Allstate Corp (ALL) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation fourth quarter 2009 earnings conference call.

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

Later, we'll set up the 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.

Mr.

Block, you may begin.

Thanks, Matt, and good morning, everyone.

Thank you for joining us today for Allstate's fourth quarter 2009 earnings conference call.

As always, Tom Wilson, Don Civgin and I will make some opening comments providing color on our fourth quarter and yearly results for 2009.

Following our comments, we will have a question-and-answer session when Judy Greffin, our Chief Investment Officer, Joe Lacher, President of Allstate Protection, Sam Pilch, Controller and Matt Winter, President of Allstate FInancial will join us.

During this session, we ask that you please limit yourself to one question and a follow-up so that we can hear from as many of you as time permits.

Last night we issued our press release and the majority of our investor supplement for the fourth quarter.

We also posted a slide presentation that will be used this morning during our presentation.

You can locate these documents on our website.

As noted on slide one, this discussion may contain forward-looking statements regarding Allstate's operations and actual results may differ materially.

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

We expect to file our 10-K for 2009 by the end of February.

Also, this discussion will contain some non-GAAP measures to which there are reconciliations in our press release and on our website.

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

Christine and I will be available to answer any of your questions that you may have once this call is completed.

Now, let's begin with Tom Wilson.

Good morning, and thanks for your continuing interest in Allstate.

I'll begin with my thoughts on our progress, then Bob will go through the business unit results, and Don will cover investments and the balance sheet.

We entered 2009 with three priorities, that was to keep Allstate financially strong, to improve customer loyalty and to reinvent protection retirement per consumer.

We made outstanding progress in the first two goals, and while we made less progress on reinventing, we did lay out a foundation for growth.

Let me go through each of these priorities in order.

First, we strengthened -- we did further strengthen Allstate's financial position.

We generated operating income of $592 million for the quarter and almost $1.9 billion for the year, which was 7% higher than the full year of 2008.

We had double-digit returns on our $100 billion investment portfolio.

Realized capital losses were reduced to $33 million for the quarter and $583 million for the year.

Importantly, the pre-tax net unrealized position improved by $6.5 billion throughout the year.

Net income was $518 million in the fourth quarter and $854 million by the end of the year.

As a result, book value grew by 31% in 2009.

We also built up a stronger capital base on both the GAAP and statutory basis.

We achieved this through focused operational efforts at Allstate Protection, Allstate Financial and in our investment activity.

Allstate Protection achieved its objectives of providing a strong source of the operating profit, improving customer loyalty and laying a foundation for growth.

The combined ratio was 93.2 for the quarter as excellent operating practices, expense controls and pricing discipline resulted in all major lines generating an underwriting profit in the fourth quarter.

Over the last five years, our personal lines businesses generated an underwriting profit of 18 of 20 quarters with an average of 93.9.

As you know, we provide annual guidance on a combined ratio.

This year was 87 to 89 for 2009, excluding catastrophes and prior year reserve changes.

We ended the year at 88.1, almost exactly in the middle of our expectations.

We expect to capitalize on our positive momentum with continued focusing on targeting high lifetime value customers, further improvements in customer loyalty, taking steps to improve homeowner returns, improve sales and service results from our agencies and expansion of our new product development and marketing programs.

Allstate Financial also made substantial progress in the quarter.

The focus to win plan, to reduce expenses, lower fixed costs and focus on profitability has achieved 90% of its original goals and is on schedule.

Operating income was $95 million for the quarter and $340 million for the year.

Importantly, we also made progress in focusing our strategy in this new investment and economic climate.

Allstate Financial's primary focus be on providing mortality, morbidity and preservation of income products to customers through Allstate's agencies and at work sites.

We are restructuring our sales programs and support, our product offerings and our marketing efforts to broaden our relationships with the 17 million households that currently do business with Allstate.

Our workplace business is growing rapidly with premiums increasing 9% last year as we expanded both the small and large employer segment.

We will continue to reduce our fixed annuity book value portfolio, which are the sales to banks, independent agencies and broker dealers.

We began the process in 2006 and will continue to exit unprofitable relationships and lower our concentrations of spread-based products.

We had a good quarter and a great year in investments.

We had strong overall total returns and made progress in positioning our portfolio for future success by both mitigating our risks and seeking to optimize our returns.

We reinvested excess liquidity, which increased throughout the year as the markets improved, raising returns.

We reduced our exposure to commercial real estate by over $5 billion last year and lowered our municipal bond investments by $1.9 billion.

We shortened the duration of our fixed income investments and hedged the unmatched portion of our portfolio for large increases in interest rates.

And while both of these lowered our investment operating income, we will be well positioned should interest rates rise.

On our second goal we also did very well, which was to improve customer loyalty.

Loyalty has three components, as you will remember, customer satisfaction, intent to renew and willingness to refer.

Obviously, all of those are important to future growth.

We raised our customer loyalty scores on an absolute basis and improved our relative position to the competition.

At Allstate Protection, we achieved those results in 13 of our 14 regional operations throughout the US.

Our agencies also improved their performance in all of our regions.

As a result, we were able to share this benefit with the employees by making the maximum contribution to the 401(k) plan which is tied to customer loyalty.

Finally, on reinventing protection retirement for the consumer, we laid a foundation for growth.

We made good progress in improving the value proposition for our high lifetime valued customers, enhancing our sales and service capabilities and started development of new products to further differentiate us from the competition.

Overall, we had a strong finish to a good year.

Now, Bob will go through the business results.

Thanks, Don.

Turning to slide three, property liability net written premium fell 0.4% for the quarter and 2.3% for the year compared to similar periods in 2008.

This decline was primarily driven by reductions in units as we intentionally chose to maintain pricing discipline in a highly competitive marketplace.

That said, when you look at the details by line, there are some trends indicating positive results in the future.

Beginning with Allstate brand standard auto, net written premium increased 0.7% in the fourth quarter 2009 compared to the prior-year quarter, as new issued applications increased 11.4% quarter-over-quarter.

We issued over 2 million applications for the year, a 12.3% increase year-over-year.

Retention increased two-tenths of a point to 88.8% after a similar increase in the third quarter of 2009.

Average premium climbed 2.6%, reflecting our consistent approach to seeking rate changes where needed while providing distribution and product choices for consumers.

Allstate brand homeowners net written premium increased nine-tenths of a percent in the fourth quarter of 2009 versus the fourth quarter of 2008.

Increases in average premium and retention are essentially offset by reductions in units as we continue to manage our exposure to catastrophic losses.

We continue to focus on gaining appropriate rate changes in order to bring this line of business back to an acceptable return on capital.

During the fourth quarter, we received approval for rate changes averaging 6.5% in 22 states, bringing the countrywide impact for the year to 8.4%.

The majority of these rate changes will be earned over the next 2 years.

While the two major lines of business were both slightly improved in the fourth quarter, the primary source of the overall decline in the quarter was business written through Encompass.

Efforts to improve the margins here are limiting topline growth as we maintain our philosophy of profitable growth in all areas of our business.

Shifting to a discussion of margins, our overall combined ratio for the quarter was 93.2%, significantly improved from the fourth quarter of 2008.

The underlying combined ratio was 88.1% in the quarter and for the entire year, consistent with the range we expected at the beginning of the year.

In the quarter we reported $328 million in catastrophe losses, bringing our total to the year to over $2 billion.

The fourth quarter included 13 events for $210 million, a relatively light catastrophe quarter.

However, we also experienced $148 million in cat losses related to reestimates of events that occurred earlier in 2009, offset slightly by a $30 million favorable reestimate related to prior years.

The upward development of these current year events was due primarily to adverse frequency related to hail events that occurred in the southeast.

As we have done for the last few years, we have provided an outlook for the underlying combined ratio for 2010, a range of 88% to 90%.

Remember that this combined ratio outlook excludes the effects of catastrophe losses and prior-year reserve reestimates.

This range is a point higher on each end than our outlook for 2009 and reflects a conservative view on the short term trends for auto frequency and non-catastrophe weather losses for homeowners.

While higher than the 2009 outlook, it represents an industry leading performance.

On slide four we give you a look at the loss trends for auto.

As we expected, reported frequencies for both bodily injury and property damage increased significantly in the fourth quarter compared to prior year.

Bodily injury frequency rose 14.4% for the quarter and 13.1% for the year.

Property damage frequency increased 7.6% in the quarter and 6.2% for the year.

We provided explanations in the past for the large increases, primarily related to the significant drop in 2008 frequency levels.

While the comparisons are large, the fact is that the level of frequency in 2009 is similar to that recorded in 2007, with bodily injury frequency a little higher in 2009 compared to 2007 levels, and property damage at levels a little lower than 2007.

That said, we watch and we'll react appropriately to these trends, incorporating them into our rate indications in order to remain profitable over time.

While auto bodily injury paid severity continues to perform better than anticipated and property damage paid severities essentially in line with expectations, offsetting to some extent the increases in frequency.

The combined effects of frequency and severity or peer premium are well within our pricing expectations and translate into a combined ratio for the quarter of 93.7%, 5.7 points better than in the fourth quarter of 2008.

For the year, we posted a combined ratio for Allstate brand standard auto of 93.6%, a 1-point increase compared to 2008.

These results complete another year of excellent underwriting margins for auto, indicative of our strong capabilities of marketing, pricing, and claims management.

We have been operating at these margins or better for the last several years.

The loss cost trends for homeowners continue to be negatively impacted by non-catastrophe weather.

Non-cat frequency increased 13.9% from the prior year with lightning, wind, hail, and water claims being the primary drivers of the increase.

Homeowners paid severity declined 8.5% quarter-over-quarter, reflecting a mix shift of the type of claims paid in the quarter.

The combined ratio for the quarter was 89% up 4.4 points from the fourth quarter of 2008 with catastrophe losses accounting for 9 points of that increase.

The results excluding catastrophes were better in the quarter, but we will continue to reach for better returns in the future.

We remain focused on gaining approval for appropriate rate changes to return this line to acceptable returns.

On slide five, we shift to Allstate Financial results.

We generated an operating income of $95 million in the fourth quarter, an increase of 7% for the fourth quarter of 2008.

This increase was driven by lower [GAAP] amortization and reduced operating expenses, somewhat offset by a lower benefit and investment margins.

The decline in GAAP amortization was due to lower investment spreads and a lower amortization rate, resulting from updated assumptions for fixed annuity performance.

The reduced operating expenses primarily reflect proactive management actions taken from the Focus to Win restructuring program.

As you'll recall, the Focus to Win initiative is expected to produce annual cost savings of $90 million.

Through the fourth quarter, we have obtained about 90% of the expected annual expense savings with the remaining reductions to be achieved by 2011.

The benefit spread declined due to higher mortality experience, which as we said last quarter, can bounce around a little bit, and non-recurring benefit cost.

The lower investment margin was the result of intentionally maintaining higher than normal levels of liquidity, effectively lowering the portfolio yield, as well as reduced asset balances, partly offset by lower interest credited on contract holder funds.

From the top line perspective, premium in deposits fell to $401 million to $1.2 billion as we continue to focus on generating acceptable returns and reducing our concentration in spread-based products.

Our focus remains on improving the overall returns of the business while seeking longer-term solutions to consumer's protection and retirement needs.

Now I'll turn it over to Don.

Thanks, Bob.

I'll cover our investment portfolio and results and finish with a look at our capital position.

During 2009, we generated strong results from our investments with substantially improved portfolio valuations more than offsetting lower investment income.

We consistently acted in a proactive way to manage the risks and returns in our investment portfolio, and our approach paid off throughout the year.

By remaining focused on limiting our exposure to rising interest rates while maintaining our view of credit spreads and taking specific actions to reduce exposure to specific asset classes, we ended 2009 in a strong position.

On slide six, you can see a breakdown of our consolidated portfolio.

At year end, the value of the portfolio was $99.8 billion, a slight decline from September 2009 due to a lower balance in Allstate Financial and the $750 million debt repayment at Corporate that we refinanced back in May.

Fixed income securities still make up about 80% of the portfolio, with the bulk being high-quality corporate and municipal bonds.

During the year, we reduced exposure to commercial real estate by $5.4 billion, reduced municipal bond positions by $1.9 billion and reduced our durations by 5% and maintained derivative positions designed to protect against rising interest rates.

Our fixed income portfolio continued to generate significant amounts of cash with $2.6 billion for the fourth quarter, consistent with our track record throughout 2009.

We aggressively deployed both these cash receipts and our short-term cash position by a further $7 billion for the quarter.

On slide seven, you'll see our two year trends for investment income and realized capital gains.

Our investment income declined for the fourth quarter, which was down 19% over the prior year, was consistent with the first three quarters of the year.

The reasons remain the same.

Lower yields, our continuing emphasis of maintaining shorter durations in spite of the yield environment, higher levels of liquidity and reduced average asset balances.

For the quarter, we generated realized capital losses or $33 million, a huge improvement over the fourth quarter of 2008.

We continue to experience some credit impairments, although it was down to $270 million for the fourth quarter, and we proactively took $215 million of intent writedowns, consistent with our desire to reduce exposure to commercial real estate.

Subsequent to year end, we did sell the majority of these securities.

We also generated $390 million in realized capital gains through asset sales.

Finally, we had a small net gain on derivatives related to rising interest rates at year end.

Unrealized net capital gains and losses are on slide eight.

For the full year 2009, our pre-tax unrealized loss position improved dramatically from $8.8 billion to $2.3 billion.

While unrealized losses after tax and DAC showed similar declines from $3.7 billion to $0.9 billion.

The primary driver was improved credit spreads during the year.

During the fourth quarter, while pre-tax unrealized losses continued to improve, there was a disproportionate decrease in shadow DAC due to updated assumptions on the investment performance, which resulted in lower DAC amortization rates.

While it was a volatile year in investment markets, our unrealized capital loss position both before and after tax and DAC are at roughly one quarter the levels they were at the end of 2008.

Finally on slide nine, you can see our capital position for year end 2009 as well as the four preceding quarters.

We finished with the year with shareholders equity of $16.7 billion, an improvement of approximate $4.1 billion from year end 2008.

As a result, book value per share at $30.84 climbed 31% during the year.

Statutory surplus for both Allstate Insurance and ALIC improved during the year as well, with estimated statutory surplus at $14.9 billion at AIC inclusive of ALIC.

Lastly, the holding company continues to maintain high levels of capital with over $3 billion of capital to service our relatively light fixed charges.

As a reminder, we continue to have full access to $1 billion of credit facilities which remain unused at year end, and our next corporate debt maturity is about $40 million in 2011, with a total of about $600 million coming due in 2012 and 2013 combined.

In summary, by consistently and proactively focusing on our priorities during 2009, we ended the year not just financially strong, we're well positioned and confident in our ability to grow our business and deliver shareholder value as we move into 2010 and beyond.

Thank you, Don.

If you go to slide 10, that shows our priorities for this year.

We've obviously come through a very difficult economic time.

We've improved upon our strong financial position.

So we have three goals for 2010.

First, continued improved customer loyalty, two, to continue to differentiate ourselves amongst our competitors by reinventing protection retirement for the consumer, and third, to begin to grow our businesses.

So with that, I would be happy to hear what's on your mind.

Matt, if you want to start the Q&A.

Thank you, sir.

(Operator Instructions) Our first question is from Jay Gelb from Barclays Capital.

Your question please.

Thanks.

Good morning.

Two issues I'd like to touch on.

Joe, if you could give an outline of your goals and plans to achieve them, given your new role as head of P&C at Allstate, that would be helpful.

And then Tom, if you could update us or give us a bit more color in terms of your comfort level with the combined ratio range, given that it went up maybe a little bit in 2009 versus 2008.

What gives you the comfort level that you'll be maybe at the midpoint of that combined ratio range, around 89 as opposed to the higher end for 2010?

Thanks.

Let me start with the second and then give Joe a chance to come up with his goals, which -- he's been here 90 days.

So we have to give him a little bit of a break.

But they will obviously be consistent with our overall goals.

So first, in terms of the combined ratio, I feel pretty good about the range we've given for 2010, Jay.

The reason being, we've done a lot of work on improving the pricing -- targeted pricing for our auto business, and we have been very consistent and thoughtful in increasing prices when we need to.

When you look at our competitors, they have started to raise their prices throughout '08 and '09.

So I feel good about our competitive position.

It think we should be able to retain customers, which obviously helps our profitability because of pricing and because of what we're doing on customer loyalty.

So I feel good about our numbers there.

Jay, this is Joe.

Terrific question, and one that I've been spending a fair amount of time on in the brief time that I've been here.

The exciting part about being part of the Allstate group is we have got a lot of bright and talented people who have been working on a strong set of core strategies to focus on growing our business and leveraging and realizing the scale advantage that we have.

Using a stronger set of business intelligence and analytics to fuel reinvention of protection and retirement for consumers we think will ultimately help us deliver that.

We have a got a great tradition and great strength at delivering strong profit margins.

I think if we find a way to continue the improvement we've got on the homeowners lines, we can use that business as an offensive weapon at some point.

We're not there yet, and drive growth initiative through our auto business and the other businesses inside protection.

All right.

Thanks.

Your next question is from Bob Glasspiegel from Langen McAlenney.

Your question, please.

I'm going to actually take Jay's question in reverse.

It seems like the fourth quarter, your underlying property casualty combined ratio improved by a point or two versus three quarters where it had been deteriorating.

You're getting more rate.

If you take the midpoint of the range, it looks like you're looking for 1 point deterioration in the underlying combined ratio.

Aren't you getting enough rate to keep up with underlying loss experience?

Bob, this is Tom.

Good morning.

The answer is frequency.

So if you look at frequency, of course it was up a lot this year, it was down a lot last year.

It was -- this year looks -- or '09 look like '07 and '05.

If you look at '06, that was down.

So frequency has been bouncing around a lot lately.

So when we make a commitment, we like to make sure we stick to it.

And when we look at frequency, we think it's hard to determine where that will be next year, given where we are in the economy, the cycle.

We should -- hopefully unemployment will go down a little bit next year, so you ought to see miles driven going up.

So the bottom line is, we're still earning great returns in our auto business and have for a number of years.

Secondly, in our homeowner business, as Joe pointed out, we're well on the way of improving the profitability of that business.

We earned an underwriting profit in the fourth quarter.

Combined ratio I think was 89.2, so we're feeling good about that business.

Obviously, one quarter does not history make.

But when you look at the price increases that Bob talked about, we think we're well on our way to keeping that business highly profitable as well.

Okay, thank you.

My follow-up is your -- in the third page of the release, you say the risk mitigation programs continue to protect the hedges against interest rate that performed as expected during the fourth quarter.

The fourth quarter was sort of a funky quarter from an investment point of view where equities were up and some risky assets did well, non-risky assets did poorly.

I guess the question is, what number should I look at to say that your equity risks performed as examined in an up 5%, 6% market?

The -- I guess in an up market, our hedges mostly are just a cost to us, because we're protecting against equities going down, not necessarily -- you wouldn't see the value those hedges with equities go up.

So the sentence means you spent what you thought you were going to spend during the quarter, or is that some convexity thing that you're doing that you're looking at?

No.

We spent what we thought we were going spend.

And in fact, I think that we came in a little bit under what we thought we were going to spend on the (inaudible) component.

Okay.

Over the year, you increased your equities at cost, but you're hedging against it.

And you mentioned that you went passive in the quarter, I think if I read it correctly What are you trying to do on your equity portfolio?

A couple things there.

First, the strategy around equities, we decided to go to a passive strategy in terms of active management around the portfolio.

So the mix in the portfolio really hasn't changed that much.

It's more that we've decided that we'll manage it passively.

The -- with regard to the amount of equities that we own, not only did we get the appreciation because the market rose, but also we have put more dollars into the equity market,, both domestic markets as well as foreign markets.

So, Bob, thanks for the second followup.

I think -- but you're after a good point, which is in our investment portfolio, it's an equity portfolio you were talking about or what we were doing on interest rates.

We've taken the approach, we will spend what it takes to make the right risk returns write-off, whether that's the hundreds of millions of dollars we spend making sure that if interest rates go up, we don't get clobbered and/or if it's making sure that if equity prices go down dramatically, we don't feel that dollar for dollar pain as well.

So we have continued to be proactive in our approach to risk management, spending what we need to spend to protect the Company.

Thanks.

Your next question is from Vinay Misquith from Credit Suisse.

Your question, please.

Hi, good morning.

On the shadow DAC of reversal this quarter, could you help us understand whether there is going to be any impact on the amortization of that for the future?

And also related to, that could you explain whether you have taken any realized losses or whether you've made a provision for the higher expected losses that you expect in 2011 and 2012 on your fixed annuity business?

Thanks.

Hi, it's Don.

Let me try and take both of those questions.

First of all, the shadow DAC, to a large extent obviously, is driven by the DAC amortization rate.

So what we do every quarter, and I'm going to start with the income statement here, we will look at all of the facts and circumstances that are available to us.

We'll look at both experience and what we anticipate for the future and then we'll make a determination of what a proper -- the proper DAC amortization rate should be for that quarter.

And what we've done, if you recall in the third quarter, which we followed in the fourth, is decided not recapitalize DAC for recognized capital -- for realized capital losses so that we did not jeopardize the future recoverability of that.

In the fourth quarter, we did update our assumptions again, including anticipated results related to the fixed annuity investment performance.

All that stuff goes into a box, and we end up with is essentially the DAC amortization rate.

So that's why, when we talked about the DAC amortization on the income statement, we pointed out it was lower during the fourth quarter.

Now I'm going to switch to shadow DAC, which of course only goes through OCI and not the income statement, in accordance with GAAP, then we'll take that shadow DAC, we'll take that DAC amortization rate and apply it to the unrealized loss position on those investments in the portfolio, not all the investments that relate to the unrealized loss, but only those that relate to the products that we sell to relate to DAC So let me take a step back.

Shadow DAC, if you look at it on a year-over-year basis, it did what you would have expected.

So the unrealized loss position went down by about 75%.

And if you look at it net of tax and shadow DAC, it went down by a very similar amount.

It does move around in quarters, though, and it moves around because ,to be honest, I don't think DAC was designed to operate necessarily smoothly in this very volatile environment.

So it did move around a bit in the quarter, but -- so I think the answer though, is we're comfortable with the numbers on a year-over-year basis.

And there is some disproportionality in the fourth quarter on shadow DAC, but that is just the outcome of how it works.

As it relates to the amortization going forward, obviously, because we're not recapitalizing DAC on the -- not shadow DAC now.

I'm talking about DAC on the, I'll call the real DAC.

There will be less amortization going forward through the income statement.

That's great.

Thanks.

Do you -- the follow up I have would be on the agent rationalization plan.

Tom, could you give us a sense for where that is going and what are the risks to that strategy?

What if you decide to let go of some agents, do you think that there's going to be some lawsuits against the Company?

Vinay, we don't have a rationalization plan, so to speak.

What we have is a strategy of making sure we provide our customers the best service possible and offer all our products and services to them in the best way with the most experienced people we can.

You will see that the number of agencies that we have in the United States has gone down over, really, the last couple of years, and that's due to a couple of things.

One is we've -- as the business get more competitive and more complex, those agencies need to be larger so they can have more experienced people in them, whether that's to sell Allstate Financial product, to sell boat insurance, renters insurance, things beyond auto insurance.

So the size and scale of those has increased.

What you don't necessarily see in that number is the number of people we have on the street dedicated only to our products, which includes licensed sales professionals, which, in fact, has again up throughout that period as well.

So we look at it and say, "How many people do we have working on behalf of our customers?" And so you'll see that that number has gone up.

So the number of agencies is a little bit of a construct of just how many contracts do we have out there as opposed to how many people sit in that agency.

In addition, this year we've been -- started putting standards in on performance as it relates to the agency loyalty index, which as I said in my earlier comments, went up in every region across the country.

All of our agencies did a better job for their customers.

Those, however, that did not make that transition are leaving our organization.

So I don't see it as a risk to our organization, I see it as a benefit to all those agencies that are doing a great job for their customers.

This raises the overall bar and raises our position the marketplace.

Who owns those policies?

Does Allstate own those policies for which the agents are leaving and therefore, you run the risk in the short term you might have a lower policy in force count?

Well, Vinay, I would start with the concept that no nobody owns the customer, the customer owns themselves and their own relationship.

When those agencies leave, we have -- they can either sell their agency to someone else, and we provide for a transition and help them do that.

If there is nobody available to buy that agency, we will buy it from them.

And then we have a variety of ways in which we take care of those customers.

Sometimes we transition those customers to other agencies in the local marketplace.

Sometimes, while we're looking for another agency on it, we have our call centers handle it.

But in all cases, the first and primary goal is to make sure we take care of our customers.

Thank you very much for those answers.

Our next question is from Dan Johnson from Citadel.

Your question, please.

Thank you very much.

On a follow-up, the -- if I do this right, the Allstate brand written premium looks like it is up year-over-year, and kind of having to go back to find when that happened last.

It look like sometime in 2006, although maybe these numbers are touched wrong, but I think they're right.

Do you want to point to a few things that's helped to make the turnaround?

I saw new issued apps look good for a couple of quarter in a row, and then obviously, more importantly than why they've gone up is what's your -- do those trends have a good chance of persisting into 2010?

And then I will have one other question.

Dan, I'll start with the longer termer perspective on the offset agencies.

Joe can make a comment about Encompass, which is -- you didn't talk about, but also obviously impacts our overall auto results, as Bob talked about.

On the Allstate agencies, I think it's important to step back and look at the decisions we talked about in 2007 and 2008, which was in the face of what we saw as upcoming difficulty in the economic environment, we decided not to take price decreases in 2007, despite the fact that some of our big competitors were.

We didn't think the price decreases were justified.

We didn't think it was the right thing to do to buy growth, and we chose to work on customer on value and not reduce prices to grow.

That turned out to be a good choice for us.

We didn't know the economy was going to get as bad as it did, but we were glad that we have strong source of profitability.

It also turned out to be a good choice because many of our competitors are now increasing their price as they started in the second half of '08 and throughout '09.

So I think in the third quarter, Joe, I think it was about 3 to 1 increases to decreases, when you look at the industry.

He's nodding acceptance of that.

So that turned out to be a good choice.

When you look at the Allstate brand business itself, I would say there are three components you have to look at for growth.

One is new business, which as you correctly point, is up; two is retention, which is flat basically, but the leading indicator being customer loyalty headed up gives us some confidence that we should be able to move that number up, combined with the fact that our competitors are raising prices.

We think that should help us some there as well.

The third component, which is less obvious, is just a trend line.

And so if you're down because over that '07 to '09 period, we did reduce the number of policies in force.

That trend, you got to kind of turn around.

We call that availables.

But you've got to do enough on new business you have got to do enough on retention to offset that trend line.

You're starting to see that work its way out, so we would hope to be able to see that business begin to grow, as Joe pointed out, as we move through 2010.

Encompass you didn't ask about, but I think it would be worthwhile for Joe to give some perspective on that as well.

Yes, Encompass -- thanks, Tom.

Encompass is continuing to be a challenge for us.

We've had a couple differently strategy changes over the last several years, some of which led us into a little bit of profitability challenges.

Then as we worked our catastrophe management actions, a large person of the Encompass book is in areas where we've got excess catastrophe exposure or those actions have been at their highest.

What we're seeing through 2009 and into the early part of 2010 will be the result of sort of rationalizing all of those challenges and refocusing on Encompass on its core value proposition and its core set of target customers.

Fixing a few of those items and then getting it positioned for growth.

I think we're going to see, for at least a couple more customers, similar results, perhaps at a lower rate of decline, and we're going to refocus the organization and again, position it to start seeing some upside.

At least on the Allstate side, I didn't hear anything that said that things that have been helpful over the last couple of quarters to turn premium around to the positive should be changing back to the negative.

I agree with that.

Okay.

And then my follow-up question pertains to capital, I think maybe best put on slide 9.

AIC added almost $2 billion in capital.

This year, I realize a little bit of that came from the holdco.

But sort of the back of the envelope, you would think that a roughly performance absent any super major catastrophes would be on tap again for 2010.

If that's not correct, I would be interested to hear why.

And if it is correct, at what point is AIC, and therefore ALIC sufficiently capitalized at a point that you risk being overcapitalized in that segment?

Oh, what a fickle group.

(laughter)

Do you expect anything else?

Dan, we think obviously, as Don said, we think we're well capitalized We thought we were well capitalized at the beginning of the year when many people were concerned about that.

We felt we had the strategies in place to keep ourselves well capitalized.

And of course, that turned out to be true, and we're happy that we had the performance we did.

As we've always said, we have a long track record and history of doing what's right for shareholders, whether that's our dividend or our share repurchase program.

I'm feeling comfortable where we are today.

I'm not so comfortable with the external environment that you should expect to see a dramatic change in that which we're doing at this point.

But obviously, as the external environment changes, as our performance continues to be strong, we'll keep thinking about that.

Are you not comfortable enough to even consider replacing a piece of the lost dividend?

The dividend, as I said, the dividend wasn't really a capital issue.

It certainly helped capital by $400 million or $500 million, but when you look at the size of those numbers it's important, but it's not the key driver.

The dividend changers really should pay out dividends out of what you earn.

And when you look at our operating income and net income last year about was about at 27 and maybe 50% payout, which is the net income was obviously higher than what you would see over a long-term basis.

The operating income looks about to be in line, and when you look at the dividend yield, it looks to be about where it has traditionally been.

So that's the way we size the dividend, Dan, is based on how much money we're making as opposed to using it as a way to give money back to shareholders.

If we have extra capital, the most tax efficient way to give that back to shareholders is through share repurchases, not by raising the dividends.

Understood.

Thank you.

Our next question is from Matthew Heimermann from JPMorgan.

Your question, please.

Good morning, everybody.

First question is, just on -- can you just help me understand what happened with the statutory surplus in AIC this quarter?

Did you actually pay a give dividend to the holdco?

No, we did not.

However, what we did is put $48 million into the life company.

Okay.

So it was a transfer from AIC to the life, and then nothing at holdco.

We did not take a dividend or put any capital into AIC; that's right.

Okay, perfect.

And then I guess on the business that we don't talk about very much, everything that gets lumped into the other segment, can you talk a little bit about two things?

One, just what is happening with respect to growth trends there, and two, it looks like over the last three years, you've been seeing ex-cats, ex-development, kind of a gradual increase in the loss ratio, and I'm wondering if that is --there is something -- if that's mix or if there's something else driving that.

Matt, let's just help to narrow down other.

It's a pretty broad category.

Are you talking about our merging businesses, are you talking about discontinued --

Everything that is non-homeowners, non-auto.

That will this our merging businesses, which is a large and diverse set of about five different businesses, everything from commercial, auto and a little bit of property in there, and two, jet skis, motor homes, renters insurance.

Renters insurance.

So Joe, do you want to make some comments?

If that's where you're at , we'll make

Yes, that's exactly what I'm talking about.

Yes.

It's down over the prior year and the prior quarter.

Principally as a result of some contraction in the business insurance side of the house, and that's offset by some growth in some of those other businesses that we mentioned as a group.

It's a little bit of a hard number to read when you look at it in aggregate, because it has those diverse businesses in there.

The declines would be driven by refocusing a little bit on what we're doing in the small commercial space.

What we did before Joe got here was we repositioned that commercial business, we brought in some new management, we shut down a lot of the operating centers to bring cost structure down.

So they're well on their way, and with Joe's help here now, we're going to accelerate that performance in rebuilding that business.

Actually, there were some reserve releases in that business.

So I'm not sure -- the second piece of your question was -- made it sound like there was some drift from prior years --

I actually was looking at the ex-cat, ex-development loss ratio looks like it's been trending up.

I'm not trying to imply it's at an unhealthy level.

Just curious what that's driving that.

That may be -- one driver underneath there may with some gap insurance we do through dealers, so --

Okay.

Thanks.

Our next question is from Josh Shanker from Deutsche Bank.

Your question, please.

Yes, thank you.

Two related questions.

One is probably my own inability to crunch the numbers here.

I'm just trying to understand, the unrealized capital loss was stagnant pretty much from the end of the last quarter to this one.

Yet the DAC reserves came down dramatically.

Then you had another small, $178 million DEC charge in the Allstate Financial book.

I'm trying to reconcile all those three numbers together, how that works

On the first piece, could I suggest that that was Vinay's question to Don about shadow DAC.

So if that answer didn't work for you, maybe --

Yes.

I know.

On the second piece, Matt, do you have a -- or Don, do you want to make a comment on the -- the question was on $145 million?

I think it was $178 million DEC charge in Allstate Financial.

We continue to amortize DAC as we did in previous quarters, through Allstate Financial.

And then the other thing is we did take against some of the realized capital gains we had in Allstate Financial.

We took some between operating and net income as well.

We took some amortization there.

We're continuing to amortize DAC in Allstate Financial as we always have.

So from that perspective, we saw in the third quarter, there was the odd (inaudible).

Should we expect this to be a run rate view for the near term, given no real dramatic change in the investment portfolio?

Run rate for what, for --

For the amortization of DAC.

I think -- let me go up a second and answer it as it relates to Allstate's Financial operating income, because the DAC moves around depending on where investment income is, what kind of realized capital gains or losses you have.

When we look at the operating income for Allstate Financial, we feel good about its prospects going forward.

Matt's got a plan in place to begin to finish up on the Focus Win and to grow that business, which he might want to make a few comments about in terms of where the focus will be.

But I wouldn't just focus on the DAC piece.

I would look at the operating income.

That kind of rattles through depending on what happens to the other component of that operating income as we go forward.

Josh, this is Bob.

Christine and I can take you through the details of how that whole thing works after the call.

We'll certainly do that.

The other question was on munis.

You sold a bunch of munis during the quarter.

You also had about a $450 million unrealized movement in the unrealized position.

What's your thought on munis?

Can you talk a little bit about the makeup of the portfolio?

The makeup of the portfolio continues to be a well diversified, fairly large portfolio.

We are, as you noted, we are reducing the balance in munis.

The unrealized position in the fourth quarter though was partially impacted by rising interest rates.

So that's a long duration portfolio relatively to the rest of our portfolios, and rates rose during the quarter.

So it's not really credit related, it's just interest rate driven.

I would say that over the quarter.

We're not that crazy about the outlook for municipal credit, but during the quarter, there wasn't any big moves one way or the other.

In fact, I would say that the market has been strong for municipals as people are seeking yield and are worried about increases in tax rates.

So we've been selling into that, because we're more concerned about the long-term prospects given the 9% to 10% decline in state and municipal revenue and balance sheets, which don't look pretty.

Okay.

Thank you very much.

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

Good morning.

Thanks for the call.

Turning to claim frequency, is it fair to say that Allstate is at a level of profitability where they can't pass on that increase in frequency?

And at what point, if frequency continue to rise, do you think you can start pushing it out as form or rate?

Paul, I would say a couple of things.

First, you look at our -- there's always 1,000 stories, because there's 51 different places where we bill for pricing changes in the United States, and if you look at the average increases, they are small, but consistent, reflecting what happens in that individual area.

Secondly, I wouldn't just look at frequency, I would look at frequency and severity combined.

And if you look at that, which is called pay peer premium, as you know, you'd see that that is relatively modest and in line with where we are on average pricing, which gives us the confidence to say we could be at 88 to 90 next year.

Great.

Thank you.

Our next question is from Brian Meredith from UBS.

Your question, please.

Good morning.

A couple questions here for you.

The first one, Bob, could you elaborate a little bit on the whole severity situation in homeowners.

You said it was a mix of claims.

Exactly, what happened there, and should we expect that to continue here going forward?

It's just a -- in the quarter, you get more water damage claims versus fire versus lightning.

That can distort the overall severity, and it's not something that you should necessarily expect each quarter happening.

It's however, the claims that get paid, how that works out for the -- when you're looking at the total homeowner severity.

Okay.

And then the second question, on the investment yield portfolio yield, is there anymore portfolio repositioning to go here, and if so, given where yields are right now, should we expect the portfolios to potentially continue to move down a little bit here?

The portfolio repositioning, as Tom said earlier, we've made a lot of progress in commercial real estate.

We've made some progress in repositioning the muni portfolio.

We continue to expect that we'll bring down our balances in commercial real estate and in municipal.

In terms of the yield, we are monitoring the yield very closely.

The reality is though, that when you reposition, rates typically are lower on the reinvest than they are coming off the portfolio.

So we are risk mitigating, and when you risk mitigate, at times, it's eats some of the income.

The only thing that would change would be if short-term rates, of course, which are near zero, go up, you would expect to see higher investment income in our portfolio.

Offsetting that some will be what Matt has to do to fix annuity rates.

So it's not like everything would come through the portfolio, but net,/net, ought to help us increase our margins in the fixed annuity portfolio.

Thank you.

Our next question is from Meyer Shields from Stifel Nicolaus.

Your question, please.

Yes, good morning.

I saw in the supplement that you're breaking out the premiums for the direct channel, and I was hoping that either Tom or Joe to comment on what we should expect to see in terms of reporting and advertising for the (inaudible) business?

Let me take it, and if Joe wants to jump in, since I am trying to be cognizant of the fact that he's been here, I guess 90 days or close to 90.

Maybe not even 90 days.

But first, we do advertising in total.

So whether -- when we run ads, they call our agencies, they call our call centers, they get on the internet.

When they get on the internet, they sometimes look at prices and roll over to the agencies.

So we don't -- while we don't have specific advertising programs that are just targeted toward one channel, which is one of the benefits of our model, which is we can spread that cost across all of our businesses, and everybody gets a lift.

So our current advertising is working pretty well.

We like the tone and tenor of the brand positioning has worked well.

We pushed hard at price last year, which reduced some of the -- the different we had versus GEICO an Progressive in terms of people thinking we were more expensive, so we reduced that some.

We probably won't have to do as much of that.

We continue to talk about our value going forward, which we would hope to do.

In terms of the direct business, Meyer, I think you should expect to continue see it grow, because it's working pretty well and it's supporting all of our business activities.

Okay.

I'm sorry.

Go ahead.

I was going to say I echo the comments, and I think that's the direction we're headed.

One of the strengths that the place has and one of the neat opportunities is the synergies and how effectively we're allowing consumers to move back and forth between channels.

So it's a plus for us.

Okay.

That's very helpful.

And this is a little bit of a nitpicky question, but is it better to look at policy holder retention on a sequential basis or on a year-over-year basis?

It all depends what you want to use it for.

It provides insight in both cases, but it provides different insights.

So I think there's a value of looking at it internally both ways.

and we look at it for a lot of different lenses.

Okay.

Thanks so much.

Our follow-up question today is from Allison Jacobowitz from Banc of America.

Your question, please.

Hi, thanks.

I was just wondering if you could talk a bit more about the life operation and maybe put some parameters around what you're thinking for 2010 for earnings.

Well, we don't obviously -- we moved away the guidance, Allison, as you'll remember, a couple of years ago.

We're not anxious to go back there.

We do like to provide some sense for the largest business, that being the property casualty business, does absent catastrophes which are not highly predictable on either quarter or annual basis.

But I think Matt could give you some perspective on -- now that he's been here over 90 days.

We kind of have a 90-day rule here.

Just barely.

Just barely.

He can give you some perspective on the business and where he's going take it, which I think will help you be able to start to build out what you think the forecast will look like.

Good morning.

As Tom mentioned in his opening remarks, we're making some fundamental core changes to strategic approach for Allstate Financial, and we have developed what we have laid out as a six part strategy.

But I'll kind of do the 80/20 rule and focus on just two core pieces of that.

The first is that we kind of are making an all-in debt.

We believe the pot of gold here is the existing Allstate channel and the existing Allstate customers and the ability to leverage the 12,000 store fronts and the mammoth customer base, the 17 million households that we have and supplement that with some work site.

So we are going to refocus and redeploy some of our resources, not necessarily to the exclusion of some of the other chance, but we are certainly going to minimize some of the investments being made in some of the other channels to allow us to really focus on the channel that we think has the greatest long-term opportunity.

At the same time we're focusing on that channel, we're focusing on some different product sets.

I think as the last 18 to 24 months has shown, an overconcentration spread-based business, specifically book value annuities and some institutional funds have hurt us, and we are shifting our concentration towards the underwritten products, the mortality and morbidity based products And to the extent we need and should offer income preservation products to our customers, we'll probably do that through a different type of annuity that has a better risk return ratio, such as the market value adjusted annuities.

And to the extent that we can get it to work in our environment through equity indexed annuities that provide strong value to the customers as well as to Allstate.

So what you'll see is a shift.

You'll see a concentration shift, again, away from the spread-based businesses toward the more underwritten products, and you'll see a shift of resources towards working together with a protection organization and approaching our business here not as an independent operating entity trying to compete in the vast life and retirement space, but to build enterprise value working in conjunction with the rest of the organizations that we think actually gives us far greater leverage, a greater competitive advantage and a greater likelihood of success.

So, thank you all.

Let me close.

We've obviously faced a number of what I would call unprecedented challenges over the last couple of years, whether that's high-level catastrophes, tough competition in the auto insurance market, the financial market meltdown or the economic recession.

We've successfully dealt with all those challenges, a couple ways we do it, being good at what we do, taking decisive action and focusing on the right answer rather than the constraints that we face.

So we'll continue to be proactive in driving shareholder value for you all.

We have three goals, this year: improve customer loyalty, reinvent protection retirement for the consumer and grow our businesses.

If we do that while we maintain the margins we have in our strong core businesses, we should drive good shareholder value this year, and that's what we're up to.

So 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.