Allstate Corp (ALL) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corp.

first-quarter 2012 earnings conference call.

(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 of Investor Relations.

Sir, you may begin.

Thanks, Matt.

Good morning, and thanks for joining us today for Allstate's first-quarter 2012 earnings conference call.

We will begin this morning with some prepared remarks from Tom Wilson, Steve Shebik, and me.

Following that we will open it up for your questions.

Joining us for the Q&A session are Don Civgin, head of Allstate Financial and Esurance; Judy Greffin, Chief Investment Officer; Sam Pilch, our Controller; and Matt Winter, Head of Auto, Home and Agencies.

Late yesterday we issued our press release and investor supplement as well as our 10-Q for the first quarter 2012.

We also posted a slide presentation, which will be used in conjunction with our prepared remarks.

As noted in our press release and 10-Q, Allstate adopted new deferred acquisition cost accounting guidance on a retrospective basis as of January 1, 2012.

Accordingly, all prior-period balances have been adjusted.

The DAC and shareholders equity balances were reduced by $572 million and $376 million, respectively, when compared to the previously reported December 31, 2011 balances.

We filed an 8-K yesterday reflecting these adjustments, and we added a few pages in our investor supplement that add details on the adjustments.

All of these documents can be accessed from our website.

Referring to the first slide of the presentation, this discussion may contain forward looking statements regarding Allstate's operations.

Actual results may differ materially from those statements.

So please refer to our 10-K for 2011, our 10-Q for the first quarter 2012, our 8-Ks filed yesterday and May 2, and our most recent press release for information on potential risks.

This discussion will and can some non-GAAP measures, for which there reconciliations in our press release and on our website.

As always, I will be available after this call to answer any follow-up questions you may have.

So let's begin with Tom Wilson.

Good morning, and thank you for joining us on what I know is a very busy day for you.

I will cover our performance relative to our 2012 priorities within the context of our overall strategy.

Bob and Steve will follow with more details on the drivers of our results.

If you go to slide 2, our strategy is to sell unique protection products to different customer segments.

The left side prefers the personal assistance of a local agent, whereas the right side is very comfortable purchasing directly from a call center over the Web.

The lower segments, the segments on the lower half of the grid, are less price sensitive than the upper half.

So we serve all 4 segments of customers.

Our 2012 priorities are to maintain auto profitability, to raise returns on homeowners in the annuity businesses, to grow insurance premiums, and to proactively manage our investments in capital.

So this strategy and those 2012 priorities are designed to enable us to achieve the goal of producing operating return on equity of 13% by 2014.

Turning to slide 3 -- it was a good start to 2012, with strong financial results for the first quarter.

On a consolidated basis, we generated net income of $766 million.

That was an increase over the prior-year first quarter of 46%, and it was driven primarily by improvements in operating results.

On an operating income basis, we increased almost 44% to $710 million or $1.42 per diluted share.

The underlying property liability combined ratio for the quarter was 88.1, which is 1.18 points better than Q1 of 2011.

We made progress in each of our priority areas.

We maintained auto profitability in the first quarter, with the Allstate brand standard auto combined ratio of 95.2, an increase of 0.2 points compared to Q1 of 2011.

Now, there is some pressure on the cost side of the business, which we are addressing to protect our margins.

We continue to improve returns on homeowners, with an underlying combined ratio for the Allstate brand of 67, which is 7 points better than the first quarter of last year and essentially equal to the fourth quarter of last year.

We remain focused on our profit improvement actions in this line, as continuous improvement is a critical component to achieving the goal of 13% operating ROE by 2014.

Allstate Financial's operating income was up, largely based on higher partnership income.

While we made some improvement in returns on the annuity business due to higher partnership income, the low interest rate environment continues to be a challenge for us in raising returns in that business.

Overall, premiums increased, reflecting the acquisition of Esurance, higher average homeowner premiums, and growth in the emerging businesses.

Esurance's policies in force grow in the first quarter from the year-end 2011 as the benefits of our new marketing programs began to be realized.

We did have an expected reduction in auto policies in the Allstate agency channel, reflecting profit improvement actions in the auto line in Florida and New York, and the impact of raising homeowner prices for multiline customers.

Our investment results were very good despite the challenging interest rate environment.

Finally, capital management perspective, we raised the dividend and repurchased $300 million from the current stock buyback authorization.

Our book value per share increased 8% and 6.6% from the first quarter of 2011 and year-end 2011, respectively.

So now, Bob and Steve will provide more details on the results for the quarter.

Turning to slide 4, we show our top- and bottom-line results for property liability.

Overall, the results were mixed for growth, but profitability was strong.

Property-Liability net written premium of $6.46 billion grew 4% versus the first quarter of 2011, due primarily to the acquisition of Esurance, which grew net premiums and policies in force as expected.

Allstate brand standard auto net written premium of $3.9 billion declined 1.2% from the first quarter of 2011, as auto profitability actions in New York and Florida and higher homeowner prices hampered growth.

Unit growth also declined from prior year.

The volume of new issued applications was comparable to each of the last three quarters, but did decline 10.8% from the first quarter of 2011.

The average premium on a gross written basis increased 1.8% compared to the first quarter of 2011.

We received approval for rate changes in 10 states, averaging 5.8% in those states.

Retention ratio at 88.7 was down slightly from prior year, driven primarily by Florida and New York.

The balance of the country experienced an increase in retention from the first quarter of 2011.

Allstate brand homeowners net written premium grew 2.7% from the first quarter of 2011, as rate actions designed to improve profitability continued to more than offset the reduction in units.

We received approval for rate changes in 13 states, averaging 7.9% in those states or 2% on a country-wide basis.

For the quarter, net written premium for the Allstate brand emerging businesses, Encompass, and Esurance all positively contributed to the top line.

We also experienced favorable sequential unit growth in our Canadian operations in Encompass and Esurance.

Moving to the bottom half of the slide, the combined ratio for Property-Liability was 92.1, an improvement from the first quarter of 2011 of 2.8 points.

The underlying Property-Liability combined ratio was 88.1, 1.8 points better than prior year, and well within the annual range we provided earlier this year.

The next slide provides the loss trends and rate actions for the Allstate brand standard auto.

On the top half of the slide are the gross frequency and paid severity trends for bodily injury and property damage coverages, which account for about 45% of the incurred losses for Allstate brand standard auto.

For the first quarter of 2012, both bodily injury and property damage frequencies improved relative to the prior year for the fourth consecutive quarter.

While bodily injury and property damage paid severities were above prior year for the first quarter, the increase moderated relative to the fourth quarter 2011.

In the lower left-hand corner of the slide, we added a chart on approved rate changes.

For Allstate brand standard auto, we averaged about 4% increase over the last 4 quarters, a pace which has kept the combined ratio relatively level.

In the lower right-hand corner we provided the combined ratio results for the last few years.

In the first quarter of 2012 the combined ratio was 95.2 for Allstate brand standard auto, an increase from prior year of 0.2 points.

Breaking the combined ratio apart, the loss ratio for the Allstate brand standard auto improved by 0.7 points compared to prior year's first quarter, while the underwriting expense ratio increased by 0.9 points.

On an underlying combined ratio basis, the results for the first quarter were essentially flat with prior year.

We remain vigilant in our efforts to maintain auto margins.

On slide 6 we display similar charts detailing approved rate changes and loss trends for Allstate brand homeowners.

We continue to gain approval for rate changes in the 8% to 9% range country-wide.

The chart in the upper right-hand corner provides the trends for loss costs excluding catastrophes.

Frequency results for the first quarter of 2012 were below prior year, while paid severity was flat.

The rate actions we have taken, coupled with the moderating loss cost trends, produced an underlying combined ratio of 67.0, an improvement of 7 points from the first quarter of 2011.

On a reported basis the combined ratio for the quarter was 80.2, 11.2 points better than prior year, reflecting the improvement in the underlying combined ratio and lower catastrophe losses in the first quarter of 2012 versus the first quarter of 2011.

We continue to focus on raising returns in this business.

Shifting the focus to Allstate Financial on slide 7, we provide results for the top line, the bottom line and returns by product.

The results for the first quarter continue to reflect progress towards improving overall returns while shifting our focus to underwritten products.

While total premiums and contact charges declined for the quarter, premiums and contact charges for underwritten products increased 3.5% to $535 million compared to the prior year.

Allstate agencies continue to generate strong growth over prior year, with a 16% increase in issued life insurance policies.

We recorded operating income of $150 million, an increase of $37 million from prior year.

The increase in operating income included a $39 million after-tax benefit from a classification of equity method limited partnership income as net investment income in 2012.

Allstate Financial reported net income for the first quarter of $112 million, up $10 million from the first quarter of 2011.

The increase resulted from an improvement in operating income in the absence of a loss on the wind down of the Allstate Bank in 2011, partially offset by current-year realized capital losses compared to realized capital gains in the prior year.

Operating income return on attributed equity of 8.8% improved 0.5 points from the fourth quarter of 2011, with life insurance at 11.3% return, while accident and health insurance provided a 15.5% return.

The favorable movement in the return for immediate annuities was driven primarily by the reclassification of equity method limited partnership income and is consistent with our previously disclosed intent to change our asset allocation for long-term immediate annuities.

This shift may result in more volatile investment income but should lead to higher total returns.

Now I will turn it over to Steve Shebik.

Thanks, Bob.

We continued to proactively manage the investment portfolio, supporting our key objectives of managing investment yield and trading value.

On slide 8 you can see the size and composition of our overall portfolio.

Improved fixed income and equity valuations, along with a positive cash flow from our Property-Liability business, more than offset the expected reduction of Allstate Financial's spread-based liabilities, raising the portfolio valuation to $97 billion at quarter end.

Our portfolio actions during the first quarter continued to optimize our fixed income portfolio's position on the yield curve, shifting out of longer-term municipal bonds and shorter-term lower yielding treasuries into intermediate-term investment grade corporate bonds.

Additionally, we shifted from public equity holdings to high-yield corporate bonds.

These actions benefited us as credit spreads narrowed, improving fixed income valuations and also supported our average fixed income portfolio yield.

Slide 9 highlights the portfolio income and yield trends.

As Bob mentioned, we made a prospective change this quarter to classify our equity method limited partnership results in net investment income.

We believe that this presentation more closely aligns the results of our expanding strategies in alternative investments and private asset ownership with the liabilities they support.

Including the effects of this change, net investment income for the first quarter was $1.011 billion, and the total portfolio yield was 4.6%, with both measures increasing compared to the prior-year quarter and the fourth quarter of 2011.

If the results of these limited partnerships had not been reclassified, net investment income would have been $915 million, or $67 million less than the first quarter 2011, driven by the expected reduction in Allstate Financial liabilities.

The total portfolio would have been 4.3%, consistent with prior year's first quarter, but lower than the fourth quarter of 2011.

On slide 10 you can see we realized gains of $168 million in the first quarter of 2012, an increase of $72 million compared to the first quarter of 2011.

Realized gains in the quarter were primarily from the sale of public equities.

Our impairment losses were the lowest recorded since the third quarter of 2007.

Derivative results also improved, reflecting a reduced usage of derivatives to manage rate risk and favorable results with respect to our credit positions.

Finally, moving on to slide 11, we have finished the first quarter of 2012 with $19.2 billion in shareholder's equity, an increase of approximately $900 million from year-end 2011.

Statutory surplus for both Property-Liability and like remains strong, and deployable assets at the holding company level increased to $2.7 billion at quarter's end.

We continued to buy back our stock during the first quarter, repurchasing shares worth $300 million.

We now have repurchased $406 million of our $1 billion authorization.

We also raised the first quarter dividend at the February Board meeting.

As Tom mentioned, our book value per share rose to $38.57, a new high for Allstate, 6.6% above year-end 2011.

Now let's open it up for your questions.

(Operator Instructions).

Michael Nannizzi, Goldman Sachs.

Just one question on ad spend and Esurance in particular.

How are you thinking about advertising there?

Is the first quarter an indication, whether from a dollars perspective or a combined ratio perspective, how you are thinking about Esurance?

And just one follow-up, thank you.

Don might want to make a comment about the first-quarter seasonality at Esurance, but let me give you some perspective on how we allocate resources.

Each brand stands on its own, so the advertising for the Allstate brand is separate and distinct, and we will invest whatever we need to do to keep that brand strong and that business growing.

The same is true for Esurance.

So we look at the economics of those in total.

We do not put those together and have a total ad spend budget; we do what we think makes sense.

Obviously, we launched a new program in December of last year with Esurance, and along with that, we increased our ad spend.

We like what we have there.

Don, you might want to talk a little bit about just first quarter results on Esurance?

Yes.

First of all, Esurance does have a more seasonal business than Allstate, and so their first-quarter spend tends to be higher.

We spent about $45 million in advertising in the first quarter, and we did that, partially, as Tom said, because the launch of the new campaign, the rebranding of Esurance -- we wanted to get some weight behind it.

I am happy to say it is working as well as we expected it to.

So we are seeing good response rates, good customer mix changes; conversion ratio is improving as we would have expected.

So I think, as Tom said, we will continue to spend money so long as it is economic to do so, and at the moment, it feels like we are spending the right amount, subject to the seasonality of the first quarter.

And then on Answer Financial, where does that roll into the financials?

Is that in Other, or does that roll into a fee line somewhere?

I wanted to get an idea of where that was and what the magnitude and year-over-year change there was?

The year-over-year change is minimal, because it's actually very small, but it rolls up into Other.

So it is not under Esurance.

Oh, it's in the Other line?

Great, thank you.

Mike Zaremski, Credit Suisse.

Underlying combined ratio and home -- high 60s the past two quarters.

I think that is relative to your longer-term goal of low 60s.

So we are not that far away.

Would you say you are making progress ahead of plan, or has the driver just been more benign catastrophe losses the past two quarters?

Hi, Mike, this is Matt.

I will try to answer that for you.

We had some great product and profit improvement in that line.

I would say about 60% of it was temporary and 40% sustainable.

So a large portion was CATs and weather ex-CATs, but a significant portion was rates, inspections, correct class actions, the non-renewal actions, and the blocking and tackling that has been done.

So I think we are -- I would not say we are ahead of plan or behind plan.

I think we are making significant progress about where we thought we would be, and we feel confident that we are doing the type of fundamental steps necessary to improve the long-term profitability of the business.

We continue a plan that includes a rollout of a new homeowner's product, house and home, that helps us deal with roof costs, specifically.

There is some pressure from pricing on roofing.

Roof prices fell 2 years in a row from 2008, but had their first increase of 12% in 2011, so we know we have to get out in front of that, and we are with our new product.

So we feel pretty confident that the fundamentals have helped us dramatically, but there is no denying the fact that first quarter was helped, also, significantly by just a lack of CATs and the weather ex-CAT.

So if 40% was sustainable, then should we continue to expect high single-digit rate increases in home going into the back half of the year?

I think that is an acceptable range to think about.

Okay.

And then lastly, on auto, can you talk about the competitive environment in auto?

And can you also comment on the knock-on effect raising home insurance rates is having on the PIFF there?

Sure.

Well, obviously, there is an impact of taking homeowners rate actions on not only home, but also on our auto customers and our PIF.

We are also, in places where it is necessary, taking rate actions on the auto side, which is compounding that.

So when you combine the two, it is having what I would say is a chilling effect on our ability to grow PIF right now, as we have a core focus on profitability side.

We feel like that is the right balance right now.

We believe that growth in the absence of profitability is the wrong strategy, so we are pretty disciplined right now as far as focusing on getting rate adequate, both in homeowners and auto, and accepting but not liking the fact that it can impact our ability to grow.

The competitive environment is interesting.

I think some of the multiline companies are now raising their homeowners rates a little later than, I think, we did, and some -- a few early adopters.

So my expectation is that we will no longer be alone in the marketplace taking rate.

Now that many of our competitors -- even though you may think of them as auto-only competitors, they are offering nonproprietary homeowners products in an attempt to bundle.

So even those traditional auto-only companies are getting some of this collateral impact on the raising of homeowners rates, and that is especially true for that market segment of personal touch loyalists, who prefer to bundle their products and are not looking for independent providers of their individual insurance products.

Let me add to that.

I think as you are thinking about growth, really, you should start with looking at the different customer segments, begin the analysis there, then drop into products.

So as Matt just said, the Allstate agencies service -- those people who want local advice assistance, one branded products by bundles -- like bundled product.

And so, when you are looking at the efforts to maintain homeowner returns at the same time you're trying to grow your auto business, it obviously compounds that.

And of course, we have our issues in New York and Florida.

If you look at Esurance, on the other hand, that is the self-serve side of that matrix.

You can see that Esurance is growing and competing effectively with GEICO and Progressive.

And then if you look on the Encompass side, that was -- we were not growing -- that business had gotten a lot smaller.

That was really our issue.

We have changed leadership.

I don't think we have got it all in the right -- it is headed in the right direction, but we don't have it fixed yet.

So I think, really, as we are thinking about growth in the future, it is helpful to set that in the context, the way Matt did, of who are the customers groups that you are serving, and how do you grow within that customer group?

Okay, and just real quickly, in terms of -- Matt said taking rate actions in auto, there is this chart on slide 5 that shows about 4% rate changes, and then how do I reconcile that with -- in the supplement page 18 it shows about 5.5% rate increases in auto?

I think on slide 5, you are talking about approved rate changes, and I think in the supplement it is what has been earned in.

No.

The difference is the 5.8% -- this is Bob -- that you see in the supplement, that is the average of the rates taken in the states specific.

What is on the chart is the fourth quarter moving country-wide impact of rates.

So they are two different numbers.

So would the supplement be at a more leading indicator that you are accelerating?

No, if you took the four quarters of the supplement for the country-wide, you would get to 4%, and add them up, you get close to 4%.

Bob Glasspiegel, Langen McAlenney.

On the auto, I thought the frequency and severity trends in total were quite benign.

With Progressive's commentary and GEICO reporting over 100, there is some nervousness about what is going on in auto.

You have been reporting steady 7 to 8 points at better than the industry auto underwriting and contracting.

I'm just trying to understand the difference between what you are seeing and they are seeing.

I'm wondering at the fact that they are growing much more rapidly and you are contracting could be feeding into it?

Bob, this is Tom.

It is hard to comment on what other people's results are.

Obviously, I think Progressive got hit with some reserve changes that they had to make down in Florida.

I can't speak to GEICO, since they are not -- they don't publicly disclose all the stuff that you can really go over.

I would say when you look at our practices in auto insurance, we pay attention to it at a very local level.

We have good operating discipline around it.

We are watching the trends -- you see the country-wide ones.

The frequency is down, but a lot of the frequency is down because of New York and Florida.

So we are looking at a level below that.

Matt and his team are on top of that, so they have a number of places where they are managing rates.

That is why you see some -- you know, 10 states had some increases.

So we believe in small, frequent adjustments rather than large and infrequent, in terms of managing our business from a customer standpoint.

Okay.

Just a bookkeeping question.

You have $4.6 billion of limited partnerships.

What is the amount of that that is impacted by the EMA geography change?

About 60% of that is impacted by the EMA.

I think it is about $2.5 billion.

And the split between PC and life of those two?

PC is about two thirds, life is about one third.

You can see that in our underlying numbers in the 10-Q.

We have those splits.

PC is bigger?

PC is bigger, yes.

Josh Shanker, Deutsche Bank.

Looking at the policy count decline in homeowners, it was negative $110,000.

I want to find out, where are you in reshaping the homeowners portfolio through risk management and price increases?

How many years until we get to stability?

And I also noticed that the decline in auto was a little higher, but about the same.

Is it possible that Allstate has begun to grow in un-bundled homeowners policies?

Josh, You broke up on a few of those, but so -- but I think we got it.

Matt, do you want to --?

Yes, I think I heard enough.

If I start answering a different question than you asked, please tell me.

(Laughter) I can ask again if you want, or look, you can take it for what you want, and I will steer you if I get misdirected.

Okay, good.

Now I lost my train of thought on what your original question was.

Homeowners -- reshaping the portfolio, where are we in the long-term process, and are you growing in unbundled auto at this time?

Okay.

So I don't think it is prudent for me to guess a percentage of how far we are along in our path.

I would say we have made significant progress in taking a look at our homeowners offerings on a state-by-state, and region by region, and even locality basis to determine where we believe we have long-term prospects of making an acceptable return for the acceptable level of risk.

We began that process and have done a great deal of work there.

As a result, we are making decisions about those areas where we will begin offering nonproprietary homeowners products and broker end products so that we can serve our customers with a complete portfolio, but not necessarily always with an Allstate-branded product.

And so we are doing a fair amount of work in our brokering operation and on our ENS segment to take a look at more -- I would say a more refined view of looking at our markets and determining what product should be offered where.

That takes some time.

It takes up some time to build up the brokering capability, to build up the linkages from a technology standpoint so we can serve those customers the same way we would serve customers with our Allstate-branded product.

And we are, I think, making excellent progress there.

To your unbundled question -- look, homeowners is often the lead product in our marketplace.

In some areas it is their number one go-to customer product, and then they follow with auto.

It is possible that we are seeing some areas where they are getting homeowners products, and for whatever reason, we do not then get the follow-on auto.

But our focus, and our incentives, and our goal is to provide a bundled product offering, deep relationship with multi-products to our customers, so they can get the true full value of working with an Allstate agent.

Hi, Josh, this is Tom.

Maybe to give you a little longer-term perspective, too, in 2005 I think it was, after Katrina, we looked and said, should we get out of the business?

And we broke it into three buckets.

One was mega-CATs -- hurricanes and earthquakes; two was non-model CATs, and three was just sort of the normal slip/fall, low severity, high frequency events.

And so we went off -- we went at all three of those components.

We went first at the CAT thing.

I would say we have made tremendous progress there, and we are pretty close to being where we want to be, but there are a few states where we have still got some more work to do.

But we feel like with what we have done in Florida, what we have done around the coast, we are down over a 1 million policies in homeowners as a result of many of those changes.

The second piece was non-model CAT.

That is the part that popped, really, in 2008, 2009, 2010, and 2011.

And as Matt said, we have been hard at work on that for the last 3 years.

And I totally agree that it is hard to predict when that one will be done, because you have got to figure out what the weather will be in the future.

And then the third piece was just the normal slip and falls, and we got a little behind in 2008/2009 as cost increases due to commodity prices and oil prices spiking in those periods.

Our actual underlying severities on non-catastrophe related stuff went up.

So I feel like we have made a lot of progress on that piece, too.

So I would say number one and number three, we are pretty far along, and number two -- a little harder to sort out.

About 75% or so of our homeowners business that is written comes with another product.

So we are not there.

That said, we would like -- as Matt said, we would like it to be a lead line.

When Matt and his team get house and home rolled out, get the pricing right, we believe that being a provider of a wide variety of products for that personal touch loyalist customer who likes to bundle stuff will be a competitive advantage for us.

And quickly on Florida and New York, the loss ratios were off the charts.

Have you overshot the mark in terms of your trying to get profits out of there at the expense of new customers?

No, I don't believe we have overshot the mark.

I think that those two markets are, obviously, extremely volatile and extremely difficult.

We have challenges there on the regulatory and legislative side.

We have some challenges in some of the PIF trends.

We have taken firm and decisive action there.

I do not believe we have overreacted there.

We are trying to reposition, and stabilize, and ensure that when we began growing that it is all profitable growth.

And so I actually think the team and the agents in those two regions have done exceptionally well in managing through very difficult circumstances and still maintaining good customer relationships and good customer satisfaction.

So I don't feel like we have overshot the target.

I think that we are -- we have hit pretty much a bullseye on both of those, and we will continue our efforts in a careful, disciplined way.

And there were some reserve changes, too.

Okay, thanks for pointing that out.

Well, thank you very much, and have another good quarter in 2Q.

Thanks, we hope to.

Jay Gelb, Barclays.

I was wondering if you can talk about two issues.

First in Allstate brand standard auto PIF, how much time do you think it will take to turn the corner to get to flat on PIF?

And then my second question is on Esurance.

With the 128 combined ratio and about $60 million underwriting loss, I'm just trying to get a sense of when you feel we might see signs of improvement there, maybe even heading towards breakeven on the underwriting front?

Well, Jay, we don't want to do forecasts of growth, so we are working our way through it.

So unfortunately, I'm not going to give an answer on when we expect that to turn.

But we are obviously hard at work.

Matt's team segments it.

We do provide some information on where we are growing outside of areas where we have big challenges, like New York and Florida.

On Esurance, there is a bunch of purchase accounting stuff in there, so the combined ratio is really 106 when you strip out all the other stuff.

And we do provide -- we added a new sheet to the investor supplement which has the loss ratio in it, which should be able to give you the -- which is page 26.

And you can -- we show in there the loss ratio, and you can see the loss ratio is down at 73.

Then you can look at what we spend in marketing, and you could do some estimates.

We do that so that you can see that we believe this is -- we are writing at an economic rate, that we are not just growing in funding by giving the business away.

How long does that amortization expense continue on the Esurance business?

Less than 5 years.

Okay.

And then on the PIF, I understand where you are coming from.

I don't know if you disclosed what the Allstate brand standard auto PIF change would have been, say, ex-New York and Florida, or ex-the underwriting actions taken in homeowners?

You can see the first piece; you can't see the second piece.

But you should assume that Matt has depth and understanding behind his comment that in those places where we take homeowner rates above 10%, we have growth challenges.

In those places where it is less than 10%, we feel pretty good about our business.

Yes.

The only thing I would add, Jay, is -- it gets lost here, but we did grow auto if -- year-over-year first quarter in 24 states.

So a lot of what you see as in aggregation, driven by a couple of large states with a lot of rate action taking place there that is causing a decline.

I see.

Understood.

Thank you.

Alison Jacobowitz, Bank of America.

Most of my questions have been touched on, but I was wondering if you could talk some, maybe, about some of those smaller operations you have, like Encompass and maybe the nonstandard side.

Is there any opportunities there to turn things more dramatically around?

I will start with what we would call -- Alison -- well, first, good morning.

I will start with what we would label as our emerging businesses.

Don might want to talk a little bit about some further growth in Esurance, other things he can do there.

Matt can talk about nonstandard.

Because there are a number of places we are pushing on growth.

Coming back to our customers, we do believe that our customers want to buy, in the Allstate channel, wide variety of products.

So we are doing quite well in motorcycles right now.

We need to do better in a wider variety of stuff.

We are doing great in Good Hands Roadside, which is our pay-as-you-go roadside thing that we launched on a national basis as part of Grow to Win last year.

And so that business has -- what we would call consumer household business and our motor club business are doing well.

We think we can continue to accelerate growth in those areas.

Encompass is -- when you look at it over the last 4 years, Encompass is a significant portion of the decline we have in total premiums.

We did not properly position that business in that channel, which are people who want local advice but are less concerned about who the company is, and they tend to be a little more price sensitive.

So we got the wrong business, we got it through the wrong agency owners.

We have repositioned that business.

You see a small growth in that business in the first quarter of this year.

I'm not satisfied that we have that completely positioned yet to grow.

They have more work to do, but we believe there is upside there, because if we just get back what we lost, we will pick up about $700 million or $800 million of premium.

So that is a good growth for us.

Don, I don't know if you want to talk about potential to add products to Esurance and the positioning of the risk profile in terms of preferred, and then, Don, maybe you can go to nonstandard, and then if anybody wants to say anything else.

It's Don Civgin.

We have only had Esurance for one full quarter now, but I would tell you, I think we are just as happy as today we made the announcement, if not more at this point.

When we look at what the opportunity -- the breakout opportunity, to your question, is with Esurance.

A lot of good things are taking place.

The integration is going quite well.

Some of that is going to be efforts to reduce costs, so we are taking advantage of scale, and process improvements, and claims.

Contract renegotiations have been very fruitful as well.

Tom is right; we are looking at launching a series of new, additional products for Esurance, increasing the number of states that they will be operating in.

Because if you recall, when we acquired them, they were not in all 50 states.

And we are adding the benefit of our deep pricing knowledge, particularly as it relates to our customer segment, which is a little bit different than theirs.

So none of that has rolled out yet.

It is all going to be part of the customer value proposition over the next year or two as it grows.

But I would tell you, even in the first quarter -- now, we don't report year-over-year results, because we did not own them a year ago -- but if you look at their gross written premium compared to when White Mountains reported them last year, they are up 6.5% in the first quarter.

So that is the result of some advertising, and a new campaign, and so forth.

But when you ask is there a breakout opportunity, I think there is a substantial opportunity for Esurance as they build a value proposition around their customer.

This is Matt, Alison.

I will touch on nonstandard a little bit.

We have shown a slight improvement in new business over the prior year.

We stabilized the Allstate blue state states, and we have had a little bit of a surge in new business in the non-Allstate blue states.

But nevertheless, gross 30-day retention continues to decline, and our items in force continue to decline.

We have slowed that down a little bit.

I have asked our group to take a very long, hard look at ways of getting more substantially back in what I will call the near-nonstandard or the near-standard niche here.

Possibly not the full nonstandard all the way down market, but those borderline cases.

And so we will do a fair amount of work over the next 3 to 6 months to assess our opportunity there.

It is an area that I think has great long-term potential if done right, and if done in a disciplined, careful manner, which includes some variations on the business model, and how you bill, and how some of the underwriting rules are executed.

I see it as a growth opportunity that we should be very careful about how we tap into so that we do it right.

Because as I said before, growth without the profitability destroys shareholder value, and we are about building shareholder value.

Dan Johnson, Citadel.

Maybe could you provide a little more insight into the alternative asset strategy that you have moved the accounting a little bit on?

Just tell us a little bit about how big, and what you are interested in doing there?

And then maybe just an update on the agent consolidation strategy?

Can you throw us some numbers in terms of where you are at on that?

Dan, it's Judy Greffin, and I can talk a little bit about what we are doing in alternative and private assets.

So if you think about where we are today, we have a mix of private equity, private real estate, real assets and infrastructure, as well as hedge funds.

We have had a long-standing program in private equity.

We continue and expect to have a long-standing program in private equity.

Don't expect that want to grow that much over the next 12 to 24 months.

Private real estate and real assets and infrastructure, though -- we are growing those.

We look at those as an opportunity to own some good assets as well as assets that generate some cash flow.

So we look at that and say, that is a nice alternative in this low rate environment, to own some assets directly.

And then within hedge funds, we have reduced our exposure to hedge funds and expect that we will look at that more opportunistically into the future.

So that is the total of those assets.

The reason why we are increasing the real assets in real estate really has to do with not just the low interest rate environment, but also the strategy for Allstate Financial, which we talked about earlier.

And we look at those assets as a nice fit to our long dated liabilities and see that as a long-term asset choice for us.

Dan, this is Steve.

What Judy has described is really the reason we moved the EMA income from realized capital gains up to endowed investment income.

It is really much more closely aligned with our operating income than it has been for the last several years.

Do we have the historical dataset on that?

Like, if we went back into the AOCI or something, can we see the earnings that have generated from those assets?

Yes, you can see that in the investor supplement and the 10-Qs going back by year and by quarter.

Great.

And Judy, in terms of new money yields on more traditional fixed income investments, what are we seeing today versus the average yields?

So our new money proxies for the property casualty portfolio, which we keep around a five-year, is around 2.75% new money proxy for Allstate Financial, which is a little bit longer; it is around 3.5%.

Dan, I will make an overall comment about the agency consolidation, and then Matt might want to talk about some things he has going on.

First, the agency consolidation makes it sound like we don't want everybody.

Everybody counts.

You can be a big agency, you can be a middle agency, you can be a new agency.

We are seeking to have all of them be more successful on behalf of our customers.

And so we have programs around there.

I think the net of that is some people have chosen to leave, so we have fewer.

But it is not as -- it is not like we're trying to get rid of a certain class of agencies.

If you are taking care of our customers, we are happy.

We have to help you -- support you, because bigger agencies do have more capabilities, so we are helping build those.

We are also -- Matt has got work going to help build the efforts -- the capabilities for other agencies, as well.

Matt, maybe you want to talk about some of that?

Sure.

So at a high level, there is such a diversity in markets and geographies that we cover that having some artificial numbers about what is the appropriate sized agency just makes no sense in a system like ours.

So what we are all about doing, and what Tom is referring to, is creating an economically viable agency that is able to appropriately serve their customers, and grow and develop so that these are vibrant businesses that are really serving Allstate customers the way they deserve to be served.

And so we are allowing the economics of the system to drive things.

In a lot of cases we have smaller agencies that see a path to getting to the right size for them and their geography to be supportable, and we are helping them every step of the way, and we would love them to grow.

So we don't really have, in my opinion, an agency consolidation strategy.

We have an agency help strategy to help all of our agencies become vibrant, economically self-sufficient, and capable of serving customers.

Next week in Las Vegas we have a conference.

We have opened up that conference.

It was typically a recognition conference for people who achieved a certain level of production.

We have opened it up to additional non-qualifiers, who are paying their own way to go there, and we have over 4000 attendees, from agency owners and exclusive financial specialists who have attended, of which 44% of them are paying their -- I'm sorry, 44% of them, this will be their first national conference of any type, which is very powerful.

It is an opportunity for people who have not achieved levels of success that would have allowed them to attend a recognition conference before be around people who have, and learn best practices from their peers and colleagues, exchange ideas in how to approach and serve the marketplace.

We are really excited about that, and we in fact have workshops and seminars available for every size agency there to help them all be successful.

I think we did a bad job previously on explaining our strategy if you think of it as a consolidation strategy, because I don't think --

I apologize for belaboring the question, but I thought the idea was to bring larger scale to the agencies to help drive, A, customer satisfaction, which had waned a bit, but also basically economic efficiencies.

Yes, that is true, Dan.

And certainly, the bigger you are, the better and easier it is to do that.

But I think what got lost in that translation was we can do some of that centrally for our agencies, so that even if you only have 1800 accounts, we can make you look and feel like a 3000 account agency.

Adam Klauber, William Blair.

My question is around buybacks.

You are obviously making more money.

You have additional debt capacity, and the life exposures are shrinking.

What is the possibility to accelerate the current buyback, and longer-term, what is the potential to actually increase the level of buyback?

Well, I think if you look at our track record, you would see if we don't have a good use of the capital, we give it back to shareholders.

This -- you do see -- you are correct in saying this is an accelerated pace on this one.

This billion-dollar program was to be done by February 13, and we are obviously ahead of pace on that.

We just thought the stock was so cheap -- we just thought we ought to be buying it back faster, so we rushed and did it.

We are making good money.

We still have -- when we get done with this authorization, then we will figure out where we are going next.

Okay, and one quick follow-up.

You show that Texas auto loss ratio popped up.

Is that tornadoes, or is there some other issue in Texas?

It is CATs and weather.

It is tornadoes, it is hail, and it is actually rain, in some areas.

That makes sense.

Thanks.

Alan Straus, Schroders.

Given the powerful cash flow, is the notion of issuing the preferred off the table again?

Or is that still out there, and you are thinking about it?

Alan, this is Tom.

When we announced the $1 billion share repurchase, we said there were three places we would source the capital from.

First was we had deployable capital at the holding company level.

Second, we said we obviously will have earnings; and we said if those are not enough, then we will issue the preferred.

Obviously, given what has happened with earnings, we have not seen the need to do that, so we don't feel like we need to issue it at this point in time.

Ian Gutterman, Adage Capital Management

Just two, if I may.

The other personal line segment, Tom, the combined ex-CATs, ex-development was the best in, I think, 5 years.

Can you just talk about what went on in that line?

And just -- is that trendable, or were there some one-time benefits?

Overall personal lines?

The Other personal lines segments, so the non-auto, non-home.

Oh, Other personal lines.

I would say one quarter does not make -- they had a good quarter.

I think we've -- but there are some portions of that business that are not operating as well as we would like them to be.

So, for example, in there you have manufactured housing, and a few other things which we're not yet well priced on.

We have some businesses that we like a lot, so there is 7 or 8 things.

They are headed in the right direction.

Last year we had an underwriting loss on those businesses, in large part because of catastrophes.

But even when you exclude catastrophes, we thought that we could run a higher profit margin in those businesses, given where the competitors are.

And so we have some work to do still.

But we feel good.

They had a good quarter, so we are happy about it.

Any particular lines that drove the outperformance?

Motorcycles, or commercial, or anything like that?

Or kind of broad-based?

No, it is pretty broad-based.

Okay, great.

And then just one other one, on the idea of turning around the PIF -- and, honestly, I'm not trying to pin you down on a number or timing, but just what initiatives are going to drive it?

Obviously, you talked a little bit about the agency issues, but beyond that, are New York and Florida now able to start growing?

Are they fixed enough where you feel like you can start turning up the market support there?

I think you mentioned in a prior meeting about expanding the bullseye a little bit, I guess, to try to target some more customers who maybe haven't been a good price set before.

What are the initiatives that we are going to see?

When PIF gets better, what are going to be the reasons?

I would say Matt and his team have a whole variety of initiatives going on relative to growth, most of which you have talked about.

The one that has not -- we have not spent as much time talking about, either on the positive or negative side, is retention.

Part of Grow to Win, which I think I mischaracterized publicly -- Grow to Win was really a -- one tactical component of our overall business strategy, and then we had more marketing programs for customers.

We wanted to launch Good Hands Roadside on a national basis.

We wanted to do a number of local programs to engage agencies in growth.

We had a program focused on retention, which we had our employees calling out on behalf of the agencies.

We called 1 million customers.

And so the retention part is something that we are hard at work on.

It is a little difficult when you are doing things like New York and Florida, and you are raising homeowner rates to get overall retention, but I would say that is the other part of our growth program, which you did not mention, and then Matt talked about nonstandard -- I don't know if there's anything else you wanted to add.

Yes.

I guess the only -- you mentioned broadening the target, and in fact, we are rolling out some refinements to our auto pricing state-by-state that will have the impact of broadening the target.

In the first state that it rolled out in, the first pilot, it improved close rates by just over 2%.

So that was very encouraging.

We have a carefully thought-out rollout plan for this year of that capability.

Don't forget, we also have Claims Satisfaction Guarantee that is being rolled out.

We have a tremendous number of initiatives.

We are trying not to overwhelm the field with initiatives, yet provide growth-oriented initiatives where they are most needed.

In my firm belief is as the need for taking rate and doing real inspections and rate re-classifications, etc., diminishes, it will free up agent time and agent capacity to focus on the things they like doing the most, which is growing and serving their customers.

So we feel like the trend line is good.

It is hard to tell you exactly when we are ready to grow in New York and Florida, but we are on the right path.

Matt, does it feel like this is a particularly good time to be broadening that appetite, given two of your largest competitors seem to be pulling back a little bit due to their margin issues?

Yes.

Vinay Misquith, Evercore.

On the homeowners, we have seen a decline in frequency and severity.

How much of that was because of the underwriting actions you have taken, and can we expect to see that in the future?

I mentioned earlier that whether it is 60%/40% or 50%/50%, some percentage is temporary due to weather and CAT, and some is very sustainable due to rates, inspections, correct class actions, non-renewals -- the actions we are taking to ensure that we are increasing what I would call the underwriting muscle in that line.

And so I think it is very sustainable, and I think we are feeling very good about it.

That is great.

Just a follow-up on New York and Florida personal auto.

Those states seem to be fixed.

When do you think that you guys can start having flatter PIF growth in those two states?

Everyone keeps circling around this one.

If you look at the business model, and the way it renews, and the way the customer flows work, it takes a while to overcome declines in retention and declines in new business.

So I don't think you should expect to see those turn around soon.

We are obviously working on them.

They are different in each market.

Florida has got some new legislation passed; auto has also got some pricing components to that, so we are watching that one closely.

New York -- we feel good about the operational position we are in.

It is a little less fluid in terms of being able to adjust if you don't have it quite right.

And we have a relatively sizable decline in both retention and new business there.

Now, we have rolled out some new pricing in New York, but -- so we are about growing in the right way, but I don't think you should expect to see us start talking about growth, including New York and Florida being up in the near term.

Maybe we will take one more question.

Brian Meredith, UBS.

I will just be a quick one here for you.

On the paid severities going on in the quarter, I know last quarter you talk about used-car parts inflation causing that to move up.

Is that still the case?

Do you think that is going to continue here for another couple of quarters, or is it an aberration?

This is Matt, Brian.

Well, yes, we saw the third consecutive month that the Mannheim index showed an increase in used-car prices, so in fact, every month of that quarter we saw an increase in used-car prices, which certainly drove some of it.

We also, remember, had a very good weather quarter, which decreased the number of small fender benders.

So the accidents that occurred tended to be the larger ones, not related to weather.

And I would say that is the predominant piece.

BI is moving along with the relevant index.

The medical CPI and PIF is within our expectations.

So the thing that we are pretty focused on is PD severity.

Frequency looks relatively benign with gasoline prices and the continued benefits from New York and Florida.

Brian, this is Tom.

If you want to look at used-car prices over a longer period of time, there are some measures out there, and what you would see is from 1999 to 2009, they were down to slightly flat over that entire 10-year period, which, of course, happened to coincide with massive amounts of new car production and sales in the United States.

Of course, then in 2009, when new car sales went way down, then you saw the opposite.

So you could base this -- our job is not to predict that, but is to react to it, and that is exactly what Matt's team is doing.

Okay, well, thank you all for joining us today.

We are off to a good start in 2012.

We obviously have more work ahead of us this year, but we do have our four priorities that we are focusing on, which is maintaining auto profitability, raise returns in homeowners and annuity businesses, grow insurance premiums, and then proactively manage our investments in capital.

Successful execution of those will keep driving shareholder value up.

Thank you, and we will talk to you next quarter.

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

This concludes the program.

You may now disconnect.

Good day.