Allstate Corp (ALL) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference call is being recorded.

I would now like the turn the conference over to your host, Mr. Robert Block.

Mr. Block, you may begin your conference.

Thank you and good morning.

Welcome to our first quarter 2006 earnings call.

Ed Liddy, Tom Wilson, and Dan Hale are with me as usual, and will give their thoughts on the quarter before we take your questions.

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

Following the call the IR team will be available for any further inquiries you may have.

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 our most recent Form 10-K as well as yesterday's press release.

In this call we may discuss some non-GAAP measures for which you will find reconciliations in our press release and investor supplements that are available on our website 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 do not 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 the date and time of this call.

Let's begin with some comments from Ed Liddy.

Ed.

Good morning all.

Thank you for joining us.

It is always good to get off to a strong start to a new year.

That's just what we've done.

We completed really an excellent first quarter, continuing to execute our strategy of generating profitable growth, managing our cat exposure and providing a consistent capital management philosophy.

Hopefully you've had a chance to read in the press release about the quarter.

We achieved very strong operating performance which was made even better by a low level of catastrophe losses.

We had about 107 million of cats this year versus 164 million in the first quarter of last year, and an expected level of about 330 million.

We had favorable prior year reserve re-estimates beyond the adjustments made to prior year catastrophe re-estimates of about $157 million that compares to $80 million of favorable re-estimates last year.

Those two items more than offset restructuring costs incurred this quarter of just under $110 million most of which was the result of a voluntary termination offer or VTO as we refer to it for our employees at our headquarters.

That VTO was accepted by approximately 15% of the eligible employees providing cost savings that are expected to be at least partially reinvested in our growth initiatives.

The important take away is that the quality of earnings for the quarter was very strong.

The overall combined ratio was 81.3% when adjusted by 6/10 of a point to exclude cat losses, prior year reserve re-estimates and restructuring charges, and that's 2.4 points better than the first quarter of 2005.

Two major drivers of current and future profitability in auto continued to perform well.

Just want to point them out to your attention.

Auto frequencies improved again in this quarter as we stated on numerous occasions over the long run we expect that trend to continue.

That doesn't mean that we won't have unfavorable quarterly fluctuations, but it does reflect our view of the future.

Overall, auto severity results were moderate and within our pricing assumptions.

Injury severities continued to perform very well, and led to some of the favorable reserve re-estimates.

Physical damage severities have been under some pressure for the last few quarters, and this has been reflected in our pricing indications.

As a result of those two factors the Allstate brand auto combined ratio was a remarkable 83.4 for the quarter.

For homeowners the story is pretty much the same.

The lost cost trends excluding cats remain very favorable with frequencies declining by 4.7% compared to last year's first quarter and paid severities increasing by just over 9%.

The resulting combined ratio adjusted to exclude cat losses and prior year reserve re-estimates remains in the mid 60's where it has been for the last three years.

Total unit growth was moderate reflecting competitive market conditions, and our specific exposure management actions.

Allstate brand auto policies in force growth remained consistent at 2.8%.

Auto pricing for the industry is rational particularly in the captive agency channel where all of the positive elements of our unique business model, that's our brand, our local presence and our proprietary agencies combined to give us a substantial competitive advantage.

Property liability investment income for the quarter was a very strong $466 million, that's an increase of just under 7%.

The increase was mostly due to healthy contributions in partnership income.

Absent that, net investment income was essentially flat as we expected given the amount of funds we've upstreamed for dividend payments and share repurchases as well as the cash outflows to pay for the hurricane losses of last year.

With interest rates raising we were well served by our actions in 2005 to shorten the duration of our fixed income portfolio.

With respect to Allstate Financial the previously announced sale of our VA business to Prudential is on pace for a late second quarter close.

We're very pleased with the strategic direction and execution of this transaction.

It will allow us to more effectively utilize our capital invested in the business and will continue to provide appropriate product offerings for our customers both present and future.

As far as the quarter goes, Allstate Financial generated operating earnings of $144 million, and that includes $10 million of after tax VTO restructuring charges.

That compares to a first quarter 2005 result of 145 million which included $14 million of favorable tax adjustments.

So on balance Allstate Financial's performance for the quarter was on track as we continued to move toward better returns in the future.

Our book value per diluted share increased in the quarter to $31.98.

That's an increase of 1.6% from the first quarter of 2005, and 3.1% from year end.

We repurchased 8.5 million shares for a total of about $455 million, and finally with one quarter behind us and with great confidence we raised our guidance for operating earnings per share to a range of $6 to $6.40 for the entire year.

Our growth initiatives continued to perform well specifically the roll out of Your Choice Auto and our new tiered pricing structures as well as our agency expansion.

Tom Wilson is going to give you an update on our progress on these initiatives.

Tom.

Thank you, Ed, and good morning.

Let me start with an update on our progress in managing catastrophe exposures and our disclosures both last earnings call and our 10-K have provided you a lot of detail, so I will just recap some of the more significant items that we achieved in the first quarter.

First, we placed a moratorium on new business in eight coastal counties in New York and some other hurricane prone states as well.

In addition in New York we started to introduce some non-renewal activity although we're seeking to try to give our customers some alternatives with alternative market solutions so that we can minimize the impact on our customer relationships.

Secondly, we ceased writing new optional earthquake coverage in most states and have changed the underwriting requirements for homeowners in California to reduce potential exposure for fire following an earthquake.

We've also begun a process of filing new property rate proposals incorporating the cost of reinsurance as we talked about last year with the various combinations of company and product lines we've already submitted about two-thirds of the over 300 rate filings.

We're also seeing the effects of these actions on our homeowner business and both new applications and renewal business and you'll see the new applications declined almost 12% for the Allstate brand homeowners which is a result we had anticipated.

We're also watching our auto production carefully for signs of collateral damage.

There is a little bit of that, but we've been able to employ these alternative market solutions and some new rating plans in places like Florida to offset this impact.

So in summary our efforts to aggressively reduce our catastrophe risk continue to make progress and we're gaining some momentum.

Let me focus now on what we're trying to do to achieve profitable growth.

As Ed mentioned we continued to roll out Allstate Your Choice Auto which is our new auto product in which we filed some related patents.

It is gaining great acceptance in the marketplace and we're advertising it heavily.

It allows our agencies to compete effectively by offering consumers more choice in coverage.

Our results show that a higher percentage of consumers choose our gold or platinum packages and as a result of that we believe we will have favorable long-term benefits for both top line and bottom line in this area.

It's now in 38 states and over 70% of the country and we'll continue to roll it out in the rest of the country as we get approvals.

We also continue to roll out our strategic risk management for pricing plan which is more sophisticated than strategic risk management 2.

We expect this initiative to be a driver of our ability to maintain margins over time, and our first quarter results show that we're on track with this plan.

Let me cover just the results of our top line growth.

Of course our property liability premiums grew at 2.2% for the quarter with the Allstate brand standard auto up over 4% and homeowners up a little over 2%.

Our policies in force grew at 2.8% rate for the Allstate brand standard auto and 2.6% for homeowners.

In keeping with our high level of transparency and to give you a feel for the impact of our actions to reduce catastrophe exposure we also provided in our press release a break down of new business applications for homeowners as well as auto split between hurricane exposure states, California and all of our other states.

You can see in there for homeowners new issue applications declined 12.6% in hurricane exposure states, and 47% in California as we changed our underwriting guidelines.

For auto new business applications increased at a greater rate in the hurricane exposure states, that's up 1.9% than the rest of the country.

That was due entirely to the new plans we put in place in Florida.

We've also grown our specialty lines which are both motor homes, recreational vehicles, and our new sales of financial products by the Allstate exclusive agencies were up almost 5% in the first quarter.

We continue to maintain the momentum in growing a broader suite of products that we've had over the last couple of years.

Having our agencies more focus on auto insurance and sale of financial services product does make a difference, especially in the cat prone areas.

You can see we're executing a strategy of aggressively reducing our property cat exposure while profitably growing the balance of our book to business.

I would like to add a little commentary on the severity trends to what Ed talked about.

Auto severity results have increased but they're within our pricing assumption.

Our BI severity trends remain very favorable offsetting some of the pressure we've seen in physical damage coverages.

Those results coupled with the declining frequencies keep our margins at an excellent level and quite honestly regardless of the trend we expect to out perform our competition because we have a history of just doing that.

We have an excellent claim operations, a lot of expertise, good systems, good management, and there is a fast track result which compares us to the industry, and it supports our competitive advantage.

If you look at our advantage to the industry in bodily injury severity, it continues to widen as it has over the last more than decade.

Our property damage and collision severity results show us maintaining a slight advantage to the industry, and our homeowners severity trend provides us with an exceptionally large competitive advantage.

In addition to this what I would just call good operational execution, we anticipate this trend several years ago, and started our next gen claim initiative which many of you know about which is designed to control lost costs, reduce expenses, and raise customer satisfaction.

We'll begin to roll that new system out this fall, particularly targeted to property and then we'll move onto auto as we move into 2007, 2008.

This is a major effort for us.

It will take a couple of years to get done.

We expect it to help keep us ahead of the industry in controlling claim costs.

Finally, I would like to take just a minute to recognize our claim operation and our agencies, not just in the hurricane areas but really across the country.

They remain committed to helping our customers put their lives back in order following things like the tornadoes and all the catastrophes you've seen this spring as well as just a normal catastrophe somebody has when their car gets in an accident.

Our people really are our key advantage.

Let me turn it over to Dan.

Thanks, Tom.

First, I would like to re-emphasize the point Ed made about the quality and strength of our underwriting performance.

As he mentioned excluding cats, reserve re-estimates and restructuring costs our combined ratio for the quarter was 81.3%.

On an apples to apples basis that's the sixth consecutive quarter of improvement in our underwriting profitability.

We're not seeing anything that would result in a significant change to that trend.

Getting to go that 81.3%, I mentioned several adjustments that deserve a few additional comments.

Let's start with catastrophe losses.

At 107 million the first quarter cat losses were relatively light.

That number included 54 million of net favorable reserve re-estimates related to the 2005 hurricanes.

That's the second quarter in a row that we've had minor reductions in our original estimates for those storms.

We've now closed more than 90% of the claims filed for each of those hurricanes.

Before moving past the subject of last year's hurricanes, for those of you who have not caught up with the latest news on the litigation front, Judge Sunter of the U.S.

District Court in the southern district of Mississippi recently issued a memorandum opinion denying a motion for partial summary judgment filed against Allstate by plaintiffs attorney Dicky Scruggs.

The judge concluded in his opinion as follows and I quote, it is my opinion that the terms of the Allstate policy specifically the flood exclusion set out above, are clear and unambiguous.

Since the court is not free to change or invalidate the unambiguous terms of an insurance contract or any other contract plaintiff's motion for partial summary judgment will be denied.

End quote.

There are other issues to be decided in this case such as the facts related to the communication between the agent and the policy holder and whether damage was caused by a flood which is not covered or by wind which is covered, we're still very pleased with the Judge Sunter's decision and analysis of this very important issue.

It is consistent with legal precedents over many, many years.

We continue to be highly confident of our position on this issue.

Going forward, we'll try not to burden you with blow by blow coverage of litigation developments unless and until there are other major developments.

In addition to the net favorable reserve change for last year's hurricanes we also had other favorable prior year reserve re-estimates totaling 157 million as a result of lower claim severity trends and late reported loss development than was anticipated in previous estimates.

The 107 million restructuring provision recorded this quarter included 97 million related to the voluntary termination offer that was available during the quarter to most employees located in our headquarters area.

Over 1,000 employees accepted the offer, and as Ed indicated some of the cost savings from these reductions are expected to be reinvested in growth initiatives.

Also just a very brief comment on our reinsurance programs just to tell you there have been no significant changes to the programs or in the aggregate cost of those programs as described in our conference call this past February.

Let's turn now to capital management activities.

First of all, during the quarter we issued 650 million of third year debt at a coupon of 5.95% at an all in cost of 6%.

Because of the concern about rising interest rates, we wanted to prefund 550 million of senior notes that are due in December of this year.

So far that certainly looks like the right decision.

This caused our debt to total capital ratio to increase a couple of points temporarily.

We should be back to our 20% target by year end.

With this transaction the average cost of our outstanding debt is 6.09% and the average time to maturity is 17 years, almost half of our debt now matures from 20.32 to 20.38 at an average coupon of 5.8%.

During the quarter we also announced that we're raising our dividend 9.4% to $1.40 per share on an annual basis.

That was the twelfth consecutive year we've increased our dividend, increased it at a compound annual growth rate of 12%.

That puts Allstate in an elite group of companies.

Only about 5% of dividend paying companies have increased their dividends for ten or more consecutive years.

Only 317 companies.

In addition, following the completion of the 10b5-1 program on February 1, we accelerated our share repurchase program and for the quarter we repurchased 8.5 million shares at a cost of $454 million or $53.54 per share.

The pace of repurchases for February and March was more than double that fourth quarter 10b5-1 run rate.

We fully expect to complete our current $4 billion repurchase program this year with about $1 billion left on that program.

We also wanted to remind you that our ROE of 9.8% is on a trailing twelve-month basis.

It includes 5.6 billion of catastrophe losses incurred over the past twelve months.

Finally a few comments on earnings guidance.

As mentioned on page 1 of our press release we're raising our operating earnings guidance from the previous range of 5.60 to $6 per diluted share to a range of between $6. and $6.40.

This assumes the level of average expected catastrophe losses used in pricing for the remainder of the year and it reflects our confidence in the continuation of the strong underwriting trends experienced this past quarter and over the past several years.

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

Operator, if you could start the Q&A session.

[OPERATOR INSTRUCTIONS] Our first question comes from Tom Cholnoky from Goldman Sachs.

Good morning, Ed and everyone.

Quick question, one question, Ed, on guidance, not to bring out the tortoise again, but it seems to me that if you look at normal catastrophe activity for the let's say second and fourth quarter your guidance would almost imply that you're expecting anywhere from 1.5 billion to 2 billion of cats in the third quarter.

Now, I know there are people calling for active hurricane season, but given everything you're doing to reduce cat exposures and your reinsurance program, am I missing something there?

Sure, Tom, we try to make the best estimate we can based upon the facts available to us at the end of a quarter.

That's what's reflected in that $6 to $6.40.

What happens in the third quarter with respect to catastrophes is the ultimate guess.

We are better prepared than we've ever been from a reinsurance standpoint, from a national cat cover reinsurance standpoint, from all the things that Tom mentioned that we're doing to minimize our exposure.

I wouldn't try to triangulate too much into what assumption are we making about cats in the third quarter into our earnings guidance.

We're really confident about what this year holds for us.

That's what's reflected in that guidance.

Then just a follow-up.

Given that you've I guess written about 700, what is it 1,000 policies or whatever in Your Choice Auto, 770,000, can you talk a little bit about how the results of that -- of those policies are developing relative to expectations versus what you're seeing in the normal Allstate brand policies?

In other words, you must go into this with a certain loss ratio pick.

Are you finding that you're generally accurate?

Are these accounts actually performing better than expectations versus your Allstate brand?

Tom, this is Tom Wilson.

The key message here would be we like what we see in all fronts as it relates to Your Choice Auto.

There is still a few more things to come.

Let me take your question apart, then.

First, starting with the top line.

More people buy up than buy down, so average premium on anybody who is -- goes to the Your Choice Auto system is higher than on our basic or what everybody else sells which is a commodity like product, everybody sells the same thing.

We like the top line aspect.

The pricing plans are really the same plans we use for our standard auto product, and most of our Your Choice Auto stuff is being rolled out with SRM-4, and we like the results of that.

We occasionally have a bump for a couple of weeks when we roll out a new plan, and we don't get the territories quite right or some of the segments right, but we're so fast at changing pricing now that we get through that in a matter of a couple of weeks.

We like what we see on the risk selection, and which tiers we're getting the business in, and who's buying up.

Yet to be determined is the impact on retention which I believe will be positive although we do not yet have enough statistics to tell us that it should be positive for a couple of reasons.

One, in the sale process you're now having a different conversation with somebody other than just price, somebody who buys on price tends to shift on price if you're having a conversation about how you should really be protected, you start the conversation different place.

Secondly, there are some consumer benefits to continuing to retain with us the declining deductible, and a reduction discount on your next policy if you buy our platinum.

So we like what we see.

We're happy with it, and we're going to push hard at it.

Great.

Thank you.

One moment, please.

Your next question comes from Gary Ransom of Fox-Pitt and Kelton.

Good morning.

I was wondering if you could give us a little more color on what you're seeing in the competitive environment which you described as disciplined or rational.

Are there places in some states where you're seeing less or more competition?

We'll give you maybe a couple of answers to that.

Tom's perspective and mine generally I think will be the same.

The point I was trying to make earlier, Gary, is that competition is a little different in the proprietary agency channel than it is perhaps in the independent agency channel, and we're pretty comfortable with what we see on balance everywhere.

I don't see people foolishly trading an attempt to get volume at the expense of pricing, so we don't see a return to the 1999, 2000, 2001 time frame.

We think that's a very good thing.

I think the competition may be coming more not so much in the form of pricing but in the form of advertising and marketing dollars.

As you know, we have we think appropriately and wisely ratcheted up our marketing spend.

It has worked very, very well for us.

I think others have done the same thing.

My personal belief is that that's going to make it easier for the large national players who have scale and the ability to advertise to compete more effectively, so my comment goes to a history in this industry that says people continue to understand the trade-off between price and volume, and they are making the right choices, where they choose to compete, they choose to compete on more rational grounds primarily in the marketing and advertising area.

Tom, I don't know if you've got something to add to that?

I agree with all of those comments.

I would say in the competition in the independent agency channel is a little more aggressive.

That said, I am not happy with the growth we've had in our independent agency channel.

Some of that is PML related.

Some of that is just transition of leadership, so we're anxiously looking to try to expand that, and we've rolled out a special value auto product in our independent agency channel to get some growth there.

A couple of comments underneath what Ed said is our advertising spend competition has clearly shifted there.

I like what I see in our marketing programs now.

They're starting to hit their stride if you look at our brand measures, the intent to consider willingness to buy from us, intent to renew, all those numbers are moving up statistically significantly.

Secondly, we are starting to compete more aggressively on customer loyalty.

We moved our number up -- we moved up two industry rankings last year to number eight which is above average.

We're starting to see some competition coming in claims, and I think we'll do well there as we seek to fight in the severity trend world, and then we're of course competing on product differentiation.

A lot of people have talked about competition.

The only thing they think about in this business initially is price.

It is a much more complicated competitive model than that.

You do see -- your comment about geography.

We're seeing a little more competition in places like New Jersey where a number of people have entered the market.

Our reaction has not been to initially reduce prices.

Some of our competitors have been much more aggressive in lowering prices.

We've tried to compete on a broader basis model that Ed talked about, brand, customer loyalty, in our agencies.

Just may be one follow-up.

How much do you think your claims operation contributes to the good results you have if you compare to what competitors might have?

I think the answer is a lot.

It is very difficult to disaggregate and find one thing that is so market leading that you can ascribe all of your outside performance to it, but as you and I have said many times in the past, claims for an insurance company is 70 to 75% of the expense dollar.

You win or lose there.

But you start the claims process with your whole risk selection process which gets you into your marketing advertising plans, your tier pricing, et cetera, et cetera, but claims has been ever since claim core process design back in 1992, 1993, has been a source of real competitive advantage.

Give us some credit for being smart enough to recognize that, and Tom's earlier comments on our technology spend for next generation, we're going to keep that advantage that we have right now.

In fact, our goal is to expand it, it is a very critical area for us.

Gary, you see that in the fast track results as Tom indicated earlier versus the industry.

It gives you a pretty good indication of the real delta.

Yes.

Thank you very much.

Thanks, Gary.

Our next question comes from David Small of Bear Stearns.

Good morning, guys.

You touched on some of this a little bit.

Maybe you can give us a little more detail.

Over the past few quarters your premium per policy has been flat to up while marriage competitor over the quarters has seen this statistic decline, and maybe you can talk about some of the drivers of this divergence?

Sure.

I would say the first reason is we haven't taken as many decreases as other people have taken.

That of course hurts your average premium directly and immediately.

Secondly, we've continued to focus on the preferred segment of the business which is less price sensitive than the high risk or nonstandard piece of the business.

Your Choice Auto clearly helps us sell a different value proposition than others.

There is probably a little bit of state mix in there as well.

So if you think about going forward on the Your Choice Auto, would that be one of the major drivers going forward since that is a higher price point product generally?

It will help us, but you have to remember that when you look at our renewal book of course that's most of our premiums.

So the sales of Your Choice Auto, while we're doing a fair number of endorsements to our existing book of business, most of the volume is in our new business that we're tracking through our advertising.

So Your Choice Auto will continue to gradually help us increase that.

I think the bigger item, David, would be lack of price reductions.

We just -- we're more disciplined would be my view of it in terms of how we address the competitive market situation.

Probably a better tiered pricing system than most or perhaps all in the marketplace which enables us to be more disciplined and a little bit wiser in terms of how we go about that.

Maybe if you could just follow-up on the advertising comments you made earlier.

Are you seeing the marginal return of your advertising dollars continue to increase or stay the same?

We're seeing our results get better each and every quarter.

Some of that is the maturity level of our advertising program.

Remember, we launched the "Our Stand" campaign in early 2003.

I think it was about May of 2003.

At the same time we significantly dialed up our advertising expenditures.

It takes awhile for that to hit and to build some momentum in the marketplace.

We've also started to what Joe Tripodi, our Chief Marketing Officers calls surround sound it with fully integrated local marketing programs, with our NASCAR sponsorship, with our Bowl Championship Series sponsorship of the Sugar Bowl, our Olympics advertising.

All of those things working together have really started to increase our results.

We're happy, and it's economic.

There are some smaller players, I know, who have I hear occasionally complaining that it is not economic for them.

That's if you're spending 10 or $20 million in advertising, you're lost in the wash these days between the amount of money that we, State Farm, Progressive, and Geico are spending.

Maybe just one final question is if you look at the results this quarter, a very impressive ROE.

The Company continues to generate a lot of cash.

Maybe if you could talk out cash, you have the authorization out there, but if you can think past that capital management options and where you think of the capital, how much excess capital you think you have?

David, the best indication of what someone will do in the future is what they've done in the past.

If you look at our history as Dan mentioned we've got a dividend that goes up by 12% a year.

That's not a forecast.

That's just look at our past.

We have been a very aggressive repurchaser of our shares.

That's after we invest very aggressively in our core businesses.

Every reason to believe that that would be our strategy going forward.

But the Board makes those decisions as it evaluates our plans at the beginning of each year.

We intend to complete our current authorization by the end of this year, and then the Board will look at dividend policy and look at share repurchases and look at the quality of our cash flow and we will move forward from there.

Thank you very much.

Sure.

Our next question comes from Ken Zuckerman of Karlin Advisors.

You may ask your question.

Ken Zuckerberg, good morning everyone.

A few questions if I could.

I guess first for Tom.

Tom, recognizing that there is different forms, rules and regulations in various states, I know this is tough, but can you give us an indication of what's your best guess of rate increases coming into play for those two thirds of the 300 rate filings that you put in place?

Ken, it is really too early to tell.

We've got the filings in.

Some of those states have well established and accepted practices of letting you pass through reinsurance.

Others don't and fight a a little more difficult.

We've only had one rejected, and that was our fault.

We didn't get it filed quite right.

Everybody is working on it.

We expect to be able to get back a large portion of what we're paying for reinsurance because it is in fact the cost of insurance that consumers should pay, but I don't yet have a forecast.

The amount that will hit this year's P&L, Ken, is relatively small because of course we just got the filings in.

We have to get them approved and then we have--.

The amount of recoveries, too.

The amount of recoveries, yes.

Certainly not the cost of reinsurance.

We're feeling the cost of reinsurance each and every month.

It will continue to go up through the year.

The recoveries will start to really hit in '07 and '08.

So it is sort of front end loaded with respect to cost of reinsurance as indicated in February, but then the partial recovery of that through '06 and through '07 and certainly through '08?

You would not see any material downside to our earnings guidance as a result of not getting approval.

Got you.

Ken, let me just make sure.

I think you understand this but I was perplexed by the question.

When Tom and Dan mentioned 2 or 300 rate increases, those are not the normal rate increases that we may pursue for frequency trends or severities or what have you.

That is essentially all oriented towards recapturing as much of the cost of reinsurance as possible.

Okay.

That's helpful, Ed.

I guess a second question would be, you have heard a lot of different rumblings in the Florida market at various structures for reinsurance programs provided by alternative providers, hedge funds and others.

Just wondered if you could update us on any of that activity that you guys have seen to be helpful and whether or not there is anything from a time line perspective we should be watching for with respect to the Florida specific programs?

Ken, the Florida homeowners market continues to be very difficult, the second largest carrier has been encountering some financial challenges and is pulling back at the same time of course Citizens which is a public entity has over a quarter of the market.

The cat fund just increased its expected deficit to 1.5 billion from about 600 million and is struggling to get enough capital to cover any potential losses for this year, and a bunch of smaller companies which have about 30% of the market are having trouble getting reinsurance for losses below where the cat fund kicks in which is of course important to their financial stability in almost all cases, and of course they also are having difficulty getting it for amounts above where the cat fund ends.

Basically the homeowners market in Florida is living from hand to mouth, and we do not believe it is a sustainable situation.

Allstate Floridian of course is a separate company that we've established.

That has been getting smaller.

We did a transaction with Universal last year where we transferred 90,000 policies to them.

When you look at the property book that's in Allstate Floridian versus March of '05, March of '06, our policies in force are down 16%.

The average premium is up a little more than 30%, so they're pushing hard.

They've bought more reinsurance.

We have a capital support agreement which goes from the Allstate Insurance Company to them.

That is about to expire.

Given the state of the market down there where the reinsurance is, where they're pricing is they have a strategy of one seeking more reinsurance and making sure that they protect the capital they have, but I expect that you would continue to see them get smaller.

And Tom, just for clarity, in terms of alternative programs that Allstate Floridian may have looked at or is participating with, in, can you update us on any developments?

We're not in a position to update you on any developments on Allstate Floridian.

I will tell you that they are actively working to determine how to continue to reduce the size of their business and when we get to a place where we have those things all approved, signed, sealed and delivered, we will certainly announce those.

Ken, sorry to prolong the agony, in terms of timing, I think you know the Florida legislature meets for a very short period of time this year, and I believe its current session closes about the second week in May or so.

I could be off by a little bit on that.

I would suspect that you will see a flurry of activity.

This is a general comment, not just one about us.

I would suspect you could see a flurry of activity either coming out legislatively or as companies react to what does or does not come out legislatively, you will see a flurry of activity in May as folks get ready for the hurricane season.

Thanks a lot, Ed.

Our next question is from Jay Cohen of Merrill Lynch.

You may ask your question.

Yes, thanks.

Let me just hit you with three I think pretty quick questions.

I will ask the questions and you can answer them.

First, is if you could talk about the premium growth in Florida as far as new policies go which was pretty exceptional.

Secondly, I notice that the nonstandard auto business from Encompass was above 100 combined ratio.

Just seems out of whack relative to the recent trend.

I am wondering why that is.

And thirdly, just to make sure I understand the guidance that you're giving, I am assuming that that assumes no further favorable reserve development going forward for the balance of the year?

We'll do them in reverse order, Jay.

At the end of each quarter when we close our books, our reserves are adequately stated.

We think the reserves that we have on the books are sufficient to meet whatever our liabilities are going to be with a very high level of confidence, so we leave it to each analyst to make up his or her own mind on what might happen in the future with respect to reserve releases.

With respect to the Florida premium growth, I would agree with you.

I think it was very impressive.

Maybe Tom can put a little bit more meat on those bones.

In Florida we introduced a new rating plan, and Phil Lawson who leads our group down there, they have been very aggressive on going back and having a win back campaign of people who have left us because our growth was off a little bit last year.

We like the plan we have.

It is a better plan.

It is just better execution.

With respect to the nonstandard business in the Encompass channel, that is what we would call the Deerbrook brand, we didn't have as sophisticated a rating plan as we had liked.

We had copied some stuff of other major players.

It didn't work out as well as we like.

You will see the volume going down in part which is of course the result we were not happy with it.

At the same time we are developing a new, better, more sophisticated and more granular rating plan than we have before which the learning I think for us is that looking at somebody else's sophisticated plan and just copying it is a very difficult thing to do, get the same kind of results.

This was a relatively small book to business.

It is much less than $100 million in total premium and getting smaller every day, so it really had no impact on our overall profitability.

I am assuming there's some sort of reserve charge there, though.

Jay, it is just so small, I don't know that we're prepared to give you the details.

If you'd like, give us a buzz back and we'll get you the exact answer.

That's fine.

Thanks a lot.

Sure.

Our next question comes from Jay Gelb of Lehman Brothers.

You may ask your questions.

Thanks and good morning.

I was hoping in the wake of what's expected to be an active hurricane season, Tom, if you could describe for us to what degree you think Allstate has reduced their catastrophe exposure overall?

Say, for example, if we had -- hopefully not obviously an '05 hurricane season or an '04 hurricane season.

Why don't I let Dan go through the reinsurance stuff.

It would be a little more difficult and complicated to go through the individual states, so maybe, Dan, you could just talk about the reinsurance program.

I think that will give you a pretty good sense of it.

We had an estimate in the full year earnings release about what '05 would like like with the cost of the reinsurance place back.

As you recall, Jay, we have that annual aggregate cover, 2 billion over 2, in addition to the 1.5 over 0.5 billion fire following and then those coverages in the various individual states.

We would expect hopefully that that would limit any potential and again these would be model cat losses to 2 billion or less on an annual period, so if we were in that $5.7 billion range that we had last year, you could expect that we would get 2 billion recovery on the average aggregate cover, and you can put numbers on it in that regard.

Overall again we think we have boxed the exposure appropriately.

We continue to look at some additional coverages in New Jersey, for instance, in Florida.

We will continue between now and the hurricane season to look at terms and conditions for potentially some additional coverage but overall we have put the appropriate major coverages in place and feel good about our position.

Okay.

Then on a separate issue with the sale of the variable annuity business, can you give us a sense of how much capital that may free up in the business and how much closer that step gets you to the 12 or 13% return on equity you're looking for in Allstate Financial?

It clearly moves us in the right direction.

We were number 17 or 18 in the variable annuity business.

We didn't think we could get the kind of scale we needed to compete effectively, particularly with a relatively choppy equity market.

We decided to exit that business.

We're delighted to have Prudential as the buyer, and as the provider of variable annuities, particularly into the Allstate channel.

Whatever capital it frees up, it will probably take us about a year or so to get it out.

It will go into the general coffers and become a part of the mix that we use to decide how much cash or capital do we have to invest in our businesses, what do we have in terms of dividends, what do we have in terms of share repurchases.

It is just another element of what we would consider to be our overall prudent capital management practices.

Generally speaking, Jay, you can consider when you look at account values from a stat point of view, reserves generally speaking for the industry, 2 to 3% and on a GAAP basis 3 to 4%.

I think you can bracket what kind of excess capital you could be looking at going forward.

If you take out that capital, we weren't making much money in VA's.

That can get you to the percentage increase in ROE.

We've also done a very good job of changing our pricing and fixed annuities, and we've moved our returns up significantly in fixed annuities in the last six months, last nine months really now, so that will start to work its way through the improvement in ROE as well.

Thanks for the answers.

Sure.

Our next question is from Greg Peters of Raymond James.

You may ask your question.

Good morning, everyone.

A couple of follow-ups.

First of all, Tom, just piggy backing off your answer from the last question, how much money exactly were you making in the VA business say for 2005?

We don't disclose the by product line information.

We give as much transparency as we can.

Sometimes it pains me because I know our competitors look at all of that stuff as well, but it wasn't a significant contributor to the profitability of Allstate Financial.

It did make a profit, though.

It was erratic, Greg, because of the DAC bills or DAC on leases depending upon what was going on in the overall market.

Fair enough.

Two other small ones.

Ed, in your opening comments or on one of your answers early on I think you talked about agency expansion as one of the growth vehicles that you guys are looking at or focusing on, and I was wondering if you could provide us an update on just the number of Allstate exclusive agents, if you will, that are selling the property liability business.

You said -- you seem to imply the numbers have grown.

I was wondering if you can give us like a count through the end of the first quarter versus where it was a year ago, he cetera.

Greg, in the last couple of years we've added somewhere between 3 and 400 agencies each year.

That's probably what we would add, 3 to 500 over the course of a year.

I tend not to look at the quarterly counts.

But the point I would make to you is it is not just the individual points of presence and the number of agencies that we have, it is also what those agents and agencies have done with respect to adding support staff in their offices.

That number grew in 2004 and 2005 and we would anticipate that it will continue to grow in 2006.

The Street on the feet number is going to continue to go up.

Having well trained agents who have an innovative array of products, who have good pricing coupled with good claims, it is another element we have in terms of being able to grow our business.

We will continue to grow the number of agencies, probably makes more sense to get into how many we grow in '06 at a later call.

Okay, and then the last one, sorry to overstep my two question boundary, but, Tom, in one of your answers on Encompass you talked about I think not being happy necessarily with the growth, and one of the reasons you cited, I think, was that the growth was lackluster I think was because of some PML adjustments.

If you look at the standard auto production or net premium written in the quarter, it looks like it was down about 3, 3.2% year-over-year.

I am wondering what that number would have looked like exit the PML adjustments and more importantly how should I be thinking about the growth for Encompass going forward?

You've got this -- the new auto product going through exclusive agents.

I am wondering if there is something like that on the cards for the Encompass brand as well?

None of us as a management team of Encompass nor I nor Ed nor Dan are happy with the growth in Encompass.

What we are very happy about is the profitability.

You remember when we got this business combined ratio is 117 in 2002.

I think it was 110 and first quarter at 92.

That's a huge swing in absolute dollars and percentage, so we are liking where we are in profitability which has given us the money to reinvest in the business.

We have rolled out a -- first level setting about 60% of that business is a package policy.

It is an auto business, piece of auto business combined with a piece of property business.

So we didn't have as good an offering in a straight stand alone auto product.

We have developed one last year where we have rolled it out over the last twelve months into 30 states.

We have four or five more states to go.

That will drive more volume and the results there are above what we thought they were going to be.

Is that also a package policy or is that like a six-month standard auto policy.

It is straight six months standard auto policy.

Okay.

The PML actions have hurt us, and particularly because we are heavily concentrated up in the Northeast.

Right.

In that business, and that's why you will see overall volume down.

I don't think you should expect to see huge growth in items en force in Encompass in 2006.

That said, I think you should expect and I certainly expect to see increased volume each and every quarter from before we are today.

Thank you for your answers.

Our next question is from Kelly Nash of Keybanc.

You may ask your questions.

Great.

Thanks.

First, I wonder if you can comment on lost cost trends.

As you look at the frequency and severity, how does your view today compare with that in the fourth quarter or the third quarter?

Are you seeing much of a change?

Kelly, this is Tom.

I would say in physical damage, that is collision, property damage, and comprehensive we started to so a little bit of a tick up in January and February, a little in March.

What you see in the numbers where it is like 5.6% up for the quarter, and that has been increasing trend.

Some of that is -- relates a little bit of it particularly in Texas and California.

It appears to be general and across the country.

That's where we're talking about having good management, good expertise, having the numbers, good front line adjusters, we're going back through all our processes from the first adjustment to subsequent additions to -- in looking at increasing the costs associated with that, the claims.

We go back and look and each and every part of that process.

Seeing a little bit of a click up there.

It is not clear if that is due to just general inflation.

Remember, the repair industry has been dealing with declining frequencies for a number of years now, and they may just have reached the point where they have to increase prices to stay afloat.

Secondly, in some states we believe that as a result of more mild weather you lose some of the little hits, so somebody slides on the ice and bumps into a pole or something like that.

You will see that, so when you look in total between frequency and severity in auto, we feel very good about where we're at.

On the bottom of the injury claims it is basically what we saw last year.

We're having great control and we like what we see and we're very comfortable.

In homeowners, of course, the big increase in severity is a continuation of the trend we've had over the last couple of years which is really due to an increase in deductibles as people have sought to manage their price increases.

Regarding the tornado season that we've had to date in the quarter, can you provide any kind of color as to whether or not this has been within your expectations?

I know it is a little bit early.

If you could provide any kind of indication.

Kelly, you mean for April?

For April, yes.

No, we can't.

We're talking about our first three months of the year, and everything that happened in the first three months of the year was remarkably mild, and that includes a start to that tornado season.

I think in the month of March there were more tornadoes than there ever had been.

I don't remember whether that is a combined March/April or just a combined March.

I would just encourage you to think about while the news can make an awfully big deal out of some of those -- some of that damage, my sense is it is well within what we would normally expect to have happen.

Great.

Thanks for the answers.

Sure.

Our next question comes from David Merkle of Huffy Capital.

You may ask your question.

First, just a compliment, have you the best data release of any firm I cover and we are shareholders.

Sam Tilt is sitting here with us who produces all of that stuff.

He is grinning from ear to ear.

Thank you for the compliment.

On the asset side of the balance sheet, assets are down a little, but investment income is up year-over-year.

Any change in policy?

What are you doing there?

Basically, the assets didn't grow that much as you know.

We're paying claims et cetera as we had mentioned previously but also we had a fairly sizeable partnership income.

If you take that out it is relatively flat quarter to quarter.

Are you getting any benefit from the rise in rates?

Yes, we are, and that really was my -- I am going to assume that you're talking about its impact on investments.

Yes.

We did make a decision just about a year ago to start shortening the duration of our fixed income portfolio.

We scratched our heads about that decision about the middle of last year.

It has proven to have been a pretty good one.

As that portfolio turns over faster than it otherwise would have, and rates today are 40 to 50 to 60 basis points depending upon when you got on that train and started the journey, we are getting a benefit.

We're feeling pretty good about it.

It also has an effect in [Casey Silva's] Allstate Financial business.

All of a sudden you get better long-term rates as more distinction between a certificate of deposit and what you can get on a fixed annuity or an equity index annuity.

My personal belief is that to the extent rates stay about where they are, maybe they go up a little or down a little, that it will provide a little bit more energy and traction in the Allstate Financial business.

That's a good thing.

Very good.

Last question, where are you finding value in the fixed income markets today?

Spreads are pretty tight on almost everything.

I don't think I will go there, David, because if I tell you that, everyone else will rush to that segment of the market.

That is a very, very skilled group of investment policy professionals led by Rick Simonson, and a crew, and they're doing a great job within acceptable risk tolerances for us to find additional yields.

It is tough sweating right now as you know.

You bet.

Great.

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

The loss ratio ex catastrophes in development in the standard auto was down a couple hundred basis points this quarter compared to last quarter and the quarter before.

Is that more of a quarterly variation or is that a level that is potentially sustainable?

This is Bob.

I think that is more of a just a quarterly variation as opposed to a sustainable result.

Okay.

Thank you very much.

Operator, we're going to -- it is a couple minutes past 9.

I let this go a little bit longer just because we started a little later.

I want to thank everyone for joining us.

If you bear with me and just let me make a couple of quick conclusory comments, it really was a very good first quarter for us and a strong start to 2006.

Our core auto and homeowner's insurance businesses are performing exceptionally well as we attempted to indicate to you here this morning, and we expect that to continue.

We're making good progress, and we remain very focused on reducing our exposure to mega catastrophes.

That will continue.

We have got god profitable growth opportunities in our property liability business, and we're funding those opportunities from both a capital and a resource standpoint.

We have got a solid strategy for Allstate Financial, and we're executing it well.

I think you will see results and returns are continuing to improve.

Our book value per diluted share is increasing nicely.

In fact, excluding unrealized gains and losses on our fixed income securities, the book value per diluted share rose 6.3% from year end, 5% from the first quarter 2005 and is now at a level higher than the second quarter of 2005 before the hurricanes of last year.

We continue to repurchase our shares, and we expect to complete that current authorization by the end of this year, and we're very confident about our prospects for '06 and the future, and based upon that confidence we've increased our guidance for the full year to a range of 6 to $6.40 per share.

I want to thank you all for your time.

We will talk to you again in about 90 days.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

Have a wonderful day.

You all may disconnect.