Allstate Corp (ALL) 2006 Q2 法說會逐字稿

Welcome to the Allstate Corporation second-quarter 2006 earnings conference call.

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

Later, we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

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

Sir, you may begin.

Thank you.

Good morning and welcome to Allstate's second-quarter 2006 earnings conference call.

As usual, Ed Liddy, Tom Wilson, and Dan Hale join me today to give their perspective on our quarterly results.

Following the formal remarks, we will take your questions.

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

Yesterday, we released our financial results for the second quarter.

In addition to the press release, we provided most of our investor supplement.

Finally, in the spirit of full disclosure and transparency, we posted several documents on our Investor Relations Web site that provided additional details relating to our 2006 reinsurance program, including information on the newest agreements covering New Jersey, Florida and the Southeast.

We appreciate any feedback you may have on the usefulness of this information.

Please note that the following discussion 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 2005 Form 10-K as well as yesterday's press release.

On 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 Web site under Investor Relations.

This call is being recorded, and your participation 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 the remarks are current only as of the date and time of this call.

Now, I will turn it over to Ed Liddy.

Ed?

Good morning.

Thank you all for joining us today.

As you saw, we reported a very strong second quarter with underlying trends remarkably similar to those of the first quarter and very consistent with the results that we've generated over the last several years.

We continue to successfully execute our long-stated strategy of generating profitable growth while managing our catastrophe exposures and providing a consistent capital management philosophy.

Now, let me just touch briefly on a few of the highlights of the quarter.

The Allstate brand's standard auto business remains very strong.

Our new business trends are solid, as Your Choice Auto gains traction in the marketplace.

It is interesting that we have now sold over 1 million policies since we introduced that product.

Our agencies are demonstrating their ability to sell auto insurance in markets where we are aggressively managing our catastrophe exposure.

Our retention ratios in this business remain strong at just over 90%, and as a result of those two trends, our Allstate brand standard auto unit growth increased 2.9% over the second quarter of 2005.

Our auto frequencies continue to decline.

I have talked with most of you at length at some point in time in the past about the reasons for the longer-term declining trend in frequencies.

We expect to continue to have positive news over the long-term.

It is hard to tell right now what impact, if any, higher gas prices are having or how permanent those higher gas prices might be -- how permanent the impact might be.

Auto severity increases remain within our pricing assumption range and have increased modestly.

We continue to make real progress in terms of managing our catastrophe exposure through additional reinsurance, new business restrictions, specific nonrenewal programs, rate increases and a few other actions.

Dan and Tom will both touch a little bit more on that topic in just a couple of moments.

Allstate Financial posted a very solid quarter with operating income of $160 million.

That is up $23 million over the second quarter of 2005.

We remain focused on improving returns in that business, and I believe this quarter's results are certainly a continuing step in that direction.

We remain committed to a consistent capital management approach as you all know, I hope.

We increased our dividend in February and continue to repurchase stock under the current $4 billion authorization.

We expect to complete that program by the end of this year.

Our book value per diluted share, which we think is a very important metric, excluding the impact of unrealized capital gains on fixed-income securities, increased 5.2% from June 2005 and 10% from year end 2005.

Finally, based on our very strong first-half results and our confidence in the second half, we increased our operating earnings per diluted share guidance to a new range of $6.70 to $7.00 per share.

This guidance assumes no additional prior-year reserve reestimates.

It also assumes an average expected level of catastrophes for the balance of the year.

Now, I will have some closing comments following the Q&A, but I cannot emphasize enough how proud I am of our employees, our Allstate agencies and our other distribution partners.

If you add them to improving capabilities and the continuity of our leadership team, it is easy to see how we have collectively continued to execute so effectively in a very competitive marketplace.

I'll turn it over to Tom.

Thank you, Ed.

Good morning.

Let me start with a few comments on market conditions; then I will address our results.

Competitive conditions in the personal lines business remains similar to last quarter,.

The auto market remains highly competitive.

The property market, however, is another story.

It is much less competitive as the industry adjusts to the impact of the potential for more hurricanes.

In the auto market, the companies are competing on a wider variety of fronts today.

The pricing sophistication is still a requirement to compete, but as more companies roll out new plans, there are fewer groups of mispriced risks to target.

As a result, you see increased marketing and a focus on customer satisfaction.

Our multifaceted strategy to grow profitably is working in this environment, and our strategy for the last three years has been based on great marketing, pricing sophistication, product differentiation, broad distribution and excellent claims management.

And that is really what is driving the results that Ed just discussed.

At Allstate Financial, the competitive environment has become slightly more favorable.

Higher interest rates have made it possible to increase our returns on fixed annuities, and the competition for spread assets, however, though, really continues to be intense, which is limiting the amount by which we can increase spreads.

I would like to comment, then, on four areas of our results -- auto pricing, auto profitability, catastrophe management, and then Allstate Financial.

Starting with auto pricing, we continue to refine Strategic Risk Management.

We are rolling out SRM 4 at this point to target specific customers and competitors.

The plan is performing well.

We are particularly pleased with the results in the Southeast and several Western states.

Florida has also made some changes to its plan, which is driving growth.

As is typically the case when we roll out a new plan, new business prices are set to be both profitable and competitive.

This is helping maintain growth without destroying profitability.

We did have two negotiated rate reductions, one in North Carolina and one in Texas, that accounted for the overall rate reduction that is shown in the press release.

At the same time that we implement SRM 4, we continue to make great progress with product differentiation.

As Ed mentioned, he we are over 1 million Your Choice Auto policies, which increases average premiums because more customers choose to buy the higher valued option.

So the net of all of our activity related to pricing is that average premiums are up 1%.

Moving on auto profitability, it was obviously very strong as a result of both lower frequencies and good severity control.

The combined ratio for all of our auto business is 86.5% compared to 89.7% in the second quarter of 2005.

Frequency per standard auto -- property damage was down 3.7% versus the second quarter of last year and all of our coverages were below the prior year as well.

Claim severities were in line with our expectations in general inflationary levels.

Auto paid severity increases for the second quarter were below the first-quarter increases for all the coverages other than personal injury protection.

Physical damage coverages represent about half of our auto claim settlements, and there's three components to that category.

There is property damage, where paid severity was up 4.1% this quarter versus the second quarter 2005, which is an increased that is slightly below the first-quarter increase.

Collision severities were up 3.7%.

The third category is comprehensive, where severities were up 6.7%, which is down from an 8.9% increase in the first quarter.

Bodily injury costs, on the other hand, represent about 25% of our total, and paids were up 3.4% to the prior year, also slightly below the increase in the first quarter.

We see this trend continuing.

It reflects really higher labor costs and some capacity constraints, particularly in some Southern states.

The combination of the lower frequencies, though, and an experienced claim team is enabling us to manage those severities while we work on our next gen claims system.

As importantly, the fast-track industry comparisons are out for the first quarter showing continued, strong results.

We have maintained as significant gap to the industry in our bodily injury costs, and we did give up a very small portion of our advantage in physical damage.

The key to all this is we have 16,000 people who have great experience, great systems, great measurement and control and are focused on controlling loss costs, controlling our claim expenses, and keeping customer satisfaction up.

So that gives us really a good competitive advantage in this (indiscernible) environment.

Catastrophe management -- you know, we are continuing at a blistering pace.

We have been taking very aggressive actions and then coming up with some innovative solutions.

We have begun to eliminate our earthquake exposure.

Our reinsurance programs really cover us from Connecticut.

You go south and then west along the coast all the way over to Texas.

In May, we executed a transfer of policyholders in Florida to Royal Palm, where we just continue to get smaller.

We are looking at other opportunities for soft landings for our customers in Florida, but we haven't executed anything else to date.

We are also executing a variety of programs designed to reduce our catastrophe exposure in other states like Texas, New York and California.

The Protecting America Coalition -- we helped found to support a privately funded government-sponsored solution is growing and generating more and more conversation and interest.

At the same time, as Ed mentioned, growth of our auto business in the Allstate channel is holding up despite these actions.

Growth at Encompass, however, has been a little more elusive as we implement the catastrophe management actions in what is a very highly competitive independent agency channel.

Shifting to Allstate Financial, we are very pleased with the result this quarter.

You know, the results do reflect a few positive events that are one-time, but the results show that we are making progress on our goal to improve return.

The benefit in investment margins both increased in the quarter.

Favorable mortality drove the increase in the benefit margin.

Last year's second quarter was probably our worst mortality margin in a couple of years, so we have done much better than that.

And then higher interest rates have enabled us to widen our spreads and raise the investment margin as well.

And then lastly, the effort to streamline our operations you can see in that our expenses are down.

So in summary, Allstate Protection's balanced approach to competing for profitable growth is working.

We have maintained a very disciplined approach to seeking this growth at the local market level.

We've reduce our catastrophe exposure, and Allstate Financial continues on the path to raise returns.

I would like to turn it over to Dan.

Thanks, Tom, and good morning to all of you once again.

I would like to begin my comments by reemphasizing the high-quality ongoing trend in our underwriting performance.

On a run-rate basis, we continue to sustain an adjusted combined ratio in the low 80s.

It has been in the mid-80s or below since the first half of 2003.

For this quarter, after excluding cash reserve reestimates and the increase in ceded premium, our adjusting combined ratio is 80.7%.

That is outstanding sustained underwriting performance.

Frequency continues to be favorable.

Severity results are well within our pricing assumptions, and we expect these trends to continue.

Next, let's cover Cat losses for the quarter.

As reported, Cat losses totaled 255 million.

However, included in that number was a $72 million favorable adjustment in our reserves for prior year's hurricanes and a $57 million reduction in the provision for the anticipated regular assessment and related recoupment from citizens of Florida.

So our Cat losses for the quarter before those two adjustments was 384 million, or about 5.6% of earned premium.

That is slightly less than we would expect, but it is within normal tolerances.

In addition to the favorable reserve change for last year's hurricanes and our citizens provision, we also had other favorable prior-year reserve reestimates totaling 226 million as a result of lower claim severity trends and the late-reported loss development than was anticipated in previous estimates.

Now, we have recounted some of the additional reinsurance agreements put in place during the quarter.

As we have discussed previously, these agreements are part of our Catastrophe Management strategy, which is intended to provide shareholders an acceptable return on risk assumed and to reduce earnings variability while providing protection to our customers.

The insurance programs were designed to provide national coverage for hurricanes, earthquakes and fires following earthquakes and to coordinate coverage provided under several types of agreements.

We have commented previously on our 2 billion -- in excess of 2 billion countrywide aggregate cover, which excludes Florida, our 1.5 billion in excess of 500 million California fire filing agreement, and the Pacific state multiyear agreements entered into in prior years.

During the second quarter, we acquired additional reinsurance protection, primarily for hurricanes, by purchasing a multistate Southeast agreement which provides 500 million -- in excess of 500 with a 20% retention covering ten states and the District of Columbia.

The agreement covers the Atlantic and Gulf Coast states with the exception of Florida.

We also added another 200 million of coverage for the state of New Jersey and four new agreements for our Florida subsidiaries to further coordinate Florida personal property coverage with the Florida Hurricane Catastrophe Fund and with our existing excess of lost reinsurance treaty for Florida.

Now, realizing that it is difficult to follow how all of these agreements work and how they are integrated, as Bob mentioned, we'd have posted on our Investor Relations Web site a detailed write-up on all of our reinsurance programs.

It includes color-coded charts and examples of how the programs work in the event of a series of catastrophic events.

We anticipate that the total annualized cost of all reinsurance programs, excluding premiums expected to be paid to the Cat fund, will be approximately $840 million, or about 210 million per quarter.

This represents an increase of approximately 600 million per year, or 150 million per quarter over our total annualized cost during the 2005 season.

Based on the effective dates of these agreements, our ceded premiums earned increased to approximately 119 million in the second quarter this year and should be close to 210 million for each of the third and fourth quarters.

Importantly, we are continuing to aggressively seek regulatory approvals to include reinsurance costs in our premium rates.

Through the end of the second quarter, we have submitted more than 300 rate filings in 25 states related to the cost of our new 2006 reinsurance programs.

We have implemented filings in 12 states, covering over 65 million of the cost.

Including rates approved in Florida and other states related to our prior-year reinsurance programs, current effective rates reflect approximately 35% of the total cost of all of our reinsurance programs.

One final note on that reinsurance coverage -- as shown in the last reinsurance example provided on our Web site, with these new programs, if we were to experience gross losses from hurricanes in 2006 of $5.2 billion as a result of a hurricane making landfall in Louisiana causing gross losses of 3.6 billion, one hitting Texas with 1 billion in losses, and a third hurricane causing 900 million in damages in Florida, if that happened in 2006, we would expect recoveries of $3.4 billion and our net losses would be only 100 -- or rather 1.8 billion, or about one-third of the gross losses.

Also during the quarter, we closed on the reinsurance transaction transferring Allstate Financial's variable annuity business to Prudential.

A deferred pre-tax gain on the transaction of $88 million will be amortized to income over about 18 years in relationship to the persistency of the business.

For the quarter, there was a net loss on disposition of 24 million after taxes related principally to derivatives held to hedge the ceding commission due from Prudential at closing, as well as other deal-related costs incurred in the quarter.

There was a $361 million statutory gain on this transaction.

During 2006, dividends of 400 to 500 million primarily related to this transaction are expected to be dividended from Allstate Life Insurance Company to its parent, the Allstate Insurance Company.

Dividends at that level are subject to regulatory approval.

During the quarter, Allstate Life paid dividends of 125 million through Allstate Insurance Company.

During the quarter, we repurchased 8.9 million of our shares for $488 million, or $54.56 per share.

We now have about 600 million remaining on our $4 billion repurchase program.

Finally, a few comments on earnings guidance, which as Ed mentioned, we raised to a range of $6.70 to $7.00 per diluted share.

This range assumes a level of average expected catastrophe losses for the remainder of the year, which should be about 6% of earned premiums.

That also assumes there will be no additional reserve reestimates for the balance of the year.

This increase in guidance clearly reflects our confidence and the continuation of the strong underlying underwriting trends experience this past quarter and over the past several years.

Now, Bob, I think we are ready for the Q&A session.

Matt, we would like to start the Q&A.

(OPERATOR INSTRUCTIONS).

Tom Cholnoky, Goldman Sachs.

Dan, I thought it was a great addendum you put on your -- about your reinsurance programs.

The question I guess I have is, in all of your examples, what size kind of industry losses are we kind of talking about for you to come up with your gross losses?

Would be kind of the first part of the question.

Well, Tom, we did not try to put it in the context of overall industry loss.

We were just giving you examples of what might happen for specific events in specific locations or specific states, at least.

But we have not tried to say what that might indicate in terms of total industry losses.

But what I'm trying to get at, though, Dan, is that, you know, for instance, in Florida, $5.2 billion gross loss coming down to 1.80 -- that has got to assume some sort of level of loss.

I mean, are we talking Hurricane Andrew?

Are we talking Katrina hitting Miami?

Because at some point, I assume you are at risk of still going through your Cat program, are you not?

Tom, that 5.2 is a combination of -- (multiple speakers)

Of all of the pieces -- sorry.

Three events -- so Louisiana, Texas, in Florida.

The Florida piece in that example is about 900 million for us.

Because of the universal and Royal Palm transactions, that 900 would drop about 600 impact on us.

As you saw, 3.6 would be the Louisiana piece, and about 1 billion in Texas.

Those would be -- (multiple speakers)

Okay.

I guess the question really then is what kind of event would have to occur for you to exceed those numbers?

Tom, we didn't do it that way.

What we are trying to do is to show you -- you know what happened in '05.

We are trying to give you a sense of what would happen in '06 if the same thing happens.

So we did not spend time trying to figure out -- well, how big an industry event would that take.

It really is just an order of magnitude kind of assessment.

Tom, as you can tell, those are quite similar to our loss ranges for each of those hurricanes last year -- Katrina, Rita, and Wilma in Florida.

All right.

Maybe I will pursue this off-line.

But the other question I guess I have regarding your guidance -- can you just be -- provide us just a little bit more detail in your level of confidence -- or what is driving the incremental -- the higher guidance in the quarter -- or for the remainder of the year?

We will try, Tom.

We have had great first-half performance with approximately -- what -- $4 per share.

The second half of the year has a higher level of expected catastrophes and more reinsurance costs, but we sure like the trends that we saw in the first-half.

We don't see anything on the horizon that is going to materially change those, and that is why we raised the guidance.

Bill Wilt, Morgan Stanley.

Somewhat unrelated to the quarter, looking at '05 versus '04 advertising expenditures, it looked like Allstate really shrank print and network TV advertising, really ramped up syndicated TV and cable.

So, I guess the question is I'm wondering if that continued into 2006.

Can you add any color?

How should we interpret the change, I guess, in the context of the drive for growth and potentially gunning for a different demographic profile?

Bill, this is Tom Wilson.

You are correct that we -- our advertising program has shifted to get more total rating points per dollar spent, which means you go to slightly cheaper media.

Last year, we continued that first-year.

We spent a bunch of money in the first quarter really of this year launching Your Choice Auto.

We are excited about the results we are getting from that.

If you look at our -- any brand measures, whether that is believability, relevancy, they are at really all-time highs.

The effectiveness of that advertising is at multiples of what would be considered normal.

That is translating into increased consideration for Allstate, and the result of all that is our quotes are up.

So we have shifted to slightly more effective advertising, but most importantly, the combination of (indiscernible), a message that works with consumers, and product news is really driving our competitive advantage.

Thanks.

Is the shift to the syndicated TV and cable relevant, I guess having grown significantly, relative to the other forms of media?

Well, I think, if you look at the general trends towards people looking at network TV, what is going on with the upfront buy today, you would see more and more people moving to more segmented and targeted media, whether that is the electronic media you talk about, whether that is online advertising, where we are way up, whether that is outdoor advertising, right down to -- you know, Bill, we have even moved to if people valet their cars in many of our local markets, the ticket has Allstate on it, because those people usually like their cars and they have got money.

So it has gotten much more sophisticated, much more local, and much more segmented.

Thanks.

Second very quick one -- is it fair to think of the catastrophe management policy you have undertaken -- I guess specifically, the nonrenewal of homeowners policies along the coasts -- is it fair to think of that as a multiyear process?

Yes.

We would say we are not offering continuing coverage to some customers as we move forward.

That will be a multiyear process.

It depends by state.

Up in New York, in your territory, we have talked and publicly said we are under a three-your program right now to continue to reduce our size on Long Island, not offering continuing coverage to a variety of people.

Then it depends by state.

As you kind of work along the coast, it varies everywhere.

Thanks very much.

Hey, Bill, sorry.

I just want to go back to your question on ad spend, because I want to make sure that -- to the extent that we have shifted the spend, you should not interpret that as a reduction in our ad spend.

Our ad spend will be every bit in '06 what it was in '05, or possibly higher.

So don't confuse a more strategic and more effective use of our advertising dollars with any kind of a cutback in the ad spend.

As Tom mentioned earlier, that is a pretty competitive area of the marketplace right now, and we are prepared to do more than our share.

Thanks, the numbers reflect that.

I was just looking at the shift within.

But that is very helpful.

Thank you.

Jay Gelb, Lehman Brothers.

Tom, I wanted to touch base on your ability to pass along the higher reinsurance costs going forward.

I believe you gave the number -- that 35% of the increased costs are anticipated to be pass-along currently.

How much of the ultimate cost do you think you can pass along, and how long should that take?

Well, Jay, let me break it into pieces.

Of course, a large portion, about a quarter of what we stand is in Florida.

We get pass-through on that and the insurance department is okay with pass-through.

So when we do that, we pass that through.

The other states, of course, is where all of the action is.

We are out aggressively doing that.

You know, there are some states that it is very easy, it is well established.

There are other states where you fight a little more.

New York is a little more difficult.

Texas, we are on a rate filing right now.

I am looking at the big states, and we are in discussions with them.

California, you are not allowed to pass through reinsurance costs in homeowners.

So we think that we will be able to get more than a majority of it.

It will take us probably three years or so before we actually get there.

There's a couple of things, right?

You have got to file with the department; you have got to negotiate with them.

You are talking about policies that renew every year, so it takes you a year before you can actually get to all the policies, and it takes you a year before you earn it in.

The key message we would like to leave you with though is we are out aggressively getting as much of that back as we can, and the competitive conditions, as I mentioned earlier, are such in the homeowners business where we are finding we are able to recoup that without ruining our competitive position.

Jay, I would also add it is really remarkable what the people in our pricing and underwriting area have been able to do.

To the extent you can file for 300 rate increases in the period of about -- what is that, Tom, four or five months?

I mean, it is really stunning.

There was a point in time when we couldn't do 300 rate increases in four or five years.

We can now do it in four or five months.

So the organization has become much nimbler, but it has also become much more focused on recovering and recouping the bulk of that cost.

Jay, those filings are in 25 states, as you know noticed -- and the effective rates we are talking about for the 35% represents 12 states for the '06 programs plus those from prior year, as Tom mentioned, like Florida.

Okay.

Thanks for that detail.

Then separately, on the claims cost trends in auto, it seems that Allstate has some permanent improvements in its claim process that allows it not only to benefit from the secular trends of better frequency.

Can you talk to us a little bit about that in terms of how we should think about it?

Yes, I can.

About three years ago, we did something we call claim footprint, strategic footprint.

We changed the way we handled a lot of our claims.

About a third of our claims are now handled in a centralized fashion through call centers.

Where we can have greater consistency and we answer them faster.

We get them resolved faster, and we still have good control of our severity.

At the same time, we're restructured some of the way our claims operations operate.

We reduced the number of offices we had from over 200 to about I think 130 today, which gave us larger critical mass of talented people.

At the same time, we focused on -- very much on keeping, attracting and retaining good people.

We have great measurement systems, really right down to the individual adjustor level.

So when we see a number pop in a particular locale, we can drive it right down to the adjustor and we go in and find out what's going on.

So I would say it is a combination of all this.

What we are working on, as we talked about last quarter, is what we call next gen claim systems, which is about using data differently, further changing the way in which we handle claims, improving our technology so there's fewer systems that are easier for our adjustors to use; they can go out and get external data in a faster, more efficient way, so that we can settle claims faster, reduce our expenses and keep severities under control.

We started rolling that out on June 28 in Property.

I would expect to see some results in the property area over the next year, and then it will be in '07 and '08 where we should be able to continue to expand our advantage in auto.

I would say this is really -- for us, this is not a decade-long really a trend.

We did core claim process redesign in the mid-'90s, where we went out and said we are going to change the way we handle bodily injury claims.

We are going to start developing files for litigation, not for settlement, which means you handle them differently.

We are going to try to work to settle some cases faster, have fewer lawyers in the process.

All of that has worked very well for us, and we have been very innovative.

We haven't crowed a lot about it.

Some people talk about different ways of handling claims locally.

We have over 900 drive-ins.

We have had them.

We started them in 1957.

When you centralize one-third of your claims in about a year -- so we have been very innovative in claims.

Then I think, as importantly, we just have great people.

So we think it is a sustainable advantage for us, particularly in this environment where you got labor prices up, sheet metal prices are up a little bit, and there is some restrictions on capacity, particularly in some places like California, Florida and Texas.

Great, thanks for the answers.

Ron Frank, Citigroup.

I wanted to ask about new applications.

It seems like virtually all of the growth, as you alluded to, is coming from Florida and California.

I know you have the new rating plan in Florida that has had a big impact.

I am just wondering if you can give us a sense as a what is driving it in California, and if there is an anniversary or a lap date out there where the comparisons start to get more difficult because of the first anniversary of whatever it is you did?

Well, there are a couple of pieces embedded in there, Ron.

First, let me talk about new business, and then I will talk about retention, of course, which adds up to overall policy in force growth.

On our standard auto business, really, we are doing quite well down in Florida.

We have changed our rating plan down there.

We have gotten much more specific targeting (indiscernible) companies starting in May of last year.

Then actually in the fourth quarter of last year, one of our competitors appears to have made some change, so the percentage of business we get from that competitor is up, and we are liking that.

We continue to kind of adjust.

We just changed some of our underwriting practices for another competitor who is not -- we can't [give] this claim data on.

But Florida, on balance, we like the plan, and we are way up on new business.

We are also way up on new business in some Southeastern states -- just north of there, and then a couple of western states.

So it is not -- new business is really not being driven by California; it is being driven by those states, and that is on standard auto.

If you look at non-standard, of course, we are down nearly everywhere and we've talked about that before.

Then owners we're down primarily due to our catastrophe management business -- what we are doing there.

If you look then at our retention, which is the other piece to the equation, it was up from the first quarter but down from the prior year.

Our retention starts to come down in the first half of 2005.

It has kind of leveled out since that period of time, and some of that, of course in standard auto, is due to a more competitive market, and that -- you'll see that really across the board in all the different states.

We are down a little bit in retention in Louisiana, Mississippi and Texas because, after the hurricanes last year, we put a deferred billing plan up, which means we would let people not pay us for anywhere from a month to three months.

Then of course -- so you don't get many cancellations when they are not paying you.

So then of course we said you've got to pay us back.

We started that in the beginning -- the end, really, of last year.

That reason for cancellation really peaked in March.

That has hurt our retention a little bit.

So you will see our retention numbers are kind of still in the zone of acceptable, particularly given this competitive environment, but certainly in line with what we expect.

Nonstandard -- we are down again across the board because we decided not to chase that higher-risk business.

Then homeowners, we are kind of up in some states, down in some states.

But the places we are down are really related to our catastrophe management again.

So I would say standard auto, growth is being driven by our pricing plans and we are holding our own on retention.

Nonstandard auto -- you will see the large drops in our items in force there.

Homeowners is down really due to Cat management, to summarize.

Is that helpful, Ron?

Yes.

I just want to follow up, Tom.

My comment about Florida and California being the drivers was feeding off the new issued apps data on Page 19 of the press release where it said the hurricane exposure states were up 4.8%, all of which came from Florida, that California was up 5.7, and all other states were nearly flat at 0.6.

With some substantial pluses and some other things that are flat in that last category, Ron.

Okay, so I am inferring from the average there.

All right.

Then just one other quick thing -- Dan, I just want to confirm something you said.

Did you say that the guidance was based on an assumed Cat burden of about 6 loss ratio points for the second half?

Right, about 6% of earned premium.

Hey, Ron, I don't know that I will be in New York.

I don't know if some of my compatriots will be for your scheduled retirement.

I want to thank you for your support over the years, and I wish you much luck.

Thanks very much.

I appreciate that.

Bob Glasspiegel, Langen McAlenney.

I just wanted to follow a little bit more on Ron's question on California and shift to just sort of what is going on on the regulatory landscape and specifically your outlook towards zip codes not being able to be used potentially in rating, how significant might that be to SRM and (indiscernible) hearings on profitability?

Bob, Tom Wilson.

Well, it is election time in California and so there is lots of noise around insurance, because people like to make that a point, particularly if you are an insurance commissioner, it's something to talk about.

We think we offer good competitive rates, a good value to customers in California on both auto and homeowners.

The issue of changing territory rating is something the whole industry is concerned about because obviously territory is an important determinant in assessing the proper price to charge customers.

So, we think that is an important thing to make sure that customers get the right price for them.

We are all -- the good news is we will all be in it together and we are all aligned around it.

The bad news is it's currently a public issue, and we will just have to play that one out and see how it goes.

On the homeowners side, they have called a hearing for excess rates.

Their position is that you are not entitled to make an underwriting profit on homeowners, which of course does not fit well with us or anybody else in the industry.

We will probably be called to a hearing there probably later this year, and of course, we would expect to not only talk about the fact that we are entitled to a fair return but the fact that we can't pass through reinsurance prices, which is clearly a cost and a cash expense we incur on a behalf of our policyholders in California, which seems like it ought to be a part of the cost base calculation.

So more to come.

They are not out there -- you know, Garamendi is not out there saying we would like you to make more profit.

But of course, we would not expect him to say that.

I would just say that, Bob, in looking at [profitability] of whether it is auto or homeowners, really we can't get just too focused on price.

There's a whole -- is a complicated equation between marketing and who you are attracting and how you are settling the claims and what your expense levels are, what kind of pricing you are doing, and the business has become much more complicated over the last really even two or three years in terms of the way people compete.

People have moved away from the slash and burn let's cut prices is the only way to grow.

Bob, I would just add one more thing to that.

A lot of this is really happening real-time, so there is much, much more to come.

You know, when you look at the homeowners profitability in California, if you include the year that had the very large loss in the wildfires, you draw a whole different conclusion than if you look at the back part of '04 and '05 and the early part of '06.

So I would caution everyone to just be relaxed on this.

There is an ebb and flow to the regulatory form, particularly with respect to the state of Florida.

It is all newly upon us, and we will figure out the right approach and the right solution.

Okay, one other question -- just fixed annuity sales were up 43%, sort of in a high CD flat yield curve environment.

Most of my Life companies are not showing much growth in that segment.

Is that just a function of -- you are either VA and your forces can sell more, or you saw some opportunity somewhere?

No, no, it is not that at all, Bob.

One, of course, we have a very strong position in fixed annuities in total through all of our channels, and we wholesale and sell those products together, but sometimes not everybody sells the bulk.

It is not our captive.

Really, the biggest portion of the growth was our sale of our -- what we call T-Link annuity, which was, again, keeping with the theme of product differentiation focused on the consumers.

I think -- it was about five or six years ago we developed a product which we certainly have trademarked, and I think, if patented, certain parts of it, where it is a fixed annuity but if interest rates go up, the crediting rate on that fixed annuity goes up with treasury rates.

So, consumers don't see it as a oh, I buy the fixed annuity now, rates go up, and you don't increase my crediting rates because I got this big surrender charge.

It is really a consumer-friendly, consumer-driven product.

We of course fully hedge all of that, price it into the product, and our sales were way up in what we call our T-Link annuity.

Our sales were way down in the second quarter of last year.

So it is a combination of those two movements.

That's way above the last six-quarter trend which has been in a narrow band.

You know, you look at five-year, ten-year treasuries, they are quite a bit higher right now.

And you have the opportunity to get a better margin on that business.

Matthew Heimermann, JP Morgan.

A couple of quick questions -- first, in Your Choice Auto, if I recall correctly, you tried to price that business to a similar loss ratio as the rest of your book.

Has your experience thus far been consistent with that goal, or has it run a little bit better than maybe you thought?

Matt, it is priced to the same margin.

It is not far enough out to actually determine what that margin is.

I will tell you that the other piece that -- besides average premium that we are liking is -- our early read is that we are going to get some retention kick on it, which of course helps total lifetime value.

Okay.

Then in terms of the Life business, can you -- I did the math in a prior quarter when you announce the reinsurance agreement.

But can you just, at this point, now that it has closed, give us a sense of what your view of the lost earnings from that block of business are?

It is not a significant number at all, Matt, not large.

Okay.

Then just from a rate perspective, as you are filing, I suspect that frequency makes its way into your rating programs, just based on your experience data.

But I guess at what point does the accumulation of all of these frequencies decline start to make a difference in terms of seeing maybe a continuation of flat or even negative rate revisions going forward?

Well, Matt, we of course only price in what we have experienced, not what we think is going to happen.

And so when we are doing our pricing, we are looking at historical frequencies.

Of course, that does work its way into rates over time.

The question is what does it do to profitability?

That is where continuing to use sophisticated pricing like SRM 4 enables us to target those areas that we should be getting more pricing, so we raise prices in those areas places where we are comfortable with our profitability, where we can lower prices.

I don't think you will see large increases in average premium in the standard auto book through next year certainly, because even if -- I think that would be true in the industry too, not just for us, because even if frequencies flatten out or go up a little bit, or severities go up, you have good combined ratios, and so people are not likely to probably take big price increases.

Gary Ransom, Fox-Pitt Kelton.

If I wanted to follow up on a comment from Tom about how there were fewer spots where you could compete effectively because other companies were starting to use sophisticated pricing, and to put that against your desire to go after this high lifetime value customer, I just wanted to get the connection.

Are you still -- is it tougher to get your targeted customer now?

Or is it still possible to do just as well going forward, finding the growth, finding the customers you want?

Well, Gary, I think the question is did other people get smarter?

There are fewer large groups of mispriced risk where you can go in and say let's put a really good price on this and run a close ratio of an 80% close ratio.

With SRM 2, we had some territories in some states where we were running 80% close ratios of highly profitable business, as you can see from our current results.

The groups have become smaller and they are harder to find, which is where our strategy of localization has really made a difference.

We get down into individual competitors, individual risk, looking at their underwriting tables for -- and you know, we might go after somebody who has been three years -- we might have a three-year discount now that is different than a two-year discount for a particular carrier.

So it has just gotten more complicated.

And that makes it a little tougher.

That said, I think, when you combine that with a lot of advertising, great marketing, great brand name, product differentiation, expanding our distribution and making sure you keep your costs in line, that enables you to compete -- if those people who are competing solely on just price or pricing sophistication are struggling a little more in this market.

Just a follow-up on the independent agent side, could you talk about how the difficulty of competing in that might be different from your direct side?

Yes, it is a harder business to compete in.

Of course, there are more carriers out there throwing more plans at the salespeople so that you are always -- it is just a little bit more competitive than you would have in a captive channel, just to start with.

That is true whether you are in Allstate Financial or -- we see it in the financial business, of course, where we are huge, as well in nonproprietary distribution.

That is also true in the property/casualty business.

Our challenge has been doubled down with Encompass because we are going after the catastrophe management.

You'll remember, Gary, that about 60% of their business is in a package policy, which is auto and home.

So that makes it difficult to hang onto your existing business.

At the same time, we have gotten ourselves more focused.

We have less than ten states we are highly focused on right now.

We are zooming in on those states to try to drive more agency appointments.

We have rolled out a stand-alone standard auto product which we call Special Value.

It is way up as a percentage, but it is not yet a big enough portion of our overall items in force to keep us from having declines in absolute volume.

I think that will probably be the case through next year as well, where it's more competitive when you lay on top of that our capacity management stuff; it creates some transition challenges for us.

Gary, Ed Liddy.

Don't underestimate or miss the point that Tom made earlier also about something like SRM 4.

We continue to develop and iterate our various forms of tiered pricing.

It is a very powerful momentum that you have.

We have been at this now for, oh, since 1999, whatever that is, seven years or so.

So our ability to literally lead the industry in terms of how we develop and apply tiered pricing gives us plenty of opportunity going forward.

Jay Cohen, Merrill Lynch.

Good morning.

It looks like some other insurance executives are watching syndicated TV, because it seems that Your Choice Auto is being duplicated, sometimes pretty closely, by some others.

I saw Hartford had an announcement just this morning.

I am watching the tape.

And Safeco has a new auto product.

How long do you think you have before just about everybody else has some sort of choice built into their products?

And how do you maintain competitive advantage with it?

Jay, a couple of things, one of course it is always flattering to be copied.

The good news is we have gotten out early.

We have made big changes in how people perceive our brand, and we have -- this is not a one-trick pony.

We have obviously thought through what would we do if other people launched similar things?

We have additional product features we are thinking about doing on Your Choice Auto.

We also have Your Choice Homeowner coming up.

I think the good news for all of that is it just makes the category more interesting and valuable to the consumers.

So I think that we can all benefit.

On the defensive side of that, we have, of course, stated to you other times before, we have patented the process that we use to develop those products.

We have not publicly published those patents.

Once you do, then of course people who have used your patents are subject to financial costs if in fact they have breached your patents and your patent is granted.

We are current -- we decided not to publicly publish it because we did not want to give people the information.

We thought we would wait until people copied us.

I think you could expect to see us -- let people know what are patent pending is, and then we will see how to work -- the market [change].

I imagine also your advertising spending and marketing effort is quite a bit larger than some of these other players, as well.

Yes, that's true.

It's materially larger.

I would also say Your Choice Auto is a product that lends itself nicely to the direct form of distribution.

When you taken into the independent agency channel, where the customer service rep has eight to ten different products to choose from, the implementation and stickiness of it is a lot more difficult.

So it kind of goes back to one of the point we made earlier and we have made frequently to you all, which is the diversification of the distribution model that we have very much helps us when it comes to new products, and when it comes to pricing sophistication.

Yes, that's an excellent point.

You could not -- in our roll out of Your Choice Auto, we spent a fair amount of time and a fair amount of money making sure we understood how to explain it and sell it to customers.

It is not intuitive.

If I could squeeze in one more quick question?

Progressive came out and pretty publicly said that they are dissatisfied with their growth, and they want to find a better balance between growth and margins.

Have you noticed a difference in their behavior in the market to date?

Well, we were satisfied with their growth rate (laughter) and you see some of their change.

But they are very local, as well.

So I could not give you an overall answer.

I think various states are doing different things in reaction to their situation, so you would have to have some other changes.

But it hasn't changed our view that a good, balanced, comprehensive multifaceted way to compete is the way to win in the marketplace.

Kelly Nash, KeyBanc.

I wonder.

You have been reducing your coastal exposure and indicated that that is kind of a continual process.

Can you just give us a sense of how much exposure reduction is left relative to what you have accomplished to date?

That is hard to get at.

You know, Kelly, let me take Florida.

There was a point in time ten years ago when we had -- just after Hurricane Andrew, we had 1.2, 1.3 million policies in force.

Today, we are down to around 400,000 or so.

The policies that we are not offering continued coverage for in New York -- it's about 4% of our policy base.

Maybe we need something like that again next year.

We have used a lot of reinsurance.

You cannot totally rely upon reinsurance, because you don't know that if it's going to be there and you do know what the cost is going to be there.

So in addition to putting reinsurance against our book of business, we are doing the somewhat harder work of managing exposure down ourselves.

We have made real progress on it this year, but we are not going to be satisfied with it until we can get some pretty good assurances that we have more consistencies in our earnings.

Okay, so it is safe to say that it sounds like there is still quite a bit of exposure reduction going forward?

Made a lot of progress, more to come.

Okay.

Then I wonder if you could just comment on consumer behavior.

Are you seeing any increase in shopping or anything unusual going on from that perspective?

You know, Kelly, it is hard to determine what total shopping rates are.

Our quotes are way up.

Our close ratios are down a little bit, which reflects the competitiveness of the market I talked about in new pricing plans being out there.

If you look at our retention numbers, of course they are down, as I said, a little bit.

That would lead you to conclude people are shopping a lot more.

But if you are looking for a [seed] change, we don't see it.

Paul Newsome, A.G. Edwards.

After Hurricane Andrew, there was a change in shopping behavior where the direct underwriters gained a lot of share because homeowners prices were going up and most people were upset about that, and it cost a lot of shopping events.

It doesn't seem like that is happening this time around.

I was wondering if you maybe had any comments as to why that may have happened this time around?

It seems like you have got a different market here.

I do not know if it's really related to -- it is hard for me to go back and remember exactly what happened after Hurricane Andrew. (multiple speakers)

You know, it was one state.

And why they grew at that point in time, or they just started advertising more or people were mad at their companies.

I can tell you what is going on in Florida today, which is, as I mentioned, we changed some of our pricing plans and got more aggressive there.

We have also expanded the number of agencies we have, the number of licensed sales professionals we have in Florida by about 10%.

Those agencies have the ability to sell homeowners for other people.

We call that our expanded markets program, so whether it's Royal Palm or some other people.

As we are out there offering them homeowners product, we are also obviously offering them auto product.

So we have also gotten more sophisticated on how we roll out new agencies and how we support our existing agencies to train licensed sales professionals.

I think we often talk about 12,500 agents.

Actually, we don't have any agents anymore.

We have agency owners inside those agencies; we have over 28,000 people who are solely dedicated to selling our product or products we approve for them to sell.

So the expansion of our distribution, the way in which we train and develop that distribution, the products we let them offer, our product pricing plans all are focused around, as Ed said before -- we don't intend to have to give up share in those states because we can't offer continuing coverage on homeowners.

It is not easy.

The people down there are working real hard.

There are lots of customers you have got to work yourself through, and they are doing a fabulous job.

But it is -- so I cannot really compare that the prior but we like what we have got going down there now.

Hey, I am going to -- it is just a couple of minutes after 9.

We like to manage these meetings effectively, so I am going to bring this one to a close.

Let me make just a couple of closing comments.

Results for the quarter were simply outstanding.

Our ability to generate profitable growth, manage our capacity exposure and maintain capital management discipline, we think, continues to be proven in a very material way in our numbers.

Our Allstate Standard Auto strategies are working very well and are the appropriate strategies for the market today.

We made substantial progress so far this year on our Cat exposure management, and we are going to continue to make substantial progress for the balance of '06 and into '07.

Allstate Financial posted very good results and continues on a strong path of yielding higher returns over time.

We achieved excellent increases in book value on an ex-FAS 115 basis during the quarter for the first half of the year.

I think that demonstrates the tremendous cash flow and operating income generation potential of the Company.

We continue to return capital to our shareholders, and we believe that we enter the hurricane season in a much different and in fact a much better position than in 2005.

Hopefully, we won't experience anything like what we got in 2004 or 2005, but if we do, we are prepared to take care of both our customers and our shareholders.

So thank you all for joining us today.

We look forward to seeing you again in October, or talking to you again then.

Thanks.

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

This concludes the program.

You may now disconnect.

Good day.