Allstate Corp (ALL) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation first quarter 2010 earnings conference call.

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

Later, we will 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 call over to your host Mr.

Robert Block, Vice President Investor Relations.

Mr.

Block, you may begin.

Good morning, everyone, and thank you for joining us, for Allstate's first quarter 2010 conference call.

Today Tom Wilson, Don Civgin will provide some thoughts on our results for the quarter and then we will up the call to take your questions.

Judy Griffith, Chief Investment Officer, Joe Lacher, President of Allstate Protection, Sam Pilch Controller and Matt Winter, President of Allstate Financial will also participate in the Q&A session with us.

If you would limit yourselves to one question and one follow-up, we will be able to get to more people during our time together today.

Last night we provided our earnings press release, investor supplement and filed our 10-Q for the first quarter of 2010.

We also provided a presentation that we will be using this morning.

All of these documents can be found on our website.

As noted on slide one of the presentation, 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 2009, Form 10-Q for the first quarter 2010, and our most recent press release for information on potential risks.

Also this discussion may contain some non-GAAP measures for which there are reconciliations on our press release and on our website.

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

As always Christine Yeider and I are available to answer any further questions you may have once the call is completed.

Let's begin with Tom Wilson.

Thanks for joining us today, and your continuing interest in Allstate.

I will share my thoughts on the results for the quarter, putting them in context of the programs we have put in place over the last couple of years, and looking forward for the priorities we have in place for 2010.

Then Bob is going to go through the business unit results and Don will cover investments in our financial position and then we'll get to your questions this quarter's operational and financial results were really a combination of the trends and progress we made throughout 2009.

We had strong profitability in auto insurance.

The homeowners business continued to under perform as we experienced near record catastrophe losses.

Allstate financial made further progress in reinventing its strategic focus, and our investment results continue to reflect low interest rates, but improving fixed income markets.

The net result was we generated $375 million of operating income and $120 million of net income as you can see on slide two.

The overall combined ratio was 98.9.

The underlaying combined ratio excludes the catastrophe losses and reserve estimates 89.1, which is right in the middle of the full year forecast of 88 to 90.

Investment income was $1.1 billion.

That's 10.7% lower than Q1 2009, which primarily reflects two things, lower short-term interest rates, and risk mitigation efforts we have taken to protect the portfolio from large economic losses if interest rates increase.

Our return optimization programs served us well, as the unrealized loss on the $100 billion investment portfolio decreased from $2.3 billion at year end 2009, to about $850 million at the end of March 2010.

This improvement reflects our decision to stay long in corporate credit and the continued decline in corporate credit spreads.

As a result of all of that, our book value per share was up 42% over the last 12 months and increased 5% during the first quarter.

The operating results underneath these numbers also reflect steady progress on our goal of creating shareholder value by raising returns in homeowners and Allstate financial and growing our businesses.

We're staying focused on improving returns in homeowners through a comprehensive set of profit improvement initiatives.

We've tightened our underwriting guidelines, reduced market share in highly volatile areas, restructured reinsurance programs and continually evaluate our claims practices.

We have raised pricing so that average premiums are up 7% this quarter over the first quarter of last year.

In addition, this quarter we received approval for price increases in another six states that average about 7%.

The weather, however, continued to out run the benefits of these initiatives so we have more work to do.

Our goal is to turn the homeowners business into a competitive advantage, instead of a burden on returns.

Allstate financial made progress in raising returns by discontinuing sales of its fixed annuities to financial institutions at the end of the quarter.

It is also now about 93% of the way home, on its focus to win expense reduction initiative.

We will grow our auto business by keeping more of our existing customers and increasing new business.

We did well on raising customer loyalty, which increased for the fifth quarter in a row, and should drive higher retention rates.

Retention was up versus last year's first quarter but was flat to the preceding quarter.

New business was off slightly, reflecting declines in Florida and California.

Our encompass business also declined due to profitability initiatives.

Average premium essentially offset the decline in overall units.

Looking forward, we have to stay focused on increasing items in force to drive long-term growth.

Allstate financial's work place business continues to grow rapidly and is now the second largest domestic insurance provider of voluntary products at the work site.

We are also well along the path of launching several new products this year, both for Allstate protection and Allstate financial which will be supported by new marketing programs.

Let me now have Bob take you through the operating results in greater detail.

Thanks, Tom.

Turning to slide three, we provide premium and underwriting trends for property liability.

Starting with the top line, total net written premium fell slightly in the first quarter, about $11 million, to $6.258 billion.

This was driven primarily by profit improvement actions in our Encompass brand included in the all other line on the slide, where net premiums fell by $71 million.

Allstate standard auto net written premium grew 1.1% to just over $4 billion, an increase in average premium more than offset a decline in units.

After a strong year in 2009 for new business, our new issued applications fell in the first quarter of 2010.

Profit actions taken in Florida and California, significantly reduced the new business flows in those two states.

Partially offsetting those declines were increases in new business flows for most of the states where we introduced enhanced discounts for our multi line customers.

Retention of key metric increased by 0.2 of a point compared to the first quarter of 2009, and about the same improvement as we saw in the last two quarters of 2009.

Allstate brand homeowner premium increased by 1.5% in the first quarter when compared to the first quarter of 2009.

Increases in average premium driven by rate actions that we have taken over the last year more than offset declines in units.

We will continue to see great changes in order to drive this line to acceptable margins.

On the bottom half of this slide, we give the combined ratio trends.

Our overall combined ratio for the first quarter was 98.9, an increase from first quarter 2009 of 2.1 points.

Catastrophe losses accounted for 10 points of the combined ratio versus 7.8 points in the first quarter of 2009.

Prior year reserve reestimates excluding those affecting catastrophe losses were favorable in 2010, whereas they were slightly unfavorable in the first quarter 2009.

The net result our underlying combined ratio finished the quarter at 89.1%, 0.2 of a point higher than prior year, and right in the middle of or annual outlook range of 88 to 90 range.

A word on catastrophe losses for 2010.

$648 million this quarter represents the worst first quarter cat loss since 1994.

In fact, we have experienced three straight years of elevated catastrophe losses in the first quarter of the year.

About half of the quarters estimated losses occurred in the month of March, including one weather pattern that affected almost half the country and is estimated to cost $250 million.

Slide four provides a look at the components of loss cost for auto, property damage frequency was down slightly in the quarter despite the weather we experienced in the quarter.

Bodily injury frequency increased over 5% in the quarter, a trend we are carefully watching.

Paid severities for both bodily injury at a minus 1.3% and property damage at 0.4% increase, were well within the expectations and in the case of bodily injury helped to mitigate some of the increase in frequency.

The combined ratio for the Allstate brand standard auto game in at 94.4% 1.1%, higher than the 93.3% posted in the first quarter of 2009 and essentially in the same range it has been the last five quarters.

The loss trends for homeowners shown on slide five are mixed this quarter.

Excluding catastrophe losses, claim frequency continues to increase reflecting the influence of non-cat weather.

Offsetting this trend, paid severity excluding the impact of catastrophes declined in the quarter.

Given the rate increases taken in the last few years, the combined ratio excluding catastrophes declined in the quarter by 5.1 points.

We will continue to seek rate changes designed to improve the margins in this line of business.

On slide six, we switched the focus to Allstate financial results for the quarter.

As Tom mentioned we are moving to improved returns of this business by reducing the concentration of spread based business and focusing on mortality and morbidity business.

The top half of the slide depicts premium and deposits activity for the last five quarters.

In total, the volume was down to $1.1 billion from $1.53 billion last year.

But underwritten products intrasensitive life, traditional life, and accident and health grew by $102 million.

About half of this growth came from Allstate work place division, where we have made good progress penetrating the large employer segment.

The decline in bank deposits reflects the fact that we held a savings account promotion in the first quarter of 2009 and did not repeat that this year.

The bottom half of the slide shows the income results.

We had a small net income in the quarter versus a loss in the first quarter of 2009, of $327 million.

Operating income of $139 million in the quarter was an increase of $54 million over the previous year's result.

The increase in operating income was due to lower DAC amortization, including a lower amortization rate on fixed annuities and the unlock.

As is our practice, we completed a detailed study of our deferred acquisition costs to determine if an unlock assumption was appropriate.

This unlock had a favorable impact on operating income in 2010 of $26 million, while last year's unlock in the first quarter was a favorable $15 million.

The total impact of the DAC unlock on 2010 net income was a favorable $8 million.

The investment spread increase almost 28% from prior year due to lower deferred sales inducement amortization, partially offset by lower net investment income.

The benefit spread declined slightly on unfavorable mortality experience, offset by the growth in the accident and health products.

With that, I will turn it over to Don.

Thanks, Bob.

First I will cover our investment performance and conclude with a quick review of our capital position.

In the first quarter, we continued to proactively manage our investment portfolio.

On slide seven, the total value of our investments finished the quarter at just over $100 billion.

The fixed income securities remained the largest portion of the portfolio at $81 billion, an increase of $2.5 billion.

Strategically we maintained a significant exposure to corporate credit which again proved to be the right call, as market conditions improved and fixed income spreads narrowed.

Consistent with our economic outlook, we continue to reduce our exposure to commercial real estate, and municipal bonds with both asset classes declining in the quarter from year end 2009.

Municipals were reduced by $1.3 billion of amortized cost, primarily through net sales which resulted in the small trading gain.

The commercial real estate portfolio made up of mortgage loans, CMBS, and real estate funds declined by $0.6 billion of amortized cost, partly due to our aggressive pursuit of mortgage loan payoffs and we did reduce our equity allocation during the quarter by $1.4 billion of cost as part of a repositioning of the portfolio.

On slide eight, we lay out the investment income and realized capital gains loss trends for the last five quarters.

Investment income fell 10.7%, versus Q1 2009 as we maintained our defensive stance relative to rising interest rates.

Realized net capital losses were $348 million for the first quarter, about the same level as in Q1 2009, but the makeup of this result was very different from last year.

OTTI impairments of $255 million were $470 million less than Q1 2009, gains from sales were significantly less than in the first quarter of 2009 at $88 million.

Derivatives generated a $185 million loss as macro hedges against interest rate and equity market tail risks remained in place throughout the quarter performed as expected.

The limited partnerships performed much better this quarter, posting a small gain versus a substantial loss in Q1 2009.

On slide nine, we provide the details of unrealized net capital gains, losses positioned at the end of the quarter.

As I mentioned earlier, narrowing credit spreads improved our fixed income valuation by $1.3 billion, and the rising equity markets benefited our position by about $200 million, compared to year end 2009.

On an after tax and DAC basis we now have only a small net loss of $84 million, $3.7 billion better than a year ago March.

Finally, on slide 10, you can see our capital position, which now stands at $17.6 billion on a GAAP basis, that's a $5.4 billion increase from March 2009.

Book value per share rose to $32.26, an increase of 42.4% from Q1 2009, and 4.6% from year end 2009.

Assets at the holding company level remained at $3 billion and our estimated statutory surplus results are roughly unchanged from year end 2009.

So in summary our financial position today is significantly improved from a year ago.

Our proactive management of risk mitigation and return optimization continues to pay off for us and our shareholders.

With that, I will turn it back to Tom.

Let me quickly summarize before we turn to our questions.

We made progress on our initiatives to create shareholder value and delivered a profitable quarter despite the near record catastrophes.

We continue to post strong auto margins.

We made progress in raising returns in homeowners and at Allstate financial.

We proactively managed our investment portfolio to mitigate risk and to optimize returns, and we're taking action to create sustainable growth in our businesses.

So with that let's open it up for your questions.

Thank you, sir.

(Operator Instructions) Our first question comes from Bob Glasspiegel from Langen McAlenney.

Good morning.

I was wondering if we could review advertising.

Where -- where do you think you are this year in your spends versus prior years and how does that stack up against Geico and Progressive and long term, where do you think you need to be to grow the business?

Good morning, Bob.

Thanks for the question.

By the way, congratulations.

You have the speediest fingers.

You always get your notes out as quickly as anybody I have seen on our numbers.

Thank you.

Actually I thought maybe it went out before the press release.

I wasn't sure about that.

The advertising.

This business has become much more marketing driven over the last really -- since 2002, when we began to -- we -- Geico and Progressive at tha point were spending somewhere around a couple hundred million dollars a year and we were spending less than that, and you remember in 2003, we said we were going to step it way up, and that really began a series of competitive responses which leave marketing as a significant way in which this business competes today.

Besides just price.

So it's -- and what you see over a long period of time is that the bigger players who advertise a lot tend to grow faster than those that do not.

So whether you look at the top ten or you look at the heavy advertisers.

So I think you should expect to continue to see advertising be a successful and ever increasing weapon used to grow.

In fact, I think sometimes Bob, people confuse advertising with channel, that it's big advertising that drives it.

You certainly got to be competitive.

You need to have all the different channels.

So you need to do it with people.

You need to do it through call centers you need to do it over the Internet.

What you will see is continued high levels of spend this year.

I can't speak for our competitors but from looking at the airwaves, it looks like they are spending about what they did last year at Progressive -- or at Geico.

Progressive seems like it's dialed up a little bit with flow and we've been reasonably steady in the first part of this year as we seek to reposition some of our advertising to be towards our target customers and talk more about longer term value.

Last year we spent a lot of time on price, which we needed to do, because -- because of our silence on price before that.

We were perceived as too high.

We are not any longer.

We brought that measure way down.

So we are shifting our focus some.

You should expect and continue to see us be aggressive in advertising as we go throughout this year.

Thank you.

Your next question is from Jay Gelb from Barclays Capital.

Your question, please.

Thanks.

Good morning.

I wanted to touch on the Allstate brand standard auto PIF trends.

Year over year in the first quarter it looks like it was down 1.5%, versus being down 1% in the fourth quarter.

I was hoping you could comment on that first.

And then my second question is on the run rate of profits in Allstate financial, ex-the DAC unlock, it was around $113 million and I'm trying to get a sense if that's the right run rate going forward or if the shift in strategy on fixed annuities business will have an impact?

Thanks.

Good morning, Jay.

Let me make an overall comment on auto PIF and then Joe can give you some specifics on it and Matt can then pick up on Allstate financial.

A couple of overall comments.

First, of course, our strategy is to grow our auto business.

The biggest way we can do that is to keep more of the customers we already have.

So retention becomes very important.

As you point out, of course, you always need new customers because people die, move away or go someplace else.

So we have to -- we do have to continue to find a way to get new customers, but you have to look at it in total.

And Joe can help you think that one through.

On Allstate financial, Matt will take you through the specifics.

But I think you are correct not to multiply this quarters number by four.

Do you want to start, Joe, and then we'll go to Matt?

Good morning, Jay.

Great question on auto PIF.

One of the things we are focusing on inside the organization is recognizing that there's market place forces where a lot of folks are driving towards auto growth and we're well in the hunt to deal with that.

What you saw a little bit last year was some significant increases for us in new business and we had a couple of states where we had to temper that a little bit in the first part of this year, and really a little bit in the last part of the fourth quarter of last year.

That slowing in new business is helping to drag down that PIF number a little bit.

We do believe that that's a nearer term issue and are actively continuing all the initiatives that Tom touched on and a number more to improve customer loyalty and improve retention, to make our value proposition clear in the market place, and the competitiveness of our products clearer to drive a crisper advertising message with -- with focused spend there to drive callers, and shoppers into our different distribution channels.

And potential new product initiatives later in the year.

So we are confident we are moving in the right direction but you see a near term slowing.

We are adding a fair amount of initiatives with PPD discounts and targeting our monoline homeowners customers so we think those opportunities will -- are showing fruit right now in the PPD discounts and will continue to bear fruit for us over the course of the rest of the year as we drive these other initiatives.

What are those discounts, Joe?

The discounts, I'm sorry, I'm speaking in internal code.

The discounts for our target customers with bundled auto and home products.

They tend to be our highest lifetime value customers and we're successfully attracting more -- more of them with these discounts and making sure our competitive position is sharpest in those segments.

Jay, it's Matt.

Your question about whether or not you can assume a new run rate for Allstate financial, as Tom said, we did have a couple of one-time favorable items and we had some favorable volatility that worked to our benefit in both life and the work place.

So I would not multiply it by four, but what you should start seeing as a result of the deemphasis of the spread business and the continued focus on the underwritten products is a slow and steady increase in returns and a stabilization of those returns that will be a result of both the product shift, the continued expense work we do, and other work we are doing to improve the returns in the business.

What were last year's profits on the spread business?

Should we use that as a base line in terms of what we take out?

No.

Well, you really shouldn't for a bunch of different reasons because we are, -- we are having runoff of different blocks of business at different times, and although we think we can predict some of that, none of it is completely predictable.

So I would not encourage you to multiply anything, but instead to kind of look at some of the pre -- predisaster run rates in some of the subsegments on mortality and morbidity and watch a slow trend line as the fixed annuities run off.

We will expect 7 billion to 8 billion of those fixed annuities to run off over about a three-year period.

And that will give you an indication of probably having our current exposure at least in the bank channel.

All right.

Thanks.

I will follow up offline.

Okay.

Our next question is from Josh Shanker from Deutsche Bank.

Your question, please.

Good morning, everyone.

I want to follow up a little bit on Jay's question about PFI.

I didn't completely understand the answer.

One question I have is I noticed that in addition to the -- the auto policy count being down, 150, 160 some policies, the homeowners policy counts are 90,000 policies.

When you lose a homeowners policy, what is the likelihood that you also lose the auto policy.

Josh, good morning.

Let me take a longer term view since I loved through some of this and if Joe wants to fill in, he can.

We work hard at trying to maintain whatever our relationship with our customers.

So in Florida, for example, we went from a double digit market share in homeowners to around 2.5 or 3% now, I think is where we are at, yet at the same time, our market share went up and the last I looked it was around 13% or something like that.

So we were able to manage our way through that, in part by offering customers homeowners products that are provided by other people.

So we maintain that strong relationship between our agency owners, so that they are still covered.

It's just not on our books.

So we've been able to do that.

The other item that Joe was referring to is -- which he is -- the acronym is PPD which is a discount for people who have their home insurance and their car insurance with us, and we have about 3 million homeowners who do not buy car insurance from us.

It is our goal to have each and every one of those buy auto insurance from us.

It really makes no sense to have a low return business for good customers and have Geico or Progressive take the high return auto business.

So we have dramatically changed the discounts called increased them for those customers.

So when we go out to somebody and we say, hey, Josh, the bad news is your homeowners insurance went from $1,000 a year to $1,150 a year, so you are up 15%.

That's the bad news.

The good news is is our discount is much higher on auto insurance.

So if you were to move your cars to us, we can package it together and maybe we can save you money in total.

That's the program that Joe was talking about that is very successful today, not only will it help us improve our homeowner business by getting the right prices there, but it gives us good, solid auto business which then has great retention to it, because we have everything with them.

So it's sort of a two-fer.

It's a win/win deal.

Is that helpful?

It is.

So in terms of -- currently, let's think a year ago, today, and one year from now, if you were going to non-renew the homeowners what historically has been your win rate of keeping the auto?

What do you think it is today?

And where do you think it is going to?

We don't give that out because we think it's competitive.

I think if you went back to the Florida example, I would say that we have been successful in competing in the market, both as a monoline auto insurer because we have good pricing, good product there, as well as we have been in homeowners.

We -- of course, sometimes you make people bad if you don't offer continuing coverage, as opposed to non-renew.

But if we don't offer them continuing coverage, sometimes they get mad about that but if you do it in the right way, we actually help them shop.

We give them different alternatives.

So it's -- we have found that we have been able to maintain that balance and have been doing that really since 2005.

So we've got a lot of experience built into the system as to how to do that.

Some of what you are seeing, Josh, to give you an indication on it is the policy decline in homeowners exceeds the policy enforced decline in auto.

So you are seeing some of the actions we are taking to drive homeowners profitability improvement, causing a greater impact on our homeowners policy in force.

Part of our issue is on the auto side, and it's as simple as we are losing more customers than we are writing.

The issue is we have to drive new business up.

We have been working on those initiatives over the last several quarters and with success.

We had to temper some of that new business drive a little bit in the late fourth quarter and the early part of this year to adjust a couple of states and are continuing to drive initiatives that will work towards increasing that new business.

At the same time, we are focusing on customer loyalty programs to improve our retention and you have seen that improve from an auto perspective as well.

So we are moving in the right direction.

And just quickly, finally, you said I understand, don't multiply the decline in policy count by four, but what do you expect your implementation serve rate is for the new directives going through?

Josh, I'm -- we were talking -- when we said four, we were really talking about Allstate financial.

So I think--.

I don't think--.

I think -- you said it twice, actually.

I think we were talking about the multiple -- Matt said it twice with different elements of Allstate financial.

We don't typically give revenue guidance.

So if we were almost doing it, we made a mistake.

Okay.

Very good.

Thank you.

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

Your question, please.

Good morning, Allstate.

I was wondering if we have seen the bottom in the non-standard business.

And then I would love to hear some comments upon strategically what you think you are doing in Encompass as compared to the standard business.

Let me give you some long-term perspective on non-standards and Joe might want to give you some short-term view on Allstate blue and how it's doing and he can certainly talk about Encompass as well.

Paul when you look at the non-standard business, we grew that business very rapidly a decade ago.

We were actually at one point in the late '90s selling more non-standard than we were standard insurance on a weekly basis.

Unfortunately, that business was mispriced, and so in about -- about 2001, we began to reduce that book of business, and so you will see actually our market share and our policy counts start to go down which was intentional on our part because we were losing money.

In 2004, we had to make a choice between whether we wanted to prioritize your choice auto or growth in nonstandard.

At that point in the cycle we thought prioritizing your choice auto was the right thing to do.

So we did that.

Of course, we are now over 5 million your choice auto policies which has really helped stabilize and protect that standard auto book.

At the same time, then later in, I think it was about 2007 or '8 we rolled out Allstate blue which was a restaged more consumer friendly non-standard product, obviously targeted towards high-risk drivers that the growth in that business is in the new -- in the new states has been good but it's not been enough to overcome the continual slide down in the non-standard business.

So the net of all of that is that business is a fraction of what it used to be, which is the bad news.

The good news is that it's an opportunity for us to grow.

It shouldn't continue to go down.

It's becoming such a small piece of the book, it doesn't actually impact the total loss book anymore, which is a bad thing from our standpoint, because it's a good customer segment.

We have to figure out how to go after it.

So that's work that's underway.

Maybe you want to jump in Joe and talk about specifically what your non-standard and don't forget Encompass as well.

Right.

And leveraging off of those comments, our Allstate blue program is a -- a more customer oriented and customer friendly program and we are growing it at a much slower rate than we did the last time we drove our product initiative.

There's some elements of the non-standard market place that it's not appropriate to sort of interact with it on the most customer friendly orientation.

There's -- there's a lot of complexity inside of that business, and the operating model to make it run effectively and profitably.

It's somewhat different than you need in a standard and preferred marketplace.

We are using our current programs now to sort of expand from our core.

We'll take the learnings there and leverage them to -- to gradually and thoughtfully expand into that long-term attractive market.

But it won't be at the pace that you saw us do it last time.

Relative to Encompass, Encompass' core business was a homeowners bundled business for relatively higher net worth than sort of the median or middle income America, and we're going to bring that business near term back to its core.

We tried for a while to expand more significantly in that brand.

To a standard and near standard auto play.

And it didn't match the distribution channel position that we had, the shelf space that we were occupying inside of agents offices and our operational capabilities weren't as well matched to that as they needed to be.

The core product offering -- the core niche that that business has provided to independent agents is a good one and a strong one and we are going to adjust our execution, and focus around that and then build from there.

What you are going to see near term is the continued retrenchment, if you will to -- to fix some of those items and that will last for a couple more quarters as we get refocused.

Great.

Thank you.

Our next question is from Dan Johnson from Citadel.

Great.

Thank you.

Most of mine have been answered.

Just a couple of remaining ones.

Maybe we can talk a little bit about the homeowners business.

It looks like we've put through some pricing increases over the last couple of quarters.

It looks like they are starting to show in the average written premium.

Can you talk a little bit about where you think that average written premium per policy is going over the next couple of quarters?

And then I've got a follow-up question, please.

I will let Joe handle that, but as he said earlier, we try to give -- the guidance we like to give you is on underlying combined ratio, not on the various components of the P&L, Dan, I think Joe can give you some perspective on that.

We -- thanks for the question, Dan.

We have clearly said before that the homeowners business is under performing our return targets for it.

We've had a series of programs actively running and are working successfully from our perspective.

We have tightened underwriting guidelines and in some cases we've produced market share in highly volatile area, we've restructured our reinsurance programs and we continue to evaluate our claim practices.

We've raised pricing so that average premiums are up 7% this quarter over the first quarter of last year.

In addition, this quarter we have received approval for price increases in another six states that also average 7%.

So without giving you a revenue guidance, you can look at those rate increases and you can look at the ones that we received approval for, which will roll themselves forward.

There should be some continued movement on pricing and we're not just one renewal cycle or one pricing cycle away from getting the returns where we want them and need them to be.

We are committed to using our homeowners business as a competitive advantage and not as a burden on returns so we are going to drive towards that goal.

I guess maybe the way to split that question a different way.

Obviously the weather has been the weather, but if you look at the rate increases you have taken and you will expect to flow into the written premium over the next couple of quarters, are we making progress on the non-cat loss ratios?

Yes, we are and we've got a couple of different spots inside our disclosures where you can see the ex-cat loss ratio and I think it's about a five point improvement over prior year.

So you can clearly see that we're moving in the right direction on that and what I would describe is that long term it's moving in the right direction.

Short term, you get weather volatility, and you are asking the right question, what's the long term view of how these initiatives are working and they are clearly making an impact.

Great.

And then the follow-up question would be just on the exit from the -- within the financial business, from the financial institutions distribution channel.

Any thoughts on the amount of sort of capital that's sort of tied up in the products there and what sort of capital release we'll see over the next, say, two years by not writing any new product?

Well, Dan, it's a good question.

We don't have a specific release number that comes to that, because, of course, part of that depends how long the block stays in business.

There's about $17 billion there.

Matt's working hard with his team to make sure we keep it in place, but you are asking the right question, which if you go back to Matt's comments, I think he said -- I was sitting here smiling because I think he said three or four times in the course of his comments, returns, which is the way we're going to improve shareholder value on Allstate financial is to get the returns up.

We are cognizant we have to manage operating income, we need to get operating income up to get returns up, but the other piece to that is even if operating income doesn't go up but the size of the business is down, and so the capital involved in the business is down is the -- then returns share go up.

You remember, we got about $1 billion out of Allstate financial in '05 and '06.

We put back a little more than $1 billion over the next two years, and then we don't think our -- our current view is we won't have to put any money in this year.

So they are focused on returns.

This will have some impact on it but we don't have the specific on what you are looking for on just the bank channel fixed annuities.

Great.

And then finally in your preference of capital deployment, would you -- would you prefer dividend increases over share repurchase or the other way around?

Our continued view is that dividend -- dividends should be tied to profitability.

So to the extent the profitability goes up and it's sustainable, then we will put in dividend increases that are commensurate with that.

Other than that we have said if we don't -- we would like to deploy capital in the business and grow it because we think that's the best alternative for shareholders.

If we cannot, then we would do share repurchases to pass that money back to shareholders.

We have, of course, a long track record of doing that and -- but that's prospectively Don and his team don't have any plans at this point to do anything different than what we have currently been doing on share repurchases which is nothing and of course, I say every quarter that -- the Board approves a dividend, and that's not for us to talk about here, make any promises for my Board that has to decide what I want them to do.

Good.

Looking forward to both of those.

Thank you.

Thank you.

Our next question is from Matthew Heimermann from JPMorgan.

Your question, please.

Hi, good morning.

I've got two key questions.

I guess one, when you talk about the multi product discount that you offer customers, how should we think about how that impacts the profitability of that customer with respect to auto?

And I guess what I'm trying to drive at is when you give that discount, does that discount effectively represent the lower acquisition cost for that client over its lifetime and so combined ratio equals that of a stand alone auto customer just with a different mix between loss ratio and expense ratio?

I just want to try to understand how that economics work.

I would say yes to your question, but there is only one piece of it that I think you want to be careful of, you said the combined ratio is equal to that of a stand alone auto.

That, of course, varies widely by year, but your comment about acquisition expense, lifetime value is consistent with the economic model that we use in -- with customer relationships, which is lifetime value.

Okay.

So it is the acquisition piece is the right way to think about it?

Well, I think -- I think what Tom said -- I'm sure what Tom said is we look at lifetime value, which is a combination of acquisition costs, loss costs, how long we retain customers.

There's a fulsome view inside of that, and we're going to be unable to give you or unwilling to give you as much information as you want because I think there's some competitive thought process underneath that.

But we do take a broad view of the lifetime value of those customers.

We recognize how that -- how that differs, depending on what they buy and how they buy it.

And we use that knowledge to -- to adjust our pricing.

We don't have a point of view that we drive everything to exactly the same margin.

We know what those margins are, and we use the knowledge to be appropriate prices in the market place.

I guess -- I guess kind of the issue underlying that that I'm trying to get at is as you discount whether or not that has any negative impact on how you think about -- how we should think about externally the loss ratio.

My thought -- my gut tells me that in total -- in terms of total combined ratio, it doesn't really have an impact in terms of how we should think about the business running, vis-a-vis pricing, general loss cost trends but I just want to make sure that I'm not missing something with respect to that.

The discounts probably have some impact, but it's not a dollar for dollar impact.

Some impact on the combined ratio, because they -- they do have other -- they interact with other components other than just acquisition costs.

Okay.

And what we tell you is we think that what it does is it will drive our capacity to increase earnings dollars and aggregate returns by attracting and keeping more customers.

Okay.

And then I guess the other question I had was one of your competitors noted that -- because frequency trends at least relative to my expectations looked a little bit better than I thought they might.

Was there any benefit in the quarter from just the bad weather, in other words, people just didn't drive as much because Travelers mentioned on their call that that was a benefit this quarter?

I'm not -- I guess I would say it's impossible to variance analysis, frequency for weather, gas prices, miles driven, good luck.

So I think we view frequency as within the expectations we had, which is why we are in the middle of the range that we committed to of 88 to 90.

And we don't see any big changes around that.

Trying to specifically say that frequency as up or down on auto, I assume you are talking about.

Correct.

Is -- is related to weather has been very difficult to prove.

We have tried for years to do that, but it gets difficult, even if you use meteorological data, like amount of rainfall, amount of snow, degree days.

We have built all kinds of algorithms on it, but it -- Matt, if you get freezing rain at 2 a.m.

it's different than if you get it at 3:30 p.m.

because people are on the road at 3:30 p.m.

and there's not time to clean it up.

So we've tried very hard to build it.

We find it to be next to impossible.

At this point, with the tools we have to do it.

It doesn't mean we won't get there eventually but right now, I don't think we could say the frequency was essentially flat in PD because of bad weather.

Okay.

And clarification on Dan Johnson's question on the fixed annuity income capital.

What -- could you quantify what -- how your RBC ratio would improve if that -- based on current capital, if those -- if that business was wiped off the books?

Hypothetically.

No, we couldn't do that for you.

It's -- first, we're not allowed to talk about RBC under Illinois law.

So it's against the law to give our numbers out that way.

Secondly, it's a really complicated problem.

You have covariants and you have got all kinds of investment portfolio decisions.

The thing to focus on is Matt understands this business well.

He understands the components of returns.

He believes that this action will drive returns up so we feel good about them.

All right.

Cheers!

Our next question is from Ian Gutterman with Adage Capital.

Your question, please.

Hi, thanks.

I'm wondering back to the early question on PIFs and growth and so forth.

Is it possible that you need to think a little bit about expanding the appetite a little bit, meaning there's been -- for auto, there's been closer to -- this focus on high lifetime value, and maybe, Joe obviously, at his past employee led them through an expansion of appetite, I'm wondering if that's you are thinking about that, I'm not saying go push non-standard or anything but do you need to expand the target range a little bit?

Because it seems like the Geicos and Progressives are trying to creep up from there, more standard customer towards your more preferred.

Do you need to reach down a little bit to get that growth?

I will make an overall comment and maybe Joe will want to jump in.

In 2007, in focusing on our -- all of our programs we decided to focus on high lifetime value, really multi car homeowners and drove our activity and actions around that because we wanted to protect that base because we felt we were going into an unstable environment.

It was not -- we didn't think it was unstable as it was, otherwise we would have solved everything we had and put it in cash and made a ton of money.

As it was, we worked our way through it.

That was an intentional decision on our part, which is where -- you see that showing up in lack of growth in those years, versus in '04 and '05, we were growing it 4% to 5%, because we did exactly what you talked about, which is expand our focus.

So that's how we got to where we are.

Joe might want to talk a little bit about where we are going from here.

Yes, and it's a good question, Ian, and the context Tom provides is an important one to understand how and why we are where we are, and I think we have a point of view similar to the underlying thought process in your question, that there are customers out there that generate attractive returns that exceed our return targets.

They may not be as high returning customers as our current highest lifetime value customers but it's an attractive business opportunity for us and we are going to increase our focus and ability to capture those customers.

Okay.

And just as a follow-up, I'm having a brain freeze here and I'm forgetting the name all of a sudden, the movement you had a couple of years ago to offer the platinum and the gold -- the tiered strategy, did that -- is there something -- looking back on that, maybe that that didn't produce the type of growth you hoped it would, that that needs to be revisited?

Ian, if you will give me your number after the call, I am make sure we call you and offer you your choice auto.

Your choice.

Thank you.

We are the only people in the industry who do it, who sell it.

It is a -- we did it because it is a differentiated product.

We never expected that it would drive growth off the top of the charts.

It was really about giving customers what they want, helping them understand the product better, so it's simply packaged.

It helps them remember what they have, do they have gold, platinum or did they go with the value product.

So they don't get all hung up in clause 2, page 3 of the contract.

It's about being customer focused, building the products around them.

It did lead to -- we believe it led to incremental growth, although trying to prove that is a little difficult because we obviously sell a lot of auto insurance every year anyway.

We do know that we sold more up than down as we got into the program, so that average premiums were up and we do know that retention was better for those people because they knew what they had and they thought the sales process was better.

As we move through this current recession, one of the great benefits of that is we have seen a -- if you look over from really -- I think it was about middle of last -- middle of -- maybe it was even end of '08 through the end of '09, the number of people moving from platinum down to either gold, standard or value, just went up.

And so what that shows is we have a relationship and a product structure that enables us to work with our customers over time, in a way that's simple that they understand, that enables them to manage their premiums, which they've had to do in this economic recession.

So I would say that it serves the purposes.

We never thought that it was going to -- competitors don't give up their customers willingly.

This is not a -- a -- a high turnover business in general.

So it's not like you buy a new cup of coffee every day.

Most people try to stay with it.

So it worked around retention.

It has got a lot of retention features built into it.

But I would echo what Joe said is that as we look forward, those people who like your choice auto tended to be those people who don't shop as much.

Got it.

As we expand more marketing, as we need to expand to those people who are shopping more, which is the challenge that he and his team have in front of him now.

Got it.

Thank you.

Very good answer.

Thanks.

Our next question is from Vinay Misquith from Credit Suisse.

Your question, please.

Hi, good morning.

On Florida and California, could you give us a sense for when you think the drag from raising pricing in those states would start to abate?

Would that be six months from now?

I'm trying to find a balance between revenue guidance and insight into some of these.

There are pieces of the actions that will come online very quickly, measured more in months and there's pieces of it that will take a little longer, but all of it we can get into this year.

So the drag from this should start to abate by the end of this year, you think?

I think what ends up happening, the profitability changes we need to make and deal with will be implemented in that time period.

There are competitive dynamics in any of those geographies that are impossible to predict, so.

Sure.

Fair enough.

And then the other states you had a 5% increase in new applications.

Just wanted to get a sense for the PIF in the other states excluding Florida and California.

Did you manage to stay flat or was that down and if so, how was that this year versus last year?

I think Vinay, and I would love to help you with, it but we are going to have to stay within our fairly lengthy and detailed disclosures already and let you work off of the components that we have there otherwise at some point we are going to get a little more detailed in our competitive actions by state than is going to be helpful for us.

Okay.

And then finally on Allstate financial, just a question on what do you think are the sustainable ROEs in the near term versus say the next two or three years?

We have a goal, of course, of getting 15% return on equity in our business.

We expect everybody to participate and get to that level but Vinay, Matt has quite a challenge in front of him, given that he's down in the mid single digits.

So he's got some work to do there.

We don't -- that's not a business you turn overnight because it is a long-term business and I like to describe the accounting as the Mr.

Coffee, you pour everything in the top and it drips out over a long period of time.

So we cut expenses and it takes about ten years to actually get it all into your ROEs.

So he's got some work ahead of him, but we haven't given out specific targets as to what that business has to do, but I would go above it and we do have to get returns up and Matt and his team will.

The other thing is that business is quite helpful to our middle income customers who need protection for life insurance, need protection at the work site, and -- and need help in retiring.

I think our challenge is -- is to find ways to create products that are simple and easy for them to understand, and can go through our system.

And when we figure out how to do that, we will be creating good incremental returns going forward, and we'll evaluate the business as to not only what is its overall return, but what is the return on the new stuff we are doing, and the growth and the ability to serve customers.

Thank you.

Our next question is from Terry Shu from Pioneer Investment, your question.

Most of my questions have been answered.

The main one I had wanted to ask, I think you answered on the discounts that you offer to the packaged policies and I think the answer, and correct me if I'm wrong, is that it probably will have some upward pressures on the combined ratio, and the profitability you can't quite measure -- or you can't say that there isn't some impact on the underwriting profitability, but overall, you are going to be earning more dollars and the overall and it meets your target rate -- target returns.

Did I understand that correctly?

Pretty close, Terry.

We don't think dollar for dollar the discounts drop to the bottom line over the long term, and we do think -- and I'm trying to remember how you phrased the second part of your thought process.

Right.

Because there has been some concerns, I think, that if you are offering discounts, are you growing or are you adding policies at the expense of profitability?

We understand -- we understand and measure and watch the impact of the profitability on these customer segments.

We just, for competitive reasons can't and won't disclose it.

So we know what's happening there.

We do believe that the lifetime value over the long term is -- is appropriate and sustainable and we believe that there are long term aggregate profitability will be better off by doing this.

Now, of course, we will put the discounts into play and we'll -- we'll have to see what happens in the market place with customers and their adoption in sales to confirm the accuracy of that.

Right.

But we are confident in its effectiveness.

In terms of the overall competitive landscape, I guess what you -- the message that you've given is that there was a perception that Allstate was higher priced and you have corrected that and I have seen your ads, your commercials and they are pretty good, the one with President Palmer, right, they are pretty good.

And so now where you stand, you feel that your pricing is comparable and that message has gotten across.

And if you look at a Progressive that has kind of turned the corner in terms of PIF growth, can you maybe just explain a little?

In terms of size, it's not like they are much smaller -- that much smaller than Allstate.

They have reached some critical mass as well.

The -- their growth, is it just a matter of advertising that they are achieving better growth?

Terry.

Just the competitive dynamics.

There's obviously a whole bunch of stuff that helps you grow, it's your advertising, how good are your quoting practices, your closing practices.

Do people want to buy?

Are you there when they want to call?

Brand perception.

There's lots going on there.

So I would say that overall we feel good about our competitive position.

We feel even better about where we are headed in terms of pricing, what we are going to do with advertising, what we are going to do with expanding the target group of customers we have and the things that Joe talked about we need to do tactically in some states where we are not growing that we feel -- we feel good about where we are going to go.

So I can't tell you exactly why Progressive's numbers are up.

I think their flow is working.

I think it seems like a good program.

They are putting lots of money behind it, and they tend to do that when their programs are working according to their numbers and they're economically rational people.

I would leave it as we think we can hunt, compete.

We have a great brand.

We have a great distribution system.

We have 12,000 local agencies.

Our direct business is up 27% this quarter.

We sell through independent agencies.

We have challenges in each of those that we work on every quarter and we talked about a lot of them today, but overall, we believe we can grow and will grow our businesses, including standard auto, Allstate financial, so that we -- and both work place and through the Allstate agencies at Allstate financial so we can drive shareholder growth.

I mean, we have really three things we need to do, get volatility down, get returns up in homeowners and Allstate financial and then grow the businesses.

That will drive shareholder value.

Right.

But you do believe that in terms of pricing kind of all of the top tier players, it's not a pricing issue anymore.

You are all fairly comparable, depending on the market?

No, I think it's complicated.

I, yes.

It's complicated.

You can never come to a conclusion that everybody is comparable, as evidenced by the fact that all the advertising, everybody saves you somewhere between $300 and $500.

Correct.

Correct.

I'm just saying--.

The crux of the matter, Terry, people don't switch if they cost more.

So the ads that say if you switch, you save $500, well, it's -- it's sort of -- it's de facto true.

I think what you can take from that comment, though, is there's still wide divergence in pricing, for any individual customer in the market place, and it's sophistication that enables you to win.

I'm not telling you we've got every sale right, every place, and we are at the lowest.

That's not our goal.

Our goal is to manage it in total.

So I think -- I don't -- I don't think you can say anybody is ever at parity in total.

Understood.

Understood.

I just wanted to get the -- kind of the general sense that pricing is -- again, it's complicated but it's not big discrepancies in a broad sense from among the carriers.

I think we have answered everything.

Yes, right.

There are broad discrepancies between the carriers on individual customers.

Correct.

Correct.

I don't think you can come to a conclusion about where anybody's overall price is and draw anything of it.

All you can really do is look and say are they growing or not.

Right.

Right.

Thank you.

Okay.

Brian, last question.

Did we lose Brian?

Our final question today is from Brian Meredith of UBS.

Thanks for letting me get in.

A couple of questions here.

Last one, G&A expense ratio, in the T&C business it looks like it's popped up here year over year.

Anything unusual there that we should expect tha going forward?

Increased advertising or something.

I would encourage you to think about our target combined ratio that we give you.

We are going to be in the 88 to 90.

Okay.

So keep it in that context.

Okay.

And then I haven't heard much out of Judy.

So I'm just curious to let her talk a little bit here.

New money yields versus kind of current book yields on the portfolio, investment port deal was down this quarter.

Are we hitting -- are we getting close to a bottom here?

Well, as Tom said in his opening comments, rates continue to be low, reinvesting generally is at a lower yield than the overall portfolio yield.

The -- but if you look at it from quarter to quarter, we were down modestly from fourth quarter to first quarter and we're working to stay fully invested and also to continue to do the things that we have committed to do in terms of risk mitigation and return optimization but with rates as low as they are, it's tough to really grow income with the significant exposure and fixed income.

My last question, Tom, if I take a look at average written policy in your auto business, it's ticked up nicely here.

You see the rates coming through.

Loss costs aren't up all that much, although we are seeing the underlying loss ratios in the auto insurance business.

Still increased on a year-over-year basis, I think they are up 90 basis points.

My question is, should we expect that to start stabilizing or going down going forward here, given the current dynamics?

Or is it the discounts you are putting through that kind of mitigate that?

Brian, are you talking about coming down being the combined ratio or the average premium.

I'm looking more at the combined ratio in standard auto or actually even more so the action in your loss ratio, ex-cat, the underlying loss ratio.

Yes, I would say we try to manage the business in total.

The 88 to 90 is a full year number.

So we, of course, try to be there every quarter because you don't want to be outside the range and not get there, but we are right in the middle of the range this quarter.

We expect we will stay in that range for the year if -- and so as it relates to the average premium, yes, it is up about 3%.

If you look at loss costs, you don't have the benefit of some of the stuff we see, where you see like paid severity is down on BI and stuff this quarter.

We feel good about staying in the 88 to 90.

We think that's a good place where we can grow and necessary for us to have the profitability to continue to invest and grow.

So I don't think you should read too much into the lines other than we said we will be in 88 to 90 and that's where we would like to be.

Thank you.

Thank you for all of your questions today.

Really, you can see this quarter is just really a continuation of the trends we have had over the last year and a half or so, things we have addressed successfully, and we'll continue to do that.

We do it a couple of ways.

One is we are good at what we do and second we just take action and move forward.

So we do have three priorities here, improving customer loyalty, growing our businesses and then reinventing protection or retirement so that we differentiate ourselves versus the competitors.

When we do that, that should -- or will end up in reducing volatility, raising returns and growing the business, which will end up driving shareholder value.

So thank you all for being patient with us.

We will see you next quarter.

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

This concludes the program.

You may now disconnect.

Have a good day.