Allstate Corp (ALL) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Allstate Corporation first quarter 2009 earnings conference call.

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

Later, we'll conduct a question and answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr.

Robert Block, Vice President of Investor Relations.

You may begin.

Thanks, Matt.

Good morning, everyone.

Thanks for joining us today as we discuss our results for the first quarter 2009.

This call is our results for the first quarter 2009.

This call is occurring later than the past as we have moved our earnings release to coincide with the release of our 10-Q.

Last night we issued our earnings press release, the investor supplement, and the 10-Q.

We also issued our slide presentation.

All of these documents are available on our website.

Because this is the first time we're using slide presentation in the call, we would appreciate any feedback you may have so that we can make these conversations as productive as possible for you.

On the call, I'm joined by Tom Wilson and Don Civgin, both of whom will make some comments before we go to the Q&A session.

Also here are Judy Greffin, our Chief Investment Officer; Sam Pilch, our Controller; and George Ruebenson, Head of Allstate Protection and Allstate Financial to assist in the Q&A session.

Please note that our discussion may contain forward-looking statements regarding Allstate's operations.

Actual results may differ materially.

Please refer to our 2008 Form 10-K, our first quarter 2009 10-Q and our most recent press release for information on potential risks.

We'll also discuss some nonGAAP measures for which there are reconciliations in our press release and investor supplement.

This call is being recorded and a replay will be available shortly following the call.

Now I'll turn it over to Tom Wilson for his thoughts on our progress in our quarter.

If you are following along with the presentation, please turn to slide 3.

Tom?

Good morning.

I'll begin with an overview of our results.

Bob will cover the results of our property/casualty and Allstate financial businesses.

Then Don will discuss investments, liquidity, and capital.

As always, we value our dialogue with you, so we'll make sure we have plenty of time for your questions.

In summary, Allstate remains financially strong despite what continues to be a tough environment.

The overall themes are very similar to the fourth quarter of last year, but our results were slightly better in several key areas.

We generated $454 million of operating income for first quarter despite extremely high catastrophe losses.

Our property/casualty business had an underlying combined ratio of 88.9%, which was in line with our full-year expectations.

Allstate Financial and our investment portfolio were adversely affected by the continued difficulties in the fixed income markets, which resulted in $488 million of realized capital losses in the quarter, over half of which is due to noncash charges reducing the deferred tax assets.

In addition, we wrote down deferred acquisition costs by $224 million due to higher expected future capital losses.

As a result, we had a net loss of $274 million for the quarter.

Despite the challenges of a significant number of catastrophes and tumultuous investment markets, our proactive approach to risk management enabled us to be highly liquid and well capitalized.

The property/casualty business had a 96.8% combined ratio, which was 88.9% without catastrophes and prior year reserve releases.

That was within our full-year expectations, 3.1 points higher than 2008's first quarter, and 2.6 points better than the fourth quarter of last year.

Allstate Financial is over the halfway mark in reducing expenses to enable to us to reposition this business in a different economic and investment climate.

Our proactive approach to investing continues to be beneficial for shareholders.

We had good gains on our equity hedges in the quarter.

We lowered our real estate exposure by $1 billion.

We also lowered the duration of our portfolio by 10% or one half a year to protect against the risk of rising interest rates despite the negative impact on operating profit.

We maintained our long credit exposure and still feel confident that this will create value for shareholders, particularly given the high quality of our fixed income portfolio.

We have high liquidity with over $23 billion available to cover maturing liabilities and very modest fixed charges.

Our capital levels are about where they were at the end of the year with substantial resources still available to parent company.

Let me now turn it over to Bob, who will go through the two businesses.

Thanks, Tom.

Starting with property liability results for quarter on slide 4, we rose $6.27 billion in net written premium, a decline of 3.8% compared to the first quarter 2008, primarily reflecting a reduction in overall units.

Shopping has increased as consumers manage insurance expenditures in this difficult economy and continued competitiveness in the market limited premium development.

The upside of increased shopping is the opportunity for new business growth.

The downside is the pressure it places on retention.

For Allstate brands standard auto, lower retention led to a decline in net written premium of 2.4% compared to prior year.

We did see a pickup in new business activity in several markets across the country, but it was not enough to offset the drop in retention of 0.4%.

Retention did moderate in the quarter, though, staying level with the fourth quarter of 2008.

Average premium also contributed positively with a small increase reflective of our disciplined pricing philosophy.

That said, contributions to premium growth through rate increases can be mitigated by consumers' actions to manage their costs by reducing their premiums through deductible changes, lower limits, or dropped coverages.

Allstate brand's homeowners net written premium declined 1.2% quarter over quarter as we continued to proactively manage our exposure to catastrophic loss.

As part of the all other category, Encompass generated the largest percentage decline in net written premium as we take significant actions designed to improve profitability this this business, such as the cessation of business with unprofitable agencies and strengthened underwriting guidelines.

Looking at the margins for property liability, we recorded a combined ratio of 96.8%, an increase of 2.8 points over the first quarter 2008.

The quarter was impacted negatively by winter weather and higher than expected catastrophe loss.

The underlying combined ratio of 88.9%, while higher than last year's first quarter, was within our annual outlook and better than the fourth quarter 2008 level.

For the quarter, catastrophe losses were $516 million or $52 million less than the first quarter 2008, but that difference needs some explanation.

This year's amount included a favorable $60 million adjustment to prior year reserves, associated with Hurricanes Gustav and Ike, while the catastrophe losses in the first quarter 2008 contained an adverse $117 million adjustment to Hurricane Katrina losses.

So on a current year basis this quarter's cat loss of $576 million was substantially worse than last year.

We experienced 14 cat events, two of which are estimated to exceed $100 million each.

Please turn to slide 5.

Looking at the components of loss for Allstate brand standard auto, gross frequency for both property damage and bodily injury increased relative to last year's first quarter.

These increases were driven primarily by winter weather experienced in the Eastern part of the country.

In the west, frequency actually declined slightly in the first quarter 2009 compared to the first quarter 2008.

This slide does show the dramatic decline experienced in the second half of last year.

The combined effects of rapidly rising gas prices, lower miles driven, rising unemployment, and other factors impacted favorably the level of frequency reported.

While we still believe in the long-term downward trend and frequency, the unusual results from 2008 do set up difficult comparisons for the balance of the year.

Auto paid severity results for the quarter were quite modest.

Compared to the first quarter 2008, bodily injury paid severity increased only 2.1%, while property damage paid severity declined 2.4%.

In all, auto loss cost trends generally remained within pricing expectations.

Allstate brand homeowner loss trends continue to reflect pressure from both catastrophic and noncatastrophic weather events.

On an ex cat basis, gross frequency rose 4.6% while paid severity increased 3.2%.

As a result, the ex cat margin rose during the quarter to 79.3%, several points above the first quarter 2008.

While this line of business is inherently volatile, we must remain diligent in terms of maintaining pricing and underwriting discipline.

Quickly turning to Allstate Financial on slide 6, profits were better than expected due to favorable mortality results.

Premiums and deposits were cut about in half this quarter, reflecting the absence of any institutional markets business this quarter.

Our current view of the institutional business is that it does not provide adequate risk to [adjusted] return.

Retail sales increased primarily due to increased deposits at Allstate Bank and sales of immediate annuities.

From a bottom line perspective, we generated operating income of $85 million, down $58 million from the first quarter 2008.

The decline was due to an unfavorable investment margin as we proactively maintained higher than normal levels of liquidity.

Lower asset balances and yields as well as lower partnership also contributed to the decline.

The net loss for the quarter was $327 million, as realized capital losses and the non cash adjustments posted in the quarter of a DAC [on lock] worth $224 million and a deferred tax valuation allowance of $142 million offset the operating income generated.

Operationally, we made significant progress on our Focus To Win program.

We've begun to refocus sales efforts, simplifying the portfolio through the discontinuation of some products.

We've eliminated several hundred positions, thus far producing about 55% of the expected annual savings for the program.

We will continue along this path as we move to strategically reposition Allstate Financial, returning it to an acceptable level of profitability.

Now let's hear from Don Civgin.

Thanks, Bob.

I'll provide some details on our investment portfolio -- how it's changing, how it performs and the strong cash flows that it generates.

Then I'll summarize Allstate's strong capital and liquidity positions.

I'll close with some details on the noncash charges during the quarter.

As the current economic crisis began to emerge in 2007, we proactively took steps to ensure the health of our portfolio through a disciplined philosophy that we termed risk mitigation and return optimization.

This approach served us well in 2008, and we continue to refine it as we manage our way through these challenging markets.

If you turn to slide 7, at March 31, 2009, our investments totaled $93.9 billion.

About 73% of the portfolio was invested in fixed income securities of which 94% were investment grade rated.

Almost 9% of the portfolio was in short-term securities as we actively managed to a higher than normal liquidity position at the expense of generating operating income.

During the quarter, we made meaningful progress toward our stated goals.

We reduced our exposure to commercial real estate by $1 billion and shortened the duration of our portfolio in order to reduce exposure to rising interest rates.

That said, we will continue to maintain a significant exposure to corporate credit in order to capture the appreciation as spreads tighten.

This is a good example of our effort to be transparent about those risks we are working to reduce and those that we're comfortable holding.

In an environment where no one can eliminate or mitigate all risks, we think this transparency is important to share with our investors.

Slide 8 provides the last five quarters of investment income and realized capital gains and losses.

Investment income in the first quarter declined 22.9% compared to Q1 2008 after considering declining income from equities and limited partnerships.

This decline was attributed about two-thirds to lower average asset balances and one-third to lower yields coupled with an intentional shift to short-term assets.

As we move forward in 2009, we will continue to assess our risk return tradeoff regarding our high liquidity levels.

Net realized capital losses were $359 million in the quarter.

While still a loss, it was a better quarterly result than we've seen in previous quarters.

The net loss was driven by impairment writedowns of $620 million, a result similar to the last two quarters of 2008, as well as $143 million of net losses on the valuation of limited partnerships.

Partially offsetting these losses were $418 million of gains taken on long data treasury securities as we intentionally move to shorten the duration of the portfolio.

Unrealized capital losses grew to just over $9.4 billion.

While our unrealized capital loss position continues to be significant, there are several important points that cushion us from the risk this imposes.

First, we intend to hold these securities to recovery.

Second, by virtue of our highly liquid investment strategy, we have reduced our risk of being forced to liquidate these assets.

Frankly, that's the reason we've been trading lower investment income to maintain that excess liquidity.

Third, as slide 9 shows, the fixed income portfolio continues to perform as expected, generating almost $2.1 billion of cash in the quarter, virtually in line with our expectations and contractual terms.

Turning to slide 10, as Tom said, our number one priority for 2009 is to protect Allstate's financial strength.

To do so, we've been intently focused on capital and liquidity.

We finished the first quarter 2009 with $12.24 billion in GAAP equity, down only slightly from year end.

We have over $3.3 billion of deployable assets at the holding company level to support the insurance subsidiary's capital needs, service our debt, and pay dividends to shareholders.

In addition, we continue to have $1 billion of available credit facilities that remain undrawn at quarter end.

Importantly, estimated statutory surplus at AIC remained level with year end 2008 and increased slightly at ALIC.

Maintaining capital strength is paramount to Allstate's continued success.

I feel good about where we ended the first quarter.

As it relates to liquidity, we have stated we will maintain a substantial liquidity position in order to meet customer needs and insulate ourselves from unanticipated asset sales.

At the end of the first quarter, we estimate we could raise $23 billion within one quarter without generating significant losses.

As we continue to grow more confident with our liquidity forecasting processes and results, we will continue to assess the tradeoff between prudent amounts of liquidity and generating increased investment income.

Lastly, on slide 11, there were two noncash charges that impacted results for the quarter.

First, the valuation allowance for deferred taxes was increased by $330 million, of which $254 million went through the income statement.

This increase was due to investment writedowns which are not currently deductible for tax purposes and increased unrealized capital losses on equity securities.

Next, our annual comprehensive review of deferred policy acquisition costs and deferred sales inducement costs was completed during the quarter.

The result is a charge to net income of $209 million due primarily to an assumption of increased expected realized capital losses, which reduced future estimated gross profits.

With that, I'll turn it back to Tom.

Let me finish on slide 12, then we'll take the questions.

Our three goals for 2009 reflect our expectation that the economic climate will remain difficult for this year.

First, we'll protect Allstate's financial strength.

We'll focus on preserving auto insurance margins and reducing catastrophe risks.

Allstate Financial will take the necessary steps to narrow its focus and reduce costs.

We'll maintain high liquidity and reduce the duration of our fixed income portfolio, despite the negative impact on operating income.

Secondly, we need to increase customer loyalty to provide additional revenue growth.

We had a small improvement in our internal measures in the first quarter, but we have more work to do.

Lastly, we will continue to reinvent protection of retirement for the consumer by rolling out new products and services.

This is consistent with our value focus and will continue to differentiate us from the competition.

Now, Matt, I would be happy to take questions.

Thank you, sir.

(Operator Instructions).

Our first question is from David Lewis from Raymond James.

Your question, please?

Good morning, and thank you.

Couple questions on claims severity and frequency.

First Bob, on the auto side, you indicated that the comps are going to be difficult relative to the favorable experience you had last year.

I guess I was under the impression that unemployment probably has a greater impact than potentially the level of gas prices, and given the fact that we're at the highest unemployment levels, shouldn't we see similar benefits because of people commuting less during those busy travel times?

All right.

I think that unemployment does have the effect of creating lower frequency, but there was such a significant dislocation in the trends last year caused by the very rapidly rising gas prices.

I think consumer behavior for a short period of time changed.

That impacted frequency, so I was just making the point that last year we did experience excellent results, and our long-term view of frequency is that it would continue to decline.

On a quarter-to-quarter or year-over-year basis, you never know which way it's going to go.

Just to talk a little about the homeowner spike in the combined ratio up 2.5 percentage points, any thoughts on the severities and frequencies there?

Is that something that's just going to bounce around from quarter to quarter?

Is there some economic sensitively to those potential losses going forward?

David, good morning.

It's Tom.

I would say this our homeowners business is not performing the way we'd like it to be.

Irrespective of catastrophes and everything else, we collect premiums and we're supposed to pay out less than we take in.

We did not do that this quarter.

We have work to do on that business.

I think if you have questions specifically about frequency and severity, George can answer them.

From my standpoint, we have work to do in getting that business to be more profitable.

Did I get your question or do you -- ?

I think we need a little more explanation on maybe why -- is just quarterly volatility?

Is there some economic sensitivity where fire losses are running higher currently, or any thoughts on just the spike in the first quarter homeowner combined ratio?

Okay.

This is George.

Largely, the increase in frequency had to do with bad weather that is not categorized as catastrophe.

Very similar to what Bob was referring to as far as the increase on the East Coast because of the weather.

In addition to that, though, as we mentioned last quarter and the quarter before that, with the declining economy, we are seeing some increase in theft, but it is not enough to actually distort much of it.

So it is really more of the weather-related losses.

If you adjust for the reserve changes that we took in the first quarter, our cat losses in the first quarter were the worst that they've been since the Northridge earthquake in 1994.

So there is a spillover from adverse weather in the non cat category, also.

The inflationary pressure we're seeing in severity is embedded in our pricing models.

However, as Tom mentioned, we're not happy with the performance we had on the homeowner line.

We're taking a harder look at the indications, which as you can probably read between the lines means more rates in that line.

We are committed to make the 87% to 89% that was referenced at the beginning of the year.

Thank you.

Our next question is from Dan Johnson from Citadel.

Your question, please?

Hey, guys, good morning.

Good morning, Dan.

So my question, a couple, please.

The partnership losses, the capital gains and losses -- just to be clear, those aren't actual losses, that's just the marking to market?

Dan, when we -- first, let me set the bar here.

We have $2.5 billion in alternative assets which is spread between private equity, real estate, and hedge funds.

That's in about 294 different funds, so it's highly diversified.

So of course the story is different for each fund.

In total, if you look at the negative impact on our income statement last quarter, it was about $300 million due to all of the -- in various pieces.

The piece you refer to in capital losses, but also through operating income.

So that it is -- but we believe that when you think you have a loss, you mark it down, not when you actually -- you've actually experienced it months before.

Of the $2.5 billion, how much is on the equity method?

Because I think that's where you would, I think, where you'd end up taking the quarterly volatility or is all of that on the equity method?

The equity method is about $1.4 billion on the equity method of accounting.

You're right, Dan, there's a difference between the impairment losses as well as the valuation loss.

So the valuation loss was $143 million.

That's just the mark versus the [NDA].

And that's [CMA].

And the $197 million is the impairment loss through our impairment process.

If I was just trying to estimate the return on the part that gets marked, the $300 million, Tom, you mentioned, is relative to the $1.4 billion?

No.

The $300 million is for everything.

Judy gave you -- there was two parts, right?

There's the impairment which is all stuff.

Right.

And then there's the part that's just on the --

CMA, which is the versus the NDA.

They didn't meet our requirements for impairment.

Okay.

Great.

Thanks for that.

I'll just move on to the other questions, which were the -- a couple companies have mentioned their life insurance capital position at the end of 2009 under a bunch of different scenarios.

One thing that many have mentioned is that they're assuming that they will not have the benefit of the permitted practices that were given whatever, a couple months ago.

What's your view on that?

I'll give you my view and maybe Sam or Don will have theirs.

First, I think the question on permitted practices is do you account for it on a way that's fair and equitable relative to the risks and opportunities you have.

Our view is that the change was actually more reflective of what the true economics of it are.

So sometimes people say it's changed so it must have been some special deal.

It had nothing to do with a special deal.

It had with doing it right.

Some of it depends whether you hold these assets in the general account or separate accounts.

There's really not a whole lot of difference from an economic perspective for us as a total company.

If the practice is to change, we could hold it in a different way which we think would mitigate any impact on the change.

So you're not anticipating the permitted practice will disappear, and if it did, you could offset some of it?

We don't project what the permitted practices would be.

From our standpoint, we think it's right the way it is.

If it was to change, and it may change, we will change the way in which we hold those assets so that we think our statutory capital accurately reflects the risk we have.

Great.

And then finally, of the $1 billion of commercial mortgage reduction, can you split that between, I think you'd mentioned sales and just the normal receipt of or the normal paydowns or conclusions of those mortgages.

Can you help split that out?

Sure.

I can do that.

It's Judy.

On the commercial mortgage -- on overall commercial real estate, we said that we reduced it by a little over $1 billion.

Within that was $533 million of commercial mortgages.

And within that, we sold a little over $100 million, and then we had a small writedown of $34 million and then on the balance were collections.

What we found was that in the quarter, we actually got payoffs earlier than what we expected for the year.

So some of those payoffs are showing up earlier in the year and some of them are showing up earlier than for mortgages that aren't even due this year yet.

Great.

Thanks very much.

Our next question is from Jay Gelb from Barclays Capital.

Your question please?

My first question has to do with Allstate's capital positioning.

I notice on the slide you put up where the GAAP and statutory capital positions are in the first quarter versus year end.

They're pretty much stable.

My question is if Allstate's capital positions both on GAAP and stat equity are lower at the end of 2009 versus where they under 2008, does Allstate need to raise capital?

Jay, it's Tom.

Good morning.

Obviously it would depend on how much lower.

We think we have additional capital, what we would call deployable capital, which is over and above either from a rating agency, regulatory, or economic perspective would be capital we could use for other things.

We felt we had deployable capital at the end of the year.

We think we had deployable capital at the end of this quarter.

The question would be how much it changed.

But we think we're in good shape.

How much of a cushion do you feel you have currently?

We don't give that number out.

Okay.

Second point is on the investment income line.

It was around $1.2 billion in the quarter, and with almost 25% of the portfolio now being in cash and highly liquid securities, what do you feel is a reasonable run rate for that going forward?

I'm not going to give you a run rate since we've been trying to move away from guidance and earnings projections.

The thing we can and do commit to is combined ratio, which as George said, we're sticking with our 87% to 89%.

Obviously, that number will bounce around a little bit, particularly in this kind of environment.

I can tell you what we're looking at doing, which is we are looking to deploy some of those short-term assets into higher yielding assets.

So if you look at the quarter, we bought a number of FDIC-guaranteed bonds, I think a couple billion dollars' worth, because we like the yield on them and we thought they were good solid [credits] and we had extra liquidity.

We will probably continue to deploy some of that liquidity into high grade readily salable but higher yielding securities, which should put upward pressure on that.

At the same time, we are seeking to reduce our interest rate exposure because we believe there's a greater chance that interest rates will go up than go down, and the benefit we've realized inside our portfolio in the last two years in both 2007 and 2008 from declining interest rates -- we don't want to give that back.

So we are shortening the duration of our portfolio, which is why we sold the governments and took $418 million of gains in the first quarter.

It wasn't because we wanted the gains.

We just didn't want the interest rate exposure because those were nine and 10 year maturity bonds still.

They had good rates on them.

So we thought they were overpriced relative to their future value, so we sold those.

That will obviously put a little downward pressure on investment income.

At the same time, we're continuing to maintain our credit exposure.

We like credit exposure.

It's been a good bet for us this year.

It obviously was not a good bet for us last year, but we're thinking rates will come in -- our spreads will come in.

That will be beneficial to us.

So we're looking to deploy more of our assets into and maintaining or potentially increasing our credit exposure, which would put an upward drift on investment income.

So I can't give you an exact number, but I can tell you that we're managing the portfolio for both the economics in the environment we have rather than just letting it sit there and hoping everything gets better.

That's helpful, thanks.

My final one for a quick one, with the application -- new applications up on standard auto, but the PIF down, do you feel that you're priced competitively enough on the standard auto versus, say, some of the direct writers?

This is George.

The uptick in new business is very encouraging for us.

It's the first time in many quarters that we've actually shown growth in the new business side.

One of the problems that we have is that over the last several years, we've been declining.

So the way the math works is what's available to renew has dropped, which will be hard for us to show quarter over quarter unit growth for a short period of time.

As far as our price competitiveness, we believe that we are.

The thing is, it's very difficult to say are you competitive with Geico and Progressive?

I'm assuming that's what the question is.

In specific places, we find we are able to take business from both of those, so we believe that our price competitive position is pretty good.

In addition to that though, we don't believe that the product is a commodity, which is what the two of them do promote.

They talk about price only.

We believe that the value proposition that we offer is enough for a lot of people to join us, which is why we're starting to see new business growth.

In addition, remember, we have 25 million customers.

We have 11% of the market.

Progressive declined in market share over the last two years while we held.

Geico has grown, but I'm starting to see that they are opening store fronts.

This morning, as a matter of fact, I heard about a Geico agent that had an ad on the radio.

I don't know if they're seeing some diminization of their ability to penetrate with just that model.

I don't know, but I do know that they have 7% of the market, and we have a vast opportunity to grow despite the fact that they're making inroads.

Maybe make a couple of more general comments.

A decade ago, we made the commitment to sell both through our own captive agencies and the 30,000 people who live in those local offices and provide local service.

We sell direct over the phone to our own call centers and over the web and through independent agencies.

So we compete across the broad breadth of distribution vehicles and have cost structures comparable to other people in those.

When you look at our price position versus Geico, you'd see -- we're about sometimes we'd beat them, sometimes we lose to them, so I think what George said is completely accurate.

If you look at the overall price environment, we've been in the, I would call it slow and steady camp, which is we take increases in -- raise prices when we think we need to, when we don't need to.

When you look at our average premium, it's been flat basically.

New look at when's happened in the industry, this is now the sixth quarter in a row where there have been more increases than decreases by our competitors in total.

That includes all of the big carriers you were talking about.

Most of those are in the camp of 3 to 1.

Three increases for every decrease.

So we feel like our competitive position and long-term position that George talked about makes sense.

You do see increased focus on price today from a marketing standpoint.

Currently obviously in this environment, that's obviously an issue.

We've changed some of our marketing so we have a higher affordability, and we've made good progress on people on a relative perception of our price position would be the way I describe it.

Price position is what it was and is what it is and getting better as people raise prices.

We feel okay about where we're at.

We have a long-term view to this rather than jacking prices up or down or going for the big increase in one particular quarter.

Is that helpful?

Yes.

Thanks very much for the answers.

Your next question is from Ian Gutterman from Adage Capital.

Your question, please.

I actually want to follow up on the new business.

George, can you make characterization of what customer type that new business is being driven by?

Is it across the board or more spike to the value type areas?

Generally, we still sample well across the board.

We have seen a migration to people taking the lower priced options within Your Choice Auto portfolio.

When we fist introduced Your Choice Auto four or five years ago, the market obviously was much more robust than it is now and a lot of our customers are migrating to the Platinum.

We're seeing more people go to the Value, the Silver, the lower priced one.

In addition, we introduced a product called Money Saver in Ohio a couple months ago.

It's about 10% lower than the Value product, and we're seeing pretty good acceptance by the market there.

What we're also seeing, though, is that by virtue of the fact that people are not buying additional cars, it's difficult for to us grow to add cars, as the fleet starts to regenerate itself.

You'll get normal rate increases.

As far as the shopping, the public -- we're seeing that across the board, and we're doing pretty well.

What we've decided, though, that we want to accentuate our attention to what we call high lifetime value customers.

Those are multicar customers with the homeowners.

We're looking at increasing in the third and fourth quarter -- substantially increasing the discounts we give to those customers on both a new business basis to attract more, but also on a renewal basis so we can increase the retention Bob alluded to in his opening comments.

What would be the price difference between a Value and a Platinum roughly?

I think it's 20% when you go up from Value To Platinum.

It goes from to bottom to top.

I believe it's about 20%.

And what we do, though, just to be clear -- each of those products is priced to the correct margin.

Sure.

It's not like we have new business on sale on any of those.

Right.

So if people migrate down, we might not get the premium development, but it does not have any adverse impact whatsoever on the combined ratio.

Right, right.

I was thinking more about top line.

I guess what I was wondering is on the places where you're losing some retention, are those coming out of the Platinum customers and the new customers are coming in at Silver and Value?

So even if you have flat PIF you might have pressure on premium dollars?

We are.

We are seeing people within our portfolio, though, staying with Allstate, opting to go from Platinum down to Value.

Endorsements are up considerably on the Value product.

In addition, I mentioned this, I know, in the last quarter that people are going to higher deductibles and dropping some coverages.

So there will be pressure on top line for average premium development.

Okay.

But again, because car sales are down 40%, what you're not seeing is the normal development of premium that you get when new cars are added to the fleet.

Got it.

That makes sense.

Could we come back to you, Ian?

It's about the fourth question.

I'd like to move on and give some other people questions.

Sure.

Our next question's from David Small from JPMorgan.

Your question, please?

Good morning.

Hey, David.

If you look at the statistics, it looks like overall for the industry, the captive agencies overall continue to lose share.

Do you think that you need to rethink about how you sell your products, put more focus on other channels in order to restart growth at Allstate?

David, we sell through both our own captive agencies.

We sell through independent agencies and we sell through direct.

Our direct business generates a reasonable proportion of our new business for us.

It's a growing business.

We have that fully integrated, though, with our agencies.

We might bring them in through an Internet sale or bring them in through a call center sale and then they might hook up with our local agencies and they sell them other products.

They give them local service.

So we don't break it out by channel, because we think the right way to think about it is by customer.

They can come to us any way they want.

So we think we have all the tools and we're active and competing.

If you want to call us and buy over the telephone, you can do that, and we sell a number of policies each and every day by that.

You can call a local office and buy it over the phone, which is a mini call center.

You can call a big call center, which is comparable with Geico.

So we're competing across all those fronts already.

Is this anything different you need to do in order to get the PIF growth moving upward?

Well, obviously, we always knew things we'd like to do differently.

The biggest thing is we need to raise our customer loyalty, which is our second goal, which is retention.

Our retention was flat this quarter versus last quarter, but it was down from this point last year.

Some of that we can write off to the competitive environment, people trying to shop more and that kind of stuff, so you see our new business up.

We still need to improve our customer loyalty.

Customer loyalty is a measure of current customer satisfaction, intent to renew, and willingness to refer to others.

We have a series of programs all across the company that go everywhere from products like Your Choice Auto to callback programs to incentive programs where it's now -- customer loyalty is the measure under which we put additional money into our employees' 401(k).

It's not profit, it's customer loyalty -- as well as a greater accountability and different standards throughout the company.

So George and his team are pushing hard on that.

We've made some progress in the first quarter.

We have more progress to go.

That is the fastest way for to us grow, rather than going out and cutting prices -- giving up margin when we provide a good value as it is.

Thank you.

Our next question is from Alison Jacobowitz from Banc of America Merrill Lynch.

Your question please?

Thanks.

Most of them have been exhausted.

I was wondering if you could give us an update on California auto.

I think with everything you said, I don't think I really heard it.

Did you -- can you talk about what impact the economy will be having on claiming behavior other than the miles driven?

Are you seeing any changes there?

This is George again.

With regard to California auto, I think you're aware that we had a mandated rate decrease in the middle of last year.

We are trying to secure some rate increases there, but the overall effect has been we are growing new business in California considerably.

We are still comfortable with the margins in that business.

Your second question, having to do with claiming behavior, could you repeat it, please?

I wasn't sure what it was.

What the economy may be doing toward claiming behavior, other than the less miles driven and everything else you already talked about.

Are you seeing anything else?

Yes.

When unemployment rises, typically, we see an increase in thefts.

We're seeing it both in thefts of auto and homeowner thefts.

We have about a 15% increase in special investigative unit referrals.

These are suspected fraud.

It's a fairly common thing that, again, happens in this type of economy.

We're taking many proactive approaches to it.

Where we think that there is a blighted area, for example, where there's homes that are going into foreclosure, we send people out to make sure that the home is indeed occupied.

If it's not occupied, then we have the ability to cancel it immediately.

We're being very careful on the type of new business that we're taking, so we're not just watching the economy create some issues for us.

We're trying to get ahead of the curve.

Again, we've done this before.

It is not putting significant pressure on us, but it does impact claiming behavior, yes.

Thank you.

Our next question's from Tom [Alacap] from Perry Capital.

Your question, please?

Hi, can you help us with downgrades to fixed income securities in your investment portfolio?

I'm thinking specifically of structured products?

Tom, is that structured products in total or is there a particular category?

Well, the downgrades to RMBS have been coming for several months now, and it looks like CMBS securities have just started being downgraded by some of the rating agencies.

I'm just wondering how we should think about that in the context of the risk based capital requirements?

Judy can make comment.

If you go in the investor supplement, we do break out by security type the credit rating of the various things.

You will see that the RMBS securities, you're right, have had a lot more downgrades on them than CMBS.

Also, CMBS, we own much more AAA stuff.

Right.

You're right.

The structured products are beginning to see a lot more downgrades for the rating agencies as they do their work, and they go through.

We've seen quite a bit in RMBS.

We've seen some in the CLO/CDO portfolio as well as in CMBS, but we think that they're still doing their work across the board.

So we will be impacted by the downgrades.

We have been impacted by the downgrades.

We look at our portfolio from a fundamental perspective still and do our own work around the portfolio, taking into consideration certainly the impact that the downgrades have on RBC -- but also doing our own work, stressing the portfolio in the structured assets.

And you can see that the impairments this quarter on the structured portfolio were not that great.

I'm just trying to wonder how to think about the RBC ratio and now I see now if you're still near the 300% target given that statutory surplus was up versus last quarter.

However, I imagine that the risk-based capital charges primarily because of downgrades is going to be up a bit.

Tom, we feel all right about our capital position in Allstate Financial.

Under Illinois law, we're not really allowed to talk about what the RBC ratio is, either whether what it is today or what it's targeted.

That's Illinois insurance law.

You can get it off a variety of stuff.

We feel good about where we're at.

Obviously look -- we don't do -- we do capital forecasting looking forward, right?

We don't say how did we do at the end of March.

We look forward a quarter, we look forward a year.

The ratings drift, I think, is what you're after.

We obviously factor into everything we do, and we have asset allocation guidelines and limits as to how much we want to have in different rating categories, and so we make adjustments for that.

So for example, if you look at our total portfolio, the entire company, and you look at the below investment grade securities, you would see they total to about $4 billion, and you would see that a year ago they totaled to about $4 billion.

There's obviously many different securities in there and we buy and sell stuff.

If we think it's going to get downgraded, and as Judy said, if we think it's a good trade and it's headed down, we sell it.

If we think it's a bad trade, and it's headed down, we might sell something else.

So we're constantly managing both the economics of our portfolio and its impact that it has on statutory capital.

One final question on capital, if I could.

Given that the final $250 million capital contribution from AIC to [Lifeco] was made this quarter, what sort of ability do you have perspectively to dividend capital from AIC to the Lifeco?

We don't have to dividend just from AIC to Lifeco, because we have capital at the parent company.

So there's plenty of places we can get money.

And we think as Don said earlier, we have plenty of capital both at the individual subsidiary levels and its parent company.

So it doesn't have to come from one place.

We have $3.3 billion of assets, which are unencumbered as a parent company, which we could push to choose whatever we could push to choose.

Great.

Thank you.

Our next question is from Matthew Heimermann from JPMorgan.

Your question please?

Good morning.

I wanted to follow up on just the preferred portion of your customer base.

But how much of the retention -- actually, here's the question.

With homeowners decreasing, I would assume crosshold homeowners/auto is a high percentage of the preferred portfolio.

How much of that is actually driving the auto retention, if it is at all?

First, you'll see homeowners retention is actually up.

And so, which is because we think we're well priced and we drive good claim service, that stuff, so there's lots of reasons.

George may have the percentage on crossline sells.

I don't know how much of that we give out.

I would tell you that in the places over time where we've substantially reduced our homeowners book, we've maintained our market share in auto.

So for example, in Florida, we used to have a double digit market share in homeowners.

Today we are down below 3%.

Yet, our auto share has actually gone up.

So we've been able to -- and we haven't changed our focus.

Obviously, some of those customers we don't sell homeowners to, but we broker homeowners business to them.

So it hasn't -- the catastrophe management programs haven't decimated our auto business.

It's obviously some challenges for you when you call somebody and they've been your customer for ten years saying I'm not going to insure your home anymore and company x is available to do it.

It doesn't exactly make them say Jesus, it's the best thing that ever happened to me.

On the other hand, we have managed -- we have good prices, good products, good relationships, and it serves them well.

The other thing is that the vast majority of the very draconian actions that we've had to take to reduce PML are actually behind us.

We're still nonrenewing in certain places, Long Island specifically.

We are pushing more to win pools going to higher deductibles.

So if you look at what we have to do in the future and the impact that's going to have on crossline sales, we have less to do now than we did two years ago.

The other thing is when we did nonrenew all of these customers, we allowed our agents to broker that business to another carrier.

That was very successful in allowing our agencies to keep the customers.

So it hasn't really been a big problem for us.

Okay.

This is -- I wanted to ask another question, but Tom, you said retention was up.

Based on the stats you give, looks like sequentially retention was down modestly and PIF fell by about 1%.

In homeowners or auto?

First quarter 2009 versus first quarter 2008, homeowner retention is up.

It bounces around a little bit.

You're talking about fourth quarter 2008?

Yes.

I was looking sequentially.

That's fair.

Just wanted to make sure.

Some of that's related to when the policy terms are.

A lot of people buy houses in different periods so that terms don't --

That's fair.

I just wanted to make sure that I wasn't completely missing something of what I was looking at.

The other question I had was with respect to the DAC assets still on the balance sheet, can you talk about what the testing will be with respect to how long you can hold that?

I mean, clearly, I believe if you mark your investment portfolio up, some of that will start to come down, but let's just say markets don't change.

How long can you actually hold that on the books?

Matthew, we completed the annual unlock here in the first quarter, and we will continue to look at it going forward.

We look at a variety of different things.

We'll look at investment returns, gains, losses, expectation of those things -- crediting rates and so forth.

There's no answer to the question how long can it stay.

I think so long as the profitability of the products that the DAC is related to continues to be maintained, it will amortize under the schedule you'd expect as the assets wind down.

I would say relative to some other companies, remember we sold our VA business in 2006.

And so when you look at the underlying assets that generate the profitability that Don talked about, they're not as volatile as assets that underlie a variable annuity in terms of their ability to generate income for you.

Is it fair -- with respect to that duration, that'll be the -- I guess that's probably the proxy for the life.

Is the duration associated with that DAC -- should we think about that being longer or shorter relative to the duration of your portfolio?

Well, first, a lot of times we write the DAC off not necessarily related to the duration of the investments underlying it, but related to the duration of the liability.

So we look at the surrender charge, and if it is a surrender charge of five or seven years, you like to have most of your DAC written off by the time you are get to that surrender charge.

It really is the liability -- the existence of the liability that drives your ability to make profit as opposed to the underlying asset.

So changing the duration on the portfolio could have the impact of lowering your future expected returns because you don't think you're going to make as much money.

That is part of what caused the writedown in the first quarter was we just looked forward and said we don't think we're going to make as much money on our investments.

Therefore the total profit we're going to make over the life of these liabilities is down.

Therefore, we need to write off some of the deferred charges we incurred for selling those products.

Thank you.

Our next question is from Brian Meredith from UBS.

Your question, please?

Good morning, everybody.

A couple questions here.

On the reinsurance purchasing, you mentioned that you may need to purchase some additional reinsurance here.

The $2 billion in tickle layer does actually go away.

I guess any intentions to actually replace some of the Willow Re northeast cover as well as you look at the tickle layer?

Any thoughts on buying additional cover there just to protect against nonpayment risk?

Sorry, Brian.

You're talking about first -- we're into Allstate Floridian?

Yes.

And the tickle layer is the --

I'm sorry, that's --

I know where it's from.

I just want to make sure everybody else knows where it's from, which is the upper level of reinsurance provided by the state to companies like Allstate Floridian, which is a separately capitalized company.

The question around the industry today is, will it be available and actually is it financially reinsurance because there's not a whole lot of financial capacity behind that.

With that background, George, maybe you'll want to answer what you're doing there?

Tom mentioned several years ago we had a 10% and we're down to around 3%.

It's still our intent to reduce our exposure in Floridian.

It's also our intent not to give more money to the parent to the Floridian company.

We under the market looking for protection that we need to maintain the viability of the company there, but I don't know personally whether the tickle layer will be there or not, but we want to protect ourselves.

The specifics and what we're going to do with Willow Re hasn't been decided.

Willow Re is small.

It's 5%.

Greet.

Tom, another one just to think about here.

You're positioning the portfolio now for higher interest rates and obviously the thought of inflation potentially going forward.

How do you protect your actual severity, your auto book from potential inflation coming forward?

Other than pricing, which would be reactionary.

Obviously prices -- you should charge people what you think the costs are going to be for the services or things you're going to fix for them are.

We obviously do that.

The bigger thing is the work that George started on four or five years ago when he was running claims and I was back at Allstate Protection which was we could see that we were headed -- we had the risk of going from a potentially benign inflationary environment and costs to a more -- an environment like you described with rapidly increasing costs.

That was why we put next gen claims in.

We spent the better part of four plus years.

Last year was the year in which we finalized the massive part of the implementation.

You're always making these things better and doing new things to them, but it was a massive change effort, really, over the last two or three years operationally.

We think that what positions us to use the data, use the -- that we get.

We've changed processes.

We can settle claims faster.

We have much greater visibility into that which we do, which we think positions us well if inflation takes off.

So in addition -- to the answer is, though, you want to pay what's right.

You don't want to pay too little, you don't want to pay too much.

You want to pay just right.

In an inflationary environment, you would you have to pay more, but given our -- the way we do pricing and the way we've been into the frequently adjust, always be there, don't get behind on it, we don't think we're at great risk this.

If you look at what our results are for the first quarter, our PD severity was down.

Last year was fairly moderate.

We keep track of all of this with a lot of lead indicators as far as the price of goods that we have to purchase.

In addition, a lot of it has to do with the labor rates that we get in the body shops.

We have 4,000 pro shops, preferred body shops where we have a lot to say as far as what our ability to settle claims is.

If you look at our history, we have always outperformed on both auto and homeowners relative to the industry.

So we feel comfortable where we are.

Okay.

Thank you.

Our next question is from Bob Glasspiegel from Langen McAlenney.

Your question, please?

Good morning.

George, you've been holding on to the interim position for five months.

I guess Tom this might be a question to you.

At what point does that become a permanent position?

We're out actively looking for a new head of Allstate Financial.

George is just working overtime these days.

Okay.

I'll let either one of the two of you take a shot at answering this one then.

Have we made a definitive decision that we want to maintain our position as a manufacturer of life insurance products?

I understand the strategic need of maintaining distribution to your customer set.

But if you look at the historic returns in this business as reported, they never really got to your target.

And if we put the all-in charges to what this has done to your balance sheet, as far as straining you, not allowing to you buy back stock at what I'm sure you think is very attractive levels, it looks like whatever arrow we target that you had historically was probably even too low.

If you want to stay and manufacture this product, seems like you should be shooting for high teens type returns.

Have you made the definitive decision to continue manufacturing life products?

Bob, thank you for the feedback.

We're anxiously waiting for you to put aggressive buy on us so our stock will be higher.

Then we won't feel as badly about not buying it all back.

In terms of our life business, really have to component.

You specifically said life products as opposed to life and retirement products.

The -- obviously, the current turmoil and meltdown in the marketplace has destroyed many economic models and businesses that people thought were attractive.

Clearly, writing as many fixed annuities as we did was not a good proposition for our shareholders.

We backed off that about three years ago.

If you look at the sales we've had on fixed annuities over the last couple years, it has been steadily down.

I wish I had backed off faster and harder.

That said, I look at our customer base, and I think they will need a place to save that is stable in return.

Might not be fixed annuity that's currently done, but we have the skills and capabilities to take a shot at can we create a new model in that business which generates good returns.

In the life business, it has generated good, stable returns.

It continues to generate good stable returns, and we feel good about that particular business.

So I think it is a question of how can we reinvent?

We have said, we're not wedded to having to make everything.

If you look at what we did with variable annuities in 2006, we didn't like the risk return tradeoff, so we sold that business.

We got about $600 million for it.

We'd be writing a check for somebody for a giant number today if we still had that business.

I didn't know it was as good a trade as it was.

If it was, I probably would have made it sooner.

The point, we're not wedded to having to do anything.

We manufacture if we think we can make money at it and it's a good return for our shareholders.

If we don't, we don't.

We do the same thing in the property/casualty business as George was talking earlier about homeowners in Florida.

Thank you for the thoughtful answer.

By the way, a definitive vote for your new format and disclosure and timing.

I appreciate it.

Thanks.

One last question, Matt, then we'll wrap up.

Our final question is from Josh Shanker from Citi.

Your question, please?

Yes, thank you.

In the prepared remarks in the press release, you stated that your internal measures of customer loyalty are up.

Give than retention's down, how do those two things -- can we talk about what these internal measures are?

Well, the internal measures we obviously go out and sample our customers.

We do measure by all the way down to the front line employee in claims and the same thing with our agencies.

We have an agency loyalty index that we do all kinds of sampling on that.

Our numbers are up.

You might say geez, why is your loyalty up and retention down?

First, one quarter does not a change in consumer behavior make.

Second, I would say that, you have a very -- people are shopping around a lot more now, which is why you see more new business.

So what would it have been had customer loyalty not gone up is an imponderable.

All I know is if we make them happy, if we want them to renew and if they'll tell our friends about us, we will have more stay with us.

So we made some progress.

Josh, I don't want to you think I feel like we've cracked the code on that one yet.

We still have more work to do.

We're working very hard on it.

It's something George is on top of daily.

And so in the long term, that will drive, I believe, higher retention, which will drive higher growth.

You move that retention number by 1 point -- that's 1 point of growth that pays off forever.

Okay.

Thank you.

And unrelated, any ballpark answer to this question?

What percentage of the OTTI marks you took in 2008 were related to interest rate movements and what percent were related to credit problems?

I'm not sure I can tell the difference.

You're going to be implementing [FASB 115-2] in the coming quarter.

I'm sure you've done some work on it.

What do you think the outcome is in terms of the addback to retained earnings?

Question behind the question.

We are going to implement 157 and 115 in the second quarter, but we're still working through those calculations.

No preliminary remarks?

No.

Thank you.

Let me close up by just saying if you go to slide -- just finish up.

We're done with all the slides, but a couple of thoughts.

First 2009 saw really a continuation of what we had throughout last year, which is a difficult operating environment.

The economy's obviously unsettled, financial markets were tough, weather was tough for us.

That said, our proactive approach continues to serve us well.

We keep folks on operational excellence, customer focus enterprise risk management, and capital strength has worked well for us.

That will continue to be the things we focus on.

Allstate Protection did post underwriting profit for the quarter with an underlying combined ratio that was within our annual outlook and we do need to generate profit growth.

We're focused on it, but we're not going to give up profits to be able to do that.

Allstate Financial did take steps to getting a more flexible cost structure, but we have more work to do there as well.

Investments actively manage our asset allocation by reducing our exposure to commercial real estate and rising interest rates, and we do want to make sure everybody understands we are strategically positioned to benefit from credit spreads and we continue to take that risk.

The portfolio continues to generate a lot cash flows.

Don talked about $2.1 billion in cash flow, which is what we expected.

We remain highly liquid, which gives us the flexibility to hold assets that are in an unrealized position so we can get them to recovery, and that as Julie likes to call pull to par, rather than being forced to sell assets into illiquid markets.

Lastly, our capital position remains solid, both on a GAAP and statutory basis.

So we remain focused on our three priorities for the year -- keeping Allstate strong financially, improving customer loyalty and reinventing protection retirement for consumers.

Thank you for your interest in Allstate, and we'll see you next quarter.

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

This concludes the program.

You may now disconnect.

Good day.