Allstate Corp (ALL) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Allstate Corporation's fourth quarter 2006 earnings conference call.

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

Later, we'll conduct a question-and-answer session, and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

I would now like the introduce your host for today's conference, Mr. Robert Block.

Sir, you may begin.

Thank you.

Good morning, everyone.

Thanks for tuning in to our fourth quarter 2006 earnings conference call.

Today I am joined by Tom Wilson and Dan Hale.

In a minute, they'll provide their perspectives on our results for 2006 and some commentary on our outlook for the future.

Following their comments, we will have a question-and-answer session.

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

Yesterday we issued a press release covering our financial results for the fourth quarter and the full year, as well as the majority of our investor supplement.

We also recently updated our reinsurance disclosure on our website to provide information on our program for 2007 and beyond.

Finally, please note 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.

In this call, we may discuss some non-GAAP measures for which you'll find reconciliations in our press release and our investor supplements that are available on our website 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 our remarks are current only as of the date and time of this call.

Now, let me turn the call over to Tom Wilson.

Tom?

Good morning.

The good news today is this call will have the same feel as the previous three quarters in 2006.

We had a great fourth quarter and a record year in 2006 across a wide variety of fronts.

We delivered excellent results for our shareholders with a 19.5% increase in operating earnings per share to $1.78 in the fourth quarter.

Net income was almost $5 billion, which represents a 23.8% return on equity, and book value increased by 12.4% to almost $35 per share.

If you take that book value increase, you add in the dividend, the return to shareholders is 17%.

If you exclude the accounting adjustment for FAS 115, the return is 23%.

Now, when you look below these consolidated results, you can see evidence -- and we made lots of progress on all of our major strategic initiatives.

Our personalized business made great progress on a number of difficult objectives, and we grew our standard auto business, we reduced our exposure to major catastrophes and we maintained strong profitability.

We grew the standard auto policies enforced by 2.7% over last year's fourth quarter, in what is a highly competitive market through great marketing, innovative product differentiation with Your Choice Auto, offering competitive prices and expanding distribution.

Now, that balanced approach is working well for us, and we expect to continue to leverage it in 2007.

Our goal of reducing our exposure to major catastrophes has not changed, and we continue to make pretty good progress on that front.

As a result, we continue to get [smaller] in homeowner's insurance along the coast.

The impact of our reinsurance program has also had a negative impact on written premiums and resulted in the eight-tenths of a percent decline in overall written premiums.

Dan is going to cover our new reinsurance program in more detail later.

The rhythm of our business was very consistent with last year.

If you look at the underlying combined ratio for property liability, it was in the mid-80's, which is very similar to the results in 2005.

We maintain that strong profitability by good management of claims severities, being very selective in reducing prices and focusing our expenses on driving growth.

We obviously benefited from an unusually low level of catastrophe losses during the year and favorable reserve re-estimates from prior years.

Dan will go through frequency, severity and expenses in more detail.

While we're talking about the protection business, let me provide some perspective on Mississippi, since I know many of you are interested in the implication of State Farm's actions.

Every insurance company is in a unique position in Mississippi, and our situation is different than State Farm's.

Our read of the situation is that our claim practices and policy interpretations were different than State Farm's.

We're proud of the fact that Allstate was one of the first companies settling claims for its customers.

We've closed 98% of all claims.

We've worked hard on every individual claim to identify and pay any covered wind damage.

We also retained engineers to determine causation wherever we needed to.

In addition to that, our employees, our agency owners, we donated over $6 million and a tremendous amount of volunteer time to help the rebuilding process.

And obviously in a tragic situation, some people don't feel properly compensated or simply use all available avenues to get enough money to put their lives back together, and that leads some of them to resort to the courts.

Allstate is committed to resolving all the claims fairly and appropriately.

We continue to work with our customers and where appropriate, their legal counsel to resolve any claims based on the individual merits of each claim.

So that will be the extent of our comments today on that situation.

Allstate Financial and our investment activity also turned in strong results for the quarter and the year.

Allstate Financial earned $142 million for the quarter and a record $594 for the year.

Fourth quarter operating earnings were up only 2% from last year, as higher investment margins were partially offset by the impacted dividends to the parent.

We reduced the amount of capital in that business through dividends last year by $675 million, a large portion of which was the result of the VA transaction that we completed in June.

Full year earnings of $594 million reflect higher investment income, improved mortality in the second quarter, which you will remember, and then good expense control.

We continue our strategy of raising returns in this business, and are willing to take short-term reductions in volume to raise returns on product sales.

Premium and deposits were down 44% for the quarter and 19% for the year, due to lower sales of institutional products, fixed annuities and then of course, the sale of our VA business to Prudential.

Let me close with a few comments on capital and earnings guidance.

We continue to demonstrate our strong stewardship of shareholders capital.

We repurchased another $500 million of stock in the quarter and we paid cash dividends of $220 million.

We have decided to eliminate our practice of providing operating earnings per share guidance, based on the discussions we've been having with you and our shareholders over the last couple of years.

We'll continue to provide the extensive disclosures through our press releases, financial reports, investor supplements and our website.

The open access to our IR staff and senior management are clearly highly valued by you, and there will be no change in those practices either.

In addition, we will provide an indication of where we think the combined ratio, excluding catastrophes, will be for the year.

Given all of that information, we're confident that the investment community will be able to adequately evaluate our performance and our prospects.

Our strong quarter was below First Call average that was done by the Street.

That appears largely to be the difference in catastrophe losses.

The winter storms were less expensive than we had planned, but they were not as low as the average estimates.

With that, Dan will now take you through the financial results in more detail, provide some additional perspective on our reinsurance program, and share our outlook for the combined ratio.

Thanks, Tom.

I would like to begin with a few comments about our profitability performance and our underwriting trends, and then I will summarize our new reinsurance agreements and follow that by covering our recent capital management actions.

Finally, I will provide additional perspective on our decision about earnings guidance.

As you've seen, our profitability performance for 2006 was exceptional, with operating earnings per share about 70% above our previous record and an operating income return on equity of 25.8%.

Obviously, those results were favorably impacted by relatively low catastrophe losses and favorable reserve re-estimates.

However, excluding both of those items, our adjusted combined ratio continued to be in the mid-to low 80's where it has been for the last four years.

For the fourth quarter, after adjusting for cats and reserve re-estimates, our combined ratio was 84.3%, a slightly lower run rate than for the third quarter.

In the quarter, Allstate brand standard auto business continued to perform well.

From a growth perspective, written premium increased 4.1%, policies in force grew 2.7%, and new issued applications were up 8.5%, including an 8.3% increase in hurricane-exposed states.

Turning to lost cost trends.

Our standard auto frequency was favorable once again but not as favorable as the trend over the past few years.

A little deeper dive, however, indicates that most of the change in the favorable trend was a result of comparing this quarter's results with the record lows experienced in the fourth quarter of 2005 following the major hurricane disruptions.

Frequency actually increased during the first part of the quarter, however the favorable trend resumed before year end with sufficient declines to drive the overall quarter into a favorable comparison with a prior year.

Allstate brands standard auto bodily injury claim frequency improved 1.8% for the quarter and property damage improved 0.8%.

We expect the long-term trend in declining frequency will continue.

However, as you'll see later on in our outlook, we're not counting on further frequency declines for 2007.

Severity results for auto continue to be well within our pricing parameters, while higher levels of homeowner severity continued to reflect shifts to higher deductibles.

Our expense ratio for the quarter was 25.1%, which was about 1.5 points higher than for the fourth quarter of 2005.

About half of that increase was caused by the increase in seated premiums which reduced the denominator of that calculation.

The balance of the increase was primarily caused by provisions for increased incentive payments to agents and employees, as well as increased advertising expenditures.

In the fourth quarter of 2005, we were reducing our incentive accruals after the hurricane activity, while our 2006 incentive accruals reflected our record breaking profitability performance.

As we think most of you know, our expense focus is on total expenses, including loss costs.

We have been and will continue to invest in initiatives like our next-gen claims process redesign, which will reduce an already low claims expense ratio, enable us to better manage claim severities and improve the customer's experience.

At the same time, we are always looking for ways to improve productivity.

And as you may recall, during the year, we announced a sizable reduction in our home office staff.

That was while continuing to make use of lower cost technology and processing capabilities through outsourcing arrangements.

In total, our number of employees declined by 1,700 or 4.4% in 2006, and the decrease since 2002 has been more than 3,000 or about 8%.

Turning to our reinsurance program.

As you know, complete details of all of our reinsurance agreements, including examples of how they work, are available on our internet site, which you can link into from our Investor Relations website.

We've now renewed our $2 billion aggregate, our southeast and our New Jersey excess reinsurance contracts.

We also opted to expand coverage on our existing multi-year contracts in the states of Texas and New Jersey.

In addition, we added a new agreement covering both earthquake and fires, following earthquakes in Kentucky.

You may recall that we're removing optional earthquake coverage on approximately 400,000 property policies upon renewal in most states, while making arrangements for our customers to obtain coverage through other insurers.

However, earthquake coverage will be available in Kentucky and to a much smaller extent, certain other states, due to regulatory requirements.

I should also point out that our $2 billion aggregate excess treaty, which has a $2 billion attachment point, now covers the next two years instead of a single year, expiring in May of 2009.

We have a 5% retention for the first year and 20% for the second year, which we decided not to fully place at this time.

The southeast agreement, which is a one-year agreement covering $500 million of losses in excess of $500 million, also has a 5% retention compared with 20% last year and provides for one reinstatement upon payment of a required premium.

Our Florida reinsurance will be placed later this year once we have a clearer picture of the state's recent legislative actions.

We anticipate that the total annualized cost of all of our reinsurance programs will be approximately$770 million per year, including an estimate for Florida coverage.

We were pleased to be able to obtain similar coverages this year compared with last year, plus we expanded coverage in several areas and negotiated that two-year term on our aggregate treaty.

The total cost is expected to be about $165 million more on a calendar year basis but about $30 million less than last year on an annualized basis as a result of the lower expected costs of reinsurance for Florida.

That reduction is a reflection of the impact of our catastrophe exposure reduction actions in Florida, combined with lower rates online for several treaties and changes to the Florida hurricane catastrophe fund.

Now back to the recent Florida legislative actions.

We were pleased to see the legislature significantly expand the Florida hurricane catastrophe fund.

We've been advocating that action for several years now.

It will provide access to substantial reinsurance coverage through the fund and at lower rates online.

Those savings will be passed along to policyholders who will be the ultimate beneficiaries of the state's more cost effective coverage.

However, they will also be exposed to potentially significant future assessments in the event of extraordinary losses from major hurricanes.

Whether or not we'll have issues with any of the provisions of the bill will depend, to a large extent, on how those provisions are interpreted and implemented by the Financial Services Commission and the Office of Insurance Regulation.

Yesterday's Emergency Rule, which was approved by the Florida Financial Services Commission, will make implementation of the new legislation more complex and more challenging.

The Emergency Rule, which became effective immediately, froze residential insurance rates and established a moratorium on non-renewals and cancellations.

Since we have just begun to evaluate and assess the impact of this rule, we'll be unable to provide you with any meaningful insight into its implications on this call.

Now for a summary of recent capital management actions.

During the quarter, we purchased 7.9 million of shares of stock for $501 million or $63.26 per share.

We completed our previous $4 billion program and used $207 million of our new $3 billion program, which is expected to be completed by the end of the first quarter of 2008.

As you would expect, that will limit our ability to grow property liability net investment income since our capital management actions will result in a significant amount of 2007 free cash flow being returned to shareholders.

Since 1996, we've now repurchased nearly $3 billion of our stock, reducing total shares outstanding by 278 million or 31%, and we've paid $6.3 billion in dividends.

Combining share repurchases and dividends, we have on average returned about $2 out of every $3 of our earnings to our shareholders.

Also during the quarter, we repaid $550 million of senior notes in accordance with our scheduled maturity and we called $200 million of junior subordinated debentures with a 7.83% coupon that were scheduled to mature in 2045.

The call premium of $7.8 million was included in operating results in the corporate segment for the quarter.

Our debt to capital ratio at year end was 17.6%.

It would have been 16.9% without the adoption of SFAS 158.

As explained in our press release, adoption of SFAS 158, employers accounting for defined benefit pension and other post-retirement plans, required us to reduce shareholders equity by $1.1 billion for previously unrecognized actuarial gains and losses and prior service costs related to pension and other post-retirement benefit plans.

It was recorded and accumulated other comprehensive income.

There is no impact on results of operations or cash flows.

However, it did increase our debt to total capital ratio and our return on equity by about seven-tenths of a point.

It also reduced our book value $1.77 per share.

Even with that reduction, however, we grew book value per share 12.4% for the year, 14.6% excluding unrealized gains on fixed income securities.

Without SFAS 158, our book value of growth would have been 18% to 21%, depending on whether or not you include unrealized gains.

Finally, a few comments on our decision to discontinue providing specific annual operating income EPS guidance.

As probably most of you know, we've been considering this decision and discussing it with many of you over the past several years.

Over that same time frame, we've significantly increased the quantity, and we think the quality, of our disclosures.

Our earnings released supplement now includes five years of detailed financial results on a consolidated basis, as well as for each of our businesses.

We show five years of history of reserve balances and the effective reserve reestimates and the combined ratio.

Frequency and severity trends, as well as renewal ratios, are provided by line of business for each of the most recent eight quarters.

We also break out net investment income and yields for each type of security for each business.

In addition, we show catastrophe losses and their impact on the combined ratio for every quarter since 1992.

Using that trend data in our performance trend outlook commentary, we're confident that all of our investors will have sufficient information to appropriately evaluate our current and future performance.

As shown in our press release, we expect that our property liability combined ratio, excluding catastrophe losses and assuming no prior year reserve re-estimates, will be in the range of 84% to 86%.

To put those factors into perspective, our fourth quarter combined ratio after excluding reserve re-estimate and actual catastrophes was 84.3%.

We expect written premium to be slightly higher than in 2006, as auto growth will be partially offset by the effects of catastrophe management actions on homeowners.

We're also assuming the frequency, excluding catastrophes, will be about level with 2006 and severities will be in the low single-digit range similar to the last several years.

We gave you the expected cost of our reinsurance program earlier, approximately 40% of those seated premiums have already been included in approved rate increases and will be included in premiums written during 2007.

And we expect that more than 50% will eventually be approved and be included in premiums written during 2008.

In summary, we have had great financial results, continue to provide substantial cash returns to our shareholders, and are in excellent financial shape.

With that, Bob, I think we're ready to open up for questions.

Matt, if you could open up the Q&A, please.

[OPERATOR INSTRUCTIONS] Our first question is from Jay Gelb of Lehman Brothers.

Your question, please?

Thanks and good morning.

Tom, could you give us a sense of whether you plan on taking a strategic review of the overall business, including Allstate Financial?

Sure, Jay.

Good morning.

I think our strategy is good.

I like our strategy, and I don't expect you'll see many changes in that.

Whether that's the way in which we're going to market in our property/casualty business, which is really trying to be focused on a consumer and try to do innovative things like Your Choice Auto or work hard on costs through things like next-Gen claims.

And you shouldn't expect to see any change in our strategy at Allstate Financial either, which is to continue to try to raise returns.

When I think about that business -- it's return that we get from it is above our cost to capital.

It has great ability to leverage the things we have as a Corporation, both our brand, our customer base, our investment capabilities, and there is good demographic trends there as well.

When you put the two businesses together, and we sell to the same customers, we tend to keep those customers, and it makes both of those businesses stronger.

Our strategy will be largely unchanged.

You might see some differences in the maturation of that strategy.

So we'll be working on new product stuff for over three years, so Your Choice Auto is one of those.

You'll see Your Choice Homeowner come out.

You'll see Allstate Blue this year.

And we're working on some other new innovative offerings, not just in property/casualty but in Allstate Financial as well.

You'll see a little difference in the way it comes to market, but the overall strategy is unchanged.

Okay.

And then in terms of the auto insurance business, advertising expenditures appear to continue to keep climbing.

Can you give your view on where you see that headed in 2007 for the sector overall, as well as for Allstate?

Yes.

I think -- well, you're absolutely right in terms of where it has come from.

It's gone from being a relatively modest expenditure category to a very aggressive one.

GEICO, of course, led that off in the early part of this decade.

Progressive followed them a little bit.

And then we stepped up quite aggressively in 2003 by ramping up our spending.

So you have -- those three people in the marketplace, as well as State Farm, tend to be the largest advertisers.

And I think you'll continue to see increased spending by all four of those people.

What you are also starting to see is some smaller players with not as strong a brand name or as strong a consumer franchise like Travelers, Nationwide, 21st Century and some others start to go spend more money on advertising.

We manage and measure our advertising effectiveness right down to the local level as well as at the national level, so we use a lot of precision measurement on it.

None of that has impacted the economics of our advertising.

We're still making good money on it, we're still driving growth.

The Our Stand campaign that we have with Dennis Haysbert really resonates with people.

And then something that I think we have thought about but we hadn't really modeled out the results and have been very positive for us, is taking that advertising stance and the spending and putting it together with Your Choice Auto has really strengthened our brand and the amount that consumers are willing to consider us.

So you can advertise, but if you're advertising what you've always done or you're advertising only low price, you don't break through as much as if you're doing what we're doing, which is advertising complete value proposition focused on the consumer.

Okay.

Thank you.

Is that helpful?

It is.

Thank you.

Separately, on the loss cost trends, it looks like for the standard auto frequency -- the improvement frequency was the slowest in several quarters.

Auto paid severity, especially in BI, ticked up a lot.

I just want to get a sense of -- I think Dan was talking about there may be some year ago factors that affected that, but seems like everything is deteriorating from a loss cost perspective.

Let me make a comment about standard auto frequency and turn it over to Dan, and he can fill in some more details on it on both frequency and then severity.

When you look, of course, at severity on a long-term basis, it has been headed down.

We've all lived through and our combined ratio has benefited from it and our consumers have benefited from it, since we haven't had to take price up.

And so that's been a good thing.

The decline was clearly not as big in the fourth quarter this year as it was in prior quarters, so it has come down some.

When you look at it by state, the decline in the fourth quarter was pretty broad-based, over 32 of the states had declines in frequency.

So it wasn't like we just rode one state down.

So you still have a broad base.

But clearly, the trend has backed off a little bit.

Dan, maybe you want to talk a little about frequency and our outlook for this year and then severity?

Again, I think, Tom, you're absolutely right.

In the fourth quarter we were, as we said earlier, comparing those frequency results with a very low period in 2005 following the hurricanes.

As I indicated in the first part of the quarter, they actually were up but recovered strongly in the latter part of that quarter, so that overall we still had a decline in frequency.

So again, a few months doesn't really make a trend.

And as we have continued to say, that long-term trend for frequency, in our view, will continue to be down.

There may be blips in this quarter.

It wasn't as down in terms of the comparisons with prior periods as we have seen.

But we still think that's the trend overall.

In severity of numbers, while you saw those 4%, 5% kind of numbers on a paid severity basis, those are volatile numbers.

And again, one period doesn't really indicate where it is headed.

We're very comfortable with the underlying trends we're seeing on severity, as we indicated in our guidance.

Great.

Thanks very much for the answers.

Thanks, Jay.

Next question is from Gary Ransom of Fox-Pitt Kelton.

Your question, please?

I just wanted to ask on Your Choice Auto, how that is actually coming through or to what extent -- in what places are we seeing -- is that helping the average premium to some extent?

Is that helping retention?

Can you just comment on those kinds of things?

I can, Jay, which is, it's helping in all of those items.

We are now in 44 states and 75% or so of the country.

We still need to get approval in Florida and California, which we're working hard to try to do, which will then give us almost a complete footprint across the country.

Your Choice Auto, for those of you not familiar with it, is a package of our portfolio [prox] it has standard, which everybody else of course sells.

It has gold, which comes with a little more; comes with platinum, comes with a lot more; and it has value, which comes with less and costs less.

The net of all of our actions is more people buy up than buy down, which says to us -- which is consistent with our consumer focus, is not everybody wants to buy on price in auto insurance.

If everybody is selling standard, then of course, the only thing you have to compare with is price.

But if you sell different features and packages, then people will pay for that.

More people buy up from us than buy down, which raises average premium.

To your question on retention, I would say it is a little early to tell in total.

But when you look at gold and platinum, how those have been designed -- they're designed to improve retention because your deductible declines every year.

And with platinum, you actually get a discount on your next policy, so you kind of be ashamed to walk away from that.

So we are seeing retention in the first time renewals move up on those packages.

Value is a little lower than standard, but when you add it up again, it is kind of like average premium.

We think by the time we roll this thing all the way out, it will raise retention, because we'll be focusing really on what customers want, and they'll be able to make choices, which then keeps them with you.

Thank you.

Just one other question on a different subject.

The ROE in the life business.

Given that you've rationalized the capital a little bit more, where is that in comparison to your longer-term goals?

Where are we in rationalizing capital?

Yes.

On the ROEs -- on the returns.

Oh, on the returns.

We made pretty good progress in moving the returns up on new business in 2006, but we have more to do.

We got there, in part, by working the investment side and the crediting rate side.

We'll continue to work both of those next year and beyond, which means we're going to have to expand a little bit where we invest.

There are a couple other things we can focus on, and one of which is looking more aggressively at our balance sheet management and trying to find other ways to source capital or reduce capital in the business by doing other balance sheet transactions, which other companies have done, some of it is securitization, some of it is buying different kinds of reinsurance, selling off some sort of mortality.

And Dan, maybe you want to make a comment about that?

I would like to say overall, Gary, when you think about what's happening in that business, as Tom indicated, improving returns from a pricing point of view, reducing costs, at the same time, aggressive capital management actions -- as you may know for the total year, we did end up $675 million in capital, to a large extent result of the VA transaction.

But the combination of working both top line, bottom line and capital, we do expect that business return to continue to improve going forward.

All right.

Thank you very much.

Next question is from Meyer Shields of Stifel Nicolaus.

Your question, please?

Thanks.

Looking at the commercial line's decline, can you explain how much of that is related to higher reinsurance costs and whether there is anything else going on?

The commercial line decline related to reinsurance, Meyer.

I can't give you a specific on that piece.

I can tell you that I think the commercial lines and our other property lines are areas which we can grow faster than we have been.

We're not satisfied with the growth we have.

We've recently reorganized a portion of George Ruebenson's operation to spike those businesses out differently.

And we're expecting them to start to grow in the second half of 2007 -- 2007, if I can get my years right.

Maybe Bob can provide some reconciliation for you later, in terms of how much of the reinsurance gets allocated back to the commercialized.

I don't have the number on the top of my head.

That's fine.

I will follow-up.

Can you talk a little bit about non-standard auto and whether -- I am wondering specifically whether changes in California's electronic enforcement are making any difference?

And secondly, expectations for 2007?

Well, there is a couple of different pieces there.

In non-standard auto, of course, we've not been growing that business.

In fact, it has been shrinking for the last three or four years, consistently.

This year we launched -- end of 2006, we launched what we call Allstate Blue, which is a new approach to the non-standard auto business.

Which is going after those people who want to buy from a good solid company and want to have a long-term relationship with people.

So we've created product features and pricing around that as opposed to those people who want the cheapest price so they can get insurance card so they can -- until next time they run out of money.

So we're clearly focused on those longer-term customers.

We've launched that in 2006.

We'll be in 17 states in 2007.

One of those states will not include California, where -- with the existing regulatory structure, it doesn't make sense for us to sell non-standard auto insurance.

Okay.

Thank you.

Your next question comes from [Josh Smith] of TIAA-Cref.

Your question, please?

Thanks for taking the call.

Just have one question.

On the Chubb call, Chubb basically scoffs at the possibility of losing some customers to Citizens -- on newly competitive Citizens, as they believe their customers would want to eventually want to have the claims paid.

When the questioner asked Chubb if they were still unwilling to buy the unfunded reinsurance in the state, they didn't respond.

What is Allstate's stand on that?

Presumably, you've highlighted lower cost of reinsurance in Florida in '07, so you do intend to buy the cheaper state reinsurance.

Is it worth getting into bed with the Florida politicians to save save $30 million?

Well, we think -- as I said earlier on, what they have done in terms of the hurricane catastrophe fund is a move in the right direction and lower reinsurance costs at the upper level is something we would expect to be able to participate in.

We will look at our overall reinsurance coverages in Florida where we already are and are in the market, and we expect that the total of, as I indicated before, reducing our exposure in Florida -- some of the lower expected costs, rates online for some of the coverages, as well as the use of the hurricane catastrophe fund will reduce our overall costs.

I guess my only question -- sorry, go ahead.

I was going to say participating in the fund we think is the right thing to do.

I guess my only question is, are you concerned that that is unfunded?

And if you have a series of big storms, their only fallback is to issue debt or to assess taxes and there could be another revolt on our hands.

And they may not be -- ultimately able to pay you.

That's my question.

Are you concerned at all with taking unfunded reinsurance?

It is obviously something we need to continue to look at.

They do have the ability to issue bonds.

They're double-AA minus rated, I think, S&P currently.

It is not that we would continue to focus on.

But there is an issue that needs to be resolved in Florida, both from a state and we think, as you've seen on our Protect America.org internet site, things that need to be done from a federal point of view as well.

So the overall issue needs to be addressed.

There is a problem in Florida.

We think this is one of the steps -- one of the first steps that has been taken in the right direction.

Thanks a lot.

Our next question is from Bob Glasspiegel of Langen McAlenney.

Your question, please?

Good morning.

Tom, I was surprised we didn't hear any Super Bowl prognostications from you.

Well, Bob, I think Urlacher shuts down Manning.

I think Jones and Benson run wild, and Robbie Gould kicks us to a six point victory.

How is that?

Cautiousness in your earnings guidance and conservatism, and aggressiveness on your sports forecasting.

I thought that was conservative.

On the -- just following up a little bit on Josh's question.

On the anti cherry picking provision, do your initial read is that you're pretty comfortable that you'll be able to provide satisfaction to the decision makers on that element?

On anti cherry picking, you're talking about Florida?

Yes.

I think Dan stated pretty clearly where we're at.

We're going to get smaller in Florida, so we're not worried about losing customers to Citizens.

They can -- if they feel like they'd like to write more of our customers -- we're getting smaller.

We're not writing new business.

We will continue to pursue our transaction with Royal Palm to get smaller.

So we're not worried about that at all.

If Chubb would like some of our business, we would be happy to do a transaction with them, too.

I was referring to the fact have you to make sure you're writing enough homeowners for whatever auto that you're writing -- that that provision.

That you just can't cherry pick auto in Florida.

Again, the way that's written depends on how you interpret it -- the impact on subsidiaries in the state, which we have, as you know.

But as I said earlier, until we have an opportunity to really assess what the finalization of those legislative actions are, it is premature to really guess.

Is it going to depend on sort of the insurance commissioner's interpretation?

Or do you think there will be clearer marching orders from the Florida legislature?

I don't think anybody knows yet, Bob.

I think from a public policy standpoint, we think all they're doing is taking a problem in the property market and bringing it into the auto market.

We would think, from a public policy standpoint, it is not a good idea.

I don't think we nor anybody else have the ability to tell you what the implications are until, as Dan pointed out, we see the details.

Okay.

My last question is -- on fixed annuities, after growing relatively rapidly the last few quarters, you put the brakes on and mentioned that there was some re-underwriting actions taken.

Should we look for that for further retrenchment in that area, going forward?

Well, I think you should continue to see us have some volatility in new business sales.

Part of the decline in the fourth quarter was also due to interest rates.

It wasn't -- I think the overall market was down, not just our sales.

Right.

So we have new return targets we're set up to go get.

We're working hard on making sure we can get investments that give us the ability to offer competitive price.

But we're not going to sell stuff if we don't like the returns, so you will see some volatility there.

Thank you.

Our next question is from Joshua Shanker of Citigroup.

Your question, please?

Hi, there.

Two questions.

One, following up with Bob on the cherry picking issue.

Just from an optical standpoint, if I go back to '05, when I have the data, you were about 14% of the Florida auto market and about 9% of the Florida home market.

Is there any update you can give us in terms of what percentage of the market you are in that state, at this point?

Don't know off the top, Josh, what the percentage is, although it has been declining.

And then in the area of overall homeowner and related policies, we're down about 20% from the August 2005 time frame, down to -- in the 400,000 range on policies in force.

We have significantly reduced our exposure there in a relatively short period of time.

Okay.

Very good.

The other question I have regarding State Farm's decision to try and settle with Katrina claimants, whether or not the policy truly is enforceable, as maybe a marketing standpoint.

Do you have any concerns about State Farm winning Allstate customers on the basis that State Farm seems more willing to pay things -- on that State Farm offers a wider breadth of policy had it comes to catastrophe protection and whatnot?

I don't -- we're not worried about competing with State Farm for customers on that basis in Mississippi.

In fact, we think that our claim practices were different than theirs, such to the point that we were paying on wind even if the house had been totally destroyed by flood after that.

Which is my understanding, one of the issues they're litigating that they did not do.

I don't follow their claim practices in detail, so I don't know what they actually did.

But we paid on wind, even if the house was totally, subsequently destroyed by flood.

Thank you very much.

Next question comes from Jay Cohen of Merrill Lynch.

Your question, please?

Yes, I am wondering if you can give us a little glimpse into the first quarter and talk about what you're seeing to date, if you have the data, from a frequency standpoint?

And also if you can, talk about the buyback activity to date in the first quarter.

Jay, we're moving away from guidance, both annually, quarterly and monthly.

So we don't -- I know -- and one of the other calls yesterday talked about their January share repurchases.

We prefer to disclose that stuff at the end of the quarter.

Okay.

Fair.

Thanks.

Your next question is from Ron Bobman of Capital Returns.

Your question, please?

Good morning.

I was wondering if you could make another stab -- could you explain to me why the Florida legislative and Emergency Rule actions are a step in the right direction for improving the Florida market?

Ron, this is Tom.

I can do that.

The Florida insurance market is not functioning well.

That would be the over -- our perspective on it.

And evidence of that would be that over 30% of the policy holders are now insured by Citizens, which doesn't have the kind of claim settlement capacity that we have, they don't have the kind of adjustors we have, and they don't have the kind of funding we have.

So when you look at that broken market, you say, well, what needs to be done differently to make it work?

You can't change the fact that the water is warmer and the air is different, so there is going to be more hurricanes and they're going to more severe.

You can't change the fact that housing prices are way up in Florida, so that the amount that people insure are way up.

And you can't change the fact that people want to pay less for their homeowner's insurance, despite the fact that there is increased risk and increased value.

So you sort of say, with those givens out there, what do you do differently?

We think the solution of a privately funded government sponsored pool, similar to the Florida Hurricane Cat Fund, is a good solution.

We think it worked well for Florida and kept the market, at least somewhat alive over the last decade that it's been in place.

And we were supportive of it when it was first created, and we're supportive of expanding it.

We think that beyond that,as Dan pointed out, there are some events that are bigger than any individual or any individual state.

And so there should be a, again, privately funded way to go about doing that.

Which some of that funding would be -- obviously be in advance and collected through reinsurance premiums.

Some of that funding come after an event happens when you're looking to get the money there.

We think that funding should come from those people who have the risks and the amount of money invested in their homes as opposed to from our shareholders.

From that standpoint, we believe that having a privately funded government sponsored pool is a step in the right direction.

We do not believe things like moratoriums on price changes or non-renewals are generally a good idea.

From the wage and price controls in the Nixon era up to today we've -- any time you tried to shut down market forces, it has been pretty clear they -- it doesn't work.

We're trying to come up with what we think is a politically acceptable solution which meets everybody's needs, including our customers and our shareholders.

Is that helpful?

Yes.

I can't say I agree, but surely it was a clear -- [inaudible - overlapping speakers]

Some people think you shouldn't -- I don't know where else the money will come from.

I don't think you're going to get Florida homeowners to agree that they should put all of the money aside for hurricanes, if it might happen.

I think most people would tell you they prefer to fund it afterwards.

There is also an economic school of thought which I don't agree with, but says that funding it on a post-event basis is better for the economy.

I don't happen to agree with that economic analysis, but there is some people who believe that.

I have one follow-up question.

People don't want to pay more for their insurance in South Dakota either, so why isn't the most direct and equitable solution really for your energies to be focused -- Allstate's energies to be focused on market-based market and actuarially sound based rates on coverage, rather than this expanding cat fund, expanding Citizens reinsurance play?

We are obviously a strong supporter of open-market pricing.

In those markets where is we have open-market pricing, the prices for consumers tends to be lower, and the markets work better, and you have more competition.

We are big supporters of that.

When you look at catastrophes, however, the ability to actually accurately predict how much an individual consumer should be charged with some degree of fairness is difficult because you don't know when the events will occur, what they will cost, or where they will go.

And so we believe that that the state based regulatory environment where they do control prices in most states quite aggressively, that the right solution is a publicly sponsored, privately funded thing.

Which is in between where you are and the purist would be, in what we think is the political and economic reality of what's achievable.

Thanks a lot.

Thanks for sharing your thoughts.

Appreciate it.

Sure.

Our next question is from Ian Gutterman of Adage Capital.

Your question, please?

A couple questions; one on new business and one on reinsurance.

On the new business, I guess I was hoping for a little bit more color.

On the auto side, it seems like things are getting noticeably better.

And just wondering what changed this quarter from the past quarters that's improved momentum there?

And then on the flip side on the homeowners, I understand why California and the coast are down, but why is the rest of the country down so much on new business?

Let me take auto, maybe, Dan, you can take homeowners business.

And then you mentioned that you had a question as well, Ian on reinsurance.

In standard auto, I would say we had good overall growth in the Allstate brand standard auto line at 2.7%.

It was actually, sequentially down a little bit versus the prior quarter, but not to a point that is anything other than people taking vacations and stuff like that.

We did grow in 35 states, the high-end of those states were -- we had some states up in the 8%, 9% range.

We had about 20 states in between 2% and 4% growth rates.

Big states like Florida, New York, California, Ohio, Illinois, those are all growing, and we feel good about those.

We have some work to do in some of the other states like Texas and Pennsylvania.

So we're feeling good about the standard auto growth in the Allstate brand.

We think that -- if you look at auto in total, Allstate Blue will help us grow overall auto as we move into '07.

And we're hopeful that we can begin to drive more growth through the combination of Your Choice Auto and aggressive advertising in standard auto.

And then we have to get our independent agency channel growing a little faster.

That is an area where you've seen other companies like ours -- the competition is much tougher in the independent agency channel.

We got smaller there in auto, and we need to grow there.

Dan, do you want to talk about homeowner's?

And then, Ian, maybe you can let us know what you want on reinsurance?

Sure.

Ian, I think clearly, from a total country perspective, it is the catastrophe management actions that are affecting homeowners.

But it is not only in those hurricane-impacted states, it is the earthquake areas, as well, which covers a much broader area.

And in fact, as you know, we're increasing rates to cover reinsurance costs in a wide span of states, depending on whether they're subject to earthquake or hurricane exposure.

So all of those factors would have some detrimental impact on new business and homeowners.

And as we go forward, we would expect that to turn around as we are successful in reducing our exposure in those areas that we are concerned about.

If I can just clarify on the auto, I was looking at new applications as opposed to PIF, and that looks like it's a lot better than it was the past two quarters.

And I was thinking of that as a leading indicator of PIF, and does that -- should I take that to assume that PIF will start getting better in auto?

When is that just your choice getting momentum or is there something else?

You're right to look at that in terms of a leading indicator.

It was way up.

You'll notice our retention was down just a smidge.

So I tend to look at that the -- and measure George by the total items in force.

So he has to work both sides of the equation.

But yes, new business applications were up and we felt good about that.

Our quotes are way up -- our advertising is clearly working.

We feel good about that.

Good.

The reinsurance real quick; first to clarify, the savings on your seated premium, essentially that's not going to start until Q3, right, because -- or late Q2, I guess, because it's inception June 1st.

We should still be thinking $200 million a quarter for Q1 and most of Q2, is that right?

Right.

And then the bigger question is, I just wanted to make sure I understood the aggregate treaty correctly; as far as the year two, where you're going to keep 20%, then there is this option.

And so I assume if you exercise that option you will have the same 5% participation you have in year one.

And why did you structure that way?

As you look at where he with are, you never know where insurance pricing is going to be, and we just chose to have a 20% in that second year.

We may, actually, do more to reduce that retention level later on.

So it depends on circumstances and the reinsurance markets.

That makes sense.

Do you have some estimate of what your '08 costs would be -- assuming that you have that 20% as opposed to the 5%, how much it will come down in '08?

Again, I think it is a little early to try to forecast '08, not knowing what will happen in the reinsurance markets.

In terms of pricing and depending on what our exposure reduction actions result in, we'll be able to give you a much better read later on.

That's fair.

I should have asked a little differently.

I thought I meant just on the aggregate treaty in general, how much savings is there -- how much of a percent of your total cat budget -- in round terms, I am sure you don't to want give the exact number?

But how can I think about the impact, if I want to say you're only going to have 20% -- you're going to have 20% instead of 5% participation in '08 -- how should I think about that as far as costs?

This is Bob.

We're not going to discuss individual contract costs, Ian.

Thanks.

Okay.

Again, it may be something other than 20% for the second year.

Right.

Okay.

Thanks so much.

Our next question comes from Matthew Heimermann of J.P.

Morgan Securities.

Your question, please?

Good morning.

Two questions.

First was California; if I remember correctly, you actually had implemented your rate changes second half of next year.

You're now seeing some of the bigger competitors actually implement rate changes.

Are there any early signs as to what impact that's having on the market, either in terms of new aps, shopping, other market trends?

Matt, on California, I think you probably meant to say rate decreases, to get us in the right direction.

Yes, yes.

We feel comfortable with where we're at in auto business there and it is growing all right.

Our homeowner's business is way down.

We did not file a decrease where other people did.

We actually filed for an increase because we believe that the capital required to support that homeowner's business in California suggests that the price should be higher than it is.

Our business is way down, even though we haven't implement that had rate increase, because we put a gas shut off valve requirement on for underwriting.

Which means we will not underwrite your house unless you have a gas shut-off valve if -- which is, if there's an earthquake, it shuts off the gas to the house and that controls your fire [inaudible] exposure.

Fair enough.

It is too early to tell whether it has -- well, actually maybe look for it a little bit.

As State Farm and Farmers implements some of their things, are you worried about relatively speaking, where rates are going to stack up vis-a-vis those companies?

We've looked at doing a small decrease in California that's targeted.

We're not worried about that.

What we really want is to get Your Choice out there, so we can compete pretty aggressively on that.

Just with all of the changes -- and I think I know what the answer is, but this is maybe I am in a pile onto Ron's questions and some others; but with the state fund increasing, there is now the moratorium on what you're going to do with business, but if this is really good for the market, why not increase exposure?

We don't feel that these -- we feel these changes are a step in the right direction, particularly on the cat fund.

There are a number of steps which are backwards.

And we're not to the point where we believe that Allstate Floridian should increase the exposure it takes on, given the relatively small amount of capital that it has and the returns that are available in that marketplace.

Okay.

Does some of the moratoriums today impact your ability?

I know -- does that impact your ability to enter into previous agreements, like have you with Royal Palm and the like, to actually either traditionally reinsure business or actually transfer?

Matt, we're still looking at what the implications are.

Although you had reinsurance agreement on that first crunch, and that's still in place, and those are being non-renewed.

What happens in the second one is something we'll have to evaluate as we look at how this is going to be implemented.

Okay.

Fair enough.

Thanks.

Next question is from Alain Karaoglan of Deutsche Bank.

Your question, please?

Good morning.

Two questions.

Dan, could you remind us what are your goals or ranges with respect to financial leverage, from a debt to cap point of view?

You're around 17% and probably, if nothing happens, it will go down further next year.

The second question is, what are you assuming for cat load in your pricing, especially given all the reinsurance that you're buying?

Is it the same as before?

What do you assume in your pricing?

Debt cap targets, historically, as you, I am sure are aware, Alain, it has been roughly in the 20% range.

We're below that with those actions that we took in the fourth quarter.

We still think that's a reasonable place to be.

We can be below that for a period of time.

Depends on again, capital actions and needs for cash.

But the cat load question is one that we've decided we're not going to provide, going forward, other than all of the information, as I mentioned before, that's in our earnings supplement -- since 1992, the cat load for every quarter.

We assume that there is plenty of information there.

We have been notably unsuccessful in forecasting cats for the last few years, if you look at the actual performance.

So we're going to leave it at that with the historical information that's available.

I have to say, so have we, as analysts, been very unsuccessful in that.

But you've changed your reinsurance program significantly over the past two years versus what was there historically.

How should we think about the reinsurance program affecting that?

Excellent question.

As you know, our attachment point is up at about a $2 billion level, and much of the hurricane -- catastrophe action, as you saw in the fourth quarter, would be normal kinds of storms and so forth other than the major modeled types of cats.

So there is plenty of room up to $2 billion, when you think about what you want to assume, in the cat load for pricing.

Thank you.

Matt, we'll take one more question.

Thank you.

Our final question comes from William Wilt of Morgan Stanley.

Your question, please?

Great.

Thanks.

I will be quick.

Under the assumption that it takes a few months for all the Florida legislation to be sorted out, will that impact your plan between now and then to grow auto only in Florida?

No.

Great.

Straight forward.

In previous calls, if I am remembering correctly, in a previous call you talked about pursuing a patent for Your Choice.

If that's right, do you have an update on that?

Yes, Bill.

You're correct in your recollection.

We have been -- we have a patent file -- patent pending on it.

We have not yet published that patent, but we have let some people know, who we think have started to copy some of our features, that they're perhaps in violation of our patent.

There is no real big news to be said there, other than we're hopeful we can get a patent and we will fight hard to protect one if we get it.

But being innovative and on the cutting edge is really what makes you win in the market place.

So we'll have more to come, in terms of trying to do more things for consumers.

Thank you all for participating in the call, giving us the opportunity to provide some additional insights into our business.

We're optimistic about this year, both a combination of a strong market position -- really a multi-faceted competitive strategy that really is focused on the consumer, and then just having great people will continue to make us a great investment for many years to come.

So thank you all.

And we'll look forward to talking to you next quarter.

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

This concludes the program.

You may now disconnect.

Good day.