Allstate Corp (ALL) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Allstate Corporation fourth quarter 2007 earnings conference call.

At this time all participates 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.

Sir, you may begin.

Thank you Matt.

Good morning, and welcome to Allstate's fourth quarter earnings conference call.

As usual Tom Wilson, Dan Hale, and I will provide commentary for our results for 2007, which were released yesterday.

These materials, the press release, investor supplement and an updated description of our reinsurance program are available on the IR portion of the Allstate website.

After the formal comments we will hold a Q&A session.

In addition to Tom, Dan, and myself, we have George Ruebenson, the head of Allstate Protection, Jim Hohmann, head of Allstate Financial, and Rick Simonson, Chief Investment Officer, available to answer questions.

We expect this call to last about an hour.

Please note that the following discussions may contain forward-looking statements regarding Allstate and itself operations, and actual results could differ materially.

For information relating to factors that could cause such differences, see our Q3 10-Q for 2007, our 2006 10-K, and yesterday's press release.

Also, we may discuss some non-GAAP measures, for which you'll find reconciliations in the press release and investor supplements.

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

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

A reply will be available shortly following the conclusion of this call, and our remarks are current only as of the date and time of the call.

Finally, once this call is concluded investor relations will be available to handle any further inquiries you may have.

Now I'll turn the call over to Tom Wilson.

Tom?

Good morning, 2007 was another year of outperformance for Allstate relative to our peers.

We successfully executed on our four operating priorities to generate profitable growth.

That includes our continuous focus on operational excellence and disciplined capital management.

We also continued to focus on the consumer and on enterprise risk and return.

When you look at the entire year, we generated $36.8 billion in revenue, a 2.7% increase.

We made over $4.6 billion in net income, or $7.77 per diluted share, which is our second-highest yearly profit.

Our return on equity exceeded 21%, and book value per share increased almost 11% over the prior year.

We repurchased 61 million shares at a cost of $3.55 billion, and we increased our dividend, as you'll remember, for the 13th consecutive year in February of 2007.

We finished 2007 with a strong financial position and a high-quality balance sheet.

Now,it goes without saying we did this in a very challenging year.

The regulatory and legislative environment remains difficult, particularly in the homeowners area.

Personal lines auto insurance continued to be a highly competitive market, though we maintained our pricing discipline.

Economic conditions deteriorated throughout the year, which does impact new business sales, lost cost trends and our investment portfolio.

Operationally we did very well in this environment.

George's team achieved our combined ratio guidance that we set out at the beginning of 2007, which was 85.7, which excludes catastrophe losses and reserve reestimates.

We maintained our pricing discipline in auto and homeowners.

We gained approvals for The Allstate standard auto business in 25 states averaging 4.4%.

For Allstate homeowners the rate changes were in 33 states averaging 5.8%.

We continued to reinvent protection for consumers with the product rollouts of Your Choice Auto, Your Choice Home, Allstate Blue and most recently Allstate Green, and then we have our variety of other service options that are designed to improve the customer experience.

And while we thankfully did not experience any major hurricanes this year, we did help our customers through 91 separate catastrophe events including the California wildfires, which are estimated a cost of $318 million..

Jim Hohmann's team maintained our pricing discipline in fixed annuities, which helped improve overall returns in Allstate Financial, and Rick Simonson and the investment group generated over $6.4 billion in net investment income and realized over $1.2 billion in capital gains.

There were clearly some areas of challenges for us in 2007.

Our auto bodily injury paid severity increased at a higher rate than we expected last year, but it was somewhat tempered by a reduction in BI frequency.

Auto physical damage frequencies were higher than 2006, but this was somewhat tempered as our paid severities moderated considerably compared to 2006.

Both of these explain why we had slightly increased prices for auto insurance last year.

We also had to deal with the subprime contagion, as our investment grade RMBS portfolio suffered a drop in fair value.

All of these bonds are current on interest and principal.

We expect to fully collect the value of our current portfolio, so you'll see we only had minor permanent declines in value in that portfolio.

And perhaps most important to our shareholders our total return declined about 17%, a result which is totally disconnected from the excellent financial results we published during 2007.

Look forward, we believe 2008 will be another year in which our strategy and operational strength enables us to outperform any competition and generate excellent financial results.

In environment plays our strengths, which is a disciplined approach to profitable growth and leveraging operational excellence.

Allstate protection combined ratio is expected to be in the range of 87% to 89%, excluding catastrophes and prior-year reestimates.

This outperformance and our focus on reinventing protection and retirement for the consumer, and maintaining a disciplined approach to capitol management should drive shareholder value.

Let me turn it over to Bob, who will walk through the fourth quarter in more detail.

Thanks, Tom.

I plan on focusing the majority of my comments on our results for the fourth quarter, concentrating on property liability underwriting trends.

I will also touch on Allstate financial results.

However, I echo Tom's comments that our results for all of 2007 were strong, reflecting solid execution of our strategies.

Let's begin with total property liability results for the fourth quarter.

Net premium written of $6.56 billion was down slightly from the fourth quarter 2006, a trend we saw all year long.

Favorable results in Allstate brand standard auto were more than offset with declines in our property line of insurance, as we continue to manage down our exposure to mega cat.

Earned premium followed a similar trend in the quarter.

Underwriting income for the quarter of $276 million declined by $702 million from 2006 levels due to an increase in catastrophe losses of $193 million, less favorable reserve reestimates of $206 million, and the reduced underlying margin worth $303 million.

The recorded combined ratio for the quarter was 95.9%, 10.2 points above a comparable ratio for the fourth quarter of 2006.

Again, parsing this variance, the difference in catastrophe losses accounted for 2.9 points of the variance.

Non-cat prior year reserve reestimates made up another three points.

So the underlying margin deterioration in the quarter was worth 4.3 points, of which the underwriting expense ratio change contributed 1.2 points,, leaving 3.1 points due to increased underlying losses.

This equates to about a 3% increase in total lost cost trends, certainly a trend we are carefully analyzing and addressing.

So our underlying combined ratio for the quarter was 88.6%.

For the year, 2007, we produced an underlying combined ratio of 85.7%.

within the outlook range we provided at the beginning of 2007 and reiterated each quarter of the year.

That represents an outstanding result in today's competitive marketplace, one that should compare very favorably to the results of our peers.

Over the last five years we have produced an underlying combined ratio below the 90% level, a direct result to our commitment to generating consistent profitable growth.

Looking at the trends for our major business lines of insurance, our Allstate standard auto business continues to grow, albeit at a slower rate of increase.

Net written premium rose 1.5% due primarily to an increase in average premium, and to a lesser extent unit growth.

We continue to file and receive approval for rate changes, With eight additional states in the quarter we closed the year with rate changes, as Tom said, in 25 states for a weighted average of 4.4%.

That's 1.3% on a county-wide basis.

Allstate nonstandard auto trends have not changed appreciably, with the exception of the acceleration in new business applications, as the introduction of Allstate Blue begins to take hold.

It will take until next year for the decline in policies enforced to reverse at current trends.

This new product is now in 12 states and we expect to expand our reach with this product throughout 2008.

For the quarter, Allstate auto loss ratio increased 4.5 points to 68.6% on a reported basis.

The underlying loss ratio, which excludes cat losses and reserve reestimates, rose 2.4 points from the fourth quarter of 2006, to 69.2%.

Shifting to the components of auto los cost trends, for the quarter there was not much change in the direction, in frequency and severity established during the year.

Frequency continued to increase for property damage and the physical damage coverages, while frequency for the injury coverages declined.

On a paid basis, bodily injury calendar paid severity jumped to over 9%, above what we would consider acceptable.

However, when coupled with the declining frequency, the loss trend remains manageable.

For property damage paid, severity increased a very modes 2.2%.

Again when combined with the frequency trend it produces a modest increase in loss cost trends.

In total, the underlying auto pure premium trend is around 3% level for the quarter.

In the quarter we did make some adjustments to current year severity targets, increasing the targets for bodily injury while lowering the target severities for property damage and collision coverages.

The overall P&L effect of these changes was minimal in the quarter.

We remain confident in the overall adequacy of our reserve position at the end of 2007.

The trends we experienced in homeowners this quarter did not display any material changes.

We continue to decline in premium as we manage our mega cat exposure.

This has resulted in declines in both new business applications and retention.

Average premiums before reinsurance increased 2.6% as we continue to file and gain approval for rate increases.

For the year, we made rate changes in 33 states, averaging 5.8%, 3.6% on a country-wide basis.

Homeowner loss trends for the quarter matched the patterns set in prior quarters, with ex-cat frequency rising 4.6% and paid severity up 7.9%, the resulting pure premium increase well in excess of average premium leading to an increase in the underlying combined ratio.

For the year homeowner remained profitable at an all-in combined ratio of 91.5%.

However, we will continue to reduce our exposure to mega cats and seek adjustments in our rates in order to generate long-term profitable growth.

Now in anticipation of potential questions, let me comment here on Florida.

The Florida situation can be summed up very simply.

We are still working to find a solution to Florida's broken property insurance market.

Unfortunately, the economic costs associated with severe hurricanes have yet to be adequately addressed.

We are working to help find solutions to fix the market for consumers.

In fact, we launched a series of public awareness ads today in several Florida newspapers discussing potential solutions for the state's property insurance challenges.

Some of the public debate has not matched the reality about our property rates in Florida.

If you look at the Office of Insurance Regulations website, our homeowner rates are about average and in some cases half the highest competitor.

Changing the focus to Allstate Financial, we continued our focus on improving returns in this business.

New business returns increased significantly during the quarter, as we maintained discipline in our pricing.

Sales through The Allstate agency system increased 7.2% in the quarter to $884 million.

This brought sales for the year to $2.9 billion, for an increase of 13.8%.

Fixed annuity sales fell significantly, as market conditions were not favorable for this type of product, and there were no institutional product sales in the quarter.

Allstate Financial operating income for the fourth quarter hit $158 million, an increase of $16 million over a similar quarter in 2006.

For the year we made $615 million, showing steady improvement over the last five years.

Net income fell in the quarter to $31 million, primarily due to higher realized capital losses, of which $95 million were related to investment writedowns and $120 million to declines the valuation of derivative instruments.

For the year we matched net income to 2006 at $465 million.

Now with that I'll turn it over to Dan for his comments.

Thanks, Rob.

I'd like to begin with a brief summitry of our investment performance, including comments on our subprime-related holdings..

After that I'll recap our catastrophe losses and prior-year reserve reestimates.

And then following a status update on our reinsurance programs for 2008, I'll wrap up with a few additional comments on capital management actions and related balance sheet metrics.

As of year end, our investment portfolios totaled $119 billion, which was $2.2 billion less than at the end of the third quarter.

The decline was related primarily to reduced securities lending activities, and to a $656 million reduction on our net unrealized gain position, down to $1.9 billion.

$521 million of that unrealized change was the result of sales of equity securities during the quarter, which generated realized gains of $351 million.

The fixed income portion of our unrealized gain position was down about $150 million from the end of September, primarily due to the fact that widening credit spreads more than offset effects of declining interest rates.

For the year our portfolios had strong overall relative performance, exceeding most of our internal benchmarks.

While many of our asset groups did well, performance from our equity group and taxable weighting decisions in our portfolio management group combined to drive most of the excess return in the property liability portfolio.

During the quarter, our property liability portfolio generated $490 million of net investment income, which was 3.8% more than for the fourth quarter of '06.

Allstate Financial net investment income grew 2.6% to $1.1 billion.

Higher net investment income for both businesses was driven primarily by increased income from limited partnerships.

Net realized pre-tax capital gains for the quarter total $98 million, as $384 million in gains from sales of primarily equity securities more than offset $166 million in net losses related to derivative valuations and $126 million of investment writedowns.

Now for more perspective and more specifics on our subprime-related investments, at year end, on a market-value basis we had $3.9 billion of securities where the underlying collateral was backed by subprime residential mortgages, with 93% rated AAA or AA.

The market value of the subprime RNDS portfolio was 89% of amortized cost.

That reflects an aggregate unrealized loss position of $502 million, or an increase in unrealized losses of $277 million since the end of the third quarter.

As we've discussed on previous calls, we value these securities using pricing information obtained from independent third-party pricing services and brokers, and we vet that information along with other factors through our internal valuation committee.

Other factors would include the capital structure, collateral quality credit enhancements, default rate, loss severities, and credit ratings.

During the fourth quarter, we recorded investment writedowns totaling $20 million on our ABS RMBS securities and we also wrote down $62 million of our ABS CDOs and had only $36 million of CDO securities remaining in our portfolio.

Writedowns were a result of our assessment that permanent impairment had occurred due to the erosion of collateral positions on certain downgraded securities within the portfolio.

We're not currently expecting any additional additional, other than temporary impairments of these securities, although further significant deterioration for today's market conditions could obviously cause us to alter that outlook.

As of now, based on our analysis and the seniority of our securities claim on underlying collateral, we currently expect to receive all contractual principal and interest on these securities, and we have the intent to hold them until they recover in value.

Consistent with these expectations, we collected $166 million of principal payments on our subprime RMBS securities in the fourth quarter.

One other investment portfolio topic we'd like to comment on is the potential impact on our municipal bond portfolio of insurance from bond insurers.

Our practices for acquiring and monitoring municipal bonds focus primarily on the quality of the underlying security and do not rely on insurance, which as a rule of thumb enhances their value by about 1% to 2% of the principle amount.

As of year end approximately $13 billion or 51% of our municipal bonds were insured by bond insurers, and our current valuations already reflect a significant decline in the value of the insurance, loosing all the guarantees that had no material impact on our shareholders value.

And while declines in the value of insurance could temporarily effect the value of this portfolio, we continue to have the intent and ability to hold the bonds and we expect to receive all of the contractual cash flows.

Now turning to our catastrophe losses, for the quarter they totaled $472 million, or about 7% of earned premium.

That was $193 million or 69% for than for the fourth quarter of 2006.

The California wildfires accounted for $318 million or about two-thirds of the fourth quarter total.

Included in those fourth quarter cat losses was $26 million related to prior-year's events.

Most of that was increased loss reserves for reopened claims arising from litigation filed in conjunction of the Louisiana deadline for filing suits related to Hurricane Katrina.

For the year we experienced cat losses of $1.4 billion, or 5.2% of earned premium, including $127 million of reserve reestimates of the prior-year cats.

Including the $26 million related to prior-year catastrophes, total property liability reserve reestimates for the quarter amounted to a $48 million strengthening of reserves.

That compared with favorable prior-year reserve reestimates in the fourth quarter of '06 of $184 million.

In addition to the strengthening for Katrina litigation claims, we added $16 million for discontinued lines of coverages for potential uncollectible reinsurance receivables.

Now as was the case last year, during January we completed the renewal of our catastrophe reinsurance agreements, except for those related to Florida.

We expect to place those contracts later this year once the Florida hurricane catastrophe funds plans are known, and then have them effective for the hurricane season beginning June 1st.

Our approach this year and going forward is to purchase our reinsurance coverage on a multi-year basis using a combination of one, two, and three-year contracts.

This layered approach obviously lessens the amount of reinsurance being placed in the market in any one year.

We estimate that the total annualized cost of all reinsurance programs for the 2008 hurricane season would be approximately $660 million per year, or $165 million per quarter, including an estimate for reinsurance coverage in Florida.

That compares with approximately $900 million per year for our total annualized cost for the 2007 hurricane season.

The approximately $240 million decrease is due in part to our reduced exposure in Florida following our nonrenewal activities for the past year.

Of course, a potential offset to the reinsurance cost reduction is a lost margin on those contracts in the absence of significant catastrophes.

We continue to attempt to capture our reinsurance cost in rate filings and currently we're involved in rate proceedings related to these costs in the states of California, Florida, and Texas.

For more detailed information on the specifics of each of our catastrophe reinsurance agreements, including examples of how the programs work on a coordinated basis for hypothetical events similar to those that occurred in 2004 and 2005, you can please see our catastrophe reinsurance program document, which we released last evening.

It can be accessed from our investor relations website.

In the area of capital management actions, during the quarter we repurchased 10.9 million shares of our stock for $579 million or $53.11 per share.

In that brought our total year repurchases to 3.6 billion at an average cost of $58.23.

As of year end we had $240 million remaining under our current $4 billion repurchase program, which we expect to complete during this quarter.

We'll be addressing future capital management options, including dividends and share repurchases, with our board of directors at our February meeting.

Our book value at year end was $38.58 per share representing an increase of $3.74, or 10.7% over the previous year.

Excluding unrealized net gains and fixed income securities, the increase was 14.3%.

Add our dividend yield, approaching 3%, and a $3.5 billion of share repurchases and you get a more complete picture of our overall operating return to our shareholders for 2007.

Finally, as Tom mentioned, based on trends we are seeing, we expect our property liability combined ratio, excluding the effect of catastrophes and prior-year reserve reestimates, will be within the range of 87% to 89% for 2008, and that level of continued strong underwriting performance should translate into a stock within our historical valuation range.

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

Okay, Matt, if you could start the Q&A session?

(OPERATOR INSTRUCTIONS) Our first question comes from Bob Glasspiegel of Langen McAlenney.

Good morning, everyone.

You indicated, Tom, yesterday in an interview that -- that you earned a 21% ROE in '07, and you're going to be giving some of that back to your customers in '08.

What did you mean by that?

Good morning, Bob.

What I meant by that, was if you look at our combined ratio guidance, the combined ratio drifts up a little bit.

That's because we have been holding average prices down some, while you'll see loss cost trends going up a little higher than that.

The combined ratio focus commitments we've made here today are consistent with that point of view yesterday.

Okay.

So this is -- somehow tilt towards growth versus profitability as a strategy on the margin?

No, not at all.

I think -- this is -- the message is not, Bob, we're cutting prices so we can grow.

The message is you should expect to see more of the same, which is if you look at overall insurance prices in the industry last year, they were essentially flat.

You'll see ours were up some, particularly those states where we thought we needed to increase price because our margins weren't good enough.

I was simply pointing out that there is a benefit to consumers with this level of profitability and that their insurance costs are not going up at the same rate of inflation as other things that they buy.

Got you.

One last question.

Dan, looked like you increased your interest rate assumption, if I understand the footnote on your pension fund.

What drove that?

Pension funding, that's in keeping with FAS 158, which requires that we have to record the changes in the valuation fund, and that $765 million is the result of applying $158 million for the year 2007.

So there's no interest rate assumption change, or there is?

I lost --

More changes in the assumption for returns on the assets.

Okay.

I guess I'll it follow up later with Bob on that.

Thank you.

Okay.

Sure.

Our next question's from Dan Johnson of Citadel.

Your question, please?

Great, thank you.

Around the auto reserves, can we talk a little bit about what is going on there.

We've all gotten so used to having reserves raining out in the P&L, and those have wound down quite a bit.

Is this just purely a function of what's going on with recent PI trends, or is there something else that we'd want to identify relative to your historically conservative reserve position?

Thank you.

Dan, this is Tom Wilson.

We obviously establish reserves at the end of every quarter to the exac -- to the number we think best represents where it is, and then ,of course, as that estimate changes that rattles through the P&L.

So the first thing you should know is every quarter we try to do it absolutely right.

Dan, maybe you want to make a quarter -- a comment on the fourth quarter relative to prior year?

Again, I think Tom explained it well.

As we look at the results for each of the quarters, we establish what we think is appropriate, and then, what happens quarter after quarter, positive or negative, flows through in the balance sheet, so we have appreciably established our reserves.

We feel good about them.

They're certainly more than adequate.

And again, whether or not there's favorable or unfavorable reserve development in the future periods will depend on what happens in those quarters.

Dan, --

Yes, go ahead.

Hey, Dan, that's about prior-year reserves.

I think you might have -- I hope you heard in Bob's comments, he mentioned we made a small change to the reserve estimates we have for the 2007 year --

Yes.

-- and that we raised our bodily injury targets a little, but we look down our PD targets a little bit.

Because if you look at the paid trends in BI, it was a little bit high, and if you look at the paid trends in physical damage it was lower than we had expected, so we made a little change.

But that's -- in the 2007 year that doesn't show up in the number you're talk about.

It's not material change for current reserves, current year.

Great.

And then just the other question was on the expense ratio.

Obviously it was up in the quarter, as you indicated, on some enhanced ad spending.

So the questions there are, how do you monitor the yield off of that and should we be expecting that to result in differential changes in PIF growth?

And overall, can you observe about what we might be looking at for macro expense ratio trends over the next 12 to 18 months?

Thanks very much.

Okay, I think there's three parts there.

First, Dan, we like our marketing.

We think it is absolutely working.

It is particularly strong when you compare the great advertising, Dennis Haysberg, combined with Your Choice Auto.

It's raised consideration, it's raised willingness to consider, it's raised our brand awareness, so all that stuff is working quite well.

We measure that at a high level of detail -- or extremely low level of detail -- I guess a better way to say that -- down to zip code level on some portions of our business, and we feel good about the effectiveness of that.

We are continuing to invest in marketing, as we started in 2003, and I think you see, if you look at the industry, the overall industry trends were up a little bit last year.

The big rump ups were -- we went up a lot in '03.

GEICO and Progressive began to follow us in '04 and '05, and it leveled off in '06 and '07, and I think you'll see pretty much the same position this year as the industry's trying to find what the right level of advertising is.

You should expect to see our advertising stay about the same.

You wouldn't see an up tip in PIF from one quarter.

When you look at -- in '06 we front loaded January and February, because that's when we really kicked off Your Choice Auto.

In '07 we didn't put as much in January and February, so the first half of '07 we were down from the first half or '06, but when you look at it in total, we were up a little bit last year.

So you are really just looking at seasonal managing related to how our products go.

What was your third question?

I --

I'm sorry.

Just overall what are we thinking about in light of growth objectives for the next two years with macro expense ratio outlooks?

Oh, expense ration.

I guess I would put it a couple ways.

We are always looking to reduce expenses, whether that be the voluntary termination offer we did a year-and-a-half ago or so, the reductions that George and Cathy Burne and their team with putting through in technology as we speak, continuing to ship jobs offshore.

That's one piece of it.

Then we also look and say what do we need to invest in?

And so, some of that's investing in marketing, which you saw in the fourth quarter.

There was a little bit of a tick-up in technology spend in the fourth quarter, as well.

We've also put a little more money into investments technology, Rick's team.

So, we look at it two ways.

One, you should always be out reducing your cost, but that shouldn't stop you from making investments in your business.

I think if you look at the expense ratio in total, what you see next year probably ought to be pretty close to what we had this year.

Appreciate the thoughts.

Thanks.

Maybe a little lower, but consistent.

Our next question comes from David Lewis of Raymond James.

Your question, please?

Good morning, thank you.

Can we talk a little bit about what your rate filings might be both on auto and homeowners, if you'd give us the general trend in 2008 over 2007?

And if claim severity and frequency trends hold pretty much in line with what you saw here late in 2007, would you anticipate only a modest increase in the underlying combined ration you in '09?

This is George Ruebenson.

With regard to '09, I don't think we're in a position to give any outlook on '09.

But as far as '08 is concerned, '08 will be a continuation of what we did in '07.

We're constantly monitoring the margin compression that we saw.

We took appropriate rates in both auto and homeowners.

I think as Bob or Tom mentioned in the beginning, we've taken rates in 25 states in standard auto this year, about 4.5%, and 36 states, about 6% in homeowners.

As part of our outlook of 87% to 89%, we do think that there will be some drift upward in the combined ratio, but it is our intent to take rates whenever we deem it appropriate so that we don't reduce our profitability.

And that's one -- I'm not trying to get an estimate for 2009.

But theoretically, if you get the rates back on track with the claim inflation trends, does that mean that we stabilize that underlying combined ratio just from a high level?

Yes, the idea is that we will always make sure our margins are good, and if we don't need rates, we obviously won't be taking them.

So your rates in both homeowners and auto probably will be something similar to what you saw in 2007, correct?

Yes.

Great.

Thank you.

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

Your question, please?

Yes, good morning.

I wanted to focus in on the bodily injury trends -- severity trends, and just -- it apparently accelerating through the year.

I just wondered if you could talk about what you see as the causes of that and whether there are any parts of that that you think you might be able to control in the future, or whether the only option is just to raise rates in response to it?

Gary, this is George again.

In the quarter we did have several very large payments that did distort at it little bit.

If you adjust for that we don't really see an acceleration of the trend in the fourth quarter.

On the other hand, we do it running about 7%, about the same as we had in the third quarter.

Part of that is attributed to higher medical inflation.

Part of it is also attributed to the fact that over the years, as we right a lot of high lifetime value customers, people tend to migrate to higher limits, but that's embedded in our pricing.

On the other hand to your real question, is there anything operationally that we're doing it to address it, the answer is yes.

There are several things that the claim department is reinstituting and we feel very comfortable that we're going to be able to maintain a very competitive position on our bodily injury disposition.

If you look at bodily injury in isolation, it's really only 24% of the price of the auto product.

And then if you look at the rest of it, physical damage collision that's about 60%, 65%, and those trends in severity are low single digits.

All in all we don't see the need to take any rapid rate increases which would distort the market.

And is there anything that you're seeing there that -- I realize it may be hard to measure, but there's different components to the BI severity.

One is just the actual medical inflation and another component is just the softer, noneconomic social inflation that might be there.

Is -- have you seen anything that suggests that the noneconomic portion of BI damages is at a higher rate or a different rate from what the underlying medical costs might be?

I think part of the softer stuff is usually driven by the underlying medical costs.

Okay.

As far as loss of wages, pain and suffering, that type of thing, no, I don't see anything materially that's happening.

All right.

Thank you.

Just one other quick question on the $16 million of uncollectible reinsurance, that adjustment in the other operations, was that a particular reinsurance situation that you were addressing there?

Yes, Gary, it was a UK reinsurer situation that we addressed.

Okay.

Thank you very much.

Okay.

Our next question is from Josh Shanker of Citi.

Your question, please?

Good morning.

Hi, Josh.

Hi, there.

A quick set of questions.

The first one was I'm wondering if it's possible that you can divide your savings in reinsurance in 2008, the projected savings, between cheaper reinsurance pricing or more competitive pricing and Florida's public reinsurance opportunity?

I don't think we can do that.

It's really complicated because you have -- not only do you have what we purchase, the price's changed, our exposure is changed, the location of our exposure has changed, the relative pricing on that exposure has changed by state, with the new air models out where New York has a lower exposure than it had before.

And then -- the Florida piece you can actually get from public documents as to what they're charging.

But it'd be really hard to -- and you wouldn't get an accurate number.

It wouldn't help you any, I guess is the way --

A lot of moving parts, Josh, and while reinsurance rates generally, I think, in the industry people will tell you are down 20%, you'd have to look at that with, as Tom indicated, the different changes in the agreements, and our coverages, our overall exposure, and then a big chunk would be the reduction exposure in Florida.

Okay.

The second question is can you talk about '06 Your Choice, '07 Your Choice in terms of what you're thinking, in general, penetration rates are in various states, depending on how long they're had Your Choice in place?

I can, Josh.

First, Your Choice Auto continues to be a great success.

We're now selling over 100,000 policies a month.

We're over 3.2 million policies.

If you do apples to apples, you would find the average premium is higher on Your Choice.

Apples to apples would mean adjusting for IS scores, [who you track], new pricing methods and all of that kind of stuff.

But we like what we see.

More people buy up than down and as we get a little better at selling this, a few more people buy up than buy down.

So we're doing a better job of explaining to people the benefits associated with this product.

That's Your Choice Auto.

On Your Choice Home.

we're not rolled it out to nearly as many states and we're working into the headwinds, pun intended, on catastrophe managements, so we've not been as aggressive as advertising that or getting -- but you see more people buy up when it comes to their home than you do their car.

And then of course Allstate Blue, Bob talked about it, and Allstate Green we launched in a couple of states.

Allstate Green is our product which is intended to answer the question of the situation of you have to buy auto insurance, you have to drive, but you don't have to pollute, and if you buy our product we offset the pollution from your car.

In terms -- in terms of understanding the most successful state, what percentage of penetration would you think that Your Choice has achieved?

Well, first, they -- we look at -- basically everybody should be offered Your Choice Auto, so let's start there.

In Your Choice Auto there is the standard package, which is the same product that everybody else sells.

That continues to get a reasonable portion of the volume, but it's less than half, and we don't give out those specific percentages from a competitive standpoint.

We'd like those not to be rattling around.

But most of the states are pretty close to the same.

There's a little bit of variation between how well they execute, but the general trends I talked about, more people buying platinum and gold than buying value, which raises average premiums is the same just -- in every state actually.

Finally, a quick one.

Can you update us on the status of hiring of someone to manage your relaunch of your direct channel sales.?

We're still working hard on that.

Okay.

Thank you.

Our next question is from Jay Gelb of Lehman Brothers.

Your question, please?

Thanks and good morning.

First on capital management, I know the board will discuss this in February.

In 2007 the -- or the current $4 billion buyback was roughly completed over two years, I believe.

Should we think about that size of a buyback again relative to the next upcoming one or is -- I guess what's going into that decision process?

Yes, I would answer that with you should expect to see more of the same philosophy (inaudible) capital management.

Our dividend increase at 13 years in a row, I think, Bob, we're in the top 1% of all companies -- only 1% of all companies have actually done that.

We're proud of that track record, and I think I 'd like to continue to maintain that track record.

When you look at the share repurchase program, it was really an 18-month period, I believe, and we did that so we sinked it up with the time in which we'd look at dividend, which is in February.

And I think you'll see it's a part of the same philosophy, but I'm not prepared to give a number as to what the board will approve.

Okay.

And then next question, on page 24 of the press release, you give a little bit more disclosure on some -- some topical investment areas.

Can you talk about your confidence in the -- in the money-good aspect of the commercial mortgage-backed securities?

And then also could you describe what the $2 billion of other CDOs are, and also the $2.7 billion of other ABS?

Well, Rick Simonson will deal with the first piece, and then you might have to direct him to where you're getting the numbers on the second pieces.

Yes, hi, Jay.

It's Rick.

We feel quite good about the CMBS exposures that we have.

CMBS is in our portfolios primarily as a supplement to our long-standing strategy of originating commercial mortgages, whole-loan commercial mortgages.

And from time to time, the economics and risk-adjusted returns from a whole-loan commercial mortgages are not as attractive.

We then supplement and use CMBS as a surge tank.

The buying of CMBS has been focused on AAA and AA quality securities.

The -- that group, as well, takes conscious degrees of additional risk and you saw in the release what we call commercial real estate CDO exposure, and that is quite different from subprime RMBS in terms of the underlying collateral, the quality of the collateral, the diversification of the originators, and manufacturers of that, and we find that portfolio to be roughly comparably spread from AAA to BBB, so all investment grade for the most part and roughly equally spread across those ratings.

And those provide additional risk-adjusted return in the context of the overall real estate exposure.

Remember, our overall commercial real estate exposure includes whole-loan commercial mortgages, CMBS securities, and a variety of other real estate exposures in more equity-like instruments, real estate funds, real estate investment trusts and the like.

Right.

And then on the -- also on page 24 of the press release, there's (inaudible) total asset-backed securities securities of $8.7 billion.

There's two line items there; other collateral debt obligations and other asset-backed securities.

Can you just remind us what those are?

Yes, the CDO stuff is generally cash CDOs of a corporate nature in terms of the underlying collateral, so consider -- consider it a range of high-yield mezzanine and some investment grade, as well, bank-loan type securities in the underlying of CDO a portion of that $2 billion that you see there.

Other asset-backed securities, we talk about cars, we talk about autos, we talk about student loans, it's a pretty diversified and high-quality, and short-duration-type mix.

And so is it a fair value on those?

Is it any discount to par or do you envision it?

No, we can get back to you.

Those should be very close to par.

All right.

And then last one, just a quick one.

On Allstate Financial could you quantify the level of one-time benefits in there so we can just get a run rate on the earnings power in the quarter?

I'm not sure what you're referring to on the one-time benefits?

There were tax benefits, a couple of other things, I believe, that were mentioned.

This is Bob.

I think there are a few, but there's always a few benefits or detractors in each and every quarter.

I would say that we feel the run rate of operating income for Allstate Financial is probably in the 150 to 155 range, so pretty close to where it actually ended up in the quarter.

Great.

Thanks again.

Our next question is from Matthew Heimermann of JPMorgan.

Your question, please?

Hi, good morning, everyone.

The first question I have was just with respect to -- as you look at '07 and some of the pricing actions you want to take, can you talk about maybe just in market-share terms, how many -- how much of the industry do you anticipate raising prices versus keeping prices static?

Well, I can't -- you're talking about our competitors?

It's --

No, just with respect to you?

So how much do we expect to raise?

How many --

Well, I just -- I'm getting to -- one of the stats you disclosed was you had 20 states where you increased rate on auto.

I think the change was four and change percent with respect to those states, but country-wide it was 1.3% impact.

So obviously that implies that those states -- while 20 states the shares were much lower than average, so that's what I'm just trying to get at is just when you think about how significant rates changes will ber, just the weight of where things were going up versus flat?

A couple of comments just as general -- in general.

First, we're always focused on profitable growth, certain to put profitable first, because we want to make sure we're making money before we grow.

We're always looking at how do we make sure we maintain our margins.

So the numbers that George quoted are individual states, and you'll see a lot of those are in the 1%, 2%, 3% range.

There's not a lot of big price increases.

Every once in a while, in Illinois we took some pretty big increases this year which is -- our volumes off a little bit there, but it was a necessary action for us.

So we try to balance those things off.

Maybe take you up a little bit, though, as you are looking at '08, our strategy's not just about price, it's about value, it's about reinventing insurance, it's about Your Choice Auto, it's about great marketing, it's about a local agent, and so -- but we know we have to be competitive in price.

So we look at where we get our business from continuously and about half of our business comes from what I would say the big, large competitors you focus on.

And about half of our business comes from all other.

The other thousand-plus companies that we're out there competing with on a local basis.

When you look at those top five competitors in the states in which we compete, we have -- and you look at high lifetime-value customers, medium lifetime-value customers, and low lifetime-value customers, George and his team clearly have a strategy focused on the high and medium time -- lifetime-value customers.

And so if you look at our rates -- just our prices and forget all the other things we bring to the strategy -- against those five competitors, we have lower prices about 80% of the time for high lifetime-value customers, we have lower prices about two-thirds of the time for medium lifetime-value customers, and we have lower prices for only about one-third -- and only about one-the of the states and those competitors when you multiply that out -- when you're looking at low lifetime-value customers.

So, it's a little more complicated than just what is the average price is the point I'm trying to make.

We sell more than that and we have much more segmentation, so we try to be really well priced on the high and medium rime -- lifetime-value customers, and we're okay losing the business on low lifetime-value customers, and so that is actually part of the market where you've seen a lot more churn going on as people have been doing more advertising in that lower lifetime value.

So our quotes are up, but our close ratios are down, hence our overall growth is down a little bit this year.

If the rest of the market keeps dropping rates, how much of an rate increase do you think the market -- I guess, at what point would you start to get worried from a retention standpoint that some of those relative rate -- those rate relativities would start moving enough against you that it would cause a drop there?

Well, our retention was off some this quarter and this year, so we're highly focused on trying to get that back up.

It's still very high relative to everybody else, but not what we think is right for us, and so we have a variety of things going on that.

I would say -- I think the price decreases have moderated in the third and fourth quarter from the first half of the year.

Those people who were the more aggressive price reduction companies have seen their combined ratio drift up.

I can't speak to what they will do and all I know is what we can do and George's team is highly focused on profitable growth.

Great, thanks.

Next question is from David Small of Bear, Stearns.

Your questions, please.

Hi, guys, just a few questions.

The first is $900 million of ABS securities, which I believe are second-lien mortgages that are backed fixed-bond insurance, could you just help us understand who the bond insurers are and what your exposure is to each for that piece of -- for that 900 million there?

Sure, this is Rick Simonson.

We've got, as you say, roughly $980-odd million book value of largely second lien subprime exposure, backed by monoline insurers.

They include the names that you're reading about, so [Figik], [Amback], MBIA, FSA, those would be the four that account for over 90% of the backstop.

I want to add the point that just as with our muni bond investment strategy, so with respect to these -- this portion of our ABS, RMBS position, we are not -- we have not gone after these securities because of the presence and the backing of the insurers.

I know there are some investors who chose to look to that portion of the market.

We have not, and consequently the deals come to market, they either do or don't have insurance backstopping.

We underwrite each deal.

We underwrite the underlying collateral, and so we feel it's a disposable item, but we don't feel as though it is an important part of the underlying strategy.

And so those -- but they are -- right now, if a bond -- just to clarify, if one of the bond insurers does get downgraded, would you have to take a mark there because you would no longer be AAA?

The underlying asset takes a mark --

Sure, they will follow the AAA in the market, and the pricing.

Okay.

My second question is just -- is back on just pricing for one second.

You mentioned earlier, I think you said 3% was what lost-cost inflation is going to be.

Just how long do you think it will take you to get prices to a point where you're offsetting that lost-cost inflation?

Is this a one year, because obviously if you're one -- lost-cost inflation will continue to go up, so the longer you don't -- you're not there to catch up, it takes -- right, it snowballs.

So is there end of year '08 or we get into '09 before you're catching up?

I think I would say we're always trying to catch up.

We don't have a target combined ratio that we publish and give out the world, et cetera, on our position.

We look at our competitive position and we set that up so we can make the goals.

I think -- our view is that given the value we offer we can operate at above-industry average returns, which means below-industry combined ratios.

Do you agree with that, George?

Yes, absolutely.

Our combined ratio in '07 was better than our major competitors and it's our intent to always make sure that we maintain the margin.

On the other hand, I think your point has to do the inherent lag of lost-cost escalation versus our ability to get rates.

That's the reason that we've changed the outlook to 87% to 89% for '08?

And then the just last question is just dividend versus share buybacks?

Have you guys thought at all about -- have any thoughts about increasing the amount of capital you return via dividends compared to share buyback?

We look at it all the time.

I don't think you'd expect to see us turn in to a bank, 5% dividend paying entity.

We -- we like the flexibility of share repurchases for our shareholders who decide they want to stay with us, and others who want to take (inaudible).

The fact that when you pay a special dividend instead of buying stock back it's factored into your total return, which everybody uses to measure you performance is not lost on us, but that's not a reason to make an economic choice.

We make -- the economic choice is based on what we think is right for our shareholders and then the Company, and I don't expect you to -- you shouldn't expect to see huge out-of-pattern increases in dividend payments.

Okay.

Thanks.

Could I ask -- we have a number of questions left and we don't have much time, for those of you still on the call, could you just ask one question so we could make sure we get through with the other people.

The next question's from Brian Meredith of UBS.

Your question?

Thank.

Hey, Tom.

Hi, Brian.

My one question, I guess, where do you think we are right now with respect to the Katrina litigation that's going on that's caused some adverse development, and when do you think we can expect to see that subside in your results?

Well, I think you'll see the Katrina litigation go on for years, unfortunately, on behalf of us and some of our customers.

I think there are people who like it to go on.

I think you should expect to try to see that.

I don't expect you'll see huge changes in the reserve amounts due to litigation.

We think we're adequately reserved.

That's about all you can say about it.

tI just kind of keeps going.

Great.

Thank you.

Our next question from Richard Sbaschnig of Oppenheimer.

Your question?

Hi, good morning.

I want to clarify a comment made earlier.

I guess were you guys saying the CMBS market is right now more favorable than the mortgage -- the whole mortgage loan market?

And if so, are you seeing any divergence in terms of delinquencies or loan charge-offs?

No, I'm not making a comment about today's current conditions.

The whole-loan commercial mortgage market for those institutional investors who have plentiful cash to invest, are probably offering the best conditions and terms as we've seen in over five years.

And the CMBS market is -- as you probably know, is relatively ill liquid today, the conduits are largely shut down.

So I wasn't trying to make a relative comparability point as of today's conditions.

Okay.

All right, thank you very much.

Your next question is from Charlie Gates of Credit Suisse.

Your question, please?

One of you made the comment, I believe, that you felt that personal auto insurance pricing decreases had moderated.

Could you elaborate on what you see the industry doing?

Seemingly Progressive is raising rates, seemingly some of your competitors are now in the emergency room, such as First Acceptance and whatever was Kingsway.

So if you could speak to that for a moment?

Charlie, this is Tom.

I don't really have a whole lot more to add, other than what we observe is that the market's a lot smarter than it used to be.

There's much more sophistication.

A lot more of the market is held by publicly-traded companies who are subject to quarterly and annual results, so I think you see a little more discipline in pricing today.

That doesn't mean that with all of the other competitors out there people won't choose to cut prices, but we're seeing it to be less -- fewer price reductions in the second half of the year than the first half.

In the fourth quarter, we saw some of the things you saw.

So we're feeling like the market will look like last year, and we think with our value proposition we have the opportunity to increase prices because consumers are getting value for that, and they've proven they'll continue to pay us more.

So we're feeling okay about it.

I don't expect to see a huge meltdown in the market, though.

Our next question's from Jay Cohen of Merrill Lynch.

Your question, please?

Yes, I guess a bigger-picture question.

Clearly the economy's getting weaker and there's obvious risks that we're heading into a recession.

I'm wondering how you would expect a recession to impact your business?

And specifically on the claims side, what kind of effects -- and I imagine there's several different moving pieces there, but what are some of the important moving pieces that would happen during a recession?

Specifically on the -- Jay, on the claims side, you'll hear people talk about claiming behavior, that people are more likely to file claims because they don't have money to pay them.

That is probably true.

It's really difficult to figure out in doing an analysis as to how much that comes -- how much is there.

You'll see a little bit of uptick in fraud, but we have a good early warning system on that, so you'll see a little bit of uptick in fraud in a recession.

The biggest item for us economic trends and claims is inflation, and making sure that the increase in prices, as that rattles through, we're appropriating managing that and making sure we get it in our prices.

And the inflation today really is -- you see a lot of inflation in food.

That doesn't impact us.

The steel prices start to rattle through on cost -- labor costs, seem to be kind of moderate in the 3.5% range.

Used-car prices were down in the fourth quarter, but -- so we're not seeing a huge amount of inflation pressure in the cost of fixing cars, and as George pointed out, that's 55% to 60% of the total cost.

That would be the bigger economic driver that would cause us to change our pricing position in the marketplace.

About the number of drivers on the road, if unemployment goes up are there fewer drivers, less accidents or is that stretching it?

No, that's true.

Obviously there was -- somebody did a study -- I think was Farmers did a study on gas prices and that had some impact, but unemployment has a bigger because people have to drive to work and if they're not still working they don't drive and so that has an impact.

But the employment numbers, while they are softer in terms of growth, you're not seeing big upticks in unemployment.

So really, the -- the worry about recession is because of a decline in employment growth as opposed to a rapid rise in unemployment, and it's that latter piece which would bring frequency down.

And of course, as you know, we did not see lower frequency in 2007.

Great.

Thanks, Tom.

Our next question is from Paul Newsome of Sandler O'Neill.

Your question, please?

I was hoping you could elaborate a little bit more about the reserve development in the other and the stuff related to the reinsurance recoverables?

Again, that was a $16 million provision and it was for reinsurance uncollectibles, as I mentioned earlier, for a reinsurer that had financial difficulty the UK, but that's all that was, one particular incident.

Wasn't related to any specific type of reserves?

For our discontinued lines it was related to those asbestos-type reserves.

Thank you.

Your final question today is from Mike Phillips of Stifel Nicolaus.

Your question, please?

Thanks for sticking me in, appreciate the patience.

A question for homeowners, how do we think about the impact, I guess, of declining home values, insurance to value and how those things would flow through?

I guess separately, premium values in homeowners as compared to loss-cost?

Well, it's two pieces.

I guess I would say, first, as home -- rising home prices and rising costs of building homes, building materials and all of that kind of stuff, has clearly had an impact on our severities over the last three or four years.

If you look back in the quarter-to-quarter move in severities, it really started in mid-'04, George?

Yes.

But it's too early to tell what the slowdown in home build willing do to material costs and overhead and profit that you have to allow to builders to fix houses that get -- that we have to pay for, so little too early to tell what that will have.

The impact on pricing, it will moderate.

We won't be getting automatic increases in PIA that we normally get homeowners as the values don't go up as much, but that should not impact our profitability in homeowners, because hopefully it'd be offset in that building cost piece that I just mentioned.

Does that get to both your questions, Mike?

Yea, it does.

Appreciate it.

Thank you.

As always we value the dialogue.

We appreciate the effort you make to follow our Company.

We're off and running in 2008, making sure we focus on those four operating priorities.

Our goals are to continue to outperform the industry, to reinvent protection retirement for the consumer, and if we do those two things we consequently will deliver a superior return for our shareholders, and that's our focus for 2008.

Thanks again.

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

This concludes the program.

You may now disconnect.

Good day.