Allstate Corp (ALL) 2010 Q2 法說會逐字稿

Good day, ladies and gentelmen, and welcome to the Allstate Corporation second 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 conference over to your host, Mr.

Robert Block, Vice President, Investor Relations.

Mr.

Block, you may begin.

Good morning, everyone.

Thanks for joining us today for Allstate's second quarter earnings conference call.

This morning, Tom Wilson, Don Civgin, and I will give some commentary on our results, and then we'll open it up for your questions.

Assisting us in the Q&A session will be Judy Greffin, our Chief Investment Officer, Joe Lacher, President of Allstate Protection, Sam Pilch, Controller, and Matt Winter, President of Allstate Financial.

During the Q&A session, we ask that you limit yourself to a question and a follow-up so that we can hear from as many of you as time allows.

After the market closed yesterday, we provided our earnings press release, investor supplement and filed our 10-Q for the second quarter of 2010.

This morning, we also posted a presentation that we will be using today.

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 second quarter, 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 in our press release and on our website.

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

Christine [Yeider] and I will be available to answer any additional questions you may have after this call ends.

Now let's get underway with Tom Wilson.

Tom?

Good morning.

We appreciate your continuing interest in Allstate.

I'll begin with an overview of our results for the quarter.

Bob will then discuss the details of the business unit results, and Don will cover our investment performance and balance sheet position, and then we'll get to your questions.

Our results for the second quarter are a continuation of positive momentum we've established over the last year and a half, despite the everpresent volatility of weather in the financial markets.

We generated $441 million of operating income, or $0.81 per share, a sizable increase over last year's results, reflecting lower catastrophe losses, as you can see on slide two.

You'll remember that last year, we had record second quarter catastrophe losses.

In Allstate Protection, the combined ratio is 96.8, 3.2 points below the second quarter of 2009.

The underlying combined ratio of 88.1 remains in line with our annual guidance of 88 to 90.

Allstate Financial continued to take positive steps towards its goal of raising returns while repositioning the business.

Operating income was $125 million for the quarter.

Investments generated strong returns, reflecting our risk mitigation and return optimization strategies.

Net investment income flattened sequentially as portfolio yields stabilized.

Valuations improved as declining interest rates more than offset wider credit spreads.

We produced $145 million in net income, a decline from last year's second quarter results, due primarily to realized capital losses from our risk mitigation programs, which were more than offset with unrealized gains in the portfolio.

We ended the quarter with $400 million net unrealized gain on the investment portfolio, versus unrealized losses of $849 million three months ago, and a $7.3 billion unrealized loss one year ago.

As a result of all of our efforts this quarter, our book value per share increased 3% from March 2010, almost 8% from the beginning of the year, and 19% from Q2 2009.

We remain focused on our priorities for 2010, and our operating results show continued progress in executing our strategies.

Our auto business continues to generate excellent returns.

While many of our standard auto growth initiatives are working, they're not generating enough volume yet to increase overall policies in force.

Our new business trends are improving as we continue to refine our product and price offerings to our targeted customer segments.

We feel particularly good about our crossline sales efforts, as Bob will discuss.

Offsetting these positives is a reduction in size of encompass, and our California auto business, as well as lower growth in Florida.

Homeowners' profitability remains a challenge, as catastrophe losses remained above average this quarter, though not as high as last year.

We have made progress and remain focused on improving returns in this line of business.

Consequently, we will continue to see price increases, tighten underwriting standards, and work to build more sophisticated risk management tools.

As you know, our strategy is to improve the returns in Allstate Financial include reducing the spread based business by exiting some distrubition channels, focusing on the Allstate customer base, and expanding our workplace business.

We made good progress in all of these areas.

Looking forward, we must stay focused on our goal to generate long-term profitable growth.

We will achieve this by retaining more of our existing customers while continuing to increase new business.

Our focus on improving customer loyalty is designed to do that, which is to drive improvements in retention and referrals.

Our customer loyalty index results, however, slipped slightly this quarter, as did those of the entire industry.

Focusing on the customer harbor remains a key strategy in our efforts to grow profitably.

Therefore, we will continue to introduce new products, new prices, and new marketing support to help us win at the local level.

With that, let me turn it back over to Bob for a more in-depth look at the operating results.

Thanks, Tom.

On slide three, we show the premium and underwriting income trends for property liability.

For the quarter, we experienced modest top-line growth, while maintaining our underlying margins within the range of our annual outlook.

Total net premium written increased slightly to $6.64 billion from the second quarter 2009.

Increases in Allstate brand, auto and homeowners net, premium written were partly offset by declines in our encompass brand.

Allstate brand standard auto net premium written grew 1.9% in the quarter.

Increases in average premium, driven by rate actions taken over the last few quarters, more than offset a decline in overall unit volume.

New business volume increased 0.4% quarter-over-quarter and was up 14.3% if you exclude Florida and California, as profit improvement actions in those two markets amassed the positive results of growth initiativies targeted at our customer segments, which are gaining traction in the local market level.

For example, our effort to cross-sell auto to our mono line property customers is progressing nicely.

Both the closed rate and quality of the business is better than average.

We are exploring more ways to improve the effectiveness of our cross-sell processes.

Auto retention remained level at 89%, after increasing slightly in the first quarter.

So, while new business volume increased, it was not enough of an increase to overcome the business lost at renewal.

Thus policies in force fell 1.7% from June 2009 levels and 0.3% from March 2010.

Allstate brand homeowners net written premium of $1.565 billion grew 2.2% quarter-over-quarter.

This was driven primarily by an increase in average premium of 6.1% as rate actions work into the book of business.

We expect to continue to seek rate changes where necessary to improve the returns over time.

The combined ratio for the quarter was 96.8 all in, an improvement from the second quarter of 2009 of 3.2 points.

The underlying combined ratio, which excludes catastrophe losses in prior year reserve reestimates, remains within the range we established for the year at 88.1.

Just a few words on catastrophe losses for the quarter.

In the second quarter, we experienced 30 events estimated at $758 million, or 11.6 points, almost matching the record quarter we had last year.

Partially offsetting the current quarter's losses were favorable reserve reestimates of $83 million for prior years and $39 million for catastrophe losses that occurred in the first quarter of 2010.

So, in total, we had $636 million, or 9.8 points, of catastrophe losses in the quarter, an improvement of 2.7 points from the second quarter of 2009.

In addition to the $83 million of prior year reserve reestimates for catastrophe losses, we had another $67 million of favorable reserve reestimates.

These adjustements were primarily due to favorable severity trends in auto physical damage.

On slide four, we get a look at auto loss cost trends, which in total were within our expectations.

Both bodily injury and property damage reported frequencies increased over the second quarter of 2009, 4.2% and 1.9% respectively, as shown in the charts on the left side of the page.

Offsetting these increases were decreases in paid severities for both coverages of 1% to 1.5%, displayed in the upper right hand corner.

These results, when coupled with the loss cost results of the other auto coverages and an increase in earned premium from rate increases taken over the last several quarters, produced a combined ratio slightly better than the prior year's quarter and one that is consistent with our experience over the last year and a half.

Slide five has similar loss cost information for homeowners where profit improvement actions continue, as catastrophe loss activity remains above average, offsetting a moderation in non-catastrophe loss cost trends.

In the top two charts, we show our frequency in paid severity results, excluding catastrophy losses.

Frequency continues to run ahead of prior year, while paid severity trends remain in negative territory relative to 2009.

In the lower lefthand corner, we show homeowners catastrophe losses as a percentage of homeowners earned premium.

Catastrophe losses in the second quarter 2010 equate to about 35 points of homeowners earned premium, versus an average since 1992 of around 29 points.

And finally in the lower right, the combined ratio came in at 140.4 for the Allstate brand, an improvement of almost 12 points from last year's second quarter.

The loss ratio, excluding catastrophe losses, was 47.9 compared to 49.3 for the second quarter 2009, 1.4 points better.

Bringing this line of business to acceptable levels of profitabilitity remains a priority.

Shifting to Allstate Financial, slide six provides a snapshot of the second quarter's results, which indicates solid progress being made.

Premium in deposits totaling just over $1 billion declined substantially from second quarter 2009, as we shift the focus to underwritten products and away from spread based business.

Underwritten products, intersensitive life, traditional life, and accident and health, grew 12% over prior year, while annuities fell about 60%.

Operating income for the quarter was $125 million, or $60 million dollars better than prior year.

This increase was driven primarily by lower DAC amortization and improved investment spread, offset somewhat by lower benefit spread.

There were some one-off items included in these results, but they netted out to a favorable after-tax effect on operating income of about $10 million to $15 million.

For the quarter, Allstate Financial had a net loss of $107 million, as we had $226 million of after-tax and DAC realized capital losses, or $353 million on a pre-tax basis.

Taking a closer look at those pre-tax realized losses, $179 million related to derivatives primarily designed to protect against rising interest rates so there was an offsetting economic benefit with higher portfolio evaluations.

The $200 million of impairment and change in intent write-downs were $29 million less than the second quarter of 2009, and sales at a gain of $18 million, were $145 million less than last year.

Now I'll turn it over to Don.

Thanks, Bob.

First I will cover our investment performance for the quarter, and I'll finish with a quick recap on our capital position.

As we have in recent quarters, we remain focused on continuing to effectively manage risk and return in the portfolio, and our proactive approach served us well again in this quarter.

On slide seven, you can see the allocation by asset class for the investment portfolio, which totaled $99.9 billion.

Fixed income securities remain the largest portion of the portfolio, at 82%.

We remain long corporate credit, as we have in previous quarters.

Consistent with our outlook, we reduced our allocation to municipal bonds by $1.6 billion and commercial real estate by $966 million in the quarter.

And we benefited by lowering the allocation equities in the first quarter as the market declined and maintained that underweight position throughout the second quarter.

Slide eight provides trends for investment income and realized capital gains and losses for the last 6 quarters.

Focusing on the top section of the slide, in total, net investment income fell 5.3% from prior year, but was almost level with Q1 2010.

We remain in a defensive position relative to the interest rate outlook, with reinvestment proceeds being placed in shorter-duration instruments and derivatives being used to manage the overall duration of the portfolio.

Shifting to the bottom of the slide, realized capital losses in the quarter amounted to $451 million pre-tax, compared to a $328 million gain in Q2 2009.

Total write-downs from other than temporary impairments were comparable to prior year, at $306 million, with credit related impairments trending down by $52 million compared to Q2 2009.

The gain from sales was $118 million less at $145 million.

The big swing category this quarter was in derivatives, instruments used primarily to protect the portfolio valuation from the negative effects of rising interest rates and equity market declines.

For this quarter, we had $310 million in losses, versus a gain of $419 million in last year's second quarter.

While we've recorded a loss this quarter, the economic offset of these transactions was positive, as the valuation of the portfolio improved as interest rates declined.

This improvement in valuation is shown on slide nine.

We moved from and unrealized loss position at March 31 of $849 to a gain of $400 million at the end of the second quarter.

In total, fixed income securities improved by $1.7 billion, with credit spreads widening during the quarter.

This increased valuation is attributable to declining interest rates, which more than offset our realized losses on derivatives.

Equities fell $483 million from March 2010.

After-tax and DAG our unrealized position improved from a small loss to a gain position of $328 million.

Finally, on slide ten, the combined impact of our income and the improvement in unrealized capital gains resulted in an improvement in capital to $18 billion, driving book value per share up 3% from March 2010 and 19% from June 2009.

Assets at the holding company remained at $3.1 billion, and while our estimated statutory surplus declined slightly to $14.9 billion, we did take a dividend of $200 million from the insurance company up to the holding company.

All in all, it was a solid quarter.

We continue to proactively manage our portfolio, and are focused on executing on our strategic priorities.

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

Let me do a quick recap before we go to questions.

We delivered another profitable quarter, despite the weather and (inaudible) investment markets, the result being that we built capital and increased book value per share.

Underlying combined ratio outlook for 2010 remains at 88 to 90.

Auto continues to produce strong returns.

Both homeowners and Allstate Financial showed continued improvement this quarter.

Investments posted solid returns, as we continue to proactively manage our portfolio, and we continue to take actions designed to grow our business profitably.

So let's open it up for questions.

Thank you, sir.

(Operator Instructions) First question from Keith Walsh from Citi.

Your question, please.

Good morning, everybody.

First question around auto.

We're seeing a few carriers out there to offer one-year policies to boost retention.

Maybe if you could just talk about the impact, if any, this is having on the market?

Then I have a follow-up.

Thanks.

Keith, this is Tom.

I'll give you my view.

And then Joe may have a view.

I don't see it really having any impact on the market right now.

Yes, a similar thought, Keith.

It's an opportunity -- it's the same trade-off we all deal with all the time, and we're not seeing it drive enormous shifts.

Okay.

Great.

And then the second question on the homeowner's side, how far along are you guys in optimizing your geographic risk?

And I guess I have a personal interest in this as you guys dropped me last year in Queens, New York.

Your agents told me there was a hurricane risk there.

Thanks.

Well, as you know, we -- I'll give you a longer-term perspective, Keith, and how -- where we've gone from, and Joe might want to talk about where we're headed to, because your question is both a macro question, and then obviously, a regional and local question on geographic concentration of risk.

As you know, we've been working hard to reduce our catastrophe losses, in particular, since 2006.

We're down about a million policies in homeowners as we've exited things, like earthquake insurance, high-risk zones, including New York.

Of course, there's the 1938 hurricane that went across Long Island, which if it happened again, could lead to dramatic flooding in New York, and lots of severe damage.

So we are getting smaller around the coast, and we'll continue to get smaller around the coast until such time as somebody comes up with a way to predict and price for hurricane risk.

Joe might want to talk some about the work he's doing on improving homeowners at a more micro level than the macro answer I just gave you.

Yes, Keith.

It's a good question, and one we're working on.

I think there's several fronts we've got to deal with on this issue.

One, Tom was talking about was clearly peak risk on big cats, hurricane and earthquake.

Another layer is just the returns we've got in those areas.

And the third is how do we deal with, what a lot of times,we'll call them non-model cats, meaning things other than hurricanes and earthquakes.

Returns, they are sometimes a function of adjusting the coverage, sometimes that's is a function of rates, and then just profitability in the underlying book overall.

We've big pockets of the country where we feel terrific right now.

We've other pockets where we are one or two renewal cycles away from where we need them to be and we've got other pockets that are further away.

We're banging away at all of those items and making significant progress.

I think you can see improvements in the underlying combined ratio in homeowners.

You can see impacts on the written rate that we're taking relative to lost cost trends, and then we're going to keep pounding away at it.

We believe this is a business where you can make an appropriate return on the core piece of it.

We've got more angst about the Cat exposures, but we think that there are ways to improve the position, and we're going to keep pounding away at those.

It's a slower and more arduous process than we or I think anyone in the industry would like, but it's an achievable one.

Thank you.

And by the way, if you want to talk about your auto policy, I'm available afterwards.

All right.

Thanks a lot.

Our next question is from Bob Glasspiegel from Langen McAlenney.

Your question, please.

Good morning.

Just a question on your comment in your press release -- actions to improve Encompass profitability negatively impacted results.

Were you talking about top line or bottom line, and maybe you could bring us up to speed on what the actions at Encompass that you're taking?

Bob, we had some programs inside of Encompass over the last couple of years, and we've been working on remediating them, which broaden Encompass' appetite out of its core area of bundled or packaged auto and home for a higher-end segment of the market, and we went into a much more standard and near-standard mono-line segment of the auto marketplace.

We've expanded distribution here there, and we got ourselves a little out ahead of our skis, and got some profitability problems there.

As we've been on that to fix it, a lot of what you're seeing is an impact and our comments were around top line.

We've had to get -- roll some of that business off or remediate it or move it from a pricing perspective.

We've had to take some actions with some of those more mono-line auto distributors, and that's got top-line pressure on that business.

We're trying to be as laser-focused as we can on that.

But sometimes as we're shooting at those problem areas, it's rippling a little bit into what I would say is our core wheelhouse, and we're trying to mitigate the issue.

But it's very much an issue around the profitability that we've got to deal with before we can get the core healthy and growing again.

Okay.

If I can follow up, you made a reference about Cat risk management actions paying off, I think.

One of metrics that you're looking at in the quarter that made you happy that you made some progress.

Bob, let me -- I don't think we meant to imply that we thought we had homeowners fixed, and that -- on a non-model Cat basis we're making money, because you look at the combined ratio, it's above a 100.

It doesn't even give you return at all, much less an adequate return on your capital.

And this business -- that business, given its volatility requires a lot of capital.

So we have a lot of work to do.

I think Joe was just pointing out, if you look at the trends and the Delta, the combined ratio is down from where it was last year, not where we want it to be, but it's down.

I think that's the progress he was talking about.

Yes.

The ex-Cat loss ratio had over a point of improvement.

We obviously had improvement in total, but that's something difference in volume.

As we look at the P&L stats that we'll track, we're seeing continued improvement there.

So yes, it wasn't an attempt to suggest that we were at victory.

I think, Bob, your question was what are we seeing in the quarter that was showing improvement as opposed to if we had achieved victory?

Yes.

Right.

Thank you.

I think you answered by question and gave me another one, too, as a bonus.

Thank you.

We're here to help.

Our next question is from Vinay Misquith from Credit Suisse.

Your question, please?

Hi, good morning.

Hi, good morning.

Two questions.

The first question is, could you provide an update on actions taken to improve retention in sales and what impact that you see that would have on the profitability?

Would higher discounts negatively impact profitability?

And then associated with that, we've seen two competitive growing (inaudible).

Of course, one quite significantly -- so if you can help us understand their growth versus your growth, and is it just a question of price in the end?

Let me maybe take a little shot at it, and then we'll just tag-team it here.

In terms of retention.

As I said, retention was flat this quarter.

Customer loyalty, whether it's statistically significant or not, was down a couple of tenths the way we measure it.

So the things we're -- but it bounces around from quarter-to-quarter.

The things we try to do to drive retention and referrals up are, obviously, are treating people well, having a good level of interaction.

When we measure our interaction, we're actually doing better now than we've done in the past.

The way we are making that real is, if people do not do a good job for our customers and we have them measure down to individual agencies and individual claim adjusters, then they no longer have the opportunity to be a part of our team.

So in addition to that, we have a number of positive things, like put it into the 401(k) so that our 36,000 employees, the retirement is based on getting -- part of the retirement is based on getting customer loyalty up.

And then we have a number of other, I'll call them, operational programs, in terms of how do you explain a premium change, all the things we do every day and the millions of calls we get to make sure we do a better job there.

The high discounts that you're referencing really aren't driven as much towards retention.

We don't have a retention-based pricing model, as you would see State Farm does.

Those are around the cross-line sales, and so Joe may want to make incentive comment about how that is a two-fer in terms of driving retention.

And I don't think we can comment on other people's growth.

I that think we're -- you can look at what we have.

We're up 14% plus if you exclude a couple of places.

That said, you can't exclude a couple of places in total, because we're supposed to grow in total.

We think we're making conscious decisions to do what's right overall, but I can't speak for why other people are growing.

Joe, maybe you want to talk some about the discounts and other things , if you want

Yes.

A couple of different points, Vinay.

Your overriding question at the end was, is it just about price.

I don't think and our data suggests and a lot of customer insight suggests that price is important, but people don't make buying decisions solely on price.

If you're fundamentally out of whack on pricing, that's an issue.

But if you're in the game, there's other things that folks think about.

So we're focusing on a whole breadth of those.

Sometimes that's product breadth, sometimes that's ease of access, sometimes that's customer service that Tom was talking about.

It's a lot of things, and we do well and are working on improving a lot of those.

The strength in your choice auto, the ability to have a more effective homeowner's product and be able to bundle that, the ability to let allow discounts for multi-line customers, interact drives, increased retention, and drives increased satisfaction.

In some places there's interplay that we find in loss ratio relative to those items.

As you take your question on discounts, if you look at one individual item, sure, if we sell the same customer and we didn't have a discount before and we do have a discount now, that obviously reduces profitability.

The issue is isolating that one item without looking at everything else that works underneath it.

And I guess the best I can give you without providing competitive intel, is we're not moving off of our combined ratio guidance, or excuse me, the outlook, the 88 to 90.

So what we're doing fits inside of that range.

So that may help you get a sense of what that's worth.

Vinay, there's one other comment you might want to -- you didn't ask about advertising but I think, when you look at growth, you also need to look at advertising.

And oftentimes the street looks at distribution channels and relates that to growth as opposed to the entire way you go to market, which includes your distribution channel, but also includes the amount of advertising you do.

Obviously some channels else like direct require more advertising and can support more advertising because of their economic structure.

But also larger sizes can support a fair amount of advertising.

So you see us continuing to do more advertising.

We've changed our advertising in this quarter.

It is -- and I won't say a war, but it's pretty close to escalating.

We've continued to step up, and you'll see our advertising last year.

We did a lot of price so shop and save.

We did that, because we felt we were being viewed as too high-priced relative to others because of our silence and not because of where we actually were.

So last year, we did a lot of shop and saving, you save $500 or $350 by switching to Allstate.

This year you'll see us shifting more to value, which is -- and the new component we've added to our advertising program with the Mayhem ads, is dollar for dollar, nobody protects you better than Allstate.

That has a price message embedded in it, but it's really to Joe's point.

It's about price and the value you get from it.

You'll see our ads also target a -- this set of ads targets a younger group whereas the continuation of our Dennis Haysbert initiative is targeted to the broader brand positioning.

Okay.

That's great.

My second question was on the capital.

This was the first quarter we saw our dividend being paid out to the holding company.

Does that indicate management is more comfortable with the capital of the operating subsidiaries.

And in looking at the capital versus the past, would premium to surplus be their metric and would you be holding more capital now versus the past since we've gone through a rough period over the last couple of years?

Well, Don will tell you.

But I'm not sure, Vinay, whether that's one question or three.

I'm sorry.

Vinay, first of all, I think the fact that we took a dividend from the insurance company up to the holding company of $200 million is an indication that we are getting more comfortable .

So I would never say never, but it's nice to return back to the tradition of the insurance companies providing capital to the parent company.

So yes, I think it does indicate an increasing level of comfort.

As it relates to the level of capital we want to hold, I think we are still comfortable -- very comfortable with the level we have at the parent, and I would still argue that this is an environment where having a dollar too much is less painful than having a dollar too little.

So we'll continue to reassess that number over time, but we're quite comfortable with the level

Okay.

Thank you.

Our next question comes from Matthew Heimermann from JPMorgan.

Your question, please?

Hi, good morning, everybody.

A couple of questions.

First, could you just expand on the conversation or just expand on your comments with respect to California and Florida versus the rest of the country, and in particular, I would be curious if you can talk about differences in trend as well as maybe differences in the rate filings between the rest of the world and those two states?

Yes.

I'll do that, and I'm going to balance, trying to help you with that and competitive itself.

So I'm not going to give you everything you're looking for.

I'll apologize on the front end.

California and Florida were - had some pretty high new business levels for us last year, and have lower new business levels this year for slightly different reasons.

California, we've backed off somewhat, just because that is a historically a marketplace that can be challenging from a profitability perspective.

We feel okay about where our numbers are there now.

We're not trying to let it get into an overheated spot.

So some of the growth there has just slowed somewhat, the new business has slowed.

Florida we've got a little bit of a different spot.

We're seeing some profitability challenges there.

We're responding to those challenges.

They're driven with some underlying tip in BI trends that we think are heavily environmental, and we're working on combating those trends, but it is a spot where it causes us some profitability angst and we're responding to that.

which causes perhaps a bigger decrease in new business, and is more substantive.

And then with respect -- are the retentions dropping in those states, too?

Yes.

The retentions are holding all right in those spots.

I'm going to try not to give you too much precision on them.

It's a bigger issue around new business.

I'd expect, in Florida, where we're going to take more aggressive actions, we may see that move a little bit.

Okay.

And if we just wanted to think about -- and I don't know what stat you're comfortable giving on this, but I would just be curious, if you're looking at the country, maybe how many states are you seeing positive TIF growth versus states where maybe it's more of the status quo and states where it's dropping?

Let me try to give you --

I know the size of state will vary but I would just be curious -- market number.

Let me try to give you this picture which is a little different than what you're asking for.

Ex Florida and California, I think we saw in new business up over 10% across the rest of the country, so when you track the relative levels of new business, you can see that those are driving the new business trends we're seeing.

Other than California and Florida, the aggregate is up 10%.

Okay.

Is it fair -- is the retention in the rest of the country higher than Florida and California?

I'm trying to think through it.

I don't believe it's meaningfully different, no.

Okay.

And then, if I could sneak, just one -- two numbers questions, hopefully that are quick.

One is just underwriting tax rate in the quarter looked -- the tax rate under P&C underwriting looked high, and then also just curious with the underfunded pension, whether you have any cash contribution requirements in 2010 and 2011?

Maybe you can follow up with Bob on the underwriting, the tax rate you're talking about.

I don't understand --

It's the investment.

More taxable income.

As you know we've been --

Oh, no.

I was just looking at the underwriting only.

But I'll follow up.

That's fine.

Yes.

We'll get back to you on that one.

And then the pension?

The pension fund, we continue to put cash into the pension fund whenever we need it to keep it properly funded.

We put cash in last year.

I'm sure -- we will definitely put in cash this year, and, just to make sure that it's -- but part of it depends on investment results, but it's not a major driver of operating income one way or the other in terms of how much cash we put in.

Okay.

Appreciate it.

Thanks.

Our next question comes from Meyer Shields from Stifel Nicolaus.

Your question, please?

Thanks.

I want to start with a question on Allstate Financial.

It had a good quarter, but as I understand it, two of the core strategic initiatives are to increase sales through the Allstate channel and to focus much more on underwriting spread or [vantage] spread than investment spread.

And neither of those seem to be showing up in the quarterly results, so I was hoping that I could get Matt to talk about that a little.

Well, this is Matt, Meyer.

Well, actually, I think that they did show up in the quarterly results.

The underwritten products, which is, as Bob said, interest-sensitive life, traditional life, accident and health actually grew 12% over prior year.

The drop that you saw in premium and deposits was on the annuity side, which fell about 60%.

So I think we did see the exact growth that we referred to.

Our strategic prong -- or our two primary strategic prongs are, as you said, to increase underwritten products and de-emphasize spread-based products, number one, and from a distribution channel perspective, to focus on the Allstate agencies and the work-site division, and both of those are the areas we saw growth in.

And the de-emphasis of the spread-based products, as Tom mentioned in his remarks, as you know, we reported last quarter that we exited the outside bank and broker-dealer channel, which was almost exclusively a spread-based product channel for us.

That had the result of immediately decreasing the amount to spread-based business that was being put on the books.

So maybe -- you can tell me if there's something else that you're looking at that would imply something differently.

Yes.

What I was looking at, in terms of the distribution is that premium deposits were down almost 10% in Allstate agencies but flat in independent agents, and the profit in the quarter came -- seemed to come more from interest spread than benefit spread.

Well, the second piece is going to be a transition, right?

I mean, the second piece is, we had a large portion of our profitability has already been generated from spread-based.

So just by the fact that we're reducing the size of the balance sheet, it will take a while to come down, Meyer.

So you can look at the size of the balance sheet, and that should come down.

I don't think you should expect, given -- the accounting and that business is a lot like Mr.

Coffee.

You pour it all in at the top and it comes out really slowly.

So changing the mix of business takes a while for it to come out a different way.

Matt, I don't know if you have any other insights into the --

No.

I think I now see what you're looking at.

You're looking at the part of the breakdown on the premium deposit by distribution channel where you show the drop in Allstate agencies from 542 last quarter to 523, but that is a conglomerate that includes spread-based products.

And so the drop there was in the spread-based products, and the pick-up was in the underwritten products.

And if I remember correctly, I think we had a big bank promotion last year, so I think we did a lot through the bank and the agency channels, but --

Well, that's true, but the comparison I just talked about was from prior quarters, from the first quarter of this year.

So it's -- it continues to show the decline in the spread-based products.

Okay.

That is very helpful.

Thank you.

Sure.

And if I can throw one to Joe, can you spend some time in terms of why you've had consistent success in the Allstate distribution channels for auto, why that information hasn't been as helpful with Encompass as you might have otherwise expected ?

I think we made a miscalculation a couple of years ago on how we used some of that data, and in the differences in the behavior within the independent agency channel.

When you're dealing with an independent agency channel, you can get subjected much more quickly to adverse selection, because you're getting a CSR, customer service rep, inside of the independent agency, effectively sometimes spreadsheeting you.

And you don't see that the same way in a captive or exclusive agency channel.

We put some products and pricing programs in, and then we expanded our distribution to a lot of auto specialists that got closer to being bucket shots, which were outside of our Encompass staff's normal agency management expertise, and that group tends to exploit that weakness more rapidly than other folks.

The combination of those two things put pressure on us, and we just didn't see it as quickly as we should have.

Okay.

That's very helpful.

Thank you.

Our next question is from Ian Gutterman from Adage Capital Management.

Your question, please.

Hi.

I just want to follow up on the capital position.

I guess first, the stat capital was lower than it was at the start of the year.

Can you talk about why you're comfortable with that?

Because your leverage ratios are still higher on a stat basis than they were pre-crisis, and then related to that, can you just walk through why changes in the quarter, even after the dividend, it look like we were down about $300 million even though you had positive earnings in both segments?

I think the answer to the question on the -- first of all, you answered to some extent the first question with the second, which is the dividend coming up.

We've been continually build capital in Allstate -- in Allstate Insurance Company for the last couple of years.

So the fact that it was higher doesn't concern me.

We let it get a little bit high.

I think we're comfortable with the levels of that.

We felt it was appropriate to getting back to the point of taking dividends out on a more regular basis.

That's why we took the $200 million out.

We still remain fully capitalized at the Allstate Insurance Company level.

Okay.

But just to follow up, Don, you were down $500 million in capital sequentially, and only $200 million was dividend.

So that's why I was trying to clarify why did the other $300 million go down?

Because you're looking at the piece including Allstate Life.

That $14.9 million is inclusive of what's down at Allstate Life.

And there was a loss there.

Yes.

So that's not just Allstate Insurance.

That's not just Protection results.

So basically Protection -- the pure Protection was flattish, and Allstate Life was down?

That's probably about right, yes.

Okay.

And that was because of the realized loss on it -- essentially most of the realized loss was on the Life Company net basis, Life didn't make money, is that right?

That's right.

Okay.

Got it.

Thank you.

Our next question comes from Alison Jacobowitz from Bank of America.

Your question, please?

Hi, thanks.

To the extent you can, given all the detailed comments you gave, I was wondering if you can talk some about how you're feeling about the total Company premium growth, property casualty, obviously, for the second half of the year, given where you are in the Florida, California cycle and the fact that we saw some growth this quarter?

And then also to the extent you can comment how you're thinking about -- or have your thoughts changed at all about share repurchase and where you are in that process?

Alison, this is Tom.

In terms of the overall growth in premium's second half, we don't give forecasts.

We don't do the detailed guidance.

All we give os a combined ratio ex-Cat and reserve releases.

So I think I would give you just the generic answer, which is that we expect to grow the business.

We're working hard to grow the business.

We don't want to grow the business and throw profitability out the door, and so it's a balancing act, and it changes from quarter-to-quarter.

Our long-term goal, though, is obviously to grow market share and the property casualty business, and we've talked about all the ways in which we're trying to do that.

In terms of share repurchase, Don said it well, which is we're comfortable where we're at.

We're longer capital today than we were at the beginning of the year, which has been one of our objectives for the year.

We've always had a track record of giving that money back to shareholders when we think the Company no longer needs it.

So I think that over the last ten years or 12 years, we generated about $28 billion of capital.

About $24 billion of that has gone back to shareholders in the form of dividends and share repurchases.

We have no reason to change our stripes on that one.

If we have a good use for the money, we'll put it to use.

If we don't, we'll give it back.

But at this point in the economic climate, where we are this year, we feel like it's better to be long capital than to be right at the edge, given that no one is really yet certain where this whole economy will move.

Thanks .

Our next question is from Dan Johnson from Citadel.

Your question please?

Thank you very much.

Just a basic question on the investment portfolio yields on the -- let's just focus on the P&C portfolio and what instruments are we investing in, and how is duration changing for new investments relative to the average [fleets]?

Dan, it's Judy Greffin.

In terms of what we're investing in -- so as you know, we have reduced our exposure in muni, commercial, real estate and, to some extent in equities, and the reinvest has largely been in corporates and government securities.

And the yields on the reinvest are generally lower because of the rate environment we're in -- generally lower than the overall yield on the portfolio.

Yet not significantly lower at this point, and the -- and I guess the second part of your question was -- or the third part of your question -- so we're -- so the yields were generally lower, and then -- on the duration on the portfolio -- on the property and casualty side, we're trying to keep it right around four years.

And so when you say the new money yields aren't much lower, I want to say off the top of my head, the fixed income average was around -- is that around 3 5% after tax?

On the reinvest?

No.

The average portfolio yield.

I'm just pulling up the supplement again.

It's around there, yes.

And are we able to put new money to work at four year duration above 3%?

No, not generally above 3%.

At four year duration, but it's around there.

Great.

Thank you very much.

Dan, we've also been putting some more money in high yield and so -- I mean, you've got to look at it is not all (inaudible) -- I mean, obviously, that would be easy to do.

I think when you look at investment income as well, you have to look at the mix, and you would see that we've gotten more fully invested as we've moved out of the period last year, where we stayed -- with liquidity improving in the overall portfolio, such that we now have the $100 billion, about $35 billion is available on a quarter.

So it's still -- it's highly liquid, and it's gotten more liquid as the markets have opened up.

And as that's happened, we've taken some other investments, which were highly liquid, and moved those into higher-yielding securities.

So there's a lot of stuff going on under the hood there.

Is the cash balance included in the taxable fixed income yield, or is that excluded?

I think -- cash balance would be excluded from the taxable fixed income yield --

Got it.

Thank you very much.

Our next question is from Michael Nannizzi from Oppenheimer.

Your question, please?

Hi, thanks.

Just a question on the portfolio.

So your sales during the quarter, do you sell mostly GOs, revenue bonds, or both?

You're asking about the muni portfolio?

Correct.

And within the muni portfolio, we are targeting certain areas to sell, but we have sold some general obligation bonds, but generally what we're looking at is selling out of things like appropriation debt, healthcare more along the revenue bond, non-essential service revenues.

So those are the bonds you're selling currently?

Those are the bonds we're selling in the muni portfolio.

Got you.

For the most part.

I mean, we're selling quite a bit.

You're going to get a broad pass at the portfolio as well, but the things that we're focused on that we would like to reduce --

And how do you think about your ideal exposure to this asset class?

Is it a percentage of the portfolio -- is it relative to GAAP equity, and how much weight do you give the tax advantage from these bonds?

I think it's a little bit of all of the above relative to the asset base as well as relative to equity, and that's the way we look at pretty much the whole portfolio.

So munis wouldn't be any different than the rest of the portfolio.

But I think as Tom said and I've said in the past, when we decided that we were going to reduce the balance in the muni portfolio, it was largely because we felt it was just too large a component of the property and casualty portfolio.

Great.

Thanks.

And can you talk a little bit about the Good For Life program?

I know there have been a few announcements recently, and just give us an update on how that's progressing relative to your plans and how we should think about that program?

Sure, Michael.

It's Matt Winter.

Thanks.

First as you recall, we just launched a pilot program for Good For Life in July.

So we're in the initial stages of the testing the product, testing our distribution.

As you know it's a brand-new product, it's a bundled product, completely electronic application.

It's simplified issue, it's done on signature pad.

So it's a pretty new process and a pretty new product and a pretty new technology.

We're actually using an Allstate Workplace Division and platform for it .

So we have a very deliberate, phased-in rollout process, so we're still in the pilot program.

We don't even go to the next regions until

Okay.

And then we begin the rest of the national rollout between September and January of next year.

So far, though, we've worked out some of the kinks in the process and some of the kinks in the technology.

The feedback from both the customers and from the distributors has been very good.

So we're pleased with the initial feedback, and we're adopting some of the process changes that we learned during the pilot program to make the national launch better.

So this is not a short-term, quick hit.

This is part of a fairly long-term, multi-pronged effort to demystify our insurance offerings for the middle-class consumer and to further engage our agency owners in the sale of Allstate Financial products.

So I wouldn't expect any dramatic quick hit.

I would expect this to be part of a sustained effort to transform Allstate Financial within the greater enterprise.

And do -- how is it on the commission side?

Can you just talk about how that works relative to your other life products or your current exclusive agency's personalized products?

Sure.

Well, one of the things that is different about this, is we tried to mimic auto commissions.

We thought that would help in the acceptance rate and the receptivity on the part of the agency owners.

So it's a 10% levelized commission for the life of the product, 10% of premiums as paid.

So unlike the traditional commission, this looks and feels like more like the auto, and helps them build value in their agency.

So one of the things we wanted to help them understand is that Allstate Financial can truly help them build the value of the book in the same way their auto insurance helps them build that sustainable value.

And, Michael, let me use it as and example how the customer focus makes a difference in terms of what you're doing.

This is about thinking about customers as cash-flow managers rather than risk managers.

So if you look at most middle-income people, they don't think about how much money should I put to life, how much disability, how much in critical care, how much should I save for retirement and how do I balance all those things off?

The product that Matt and his team have designed does it for them.

So it says, "Look, how much money do you have a month?" It's got some simple packages so the demystification you talked about.

So if you don't die, then you get half of your money back at 65.

It's not a complicated formula.

It's not "here's what the investment portfolio does, here's the asset selection you've got to make." It's really simple and it's really fast.

It reflects the fact that they don't want to spend a lot of time on something that is not -- where they're not putting that much money to work.

So this is about really designing it from the customer back as opposed to from our risk perspective forward.

So I think it's -- and you'll see that in other things we do, other new products.

That's a little bit about what Your Choice Auto was about, some other new products we have coming up in Allstate Protection, will be similar things, which is make it simple, base it on how they think about the world and not what we think about the world.

And then, I mean, you just -- you reference the economy in your opening comments, Tom.

Has that -- how does that factor into the rollout, and have you seen the impact of that, and during -- the test area of this product, and thank you for answering my questions?

I don't think it influences the rollout much.

The rollout is going to be when Matt is ready to hit the accelerator, and we're ready to go.

And he and Joe feel like this system will put a lot of that product through it.

But the economy has made people much more risk-averse, much more willing to save money and think about the future as opposed to just current consumption.

So we think from and overall MacRo perspective, this focusing on their needs, their focus on cash and to think longer term will be in the sweet spot.

But it doesn't really impact the rollout.

The rollout will be based on doing it right.

Thanks again.

Matt, we'll take one more question.

Our final question is from Cliff Gallant of KBW.

Your question, please?

Thank you.

A question on just loss trends.

On the auto physical side, you saw some favorable development this quarter, and the [pay] severity trends also were negative.

I'm just curious what is driving the deflationary trends, do you think, at this point?

And at what point are you pricing those into your products?

I missed part of your question.

Which specific ones were you asking about, Cliff?

Just auto physical damage.

Auto physical damage.

We continue to drive our plan processes, to be as effective as we can around that.

I think we're finding that those processes are working effectively.

We had some rollout of some new claim processes over the course of the last 18 months for a little while, as we brought that new plan system online, that may have slowed us down a shade, and now we're back into our stride.

So you may see a piece of that running through there.

There may be a little bit of it that's economy-related in terms of what we're seeing in underlying costs that may be reversing some inflationary trends we saw last year.

it's modest numbers overall, so we're watching them.

Generally the aggregate loss trends, when you combine frequency and severity are in line with what we were expecting, so they're in line with what our pricing had anticipated.

.

So I don't see a lot of change as a result of

In terms of relating that to your pricing though, I look at the slide show, or your financial supplement on page 16 where you talk about the historical rate of impact of rates.

In the Allstate brand, standard auto, it looks like under a state's specific percent change, the trend has been at your -- it seems like you're seeing less change over each of the last four quarters.

Is that an indication that you're just relatively happy with the level of pricing now for your Allstate brand's standard auto?

Yes.

That would be a reasonable way to look at it.

We also, when we look at what we did over the last 15 months -- and we talked about this a little before.

If you dial back to the early part of last year, there were big challenges in the economy.

We've seen even more challenges in homeowners than we had right now.

There was a lot of pressure from a lot of different functions, the capital conversations, as a Company, we were having with you, ones where we were concerned that -- did we have enough, not did we have too much.

So we took a conservative view of our pricing there and said, "You know what?

We're going to make sure our auto business is performing."

We anticipated some adverse loss trends potentially coming around the economy.

So we made sure we were quick on that.

I think we're seeing some other competitors catch up with some of those observations and trailing where we were a little bit, but our goal was to make sure that business performed well in the environment with all of that other uncertainty, and it's done that.

The loss trends weren't perhaps as pessimistic as we had anticipated, and when you look at it over the course of maybe a total view of two years, we're in line with where we'd expect to be, but the timing may have been a little accelerated.

Okay.

Thank you.

Thank you all for your questions.

Let me just close here.

Second quarter just to reflect continued progress on the strategies we've undertaken to drive shareholder value.

We achieved this performance by being good at what we do and taking decisive action.

Our plan is to continue to improve shareholder value by raising returns, lowering volatility, and growing our business.

So thank you all for investing 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.