Allstate Corp (ALL) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Allstate Corporation third quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS) I would now like to introduce your host for today's conference, Mr.

Robert Block, Vice President Investor Relations.

Sir, you may begin.

Thanks, Matt.

Good morning, everyone.

Last night we issued a press release detailing our third quarter financial results, as well as the majority of our investor supplement.

These documents are available on the investor relations portion of the Allstate web site.

Today Tom Wilson, Don Civgin, our new CFO, and I will offer some thoughts on the quarter after which we will open up the call for your questions.

To help with that conference, during the Q&A session, we have Judy Greffin, our Chief Investment Officer; Jim Hohmann, head of Allstate Financial; Sam Pilch, our Controller; George Ruebenson, head of Allstate Protection; Ric Simonson, head of Investments.

We ask that you limit yourself to one question and one follow up so that we can accommodate as many inquiries as time permits.

Please note that the following discussion may contain forward-looking statements regarding Allstate and its operations.

Actual results may differ materially.

For information on factors that could cause such differences, refer to our 2007 Form 10-K, the second quarter 2008 Form 10-Q, and yesterday's press release.

We will discuss non-GAAP measures, for which you will find reconciliations in the press release and investor supplements on allstate.com.

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 do not agree with these conditions, please disconnect now.

A replay will be available shortly following the conclusion of this call.

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

Finally, Investor Relations will be available to answer inquiries after the call.

Now let me turn it over to Tom Wilson.

Tom?

Good morning.

I'll begin by providing an overview of the quarter, then Don will discuss liquidity and capital.

We're going to flip the conversation a little bit since that's been one of market's key focal points.

Then Bob will go through the details of the earnings before we open up for questions.

This quarter we faced significant challenges with two severe hurricanes and substantial repricing of credit risk.

But the wisdom of our proactive approach to risk mitigation served us well in this environment and we remain a strongly capitalized company with significant excess liquidity.

Furthermore, the bedrock of our company, our high performing property casualty operation continues to deliver good underlying margins and operating cash flow.

Despite these efforts, we recorded a loss of $923 million for the quarter, reflecting pretax catastrophe losses of $1.8 billion and realized capital losses of $1.3 billion.

As you will see as we go through the details, the third quarter looked a lot like the second quarter, just with more severe weather and increasingly negative investment market.

Let's start with catastrophe losses.

We experienced 35 catastrophic events, including four hurricanes in the third quarter.

Two of those hurricanes, Gustav and Ike, we expect to be amongst the top 10 most costliest hurricanes in the United States.

And as you know, we have been moving aggressively to reduce our catastrophe exposure.

We've been doing that by reducing our market share in coastal areas, purchasing reinsurance, and raising deductibles.

These actions have been good choices since our losses on Gustav and Ike would have been about twice as high without them.

Continuing on with our challenges, the financial markets were extremely difficult with widening credit spreads and lower equity prices.

As you know, the Lehman aggregate credit spread rose from 129 at June 30 to 176 at the end of September, which caused most of the decline in the evaluation of our portfolio.

This reduced earnings and increased the unrealized loss in our portfolio.

As we discussed last quarter, we have been proactively mitigating our risks, reducing our holdings in financial services companies and real estate backed securities, and instituting a series of macro hedges to reduce or cut off the [payout] losses.

These actions served us well this quarter, as Don will discuss, and will continue to be expanded as we go forward from here.

Our decision to protect margins in the property casualty business at the expense of short-term growth provided stability to our overall performance.

The underlying combined ratio of 85.9, that excludes catastrophes and prior year reserve re-estimates, was essentially equal to both last quarter and last year.

This provided excellent returns in strong cash flow to offset the turmoil in the external environment.

One of the consequences, however, was that we did not grow market share despite our continuing efforts to reinvent protection and retirement for the consumer.

Allstate's financial results are explainable, but not acceptable.

We are redoubling our efforts to improve returns in the fixed annuity business, while leveraging the parts of this business that generate good returns.

The net results for the quarter is -- and we did what we do best, we take care of our customers, we protect the strength of our company and executed a strategy that will generate long-term value for shareholders, despite the unprecedented external challenges.

As a result of this proactive approach, we have strong liquidity and capital position.

Don will now cover both investments, liquidity and capital.

Thank you Tom.

Before I start, let me just say that I'm excited to be a part of the team at Allstate.

It's a company with a terrific history and a very promising future, and I'm both excited to be here and fully engaged to help the team shape the future.

I want to cover three main topics, liquidity, capital, and the investment portfolio.

With respect to liquidity, we have and continue to proactively and aggressively manage liquidity.

Our position at the end of the third quarter is strong.

We have $5.4 billion of our portfolio in same day next day cash, that's about 5% of the total, and we have about $33.4 billion or roughly one-third of the total, which is or can become liquid within one quarter even in today's challenging market.

We continue to generate strong underlying cash flows from underwriting and investments.

We have over $2 billion on the year-to-date basis.

Our $1 billion credit facility is undrawn, and we have no commercial paper outstanding.

We also have no debt obligations maturing until December of 2009, at which point we have $750 million.

After that, we have nothing until 2012.

And we have manageable fixed charges at corporate of about $275 million a quarter.

We made the decision to suspend our share repurchase program.

We don't expect to complete it by the previous target date of March 2009.

We will re-evaluate the situation as market conditions develop in the future.

The amount that was remaining under the authorization had been just under $1 billion.

Our priority is and has been to maintain and enhance the strong liquidity that we have.

Allstate also has a strong capital position as well.

We have approximately $5 billion at corporate at the end of the third quarter.

We're using $1 billion of that to fully capitalize the life insurance company.

We have a long history of conservatively managing capital.

As an example, this past year we took a fairly modest approach to share buybacks because of our concerns about the investment markets.

Some of the reasons we have been able to maintain our capital strength include our proactive CAT risk management, which has paid off substantially, Allstate's risk mitigation and return optimization program, as it relates to the investment portfolio, our aggressive push to enhance liquidity over time, and our proactive decision to suspend our share repurchase program.

On top of that, our disciplined approach to maintaining our very strong underlying margins in Allstate Protection have served us well.

That said, we're fully aware that these are unusual times and we respect the fact nobody can predict the future.

So, while we're in a strong capital position, we're also vigilantly looking for opportunities to preserve and further strengthen our capital base during these turbulent times.

With respect to the investment portfolio, our $105 billion investment portfolio remains highly diversified at the end of the third quarter.

We mark to fair value our assets in a manner that's historically consistent.

In accordance with GAAP, all these marks are reflected on our balance sheet, and those marks related to assets that have had permanent declines in value, or that we are not planning on holding to recovery go through our income statement.

Again, this is consistent with our past practice.

I would point out that GAAP does not have us mark to fair value our liabilities, which prevents us from having a completely mark to fair value balance sheet.

We're proud of the transparency of our financial disclosures and have a substantial amount of detail in the press release today regarding the portfolio, but I want to point out a few of what I think are the most important points.

Between the second and third quarter, the total value of our investment portfolio declined by $8.6 billion.

Roughly half of that amount has nothing to do with the investment returns, instead being primarily the result of retirements of institutional products at Allstate Financial, as well as the reduced securities lending portfolio.

Of the remainder $1.3 billion pretax was due to realized losses, of which the largest components were $666 million for impairments and $453 million from change of intent.

The majority of the credit impairments was due to widening interest rate spreads on fixed income securities, reflected in the increase in the Lehman aggregate that Tom referred to.

Significantly, a large portion of the fixed income securities that were impaired during the quarter are still performing in line with our expectations.

The $453 million of intent charges relate to our proactive decision not to hold some assets to recovery.

$392 million of the intent charges relate to second quarter decisions, while $61 million relates to decisions made in the third quarter.

As Tom said, we have been successful in economically reducing our exposure due to our proactive actions and we have sold close to one-third of these assets during the third quarter at prices close to our 630 marks.

The remainder of the reduction in our investment portfolio during the quarter, or approximately $3.3 billion, is due to unrealized losses.

As we have noted in past earnings calls, the unrealized gain or loss position can change meaningfully from quarter to quarter.

Consistent with GAAP and our intent to hold these assets to maturity, these marks do not run through our income statements.

Our ability to hold these assets to maturity is supported by our highly liquid position.

The increase in unrealized net capital losses during the quarter was primarily driven by widening credit spreads and equity market declines, and a further breakdown of these details is available in the press release itself.

During the third quarter, we, like all financial institutions, had to deal with a difficult investment environment.

However, our proactive decision-making over prior quarters has helped us to maintain our strength today as it relates to liquidity, capital, and the underlying health of the investment portfolio.

Now I'll turn it over to Bob.

Thanks, Don.

Let me provide some highlights for the business units beginning with property liability.

From a top-line perspective, our results mirror the trends that we have experienced in the last several quarters.

Net written premium declined 1.5% from the third quarter of 2007 as the economy weighed heavily on new car and home sales, resulting in declines in new business applications in both of our primary lines of business.

In the fourth quarter, we will introduce Your Choice Auto in California, the last of the major states to get this innovative product.

Retention results were mixed and as a result, we had a decline in the number of cars and homes insured at the end of the quarter.

On a positive note, based on observations of competitor pricing actions in the third quarter, pricing remains competitive, but rational in the auto space.

We filed and gained approval for rate changes in 12 states for the Allstate brand, Standard Auto, averaging about 3.8% and in 17 states for homeowners, averaging a minus 11.5%.

The homeowner price reduction implemented in California overshadowed rate changes in the other 16 states, which averaged a positive 3.9%.

Encompass also gained approval for positive rate changes in the quarter.

And we continue to execute our strategy of maintaining price discipline in order to produce long-term profitable growth.

We also saw a nice increase in our specialty line products, Premium Written, as our emerging business efforts gained traction in the market.

Switching the discussion to margins, we recorded a combined ratio of 112.7% in the quarter, compared to 91% in the third quarter of 2007.

The increase of 21.7 points is entirely due to catastrophe losses.

The underlying combined ratio was slightly better than prior year and remains at the low end of our annual guidance, further evidence of the effectiveness of our profitable growth strategy.

This has been an extraordinary year for catastrophes.

With 35 events in the quarter, it brings the total number of events that we've experienced to over 100 for the year.

Among the 35 events estimated at $1.8 billion in net losses, were estimated losses from hurricanes Gustav, worth $459 million, and Ike, worth $944 million.

Estimated net losses from hurricane Ike, which covered a number of states, did trigger $245 million of reinsurance recoverables from our Texas contract.

We estimate that, had we not taken the actions we did over the last several years to address our exposure to catastrophic losses, the estimated cost of Gustav and Ike would have been about double.

Looking at lost cost trends for Allstate brand, Standard Auto, frequency declined by 11.8% for property damage and 13.7% for bodily injury from prior year's quarters.

This represents a significant downward move and one that may not be sustainable, but one that we are watching and analyzing very closely.

Paid severities for property damage fell 0.3% and rose 6.4% for bodily injury compared with the third quarter of 2007.

Both results are slightly better than the last few quarters.

All in, the combined ratio for Allstate brand, Standard Auto, was 89.1% or 0.6 points better than the third quarter of 2007, reflecting our strategy to maintain margins while striving for profitable growth.

Quickly reviewing the loss trends for homeowners.

Excluding catastrophes, we saw a rise in non-cat frequency, partially offset by a decline in paid severity.

The result, a 1.8 point increase in the ex-cat combined ratio at 75.1%.

We will continue to be diligent on price and claims management, in addition to managing our exposure to catastrophic events.

Finally, as we always do, we conducted a bottoms-up review of our reserves for discontinued lines and coverages during the third quarter, and made no material adjustments to the reserves.

Now turning to Allstate Financial.

Net premiums and deposits fell in the quarter from $2.3 billion in the third quarter of 2007 to $1.9 billion for this year's quarter.

We issued no institutional products in the quarter versus $500 million last year.

So, excluding institutional products, we grew premiums and deposits by about 5%, primarily in fixed annuities.

Since we are focused on returns rather than volume, top-line results may be more volatile in the future, depending upon market conditions.

From a profitability perspective, we indicated last quarter that the run rate for operating income would decline substantially from recent historical levels.

In the quarter, we posted operating income of $88 million, a decrease of $59 million from the third quarter 2007.

The decline was due to lower investment spreads as we held more investments in short term, adverse mortality results in life and annuity products, and elevated operating expenses partially offset by a lower amortization of deferred acquisition costs.

We posted a net loss of $196 million as we experienced significant after-tax realized capital losses.

This compares to a $70 million net income from the third quarter of 2007.

We're not satisfied with Allstate Financial income levels.

We are reviewing every line of business, product line, and distribution channel.

Profits will be improved by raising return requirements on fixed annuities to reflect the new reality of credit spreads and higher cost of capital by lowering expenses and by improving investment margins, being fully invested and lengthening the portfolio.

Now this last point we are not doing right now given our negative economic outlook.

Now I'll now turn it back to Tom.

Let me summarize the quarter before we open for questions.

First, our proactive risk mitigation philosophy served the Company well in a quarter with severe weather and poor credit markets.

Despite this, we had a loss to the quarter in our share price decline with a drop in financial company evaluations.

Consequently, we will continue to enhance and expand our proactive approach to risk mitigation to drive both short-term and long-term shareholder value.

Secondly, our property casualty business is maintaining excellent underlying performance and will be at the favorable end of our commitment to shareholders.

We are highly focused on raising returns in Allstate's financial fixed annuity business and will bring the same rigor, aggressiveness, and focus to this just as we have done on hurricanes and investments.

Lastly, we remain financially strong, which will enable us to continue to serve customers and execute our strategy of reinventing protection retirement for the consumer.

We'll now start with the dialogue portion of today's call.

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

Thank you.

Our first question is from Jay Gelb of Barclays Capital.

Your question, please.

Thanks, and good morning.

With regard to capital position, given what's going on in terms of financial dislocation overall in the market for the fourth quarter, can you give us a sense of, as of the third quarter you say you don't need additional capital, what could change that view?

Morning Jay.

Well, first we feel that we are extremely well capitalized at the end of the third quarter, and if you look at the amount of capital we hold that the parent company, then a large portion of that, we believe, is excess to that which we need because we have the individual subsidiaries capitalized at the appropriate levels, particularly given we're going to move $1 billion down into Allstate Life Insurance Company this month.

So those two, the Allstate Insurance Company, Allstate Financial are well capitalized.

We'll be left with around $4 billion at the holding company level, which we believe some of that's excess.

So you could do your own modeling as to what you think will happen to statutory capital, but remember our capital requirements are based on statutory capital, not GAAP capital.

So the big switch in unrealized gains and losses runs through GAAP, but does not run through statutory capital.

Okay.

And then, separate issue for auto loss frequency, there was a significant improvement there.

With gas now back at around 3 bucks, does that trend reverse or does the economy or the economic slow down, is that going to play a larger role?

Well, I think you're right on both things, that clearly miles driven are down.

And the fewer cars on the road, the fewer people that get hurt and have accidents.

That is, of course, in part due to what happens to gas prices, but perhaps the bigger driver is economic conditions.

And with unemployment at 6.1% and most people believe it's headed north of 7%, we think that trend will probably continue as you see it this quarter.

You won't get the same kind of percentage declines.

I mean, at some point people have to go out to the store and do make mistakes.

But we don't expect to see a rapid increase in frequency next year.

Okay.

So more driven at this point by the economy rather than gas prices alone.

That's correct, yes.

All right, thanks very much.

Our next question is from Bob Glasspiegel from Langen McAlenney.

Your question, please.

Good morning.

I was wondering about the funding agreement sales in the first half at Allstate Financial of $4 billion coupled with the short-term investments going up by about $6 billion in the first half.

What drove the funding agreement sales?

I thought normally that's a product used to sort of get a few extra basis points out of an excess capital position.

But when I see that at the same time that you're raising liquidity, I guess I'm a little confused what the overall strategy was behind it.

And you hit the brakes in the third quarter, I just want to make sure there's no sort of hidden concerns related to that product.

Morning Bob, Tom Wilson.

I'll give you part of the answer, then Jim maybe can answer the specifics about the stuff we issued in the first half of the year.

You're correct in the way we evaluate the institutional markets liabilities, which is the way to leverage our skills capabilities and balance sheet to get attractive returns.

Earlier this year when the credit market started to freeze up, we decided we were going to get highly liquid on our investment portfolio to be able to have that money available to pay off the institutional liabilities that were coming due.

In fact, in some cases we called those early because we specifically didn't want to get into the position of having to sell stuff we didn't want to sell to fund liability.

And I've asked Jim to run that book, really as a separate asset liability management cash flow thing and not merge it together and think about using liquidity from other parts of the company or other parts of Allstate Financial sales to fund it.

So what you see there is really trying to run it as a stand alone business, because I believe that those companies that start to move from line to line embed subsidies in it and usually get themselves in trouble because they haven't figured out how all this stuff connects.

So, that's the philosophy we used.

Jim, maybe you want to talk about the specific things we issued in the second quarter.

Thank you.

In the second quarter, basically a couple things that we were doing is we were looking at opportunity that was within the market.

So we saw some opportunities to issue spreads that we thought would likely not be there in the future.

We also had some extendible institutional markets products that were actually being, I guess you would say, being called in the markets or put in the markets.

So, essentially what we were doing is we were doing some issuance that was allowing us to retire some of those, which we have done, we have actually taken down the size of the book by about 25% between the end of the year and where we stand today.

And then we also have built substantial cash as we maxed out the potential liquidations that we would have of those liabilities over the next 18 months.

Our next question comes from Dan Johnson from Citadel Investment.

Your question, please.

Thank you, and good morning.

Can you help us with all the data you provide us, with just the simple walk through of if we looked at the impact of the realized and unrealized losses in the quarter, the impact that it had on shareholders equity, not only on a net basis, but a gross basis and then between the two of those we likely have a tax as well as a DAK shield that were helping offset that gross loss.

Can you sort of walk through those numbers?

Morning Dan, Tom Wilson.

That's a broad and long question.

Let me see if we can attack various pieces of it.

First, the -- as Don mentioned, about half the change in the total value of the portfolio was due to change in market conditions.

So about $4 billion gross of the change in the portfolio was due to -- primarily due to higher credit spreads, a little bit due to lower equity prices.

So that was the big driver of the change in the portfolio.

We did have some writeoffs for credit impairments embedded in there as well.

So, that's the big first piece.

When you look at, then, the components of that, of course, some of it goes into realized and some of it goes into unrealized.

In this quarter, $1.3 billion went into realized and Don took you through the various pieces of that in terms of how the accounting works.

Some of that I just point out is because we actually sold stuff, but the largest portion of that are things we didn't sell that are continuing to perform.

Either we don't think they'll be worth what they're on the books for today in the future, or we don't intend to hold them to maturity.

So, despite the fact that they're still performing as the market values come down, we mark them to market and they go through realized losses even though we still hold them.

Bob can take you through some of how that works through that piece.

When you look at the unrealized portion, that tends to bounce around a lot because, when you have a $100 billion dollar portfolio, as you know, it goes up and down.

It has been -- this was about a $3.3 billion decline in unrealized, which wasn't the biggest loss we've ever had.

I think the biggest loss, Rick, was like 2002.

2004 second quarter we had about a $3.4 billion change.

Okay.

So that said, $3.3 billion's high and, but it is largely due to the change in credit spreads, of stuff we don't intend to hold, and in fact, we intend and need to continue to hold those assets to get the cash flow off them so that they can pay off the liabilities that we have behind those.

You asked about DAK and taxes, so when we, when we write off unrealized, for book purposes, for the balance sheet, for equity, when we take the $3.3 billion reduction in equity, we said, Okay, well, if we actually sold that stuff, we would have some tax savings on that, so it wouldn't be a dollar for dollar loss to equity.

We record that.

And of course we're always looking like other people are to make sure that we actually have the wherewithal to capture those tax savings.

We feel comfortable with that.

We're not in the position of Fannie and Freddie, if that's what you're referring to, where they had a significant portion of their capital was deferred tax, perhaps never to be realized.

So, we're not in that camp.

And the DAK follows really the traditional DAK policy of writing DAK up or down as it relates to future profitability.

So with the $3 billion, and then you look on the balance sheet, it looks like the AOCI component went up by about $1.2 billion, so the difference between the $3.3 billion and the $1.2 billion is DAK and tax?

Yes.

Yes.

And I guess the question is, has that historically been normal to take roughly a third of those losses and put them back on the balance sheet in the form of DAK, which looks like from one of the supplement pages, looks like $1 billion of DAK was put back on the balance sheet.

Well, yes, keep in mind, Dan, that that's going through unrealized, not going through the income statement.

I'm aware, but I'm trying to think, should I be thinking of we had a $3 billion gross and we put a third of it back onto the balance sheet.

Well, yes, you should.

You might say, well why would you do that, just writing up the balance sheet.

The answer is no.

It's because, you have to go back to the change in the value.

Why did the value change?

The value changed because credit spreads went way up, not because the cash we're receiving is any different or the liability payments we have to make in the future are any different.

So, it's really market value adjustment and because we don't mark the liabilities to market, you don't get the opposite side to that.

So I know it seems high, but I think you have to look at the entire picture, which is first start economically.

We still expect to get the same cash we thought we were going to get last quarter and we still expect to pay out the same amount on our liabilities as we did last quarter.

It's just that if you want to sell these securities today, which we do not intend to, then you would get less money for it.

If we were to sell those securities and you were to somehow be able to cash out the liabilities at market value, then you wouldn't have as big a change there.

Great, thanks very much for that.

Then I just have a quick one on, you did a great job of giving us mark to market even adjusting for the OTTI on some of the liquid securities, and I think you got another page where you do a lot of the fixed income securities.

Just on that issue, the $10 billion of mortgage loans at the life company, where would we find the valuation of those relative to the either amortized, I guess amortized cost would probably be the best metric for value versus amortized.

The mortgage loans are not mark to market.

We do look at those, of course, for credit impairment all the time.

Judy, maybe you want to make a comment on the portfolio, the overall size of it, the number of loans we have in it, and how it's performing.

The mortgage portfolio has a little under 1,000 loans in it.

The average balance on the loans is a little over $10 million.

It's highly diversified by geography and property type.

We currently have no delinquencies on the portfolio.

Great.

Thanks very much for taking the questions.

Our next question is from David Lewis from Raymond James.

Your question, please.

Good morning, thank you.

At September 30, you had a total unrealized investment loss of $4.1 billion.

Can you give us a sense of what the further deterioration has been over the past three weeks.

I know it's difficult to get those new marks, but just something rough.

And your recent discussions since you've talked to the rating agencies with third quarter results, how comfortable are they with your capital position today?

David, this is Tom.

First, I'm not going to give you daily mark to market.

I didn't see a daily mark to market as to Judy and Rick and Don, we look at it every day.

If you just look at trends in October, you would see, of course, that credit spreads went way up until about the 10th or so and since the 10th, you've seen kind of the credit spread stuff kind of bounce around a little bit, still very high levels.

You've seen a little bit of light at the end of the tunnel in the money markets in terms of Libor rates coming down the last couple days.

So there appears to be a little bit of thawing.

I will tell you that, of course, then the equity markets have not performed well.

But our macro hedge is way in the money at this point.

Not only because equity prices are down, but because vols are up so much.

So we're feeling pretty good about that tail management strategy.

This is the kind of thing, it bounces around, when you have $100 billion, as you all know as investors, it bounces around a lot from day to day.

We take actions based on what we think, sort of proactively looking for, thinking about the economy, what we invest in, but we don't necessarily make huge changes every day.

David, did you have a second part of the question?

Rating agency.

Rating agency, you will have to ask them.

They get to make their own calls.

Just to follow up, Tom, you are sticking with your underlying combined ratio in the 86% to 88% range and, based on my model, that would imply something close to a 90% underlying combined ratio in the fourth quarter.

Is that just conservatism on your part or do you see some reason why that's going to rise in the fourth quarter?

You know, we try to give the range once a year if, during the course of the year, we think it's changed enough to warrant letting you all know we change it.

But I don't want to start move into sort of quarterly forecast of the combined ratio.

And you can look at the patterns, people, we do that to help give you an indication of where we think the business is going.

By the time we get this far into the year and you can look and see frequencies, we think people can make a pretty good forecast for the next quarter on their own.

Given that, we think we're going to be in that range.

We didn't see any reason to narrow it or change it somehow.

David, this is Bob.

We did indicate that we expect to be at the lower end of that range.

Yes, but even if that's the lower end, that still is going to be your highest period.

But you don't see anything necessarily to change your kind of trend thought there.

This is George Ruebenson.

No, we don't.

Frequencies continue to be very benign.

The question before about do we see a spike.

I doubt it.

There might be some movement.

It's been more volatile than it's been historically.

On the other hand, we've seen over the last 20 years a very, very consistent decline in property damage frequency for a lot of demographic reasons, cars are better, that type of thing.

I would not read anything into deterioration in the fourth quarter.

Typically we have a little higher loss ratio in the fourth quarter because of the weather, driving patterns, that type of thing, but this is very, very moderate.

And we are committed to defending the margin.

You saw as Bob mentioned in the opening comments, we continue to take rates wherever we think it is necessary.

The good news for us is that we are not in the same position as our competitors, we do not have to take rapid rate increases to protect the margin.

But above all, I want to leave you with the idea that margin preservation is the number one priority for us.

Very good, thank you very much.

Our next question is from Matthew Heimermann from J.P.

Morgan.

Your question, please.

Hi.

Good morning, everybody.

A couple questions, maybe one at a time.

This may seem a little, maybe this is the wrong time to ask this given everybody's worried about capital, but given your commitment to the financial, Allstate Financial, why isn't this, with all the distress you're seeing around, potentially the right time to think about either adding more scale or adding an asset management capability or something of that sort to actually further your competitive and strategic position?

Matt, Tom Wilson.

I think, let me go broadly on acquisitions in total, then come down to Allstate Financial.

I think in this environment you will see some good opportunities come along that we believe prices will be lower than they have been historically.

I would say we are interested and look at those.

We're perhaps a little more cautious about stepping out and taking large big bets at this point in time, so we do it.

We look at them all and if we think it's a good price and we think we can do it without moving off our proactive risk mitigation process, then we will do it.

You will see both property casualty and financial companies come to market, I believe.

Property casualty companies are a little easier to value, though, because you don't have the huge embedded investment portfolio.

So when you're buying, whether it's an asset manager or mutual fund company with equity funds, or if you were to buy a life company that has all fixed income, anywhere in that spectrum, given the volatility in the market, it's a lot harder to value those companies today, which makes it a little more difficult.

So we remain focused on it, but a little more cautious than, perhaps, we were, would have been two years ago.

The offset to that is, I think, prices will be a lot lower.

Okay.

And then, just with respect to GAAP versus stat, can you give us a sense of how much normally, I guess, I don't know what normal is, but how much of the market valuation change is actually flowing through the stat balance sheets in terms of life and PC?

The difference between unrealized, are you talking about unrealized?

Well, I didn't know to what extent, whether change intents to hold influence stat as well.

The difference in unrealized and realized.

I'm sorry, the difference between GAAP and stat on unrealized at the end of the quarter is about $186 million after tax.

Okay, that's an easy way to take it.

Can you tell me what the change was, what the difference was at 2Q.

I can get that for you later Matt.

Okay, I'll follow up with you, Bob.

Then one quick last one if I could sneak it in.

Does your change in cost of debt in the public markets affect the marks you took?

Did that create any offsets this quarter?

No, we don't mark the liability side of our balance sheet to market.

So we don't, like the banks where their spreads go up and they report a gain in that, we don't do that.

Okay, perfect.

That was the point, actually, when you look at the whole liability side.

So if you look at the fixed annuities and everything else, none of that gets mark to market either.

Okay.

Perfect.

Thank you.

With respect to Don's remark, the value that he mentioned roughly $200 million, it was in the earnings release.

What it represents, though, is the difference between the GAAP recognized change in intent losses and the losses recognized for stat.

So, that's the difference.

It's not related to the unrealized.

Our next question is from David Small of J.P.

Morgan.

Your question, please.

Good morning.

Two quick questions.

The first is could you just talk us through the capital adequacy of the life company after you downstream the capital that you have talked about in the press release.

And what I mean by that is if we think about, if we have another quarter with marks, is that something we're going to see more capital going downstream, could you just elaborate a little bit?

David, Tom Wilson.

The RBC ratio will be slightly above 300%.

Okay.

My second question, in terms of reinsurance buying, do you think you would think about changing how you bought, how you buy reinsurance given that you had such a large storm this quarter?

I think you said it was one of the top ten ever.

And given how much you spent for reinsurance and looking at the benefits you got.

Well, you know, we're always looking at how we buy reinsurance and where the programs are.

We did get back about $.25 billion on our reinsurance from Ike, which turned out -- which is what we wanted to do, we wanted to cap those losses at a certain level.

Had all those losses been in Texas, we would have gotten even more back.

So we're always looking it move it around.

I would say, though, that in general next year, Georgia is approaching reinsurance buying at about the same levels of protection as they had this year.

The one thing we have been looking hard at, which you didn't ask is, on the nonmodel cats, which has been the bigger driver of our cat losses this quarter, those roll through pricing faster, those tend to move around by region faster, but this is the second year in a row we have had high nonmodel cats, so we're evaluating how we want to deal with that part.

There's lots of different ways you can do that.

You could bring the same tools to nonmodel cats that we brought to hurricanes and earthquakes.

Hurricanes, of course, we have talked about all the different things.

Earthquakes we basically just got out of the business other than fire following in California.

So, we're looking at the nonmodel cat piece and saying, how do we bring more stability to that given we have had two bad years there?

Would that mean in nonmodel cats that some of the tools would be nonrenewals?

You have nonrenewing and buying more insurance?

Certainly we could look at reinsurance, it tends to be pretty expensive when you're at that low a level relative to the risk and the capital we have.

So, we look at it and think we can handle the volatility.

In terms of the other tools, you can obviously decrease your market share, and in this particular case, it becomes more about, much more about geographic concentration in certain zip codes that tend to get a lot of hail and stuff.

But we're not looking at massive nonrenewals like we did in Florida or shifting a bunch of stuff to the windstorm pool in Texas.

This becomes much more a precision game, which you manage your way through over time as opposed to massive changes in nonrenewals, which we've done before.

So it might mean we price our business up and we don't write as much business in a particular zip code.

We may change, try to change the pricing on deductible so it's more attractive for people to take higher deductibles, to put more risk mitigation into their efforts around their home.

So, it's the same kind of basic tools, but you shouldn't expect to see the same kind of massive movement as you would.

I was only pointing out, when you look at catastrophes, in nonmodel cats in the last couple years we have got hit pretty hard, so we're trying to bring the same tools, experience, and expertise to bear on controlling those losses just like we have done on the mega cats.

Okay.

And just back to the life for one second.

Is 300 RBC a target or do you have a target RBC you could share with us?

That's the actual number, that's close to what the actual number.

We have moved $1 billion, or about to move $1 billion.

I don't know if we've executed that trade yet, but that will bring it to 300.

If you look at the other companies, you look at other people's life ratings, you look at the guidelines from the rating agencies, you look at our mix of business, we feel that that's a very comfortable position to be in.

Okay, thanks.

Our next question is from Ian Gutterman from Adage Capital.

Your question, please.

Hi, a couple of capital questions.

First, to follow up to David's question.

The large unrealized loss under 70%, I think it was $1.7 billion, it was over $1 billion, presumably a decent portion of that's inside life company assets.

If that rolled over to realized and, therefore, rolled into stat, could the life company need to have another $500 million or $1 billion sent down down the road?

Well, I mean, if you go through all the assumptions that you made, obviously, if stat capital goes down and if your liabilities don't go down, you need to put more money in.

I would tell you, we're highly focused on managing Allstate Life Insurance Company's capital to make sure it has good, solid ratings and to make sure that we put money in when we're going to get a good return on it.

So, there's a lot of leverage you can pull along the way.

I don't know that I would automatically go to its just a matter of time until some that's unrealized becomes realized for statutory purposes because, again, statutory accounting is, if you're getting your cash in, you don't have to mark that stuff to market, because that's not, we don't mark the liabilities to market.

Okay.

Very fair.

And as far as some of your (inaudible) competitors have raised large amounts of capital to really put the RBC in a very safe place so they don't have to worry about it any more.

You guys, because you obviously have the PNC company and the holding company, the structure, I think, is a little different.

Should I think of it more as you guys don't need to go and take the RBC to 350 because you have the excess capital with the holding company and, therefore, you could do sort of as needed rather than go and overcapitalize the Company, is that sort of how you think about it, as opposed to putting in $2 or $3 billion today instead of just the $1 billion?

Well, we look at capital first and foremost economically and say, how much capital do we think we need economically to support the business?

We also look at it with respect to what the rating agencies require.

And then we look at it, of course, from a regulatory standpoint which tends to be the lowest of those numbers.

And we feel good at the level we're at, in part because of the business itself.

In terms of its mix of business, it's got a large block of life insurance, got long-paid liabilities, so we have got very conservative investment portfolios.

The rating agencies obviously look for some level of support from the holding company, as you point out, and there is a $1 billion capital support agreement from the holding company to Allstate Life Insurance Company, but we don't, we're not using that in this particular case and we don't think it needs, will need to be used.

Okay.

Can I ask what's your sort of minimum target for the parent company capital?

I mean, I guess you have a little bit over $1 billion of annual expense, plus you mention the 900 (inaudible) at the end of next year.

Does that apply or you need $2 billion, or is your normal safety margin that you want to be higher than that?

Well, there's of course no magic number, it changes over time depending what you think about the prospects of your businesses going forward.

Let me tell you how we think about the holding company.

The holding company today has fixed dividend charges of about $900 million a year.

Then we have interest payments that we also take that are couple hundred.

Dividends are $900 million and interest are about $350 million.

Okay.

So interests of $350 million.

And then, of course, we have all the capital we talked about up there, which would be about $4 billion after we fund Allstate Life Insurance Company.

That Company has, the total debt outstanding is about $5.6 billion.

Now, we also own Allstate Insurance Company and Allstate Life Insurance Company, which generates substantial amounts of earnings in and of themselves, which helps support that.

So, we feel like at the levels we're at we have excess capital and we're well positioned if the market continues to stay in its current depressed state.

But these things move around by time.

So I would say I like having that amount of capital there today.

And I probably would keep a little more there today than I would have three years ago when the market was chugging ahead and we're not had any unrealized gains or losses and we got $1.5 billion dividends out of Allstate life insurance company.

Giving that we're now putting that money back in, I feel like we need to maintain more money at the holding company level.

But there's not a specific number that I would say to you, it's static, hang on to this number for valuation purposes.

Okay.

There's just one last numbers question, do you have preliminary statutory capital for the PNC Company for the quarter?

No.

Not yet, okay.

All right, thank you.

Our next question is from Josh Shanker from Citi.

Your question, please.

Good morning.

My first question, I'll probably have a follow up.

Given that Ike particularly and maybe Gustav, did the amount of excess protection you bought on top, was your reinsurance buy is this how you wanted it to work?

Josh, good morning.

You know, we always like it when we get money back.

You know, it worked well in terms of the way we controlled the growth losses, so we feel good about that.

The interesting thing about these two hurricanes is sort of like nobody paid attention to them, because you had the economic turmoil, then you have the presidential election, so nobody seemed to pay attention.

But we are, we are happy with the way it worked.

George, do you have anything you wanted to add to that?

Yes.

The only other thing that I would add, and Tom mentioned this or Bob mentioned it, I can't remember in the opening comments, is that over the last couple of years, in addition to reinsurance, we have taken dramatic CAT management action.

Our exposure in the cat management area is down between 33% and 42% compared to where we were less than two years ago.

When all is said and done, when the estimates are correct for both of those hurricanes, you will see that our losses are less than our statewide market share, even if you go to the gross losses.

So we have been pretty happy with the way our PNL actions have worked.

The answer to the question about the reinsurance, what we wanted to do was cap our losses and $500 million we thought was a reasonable deductible, if you want to put it that way.

Because the reinsurance was put into protect us from anything severe like Katrina that we had a couple years ago.

So, yes, we're pretty happy with the program.

Going into next year, there's a lot of chatter that maybe rises will rise.

Would you aim to be buying the same amount of excess protection in 2009 or is that going to be very much cost dependent?

At the Monty Carlo event where the prices are set for the year usually in reinsurance, there was a lot of conversation about excess capacity.

Whether that still continues or not, I really don't know.

But at that point in time, they were saying they thought the prices would actually decline.

Now how many reinsured losses there will be for the hurricanes, I really don't know.

But we have three year placement.

So, If you look at it on a calendar year basis for '09 we do not see any real increases in the reinsurance cost.

If we do, obviously we think they will be minimal.

But the intent right now is to stay with the same basic program and then see, should we do anything on some of the smaller losses.

Okay, well thank you very much.

Our next question is from [Terry Shoe] from Pioneer Investments.

Your question, please.

Hi.

There's been quite a number of questions about the life insurance subsidiary and in the current environment, I think when people think about risk with Allstate, it's all about the balance sheet and invested assets and a very large chunk of your investment leverage, as well as the, what is perceived as risky assets is in part due to your involvement in the life business.

Can you give over again, you said you talked about your commitment to it, that the returns are not adequate, that you want to bring it up, why you're committed to your life business, which is now more of a fixed annuity book than anything else?

Good morning, Terri.

Let me maybe step back a little bit and -- what we have done is we have said our strategy is to reinvent protection retirement for the consumer.

We defined ourselves as focusing on the consumer and providing to them protection, both in terms of their auto, their house, their boats, their lives, and those things, as well as help them save for retirement.

We think that makes sense for a couple reasons.

One is there is -- we're good at most of those things, despite the fact that the credit markets have currently cycled down.

We're good at investing money.

If you look at our investment results, while we're not happy with what's happened in the marketplace, we feel like we have skills and capabilities to do that.

If you look at the consumer piece of it, of course, selling more things to people improves your relationship and your retention across the board.

And then you also have the demographic trend of people needing to save for retirement, which is a growth opportunity.

I think that actually that opportunity will be increased as we go forward, particularly as you look at their need to have guarantees in safe places and places they trust.

So we're still committed to it in terms of strategy.

The fixed annuity piece, I think, uses about a third of the capital, so it's not the biggest piece of that business.

It is the biggest underperforming piece of the business.

And, clearly with the revaluation of our credit spreads in today's environment.

And I believe what is a higher cost to capital associated with participating in those businesses, at least you're seeing it today in terms of PE's and price to book of other life companies.

You need to clearly drive those returns up and that's what we're focused on.

But we're not going to change our macro strategy based on a bump in credit spreads in what is the worst environment ever.

That said, we will change the way we operate and the way we go to market in that business to make sure we can make money.

Thank you.

Another question, there's been a lot of questions about your capital position and you discuss at length your capital position and liquidity position.

There was one earlier question about rating agencies.

You have very strong ratings and I assume that you have continuous discussions with them.

And you clearly are in, as you said, excess capital position from a corporate standpoint.

Maybe you can just elaborate a bit more.

Is there any threat at all to potential rating downgrades?

What would have to happen to threaten your ratings?

Well, Terri, it's Don.

Let me see if I can add a little color to it.

We do have high investment grade ratings now from (inaudible) and Moody's.

All three of them have been very cautious about the insurance industry for general reasons.

And they continue to be that way.

So the investment markets primarily, but also the catastrophe losses and so forth.

We have met with them recently on regularly scheduled basis, we do that throughout the year.

We have discussed with them our capitalization levels both at the holding company and the two main insurance companies.

We have declared our intent and capacity to fully capitalize the life insurance business.

We reiterated all the information we shared with you.

To be honest, we're waiting for their decision.

I see across the tape Allstate outlook to negative from stable by S&P, I gather it's more a commentary on the general insurance industry than anything specific to Allstate would be my guess?

You had the advantage of reading it before it I did, but my suspicion is that's true.

Okay.

It just came across.

Thank you so much.

Our next question is from Meyer Shields from Stifel Nicolaus.

Your question, please.

It's sort of a comment that I'm hoping will morph into a question.

The bang for the buck that you would get from share purchases now is obviously better than it's been in awhile.

Do you have any sense as to what could trigger a resumption of the share repurchase program?

How should we think about that?

Meyer, could you say that again?

What would trigger?

A resumption of the share repurchase program.

Resumption.

I think increased stabilization in the financial markets would be the biggest thing.

So if credit spreads come down and we start feeling like liquidity is up in the marketplace, some of this is about valuation, but some of this is about liquidity.

For those of you who are involved in the credit markets, it's very sell just about anything these days.

To maintain the kind of liquidity levels we have may not be herculean tasks, but it's been hard.

We work very hard at it, so every dollar coins.

So it's really more a comment about sort of the breadth and depth of trading available in the financial markets.

So as those financial markets opened up, I think you could expect to see us change our view.

Clearly, we think the stock is cheap today.

I mean, you could liquidate a company like ours for more than book value.

We think it is cheap.

But we're really, go back to our philosophy, which is protect the house at all costs.

Okay.

No, that's certainly fair.

Within the P&C business, are you seeing any change in the rate of nonpayment for premium for either auto or home?

What do you mean like --

Nonpayment of premium.

Oh, I'm sorry, delinquencies in payment?

Yes.

Nothing that's substantial right now.

One of the advantages we have in a recessionary time is that, if you want to drive a car or you want to live in a house, you have to have insurance.

It's not like consumer products where you can defer some of these things, so we're one of the first things that people do pay.

What we have seen is people migrating to different policy forms, cutting back a little bit on the coverage and raising their deductibles is a way to manage it.

Okay, thanks very much.

Sure.

Our next question is from Josh Smith from TIAA-CREF.

Your question, please.

Thanks for taking the question, just one quick one.

On page 51 and 52 of your earnings release, you detail some of your risk mitigation efforts.

If I add all these things up, it looks like it's pretty close to zero.

How do you want us to think about the effectiveness of your risk mitigating in terms of reducing your losses, either realized or unrealized, in the third quarter and given that the market has turned south in the fourth quarter, would you expect a similar benefit from these risk mitigating activities in the fourth quarter or should it be greater since you started mid-third quarter?

Josh, are you talking about from an income standpoint?

I mean I added the three areas.

I looked at your risk mitigating, total income generation, and total accounting, all those add up to basically a net zero, so.

I'm not sure of all the numbers you've added up, but I guess here's the way I think about it.

Rick might want to make a comment about risk mitigation as it relates to investment portfolio.

It's always very difficult to determine the benefit of that which you've done at any particular point in time, so you have to decide what you think makes sense and do it.

You do try to keep track of it, but, for example, the fact that we reduced our holdings in banks by 36% from the end of last year clearly has served us well.

Does that translate into a number in the P&L or even in the unrealized losses?

It would be bigger perhaps today than it was, but you can't really say.

You don't put that number down anywhere.

The fact that we avoided substantial losses in Fannie and Freddie because we had less than $60 million in those and other people were taking hundreds of millions of dollars shots.

How do you measure that piece of it?

We do try to look at it from all different ways, but also try to do what we think is economically the right thing to do from a risk and return standpoint.

Now, in terms of the specific programs and the impact that shows up in the balance sheet, Rick are there any specific ones you want to talk about, whether risk mitigation program or macro hedges?

Yeah, I mean the reason we are in the macro hedges is to protect against tail risks.

it's not a dollar for dollar risk mitigation that we're doing, so the stock market has fallen 39% this year, to date.

And we set our macro hedges with the best information we could and analytics we could put together late in the second quarter.

We put together our put and call program and had a strike price that we thought was pretty aggressively down 20% to 25%.

And while you didn't see a heck of a lot of value accruing to that hedge in the third quarter, it has really spiked in the first three weeks of the fourth quarter.

Credit spreads were a target of our risk mitigation thinking, but in actual fact there aren't that many instruments out there that are efficiently executable to protect against credit tail risk.

And so we were only able to put on, I'm thinking $0.75 billion to $1 billion in credit option instruments.

So, obviously we have a big fixed income portfolio and just unable to go at credit that way, which was why we went at credit heavily in the so-called micro or individual security sales programs where we got off about $1 billion, $1.1 billion in the early part of the third quarter before the credit markets really seized the up.

So, if you think about where we would have been today in the absence of tackling these risk mitigation dimensions we would clearly be in less attractive shape.

So we think this was a successful program.

It's our first stab at a combined macro just like in the PML in hurricane land, we learn every year from our success and what we can do better.

So we will continue to reshape these macro hedges as the economics and market forces make them look more attractive to us.

Just to quickly summarize, you're saying that given the down draft at least in the equity markets in the fourth quarter, your solid in the money in your macro hedges.

Yeah.

But keep in mind, I want to come back to the reinsurance question, we haven't made any money on the interest rate hedges we put in place.

But we look at that and say look, if that's what it costs to hedge off risks -- so when you add that up and say well, okay, well that's a negative.

Yes, that's a negative, but we shed the risk, so we're okay with it.

You go to reinsurance, somebody said to George, will you still buy it if it's at the right place?

No.

We start with, do we want the risk.

If we don't want the risk, as long as we get a fully distributive price, we trade the risk away.

We don't try to get too cute and say, for another five basis points, we will do it or we won't do it, that's where people get in trouble.

Some of these things are just risk reduction.

We feel good about them and will continue to do them.

Thanks a lot.

Yes.

Next question is from Brian Meredith of UBS.

Your question, please.

Good morning.

Two questions for you.

The first one on the reinsurance program, just quickly, have you rethought your use of cat bonds given some of the problems that part of the (inaudible) bond has had recently?

Good morning Brian.

I think we're always looking at it, that thing will probably unwind is my guess, and we will have to just buy the reinsurance from some other place.

So economically, we're going to be just fine with it.

We would like to see alternative sources of capital brought into the reinsurance market.

So, to the extent if things like this can make long-term sense, I think you will see us continue support it.

Thanks.

Tom, the second one would be, you talked about the rate environment and you're trying to get some rates, sounds like others are trying to get rate, but the frequency was this quarter, I sense some others will have rate results in auto insurance.

From a regulator's perspective how are they looking at this as far as granting price increases?

Are they looking at underlying trends and it's going to be more challenging to get a price increase over the next six months in auto insurance given the favorable frequency?

Okay, well, assuming that the frequency stays stable, the necessity for rate increase goes away.

Right.

And so commissioners are obviously very attuned to the fact that we have had very high gas prices.

But as someone mentioned earlier, gas prices are starting to decline.

I think there's some political pressure always to make sure that your rates do not get out of whack.

The reason that we have been taking rates is whenever we see an indication and, Bob alluded to it in the opening comments, we're looking at about low to mid-single digit increases.

That does not cause much disruption in the marketplace, nor does it cause much consternation for regulators.

So, by virtue of the fact that we did not take rate decreases going back a year or two years ago, we're in a better position than our competitors who have got to take high single digit or double digit increases to improve their margin.

We're happy with where our margins are.

As long as we can continue to increase it moderately, we don't see any big political backlash.

Great, thank you.

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

Your question, please.

Good morning.

Thank you.

My question is a little on different topic.

The home insurance business, obviously you had a lot of cats, but it also seems to be deteriorating through ex-cat as well.

If you could talk a little bit about that, because to my mind, that was a major factor in the pretty significant improvement of your profitability since like '02.

That seemed pretty permanent, but is competition getting the best of you or what else other factors are going on there?

Paul, it's Bob.

Actually the ex-cat margin went up just slightly from third quarter of '07 to third quarter '08.

And excluding the catastrophe, this is still a weather policy.

And I think others have noted that there have been a little bit more non-car weather related losses in the last, in the third quarter I believe travelers made that comment as well yesterday.

So I don't see that we're getting much of a margin deterioration.

If you also look, I think we took rate increases in 16 of the 17 states, averaging about 4%, so we're pretty focused on trying to maintain margins.

Our fast track results are better than the competition, so from when you look at the whole package, I don't think you can come to the conclusion that that particular line, ex-cat, is deteriorating significantly.

Fair enough, thank you guys.

Thanks Paul.

Our final question today is from Alain Karaoglan from Banc of America.

Your question, please.

Good morning.

First, let me thank you for the very extensive disclosure.

Clearly a lot of people have worked long hours and it's very helpful, so we really appreciate it.

The second question, the question really relates to -- you guys have done a good job in reducing your exposure to large catastrophe events, but your nonlarge event cats are still fairly high.

I heard you're trying to focus on that and reduce it.

If we bring the same concept to Allstate Financial, given their results lately, it seems that it's more akin to catastrophe events affecting the company.

And you've been wanting to improve the ROE of Allstate Financial before we have had such an event.

So going forward, since you want to keep Allstate Financial, should the ROE that you earn on that be a lot higher than what you thought three or four months ago given the volatility, or do you really think with the risk mitigation or what you have learned or what you will bring in you will be able to attain that volatility in the same way you did for the large CAT event sort of?

Well, thank you for the question.

I would say first, I always have high profit expectations, and so return expectations from all of our businesses and certainly, but I have shortened up the timeframe under which I'm willing to let them escalate to the level that is substantially above where they are because of this.

I mean, to a certain extent, you can look at catastrophes and say, we didn't do it, it kind of happened to us.

I don't believe that, we make our choices as we go.

We decide what business sounds right, what investments to make.

And so, to the extent you get surprised, you need to re-evaluate what your returns ought to be.

That should be a higher return business.

I agree with that.

If it's not going to be a high return business it will be substantially smaller than it is today and because we are going to get returns up in that business.

So we will bring the same kind of heat to that as we have the other things.

But I don't disagree.

In fact, I think if you look more broadly, I think the cost to capital for financial services in total has gone up and I think that's why you're seeing the repricing of all the stocks.

We, perhaps, think we have been unfairly swept along with that, but I do think you will see higher cost of capital for financial services in total.

Let me close with just a couple thoughts.

We have a great franchise at Allstate.

We protect and prepare about 17 million households.

We're really part of the fabric of the financial system and we have great strategy, we have good people, we have good capital, all of which enables us to deliver good returns for our shareholders.

We do expect this economic climate to remain difficult, so we will continue to be aggressive and proactive in both risk mitigation and return optimization in our portfolios and our operating businesses.

We are hopeful that the fixed income markets will get back to work, that's about what we need to do today.

Everybody has been stopped and waiting another day just saves you more losses.

It's about time for America to get back to work in the capital markets.

We're hopeful that that will start to improve the conditions as we move throughout this year and into next year.

But, and in that environment, and in a difficult economic environment, as George talked about having options for people to buy things like value policies and everything are being focused on the consumer, really will work well for us and should further improve our competitive position.

Thank you all for participating in today's call, and we will see you next quarter.

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