Allstate Corp (ALL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation fourth-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.

Sir, you may begin.

Good morning everyone.

Thank you for joining us today for Allstate's fourth-quarter 2010 earnings conference call.

As always, Tom Wilson, Don Civgin and I will make some opening comments providing color on our fourth-quarter and yearly results for 2010.

Judy Greffin, our Chief Investment Officer; Joe Lacher, President of Allstate Protection; Sam Pilch, our Controller; and Matt Winter, President of Allstate Financial will join us for the question-and-answer session following our prepared remarks.

Yesterday we issued our press release and our investor supplement for the fourth quarter.

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

You can locate these documents on our website.

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

So refer to our Form 10-K for 2009, our 10-Q for the third quarter of 2010 and our most recent press release for information on potential risks.

We expect to file our 10-K for 2010 by March 1.

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 following the call.

Now Christine Ieuter and I will be available to answer any follow-up questions that you may have once this call is completed.

Now let's begin with Tom Wilson.

Good morning.

We appreciate your continuing interest in Allstate.

I will provide an overview of our results for the fourth quarter and the year, Bob will then cover the business unit results, and Don will cover investments and our financial position.

Overall we made continued progress on our business strategies in 2010 to position the Company for long-term growth and raise returns on capital.

Let's start by reviewing the numbers on slide 2 and then I will provide some context on the underlying strategies and drivers behind these results.

At the top, revenues were flat for the quarter and down 1.9% from the prior year, as actions to restore auto margins in several large states negatively impacted growth.

We generated $296 million in net income for the quarter and $928 million for the full year.

Operating income fell for both periods, reflecting higher catastrophe losses, lower net investment income, an increased frequency of auto claims -- that is particularly true in New York and Florida.

Book value per share increased 14.5% to $35.32.

That is compared to fourth quarter of 2009 number.

If you go to slide 3, in Allstate Protection we recorded an underlying combined ratio of 89.6 for the year, which was within our outlook range of 88 to 90.

We did begin to see some signs of success in our efforts to grow our auto business with increases as we moved throughout the year and higher business in most states -- higher new business.

This resulted from our new Mayhem Campaign and improvements in agency effectiveness.

We were not successful in raising customer renewal rates, so that the new business success did not result in overall growth this quarter.

The actions we took in three large states to improve auto profit margins negatively impacted the good work our agencies are doing in raising their service levels.

Our direct business, which largely appeals to the self-directed price-sensitive customers, was up 19.8% for the year to $745 million.

Overall standard auto policies in force were down 1.5% from a year ago and essentially flat to the third quarter of 2010.

We continued fixing homeowners profitability with average rate and premium for the quarter up 7% from the prior year.

Catastrophe losses, particularly a hailstorm in Arizona, however, offset these gains.

At Allstate Financial we successfully completed the Focus to Win downsizing, exited the bank and broker-dealer distribution channels, and began shifting our focus to underwriting -- underwritten products from our traditional focus which was more on investment spread-based products.

We also just announced our intention to wind down the Allstate Bank, which means we expect to no longer be a thrift holding company for regulatory purposes.

Operating earnings increased for the quarter to $104 million and finished the year with positive net income.

We continue to improve the growth trajectory of Allstate Benefits, formerly known as the Allstate Workplace Division.

It has been very successful in expanding in both the small and large employer markets.

In investments our strategies were well-timed and executed and generally ahead of the market.

We stayed long corporate credit and held on to the structured securities that we felt were undervalued by the market.

We continued to mitigate risk by reducing our exposure in the muni bond and commercial real estate portfolios.

We did spend over several hundred million dollars on our macro hedge programs to protect the portfolios' value if there were large increases in interest rates or declines in equity prices.

Given the substantial increase in our capital levels in 2010, we will reduce the size of these programs in 2011.

We generated a good total return on both our Property-Liability and Allstate Financial portfolios for the year, but did experience a 7.7% decline in investment income.

The net of these results is that we had a large increase in book value per share and were able to initiate a share repurchase program in the fourth quarter.

Bob will now take you through the operating results in greater detail.

Turning to slide 4, Property-Liability net written premium fell 0.6% for the quarter and 0.2% for the year versus comparable periods in 2009.

Overall a reduction in units was partially offset by rate actions taken.

Allstate brand standard auto net written premium finished the year with a slight increase over 2009.

For the quarter the result was a small decline.

The underlying trends were similar to prior quarters.

New business application growth was flat for the year, but increased almost 8% versus the fourth quarter of 2009, as you can see in the middle of this slide.

Excluding the few large states where we have taken significant profit improvement actions, new business was up 19% and 13% quarter-over-quarter and year-over-year, respectively.

Retention fell by 4/10 of a point relative to the fourth quarter of 2009, about the same level of decline we experienced in the third quarter of 2010, and is currently at the lower end of our historical range.

Overall units in-force where lower year-over-year, but flat relative to third quarter 2010 levels.

The average premium were comparable to fourth-quarter 2009 levels, resulting from a combination of higher rates in underperforming states and rate investments made in key growth states.

Moving back up to the third line, Allstate brand homeowner net premium grew just over 2% in both the fourth quarter and the total year.

We posted increases in the average premium that more than offset declines in units, as has been the case for the last several quarters.

Rate actions approved in the quarter affected 10 states, averaging 7.4%.

Despite the rate activity retention remained slightly higher than in the fourth quarter of 2009.

A significant source of net written premium decline remains in the IA channel where we utilize the Encompass brand.

Net written premium in total fell 17.5% for the year in Encompass, as we direct our efforts to improve the overall profitability of the business.

As Encompass strategically shifts back to its core product portfolio that independent agencies value the decline in net written premium has begun to moderate to 10.5% in the fourth quarter of 2010 versus the fourth quarter of 2009.

Moving to a discussion of margins, for the year the 2010 combined ratio increased 1.9 points to 98.1%.

About one-third of the variance was due to higher catastrophe losses and the balance to the underlying business.

The underlying combined ratio 89.6 came within the outlook range of 88 to 90, as we provided you at the beginning of 2010.

As we look forward to 2011 we expect the underlying combined ratio to be within the range of 88 to 91.

Remember that this measure excludes catastrophe losses and prior-year reserve re-estimates.

We recorded an all-in combined ratio of 100.8 in the fourth quarter of 2010, a 7.6 point increase from the fourth quarter 2009.

When you break down that 7.6 point increase in the fourth quarter, catastrophe losses account for 3.3 points of the increase.

Prior-year reserve re-estimates, excluding catastrophes, were worth another 0.4 points.

And the balance, or 3.9 points, came from the underlying business, primarily from the Allstate brand standard auto, and to a lesser extent, homeowners and commercial.

On slide five we provide a look at the loss components for Allstate brand standard auto -- on auto.

On the left side of the exhibit we show the reported frequency levels for bodily injury and property damage.

To simplify the frequency charts we averaged the 2005 through 2008 experience.

The fourth quarter of 2010 results followed the trends established over the last several years, with bodily injury frequency increasing 7.7% and property damage frequency rising 2.4%, and are at their highest levels in the last six years.

There continues to be upward pressure on auto frequency.

In the upper right-hand corner we provide the quarterly increase in paid severity for both coverages since 2004.

Both coverages declined in the quarter relative to the prior year and have performed very well over the last several years.

This offset some of the frequency pressure.

In the lower right-hand corner we show the recorded combined ratio, as well as the trailing 12-month results.

You'll notice the jump in the combined ratio in the fourth quarter 2010.

A similar pattern occurred in 2006, 2007 and 2008.

It did not occur in 2009.

The movement in the combined ratio from the third quarter of 2010 to the fourth quarter 2010 was primarily the result of higher frequency levels, part of which is the underlying trend and part of which is seasonal.

The auto combined ratio also was negatively impacted by current year severities, particularly in personal injury protection.

We will factor these frequency and severity trends into our pricing actions in 2011 to protect margins.

Overall, the combined ratio for standard auto was 95.5 for the year, up 1.9 points from 2009.

On the next slide we show similar components for homeowners.

The underlying excluding catastrophe frequency improved in the fourth quarter by 8.5% compared to the fourth quarter 2009, while the paid severity rose 4.1%.

The underlying loss ratio for the quarter was 47.9%, an increase of 0.7 points compared to the fourth quarter 2009.

For the year the underlying loss ratio was 49.4%, an improvement from 2009 of 1.8 points.

We will continue to drive for improved profitability in this important line of business.

Switching to our results for Allstate Financial, on slide 7 you see results for the top and bottom lines.

Our strategy to shift focus to underwritten products and away from spread-based products continues.

We generated over $2 billion of premiums and contract charges for the year, an increase of more than 10%.

The primary driver of this increase was in accident and health produced through Allstate Benefits, as this division successfully acquired several large employer accounts in 2010, and now stands as the number two player in the workplace voluntary market in terms of annualized sales.

The total premium and deposits were $4.1 billion, down from $5.1 billion in 2009, as annuities are deemphasized.

Looking at the profitability results for Allstate Financial on the bottom half of the slide, we generated $76 million in net income for the fourth quarter, $58 million in net income for the year, a turnaround of $541 million from 2009.

Operating income increased to $104 million in the quarter and $476 million for the year.

Remember when you look at these operating income results for 2010, there were several favorable items that hit in 2010, primarily in the first two quarters, $26 million and $12 million, respectively.

The first quarter related to our annual DAC unlock study, and the second quarter related to reserve re-estimates and the recovery of a disputed reinsurance recoverable.

Breaking down the operating income into component pieces, the benefit spread was favorable in the quarter, first time this year.

Investment spread was flat as the continued downward pressure on lower interest rates and declining contract holder funds was offset by lower interest credit in the quarter.

Expenses increased in part due to non-deferred acquisition costs emanating from the growth at Allstate Benefits.

Allstate Financial made significant progress in 2010.

Income trends stabilized.

The focus on shifting the mix to underwritten products is working and Allstate Benefits continues to generate profitable growth.

Now I will turn it over to Don.

Slide 8 provides a longer-term look at the composition of our portfolio and the unrealized capital gain or loss by asset class.

We came into the year with the portfolio valued at just under $100 billion and a pretax unrealized capital loss of $2.3 billion.

We finished 2010 with a portfolio worth just over $100 billion, with an unrealized capital gain of $1.4 billion.

During the fourth quarter the unrealized position declined by $1.26 billion, driven primarily by a rise in interest rates near the end of the quarter.

Through our focus to reduce risk and optimize returns we continue to favor corporate credit risk over municipal and real estate exposure.

During 2010 we reduced our holdings in municipal bonds by $5.5 billion of amortized costs and commercial real estate exposure by $2.3 billion of amortized costs.

Our municipal bond portfolio went from an asset allocation of 21% at year-end 2009 to 16% at the end of 2010.

Our focus has been to lower our exposure to certain sectors, such as appropriations debt in states and municipalities that are under budgetary stress.

Our preferred segments of corporate and other fixed income securities proved to have significant market returns during 2010.

Slide nine shows trends for our portfolio yields, net investment income and duration.

We had a drop in Property-Liability yields, as actions to shorten duration and reduce higher-risk exposures impacted net investment income.

This resulted from the fact that proceeds were reinvested in lower yields.

The decline in Allstate Financial's net investment income was primarily the result of reductions in contract-holder funds.

Overall with rates rebounding, and less risk mitigation activity, our yields and net investment income have shown limited deterioration in the current quarter.

For the year total net investment income was $342 million below 2009, with lower assets under management accounting for about half of this decline.

The balance of the decline came from lower reinvestment yields, offset partially by equity and partnership dividends.

Slide 10 shows trends for our realized capital gains and losses.

The fourth-quarter results were a net positive $116 million, driven by derivative gains from rate hedging, sales gains and improving limited partnership results.

These gains were partially offset by impairment and intent losses in our real estate and municipal bond portfolios.

Both for the quarter and the full year impairment losses declined substantially from prior-year levels.

Derivative results are primarily driven by interest-rate management activities, which partially offset fixed income valuation changes.

Macro hedge protection, which is struck well above market rates, protects against material interest rate increases.

Even with the rate increases in the fourth quarter these positions remained out of the money.

The losses incurred from having this protection during a declining rate environment in 2010 was $206 million.

ALM hedging and [AP's] duration management programs help maintain targeted duration ranges and are struck at current market levels, having more sensitivity to changes in rates.

While we saw gains in the fourth quarter, we incurred losses for the year as rates fell overall.

Finally, on slide 11 you can see our solid capital position.

For the year shareholder equity grew by $2.3 billion to $19 billion.

Statutory surplus continues to be solid.

Holding company invested assets grew to $3.8 billion after a $700 million dividend from AIC was made in the quarter.

As you know, the Board authorized a $1 billion buyback in November.

We repurchased $160 million of the stock by year-end 2010 under that authorization, which expires at the end of Q1 2012.

Now let's open it up for questions.

(Operator Instructions).

Bob Glasspiegel, Langen McAlenney.

Your underlying combined ratio guidance, if you take the middle of it, it is 89.5, which is roughly even with where you ended the year at 89.6, yet you're talking about auto holding and homeowners improving.

Why would that not be modeling an improvement in underlying underwriting if that is your goal?

Good morning, Bob, this is Tom.

First out with your -- I would like to see you keep your record consistent.

First out with your important first question.

Don't I remember, are you like a Green Bay fan or something?

Yes, thank you.

Unfortunately.

Anyway, but back to your question and a more serious note.

We provide the range to give you some sense for where we think the pace and the rhythm of the business is.

It is a wider range this year than last year, because of -- specifically because of the performance of two states, which are New York and Florida, which as you know have large personal injury protection coverages in them as no-fault states.

They have -- those states the results have deteriorated substantially in those, and so that is a little more volatile.

We believe we can fix that, so I wouldn't -- we don't necessarily shoot for the middle, the top or the bottom of the range.

It is just where we think we will end up.

We will obviously shoot to get the combined ratio as good as it can be.

Okay, working the other way on the question, the last three quarter comparisons were underlying slips of 1, 2 and then 4 points this quarter.

So it seems like to get the underlying flat is going to take some work.

You mentioned maybe the year ago comparison was tough.

I think that was part of your opening remarks.

But is down 4 underlying a fair state of where you are, where the base is?

This is Joe Lacher.

I don't think that is a fair state of where we are.

I think a big part of that, and you can see it on page 5 of the webcast, when you do year-over-year quarters is the fact that the fourth quarter tends to be a higher quarter.

Last year was abnormally low, so I think that is a bad measure to use trying to do the year-over-year quarters.

I think when you look at the overall number, and the blue line on there actually shows a rolling 12-month average of the combined ratio, it sees a relative flattening over the last four or five quarters, except for a little uptick in the fourth quarter from an auto perspective.

And that really comes from the New York and Florida PIP and BI issues that we are talking about that we are seeing move faster than we had anticipated.

So our actions to improve those geographies, and they are places where they have had those problems before and we know how to handle them, are how we are thinking through our numbers.

Thank you.

Put another way, the entire uptick in combined ratio, most of that -- a large proportion of that uptick in the combined ratio is in those two states.

For the full year the auto combined ratio went up a couple of points.

A little north of 85% of that is driven by the changes in New York and Florida.

So the rest of the business is running fine.

We've just got to fix those two states.

Mike Nannizzi, Goldman Sachs.

Thanks a lot.

Just a couple questions.

So of the 4 point -- or the 7 point increase sequentially in standard auto loss ratio -- how much of that is the result of those two states?

And if you were to back those two states out where is the underlying combined on the standard auto book?

And just a couple of follow-ups.

Thanks.

We don't obviously give guidance for just auto alone.

And I wouldn't necessarily look at the -- I think as Joe pointed out, I wouldn't necessarily look at the 7 points as the appropriate comparison.

When you look at it year-to-year it is up.

And as Joe pointed out, 85% of it is in those two states.

The rest of the states have an auto combined ratio that generates a very attractive return on capital.

I wasn't asking for guidance.

I was just asking if you back out those two states what (multiple speakers).

If you back out those two states I think it is about 91%.

On a full-year basis.

So 91% on a full-year basis for -- ex those two states in standard auto.

Correct, that is what we achieved in 2010.

And then I just want to ask, can you talk about your decision to use an underlying combined as a metric?

Going through here the last several quarters, you have this measurement that you hit your target, but yet we look at the results -- the world at large looks at the results and you see the impact -- the frictional impact of cat.

Does it make sense to maybe think about putting a little bit more attention on that exposure, maybe giving people a heads up as to what that is looking like when you're going to have meaningful exposure?

You point out an issue we have had forever in the insurance business because of the volatility.

Let me tell you how we think about it, and then I will give you some sense for what we have been trying to find a way to help give you and other people better information on cats.

First, if you go all the way up as what we expect to deliver to our shareholders are good operational results.

Second, to have this business strategically positioned for the future.

And third, to make sure we have the right management team to execute those two things.

Those are the kinds of things we need and want to communicate on.

Underneath that first bullet is obviously the issue of how much you're going to make this year, this quarter.

Because we have not been able to forecast catastrophes well, we said that the only thing we could really give you that we feel comfortable in looking at the rhythm of business and making a judgment as to where the next year will be was excluding catastrophes, and then prior-year reserve releases which nobody factors those into their estimates.

The issue is with the weather different, that being in -- if you look at hurricanes, the water is warmer and the air is different, and so you have much larger, much more severe hurricanes.

So when the hurricanes started to hit, obviously are very difficult to forecast what your losses are after it hits, much less before the season.

What has happened is you have seen a big increase in other related weather, so tornadoes, hail storms, wildfires, because of severe weather patterns.

Those are notoriously difficult to predict.

I don't think -- if you had asked me did I think we could have a $355 million hailstorm in Arizona, I wouldn't have thought the hail could be that bad in Arizona.

It obviously was.

We are changing our pricing to reflect that, which is why you see the average homeowner's premium is going up 7% this year, and you should expect to see it go up next year.

It is very difficult, though, to give any kind of forecast after -- until the event happens.

We have looked at, can we give you more information once the event happens, which is a little difficult, because if we set up a structure to give it to you on the first of the month or the fifth of the month after a month, sometimes tornadoes happen on the 30th and the 29th and you don't even have all the claim calls in yet.

So it is very difficult to even on a monthly basis.

We continue to try to find ways to come up with better information, but yet we haven't found any silver bullet.

One thing you just might want to consider is this storm was in October, maybe if you give people some idea of what this looks like then it might help when your earnings do come out, at least people will have some notion.

And that would just be a suggestion if you might incorporate that.

I understand.

We are open to any thoughts and help you guys can give us, because we obviously want you to know what we know when we know it.

Then just one other one, if I could.

As far as holding company liquidity of $3.8 billion of liquidity, you had a relatively active cat quarter.

You bought back some stock for the first time in some time.

So how should we think about that?

You are not -- it doesn't seem like the frictional cat activity is impacting your deployment.

How do we think about that part of the equation?

How do you think -- capital, I would say we are long capital.

We continue to be long capital.

If you look at the capital in the various insurance companies, and Don quoted the numbers there, we are, I think, it is $15.2 billion of statutory capital.

We feel well-capitalized and capable of handling any volatility that comes from catastrophes, either because of the capital we have or the reinsurance programs we have in place.

When you look at the holding company, we have $3.8 billion of essentially cash or highly liquid securities.

And that is the area that we use to repurchase stock, pay dividends, and we have plenty of capital there.

Whatever happened in this quarter will have no impact on our share repurchase program.

As we look at our models, we don't find a case in which we would not complete the $1 billion program we have out there, and still have extra capital.

We continue to generate extra capital, in part, because our business is not growing as rapidly as we would like.

Right, but if you have $4 billion roughly of capital and you have $1 billion -- less than $1 billion in outstanding repurchase, your business is not growing, why -- and the date of your buyback is 2012 -- do you plan on being at $5 billion in holding company liquidity next year or where is that number -- where do you want that number to be?

All I can tell you -- here's the way I look at those programs.

One, if we don't have a use for the capital we give it back to the shareholders, either through dividends or through share repurchases.

We bought back about $19 billion of stock since I have been here.

So if we don't have a use for it, we buy it back.

I tend to lag a little bit so that the Company is stable and we don't have to go look for money, because the worst time to look for money is when you don't need it.

And when we put a share repurchase program out there, we put it out there, one that we will complete.

Because if you look at the history of share repurchase programs there are a number that -- where people talk about them and then don't actually get them done.

We believe in finishing what we say we are going to do.

And there was only once we weren't able to do that, which was in the financial crisis of 2008.

So we put out there -- and then we just buy it back as aggressively as we can.

So when we are done with this one, if we still have extra capital, we will consider doing another one.

You may finish it before -- so there is a chance you could up before this one expires?

Yes, that is -- there is a chance we would do that.

Given that we bought back $160 million of stock in 45 days, I don't know that we will always continue at that pace, but, yes.

Vinay Misquith, Credit Suisse.

First on the frequency, and I appreciate that about 85% of the frequency spike was in New York and Florida, but we have not seen this from some competitors.

So if you could help us understand what happened differently at Allstate versus the competitors that you saw a higher spike in the second half of this year?

This is Tom.

I will give you an overview answer, and then Joe will maybe want to jump in and give you some more specifics.

It is always difficult, of course, to compare our frequency to other people's frequency, because we don't know what happened to their business.

In some of our larger competitors, such as State Farm and Geico, we actually don't see their numbers.

So there is only a few large companies that you can see.

And some of those companies also have change in mix of their business.

So as you write more preferred customers as a percentage of your book and less high-risk customers, the weighted average of your frequency changes.

That doesn't mean the underlying trend in your business isn't the same when you get down and look at individual risk classes.

That would be the first thing.

The second thing I would say was the issues that we have seen in New York and Florida are not ours alone.

So all you've got to do is look at the press in Florida about how much fraud is going on with PIP.

Our sense is in New York when we look at competitors the same thing is happening.

Joe, you might want to jump in on frequency in other parts of the country.

Yes, I would add to that.

I think if you look at page 5 of the webcast, you can see frequency trends there.

The black line is 2010, the blue line is 2009, the red line, the average of the previous 2005 through 2008.

2009 and 2010 for our frequency numbers were higher than all those prior periods.

So this is not something that popped in the fourth quarter exclusively, there has been an underlying pattern there.

And I think that is consistent with when you peel apart, the way Tom talked about, what we are hearing broadly across the environment.

I think we end up being larger and more concentrated in personal lines than some of those players, so it does this.

And we don't have the underlying mix change, but there has been a consistent trend running in New York and Florida.

You could look at rate filings; you can look at conversations in the press, conversations with insurance departments, there is a consistency to this in the environment.

Should we be concerned at all about adverse selection in terms of your retentions going down and the new business that you're adding?

I guess we always have that concern and are sensitive to it and watching it, because that is an issue or risk you always have as an insurance company.

One of the reasons we have seen new business flat when Tom and Bob described that new business was up outside of these states is because we have tightened our underwriting programs and tightened what we are allowing to come in from a new business perspective in New York and Florida for exactly that concern.

Second question is on the retentions.

It seems to be the lowest number, I think, since 2001.

I just wanted to get a sense for what the drivers of that are.

And I understand that you have been taking rates up in two states, California and Florida.

But it seems that it is the lowest ever that I've been tracking.

I just want to get a sense if there is something else that is really factoring into that number.

There is a couple of different thoughts that -- a couple of different thoughts on it.

We have seen these retention levels before.

I think if you go back to the time that you're talking about, we saw some peaks two years ago, three years ago.

So we are operating at the low end of a range that we have operated in historically.

Number two, the actions we have been taking in Florida, California and New York are aggressive defense of profitability, so it creates some disruption there.

So it is -- and the actions we have been taking from a homeowner's perspective also add to a little bit of that underlying disruption.

So it is inside of a normal range, and we are actively trying to drive it back up to the middle and upper end of that normal range.

This is Tom Wilson.

A couple of other things I would say is, one, it is our goal to do a better job for our customers, because this is not just a price game.

A lot of people look at insurance and think it is only about price.

That is not the way the market segments, if you do a fair amount of consumer research on it.

So, obviously, you also have to raise value.

We have done a good job in a number of areas, but obviously not good enough, because the number didn't go up across the country, and that is a disappointment to us.

But we have -- our agency loyalty scores we track the performance of individual agencies, that was up about 5% last year -- the index was.

If you look at our claim operation they have done a good job of increasing the amount of empathy and responsiveness they have.

We have more work to do there, but it is also about raising the value that we provide to customers as well.

So we have tried to build a set of processes and programs in place all the way down to the -- our 401(k) plan pays out based on customer loyalty, so all employees are aware of it and they are all motivated and compensated by it.

Outside of those three states how are you seeing your retentions?

I will answer that question, and then if we can move on so we can make sure we get other people -- I appreciate the line of questioning.

Our retention is up outside of two or three large states.

Thank you very much.

Keith Walsh, Citi.

Just the first question, I think -- I know in the past you have been asked this about how standard auto -- actions on your homeowner's book, if they in fact impact retention on standard auto.

I just wanted to ask it again, because it just seems that the trend continues there.

And I've got a follow-up.

The answer is anything you do to customers that is negative, whether that is raise their average price on their homeowner's by 7% or put new risk management programs in place so you're not writing new business, and you are brokering it to somebody else if it is in a cat-prone area, have a negative impact on you.

We try to do it in a way that is customer-friendly.

And if you look at what models would say happen and what our actual results are, the actual results we are able to manage our way through it.

So it usually ends up being somewhere in the 20% to 30% of what a straight up model would show you.

So we are doing a pretty good job of managing our way through it.

It does show up in the numbers, but I think that is just, again, about showing value.

I'm not prepared to have us lose money on homeowner's when we have so much capital up on it to retain the auto insurance.

It is about -- it is a challenge for us as opposed to an excuse.

Then just turning to net investment income, on page 9 of the presentation you show a $33 million variance in Property-Liability and a $45 million year-over-year in Allstate Financial.

Is that a good run rate to think about as we head into 2011 when we think about how net investment income will probably year-over-year look?

Let me make an overall comment, and then Judy will give you some sense for the underlying run rate and the specific numbers.

First, there is three components to our investment income.

Obviously, there is volume, second, there is lower rates, and third is what you invest in.

When you look at volume, the size of the Allstate Financial balance sheet is down on the contract to all the funds of about 20% since the end of 2007.

So over the last three years we have brought that down 20%.

That is obviously because of Matt's shift to focus on the underwriting profitability versus spread-based product.

So that rolls through that.

It is not necessarily a big impact on income -- operating income, because you are -- as well as you're losing the assets, you're getting rid of the liability.

So that tends to be a little more of a margin reduction as opposed to a straight-up number that you would see in just investment income.

Secondly, obviously, lower rates, Judy can talk to that.

Then what you invest in is obviously important as well.

We have -- since 2008 we have been focused on total return and protecting the balance sheet.

And if we didn't want to own something we sold it, despite its negative impact on operating income.

So if we didn't -- if there was a muni bond we didn't want and it was paying a good rate, we sold it, even if that meant we had to in the short term invest it in govies or something like that, because we said, let's just protect the balance sheet.

That focus will shift now as we go into 2011, where we will be more focused on operating income, because we are kind of invested in what we want to be invested in now, we can start to manage income.

Judy might want to talk about both that piece and lower rates.

So when I think about, first, lower rates, the portfolio still has a higher book yield than the market yield, yet that has been going down as market rates have gone up.

So in the last quarter you would have seen that our income somewhat stabilized.

And that was partially because during that quarter we actually -- our reinvest was higher.

Reinvest yields were actually higher than the yields on our dispositions, plus we didn't have as many dispositions in the fourth quarter.

And as Tom had said, going forward we have stabilized some of our risk mitigation programs.

So when I look at market yield versus our book yields, as I said, still our book yields are higher, yet market yields are rising as we go into 2011.

Thanks a lot.

Alison Jacobowitz, Bank of America.

A lot of the questions have been answered, but I guess a couple still outstanding.

I was wondering if you could talk about your ad budget maybe going forward, and what you're expecting to do this year with the campaign.

Then also I know it is still not fully through the quarter yet, but is it -- to the extent that you can comment, is it fair to expect inflated weather cat losses in the first quarter?

Then my last question is, you didn't really talk too much about California, can you give more of an update on that state?

Thank you for getting all your questions on the table.

We can speed it up this way.

First, with respect to the ad budget, let me go way up for a minute and then swoop down to the ad budget, with a caveat that I'm not going to tell you exactly what we spend, because I care less that you know, but I care a lot if like Progressive and Geico know.

So first, we decided we wanted to broaden our approach to the marketplace, make the brand a little more contemporary in that as we -- and we were going to spend more money and we needed a -- we couldn't continue to run just one campaign, which was the Dennis Haysbert campaign, because it wears out.

People get bored watching the same commercial all the time.

So we came up with the Mayhem concept, which is very important, because it is about value.

And the tagline at the end, dollar for dollar, nobody protects you better than Allstate, is because we want people to understand that it is not just about price.

That is because that campaign is really targeted towards the core group of customers that come to us, which are personal touch loyalists.

These are people who want advice, want a local presence, want to buy multiple things from one company.

And it is a portion of the market where we over-index in our share.

So it makes us more contemporary and calls into question for those people.

The contemporary piece and the funny nature of it, also happens to appeal to the other end of the spectrum, which is the self-directed price-sensitive people, who don't really care as much about local presence, don't want as much advice, more willing to do it on the Web and do it through the call centers.

So it happens to be a one-two punch for us.

It strengthens our existing programs as well as broadens and makes us more contemporary.

We like it; it is working.

If you look at our quotes in our new business it is way up.

And so we are liking the results of that.

We will continue that one-two punch as we continue to try to serve both segments of the market with this value proposition.

And I would expect we will probably spend about the same amount of money this year as we did last year.

If you -- question on weather, who knows -- it is February or whatever it is, 10th or something like that.

It has been a dicey January.

The bad news is it has been all kinds of bad weather.

The good news is sometimes when there is bad weather people aren't driving.

And then the question is, how quickly does the weather get over it?

Does it turn into ice stand problems on houses?

Does it turn into ice on the roads and if people slip and crash into everybody when they believe it is safe to drive?

So it is really -- I have no way of predicting what we will do in the third quarter.

And then in California, Joe can answer that question.

We are continuing to see -- there was no update for California, which is why we didn't talk about it.

We are seeing comparable trends and we are attacking them and working on them and are confident we are moving in the right direction there.

Thanks a lot.

Jay Gelb, Barclays Capital.

Could you talk a little bit about the decision to exit the bank product and Allstate Financial, and what that -- if I go back a couple of years, Allstate also exited the variable annuity business.

So I'm trying to get a sense is this a trend towards narrowing down the offerings within Allstate Financial, and could Allstate maybe look to exit that business entirely over time?

Let me provide some longer-term perspective for you onto why we got into the Bank.

And Matt can answer it very specifically how it relates to what he has going forward.

We got into the banking -- we got a thrift charter in 1998.

It was right around Gramm-Leach-Bliley when financial services companies were going to do everything for everybody, and we decided we should have one of those.

We got it and we turned it into basically a savings vehicle, which was a place to park -- to put money before you rolled it into annuities or life insurance and away.

So that business grew to about $1 billion.

Matt can talk about how that concept fits in how he is going to execute in the future.

But his conclusion, which he will take you through with a little more specificity, was that it was not strategic.

Given that it was not strategic, and it would subject the Company to regulatory oversight at the holding company level, which had the potential -- and I say only the potential -- to conflict with the state-based regulatory environment we are in, we decided it was not necessary to continue to own that business.

As it relates to variable annuities, variable annuities was a different situation.

We just didn't like the economics.

We thought people were giving it away.

It wasn't age-related, it wasn't health-related.

We didn't like all the features on it.

And we sold it to Pru because we didn't like the product mix.

That didn't mean we didn't want to sell the product to people though, so we continue to sell variable annuities through our agencies and the EFSs that are just other people's.

It is Matt Winter.

Thanks for the question.

Let me start out by explaining what we are trying to accomplish at Allstate Financial right now, which is we are looking at it from two perspectives.

First, to add an element of financial stability and higher business returns to the business.

And secondly, to focus on adding strategic value to the Corporation.

So as we looked at the first prong, the financial stability and business returns, we made a decision that in order to decrease some of the volatility in that business results, we needed to change the mix of business and move away from some of the spread-based businesses and increase the proportion in our portfolio of earnings that come from mortality- and morbidity-based businesses.

We find that that the profile of those earnings is more appropriate for where we are in this enterprise.

So a lot of what we are doing is trying to get to a more balanced perspective in a mix of business, and slowly allow the spread-based businesses and some of the investment-related businesses to roll off, while we build mortality and morbidity-based businesses, and at the same time improving the new business and continuing business returns.

So a lot of the decisions we have made about product lines to exit has been a result of that.

So that is one of the reasons we stopped manufacturing around book value annuities.

The issue with getting out of the banking business has more to do with the second prong, which is the strategic value.

Once we've stabilized the organization financially, we want to make sure we are focused on adding strategic value to the enterprise, which we think we do in one of two ways, by either bringing new customers to Allstate, or by helping existing customers develop a deeper relationship with Allstate.

The products that tend to do that best are the longer-term products, the mortality- and morbidity-based products that last for 5, 10, 20, 30-year products.

They tend to change the nature of the relationship from a transactional relationship to a longer-term relationship.

As a result, as we look at the products we want to manufacture and offer, we want to concentrate on those products that will add the greatest strategic value to the enterprise and the customers.

The banking products tend not to do that.

They are quasi-transactional.

They are shorter-term in nature.

And they don't fit within our overall strategic and financial objective of growing mortality-, morbidity-based business and entering into long-term strategic relationships with the customers.

That, in addition to the regulatory issues Tom mentioned, led me to the decision to recommend to the Corporation that we exit that.

We will still offer those products to our customers.

We still believe in the ability to deepen the relationship a little bit with that, but it doesn't necessarily have to be with a product that we manufacture.

Matthew Heimermann, JPMorgan.

A couple of questions.

One, just if you change the hedging in 2011 versus 2010, can you talk a little bit about how that -- where that cost reduction will actually show up, how much is balance sheet versus income statement related?

And then the second question I have is, with respect to -- just as you think about 2011, 2012, and rather than strategic factors just maybe think about -- what do you think the most important operating factors are, excluding the loss ratio ex cats and development that you are focused on to measure progress this year?

Let me -- on the macro hedging programs that will go through realized -- largely go through realized capital gains or losses.

And which shows up not in operating income, obviously, but in net income.

And then obviously that translates into book value per share.

So that is how the math of that piece works.

So on the interest rate swaps there is not -- if there was -- so that actually -- okay, including the make whole or make --

That goes through realized gains or losses.

We don't -- that doesn't get rolled up into investment income, which makes sense, because what you're trying to do is protect the balance sheet.

You could argue about whether it ought to be mark-to-market and go through realized or not, given that some other stuff doesn't go through realized, but that is a battle for the accountants to fight, not for us.

Secondly, I am going to interpret your question broadly and then come back to the specific things that we are focused on for this year.

So, first, I think the thing you and other shareholders and analysts at the Company should be looking at is, one, how are we doing operationally?

Two, how are we doing strategically?

And three, what does our team look like and how are they performing?

When you look at operational results, we obviously need to improve our auto results in New York and Florida.

So it is something that I am spending time looking on.

Joe is working hard on getting that team organized to drive the results.

We do need to grow the rest of the country, but I am prepared to not grow if that means we have to give up too much margin in Florida and New York.

So everybody wants us to look at the combined ratio and growth, I am just telling you how I think about those two with some sort of components down below it.

We obviously need to continue improving the homeowner business.

I think we made good progress at on it this year, but we have more to go there.

At Allstate Financial we need better integration into the Allstate agencies, so our cross-line sales need to be going up, as well as our workplace business needs to continue to grow.

That business has really grown rapidly.

It is a hidden gem under there, which nobody really wants to talk about much.

But it is a great business that is doing quite well, and we are very pleased with it.

From the investment side we need to continue to generate both operating income and growth in the overall balance sheet, so we try to -- we will manage between those two.

We talked a little bit earlier about before our efforts were primarily focused on the balance sheet and we were less focused on operating income.

This year we will be a little more focused on what investment income is, as well as managing the total return.

So we are not giving up on one, but we are prepared to -- life is always about a set of offsets and trade-offs.

So the net of all those really are, as you know, operating income, book value per share, two measures that you and everybody else look at importantly.

Strategically, we need to continue to do a better job and reposition our Allstate agencies around the personal touch loyalists.

And make sure we are doing everything we can do for them, which means customer retention going up, selling more Allstate Financial products, having more cross-line relationships between auto and home.

So there is a lot of work to be done in that and making sure our agencies are as effective as they can be.

We need to work a little harder on what the value proposition is for the self-directed price-sensitive people that goes through our direct business.

As I mentioned to you, our direct business was up 19% this year, $745 million.

That is a real business.

It is growing quite rapidly.

That customer segment wants things a little differently than the customer segment that wants it through the Allstate agencies.

It is not just about price.

People don't just migrate to those channels because of price.

They migrate to those channels also because of the offering.

Price is obviously important.

So we need to work a little harder on that piece.

And then organization, if you look at our management team, well over half of our senior management team has been here about three years or less.

We need to just continue to make sure we function effectively as a team.

We feel like we've got our legs under us now, and we can continue to deliver good results.

Meyer Shields, Stifel Nicolaus.

I guess the key question in auto is whether the overall policy in-force or growth trends, however you want to look at it, is the aggregate impact of California, New York and Florida versus the rest of the country getting better or getting worse?

Maybe you could give me a little more -- are you talking about topline or bottom line?

Topline.

I think we have mentioned to you that the new business stats ex those states were up year-over-year.

And I think Tom mentioned that retention was better in those other geographies year-over-year, so the measures of items in-force are better when you put those two together than they are in those three big states.

The issue for us is those are three big states for us that represent a large portion of the organization.

And we're going to relentlessly drive to get the profitability right in those and not try to drive growth overall by selling things at a loss.

When you look at, I guess, the rate actions that you are planning for this year and what you have seen so far from competitors' rate filings, is there any chance that volume in those states stabilizes in 2011?

It is a different story when you go state-by-state.

That becomes a tough question to project what we think competitors are going to do from a rate filing perspective and I hate telegraphing to them what we are doing with any specificity.

So there is always a chance that that will occur.

I think those are difficult environments where we have had a broad set of industry issues and a broad set of industry challenges with PIP and BI, so I hope that is what we see.

One last question, if I can.

There was an other personal lines reserve charge that I think cost about $0.10 per share in the quarter.

Can you talk about what is going on there?

Because it was a -- I think relative to the amount of reserves for those products it seems like it is pretty significant.

I am not sure which specific -- why don't we follow up?

There is a variety of things going through reserves, obviously.

We have moved some money around on lead paint.

We obviously have some PIP stuff going on.

So I'm not sure which specific piece you are looking at and what report you're getting it from.

If you just follow up with Bob, he can give you this -- he can get you the specific number.

Okay, perfect, will do.

Josh Shanker, Deutsche Bank.

One thing that is positive in the quarter that I am looking at is 5,000 standard auto drivers added.

I am wondering how the Mayhem is playing into that, and what that means for 1Q, which tends to be a very difficult quarter for you guys to add customers.

This is Tom Wilson.

I don't know that first quarter is any more difficult than any other quarter to add customers, is my first reaction.

They are all hard.

But as we mentioned a little earlier, the Mayhem program is working, quotes are up, brand consideration is up.

The way in which we are quoting those people, we are being more effective at it, so we are liking the new businesses.

Joe just pointed out, we are growing in most other states, other than the ones where we are working hard on getting the profitability in place, which is in part a result of the Mayhem campaign.

So we like what that is doing there.

The other part too is we just have to keep more of our customers.

So even though retention was up quarter-to-quarter in most of those other states, we would still would like it to be higher.

So it is improving, but the overall number will continue to be challenged by the efforts in New York and Florida.

As Joe just pointed out, we know how to make money.

We know how to get a combined ratio down.

That team is working hard on doing that.

And if that means that we give up more growth in those states than we garner in the other states -- we look at each state as its own battleground, the only place we want to pick up marketshare.

But we are not going to lose in one market so we can make ourselves feel like we are winning in total.

Can I make any intuitions about there being a trend change going on, or is it premature?

I think it is a little early to tell.

I think you could say in the other states we are growing rapidly and we are feeling -- so I think if you just look at -- I would tell you, our business model is working.

Going after the personal touch, the advertising we are doing.

We know how to run a good combined ratio in auto.

I am not worried about that.

We've got a few places we have to fix.

I think you could draw that conclusion.

Drawing a conclusion or trying to make a forecast on sales and retention, while not as difficult as catastrophes, is also a little difficult.

My second question, I definitely think you guys have certainly exhausted this in Q&A to some extent, but in the way it shows up in the numbers it would appear as if the frequency uptick, particularly up in New York and Florida, came suddenly in terms of the way it hits the P&L.

Maybe I am not really understanding how this books, but I understand that this has been a developing issue.

But the rise is very sudden in the way it hits the numbers.

How can I reconcile that a bit?

I would say that the number continued to accelerate throughout the year.

And particularly in the fourth quarter?

You get two things going on in it.

One, particularly when you look in the sequential quarters there is a seasonality effect.

And if you go back to the bottom-right corner of page 5, you can see that pattern of fourth quarter as being higher for a long period of time.

So that is a big chunk of it.

There is a second piece of it that some of these trends were accelerating over the course of the year.

There have been some fee schedule changes in New York.

There have been things that were accelerating that issue.

So a little bit of what was going on in the quarter was maybe a catch-up, as we digested those from the previous quarters.

So it's a combination of all of those.

The biggest piece of it is seasonality, and then the next piece is the continuation of those trends.

Okay, thank you very much.

Can we do the last question?

Brian Meredith, UBS.

I hope some quick ones here.

First one, Don, is it possible to get what the pension expense figure was for 2010 and what you expect it to be in 2011?

I could tell you what it was in 2010 is about $350 million.

Most companies are saying that that is going to actually probably be down in 2011.

Would you expect it to be similar for you all?

I'm not going to tell you what we expect yet for 2011.

Then the second question, I am just curious, the Arizona loss, at least looking at what the industry loss statistics are out there right now, it looks like an awfully large number for you all relative to what the industry is reporting.

I am wondering if there is anything unusual with that loss.

If you -- concentration issues in Arizona?

Your policy is more [generous], or something like that that possibly happened?

Here's what we are seeing on it that is a little bit different.

The storm happened.

We have a normal pattern of reported losses that comes in.

And you get a lot right after the storm, and then there is sort of a decay rate that runs through there and it declines.

We actually saw that normal pattern running through and then all of a sudden it popped.

There is a -- and then it went back up, and now it is starting the decay rate again.

Arizona has a unique law on how long somebody -- a waiting period on when new contractors come into the state and get licensed before they can start actually working business.

So we got a bunch of roofers come into the state, get licensed.

They are going door-to-door knocking on people's doors, saying can I get on your roof?

That is accelerating the claims.

And almost to the day we saw what would have been the expiration of that waiting period, we saw a spike in claim volumes come up right after that.

It came up late in the year, actually after the turn of the year, so we went back and have reacted quickly to what we were seeing in those underlying numbers to get that cost rolled through our fourth quarter.

So I think that is some of it.

Okay, great.

Then just a last question.

I am curious, your new issue apps clearly up.

My question is, hit ratios on new issue apps coming in, how has that been trending on a year-over-year basis?

What do you mean by --?

I mean actually binding it.

Oh, close ratios.

Close ratios, sorry, hit ratios, my apologies.

There is really no -- that is a tale of 50 states.

So I wouldn't -- we still like where we are positioned competitively.

If we don't like where we are, we restructure the rates, you know, open new companies, do all the things we do.

So there is nothing really to do in terms of -- nothing major there in terms of forecasting.

Let me summarize then, just -- we had good progress in executing our strategy this year.

We do have the financial capability and wherewithal to do what we want to do, which is to both grow our business and give a good return for shareholders.

Our goals this year are obviously to improve our operating results by getting customer loyalty up, by lowering the combined ratio, and raising investment income, although that has to be adjusted for volumes because the balance sheet gets smaller.

We need to grow our businesses profitably.

And then differentiate ourselves from the competition by serving the unique needs of each customer.

So, thank you all.

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.

Good day.