Allstate Corp (ALL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Allstate Corporation third-quarter 2011 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 introduce your host for today's conference, Mr. Robert Block, Senior Vice President, Investor Relations. Sir, you may begin.

Thanks, Matt. Good morning, everyone, and thank you for joining us today for Allstate's third-quarter earnings conference call. Tom Wilson, Don Civgin, and I will make some brief remarks to provide more color on our results for the quarter. We will then hold a question-and-answer session, and we ask that you limit yourself to one question and one follow-up so that we can hear from as many folks as time permits.

Joining us for the Q&A session are Judy Greffin, our Chief Investment Officer; Mark LaNeve, Senior Executive Vice President Agency Operations and Chief Marketing Officer; Sam Pilch, our Controller; and Matt Winter, Senior Executive Vice President Insurance Operations and President and Chief Executive Officer of Allstate Financial.

Late yesterday afternoon we issued our press release and investor supplement as well as filed our 10-Q for the third-quarter 2011. We also posted a slide presentation which will be used in conjunction with the prepared remarks. All of these materials are available on our website.

Our discussion today may contain forward-looking statements regarding Allstate's operations. Actual results may differ materially from those statements. Please refer to our 10-K for 2010, our 10-Q for the third quarter, and our press release for information on potential risks.

The discussion may also contain some non-GAAP measures for which there are reconciliations in our press release and on our website. After our call concludes, Christine Ieuter and I will be available for any follow-up questions you may have.

So let's begin with Tom Wilson. Tom?

Good morning. I would like to begin our conversation by reviewing our strategy and operating commitments for 2011. Then I will compare this to our third-quarter results and discuss our 2012 priorities. Bob and Don will then go through the underlying drivers of our results.

To begin on slide 2, we're in the business of selling protection products to consumers based on their preference for price, service, and delivery channel. It's a long-term strategy designed to evolve with the changing marketplace.

Our Board and management are fully aligned behind this strategy and goal of generating an operating return on equity of 13% by 2014. To do that we are focused on three near-term priorities.

First, we must maintain margins in the auto insurance business at industry-leading level. Secondly, we must improve returns in homeowners and Allstate Financial. Thirdly, we must aggressively manage our capital.

On a longer-term basis, we are repositioning our products and distribution platforms to meet the changing needs of customers. So near and long term, of course, we continually -- to manage our most powerful asset -- that is the Allstate brand. And it gives us unparalleled access and opportunity within our core businesses and to each of the companies' core constituencies.

So let me review our progress in the third quarter on slide 3. We strengthened the breadth of the Allstate brand standard auto insurance profitability by improving combined ratios in New York and Florida. Both of those states continue to have loss ratios that are higher than the countrywide average, though their results have improved significantly relative to 2010, reducing the pressure on countrywide results. The rest of the country continues to have strong results.

The overall combined ratio for Allstate brand standard auto insurance is 94.2 for the quarter and 95.8 for the first nine months of the year.

The Allstate brand homeowners combined ratio was 131.9 for the quarter, of which 55.8 was due to catastrophe losses. To improve returns we continued to increase prices and downsize this business, with average premiums are up 5%; and then there is a 4% reduction in items in force versus a year ago.

The underlying combined ratio was 72.3 for the nine months, which is a 0.9 improvement from the prior year. For the quarter, it was 1.7 points better than the prior year.

Over all, the property-liability underlying combined ratio was 88.9 for the first nine months, which is at the favorable end of our committed range of 88 to 91 for the year.

Allstate Financial had a solid quarter with operating income of $134 million, a 24% increase from the third quarter of 2010. The returns from Allstate Financial were improved over the prior year as a result of higher investment income and lower crediting rates.

The fixed deferred annuity business declined by $4 billion in [contract to holded] balances since the year-end of 2010 as surrenders continue to outpace new sales.

Proactive management of the investment portfolio gave us three great results. We maintained deals; we realized substantial capital gains; and we increased the absolute level of unrealized gains in the portfolio from the end of last year.

Our capital management program includes an active outsourcing program for products such as homeowners and annuity. In the homeowners business we've reduced our items in force by 1.2 million or 15% over the last four years in part by offering coverage from other carriers. Today we broker homeowner premiums in many markets, the vast majority of which is Florida and other hurricane-exposed areas. As you know, of course, we are a substantial user of reinsurance, which enables us to shift risk to third parties and recover most of the cost through higher prices from customers.

Allstate Financial uses similar strategies. Of course we sold the variable annuity business in 2006; but the Allstate agency distribution channel sold $736 million of nonproprietary variable annuities in the first nine months of the year.

Earlier this year we instituted a similar strategy for fixed annuities. So fixed annuity deposits declined to [$439 million] so far this year. So the Allstate agency distribution channel expenses were reduced by increased fees in these arrangements.

This capital management strategy, what it does is enables us to meet our shareholders' objective of getting a 13% operating return on equity, without sacrificing customer relationships. So we will continue to aggressively use those tools as ways to improve shareholder value.

We also completed our most recent $1 billion share repurchase program at the end of the quarter, which was about five months ahead of schedule. As you know, we usually determine our capital plans in February after the conclusion of catastrophe season, and when we have a good read on year-end capital ratios. We are accelerating that review into the fourth quarter of this year.

Let me finish current results by commenting on some important organizational changes. As you know, to drive higher performance and increased urgency we have been changing our performance management practices and rebuilding Allstate's top management team, which includes replacing some people who've retired. 60% of our senior leadership team joined the Company within the last four years which, when combined with the breadth and depth of Allstate experience from the remaining 40%, gives us a really good blend of external and internal perspectives.

As a group, this team is dedicated to urgency. It has a great sense of urgency. It is completely aligned and has a deeply committed to the strategy to deliver the value that we know you all expect.

Given the strength of our senior leadership team and the similarities of our businesses, we decided to move to a flatter, more streamlined operating model that separates responsibilities for Allstate Protection along functional lines. So in addition to his role at Allstate Financial, Matt will oversee Allstate Protection claims, product operations, risk management, and program management.

Mark LaNeve's responsibilities have been expanded to include Allstate Protection's field and agency operations, in addition to his role which was to lead marketing and sales and service programs. This move will shorten the lines of communication and improve our response as an organization to an ever-changing marketplace.

As we look forward to 2012 our priorities are very similar to 2011. We must maintain profitability of the auto insurance line. Improving returns in homeowners and annuities will continue to be an urgent priority for us. Aggressive capital management will continue to be a tool for us to improve our operating return on equity to 13% by 2014.

In addition, we need to adapt the strategic positions of our businesses to reflect the changing consumer marketplace. Though the ability to ensure Allstate customers receive the highest level of service from our agency force is as critical as ever to the success of those Allstate agency businesses. That is why we are building stronger local agencies.

This is a program that has been implemented in phases over the last four years, most recently including a prospective change to agency compensation in 2013. Our goals are to build to build up the average size of agencies so they have the capabilities and financial wherewithal to meet customers' needs at an affordable price.

We support the mergers of agencies by loaning a portion of the purchase price to high-performing agencies. This program has loaned about $250 million at this point with minimal losses, and we expect to continue to increase over the next three years.

Since 2009 the average size of our US agencies has increased by 10% and the overall number of agencies is down by 14%. The recently announced compensation change will have the same overall cost to the Company, but compensation will be shifted to those agencies that are performing at higher levels.

All of those changes are supporting increased performance on behalf of customers, who prefer the personal touch of a local agency. For those customers who want a local personal touch, but choose -- are less concerned about the brand and choose to buy through an independent agency, we have new leadership for Encompass and believe our skills and capabilities will enable us to earn solid profitability in that channel.

We also closed on our purchase of Esurance and Answer Financial in early October and are implementing strategies to improve the value of that franchise. Esurance will be able to leverage our preferred risk-pricing expertise and, very importantly, our claim protocols and systems that -- both which enable them to improve their competitive position.

In addition they are already leveraging the Allstate brand by changing the tagline to From Allstate. They also hired a new advertising agency to position the Esurance brand to compete more effectively with those self-directed or self-serve customers.

We now have all the business platforms we need to be successful in protecting US customers while generating a 13% operating return on equity by 2014.

One final update as we look forward to 2012. Based on the results of last May's shareholder vote I embarked on a corporate governance listening tour. I met with shareholders that own about 30% of Allstate's outstanding shares and the major governance advisory firms. Those were productive and helpful meetings. As a result, the Board is actively welcoming working on governance and compensation plan changes to be responsive to their feedback.

Now, Bob and Don will cover more of the detail on this year's third-quarter results.

Thanks, Tom. On a consolidated basis, total revenues of $8.2 billion increased 4.2% from third-quarter 2010 on the strength of $264 million of realized capital gains versus $144 million of realized capital losses in the third quarter of 2010.

Consolidated net income of $165 million declined by $202 million from last year's third quarter. Increased levels of catastrophe losses, which negatively impacted net income by $449 million after-tax, were partially offset by the favorable effects of higher after-tax realized capital gains of $170 million.

Looking at property-liability on slide 4, net premium written up $6.7 billion declined slightly quarter over quarter, a result similar to the first two quarters of the year. Allstate brand standard auto net premium written at $4 billion was down 0.8% compared to the third-quarter 2010, as lower unit volume more than offset a small increase in average premium.

New business volume was comparable to the second quarter but off by 13.2% from the third quarter of 2010. Retention improved by 0.4 percentage points relative to last year's third quarter and remained consistent with the first two quarters of this year.

Profitability actions taken in New York and Florida have negatively impacted unit growth, as expected. Excluding those two states our policies in force growth was slightly positive for the quarter.

Allstate brand homeowners net written premium of $1.6 billion increased 1.5% from the third-quarter 2010 as we continue to seek and receive approval for rate increases. In the third quarter we received approval for rate increases in 15 states, average 13.9%.

Canada and Emerging Businesses both contributed positive net written premium and unit growth in the quarter. The property-liability combined ratio for the third quarter was 104.8, and included 16.7 points of catastrophe losses. This compares to the combined ratio for the third-quarter 2010 of 95.9%, which contained 5.9 points of catastrophe losses.

The underlying combined ratio was 89.2 for the quarter and 88.9 year-to-date, well within the range we established at the beginning of the year.

During the third quarter we conducted our annual detailed assessment of our Discontinued Lines and Coverages reserve levels. We made some minor adjustments to the reserves, similar to last year, which resulted in an immaterial increase to the overall combined ratio for the quarter.

On slide 5 we provide the loss cost trends for Allstate brand standard auto. Bodily injury frequency improved by 3.3% relative to the third quarter of 2010, while property damage frequency declined by 2.6%.

Paid severity results for both coverages increased slightly, with increases of 0.2% and 1% for bodily injury and property damage, respectively. Auto loss cost trends remain well within the range of expectations contemplated in our pricing.

The combined ratio for standard auto was 94.2 for the quarter, an increase of 1 point from the third quarter of 2010.

Homeowner loss cost trends are displayed on the next slide. Excluding catastrophe losses, frequency increased 6% from the third-quarter 2010, reflecting heavier non-cat weather losses in the quarter. The frequency pattern was consistent with the last several years.

Paid severity increased 3.3%, a level of increase similar to the first two quarters of the year. The combined ratio for homeowners was 131.9, with catastrophe losses accounting for 55.8 points.

The underlying combined ratio improved relative to the third quarter of 2010, coming in at 73.3, 1.7 points better than last year's result. Rate actions to improve the profitability of this line continue to be reflected in these results.

Allstate Financial results are shown on slide 7. They had a solid quarter. Net income of $183 million increased $98 million from the third-quarter 2010 on the strength of improving operating income and realized capital gains. Operating income of $134 million increased $26 million as increases in investment spread and lower expenses were only partially offset by a decline in the benefit spread.

Premium and contract charges were essentially flat in the quarter as increases from underwritten products were offset by declines in annuity sales, as expected. We continued to successfully execute on our strategy of reducing the concentration in investment spread products while improving the profitability of those products, focusing on the sales of underwritten products through the Allstate agencies and growing Allstate Benefits.

Now I'll turn it over to Don.

Thanks, Bob. As we have done consistently in the past, we have had clear objectives and we have been proactive in the way we managed our investment portfolio. Again this quarter, our approach has paid off in the form of investment income, realized gains, and an attractive risk-return position.

Looking at page 8 of the presentation, the overall portfolio finished the quarter at $97.5 billion, a small decline from the second quarter of 2001 as the Allstate Financial portfolio continued to decline as planned, consistent with Matt's strategy to downsize the annuity business.

During the quarter we took advantage of market opportunities to realize gains from sales of primarily government and corporate securities and reinvested those funds into intermediate-term investment-grade corporates. This resulted in the reduction in the allocation to governments and an increase in the allocation to corporates.

You can also see on the right side of this page that we are maintaining the shift in the distribution of fixed income securities by scheduled maturity date towards the three- to 10-year category. This is again consistent with what we discussed last quarter.

Net investment income and yield trends are displayed on the next slide. Even in this difficult environment overall portfolio yields improved compared to prior year as a result of our [first-quarter] interest rate curve and derivative positioning, additional high-yield allocation, and limited partnership distributions.

The sequential decline in the property-liability portfolio yield was driven by a seasonal drop in foreign dividend income in the third quarter relative to the second quarter. Overall, net investment income at $994 million fell by 1% compared to Q3 2010.

Increased net investment income for property-liability was more than offset by the decline in Allstate Financial due to expected declines in the size of their portfolio. In both portfolios enhanced yields produced favorable variances to income, while declines in the average assets countered the favorable trends.

We generated $264 million of realized capital gains in the quarter as shown on the next slide. That compared to $144 million of realized capital losses in the third quarter of last year.

As I mentioned previously we took advantage of market opportunities in our fixed income portfolio to realize $692 million on sales of foreign governments, treasuries, and other fixed-income securities, with the proceeds being reinvested primarily in intermediate-term investment-grade corporates.

These gains were partially offset by $203 million of impairments and $234 million of derivative losses. The impairments arose primarily in our residential and commercial real estate and equity asset classes. In the derivative category, the majority of the losses were interest-rate related.

The unrealized net capital gain position at the end of the quarter was $2.36 billion, down slightly from the second quarter. Unrealized capital gains on our fixed-income portfolio increased to $2.46 billion from $1.91 billion at the end of Q2, while the equity portfolio's unrealized position went from a $625 million gain to a $95 million loss, reflective of the equity market's experience in the third quarter of this year.

Moving to our capital position on slide 11, shareholders equity was $18.1 billion at the end of the third quarter, a decline of $664 million from the second quarter of 2011. We completed our share repurchase authorization, buying $308 million in the quarter. Book value per share of $35.56 was essentially flat from prior year and down about $0.40 from Q2 2011.

The statutory capital levels of our insurance companies remained strong with an estimated $14.4 billion at the Allstate Insurance Company and an estimated $3.7 billion at Allstate Life Insurance Company. We paid a $200 million dividend from AIC to the Holding Company during the quarter, bringing invested assets at the Holding Company to $3.4 billion.

As we've discussed previously, we have been hard at work to dissolve the Allstate Bank, and during the third quarter we received regulatory approval to voluntary dissolve Allstate Bank. We expect to return all funds to customers, cease Bank operations, cancel the charter of the Bank, and deregister The Allstate Corporation as a savings and loan holding company by the first half of 2012.

Lastly, following the close of the quarter we completed the acquisition of Esurance and Answer Financial for approximately $1 billion. We will begin to reflect their results with our fourth-quarter report. Now, let's open it up to your questions.

(Operator Instructions) Bob Glasspiegel, Langen McAlleney.

Good morning, everyone. I was wondering if we could dig into Esurance and your strategy, and specifically how you are going to integrate Answer Financial into your agency distribution plan. For example when they aren't able to close an account or -- would you offer that as a vehicle to potentially save customer relationships?

Good morning, Bob. This is Tom. I will make a couple comments and then maybe Don or somebody will want to jump in as well. First, the way we look at the marketplace we have four segments of customers. Those who want a personal touch of a local agency and want a branded product buy it through the Allstate agencies. Esurance is really targeted towards those who are self-directed or prefer to self-serve and want a branded experience.

And what we intend to do with that business is position it squarely towards them. Before we acquire them they had a value proposition which applied more across that board. It was people when you want a technology, when you don't; that sort of applies to the whole segment. We will get it a little more focus on the self-directed customers with the new branding program they are working on.

At the same time, we are much better in preferred risk pricing, and we are -- we have great claims capabilities. We believe we can reduce the variability of their claims costs; use our resources, our systems, and our relationships to lower the cost, which will make them more competitive, which should help us compete more aggressively in that marketplace.

So it will operate as a separate business, but then leveraging the skills and capabilities that reside inside Allstate, including things like the brand, as I mentioned earlier.

Answer Financial, as you know, really serves those self-directed customers who have less preference for brand. What Esurance does is when you call Esurance, if they can't close you, they then route you to Answer Financial. Answer Financial gets business from other places as well. But what that does is enable Esurance to lower its advertising cost versus other people because it is monetizing those people who call who they don't close.

And that program works quite well for Esurance and Answer Financial, as you point out. That segment of the market seems to be growing. And we of course -- what Answer Financial then, it does place that business with a whole variety of carriers, which we continue to do and it continues to grow.

What we do -- we haven't decided yet to do with those quotes that come from the people who want personal touch loyalists in the Allstate agencies, whether we will route those to Answer Financial or not. We are going to test that in the next six months or so and get a feel for it.

But of course, you know we get millions of quotes that come into the Allstate agencies. Some of those quotes we don't close right at that particular time, because these are the persons not ready but they really want that local agency. Some of those people just called because they saw our ad, and they would be perfectly happy to buy it on their own or buy it from somebody else.

So we have to sort through really that flow. But we are working as to how to optimize the overall system. Does that answer your question?

Yes, very well. One other follow-up. Did you push the comp change from 2012 to 2013? If so, what was behind the delay?

We -- it was initially discussed as middle of 2012, and -- but we have been -- when we did this comp change, we don't just sort of sit in a room and make it up. We had over 300 agency owners working with us through various groups to help us figure out how to design it.

When we looked at the timing of it, what it took for them to change their business model, how we could get accuracy around the numbers so that it really drove behavior, and quite honestly to give people a little runway to adapt to the thing, we moved it back to the beginning of 2013.

We did give some people who were excited about the change and believe it will work to support their business model, the opportunity to opt in, in July of 2012 if they want. So we are -- it becomes effective for everybody, Bob, at the beginning of 2013, but we are letting some people choose to get in the program, which we see as a good opportunity to help people see how you can win with the new program. Does that make sense?

Yes, thank you.

Jay Gelb, Barclays Capital.

Thank you. In terms of being able to achieve the 13% return on equity by 2014, it seems that the biggest lever for that is improvement in the homeowners business. Given the recent track record on catastrophe losses, I am just trying to get a better handle on what type of catastrophe load you are including on that to be able to achieve those results; or what other steps you are taking to improve the all-in homeowners results.

Well, Jay, your math is right. About 70% of the improvement is due to the homeowners business, from where we have been historically to where we are sort of recently to where we need to go.

As it relates to the catastrophe load, it's sort of the average of what we would have experienced over the last 10 years as opposed to what we have experienced this year. This year, the last two quarters we have had higher catastrophe losses than if you look back at the prior 20 years. Higher in just this six months than 18 of the last 20 years.

So this last couple of months has been particularly bad, as you all know; and you can see it in our results.

As it relates to how do we reduce our catastrophe exposure, that is part of what I talked about in terms of -- some of that we just do through normal insurance underwriting, insuring the right houses, getting deductibles up, making sure we have the right kind of standards as to what we charge for different kinds of roofs and things like that. So getting the pricing right.

We also, of course, aggressively use reinsurance and brokering. And I think this is an area where I haven't communicated enough to you how much brokering we actually do. We broker a huge number of policies where we can maintain the customer relationships.

So while we want to service personal touch loyalists with everything that they need, we don't have to make it all. And we have done that successfully in homeowners; we have done it in variable annuities; we are now doing it in fixed annuities. To the extent we need to do more of it in homeowners to get to our return, we will do as much as we need to do.

Can I just -- it occurred -- it was just pointed out to me that the option -- the opt-in on the agency stuff, Bob, was eliminated as part of some additional changes we made. People apparently didn't feel it was a big need to opt in, so we took that out.

My second question is on the change in DAC accounting for 2012. Allstate has $4.4 billion of deferred acquisition costs. Even though you said in the Q you are still trying to determine what the impact is, do you have an early sense of what the potential for writedowns may be and whether or not that will impact 2012 earnings?

Jay, at this point I have no estimates of the impact either on the balance sheet or the income statement. So we will adopt it as we are required to at the beginning of next year; and when we have an estimate, we will share that with you.

Thank you.

Keith Walsh, Citi.

Hey, good morning, everybody. First question for Tom on standard auto, just looking at new applications down 13%, and down 7% ex Florida and New York. Just trying to understand why that is, if the ad spend continues to be robust. If you can give us some color around that, thanks.

Sure, Keith. First, let me point out, the results on new business in a quarter never do exactly what you did in that quarter. So I would say that the results in this quarter were due to things that we had done much earlier in the year, whether that is advertising, pricing, where we are with agency capacity. So there is a lag impact as to what you do in a quarter.

With that said, it's hard to do a variance analysis, of course; but I would say it's a combination of really three things. One -- or maybe four I guess -- rate increases; lower share of ad spend in the third quarter; fewer producers; and higher homeowner rates.

It's kind of hard to split that up. When you look at the rate increases we've had it's a little masked by the shift in reducing volumes in Florida and New York, which are high average premium states. So we have had increases in other states. Not huge, but at the margin they make a little bit of a difference.

We have lowered our ad spend in the third quarter. Now we are up this quarter because the competition continues to stay strong. Sometimes we back off a little bit to see what other people will do. But as ad spend stayed up, State Farm started spending more money, you will see our ad spend be up again this quarter.

Fewer producers. We are really working on now expanding the number of licensed sales professionals inside our agencies. While our number of agencies are down, we need to -- we can increase capacity by increasing the number of licensed sales people who work in those agencies.

Then higher homeowner rates obviously takes a toll, because homeowner rates are a place where you can start to lead the business. Once you get the homeowners, it is easier to get the auto insurance.

Okay, great. Then just a follow-up for Matt on the life side. Just thinking about the new business returns there on the life side, are they in line with the 13% ROE objective with interest rates at current levels? Or is the mix of business now more dependent on mortality-morbidity margins than interest income? Thanks.

Those are great questions, Keith. So just for clarity I think at our investor day we talked about the Allstate Financial returns, getting them up to the 9% to 10% range. The 13% you are referencing was for the overall enterprise.

So within Allstate Financial, obviously we had an over-weighting in the investment products, the spread-based products that in today's interest rate environment create a lot of pressure on returns.

We have done, I think, a pretty good job with getting increasingly sophisticated in our ALM in order to maximize investment returns. We managed to do that again this quarter; and despite the decline in the size of the portfolio and the interest rate environment, we managed to actually grow our return.

But I think as time goes on we will be under additional pressure. Certainly if this interest rate environment persists for an extended period of time, it will probably accelerate our desire to shift the mix of business towards more of a morbidity-mortality component and a fee component, and away from the spread component. We had already begun that at the end of 2008; we accelerated it in 2010; and we are getting the results that we wanted, Keith.

So it's a fine line. You want that portfolio to roll off, but do so in an orderly and methodical manner so that you don't have pressure to sell assets at the wrong time. We have had the right run-off in the business. It has done what we hoped it would do and at the same time we have grown the mortality and morbidity based business.

So we are comfortable in there. And as you know, the returns on the underwritten business are significantly higher than the spread-based businesses and are in the low teens. We believe that on some of those products, especially the accident and health products, we can go in the high teens on a consistent basis.

So as a result the more we shift away from the spread-based business towards the underwritten business, whatever interest rate environment we're in for the next three to four years, it will be to our advantage as long as we do so fairly methodically. Does that answer your question?

Absolutely. Thank you.

Alison Jacobowitz, Bank of America Merrill Lynch.

Hi, thanks. I was wondering if there's any chance you could give some more color on the extent that New York and Florida are holding back your margins, or maybe how that might progress going forward, or some details on the progression already, but quantified.

Alison, this is Tom. Both of those businesses are now operating profitably. Of course you get all kinds of measures of profit, whether that is run rate, includes reserve releases, doesn't include reserve releases. But we feel good about where those businesses are.

As I mentioned, they are operating at a combined ratio that is higher than the overall level. But I feel very good about the trends.

We made additional progress in the third quarter on a variety of fronts, including rates, including the way in which we handle our personal injury protection claims. We have made good progress in getting those costs down.

As well, we have also gone in to do a bunch of correct class work in New York in the third quarter as well. So I feel very good about the underlying strength of what we are doing. It will bounce around from quarter to quarter, but it certainly -- from my perspective, it certainly made the auto profitability much more robust when you look at it across the whole country.

Thanks.

Michael Nannizzi, Goldman Sachs.

Thanks. So, on your ROE goal, you mentioned homeowners. As I am trying to understand if that is a competitive market, how much can you raise pricing there without eventually hurting auto retention as a result of the bundlers, and then just generally overall profitability? And then I have one follow-up. Thanks.

Mike, this is Tom. We are not having a lot of problems raising prices right now, either with regulators or competitors. Of course, it is no surprise since we are all losing money. But we haven't had -- and so you can see the increases we continue to get average premium -- average is up 5%.

And that includes some [falter]. Because when you take rates up higher than that, some people raise deductibles and do other things, which of course works to -- even though you are not getting it in rate you are getting it in margin, because you don't have the loss cost associated with that.

So we don't see competitive pressure there. You do have some customers who obviously don't like big price increases. One of the things we have been doing is put increased spread into our rates. So if we say rates are up in 9% in a state, some customers might be up 30%; other customers might be down 5%, which is about getting more accurate in our pricing particularly as it relates to roofs and wind and hail damage.

So that does have a negative impact on the auto business. We don't accept it as a good excuse not to grow the auto business; but we recognize that in fact it does have a negative impact.

So you can't be down 1.2 million policies in homeowners and not have lost some auto policies as a result of it. That said, our goal first and foremost is we've got to get our returns up. So our returns -- we want to get 13% return, operating return on equity. We're going to do everything we need to do that.

You can see we have done that in homeowners really over the last -- since, I don't know, since 2004, 2005 we have been banging away at this thing. We are going to keep banging away as aggressively as we need to, to get returns up.

Okay, thanks. Then just on the other lever, being capital deployment, do you plan on buying back more in stock than you generate in cash?

Do I plan on buying back --?

In other words, you plan to deploy more than you make?

Well, if you look at our history, we have not used leverage in a massive way to buy back stock, right? We do occasionally restructure our capital structure. So I think, I don't know, was it four or five years ago we did -- or it maybe was six years ago -- we did a hybrid and we bought some stock back.

But in general the way we look at stock repurchases is -- how do we -- if we have extra capital we return that to shareholders either through dividends or share repurchases. And then we always look to just optimize the capital structure.

We will do that in the fourth quarter. Normally we would do that in February when we got through cat season and we knew exactly where we were coming out on capital ratios for the year. It sort of gives you a greater base from which to look forward. We are going to accelerate that into the fourth quarter of the year.

We didn't do it already, quite simply because the hurricane season is just ending, as evidenced by some activity down in Mexico last week. So we just didn't feel it necessary to have it completely linked up.

That said, we were -- we thought the stock price was attractive, so we went and got it, and decided we were going to finish the program early.

Great. I guess my question is -- so, if cash flow from the P&C companies year-to-date I think it was $500 million. Last year full-year was $1.4 billion. And before that, just over $2 billion. And the cash dividend is about $400 million.

So I am just trying to figure out how you are thinking about deployment versus how much you make; and how much you are deploying are ready through the dividend. Thank you.

Well, let me see if I can be helpful. We of course look at how much capital we have at a given point in time. We think we are adequately capitalized today.

We haven't made as much many as we would like this year because catastrophes are at $3.7 billion versus all year last year they were at $2.2 billion. So had expected, of course, to make more money because we didn't think catastrophes would be at such a high level.

We do believe we still have enough capital, which is why we went out and bought the stock back early. What we do is we look at how much capital we have at a particular point in time; and then we also look at what we think we are going to make going forward in the future.

We tend to have a little bit of a lag on that, (multiple speakers) I like to be a little long in capital rather than cut it right to the margin.

So as you look at where we are today versus where we thought we would be, we have less deployable capital today than we thought we would have because of higher catastrophes. Which -- that said, I feel good about the underlying profitability of the business.

I don't feel good about the cash freeze, but that's always a little speculative as to what you are going to -- what it is going to be next year. But I feel good about the underlying performance of the business.

And of course from a capital standpoint, we are incredibly solid. We have a lot of capital and we are very strong in terms of our ratings. So I am not concerned about that part.

So I think we have flexibility to make choices. I don't know what those choices will be yet, because I want to see where we are going to come out in our overall analysis in the fourth quarter.

Okay, thanks.

Mike Zaremski, Credit Suisse.

Hi, good morning. A follow-up to the earlier question regarding the interest rate environment. So if the current environment did persist, I know you have talked in the past about a target of $1 billion of excess capital being generated in Allstate Financial. Would that be impacted?

Then also, if you could talk about the overall net interest income outlook for the Company, I know you guys -- yields have held up well. Are you guys continuing to shift towards corporates? Thanks.

Let me see if I can break that into pieces; and Matt can feel free to jump in. Returning $1 billion of capital from Allstate Financial continues to be our goal. Interest rates, obviously, will affect how much money we earn. But remember, part of the capital coming out of Allstate Financial will be as he downsizes that fixed annuity business.

So it is down $4 billion in the last year. Matt is working hard to continue to downsize that business because we don't like the returns in it. So we want our money back; and that is what he's going to go do. Matt anything you want to add?

No. We feel confident that through some fairly sophisticated work on the asset liability management side and some additional work on liability governance on the in-force, that we are going to be able to maximize our potential for hitting that $1 billion figure in the required time frame. But we are also going to use our capital smartly and not do stupid things just to hit an artificial target.

So if the interest rate environment applies pressure on us in a way that that seems no longer the prudent thing to do, then we will rethink that. But right now we believe that is still a realistic target. We still think we will be able to achieve that.

As far as the long-term impact of the interest rate environment, as I think we have said previously, most of our products are at minimums at this point. Very few do we have additional room to lower crediting rates on.

We are now spending a lot of our time on the ALM side and bundling our liabilities based upon both duration and liquidity needs, and therefore working with the investment organization and Judy to get the proper investment mix and asset mix for each of those groups of liabilities.

As a result, we feel pretty confident that we can do a pretty good job in the foreseeable future in this interest rate environment. But it's undoubtedly true that if this interest rate environment persists for an extended period of time, it will put pressure on us.

Hey, Mike, let me maybe give you an overview of what Judy is doing in the investment world, and maybe she'll want to make some specific comments on it. The position we have taken in investments is sort of a two- to three-year time horizon. So we are not trying to make trades for tomorrow, but we are looking forward two or three years.

Judy and her team, we want them to be proactive, to take action to move ahead. But it's really around risk and return; what is the right trade-off?

So obviously we took some gains this quarter because we thought that was the right thing to do over the medium term, and it actually I think worked out quite well.

Obviously, taking gains and then reinvesting -- if you were to reinvest in a like security would mean your overall investment income would go down. But that is not the approach we take. As Matt was pointing out, it is very much asset liability management.

So if maybe Judy wants to talk a little bit about the shift out of governments into corporates, and what you've been doing to maintain yields.

Okay. So as Tom mentioned, this year we have done quite a bit of shifting out of corporates -- out of govvies into corporates. And for the most part we feel good about that trade.

I think that probably the more important shift that we have made this year is the curve repositioning. So if you think about earlier this year, we moved the portfolio and moved some of our near-term maturities to the intermediate part of the curve. We moved some of our longer term maturities to the intermediate part of the curve. And because of that move we don't have that much in Allstate Protection that is maturing over the next 12 to 24 months.

So we have already done some of that reinvest in what was a higher interest rate environment. So if you look at what is coming off the Allstate Protection portfolio over the next three years, it is about $3 billion in three years; and it's about $1.5 billion in pre-pays, all very manageable.

In 2012, it is even more manageable in that we are looking at significantly less, like $500 million in maturities and $600 million in pre-pays. And those, again, at fairly decent yields in terms of being able to reinvest and not give up that much income.

That's very helpful.

Matthew Heimermann, JPMorgan.

Hi, good morning, everybody. First question, just on auto. Given that you are reporting some year-over-year gains in Florida and New York, I guess a little surprised that year-on-year both in the quarter and nine months that that underlying combined ratios there looked like they are sliding a little bit. So some color there.

And if you could just clarify your comment on New York and Florida being profitable, was that run rate 3Q? Or just some color on that would be great.

Matt, I don't know that I got the first part about the combined ratio sliding in other places. Were you talking about other -- that the results were worse in other parts of the country?

Well, in aggregate, you have reported -- you are reporting higher underlying combined ratios this year than last year both for 3Q and for nine months. So if New York and Florida have made progress, I guess that implies other places have gone backwards. So just some color on what is going on there.

Yes, I would start at the most macro level, Matt, and say that the returns we are getting on capital in our auto business at the levels in -- all those states even where the combined ratios have gone up a little bit are great. So we are getting really strong returns in those places.

And we try to manage both overall return, returns in an individual state, and then growth and being competitive in the marketplace. So there is nothing in the auto business that concerns me that the combined ratio is ready to head to the sky. In fact, I feel better about it because specifically New York and Florida are in much better position.

The story is different for each state as to why do I feel better about it. One could be the -- one is certainly the run rate. The other is the current rate. But then where I see us reserving, when I look at that, when I am looking at the pay trends, on some measure both states are profitable.

And when I look forward the trends I see indicate that it will continue to stay strong and in fact get better. We are still going to be stuck with a little bit of the overhang on growth in those states because that's -- if you look at our decline in items in force, 97% of it is due to those two states. So we are trying to manage growth in the other states.

Early last year we took some changes in combined -- raised -- lowered rates to some place to get more competitive.

And then the other part I guess would be when you look at the quarter I am not sure how much -- I'd look at maybe taking cats out of that number too.

Well, I am looking at underlying, so it already adjusted out. But I guess I'm just trying to put that in context, given that one of the strategic and financial goals has been relative stability in those margins.

So I get your ROIC comment; I am just trying to put it in context with that.

Matt, we are not going to let the combined ratio in auto get out of control. We are on top of it. We watch it every state, every rating plan, every -- we are all over that. It is a core goal of ours.

I don't -- I wouldn't read into what I would say are normal variations in the combined ratio. Frequency -- you can't really predict frequency on a quarter by quarter or even a nine-month basis with that much actually. So it bounces around. It can bounce around by a point easily.

So we -- that is when we give our 88 to 91 it is with that in place. I feel very good that we will continue to be -- finish out the year strong. And I feel good about where we are headed next year as well.

Okay. Then the second question I had was just on the corporate, the compensation and governance changes that you alluded to. I guess based on how you historically have paid people, in the proxy it has been pretty specific metrics, corporate as well as SBU.

So I am just curious on when you refine compensation how we might think about that. And then just general governance, I guess what is -- where are the improvements that you are talking about there?

Well, there is a whole host of things we are doing. The biggest change that we are contemplating -- and I think contemplating is a decision that the Board has to make and I have to work my way through it, our management team. But is using performance stock units instead of restricted stock units as part of the compensation plan.

There are some governance people do not consider options to be performance-based, and they would like a larger component of compensation to be performance-based. So we are likely to use performance stock units instead of restricted stock units for the most senior members. There will be lots of other people inside our Company where restricted stock is absolutely the right way to compensate that.

We have moved to -- we do have very specific measures as you point out, much more so than other companies. That, though, over the last four years we have changed; that is what funds the pool. It used to be what funded individual pay. We have now shifted to that still funds the pool; we have very specific measures to fund the pool which protects shareholders.

But then we allocate that amongst people based on their individual performance. And that is where, when I started I said one of the things we are trying to do is drive increased performance, greater sense of urgency, more accountability and driving results in the Company. So we do that with pay and have done for the last three years. So that's a change which we have implemented.

As it relates to other governance things, there is a whole host of items that we're considering, the largest of which is probably a right of shareholders to act by a written consent. As you may or may not know, that has been proposed as a proxy item for us in each of the last two years. It got I think 52% and 55% vote of the current -- of the shares that voted, support for it. And we are likely to put that forward to shareholders as something they can vote on.

Then there is a host of other things, Matt, that we have gone and looked at. What we did is we went out and listened to everybody, heard what they had to say, and we will adopt those things that we think meet their needs and drive what shareholders want in terms of governance, transparency, and compensation.

All right. Thanks for the color.

Ian Gutterman, Adage Capital.

Hi, Tom, I was hoping you could just talk a bit more about the agency consolidation, and I guess in regards to maybe two things. Just one, the effect on morale especially as the compensation changes are coming soon, and I think that is creating some anxiety as well. How are you managing morale with both of those changes?

Then two, I guess I've just been a little bit confused. It seems every month or so I see a press release about Allstate adding 25 agencies in this state, 50 agencies in that state. Why are we adding new agencies, which I am guessing would be small, at the same time we are trying to consolidate agencies on the top side?

Well, let me deal with the morale piece first, as it relates to agencies. Obviously, when you change compensation programs, it creates concern amongst people who are subject to them. That would be true for our employees; it is true for our agency owners; it would be true for each of us individually.

Anytime there is a change, your sort of first perception is people don't want to pay you more money. They are probably trying to figure out how to get a better deal for themselves.

That is not true in this case. In this case, what we have said is we are going to pay out the same amount of money. In fact, to the extent performance is better we would like to pay out more money.

We do want to shift it, though, towards those people who are doing the best job for our customers. And that is how we designed the program.

The program historically has paid out about 10.7% of premiums, of which 10% was stated and 0.7% was bonus incentives, which we put in place I think four or five years ago, something called RFG bonus, which is about $200 million to $250 million a year in terms of compensation.

We put that incentive-based plan in place four or five years ago. We like what we see in that, in terms of it's driving behavior. So we are working on a new compensation plan, which is still 10.7% but has 8% locked-in, and then 2.7% which is based on performance.

Some of that is very easy to do. You have to be open, you have to have a certain number of licensed sales professionals per customer, you have to do protection -- I mean it's not -- you have to have good signage.

It's not like you have to jump over the Great Wall of China to get the money. That said, some people will end up with less in this new program unless they change their behavior in their practices, which is really driven by what the customers want.

So there are a couple of options for them. One is we are trying to support them, to help them get better, with all kinds of programs and efforts. Secondly, if they don't want to do that, then it would be in their interest to sell to other agencies who do want to do it, who are close to them. So we then, as I mentioned, we will loan agencies money to help them buy other agencies. And we do that out of Matt's portfolio, and that has worked quite well for us.

Despite that, in any change you would expect to have some people be unhappy, and there are some people who are unhappy. It is our goal to try to make as many of them that want to be successful successful so we can do a great job for our agencies.

As it relates to adding new agencies, we are always looking for fresh blood and talent. Just because we want the average size to go up doesn't mean that we are not interested in having somebody come in who is entrepreneurial, who wants to build up an agency, or somebody who wants to come in and buy an agency, one of the existing agencies.

So they don't all have to be consolidated amongst themselves. We are perfectly happy to have new buyers come in, buy an agency, and take it to a new level of performance, because they see it.

So there's all -- we are always looking for talents and capabilities and that's why -- and then of course there is obviously just the geographic footprint. As people move around and stuff and you have holes in your footprint. You know, we are not as strong in the upper Midwest as we are in the urban areas along the coast because of our history. So we obviously would like to have more agencies in those upper Midwest places where we are under-represented relative to our brand.

Does that make sense? Mark, is there anything you want to add to that?

I would just add that we do continue to need to add what we call scratch agencies, as Tom said, in certain geographic agencies locations. Texas right now is an expanding market, would be a good example.

We continue to need to bring fresh talent in that is buying existing agencies as they exit out of the business or retire. We are doing that with a much stronger selection process and capital requirement than I think we had seven, eight years ago. And as a result we're getting much higher success rates, much higher productivity levels.

So that's part of the overall plan and it did (technical difficulty) programs such as the loan program to have agents acquire other agents, either operate them in separate locations or merge them together when it makes sense to increase scale so they can serve our customers better. So it kind of works in concert with each other.

You know, I would like to make a point that the agency's success is completely tied to and important to our success. Sometimes I think people hear some of the noise and people who are unhappy with what we are doing, and think we are at odds. Those agencies are worth billions of dollars. We want them to be worth even more than they are worth today, because if they are worth more that means they're bigger, they are growing, they have stronger customer relationships, which is good for us.

So we are in this together. We are willing to -- we are already in for a quarter of $1 billion supporting them. We will go in for more.

So this is about all of us being successful. This is not a -- we are not headed into this with a fight in mind or thinking that it's a zero-sum game and we have to take money away from those agencies. This is about meeting our customer needs, doing (technical difficulty) the kind of change we need to do, which is never easy, but in competing in what is a pretty competitive marketplace.

That is very fair, and I agree with most of what you are trying to do, Tom. I guess I was trying to figure out is -- to some extent if there are some morale challenges, is that part of what is behind the new apps declining some? Is it maybe a little bit too much too fast and it's going to hurt production for a while until things settle down? Or am I reading too much into it?

No, I would say that the reduction in new apps is the Company -- is on the Company's performance, not on the agencies. The agencies, it has nothing to do with them.

They are working hard every day. They are out talking to their customers. We have to get a broader pricing target in auto insurance than we have today. We need to be competitive from a technology standpoint and make sure our systems are working quickly and effectively. We have to do good work on customer service.

So I would not put that on the agencies. And it is not like they have gone on strike or anything like that. They are just busy doing other things.

We need to help them. But it's the Company's job to start to drive that growth, and I wouldn't put that on the agencies.

Very good. Thank you. Appreciate it.

Vinay Misquith, Evercore Partners.

Hi, good morning. I first wanted to follow up on the margins in the auto insurance. Your loss ratio ex-cat went up over 100 basis points this quarter. Was there some non-cat weather in that number?

Vinay, hard to tell. I mean there is -- when -- we do cat code, and so when it goes through a particular state, it gets -- and there is a catastrophe in that state it obviously gets carved out. But then sometimes people don't report it right away. Sometimes it is a neighboring state or a neighboring area.

So I would say that frequency bounces around a little bit. We are feeling okay about frequency this year.

And importantly, our paid loss trends look good as well, so we are feeling good about those. We were up a little bit in collision this quarter, so we changed reserves a little bit on collision. But we are feeling good about the rest of the PD coverages, and BI as well.

Okay. On the auto insurance business, what is your targeted combined ratio for that business?

We don't have an established countrywide target the way some of our competitors do. But we obviously think that -- if you are at 96 you are still earning a good return. It is not our objective to take our combined ratio on standard auto up to 96, however.

So I don't want you to -- but we do -- we look at -- what we want to do is maintain our margins overall and begin to grow the business, which we think we are now in a better position to do given the progress we have made in New York and Florida. It is not going to turn next quarter, so I don't think you should expect to see us suddenly be growing at incredibly high rates next quarter, because we have got those fixed.

As you know, this business takes -- the strength of this business is 80%-plus of what we will earn over the next year we have already written. The downside to that is it takes -- it is harder to turn the overall growth side because you've got to get past those renewals.

That's great. On the homeowners side, what are the loss cost trends? Are they up in the 5% to 6% range?

And if you are getting rates up say maybe about 8%, do you think you can get to your targets of low 60s on loss ratio by the end of 2013?

We are committed to getting a 13% return on operating income -- return on equity on using operating income by that period of time. We are going to do what we need to do in homeowners to get there.

Okay, thank you.

Maybe we will do one last question.

Brian Meredith, UBS.

Thank you. Just got in. Two questions here for you.

First one, just looking at capital position and knowing that you had to fund the Esurance acquisition I guess in the fourth quarter, would it be a stretch to think that you could buy stock back in the fourth quarter? Even though we are -- or at least renew it, and buy some back?

Brian, I think the question you're really asking is the one Tom already addressed, which is we are going to re-examine where we are on share repurchases in the fourth quarter. When we have something to announce, we will tell you then.

Okay, but on the Esurance acquisition, I assume you funded that with cash.

Yes.

Okay. Terrific. Then the other one, I was just kind of wondering. Tom, could you talk about the competitive environment out there?

Given we have gone through record catastrophe losses this year, has it causes any -- I know in the homeowners line obviously people are -- companies are raising rates. But on the auto insurance side, have you seen it cause anybody to step off the accelerator at all?

No. I have not seen -- the three large competitors in auto insurance that we all spend a lot of time talking about -- called State Farm, Progressive, and Geico -- are all continuing to be very aggressive in the auto business, as you can see. Just watch some football game or baseball game, you can't kind of get away from us. So that continues to be highly competitive.

You're starting to see some other companies, like USAA, Farmers, Nationwide, step up a little bit. Whether they can stay in the game as the advertising spend gets higher, I am not sure.

You are also starting to see the competition shift to new products. We didn't talk much about it here, but whether that's the telematics approaches or the products we have been launching. So you are starting -- you're continuing to see pretty aggressive competition amongst those big carriers.

Brian, I can't really speak to the smaller carriers in total; but as you know, they have about half the market. It doesn't look like they are all of a sudden taking price increases way up. But they are having an increasingly difficult time to compete on advertising and new products, which probably means they will keep their prices -- try to be as competitive as they can on prices.

So I am expecting that market to stay as competitive next year as it is this year. But it's a market we think we can win in.

We didn't have a great third quarter of new business for some things that happened early in the year; but we feel good about what we have got going in the fourth quarter and as we head into next year.

Terrific. Thank you.

Okay. Thank you all for participating this quarter. We will talk to you in three months.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.