Allstate Corp (ALL) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen.

and welcome to The Allstate Corporation first quarter 2007 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 to introduce your host for today's conference, Mr.

Robert Block, Vice President of Investor Relations.

Sir, you may begin.

Thank you.

Good morning, everyone.

Thanks for joining us for our first quarter 2007 earnings call.

Tom Wilson and Dan Hale are joining me today, sharing their views on the quarter.

Following some opening comments, we will hold a question and answer session.

This call is expected to last about one hour.

As always investor relations is available to handle additional inquiries after the conclusion of this call.

We issued our press release and investor supplement yesterday, covering our financial results through March, 2007.

We have altered the format of the press release and would appreciate any feedback you may have on the changes.

Finally, we note that the following discussions may contain forward-looking statements regarding Allstate and its operations.

Actual results may differ materially from those projected in these statements.

For information on important factors that could cause such differences, see the forward-looking statements and risk factors effecting Allstate section in our 2006 form 10-K, as well as yesterday's press release.

Also on this call we may discuss some non-GAAP measures for which you will find reconciliations in the press release and investor supplements available on our website.

Nothing in this presentation should constitute any offer of any securities for sale or a solicitation of any offer to purchase any securities.

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

If you do not agree with these terms, please disconnect now.

A replay of this call will be available shortly after the call ends.

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

Now let's begin with Tom Wilson.

Tom?

Good morning and thanks for joining us today.

I'm happy to report that 2007 is off to a good start, which highlights the resilience of our business model and our strategy.

I'll begin with an overview of our financial results and an update on our strategic initiatives, Dan will then discuss our financial results and capital management plans in more detail.

And as always there will be an opportunity to discuss your thoughts as well.

Let me begin with a summary of our financial results.

Revenues increased 2.8% over the first quarter of 2006 to $9.3 billion, which is the result of continued growth in Allstate's standard auto earned premium investment income and a significant increase in realized capital gains.

Net income rose 5% to $1.49 billion, a 9.1% increase on a per share basis.

Operating income for the quarter declined 8.2% to $1.2 billion as we experienced higher frequency results in auto and homeowners increased reinsurance cost and cat losses and a smaller amount of favorable reserve re-estimates.

Our return on equity was an outstanding 23.5%.

Book value per share grew to 36.54, an increase from last year's first quarter of 14.3% and 4.9% above the fourth quarter of 2006.

Now let me update you on our individual business results and our strategies.

Our Allstate protection business, which is under the leadership of George Ruebenson, made continued progress in distinguishing ourselves as a consumer focused Company.

Financial results were also strong despite difficult weather.

Our property-liability combined ratio was 84.6% in the quarter, which was 2.7 points higher than the quarter of 2006, but which is in line with the targets we established for the year.

The increase versus last year reflects higher frequency of auto physical damage and homeowner claims caused in part by severe winter weather, which Dan will cover.

Frequencies for auto bodily injury claims, however, were lower than last year.

Auto severity increase is moderated in the quarter, property damage paid severities were up only 1.2% versus Q1 of 2006, and bodily injury severities were also up only about 1.1%.

Strategically we continue to make progress on a number of fronts.

Our focus on the consumer gain traction with the production of Your Choice Auto reaching over 2.1 million policies issued since its introduction.

We have also advanced our other consumer initiatives rolling out Your Choice Auto and Allstate Blue to more states.

Our investments in marketing are paying off well.

We did some-- we had some independent research on the effectiveness in insurance advertising, which looked at 34 ads.

Allstate had all of the top five and 10 of the top 15.

The net of all of this is that our standard auto business policies enforce are up 2.6% versus the first quarter of 2006, while we're maintaining pricing discipline.

Catastrophe management remains a major priority for us and we continue to take the necessary steps to reduce our overall exposure to major catastrophes.

At Allstate Financial, under Jim Hohmann's leadership, the focus remains on raising returns.

Today at end of first quarter was another step in the right direction.

Operating income hit $156 million for the quarter, premium and deposits at $2.6 billion increased slightly despite a decline of fixed annuity sales in the quarter, which was offset by strong institutional markets activity.

The relative attractiveness of fixed annuities to consumers is down, given the inverted yield curve which of course favors short-term deposit products, and the relative strength of the equity markets.

We also continued to work to increase spreads in this line to raise returns to acceptable levels.

Our investment operation, under Rick Simonson's leadership, also had a strong quarter.

Total net investment income was up 4% from the first quarter of 2006 and we beat our internal benchmarks in the fixed income area by a good margin.

Capital gains were $471 million as we sold our position in several private investments, had good gains on our equity portfolio and avoided losses in the subprime market by focusing on higher quality credits, starting about 18 months ago.

Finally, we continued to aggressively manage our shareholders capital.

We continue to repurchase our stock under our $3 billion repurchase program, having acquired 11.4 million shares for $700 million in the quarter.

We also recently approved an increase to this program of up to another $1 billion, the funding of which would come through the issuance of up to another $1 billion of hybrid securities.

And Dan will talk more about that later.

Continuing our historical trend, we also raised our dividend by 8.6% in February.

Overall, the first quarter showed our multifaceted strategy continues to work and that our business and people remain resilient in the face of change and adverse conditions.

Let me now turn it over to Dan Hale.

Thanks, Tom.

I would like to begin with a few comments about our underwriting performance and related trends, and particularly with respect to frequency results.

Once again, our underwriting profitability was outstanding, over $1 billion for the quarter.

That's the 12th straight quarter of ex-catastrophe underwriting income exceeding $1 billion.

Our combined ratio 84.6%.

Excluding catastrophes and reserve re-estimates, it was 84.1, a slightly lower run rate than for the past two quarters and the 16th quarter in a row that our run rate had been in the low to mid-80s.

Now that lower run rate is despite experiencing higher auto and homeowner frequencies during the quarter.

Standard auto property damage frequency increased to 4.8% and homeowner frequency was up 14.7%.

We believe a significant portion of the frequency increase is due to winter storms and you begin to see that when you pull out the 10 northeastern and central states where most of the inclement weather occurred.

The property damage frequency for the remaining 40 states was up less than 1%.

So those 10 states drove 85% of the property damage frequency increase.

As you might expect, homeowners frequency was also generally up in states with higher auto property damage.

Bodily injury frequency, on the other hand, continued to decline down 1.1% for the quarter.

We should also keep in mind that frequency for 2006 was very low for the first quarter with relatively mild winter weather and the entire year came in at record lows.

So far this year our frequencies in line with 2004/2005 levels, which at the time, as you recall, were record lows.

We told you on the last call that we expected our combined ratio run rate, without cats and prior year reserve re-estimates, would be between 84 and 86 and we hit the low end of the range for the first quarter.

We still expect to be within that range for the year.

On the catastrophe management front, as we discussed on our last call, we have renewed our major agreements and are now in the market to finalize our Florida agreements.

Complete details of our total reinsurance program, including examples of how different treaties work, are available on our internet site, which you can link into from our investor relations website.

The site will be updated for our Florida agreements once they are finalized.

We're still estimating that the total annualized cost of all our reinsurance programs will be approximately $770 million, or $193 million per quarter.

Additionally on Florida, given the ongoing uncertainty associated with both the changing weather patterns and the legislative environment, we plan to continue actions to reduce our catastrophe exposure there.

In keeping with that strategy and in accordance with recent legislative requirements, we filed for an average rate decrease of 14% to reflect the lower cost of reinsurance from the Florida hurricane catastrophe fund.

As the final step in the non-renewal announcement made in May of 2006, we then began notifying approximately 200,000 policyholders that our coverage would no longer be continued going forward.

And as part of our renewal rights agreements, those policyholders will be provided with a replacement offer from another carrier.

Turning to capital actions, since our last call we increased our common stock dividend, as Tom mentioned, 8.6% to $0.38 per share for the quarter or $1.52 on an annualized basis.

This is the 13th consecutive year we have increased our dividend, putting us in an elite class of companies.

Only a very small percentage of all publically listed companies have increased their dividends for 10 or more consecutive years.

In addition, during the quarter we repurchased $700 million of our stock, bringing the total purchase under our current authorization to $907 million.

Since 1996, we have now repurchased $13.7 billion of our stock, reducing total shares outstanding by 32% and we paid $6.6 billion in dividends.

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

As you know, we also are continually looking for ways to optimize our capital structure consistent with our enterprise risk and reward profile.

In that regard, we have been closely monitoring the development of the latest generation of hybrid securities, or junior subordinated notes.

At this point, we believe they have evolved to where they should be incorporated into our capital structure, given the current favorable interest rate and spread environment.

We have been authorized by our board of directors to issue up to $1 billion of hybrid securities by the end of the second quarter, market conditions permitting.

The proceeds would then be used to purchase an additional $1 billion of our common stock.

That would essentially be a hybrid for equity swap, which would be accretive to earnings per share, would increase our return on equity, and would reduce our overall cost of capital.

We anticipate completing the original $3 billion share repurchase program and the additional $1 billion authorization by the end of the first quarter of 2008.

Our operating income ROE for the last 12 months was 24.3%.

Our book value increased $4.56 or 14.3% over the past year, up to $36.54 per share.

And that's despite the $1.74 reduction in book value as of March 31st, related to the adoption of FAS 158 at the end of last year.

Our price to book multiple is now 1.7 and as you can tell from our accelerated share repurchase program, we are very optimistic about our future.

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

Okay, Matt, I think we can start the Q&A session now.

Thank you, ladies and gentlemen.

[OPERATOR INSTRUCTIONS] Our first question comes from Greg Peters of Raymond James.

Your question please?

Good morning, everyone.

A couple questions.

First of all I was struck by the fact that you didn't really comment on that recent lawsuit, the adverse settlement that went against the Company, and I was wondering if you had any public comments regarding that?

Sure, Greg.

This is Tom.

Did you want to give us all of your questions so we do them all at once or do you -- ?

Sure.

The second question was relating to the rating agency's tolerance for more leverage as you improve your catastrophe profile in the context of your share repurchase program and then the third question is more of a micro question.

I think you said in your annual report you had some 12,941 exclusive agents at the end of 2006 and I'm wondering what kind of targets you have for 2007 in terms of growth there.

Well, why don't I take the first one.

Dan, you want to take the second one on leverage and rating agencies and I'm come back on distribution.

Okay.

Greg, first, as you know that case was related to hurricane Katrina.

And I am proud of the work we did on hurricane Katrina.

We had over 2000,000 claims, of which 98% are closed.

At one point we had over 4,000 people down there working settling claims.

That said, some people didn't have enough insurance, either from the insurance Company or federal flood insurance or they are unhappy with their claim settlements.

Many people are having difficulty rebuilding.

As a result of all those frustrations, some people resort to the courts to seek a solution.

The Wiess case, which is the one you referred to, was one where we were disappointed with the jury's verdict.

But there's been other cases that have been resolved positively and support of our view that we did a good job in very difficult circumstances.

The key thing on this is each case is unique.

Each one has its own set of facts and circumstances and we deal with them one at a time.

I guess, Tom, just as a follow-up there, do you anticipate any changes in the way you are handling the claims process for future cats or is this do you really view as sort of an anomaly in part of the whole big picture.

Our claim practices relative to catastrophes are really the best in the industry.

We're always the first people out there.

We're operationally ready, we are start planning for storms five days in advance.

We have 10 mobile response units.

We have got 300 people who's only job it is to deal with this stuff and thousands of people on a moment's notice.

We're good at it and we expect to continue to do the overall procedures.

I'm not, of course, intimately familiar with every claim we settle, and that's not my job, so, no we don't expect any changes there.

Dan, do you want to do the hybrids and the leverage and then I'll come back on distribution capacity?

Greg, I think your question related to rating agencies tolerance for leverage.

As you noticed, our debt to capital at the end of the quarter was 17.1.

So we have very solid leverage in terms of where the rating agencies would be looking for us to be.

And plenty of room, in fact.

If you look at the hybrid issue, if we were to do the $1 billion we talked about having authorization to do, that would add 3 to 4 points to our leverage on a reported basis, but as you know the rating agencies will, depending on which rating agency, will give you credit for those being equity up to, in one case 75% another 100%.

So we are -- we have plenty of room in terms of leverage as far as that particular transaction or type transaction would be concerned.

Going forward you may have been asking even more broadly as we continue to reduce our P&L exposure, our exposure to cats, continue to work with rating agencies on what the right amount of leverage or what the right amount of economic capital should be, and we think there is an opportunity over time to have some relief, if you will, on both capital and leverage, given that we are reducing our exposure to cats.

And then let me come to distribution capacity.

I'm going to state it a little broader than the question you asked, Greg, but I will get to your question, which is first, of course, we have three ways we distribute the products, the largest of which is through our Allstate agencies.

Then we do it through independent agencies and then on a direct basis.

And we're expanding all three of those.

Under the Allstate agency piece I like to think of it, really, as total distribution capacity.

The number you quoted are really the number of agency owners we have.

Those people clearly sell for us, but they also have people in their offices who sell and work for them.

And so we look at really total distribution capacity.

So it's agency owners plus licensed sales professionals and that number is over 30,000 and we continue to grow that one.

The targets vary, of course, by geography.

And so -- but I would say overall we expect it to grow, but we don't have a specific number.

I would rather make sure we grew the right level in each local market with the right people as opposed to chase a specific number and not get the right people.

Fair enough.

Thanks for your answers and congratulations.

Thank you.

Thanks, Gregg.

Our next question is from Gary Ransom of Fox-Pitt Kelton.

Your question, please.

I had a couple of questions just to clarify.

The higher losses in frequency from weather, that is entirely independent of the catastrophes that you reported?

Is that correct?

That is correct, yes.

Okay.

And then just further on that, if we -- if we somehow tried to normalize the frequency, I guess in the comments you said 85% was from these various 10 states.

If you attempted to normalize what happened does that suggest that frequency was still up slightly in property damage in the quarter?

Gary, I think it's difficult to look at any one quarter and one data point and predict a trend out of it.

How about if we added -- let's add in a few past quarters.

Let's just say over the past year or so?

I mean, what do you think is the general trend that you are seeing right now?

A couple of comments.

I would say is that, as Dan mentioned, this -- this year looked a lot like 2004 and 2005.

And 2006, as you all know, was the first two quarters of 2006 frequency was down substantially versus those two prior years.

And this looked a lot like 2004/2005.

That said, 2004 and 2005 were both data points on a longer set of analysis which would say that frequency is on a long term trend down.

We -- our goal is to make sure we give our customers the right price, that we get the right return for our shareholders.

When we see changes that we think are permanent we react to them and we feel good about where we're at.

And the bottom-line is despite the increased frequency we still had a great quarter.

And still we're at the low end of that 84 to 86 range, as we mentioned, even with the increase in frequency.

Duly noted.

Can I ask one other thing on the pricing?

The table that you give where it says that there were price, actually, slight increases in the quarter seems to be contrary from what we hear in the broader markets about auto prices being down.

Can you help clarify why you're different from what we hear from others on that front?

Well, let me start with sort of a macro view and then kind of work my way down, Gary.

First, I think if you look at auto insurance pricing in total in the industry it's been relatively flat last year and looks to be flat so far this year in total, if you just look at like a CPI number.

You'll see different companies taking different strategies in there.

If you look at our average premium it's been about flat, which kind of looks like the industry.

There are some other companies, Progressive, GEICO, my recollection is their average premium was down last year.

State Farm has taken some decreases.

But some of the average premium gets a little confusing because you have got state mixes.

You know what I mean?

So if somebody's growing in a low average premium state, their average premium in total drops but it doesn't mean they cut their prices by that much everywhere.

The way we approach it is we don't have a price-only strategy.

Our strategy is really focused on the consumer.

It's things like Your Choice Auto, where if you look at Your Choice Auto more people buy up in that portfolio of products than buy down.

That means the average premium goes up.

We do adjust our pricing in states where if we think we need to be more competitive, we will reduce our prices.

But we also take the approach if we need to raise our prices we in fact raise our prices, so that we earn a good return.

And with a multifaceted strategy, which includes product differentiation, good advertising, a local representative, good claim service.

We feel like that is a strategy that continues to work for us.

We do not have a price-only strategy.

All right.

Thank you very much for that answer.

And our next question is from Charlie Gates of Credit Suisse, your question please.

Hi, good morning.

My first question, I believe non-standard auto and specialty auto sales in the quarter declined some 15%, so at $340 million, they are down a lot from what they were back 1999.

When do you see the impact of, what do you call it, Allstate Blue taking impact.

Well, good morning, Charlie.

Good morning.

The-- of course the numbers, as you know, are accurate and that's been a line which has gotten, as you point out, substantially smaller since 1999 when we were losing money on that line.

So we made a decision we weren't going to continue to do that and we were going to get smaller, so we protected our overall profitability.

We did launch Allstate Blue in Virginia last year.

We liked the result there.

I think we are now in four states.

I think it will take til into next year before that number starts to turn positive.

But I feel good about the reception we are getting in the states we're in.

We like the pricing.

We like the results so far.

But as always we'll adjust it as we go from state to state.

Dan, do you have anything you want to add on that?

No, I think you covered it well, Tom.

My one follow-up question, Tom, I believe in answer to an earlier question, you went through how Allstate sells auto insurance through three marketing or distribution structures.

Approximately what portion of sales come through direct or what Progressive calls direct response now.

We don't breakout direct as a separate segment, because it is all sold under the Allstate brand.

And it's -- it's also linked tightly with what happens.

A lot of times we'll do advertising direct and the stuff will go right to agencies.

Or we'll do it on the internet and it goes right to agencies.

Sometimes it will come to our call center, so we don't break that out, Charlie.

Thank you.

Your next question is from Dan Johnson of Citadel, your question, please?

Great.

Thank you and good morning.

Two questions, if we could.

Can we talk a little bit about the auto reserve and development in the first quarter?

Maybe we have just gotten used to some fairly meaningful numbers over the last few years, but help us put the, I think it was the 66 number in context to what we have been seeing over the last few years.

Well, as you know, Dan, each quarter we look at reserves and our approach is to make sure that we have a high confidence level in their adequacy.

Theoretically they are adequate at the end of any one quarter as we settle claims and we settle them for less expense than what we had anticipated in the prior period.

But we do have some favorable development and we have been fortunate in that regard over the past few years.

That did continue at the first quarter a little less favorable than some others, but that varies quarter by quarter depending on what happens in terms of actual results.

You -- can you put your finger on anything, since I think historically a lot of the development, I think, was coming from less than expected severity on the case reserves and please correct me if that's wrong.

If not, what has made it sort of less severe versus original estimates.

Well, it basically has been better severity than had been assumed in the prior periods.

You're right, Dan.

So does this mean that you've tried to sharpen the pencil in the initial year to try to get the case reserves more accurate and therefore we see the better results up front instead of later, or is there some sort of trend change in the severity of the existing cases.

Again, we haven't changed your practices.

We attempt to establish the appropriate amount of reserves at each period and, depending on what happens in terms of actual results, we adjust accordingly.

We'll just have to see how those trends development over time.

Okay.

On the-- going down to Florida, the -- the Royal Palm One and Two programs that are set to roll off here shortly, ballparkish are we talking like some-odd $200 million for these 200,000 homes or can you sort of point me in the right direction there?

I don't think we try to give out a dollar number.

Again, it is roughly 200,000 that we will be discontinuing coverage going forward, but I haven't tried to qualify that in terms of dollars a top-line.

If your average home, I guess, is running, what, 800 on an annual basis?

Dan, though, if you are trying to do the revenue model, remember reinsurance costs change.

Lots of stuff along the P&L change along that way.

Got it.

I would suffice it to say that we do not think that is a good economic use of our shareholders capital and we don't want to put that much of our capital at risks, so we stay strong for everybody.

So you can't really -- you would have to really look at the whole P&L and just take our word for it is a good deal.

Got it.

Last question, then, is what is going on with the, we'll call it PML or any other sort of risk characteristic you would like to help us out with, but what is going on with that metric in the homeowners business during the last year in light of model changes and your own portfolio changes.

Our overall PML clearly is moving in the right direction, when you think of what we have been doing as far as catastrophe, reduction -- exposure reduction actions and the reinsurance coverage we have been buying.

You notice, when we talk about our reinsurance covers, the mayor ones in the first quarter, we actually had some increases in key areas of coverage.

So, PML is coming down and that's what should be happening, as we have been talking for some time now, but the approach to aggressively managing down that exposure.

Can you put any sort of qualification around the fact that it's coming down?

No, we're not giving out the absolute numbers, but trust me, Dan, we clearly are making significant progress in that regard.

Great.

Thank you very much for the questions.

Thanks.

Next question is from David Small of Bear Stearns, your question, please?

Good morning.

The first question I had was it looks like growth in the states where you are pulling back on the homeowner's side, I'm talking about auto growth here, is lagging the other states.

And I guess, could you just talk a little bit how you plan to address that?

Well, if you -- first, of course, is you have got to have a good product, because people want to buy what is best-of-class in that particular product area.

So you have got to have a good auto insurance product.

We think with Your Choice Auto we do.

We look at, obviously, having a good competitive price and then a good advertising program and then the right distribution.

If the question is really are you -- it is hurting you in the marketplace by not offering continuing coverage to customers?

Yes, it clearly is not a good thing.

But on the other hand, the way we deal with our customers we give them lots of notice.

We give them more notice than we are required to.

We offer them alternatives, so we'll go to them and say we can't offer you coverage but we have somebody else who can.

That's sort of the Royal Palm type transaction.

We do that in other states as well.

So it's really a state-by-state basis.

I would say, though, that we believe we can continue to compete aggressively in auto while we are doing our catastrophe management program.

In your expectations are you -- you assume that growth in those coastal states, where there tends to be a lot of population, will be lower than the rest of the country?

Not necessarily.

David, I don't have the numbers right here in front of me on that specific piece there, but I'm looking at the table, but I think Florida was down a little bit because we took some pricing changes in Florida.

So it really depends on -- keep in mind we run this as a local business, so we're making changes in each state all the time to optimize what we think the right growth and profit matrix is.

And then could you just give us an update on California?

If my memory serves me correctly, you haven't been able to get Your Choice Auto into the state.

There has been some negotiation with the new insurance commissioner.

Just tell us what is going on there.

It's basically where we left it before.

We would like to launch Your Choice Auto in California.

We believe that would be positively received by the consumers in California.

And we believe they deserve to have a choice like everybody else in the country has a choice.

We are -- have had conversations about what our auto pricing should be, but we haven't come to any resolution of that.

And of course in homeowners, we filed for a rate increase, the state asked us for -- to take a rate decrease.

We do not believe that's appropriate because you have to put up a lot of capital to cover any potential fire following losses from earthquake and we think we should be able to recover the cost of our reinsurance that we buy for that as well.

So that will take longer, probably, to resolve than the auto piece.

So you don't have a time frame, though, for us?

No, I -- we have not proven accurate at being able to forecast when we can get regulators to agree.

Okay.

Thanks for your help.

Your next question is from Meyer Shields of Stifel, your question please.

Thank.

I guess I have two questions.

First of all, commercial line seemed to have dropped off rather severely in the quarter.

I'm wondering is that competition or is it exposure management?

Meyer, it's both.

Some of the -- we continue to get smaller in commercial property as part of our cat management activity and then there is a little more competition in commercial lines.

We have re-staged that business a little bit.

We've got some new pricing plans we're rolling out.

And we also changed our organization structure to get a little more focus on that business, because we believe we should have more market share there.

Okay.

If I can shift gears, we have been seeing, I guess, more signs of State Farm starting to roll out mid-single digit rate decreases.

Is there any difference in terms of how it effects your book of business when State Farm cuts rates as opposed to when Progressive and GEICO do?

Yes, I think State Farm customers look a lot more like ours, but I would always say you have to look at what the overall price position is first.

So a decrease comes off of some base.

And so a lot of times people look at the decrease and say, well geez, everyone should take the same decrease.

Well, if we were already more -- had a better price than State Farm, if they take a decrease, that makes them more competitive, but it doesn't mean that we have to take our price down.

Excuse me?

Sorry, can you still hear me.

Yes, I'm still here.

I'm not sure where that came from.

There is somebody else helping answer the call there.

The-- so I think State Farm taking decreases is a little more troublesome in the marketplace, but I don't see it impacting our multifaceted strategy.

Our marketing is working really well, as I said.

We are expanding distribution capacity.

State Farm doesn't sell Your Choice Auto, so we're still feeling good about the way we go to market and expecting to say in the current plan.

Okay.

If I can throw in one last question, I'm just-- I'm wondering why it takes about a year to roll out Allstate Blue across the country.

We're regulated in 50 different states.

Each state has its own form filings.

They all move at their own pace and so it just takes a while to do it.

It -- I would say a year is putting a full corp press on it, but the point you make is what we have been suggesting is having an optional federal charter would certainly be a better solution for everybody, including consumers, because if we had an optional federal charter, we could have had this rolled out in much less time.

Okay.

Thank you very much.

Our next question is from Joshua Shanker of Citigroup.

Your question, please?

Good morning.

Morning, Josh.

A few questions, the first one following up on Gary' question.

I realize you're not all about price but I'm also trying to understand why you have some different results from your peers.

The-- in terms of price, to what extent is Your Choice increasing the average price per policy?

To what extent is desiring to retain clients causing you to lower prices?

And to what extent does the current policies being offered to new clients less expensive than ones that are more legacy-oriented policies?

And the second question concerns the share repurchase.

I am curious, how much excess cash you have right now to buyback shares versus how much of the authorization is going to be generated by future cash flow.

Why don't I take the first one, Dan, you'll take the second one.

On average premium, which is, I think, what I'm going to highlight your question as, Josh, it's really hard to do a variance analysis on that.

A lot of people doing macro models want to be able to just take some percentage and apply it times a gross, $9.

billion, $9 billion number and multiply out.

What you have to remember is any -- of course, we have got every state, so the extent you change what you sell in the different states impacts that average premium.

Your Choice Auto, of course, has our standard policy, which is what everybody else in the industry sells.

It also has Gold, which costs about 7% more.

It has got Platinum, which is 15% more, and it has got Value, which is about 5% less.

And that, of course, varies by state.

But in total, we sell more up than we sell down, which means that the average premium goes up.

That said, when we roll out Your Choice Auto we oftentimes do it in conjunction with other changes in our pricing plan, which go below the state level, which is how competitive do we want to be in one of the 10s of thousands of different segments we have, based on who we think is shopping, what we think the price sensitivity is in that particular area.

We try to manage our business so we are competitive, but we're not the lowest price.

We believe that the packages we offer, the service we offer at the local touch is -- gives us the opportunity to charge more.

So it's a little hard to answer that question with -- give you specific numbers you can go back and say well this is what is happening.

Just suffice it to say we believe in manage our P&L in total.

We're not all about price, but we are about being competitive.

So you'll see that number bounce around a little bit, but you won't see ours be like some of the other people who only compete on price, that's the only thing they -- the only lever they have to pull.

And just to follow-up, what type of retention oriented price relief are you giving clients at this point?

Well, we don't have relief in terms of a retention discount.

Right?

Some people do.

We do not.

What we do is we work hard on making sure they have the right service.

We have a huge effort going on today in customer loyalty, that's everything from selling products like Your Choice Auto, where we do have higher retention on basically in total, where we're doing everything like sending loyalty -- we have safety kits we send to long-term customers.

We have service standards.

So it's about making sure your customers are happy.

If your customers are happy, they are not going to leave for $20.

So we try to manage retention and customer loyalty in total.

Dan, do you want to take the excess cash piece for Josh?

Josh, if you look at our supplement you may have noticed at the corporate level, in terms of basically cash on hand, $2 billion.

Basically the same we had at the end of the year we have at the end of the first quarter, even after purchasing the 700 million of stock and tax payments and all of the other things that go on.

So we have sufficient amount of excess capital for our share repurchases.

In fact, those balances, as you might expect, are before the amounts that we can dividend up from AIC, based on statutory limitations and requirements of statutory earnings from last year that we will be dividending up the balance of this year.

The substantial excess cash more than sufficient for our share repurchase programs.

The hybrid program that we discussed, as I mentioned, is basically a swap of hybrids for common equity that is accretive to earnings per share, increases the ROE of the Company and lowers the cost of capital slightly.

So excess cash is there in sufficient quantity.

Could I make a suggestion, we have about 15 minutes left, and we've-- we're a little less than halfway through all of the people who wanted to ask questions.

So maybe if you could prioritize your questions and pick like the one you are really most interested in and then keep it to one follow-up question.

If we have extra time I'm perfectly happy to go back and answer any other questions you all have.

But I'd like to make sure we give everybody a chance, because we got about half the people still on hold.

So with that, could we have the next question, please?

Our next question is from Jay Cohen of Merrill Lynch.

Your question, please.

Yes, you guys had spent some time talking about the frequency in the quarter and your view of what was causing some of the changes.

But the severity did improve relative to what you saw in the second half of last year and I'm wondering if you put any thought behind why you saw that severity improvement or it is just kind of a random quarterly pattern?

I think you sort of put your finger on it when you look at the weather patterns and if you think of the heavy snows we had in those northeastern and central states that we were saying that we attributed a lot of that weather too increased frequency, that sort of goes hand in hand with the lower severity number.

So property damage 1.2% is indicative of higher frequency, but lower snow fender-bender kind of collisions?

Great.

Thanks, Dan, I appreciate that.

Your next question is from Bob Glasspiegel of Langen & McAlenney, your question, please?

Good morning.

You seem to be the first major Company that's actually released reserves for Equitas post the merger transaction.

I was wondering, if A, you could step us through what the sort of accounting actuarial bench posts were to make this release?

And B, explain to us why you didn't reallocate this to other parts of asbestos environmental, et cetera?

Should we take that as a sign that you're feeling increasingly confident about the visibility of where your A&E reserves are?

First of all, Bob, we do feel very comfortable about where our level of reserves are.

When you look at reinsurance collectables, receivables, we have established, as we described on prior calls, a bad debt allowance, if you will, based on reviewing in some depth and detail each of the major players and making sure we understand what their financial condition is, how long they might be around, if we're concerned to that extent, and how much cash they may have available to pay reinsurance receivables.

So we did the analysis based on, again, an in-depth review of Equitas and looking at the National Indemnity, agreeing to reinsure their liabilities and provide additional cover and determined that that had improved, the financial condition of Equitas, and as a result, the way we do our formula for bad debt allowance enabled us to reduce it about $46 million.

But this is the first quarter, in my recollection, where there was no strengthening of discontinued reserves at all.

So you didn't look at this as an opportunity to -- there was no, clearly there was no need to fill any puddles and you are feeling good about the rest of asbestos environmental respectively.

Again, we look at it every, just about we look at it every quarter and, as with all reserves, ensure that we feel comfortable that they are adequately, provisions are adequate to cover the exposure.

When you think about this bad debt allowance, it's 15% to 20% of the total reinsurance receivables.

So it's a very comfortable provision that's done in-depth.

So if we had needed to provide anything else, we clearly would have done so but that wasn't the case.

Thank you.

Your next question is from Adam Klauber of Cochran, Caronia Waller, your question, please?

Good morning, thank you.

The expense ratio was lower at 24%, compared to an average of 25% for 2006.

Could you guys, I guess, give us some color on why it was lower?

And for the rest of the year are we looking at more in the 24% level or back to the 25% level.

Adam, the principal reason for that was the difference in the cost of the VTO.

You may recall last year we had a [volatary] termination allowance, so restructuring charges was the majority of that.

We think once you take that out, we're from last year we're about at level where we can anticipate operating going forward.

Okay.

Thank you very much.

Your next question is from Brian Meredith of UBS, your question please?

Good morning.

Can we focus on the Encompass business?

Continue to see premium drops there.

Is that principally because you're just a little less comfortable with the competitive conditions in the independent agency business, because I know you would like to grow there ultimately, correct?

Brian, this is Tom.

Yes, we would like to grow there.

First, to Adam, Bob, and Jay, on behalf of all your compatriots, thank you for keeping your questions focused, that will make sure we get to everybody.

So thanks for playing along.

Brian, we are trying to grow Encompass.

We have had a couple of challenges there.

One is it has been -- most of that business is a package policy, which homeowner and auto, and so as we have taken our catastrophe management actions, it has been harder, of course, to growth that business when over 60% of your business is packaged policies.

Secondly, there is a little more competition in that area and we have been working on some new pricing plans to make sure we are earning good returns, but we're competitive.

I think we have something right now that looks like it's working in one state.

We'll see if it gets rolled out.

But the -- you'll remember on a long-term basis we bought that business from CNA, it had a combined ratio of 117.

We brought that way down.

Now we're earning a very strong return in that business and we do need to grow it.

I think we have plans to grow it.

It is a little harder to grow in that independent agency business in this space because you have some pretty strong competitors who are ramping up as well.

But I think on a long-term basis we'll start to grow.

I wouldn't expect to see its growth, though, take off in 2007.

Thanks.

Your next question is from Richard Sbaschnig of Oppenheimer.

Your question, please?

Hi, good morning.

Just sort of quick question.

In terms of the frequency changes, if they actually keep continuing heading up, which you clearly don't expect, but assuming they do, how long before you can change your rates to react to that?

Again, we are-- we have improved dramatically in the recent last few years, at least in terms of our capability of filing and getting filings through, and as we have had several discussions on the call.

In the quarter Allstate brand standard auto in nine states we had rate increases 2.8%.

We do monitor, as Tom indicated, on a location-by-location basis.

And as we see indications that would require filing, we do so.

So it's relatively prompt.

And then it varies by state, right?

Some states give you a hard time.

Other states you get to file and use it the same day.

Some days-- and so it really depends and then you have different companies that you are selling products in.

So there's really no easy answer.

What I think Dan is saying is we have a commitment to make sure that we have competitive prices, but we also have good returns.

And we're not about to sacrifice profitability to get growth.

Thanks very-- thanks a lot.

Your next question is from William Wilt of Morgan Stanley.

Your question, please.

Hi, good morning.

Could you offer an update on cross-selling efforts, auto-home, home-life, and I guess maybe setting aside the impact of the catastrophe reduction, any other progress or setbacks to report on cross selling efforts?

Those, Tom, cross-selling, of course, is a key part of what we have been trying to do because not only does it leverage the customer relationships we have, we know that the more things people buy from us, the more likely they are to stay around.

And so that is part of what we do.

We have made good progress over the last six years in the financial services area.

Although, as we have been growing the standard auto book, the percentage hasn't gone up as much as we would like.

So I think we still have a tremendous amount of opportunity there.

Jim Hohmann and George Ruebenson are working on a plan to try to increase the amount of cross-sell there.

I think there's another area where we have great opportunity and that's in what we will call our specialty lines, motorcycles, commercial auto, boats, jet skis, snowmobiles, all of those products.

If you look at our market share, almost everywhere it's much lower than our market share in auto and there's really no reason why we shouldn't be bigger in those lines.

We have to get ourselves focused on it.

So what we did is we've created a different organization inside our Company to be focused on those lines, which we think will slightly raise costs a little bit, it's not going to be as efficient as running it as an other line, but we do believe it will generate additional growth for us.

So that's an area where I would expect to see us start to grow some.

Thank you.

Our next question is from Matthew Heimermann of JPMorgan Securities, your question, please?

Hi, good morning.

Quick question just on -- related to Encompass.

I guess I can appreciate the direct strategy today is pretty much focused on the Allstate brand.

Is there a reason why you wouldn't consider perhaps having a more aggressive direct strategy and using the Encompass platform to do it?

Matt, when we look at the direct business, the -- one of, of course, the key leverage you have there is your brand name and your ability to service customers.

And when we're out talking to direct customers, they love the fact that they can get to us either directly or to an agency owner.

They like the fact that there are people locally who can help them.

So sometimes people actually start in the direct channel.

They might buy auto insurance from us and they end up with an agency owner and they buy homeowners from them or a motorcycle policy and build a relationship on financial services.

So it's working pretty well in that area.

To launch a new brand in direct or to take the Encompass, which is really more of a name than a brand, and make it a brand, we would have to be competing with GEICO, who spends, oh, by my public reading, over $600 million a year in advertising and Progressive was at a couple hundred.

It just makes sense to leverage the system we have because customers appear to like that as opposed to go and leverage the Encompass name.

Does that answer your question, Matt?

It does.

I disagree slightly, but appreciate the candor.

Your next question is from Paul Newsome of A.G.

Edwards, your question, please.

I'll catch you later.

We'll let somebody else ask a question.

Okay, thanks, Paul.

Thank you, our next question is from Alain Karaoglan of Deutsche Bank.

Your question, please?

Good morning.

It's a question on the expense ratio.

Looking at the auto expense ratio and Allstate brand is 23.3 Encompass is 26.1.

Are you satisfied where it is now?

Do you think you can get these expense ratios lower over the next three years, even in a more competitive environment?

Did you have any specific goals as to where do you think you would like to be, especially given that companies like Progressive now are, through their independent agents, at a 20% expense ratio, so it makes it more difficult.

Alain, let me answer that.

First you have to look at the total price.

You want to make sure what you have is a competitive price.

That, of course, has expenses in it, which as you point out, ours are a little higher than Progressive's.

And then you also have claims.

And so we haven't spent a lot of time on this call talking about claims.

But we're good at claims.

We work hard at it, getting our expenses down in claims.

If you go just to the underwriting expense line, what we try to look at is how are we delivering the product as opposed to how do we do it the cheapest way possible?

And so, you'll see our marketing expenses have gone way up in the last four years, really, which we think has worked quite well for us.

At the same time we have been shifting some jobs offshore using lower cost labor, using 24 hour stuff around the clock as a way to reduce expenses.

We're constantly looking for ways to reduce expenses, at the same time looking for ways to invest in growth in the business.

So I talked about customer loyalty, sending out safety kits to our long-term customers cost money.

We think that's a good trade because we think they will stay a long -- stay with us longer.

So we try to manage it both aggressively, but not be shy about reinvesting in the business.

You have noticed that I -- some of the people in the independent agency channel, which as you point out our expenses are higher, of people have been trying to bring their costs down there.

Some have done it through commissions.

We reduced some of our contingent commissions last year and brought that expense ratio down.

I think we ought to be able to continue to reduce our expenses in both channels, but we won't be shy about reinvesting in things that we think will drive growth.

That said, I think the comment Dan made earlier, which is our expenses are about, this quarter, will be about where they will probably be for the year is probably about right.

Thank you.

Next question is from Ken Zuckerberg of Fontana Capital.

Your question, please.

I just wanted to follow-up on Bob Glasspiegel's question on the Equitas adjustment.

Dan, I know that each third quarter is the typical period when Allstate reviews its A&E exposures in general.

So again, I just wondered given when the transaction was announced by Mr.

Buffett, was there any other catalyst to make this change now versus later in the year?

No, this was basically being sure that the, not just the announcement but what needed to happen after that.

We were satisfied with that transaction proceeding and based on that we did the analysis.

We will do our normal in-depth bottoms up review in the third quarter and, again, depending on the results of that we will do what is appropriate for those reserves.

Thanks very much.

We'll take one more question and then wrap up.

Your question is from [Chin Choin] of UBS.

Your question, please?

Your line is open.

You may want to check your mute button.

Okay.

Do you have a question or -- okay.

Let me close down with a couple of summary comments.

First, our business continues to generate strong returns in cash flow.

Secondly, our multifaceted strategy continues to work, we're growing and making money.

We're growing where we want to grow.

Lastly, we have a very talented team.

We have got a strong franchise.

That has enabled us to be resilient in the face of both change and adversity.

And those are the things that have been the corner stone of our long-term success in driving great shareholder value and we expect to just continue that as we go forward from here.

Thank you for participating and we'll talk 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.