in our quarterly investor supplements that are available on our Web site under "Investor Relations".

This call is being recorded and your participation in the call will constitute consent of any recording, publication, webcast, broadcast, and use of your name, voice and comments by Allstate.

If you don't agree with these terms, please disconnect now.

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

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

And at this time I'd like to turn the call over to Ed Liddy.

Ed?

Good morning and as always thank you for joining us.

I'm glad this day really has finally arrived.

I think in every quarter but the fourth we release our earnings early in the reporting season, and that's a position we prefer.

It's been somewhat difficult watching our stock performance over the last week or so, but I think now the stock can, in fact, trade on fact.

I would summarize the headlines for the quarter and the year as follows.

First, our core auto insurance business is performing exceptionally well.

We expect that to continue.

Second, we've made substantial progress, and we remain highly focused on continuing to reduce our exposure to mega cats.

Third, results and returns are improving at Allstate Financial.

Fourth, book value per diluted share resumed its growth in the fourth quarter of 2005 increasing 4.6% versus the third quarter of 2005.

Fifth, we continue to manage our capital well.

We completed 2.5 billion of our $4 billion authorized share repurchase program and will complete the remaining 1.5 billion in 2006.

And finally, with confidence in our strategy, a proven ability to execute and our capability to adapt to changing market conditions, we anticipate operating earnings per diluted share to be between 5.60 and $6 in 2006.

To put a little meat on those bones, in terms of demonstrating the underlying strength of our business I don't think you have to go any further than our combined ratio results.

We've posted another excellent quarterly result at a combined ratio of 89 for property liability.

And if you adjust that result to exclude cat losses and prior year re-estimates, it was better than the fourth quarter of 2004 and better than the third quarter of 2005.

In fact, on that adjusted basis, the combined ratio has improved for five consecutive quarters and has been in a relatively tight range for about three years.

We know this business well.

We're executing on our strategies well, and we expect to continue to perform at these levels for the foreseeable future.

Now, driving these excellent margin results is a continuation of very favorable auto and homeowners frequencies.

While we expect the long-term trend of slowly declining auto frequencies to persist we're not projecting this in the short run preferring to stay on the conservative side by forecasting relatively flat frequency results.

On the severity front we continue to post low single-digit increases in auto that are well within our pricing assumptions, and we are experiencing an improving trend in homeowners excluding cats.

If you review the paid severity trends which we disclose I think you have to be impressed with the relative consistency and the modest level of paid severity increases specifically in our auto line.

While we are not immune to market trends I believe our disciplined approach to tiered pricing and excellence in claims management provide Allstate with an opportunity to not only outperform the competition but also to manage our margins in a more consistent manner.

Now, for the year, operating EPS of 2.37 was within the guidance range we provided last quarter, even including the above expected level of catastrophes in the quarter.

Generating an operating profit of almost $1.6 billion for the year speaks again to the underlying strength of our business given the fact that we experienced about $5.7 billion in pretax catastrophe losses.

That's around 4.2 billion more than our annual expected level for catastrophes, or about $4 on an EPS basis.

For the fourth quarter we earned $1.49 in operating income per diluted share.

That's an increase over the fourth quarter of '04 of about 5%.

That result included significantly more catastrophe losses in this quarter than in the same quarter last year.

The primary reason for the increased catastrophe losses this quarter were attributable to Hurricane Wilma and an accrual for anticipated assessments from Citizens Property Insurance Corporation of Florida.

We also went through a re-estimate process for Hurricanes Katrina and Rita and found that we had to make only minor modifications to our estimates and they were, in fact, favorable modifications.

Net written premium grew modestly as competition remains rational and the effects of our exposure management actions take hold.

Net premium written growth in our core Allstate brand standard auto and homeowners line was a little higher than the overall trend and our unit growth in standard auto was ahead of the market growth.

Homeowners PIF growth was 3.4% but is expected to decline from that level as we take actions to reduce our exposure to catastrophe losses.

Property liability net investment income aftertax came in slightly below the fourth quarter of 2004 at 458 million.

The important takeaway here is that the portfolio measured at cost did not increase year-over-year.

The underlying business generated tremendous cash flow during the year but we upstreamed over $3.8 billion in dividends to the holding company and recently the payments for 2005 hurricane have begun to impact cash flow.

So going forward, increases in net investment income will be pressured by continued declining portfolio yields and very modest cash flows.

For Allstate Financial, we see progress continuing as we work to increase returns over time.

As expected, volume in terms of premiums and deposits at just over 4 billion was hurt by lower fixed annuity flows due to a relatively flat yield curve and proactive pricing actions offset by a pickup in the institutional product category.

Allstate agency generated business continued to show growth, up 2.5% in the fourth quarter 2005 and over 5% for the full year.

That's been a real success story over the last four or five years.

Operating income was in line with recent experience, and we moved about $250 million in dividends out of Allstate Financial in keeping with our strategy to improve our returns and to rationalize our capital level.

I'd like to turn it over to Tom Wilson.

Thanks, Ed.

During our last earnings call I laid out our catastrophe management strategy for you.

We also provided you with another fairly detailed summary in our latest press release so what I'd like to do is just cover the overall structure and some key updates.

We have continued to make progress on our strategy here.

We successfully placed two large reinsurance programs.

One is an aggregate cover which will be effective June 1st of this year, for a one-year period that covers both auto and personal property losses from named storms, earthquakes and fire following on a country-wide basis, excluding Florida.

The second program, which is effective today through May of 2008, covers fire following in California.

Dan will give you some more details on the reinsurance in a few minutes.

Secondly, we announced some further risk management actions.

For example, in New York we stopped writing new business in eight counties on Long Island.

And we will continue to assess our risk profile and we'll take further actions across the country including things like limits on new business, non-renewals and changing policy terms.

Pricing is the third leg, getting the appropriate price for the risk, we will continue to push to raise rates to cover the cost of reinsurance.

And then we continue to work on a fourth piece, which is gaining support for a national solution through Prepare and Protect America.

I'd also like to take a minute to cover our profitable growth strategies and our competitive position.

The key message here is that we have balanced results, but it's because we're competing across a number of dimensions.

Some of our competitors have built their strategies around one or two key elements such as pricing, sophistication or expanding distribution, and they have a harder time performing in this kind of market.

Our strategy is much broader as we've discussed at length over the last three years.

There's really six components of our strategy.

First is pricing sophistication and discipline.

We're one of the leaders here, as Ed just talked about, and we expect to stay ahead of the competition, both leveraging our data and our actuarial capabilities.

But we've also maintained our pricing discipline in the face of increased competition over the last several years focusing on profitable growth.

And that's critical to maintaining superior returns.

Secondly, we continue to invest heavily in marketing and leveraging our great brand name to drive new business.

Some of our national competitors also invest heavily in marketing so we measure our results to make sure we're getting the right benefit for the dollars we invest there.

Thirdly, we've been expanding distribution.

We'll continue to do so in 2006.

We now have over 31,000 licensed sales professionals in our Allstate agency channel and that's 5% higher than at the end of 2004.

In addition, we've expanded our independent agency platform by about 500 new agencies and the number of people on the phones who handle our direct business.

So increased marketing, broader distribution helps us maintain growth in the face of increased competition.

Sophisticated pricing methodologies make sure we do it in a rational way.

The fourth part of our strategy is customer loyalty.

We're highly focused on keeping the customers who buy our products.

Part of this is by being selective in targeting high lifetime value customers which is why you see our non-standard auto policies shrinking and our standard auto policies increasing.

We've also changed our operating processes to improve the customer experience.

The result is we've increased customer loyalty for the second year in a row.

Fifth, product differentiation.

We've now launched "Your Choice Auto" in 27 states and we began to advertise that nationally in January.

Nobody else has this type of product offering, and a patent has been filed to protect the processes to develop these types of products.

This offering helps us meet our customers' needs, it raises average premiums in a low growth market, and we hope it will drive higher retention.

Lastly, we are in plan to continue leveraging our claims capabilities to protect margins.

Our paid severities are well under control with physical damage cost increases being consistently in the sort of low single digits and exceptional early performance on our bodily injury claims from last year.

Competing across a number of fronts gives us the strength and gives us options in changing market environments in each individual local market.

It's slightly harder to coordinate and a little more expensive than strategies that are only based on one or two of those elements, but when you see the overall results it clearly pays dividends.

So now I'd like to turn it over to Dan.

First I'd like to provide a little more detail on our cat losses.

During the fourth quarter, our aftertax catastrophe losses net of reinsurance totaled $427 million, or 657 million on a pretax basis.

Hurricane Wilma, which is now estimated to be the sixth costliest hurricane in U.S. history, accounted for 330 million of our aftertax losses net of the cat fund and other reinsurance recoveries.

As shown in the table on Page 19 of our press release on a gross basis Wilma losses totaled 721 million and our Florida hurricane catastrophe fund recovery was 191 million.

The fund covers 90% of qualifying personal lines of residential property losses above an estimated $262 million retention level for Allstate.

That retention is before the session of applicable losses to the Universal Insurance Company of North America.

Keep in mind that auto and non-habitational commercial losses, which amounted to about 200 million for Wilma, are not recoverable from the fund.

We did recover another 22 million as a result of the sessions to Universal, taking total recoveries to 213 million.

Wilma obviously did not hit the reinsurance cover that we have in place for Allstate Floridian, which provides about 900 million of coverage above the cat fund cover of 945.

We expect a total of about 103,000 claims for Wilma and more than 85% of reported claims have now been settled.

Also in our catastrophe claim losses for the quarter was 77 million, or about $0.08 a share for the expected assessment from Florida's Citizens Property Insurance Corporation.

As you know, most of this amount will be recoverable and billed to policyholders.

Importantly, during the quarter as Ed mentioned, we actually had a net small favorable re-estimate of cat losses for Hurricanes Katrina and Rita.

About 75% of the property claims have now been closed for these third quarter catastrophes.

As we described in our third quarter call, because of the unprecedented level of devastation and complicating factors associated with these events, we developed a much more sophisticated methodology for estimating the losses from these cats and our claims settlement experience to date has been very consistent with expectation.

We used the same methodology for Hurricane Wilma.

One further update on the aftermath of those storms.

A Texas state direct judge recently ruled in our favor stating that Allstate is not required to pay additional living expense claims of policyholders affected by Hurricane Rita absent physical damage to the insured premises.

Since we issued an 8-K concerning our expanded reinsurance purchases and there's significant additional detail on Pages 22 to 24 of our press release, we'd like to simply point out that both our $2 billion countrywide aggregate access coverage for losses in excess of 2 billion, and our 1.5 billion excess of 500 million California fire following agreement, have now both been fully placed and placed at the same rate on line and related terms as the initial commitment which was discussed in our 8-K dated January the 9th.

In both cases, we retained a 5% share as planned.

We should also point out that the aggregate excess agreement covers all states except Florida, but as you know, we have other coverages for the state of Florida.

And the aggregate excess agreement covers property and auto losses for hurricanes, earthquakes, and fire following earthquakes for both Allstate and encompassed policies.

Any losses recovered from our state-specific treaties that were put in place last year would be excluded when determining retention amounts for the aggregate excess agreement.

The total annual cost of all the reinsurance we've purchased to date is about $600 million, or about a 400 million increase.

During 2006 ceded premium will reduce our top line by about 60 million in the first quarter, 100 million in the second, and 150 million in the third and fourth quarters.

We'll seek to incorporate reinsurance, as Tom indicated, into rate filings as soon as possible, but not all reinsurance costs will be recoverable and only a relatively small portion of recoverable costs are expected to be realized in 2006.

With respect to the annual aggregate and incremental multi-state reinsurance coverages purchased this year, it's our expectation that they should significantly reduce the probability of catastrophe losses exceeding 2 billion in year '06.

In case you haven't yet done the math our homeowners business continues to be very profitable at very attractive return levels with the amount of reinsurance that we've purchased.

Using year 2005 results and attributing the entire $400 million incremental reinsurance costs to homeowners would produce a combined ratio well below 90 for a normal cat load with normal being the adjusted historical average shown on Page 25 of our supplement for years 1992 through 2004.

We plan to continue buying appropriate amounts of reinsurance and will modify the coverage amounts and terms depending on our progress with regard to the other PML reduction actions that are discussed in our earnings release and that Tom just mentioned.

In terms of capital management actions we prudently reduced our fourth quarter share repurchases pending the development of loss estimates for Hurricane Wilma and re-estimates for Hurricanes Katrina and Rita.

Given the potential for estimates that would qualify as material non-public information, we made the decision to enter into a prearranged plan in compliance with rule 10b-51 of the Securities Exchange Act to insure our continuous presence in the market.

During the fourth quarter then, we repurchased 236 million shares at an average price of $54.65 per share.

That brought our total year share repurchases to 2.5 billion at $55.99 per share.

As we mentioned on our last call, we expect to complete our current $4 billion program during 2006, completing the approximately $1.5 billion left on that program.

As far as dividend actions are concerned, as was the case last year at this time, our first board of directors meeting of the year will not take place until later this month.

At that session we'll discuss and make recommendations concerning dividends for '06.

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

As mentioned on Page 2 of our press release, our operating income per diluted share guidance of 5.60 to $6 per diluted share assumes that first of all, that written premiums will be generally consistent with the 2005 level because of the expected impact of catastrophe management actions and increased ceded premium for cat reinsurance.

It assumes that the expected cat losses used in our pricing assumptions for 2006 will be higher as a percentage of earned premiums than the average that we've used in the past.

Given the level of cats over the past couple of years we're not only buying significantly more reinsurance, but we're also increasing our estimated base cat load to around 6% of earned premiums.

The guidance further assumes that auto frequency trends will be relatively flat, that there will be no prior year reserve re-estimates, and net investment income will decline slightly due mainly to higher cash outflows and that will complete that $4 billion share repurchase program this year.

If you were to adjust our 2005 results to a 6% cat load, add the cost of the incremental reinsurance and exclude the reserve re-estimates, our adjusted EPS would be $5.47 per share.

So you can see that on an apples-to-apples basis the top end of our range for '06 equates to about a 10% EPS growth rate.

Now with that, Bob, I think we're ready to open it for questions.

Thanks, Dan.

Operator, we're ready to start the Q&A session.

Thank you, sir. [OPERATOR INSTRUCTIONS] And now our first question comes from Greg Peters from Raymond James.

Good morning, everyone.

There's been a lot of commentary regarding the competitive environment in auto in particular and I'm wondering, in the context of your guidance, I think on Page 15 of your press release, oh no, excuse me, Page 13 of your press release you give us sort of a snapshot of rate activity not only in the quarter but for the year.

And I was wondering if you might give us a sense of what we might see in this table a year from now in terms of number of states where there's been rate action and what type of rate action you've taken?

Greg, this is Ed Liddy.

A couple of thoughts on that question.

It's been a competitive market for three or four years, and we really have demonstrated an ability to adapt to those market conditions.

It doesn't feel much different to us from a competitive standpoint today than it has recently.

I think the key here is that frequencies and severities are performing well within our expectations, and that has such an impact on our profitability and our profitability trends and we're pretty comfortable with the level of performance that we've seen in both of those.

Now in terms of specific pricing indications or where we might go, it's tough to answer.

Tom, you got any thoughts on it?

Greg, I think you should expect to see more of the same in standard auto.

You get normal make and model drift upwards.

We have taken price increases when we feel like we're not priced properly.

If we feel like there are places where we can benefit economically from taking a price decrease, we've done that, although that has been selective and focused, so you shouldn't expect to see a lot of change.

Fair enough on that.

The other comment I was hoping to get from you, in the past when you've talked about PIF growth, you haven't talked about it on a year-over-year basis, but there has been times when, Ed, you've commented on sequential results as well.

And I was wondering if you could give us an idea sequentially of how auto PIF has performed fourth quarter from third quarter?

Yes.

I'm sorry, Bob, what was the --

Greg, this is Bob.

The auto PIF has gone up about half a point third quarter to fourth quarter.

What did you say, half a point up or down?

Up.

Up.

Okay.

And then the final question.

Can you just give us a snapshot of agent count year-end '05 versus where we were year-end '04?

And I'll stop there.

That's over 590 million, I believe, isn't it, Bob?

Close to the 600 million we had last year.

But Greg, the way to think about that is not number of agencies or agents, because agents are defined as an individual who represents a company.

We like to think of it as licensed sales professionals, which are the agencies we have, which is the number Dan just quoted, plus the people who are licensed to sell our products and only sell our products in those agencies, and that number is over 31,000, up 5%.

Okay.

Just property liability only.

That's property liability.

If you added the financial services specialists inside the Allstate channel that would add another about 1250 people at the end of the year.

All of the agencies, though, are licensed to sell life.

Fair enough.

Thank you for your answers.

Greg, that was 561 and it was 600 the previous year.

Got it.

Thanks.

Our next question comes from Jay Gelb from Lehman Brothers.

Thank and good morning.

Ed, I was hoping you could talk about the guidance in terms of the expectations of no reserve releases in 2006.

By my math, it looks like, excluding the discontinued lines, there was over two points on the combined ratio from reserve releases in '05 and over three points in 2004 and my guess it's not going to just stop there, it may be less of a benefit, but probably still a benefit.

Can you talk a little bit about that expectation?

No.

Jay, I'm sorry to be flip.

You know, we are conservative in our projections.

That is our historical approach.

It will continue to be our approach going forward.

We think the reserves that we have on our balance sheet at year-end 2005 are accurate and adequate and I would invite you to look at our past history and for you to draw your own conclusions about what may transpire.

Right.

That makes sense.

Okay.

And then separately on the life insurance business during the quarter I believe there were two products, long-term care and disability insurance, that you've opened up to third parties in terms of providing that and in addition to that you moved about $500 million of capital out of the life insurance business.

Can you talk about the trends of perhaps moving towards more of an open architecture there so you don't have to tie up as much capital in the business?

I can.

It's kind of a mixed bag, Jay, in that some products it's clear to us that you want to own from a manufacturing standpoint and you want to capture both the manufacturing profit and the distribution profit.

So life insurance in its various forms, fixed annuities, we are very, very good at the manufacturing of those products.

We prefer to keep the manufacturing profit and the distribution profit.

Other products such as long-term care, we are uncertain about the pricing and the morbidity baked into those assumptions.

So we think in that case, particularly since there are others that are larger and better at the manufacturing of it, that it makes sense for to us pursue an open architecture philosophy.

We do it on a product-by-product basis.

We do it based upon what we think the market potential is, what the growth potential is and the earnings potential is of each product.

I guess I'd like to conclude simply by saying the key is to be flexible and not have a hard coded approach, you have to do it all one way or you have to do it all another way.

Be flexible, and we can generate the kinds of returns over time that we're looking to generate in Allstate Financial.

And where do you think those could be?

We'd like to get it up into the 12 to 13% range.

We're moving it forward.

We'd like to move it forward as quickly as possible.

Need a little bit of help from the marketplace.

It has not been easy with an inverted yield curve and a choppy equity market to drive those returns up.

That's why we've been cautious in pursuing top line growth in that category.

We can be successful at Allstate Financial both operationally and financially.

Great.

Thanks for the answers.

Our next question comes from David Small from Bear Stearns.

Good morning.

Just a couple questions.

In New York state, and I guess in other areas where you're pulling back on the homeowners side, do you have plans to allow your agents to sell other competitive homeowners products so that you can continue basically to get people coming into the agent's office to sell auto?

David, this is Tom Wilson.

The answer to that is, in places where we think we can get an acceptable carrier we will do that to provide a soft landing to our customers, our existing customers.

We also, in some cases, do it for potentially new customers, so in Florida, of course, as we reduce our size there we set up the deal Dan talked about with Universal and we also broker some policies down there.

In New York we are working on, we have a brokering arrangement right now with Tower for new business, and to the extent we have to do anything else we're working hard to get arrangements with another set of carriers so that if we have to non-renew customers, they are not left without a choice of insurance.

And then maybe could you just talk a little bit about your ability to pass through some of these high reinsurance costs?

How have your conversations gone with the insurance commissioners of the various states?

Obviously this is a highly local business and each state has a different point of view.

I would say that in general, there is an increased awareness and recognition that reinsurance costs are a legitimate expense and need to be passed through.

So in Florida, the department recently waived their right to go to arbitration and allowed the price increase we put through in October of last year to stand, because they recognized that that money needs to be used by Allstate Floridian to buy reinsurance.

In New York we have an arrangement whereby some of the costs of reinsurance can be passed through but not all of them.

In California, you are not allowed by the department to pass through the cost of reinsurance on expenses related to, for example, the California earthquake assessment that we might be subject to.

So it's a wide variety of answers.

I would tell that you we look at each one.

We push really hard.

I think we've made great progress, and I expect that we will continue to make progress in being able to include that real cost to us for assuming the risk of somebody's house being hurt by a hurricane or earthquake into our expenses.

And let me just ask you one last question on ad spending.

One of your competitors said recently they were cutting back on ad spending.

Do you expect to change your ad spending in any way?

Are you seeing less incremental benefit now from kind of incremental ad dollar?

We expect to maintain our ad spending where it has been in the past.

We measure it and make sure that it is highly effective.

We know from our standpoint that it increases both new business quotes and retention and it's an economic transaction.

Some people's positions, though, are always dependent on where you're at and we have really three types of competitors in this business.

We have large national players that spend a lot of money advertising, we have what I would call smaller national players who tend to be in the low single-digit share levels, and then we have regional companies.

Those people who are in the middle are finding it harder to compete and probably are finding their ad spending to be less effective as those who are large national players and spend a lot of money on advertising dial-up are spending.

So those people are being drowned out, and so if you're only going to spend $15 million on advertising, it's probably not worth it.

Okay.

Thank you very much.

Our next question comes from Bob Glasspiegel from Langen McAlenney.

I was wondering if we could talk a little bit about Encompass and where that stands?

I know you've made some management changes and clearly the growth at Encompass is not matching the growth in Allstate brand, and I see sort of in your first paragraph in how you look at the quarter, you highlight sort of we should be looking at how Allstate brand is doing, maybe suggesting that that's from a management point of view and a shareholder point of view, the more important asset.

I know you'll disagree with that interpretation.

But what do you think the growth prospects for Encompass are over the next five years in a more competitive world?

Does the absence of a distribution edge make this sort of operation more challenged than your Allstate brand?

Bob, I'm going to, this is Ed Liddy.

I'd like to give you a top line answer and then Tom will add a little to it.

We like the Encompass brand.

We think the independent agency opportunity is a substantial one and we intend to capitalize on it.

Not to recite too much history, but we have made great progress in including Encompass into the Allstate structure where it makes sense from a claims standpoint, from a pricing standpoint, we've gotten that business to very, very profitable levels and the challenge now is to grow it.

We intend to grow it.

We've devoted substantial resources to the development of industry leading technology.

We've gotten more sophisticated pricing in that category, and we've become a pretty big player.

If you add what used to be sold under the Allstate name in the independent agency channel, as well as Encompass, we've become a pretty large player in that business.

We intend to compete effectively.

We expect to grow in that channel, and we think we will see growth.

Bob, this is Tom Wilson.

Encompass' volume, of course, is down.

We would like it to be up.

And as Ed mentioned, the profit is very good, so we've focused on profitable growth.

We're doing a number of things that we believe will drive increased growth.

First is, as I mentioned earlier, we've expanded the number of agencies by about 500 last year.

That was skewed towards the back half of the year, so you wouldn't expect to see a huge amount of volume coming through last year.

Secondly, we have expanded our product offering.

The Encompass business is largely a packaged policy business, somewhere between 60 and 66% of the business is packaged policies, depending on where you look.

We did not have a strong stand-alone standard auto product.

Our plans are to introduce that in 34 states using Allstate technology, actuarial sciences and data to help us get that priced properly.

And we feel good about that.

We're in -- it's over 25 states at this point.

We're seeing good growth in that business, high percentages off of low volume, so we think that the combination of increased distribution points and a broader product offering will drive growth.

We are not raising compensation or buying business as some people are doing to maintain growth in that business.

If I could just follow-up.

Tom, you're cutting homeowners back in some pretty big premium states, New York, Texas, Florida, Louisiana.

In the independent channel does the lack of a homeowner product in some key states make PIF growth in '06, you know, a formidable challenge?

Bob, being multi-line and selling multiple products certainly helps establish a broader relationship with our distributors, but it hasn't proven to be a barrier for other people in the market so we don't think it will be a barrier for us.

And we've learned from our Florida experience where we curtailed the writing of new homeowners business in Florida, had a slight dip down in our new auto production.

We think that may have been as much us as it was the marketplace.

Made some adjustments to our pricing algorithms and have done well.

So I think evidence would suggest that we can in fact to grow where it makes sense to grow in our pursuit of profitable growth strategies.

Thank you very much.

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

Good morning.

Two questions.

Just a follow-up to Bob's.

Is it possible that the competition in independent agency system is perhaps more intense than what you're seeing in your captive area?

Is that typical in kind of a competitive market like we're seeing right now?

Brian, I think this has always been a highly competitive industry with over 1,000 companies, and, of course, much of that is very local.

I would put people into three buckets: the large national players, the small national players and the regional companies.

If you look at the large national players like us who are competing on the basis of sophisticated pricing, aggressive marketing, beginning to focus a little more on claim expertise and customer loyalty.

The regional players have -- compete really on local knowledge, control, they're watching the results closely on a block-by-block basis.

They have strong relationships with their distributors, whether they be IA or captive, and they're beginning to develop some sophisticated pricing.

The people who are struggling the most, I think, are those in the middle.

They don't have the scale to invest aggressively in marketing as I mentioned before.

Many of them are in non-proprietary distribution where they are less loyal, and it typically generates lower returns from non-proprietary distribution than you get from proprietary distribution.

So I think they are -- it is a little more difficult to compete in the independent agency channel on a national basis when you don't have large share.

So I think there is some softness that you'll see there first.

Certainly when you have proprietary distribution, it gives you a lot more options and a lot more ability to adjust your strategy in response to the changing market conditions.

Great.

And then my next question is, given your excess capital position in what is probably a competitive marketplace right out there right now, and PIF growth challenging, and the fact that you do have Encompass in pretty good shape right now, would you consider expanding distribution through acquisitions?

You know, Brian, we are always looking at acquisitions.

We generally haven't found anything that we thought fit our strategic profile.

On the property casualty side we're in pretty good shape.

We have, you know, if you think of a typical box chart and you think about the products on one side and distribution channels in the other, you can buy the Allstate product or you can buy property casualty products through Allstate agents, through independent agents, over the Internet or through call centers.

And we have the right set of product offerings, so I don't know that there's much on the property casualty side that would interest us.

We are always looking and always listening.

Haven't found anything that we thought that really made sense, or made sense strategically or financially.

I would say the same thing on the Allstate Financial side.

We like where we're positioned on the Allstate Financial side in terms of distribution capacity and product offerings, would like to have more finance specialists there.

They're hard to find.

We've been growing our own.

We've been successful with growing our own.

I mentioned earlier in my prepared remarks that we've increased our sales of financial products through Allstate agencies by about 5% in '05 over '04.

And that number now has reached about, in premium deposits, about 2.4, $2.5 billion.

Five years ago or so, that number was about $400 million.

So we have shown that we can sell more product through that channel with the use of exclusive financial specialists.

If we could increase that number from the roughly 12 or 1,250 that we have to some greater number, we think we could get even more throughput.

If you buy distribution what you frequently get with it is a whole lot of stuff that you don't like and you have to rationalize.

So we've not found anything that would help us meet our strategic objectives.

So you're happy with the breadth of your independent agency distribution right now?

And there isn't any other necessarily channel that you'd like to tap here like for instance selling directly into corporations?

No, we're a personal lines company.

We're very happy with where we are.

Thanks.

Our next question comes from Stephen Peterson from Citadel Investment.

Good morning.

I was wondering if first of all I could get Dan Hale to sort of revisit his comments on the share buy back process?

And it does look like share repurchases slowed in the fourth quarter despite plenty of hold co. cash.

I was wondering kind of a little bit about the thinking that takes place between, or the balancing act that you have to do in terms of the share buy back and the claims payment process following Katrina?

Dan will address that.

I would say, Stephen, it's not a matter of it looking like they slowed down in the fourth quarter, they did slow down in the fourth quarter.

Clearly, on purpose, Stephen.

Again, as I said before, at the end of the third quarter, beginning of the fourth, when we decided to put our 10b5-1 program into place I know there were still more development issues on, certainly on Hurricane Wilma and then re-estimates on the other two very large hurricanes, so we want to be prudently sure that while we wanted to stay in the market that we had ample cash to prudently protect our balance sheet going forward.

So it was a decision to be sure we could stay in the market on the one hand, on the other hand to do the right thing in terms of our shareholders and our balance sheet.

I think the critical takeaway there is we'll complete that program as we initially articulated.

We complete it by the end of '06.

We have every intention of doing that.

That means we have about 1.5 billion left to go over the 12 months of 2006.

And then a quick follow-up on the bit of positive development you saw from the storms.

Is that noise, or is there something that you sort of thought about, given time and distance that turned out a little bit better than you may have thought originally?

It's just too early.

I would put it in the category of noise.

We have a very disciplined process as Dan said.

Unfortunately we've learned and learned and learned and learned as these various hurricanes have gone through Florida and some of the exposed areas.

We've gotten better at the estimating process, just as we get better at all other pieces of our business.

We have a process that we follow.

As we followed that process it yielded a very, very slight upside revision, so I would categorize it as noise, as I think you're using that term.

Terrific.

Thank you very much.

Our next question comes from Jay Cohen from Merrill Lynch.

Good morning.

A couple of questions.

First is on the property liability side, the expense ratio seems to have ticked down a bit the last couple of quarters.

I guess I would have expected maybe to see, given not much top line growth and higher advertising spending, I would have expected to see the same or even higher, so I'm wondering what's behind that?

And then secondly, in Allstate Financial, you've talked in the past about examining at least parts of that business where you didn't have scale, and I'm wondering if you're looking at any business particularly closely right now that might be restructured or sold or you'd do something with?

Jay, I'd like to do them in reverse order.

I'll do the second one, Tom will do the first.

We're always looking at every single piece of every business that we have, including Allstate Financial.

We want the returns in Allstate Financial to get to more acceptable levels, and then we want to grow that business.

We really think it represents an enormous opportunity with 35 million policies that we have and a relationship with 17 million households in the United States.

We just need to get at it in a way that enables us to get really excellent returns.

We earn good returns in that business now, it's not like we're dissipating our capital.

We just want to do better in that business than we have before.

Beyond that, I don't have much to say.

And on your first point, which was, oh, expense ratio.

The first was expenses.

The underwriting expense ratio was down slightly in the fourth quarter from third quarter.

That was due to a couple of things.

One, we had a release on some guarantee funds in December.

Secondly, the bonuses that have been accrued for employees were revised downward to reflect that we did not get anywhere close to our targets.

And then we sold a little bit of real estate.

I think could you expect it, Jay, to stay about where it is next year where it was last year.

We are investing heavily in marketing, investing in technology, investing in customer loyalty programs, but at the same time, we're reducing costs, so we've recently announced a voluntary termination offer in the home office, which we think will reduce home office costs.

We continue to shift jobs overseas, not just technology jobs, but processing jobs, so we're continuing to manage our expenses in that zone, which we think gives us the ability to invest for growth while staying economic.

Thanks.

And just one quick follow-up.

Dan made some comments about he sort of adjusted the '05 earnings to a number, a normalized number of $5.47.

I'm assuming that excluded favorable development from prior years?

Yes.

It excluded the reserve re-estimate, adjusted cats and included the additional reinsurance costs.

Got it.

Thanks a lot.

Our next question comes from Ron Frank from Citigroup Investment.

Good morning.

Good morning, Ron.

A few things, if I could.

First of all, I was wondering, Tom, if you could define either in market share terms or in premium volume terms what you consider to be that middle market that struggles more among your competitors?

I think I would look at it -- well, first I would say there are a whole bunch of companies that lead the industry, and you have the list as well as we do, who are large national players, of course, which we are one.

There are a host who are in the low single digits on a national basis, but then you also have to look at the local market and say, you know, how is that national share really -- because they have, you know, 5 or 10% in one market, that's a different position to be in than if you have 1% in a variety of markets.

Okay.

Second question is on the life business.

The Allstate Financial, from what I could see, was not addressed specifically within the overall guidance, but is it fair to say that given your emphasis, or, I should say, increased emphasis on returns as opposed to growth, the flat yield curve and its effect in -- the low yield environment I should say and its effect on the fixed annuity business, which is obviously big for them, that we probably shouldn't look for much in the way of bottom line growth out of Allstate Financial in '06?

I think that's a fair conclusion.

We have every expectation that they will improve their earnings and at the same time improve their returns, but I think the way you phrased the question, Ron, where you tied it into an assumption on overall market conditions, be that equity markets or interest rates, is absolutely correct.

Like all businesses, they do not exist in a vacuum.

And if the rate environment were to change, where fixed annuities were to become a more attractive investment vehicle for a larger number of Americans, would be very powerful for that business.

We intend to be cautious in terms of chasing growth where it is not economic and where does it not improve our returns.

Okay.

Thanks.

And finally, a quick one for Dan.

Dan, you mentioned, I think it was you, that mentioned a number for the non-habitation and commercial piece of the Wilma loss, and I think that was 200 million.

Is that correct?

That was auto and non-habitational commercial for Wilma, about 200 million.

Okay.

Thanks very much.

Thanks, Ron.

Our next question comes from Matthew Heimermann from JP Morgan.

Good morning, everybody.

I had a quick question on Your Choice Auto.

And I guess given that that product's been in the market in several states for awhile now, can you just give us a sense of, in addition to getting higher average premium if you're also getting some margin benefit from that product and whether or not you're seeing any early signs in terms of retention actually benefiting as well?

Your Choice Auto we think is a success.

It's a success because, one, customers are telling us it's different.

Our agency owners are excited about selling it, and what that has translated into is higher average premiums.

It's also translated into, in most states, a higher close rate.

We think it will run at about the same margin as the rest of our business but you'll have higher dollars, so it's a dollar per customer margin.

We would expect it to go up.

And it's too early to tell on retention.

Is the ultimate difference maker in this product though going to be on the retention side in terms of higher lifetime value kind of fitting into that whole theme?

I think all three of them help actually.

The average premium's a decent number, so we don't disclose it, but it's a good number, particularly in a market where there's not much room to increase price, we're going out and saying to customers, we have something better than anybody else has and they're willing to pay us for it.

Now, just in terms of the margin you said they're similar to others but you're getting obviously a one-time increase in higher, in terms of average premium.

Does that mean that over time once customers migrate to this type of product that margin trends would be similar to the rest of your book, or is there some change in terms of the volatility or, I guess, the margin performance versus the market that's different as well?

We think the percent -- depends how you're evaluating margin.

On a combined ratio basis we would expect Your Choice Auto to perform similar to our other products.

If you look at it on a dollar basis, we would expect it to have higher dollar margins per customer forever.

Okay.

Matthew, you didn't ask this, but I want to connect two dots for just a minute.

First of all, our agents love this product.

It is an innovative product in an area where there has not been much innovation historically.

I would not underestimate the importance of that.

Second, somebody asked in one of the prior questions, well, what do you do when you go into one of these cat management areas and you don't have homeowners to sell?

Well, what Your Choice Auto does is it gives our agencies an opportunity to reinvigorate their efforts with a creative new product.

So connecting the dots and thinking about it holistically in terms of its impact on our business is an important point.

Thank you very much.

Our next question comes from Charles Gates from Credit Suisse.

Good morning.

Could one of you elaborate on this program of stepping back from the Coast?

Are there states other than Florida where you are cancelling homeowners [RIF]?

Could you specifically, in your answer, address as well the state of Texas?

Thank you.

Charlie, this is Tom Wilson.

Our cat management program is comprehensive, all states, all lines of business, all types of perils.

So it includes everything from hurricanes to earthquake.

It is -- we have a number of parts of that process, which is including things like require, effective I think it's this week in California, we are putting restrictions on new business that if you don't have a gas shutoff valve which is triggered by earthquakes, then we will not write new business for you, it won't insure your house.

That's the [carrot] to reduce the fire following loss, even though we don't insure for earthquake.

I just give that you example, Charlie, to have you understand it's very comprehensive and very detailed.

Texas is obviously a state where we've had some significant losses.

We have reinsurance down there.

Our aggregate also applies to Texas.

And we have a number of risk management processes we are looking at which include all the things I talked about before, looking at deductibles, looking at policy forms, looking at the wind pools that are available in the state.

All of those things are available to us and we have 14 market operating committees which are responsible for designing and executing strategies to compete locally.

There is one market operating committee that is only focused on Texas and they have a very detailed and comprehensive plan to reduce our risk there.

Does that help?

It may be more than you wanted.

No, it was great.

I guess the follow-up question, though, is to the extent I have my homeowner's insurance in California and I don't have -- with Allstate, and I don't have one of these cut-offs, you're still on the risk.

Would that be a correct --

That would be a correct statement, yes.

Thank you.

Charlie, I would also say that we are a leader in homeowners and where we go, much of the rest of the industry eventually follows.

So in terms of what does it do to the competitive positions, you've just got to wait and see how it all plays out.

Sir, what does it mean in terms of personal auto insurance?

Would that be a positive all other things being equal, for a Progressive, for a Geico that don't have a homeowners business?

No, we're not prepared to concede that space at all.

Again to my comment about Your Choice Auto, if our agencies have fewer products to sell and one of them that they have is auto, and it is priced competitively, and you can offer a very innovative product, we're going to compete in that space.

We have competed.

If you look at our growth rates in auto, standard auto, and you look at our profitability in standard auto, that's a space which we intend to defend and protect.

Charlie, this is Tom.

I would say that each product has to stand on its own and it competes in the market on its own.

That said, being a multi-line carrier certainly has helped us drive higher retention in our book of business.

So if you look at our retention results they're higher than most other people in the industry.

And so if the market in homeowners gets more restrictive, there may be people who want to put more of their policies with us.

We also, when we look at our relationships with customers, we look at them holistically, and if somebody only buys a homeowner policy from us they may have a lower lifetime value than someone who buys multiple policies from us.

So we would treat them differently if, in fact, we were allowed to under the regulations when it came to non-renewals.

Congratulations on a nice quarter.

Thanks, Charlie.

Operator, we will go for about another five minutes to honor other companies' calls.

We'll just go a little bit longer.

Our next question comes from Andy Schroepfer from Farley Capital.

This is kind of a follow-on to what Charlie was talking about.

So is it the case that you do not expect to see significant kind of drop off in auto policy renewals in places where you're choosing not to renew homeowners policies?

And then also, for the new auto policies, in places where you're stopping writing new homeowners business?

Andy, this is Tom Wilson.

Obviously a challenge for us, that is a challenge for us.

We do have our strategy that both protects the balance sheet and protects the brand.

If you look specifically at retention, if that's where your question was headed, it is down across really all lines in the second half of this year, really started in standard auto in about May, non-standard auto was sort of August/September time frame. *** AUDITING ENDS 1:00:00 ***

Maybe I can take a second to explain what is going on there.

In standard auto, really a lot of it has been concentrated in five states.

In Texas, we had to rerun pricing for all of our customers using one consolidated credit algorithm where they had been priced on multiple credit algorithms in the past, which meant we had to rewrite the whole book.

And that was the largest driver of a reduction in retention.

In New Jersey, was another big state for us where retention was down, we decided not to chase some of the new competitors and to cede some of the marketplace there.

And then there were three states in which over the last couple of years we took price increases where some of our competitors took price decreases.

We believe that's the right economic decision, but in a couple of more competitive states we decided to go for profits as opposed to chase growth.

Those five states drove a lot of the reduction.

We have several states, places like New York, California, where we've done quite well and I like our retention trends there.

And, of course, we're focused on both customer loyalty and our multi-line sales to your point help with us retention.

That said, I think managing retention, protecting the brand as we do catastrophe management is something we're highly focused on, but our focus is really to drive profitable growth and protect the balance sheet at the same time.

Okay.

I know in Florida, I think it was in '04 maybe when you stopped writing some new policies there, where you saw significant drop off in new auto policies.

Would you expect something like that to happen in maybe New York, in those counties there?

I would always expect our local management to be able to handle it from an "and" standpoint which is manage catastrophes and to grow the business.

The situation in Florida, I think to Ed's point earlier, was a connect the dots.

He mentioned that we had a new pricing plan in place at the time.

It did not have, it had a pretty restrictive prior carrier provisions in it.

We've since changed it.

But that in combination with non-renewing and shutting down new business in homeowners, agencies changing how they go to market caused a little slip in growth in '05 versus '04.

That said, I would say we are still increasing auto policies in Florida.

So it's not like we're going backwards.

Thank you.

Operator, we'll take one more question.

Okay.

Our final question is from Kelly Nash from KeyBanc Capital.

Thanks.

Quickly, could you give us an idea of how much Your Choice Auto is of either new business premiums or what kind of growth rate you're seeing there?

No.

We think it's a unique competitive product.

We've filed patents to protect ourselves on it.

We're not interested in having all of our competitors chase us, and we're trying to do everything we can to protect our innovative position in this area.

Kelly, I would add to that, it's important to us.

We think we have something here.

It's relatively new.

We are in 27 states at the end of '05, but many of those states came in towards the back part of the year.

I think we were in only four states at the end of '04.

I just don't remember if that's -- oh, one state at the end of '04.

So it still has legs in terms of having a positive impact on our business, which I expect is the intent of your question.

And Kelly, I think the answer is it will be difficult for anybody to model the impact on near-term earnings or policy or premium growth.

We think it's a really good product.

I don't think it's going to change the trajectory in a meaningful way that you would want to spike it out in your analysis.

It's just one component of the things we're doing.

It's product differentiation, it's sophisticated pricing, it's spanning distribution, it's controlling our claims costs.

All those things together are what give us the balanced results.

Finally, you mentioned that you were increasing the number of employees on the phone.

Can you talk a little bit about your direct growth and expectations?

Yes.

Our direct business has been an increasing set of capabilities.

I think we finally got it right, and we started to really grow that business aggressively in the second half of last year.

We found a way to integrate it with our other channels in a way that is supportive of them, and we think that we should be able to continue to grow that business next year.

The number of call professionals we have just selling product is about 300.

Thanks for taking my questions.

We should bring this to a close.

We like to honor your time commitments, and I know that there are other companies that have calls.

A few points just to summarize.

Our strategy is pretty simple, it's focused on profitable growth.

Our takeaways on the quarter and the year, our core auto insurance business really is performing exceptionally well.

We have every expectation that that will continue.

We've made real progress, and hopefully you see that and we remain very focused on continuing to reduce our exposure to mega catastrophes.

We'll complete our share repurchase program.

We have about $1.5 billion to go in 2006.

And we are very confident in our strategy, in proven ability to execute and in our capability to adapt to changing market conditions.

For those of you to whom we did not get in terms of questions, Bob and Larry and Phil are available.

It's their busy day.

Please call.

Thanks.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.