Allstate Corp (ALL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation second quarter 2012 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 of Investor Relations.

Mr. Block, you may begin.

Thanks, Matt, and good morning, everyone.

Thanks for joining us today for Allstate's second quarter 2012 earnings conference call.

As usual, we will begin today with some prepared remarks from Tom Wilson, Steve Shebik, and me, followed by a question-and-answer session.

Don Civgin, head of Allstate Financial and Insurance; Judy Greffin, Chief Investment Officer; Sam Pilch, Controller; and Matt Winter, head of Auto, Home, and Agencies, are here as well.

Yesterday afternoon, we issued our press release and investor supplement, as well as our 10-Q for the second quarter.

We also posted a slide presentation to be used in conjunction with our prepared remarks.

These are all available on 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 these statements, so please refer to our 10-K for 2011, our 10-Q for the second quarter 2012, and our most recent press release for information on potential risks.

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

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

Now we can begin the discussion of our results, Tom Wilson.

Tom?

Good morning.

Thanks for your interest in Allstate.

My remarks will focus on our performance relative to our 2012 priorities within the context of our consumer corporate strategy, and then Bob and Steve will cover their quarter's results in greater detail.

Let's begin on the top of slide 2. As you know, our strategy is to provide unique protection products to each of the four consumer segments in the marketplace.

The Allstate brand, which is in the lower left, serves those customers that want local advice and assistance and prefer to purchase competitively differentiated branded products.

In this business, we are successfully introducing new differentiated products such as our Claim Satisfaction Guarantee, Good Hands Roadside, and House and Home.

Our support of Allstate agencies and marketing programs continue to be expanded with good results.

Premiums written, though, were flat for the Allstate brand, as our efforts to raise returns in homeowners negatively impacts retention of homeowners, and we had lower new business sales of auto insurance.

We did increase the emerging businesses and Allstate financial products sold through Allstate agencies.

The lower right customer segment is served by Esurance, which we acquired in October to give us a growth platform for self-serve customers that prefer a brand of product.

We continue to believe to our capabilities will make us a more powerful competitor, and policies in force are up this year.

The results of Encompass and Answer Financial also improved this quarter.

Our four 2012 priorities are to create shareholder value by, one, maintaining auto profitability; two, raising returns in homeowners and annuity businesses; three, growing insurance premiums; and fourth, proactively managing investments in capital.

Moving to slide 3, we had another very good quarter, with financial results showing progress on our priorities.

On a consolidated basis, we reported net income of $423 million and $432 million of operating income, both significant improvements from the net and operating loss posted last year in the second quarter.

The improvement was driven by lower catastrophe losses and a favorable reduction in the underlying combined ratio.

While catastrophe losses this quarter were reduced from last year's record second quarter, this quarter's losses were still high versus the long-term average.

It reaffirms our 2008 decision to focus on improving returns in a homeowners line.

Book value per share has increased 9.8% this year, reaching almost $40.

Return on equity for the last 12 months increased 11% on a net income basis and was 11.4% on an operating basis, getting closer to the 2014 goal of 13%.

Good progress was made on our 2012 priorities as well.

We maintained auto profitability with the Allstate brand standard auto combined ratio of 95.5%, which is better than last year's second quarter.

Esurance's combined ratio increased, largely reflecting higher advertising expenses, acquisition costs, amortization, and catastrophes.

There was modest upward pressure on auto loss costs, but this is well within our pricing parameters.

Homeowner returns continued to improve with an underlying combined ratio 64.6%, which was 4.8 points better than last year's second quarter.

This reflects both our long-term effort to raise prices and improve underwriting selection, as well as a moderation of lost costs.

We are pleased with the results but recognize there is more work to be done until returns are adequate and sustainable.

Allstate Financial's annuity returns were essentially unchanged economically, but the reported results were higher, largely as a result in the shift in the location of income from limited partnerships.

Overall, Allstate Financial had $138 million of operating income, which is comparable to last year's quarter on a slightly smaller asset base.

Insurance premiums increased in the quarter by 3.8% from the prior year, largely reflecting the acquisition of Esurance and increases in emerging businesses and Encompass.

Esurance's policies enforced have increased by 13.5% since the beginning of this year, as our new advertising and pricing sophistication resulted in economically attractive growth.

The investment portfolio had a total return of 1.8% in the quarter, with a small increase in investment income, $27 million of net capital gains, and a $442 million increase in unrealized capital gains.

We remain focused on balancing returns and preservation of capital by favoring intermediate corporate credit investments in this low rate, unstable economic environment.

We also repurchased $275 million of common stock in this quarter.

All in all, good progress on all four priorities.

Bob and Steve will now provide more detail on the various components of these results.

Slide 4 provides our net premium written and combined ratio for property liability.

Overall, premiums written of $6.86 billion grew 3.8% compared to the prior year, a growth rate similar to that of the first quarter 2012, driven primarily by our acquisition of Esurance, which continued to grow both premiums and units, as well as positive growth experienced in both the Allstate and Encompass brands.

Allstate brand standard auto net premium written of $3.9 billion declined slightly from the prior year quarter, as auto profitability actions taken in New York and Florida, coupled with actions to improve homeowner returns, continue to hamper overall growth.

Excluding New York and Florida, net premiums written for the Allstate brand standard auto grew slightly from the second quarter of 2011.

The drop in units was partially offset by an increase in average premium.

Retention at 89% was down 0.2 points from last year's quarter, driven by declines in New York and Florida, with the rest of the country increasing slightly.

Allstate brand homeowners net written premium of $1.64 billion increased 2.1% from the second quarter 2011.

Rate actions designed to improve homeowner returns more than offset the decline in units, as average premiums increased 9.2% in the quarter compared to the second quarter of 2011.

In the second quarter, we received approval for rate changes in seven states averaging 10.2%, worth 1.2% on a country-wide basis.

In addition to the rate actions, we have introduced our new product, called House and Home, in nine states, seven of them in the second quarter 2012.

We are pleased with the results thus far.

As early results indicated, we're gaining a little lift in new business acquisition for both the homeowners and auto insurance.

Within the Allstate brand, the other personal lines, which comprise emerging businesses, posted net written premium growth of 1.8%.

We also experienced net premium written growth in Encompass of 5.9%, driven by a substantial increase in new issued applications, as well as increased retention ratio.

Sequential growth in policies enforced was achieved in emerging businesses, Canada, Encompass, and Esurance.

On the bottom half of slide 4, the reported combined ratio for property liability was 98.0%, a significant improvement from second quarter 2011's 123.3%.

A lower catastrophe loss and an improved underlying combined ratio were the primary reasons for the favorable results.

The underlying combined ratio was 86.3%, a 1.2 point improvement from the second quarter 2011.

Seasonally, the second quarter has produced the lowest underlying combined ratio in every year since 2005.

Moving to slide 5, we provide the loss trends for Allstate brand standard auto for the last few years.

The top half of the slide displays the gross frequency and paid severity for bodily injury and property damage coverages.

After four quarters of frequency reduction, both bodily injury and property damage frequencies increased from prior year by 1.9% and 1.4%, respectively.

Paid severities for bodily injury and property damage also increased by 3.4% and 3%, respectively.

While this represents a modest increase in loss cost for these coverages, when you include the results for the other coverages, coupled with the impact of an increase in average earned premium, the underlying combined ratio improved slightly to 93.4% from 93.7% in the second quarter of 2011.

We continue to gain approval for rate changes this quarter, with 19 states approved at an average in those states of 4.4% for a country-wide impact of 1.5%.

With maintaining auto profitability being a key priority for us, we added the next slide to give you a longer-term view of this key metric.

Since 2001, we have produced strong profitable underwriting margins in the Allstate brand standard auto, averaging a combined ratio over the last 11 years of about 93%.

The chart on the bottom of the page gives you the underlying combined ratio since 2008 by quarter and year.

While there are some seasonal fluctuations, the pattern of profitable margins is evident.

It has been and will continue to be very important for us to maintain auto profitability.

Before moving on to homeowner loss trends, we made a commitment to you to provide an update on Esurance.

Details for Esurance underwriting results can be found on page 24 of our investor supplement.

Growth accelerated in the second quarter with premiums written of $224 million.

Keep in mind that seasonally, the first quarter tends to be the highest quarter of the year in terms of premium volume.

Policies enforced grew to 9 -- or 892,000, up 13.5% since year-end 2011.

The underlying combined ratio was 106%, including 16.2 points of advertising expense.

The reported combined ratio for the quarter was 116.7%.

Overall, Esurance is performing as we expected.

On slide 7, we provide charts on homeowner rate activity, loss trends, and profitability.

In the upper left, we show the country-wide rate effect of the approved rate actions over time.

As I mentioned previously, in the second quarter, we received approval for rate changes in seven states, averaging 10.2%, worth 1.2% on a country-wide basis.

Over the last four quarters, we have averaged over 8% on a country-wide basis, a level consistent with the last few years.

In the upper right, we display the frequency and paid severity trends, excluding catastrophes.

In the second quarter, frequency declined 6.7% compared to the prior year, while paid severity increased 2%.

Given these modest loss cost trends, coupled with approved rate actions, the underlying combined ratio shown in the lower left declined by 4.8 points to 64.6%.

The combined ratio -- the reported combined ratio for the second quarter was still unprofitable at 104.9%.

We will continue to focus on improving the margins in homeowners.

Taking a closer look at the underlying combined ratio for Allstate brand homeowners on the next slide, the top chart provides the results for the underlying combined ratio by quarter.

The underlying combined ratio began to improve in the back half of 2011 and continued into the first two quarters of 2012.

The chart on the bottom of the slide provides some insight into this improving trend.

It plots the percent increase in the average earned versus the underlying loss trend.

It also answers the question, with all the rate increases Allstate has taken, why hasn't the underlying combined ratio improved faster?

First, looking at the earn premium line in red, we observed that the increasing trend beginning in early 2011, one that is more reflective of the approved rate action levels.

It takes time for the rate changes to be earned, because its an annual policy.

Second, the loss trend in blue essentially matched the change in the average earned, so the underlying combined ratio didn't show much improvement until the last year and a half.

The improvement that we have experienced in the underlying combined ratio was driven by rates being earned and by favorable loss trends.

Results for Allstate Financial, on slide 9, are reflective of our efforts to improve returns while shifting the focus from spread -based to underwritten products.

In the second quarter, total premiums and contract charges increased 2.2% from prior year, with underwritten products up 3.1% from the second quarter of 2011.

Allstate agencies increased life unit sales, with issued policies growing 2.5% compared to the prior year quarter.

Operating income of $138 million increased 2.2% from the prior year, helped by the inclusion of equity method limited partnership results this year, as well as lower crediting rates that were partially offset by worse mortality in both life insurance and annuities, lower yields on fixed income securities, and the continued managed reduction in spread business.

Net income of $132 million declined relative to last year, driven by a reduction in net realized capital gains.

Operating returns on attributed equity were relatively consistent with the first quarter 2012 levels.

Life insurance returns were 10.8%, accident and health were at 16.3%, and annuities came in at 5.9% as of the end of the second quarter.

The overall return was 8.7%, 0.4 points better than year-end 2011.

With that, I will turn it over to Steve.

Thanks, Bob.

We continue to proactively balance portfolio yield and return objectives in this challenging, low rate market environment, delivering a total portfolio return for the second quarter of 1.8% on a GAAP accounting basis and 3.8% to the first six months of the year.

On slide 10, we can see the size and composition of our overall portfolio.

Improved fixed income valuations, portfolio income, and positive cash flows from our property liability business more than offset the ongoing managed reduction of Allstate Financial's spread business.

These factors combined to raise the portfolio valuation to $97.3 billion at the end of the second quarter, compared to $95.6 billion at year-end 2011 and $97 billion as of the first quarter.

Our portfolio actions during the second quarter continued to focus on optimizing our fixed income portfolio position on the yield curve, shifting more toward the intermediate term part of the curve and favoring corporate credit over treasuries and equities.

You can see the result of these actions, which reduces reinvestment risk and will preserve capital when interest rates begin to increase in the asset allocation breakout, as well as the scheduled maturity profile.

Slide 11 highlights portfolio income and yield trends.

For the second quarter of 2012, net investment income was just over $1 billion, comparable to the second quarter of 2011 and total portfolio yield was 4.6%, higher than the second quarter of 2011 and consistent with the first quarter of 2012.

Limited partnership results were the primary driver of the favorable variance to the prior-year quarter.

You may remember that we prospectively changed our classification of equity method limited partnership results to net investment income from realized capital gains at the beginning of the year.

This brought us more in line with the reporting practices of our peers.

Investment income provided in limited partnerships was $107 million in the quarter, comparable to the total from the first quarter and $89 million higher than the prior-year quarter.

The increase reflects the changing classification, as well as an improvement of $34 million in limited partnership performance.

If our equity method limited partnership results had not been reclassified, second quarter 2012 net investment income and portfolio yield would have been lower than the prior-year quarter, as seen from the chart on the bottom of the slide and consistent with the reduction in Allstate Financial's liabilities and lower interest rates.

On slide 12, you can see that we realized gains of $27 million in the second quarter of 2012, a decrease of $30 million compared to the second quarter of 2011.

Our portfolio management actions and other trading activity generated approximately $70 million in trading gains from the sales of fixed income and equity securities, which were offset by [$50] million in write-downs for the quarter.

Impairment and intent write-downs continued to trend significantly lower than prior-year periods.

Derivative results reflect reduced usage, as we are focusing the management of rate risk in the cash market through portfolio positioning on the yield curve.

We finished the quarter in a strong capital position, as shown on slide 13.

Shareholders equity of $19.5 billion increased $1.2 billion from year-end 2011.

Statutory surplus for both property liability and life remained strong, and deployable assets at the holding company level was $2.3 billion.

We continued to buy back our stock, purchasing $275 million during the second quarter.

That leaves $319 million on our current $1 billion authorization.

Our book value per share hit a new high of $39.73 on the strength of our operating performance, improved portfolio valuation, and active capital management.

Now, let's open it up for your questions.

Thank you.

(Operator Instructions)

Our first question is from Bob Glasspiegel Langen McAlenney.

Your question, please.

Good morning, everyone.

Quick question on homeowners that I've asked before.

What inning do think you are in the playing of this business?

And I guess put another way, how many more quarters do think we will be hearing that aggregate premium growth or PIP growth was held back by homeowners actions?

It seems like your underline is getting close to the low 60s this quarter, and I thought that the relatively low CAT ratio of 12 points versus your peers was an encouraging quarter, relative to your CAT management programs.

Where you think you are, Tom?

Bob, if nothing else you are consistent, so thank you for that.

As we said, this is a business we have about $6 billion of capital up in.

We're looking to get in the mid-teens returns on our capital, so we obviously have a way to go.

Matt can talk specifically about what he's doing.

I will say I feel very good about the results in the underlying trends we see.

Clearly, we had a little bit of benefit, I think, lower fire losses and a few things this quarter.

But the geographical focus Matt has brought to the business has been quite good, and he could talk about the things he has going there.

So, Matt?

Sure.

Thanks for the question, Bob.

I usually tell people if I could predict the weather patterns, both CAT and non-CAT, I could tell you what inning we are in.

But until then, and since I can't, I can't really give you an answer to what inning we are in.

I can tell you how we are approaching the business, though.

This may not surprise you, but like politics, this business is entirely local.

It's like playing a game of whack-a-mole at the amusement park.

Everywhere you turn, something pops up, and you have to deal with it aggressively.

And as Tom said, we've decided that trying to have one person with a club managing all of these interactions is impossible.

So we pushed some of the decision-making down to the more local level and empowered local management, state managers, and people who can watch individual geographies, not just by state but even within a state, to manage and react to trends very quickly, as opposed to trying to manage them all from a centralized basis.

And so that has enabled us, I think, to react very quickly to trends as they emerge.

So the things that we are watching pop up may be somewhat unexpected, but they are still manageable.

And in some cases, we have been able to react so quickly that they don't even emerge as micro trends, much less macro trends.

So, we will continue to approach the game that way.

Depending upon how weather pans out and how a couple of other factors pan out will determine how soon we are through some of the stabilization mode and getting to the growth mode that we all want to be in.

But we know our task, and that is to get rate adequate, manage our volatility, create a sustainable base for growth, and then focus on that growth.

Matt, I think we are down about 200,000 policies in homeowners, I think, the first six months.

I don't think you should see that rate of decline change in the second half of the year.

In fact, it may be a little higher as Matt does some specific targeted actions we have talked about.

We feel good about it, but we're not there yet.

So as Matt said, he is not ready to turn on the spigot just yet.

Expect the same question next year this time.

Okay.

We will count on it, Bob.

Thank you.

Our next question is from Vinay Misquith of Evercore Partners.

Your question, please.

Hi.

Good morning.

Great job on the quarter, by the way.

The first question is on the expense ratio.

That's been picking up because you've been making grade, which is a good thing.

But any sense for -- any specific projects that you plan to reduce the expense ratio?

I will make a general comment, and then Don can speak about what we are doing in advertising in Esurance, and Matt can talk about the work he is doing.

We obviously look hard at our expenses all the time, as you would expect, and we are always trying to reduce expenses and shift those to where we need to put them.

Part of the reason for our increase in expense ratio would be the Esurance insurance increased advertising.

We also spent a little bit more money in advertising in the Allstate brand this quarter as well.

Matt has a number of programs going on, though, to simplify and reduce costs.

Don, maybe you want to start, and then Matt, jump into yours.

Sure, Vinay.

Of course, Esurance has a slightly different model -- business model than Allstate does, and so much of the expenses are acquisition related and charged upfront.

And so, as we have grown the business, and that growth has been pretty substantial here in the second quarter, with new policies sales are up over 30%, as that happens, what happens is you are expensing a lot of advertising expense upfront, which obviously has an impact on the expected impact on the combined ratio for Esurance.

I would tell you the integration is going quite well.

The other expenses are coming down, as we expected them to, so we're getting the efficiencies and we're getting the savings we expected from the acquisition.

We are intentionally spending the money on advertising, quite honestly, because the response has been so strong to it, and we're seeing some very solid growth.

You will see a tick up in the combined ratio, but what's important for you to understand is we're looking this at this from an economic combined ratio.

If you allocate those acquisition expenses through the life of the contract, the business that Esurance is writing is a combined ratio under 100.

It's actually quite attractive business.

On a GAAP basis, it is going to raise the combined ratio for some period of time, but that is what happens with that accounting model and high growth levels.

Vinay, it's Matt.

I will give you a little perspective on the expense ratio and how we are approaching it.

We look at this as two prongs.

And we don't believe that you can manage the expense ratio just by managing down and cutting expenses.

If you do that, actually you so constrain growth that you will actually hurt the expense ratio.

We're trying to do a balanced approach to managing the expense ratio through targeted efforts on growth and pruning out all of the unnecessary and non-value-added expenses in the business.

Most of that is through simplification of workflows.

I have a team working with my back office right now focusing on removing handoffs, simplifying processes, dramatically reducing service level agreement times, and taking out expenses through productivity, as opposed to reducing expenses through other efforts that might impact growth.

So, we are looking at this in kind of a balanced way.

We think we are making some good progress on it, but we don't want to try to cut our way to success there, because we think it will be counterproductive in the long term.

Vinay, this is Tom.

And if you look forward, as I know you always do, as we look forward to next year, you should expect us to continue to compete aggressively in the marketplace, as both Matt and Don just talked about.

We are also going to have to spend more money on technology, because all of the customer segments we talk about, whether they be the Allstate agency local advice and assistance or Esurance, are adapting to new technologies quickly.

So, we are going to probably spend more money on technology as we move forward next year.

Okay, that is helpful.

The second question is on PIF.

Could you help us understand how you're looking at PIF as you get into the back half of this year and early next year, especially considering that the new commission structure for agents is going to come up through force on January 1 next year?

Maybe I will make a comment about all the different businesses.

Matt can talk about the commission stuff, and maybe, Matt, you want to talk about the agency relationships, because that's related to it as well.

Obviously, we expect Esurance to keep growing.

We like what we've got there.

Don talked about that.

Encompass has started to grow, but they've got a long way to go to get back to where we were.

So, I am hopeful they will continue to push their package policy growth.

The Allstate channel we've talked about at length in terms of the headwinds of the homeowners business and what is going on in New York and Florida.

We should start to cycle through those, but I don't think you should expect to see dramatic growth in PIF there.

Allstate Financial, we continue to make some progress on life sales and the Allstate benefit business.

And then you should expect to see the size -- as it not really relates to PIF -- but the size of the fixed annuity business continue to come down.

We're down about 4% or $1.5 billion so far this year.

We would expect that business to keep coming down, if you're just thinking about growth in total in the Company.

Matt, maybe you want to talk about that commission structure or agency relationships.

Sure.

I want to make sure I understood the question.

So if this is not the answer to your question, please follow up again.

But you mentioned the changing commission structure as if that was going to impact PIF and our ability to grow.

But in reality, the primary changes taking place in January is a simple variable comp piece that has been drawn in as part of the overall commission structure.

And that variable comp piece, that 1%, is earned back by the agents through a series of fairly simple and fairly controllable actions on their part about physical presence and the location and what it looks like, having sufficient number of licensed sales professionals to support the agent, maintaining continuing education credits, and things that are manageable within their control.

And in addition, they will have the ability to earn an extra 1% based upon customer experience results and customer satisfaction through survey.

So, I don't anticipate that the change in commission structure will impact PIF in any meaningful way.

My expectation is that it will improve customer experience and align the interest of our agencies and the Company and the policyholders together in a more productive manner.

The collateral or tangential question you raised is agency relationships.

And that has impacted PIF to some extent, in that they have been distracted a little bit by the change in commission structure as they were learning it and trying to understand its impact and trying to figure out how to manage their cash flows.

We have had an aggressive agent re-engagement strategy underway for the last several months.

It began with a fairly massive gathering at the national forum in Las Vegas where we had over 4,400 agencies present.

And the vast -- I would say over 40% of whom had never been to a national conference before, any time in their history of affiliation with Allstate.

So we managed to pull together a bunch of people who do not typically have the opportunity to hear from management, learn best practices from each other, and share and develop.

And that was used as an opportunity to give people a chance to ask questions about the new commission structure and the new bonus structure, to learn about it, figure out how they can maximize their own compensation, and get their heads back in the game.

It has been productive.

It hasn't solved everything yet.

We understand how important agency morale is.

We know it's critical that they understand how much we believe in them and how much we want them to be successful.

And we will continue to work on it and align with them, and our goal and belief is that we can make these compensation changes in a positive way without negatively impacting anything.

Fair enough.

Sorry, go ahead.

We did a survey after the event, and in the 80% to 90% said we feel good about the Company, we think management understands us, we're feeling good about where it will go.

So, you'd rather be at 100% rather than 80 -- in the 80% to 90%, but if you look at a large, geographically dispersed and diverse workforce, we recognize we have room to improve.

It's also not as -- you have to listen to the broad set of opinions, as opposed to just the noisiest ones.

Fair enough.

Just as follow-up to that, my concern was that as you approach the January 1 date, you might get some more requests for terminations from agents, just because they don't want to move to a low commission structure and should that affect the pay.

So that was really my question.

Let me clarify, it is not a low commission structure.

It's actually an opportunity to earn a higher commission through certain activities and customer satisfaction.

And we believe strongly that once they understand that and see how achievable it is and they see their true earnings potential, that it will actually be helpful to attracting and retaining more agencies, as opposed to a catalyst for departures.

Thank you.

Our next question is from Jay Gelb of Barclays.

Your question, please.

Thanks.

On the return on equity goal of 13% by 2014, it seems like you're getting real close to that, faster than I would've expected, probably a lot of other people.

What are your thoughts in terms of achieving that goal prior to 2014?

Jay, we are still two points and $19 billion is a ways to go.

And so you are talking about $600 million by the time you sort through all.

And so, we have some work to go.

We still feel good about it.

Obviously, we have the headwind which, when we made that production, interest rates were a lot lower, so we had to work our way through that.

But we still feel good about getting to 13% by '14.

To the extent we get there sooner, we'll just make our shareholders even happier.

Okay.

And then on the underlying combined ratio guidance, I struggle to remember whether if it had come in better than your range, if you had changed the guidance over time.

I'm not sure I --

It's coming in better, clearly, than in the first half, compared to the guidance range?

Is there a point at which you might improve the guidance range?

We put the guidance out there as 88% to 91%.

There's obviously a fair amount of bouncing around because of frequency, which can move a point either way, which translates right into a point.

So, we've had good frequencies so far this year.

It is a full-year number.

Don't feel like changing it right now.

And it's just one component of what we try.

I would really ask you to focus on the four priorities we have.

We delivered on those four priorities.

We provide that guidance to help people do their analysis, but as you are well aware, that is only a small piece of what overall results are.

It doesn't include catastrophe, doesn't include investment income, doesn't include all of Allstate Financial's stuff.

So, there is a lot of pieces missing.

So, I am not inclined to change it right now, because it's a full-year number.

But I like where we're at.

I'm feeling good about the business right now.

And then finally, switching gears to property liability, net investment income.

It was up pretty meaningfully on the link quarter basis, $352 million versus $313 million.

I realize limited partnership had a benefit there, but the pickup in taxable non -- the taxable fixed income was also a benefit.

So I'm just trying to get a sense of what do you feel the right normalized quarterly run rate is there?

That's a complicated question.

Maybe I can get Judy to talk about -- Judy, if you talk about the difference and what we have done in repositioning the portfolio into the intermediate part of the curve, what we did with equities at the end of the first quarter.

And then maybe talk a little bit about the role and what we have going on over the next 12 months.

That might help Jay get to his number.

I don't think -- we're not going to give you a specific number, but Judy can give you those components, which will help get you there.

When you look at it with LPs and without LPs, you're right, we're doing okay in both.

I would say without LPs, it stabilized as well.

And as Tom mentioned, we are doing a lot in terms of optimizing the portfolio.

And one of the things we did in the first quarter which we might have mentioned before was that we sold some equities and bought high yields in the property and casualty company.

We liked that trade from an economic perspective, and it also has helped investment income year-to-date.

And what we have also done is continue to optimize the portfolio on the interest rate curve.

So over the past several quarters, what we have done is we have sold near-term maturities and sold longer duration maturities, because we are still concerned about long-term interest rates eventually going up.

And where we have really focused our efforts in the intermediate part of the curve, five- to seven-year maturities.

So that has helped us maintain our income, but it has also helped preserve the income going forward, because we will have less coming off the portfolio than what we would have, had we not done anything.

I see.

All right.

So, if I look at that 352 for the quarter, was there anything in there you'd view as extraordinary in the quarter?

Except for the LPs, I think LPs are more difficult to project, and we had a pretty good first quarter in the equity market.

And that might have pulled some of what we thought was going to happen throughout the year forward.

And you have to remember that we report those on a lag, and the second quarter equity market wasn't as good as the first quarter.

So the LP component is going to be a little bit more volatile, but while we are focused on both, yet I think we have also seen some stability because of some of the actions we've taken in the core portfolio as well.

I understand.

Thank you.

Our next question is from Mike Zaremski of Credit Suisse.

Your question, please.

Thanks.

Good morning.

In the prepared remarks, the term moderate was used in regards to the rise in auto loss cost trends.

But when I look on paper, it looks like the rise largely in frequency was somewhat steep.

Could you provide color on what could be driving the increase?

And could you also comment on whether non-CAT weather costs were lower this quarter versus 2Q '11?

Thanks.

Let me just get to the right page.

So, when you are looking at --

I was looking at slide 5.

Slide 5, and you're looking at the gross frequency numbers.

Correct.

That's a percent change year-over-year.

I think maybe I'll make a general comment.

We obviously try to factor in severity and frequency into our pricing.

Matt can talk about how he is doing that.

I don't see anything particularly abnormal in the second quarter.

It is true that you saw some unfavorable trends there.

But just remember that 2011 and the beginning of 2012 were both at the low end of the historical bound, so the rise looks disproportionate.

But it is clearly within historical volatility bounds.

There are certain geographies that were impacted by ex-CAT, whether -- which drove frequencies higher, such as Texas, where we had a bunch of issues.

Not only was Texas the site of three of the four largest CATs, but also had a lot of ex-CAT, whether that drove frequency.

So as I said, we monitor the quality of our book on a fairly micro basis.

As these emerge, if we can't explain him or they weren't predictable, then we take immediate action to manage them.

So we don't feel concerned about it.

But we are certainly watching these as they emerge.

But as I said in an earlier response, I think some people have interpreted some of these as large macro trends.

And the more we look at them, they are very, very locally based micro trends that influence a larger number.

Tom and I talk all the time about how averages lie, and so we don't look at the overall average number.

We look at the micro targeted local numbers, and those are within expectations and within historical bounds.

Okay.

And next, $320 million left in the buyback authorization.

Is that tracking ahead of expectations?

And would the Board consider increasing the program before year-end?

It's a little faster than we had originally planned on.

We thought the price was cheap, so we kept buying it back, and we generated enough capital and have plenty of capital at the holding company relative to do that.

We got on top of it early and aggressively.

The way we do it is, when we get close to the end of the program, then we go back and look at whether we want to do a new one.

But we typically finish a program then start a new one, as opposed to continually increasing the size of the existing program.

As you know, we've traditionally have done that in February when we have a good read on statutory capital for the year and where it came out.

Last year, of course, we accelerated that, because we, again, thought the price was cheap and we were buying it back.

As soon as we get done with this one, we will sit down with the Board and look at it again.

I think you should expect our philosophy to stay the same, which is if we have capital that is not being deployed in the business, we believe it is the shareholders' capital.

And we will pay that back out to the shareholders.

Largely, we have done that through share repurchases over the last 15 years.

And obviously, dividends eat up about $450 million a year as well.

We do generally front-end load the programs a bit before the hurricane season.

So if you look, we have the same basic trend a year ago also.

Okay.

If I could slip one last one in as a follow-up to the previous question -- caller's question.

The new money fixed income yields, would you be able to comment on that?

Thank you very much.

The reinvest yields for Allstate Protection and Allstate Financial?

Correct.

For Allstate Protection, we target, again, the five- to seven-year part of the curve.

Corporate, right now, we would say that's around 2.5 to 2.75.

And then for AF, it's longer than that.

It's more 7- to 10-year.

Corporate is something over 3%.

But remember, in AF, because the contract holder funds are coming down in the annuity segment, we don't have much reinvest risk there.

Really, we are pretty well matched, maturities versus on what we expect will come up in terms of liabilities.

Thank you.

Our next question is from Alison Jacobowitz of Bank of America Merrill Lynch.

Your question, please.

Hi, thanks.

Most of my questions have been answered, but I was wondering if you could possibly give some commentary around what maybe you're seeing your competitors do or the peers do in auto.

We have heard them indicating severity pressures a little bit more than you have.

Are you seeing more rate actions there?

Alison, this is Tom.

Matt might want to make some comments as well.

We can't speak to specifically what their strategies are.

Certainly, the decreases people were taking back in the '08 period of time, we don't see people doing that.

We see more modest, small increases.

If you look over a longer period of time, if you look at our results from 2007 forward to today, average premium hasn't really gone up much.

We've done a much better job of getting our pricing right for our customers on an individual basis.

Frequency has been down a little bit.

Severity has been up modestly.

We have controlled it from our standpoint.

I think some of our competitors have been recently talking about higher increases, but that's, again, back to Matt's point, averages lie.

If they have got a bunch of business in Florida and they messed up, then they have got to raise it.

I don't know, Matt, if you see anything different in the marketplace.

No, I can't really comment on the competitors.

So I will just continue to comment on our approach, which is -- I think really one of the benefits of our structure and the way we operate, which is the locally -based decision making and monitoring by both state managers, controllers, regional senior vice presidents, those teams are able to focus differently and focus more quickly when trends emerge.

They also know, based upon the local geographies, what to expect.

They know, for instance, when you aggressively push on BI or PIP, in some states, BI will pop up next, and they are prepared for that and they get ready for that.

And so all I can say is we are managing both frequency and severity and dealing with it through appropriate rate, correct class, the typical underwriting discipline that you would expect to see from Allstate.

Thank you.

The next question is from Ian Gutterman of Adage Capital.

Your question, please.

Just a couple follow-ups.

On the homeowners comment, I think going back to investor day a year or so ago, the goal was a low- to mid-60s underlying combined.

And you're at basically a mid-60s now, and you're still taking a lot of rate, and loss costs seem to be getting a little bit more favorable.

Is it possible that you overshoot that and we could see even better than what your goal was?

Ian, thanks for remembering, and I would say it's always possible, but probably not likely.

One of the things impacting this year is mix.

There is a lot fewer fire losses in the first half of this year.

Fire losses tend to have very high average severity, and so that can rattle through your paids.

We also had some -- a high number in paids in the second quarter of 2011.

So the decrease is really -- because of the loss, the decrease is not as big as it appears to be.

I think last quarter, Matt said he thought about 40% was sustainable, 60% was one-time.

I don't know what you're percentage is this quarter, but I would say we're happy where we are at.

We like where we are going.

If we overshoot, given the volatility of this business, it's possible some quarters we could make -- I think we said at the investor conference, our goal is to take this business from sometimes earning a profit to sometimes losing a profit.

To always making some money, sometimes a lot of money, sometimes not so much money, but move it from the plus or minus category to the plus or plus-plus category so that we get a decent return on our capital.

Great.

And then switching to the auto side, it seems like there is some concern about rising loss cost trends in the industry.

I know you addressed it a little bit earlier.

But just within the context of you also -- also, you talked about raising prices commensurately.

Do you feel comfortable that the pricing you put through year to date has incorporated the loss trend we have seen so far?

Or have we seen a little bit of a surprise and maybe we might be behind the curve for a little bit and we have to keep filing for more rate?

Thanks for the question, Ian.

It's Matt.

No, we feel comfortable that the rates that we have put in place have reflected the trends as they emerge.

Obviously, we don't know what trends are going to emerge tomorrow and next month.

And if they are outside of the bounds, we will reflect those in the next set of rate taking or underwriting actions.

But again, we haven't been that surprised.

BI and PD severities performed within expectations for the quarter.

BI moved with the medical CPI, as we would have expected.

We did get -- there's been a lot of, I guess, conflicting information out there about used car prices.

Manheim Index shows a decrease in second quarter after rising first quarter.

I know one of the analysts posted something about the CarMax index.

So there's a lot of variation in there.

There are things that transitioning, but we feel good about our rates that we have taken.

Obviously, some geography, some states are more challenged in taking appropriate rate, and it's harder for us there.

And others, we have more flexibility and the ability to accurately reflect what is happening.

Our goal is -- and I would say this not only for auto, but for homeowners in response to your first question.

We're trying to charge the right rate.

It's all about charging appropriately for the risk we are taking and earning an appropriate margin and providing the customer with a fair value.

And so, we will continue to try to move with that philosophy.

And competitively, are you seeing any signs that maybe your close rates are starting to go up or anything that suggests -- it does seem a lot of your competitors are struggling with this change in loss trend and maybe have to change your appetite.

Has that started to translate for real-time yet, or not so?

We have seen some fluctuation in certain states, but I would say it is too early before I could comment on it and tell you I see something that is material and sustainable.

Great.

Thank you so much.

Our next question is from Alan Straus of Schroders.

Your question, please.

I was just curious what the weather looked like for July, if you guys have any comments.

No.

I appreciate that.

It's sunny right now and warm.

We will do what we always do, which is if CAT losses are over $150 million, I think it's the third Thursday after the close of the month we put the number.

I think -- we are just closing the month right now, so I don't have anything to add there.

Okay.

I will ask a second question.

Given the capital management, the earnings are a little bit ahead of schedule.

Would you expect to go to your Board a little sooner than you expected to, to re-up the buyback?

I think Steve mentioned that traditionally, it was a good addition to the answer that I gave on long-term, we believe in giving money back to shareholders.

We do it sort of annually.

We do try to get ahead of it, and then we back off a little bit during hurricane season.

August, September, October tends to be the biggest hurricane months, so we probably won't be as aggressive in those three months.

But as soon as we're done with this one, then if we have extra capital and the Board approves, we will do another one.

The amount we've bought back, I don't know, over the last 15 years, like over $20 billion.

So we believe in -- if we generate extra capital, then the shareholder should be able to deploy it where they would like to.

Okay, thanks

Our next question is from Josh Shanker of Deutsche Bank.

Your question, please.

Yes, thank you.

Good morning, everyone.

I am going to pull a Glasspiegel here and ask the same question I asked the last conference call.

I can tell from the numbers, though, that your auto-only PIF growth is up.

You said to me you didn't know last quarter.

I can tell you, you are growing in auto-only PIF, and I'm wondering if you kind of have some color about growth rates going on and where you think that is headed.

Josh, auto-only PIF -- so we have -- we would break it into pieces, right?

So we would have the Esurance piece, which we said is up 13.5% this year.

The Allstate brand is down in actual PIF count.

The Encompass brand is up a little.

But it is not a -- it might be 20,000 or something like that.

And Canada is up a little.

Is there other color other than those component pieces?

When you say Allstate brand is down, that includes policies that were non-renewed with a homeowner as well as policies that were sold as standalone?

Yes.

But maybe this will -- if you look at -- maybe Matt wants to comment on the growth rate in three different categories.

So there is Florida and New York, that's one separate auto business.

There is those homeowner markets where he and his team are hitting it hard to try to get our return back.

Then there are all other.

That might, I think, provide some color for you in terms of helping you analyze where you think that's going to go.

I will take it.

Hopefully, it's a better answer than last quarter.

Not auto only, but whatever.

Go for it.

Let's hear the different curve.

The good news, Josh, is at least we're trying to answer yours.

We didn't try to answer Bob's.

So, let me try to break it down the way Tom suggested.

First, New York and Florida, obviously we -- our auto IF in both states has continued to decline.

We are focused on margin improvement actions in those states.

We are seeing some pockets, even within New York, we had a new rating plan put in a few months ago.

We are seeing pockets of growth there.

But when you look at the entire state, you still have a decline.

And then as Tom said, if you break down the country and our geographies into those areas where we are taking significant homeowners rate, and it's impacting auto growth versus those geographies where we are not taking significant homeowners rate or we are not having significant non-renewals due to inspections, there is a substantial difference.

There is certainly a big correlation between those homeowners actions in certain states and the impact on auto.

But it's -- I don't want to overgeneralize and say everywhere that we look at mono-line only, we are managing to grow.

There are certainly pockets where we are growing and growing nicely.

Some of those are due to new rating plans, some of those are due to competitiveness due to changes from some of our key competitors, as one of the earlier speakers asked about.

I just -- I would caution you on overgeneralizing anything here.

We will have pockets of growth, and as we stabilize the actions we are taking on homeowners, it will free up capacity on the other side.

But recall that our target market has historically been multi-car homeowners.

And so when you take homeowners' actions, you're hitting your target market, because they bought multiple policies from us.

And so, I guess that's the best I can answer that.

I am not sure I am seeing the exact trends you are referring to.

I think it was a good answer.

What a difference a year makes.

My hat's off to you.

Thank you.

Thanks, Josh.

Should we do one more question?

Our next question is from Brian Meredith of UBS.

Your question, please.

Thanks.

I will make it quick here.

The first one, I think you may have answered this already.

But the decline in the homeowners frequency that we're seeing right now, how much of that would you attribute to underwriting initiatives versus lower non-CAT weather going on so far this year?

Matt, do you want to take that one?

I am not sure I can give you a percentage.

I would say it is mixed.

It is reinspections, correct class actions, non-renewals, as well as ex-CAT weather.

I'm not sure I have the breakdown.

Bob, do you?

No.

On a quarter-to-quarter basis, I would say there's -- when you look at the mix, as we talked about fire, some stuff we got a break on for weather, and we may not get a break on that next quarter.

Fire ex-CAT is at a four year low.

I'm not sure we could expect it to stay at a four-year low on a long-term basis.

And so we have been benefited.

If I had to guess, I would say it's a combination of both factors, maybe 50/50, maybe 60/40, and I couldn't tell you exactly which is the 60 and which is the 40.

Thank you all for participating in today's -- the second quarter, as we said, was a strong quarter, despite the heavy weather activity.

We achieved progress on all four of our priorities, and we look forward to talking to you next quarter.

Thanks very much.

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

This concludes the program.

You may now disconnect.

Good day.