Allstate Corp (ALL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation third-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, Investor Relations.

Sir, you may begin.

Thanks, Matt and good morning, everyone.

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

First, Tom Wilson, Steve Shebik and I will provide some color on our results for the quarter and then we will go into a question-and-answer period.

Also on the call are Don Civgin, head of Allstate Financial and Esurance; Judy Greffin, our Chief Investment Officer; Sam Pilch, our controller; and Matt Winter, head of Auto, Home and Agencies.

Don Bailey, who leads the emerging businesses, will not be able to join us today since he is on the East Coast as the result of Super Storm Sandy.

Last night, we issued our press release and investor supplement and filed our 10-Q for the third quarter.

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

These are all available on our website.

Beginning with slide 1, 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 third quarter of 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 and I will be available after this call to answer any follow-up questions you may have.

Now I will turn it over to Tom for his perspective on our performance.

Well, good morning.

We appreciate you spending time with us today.

Before we discuss results, let me say a few words about Hurricane Sandy, which I know personally affected many of you.

First, I hope you're all getting your lives back together.

As you know, this was a massive storm; affected most of the eastern half of the country.

If you look on slide 2, you can see the breadth of that.

Put in comparison to other events, this is at least twice the breadth of Hurricane Katrina.

The good news is that the wind speeds were substantially lower than Katrina and more like last year's Hurricane Irene.

In fact, wind speeds were about two-thirds of Katrina and as you know, the damage is exponential as that speed goes up.

And while it is, of course, too early to call ultimate damages, several modelers have put out insured loss estimates.

Equicat's at $5 billion to $10 billion, AIR's at $7 billion to $15 billion with economic losses at twice that amount.

If the storm's damage is over $8 billion in insured losses, that will make it the fifth largest hurricane in US history.

Of course, a lot of the damage at this point would appear to be caused by flooding.

That is covered by your auto insurance.

As you know, the federal government provides flood insurance and it is typically not covered by people's homeowners insurance.

And of course, in these times of trouble, that is when our Company, Allstaters, do great work on behalf of our customers.

We have 1100 catastrophe claim adjusters out in the field as we speak, another 500 at our service centers.

We have 24 mobile claim centers.

We are reaching out to customers, we are doing advertising, we're walking the neighborhoods.

We are very proud of the fact that we were either among the first, if not the first, to be there for our customers.

It is sort of a point of pride for us.

We are out there helping them find a place to live, get food, clothing, assess their losses and Allstaters really do an amazing job of providing for the needs of our customers, being empathetic and supportive at this time.

As you know, customer focus is central to our strategy.

In fact, we have just got the JD Power Auto Claims Satisfaction results this week and our overall satisfaction on auto claims increased significantly.

We are now in the high satisfaction tier, above the industry average and several other well-known insurance brands.

Now, we all want to know, of course, how much this storm will ultimately cost us and it is obviously too early to estimate the impact of that storm.

However, the catastrophe is not expected to have a material impact on our overall financial condition.

Obviously, at this time, our focus is on our customers, not our monetary losses.

Ultimately, of course, we do provide an estimate for cat losses in a month if it surpasses $150 million.

We typically do that by the third Thursday of the following month.

Because this event occurred at the end of the month and it involves such extensive damage, we may not have enough information to develop a credible estimate by November 15 because the way that Thursday falls, it is really 15 days after the end of the month.

But as soon as we have an estimate, we will put one out.

Now let's move on to discuss the results for the quarter.

I will focus my remarks on our performance relative to our 2012 priorities and then Bob and Steve will cover the quarterly results in greater detail.

So moving to slide 3, our strategy, of course, is to provide unique products to each of the four customer segments in the marketplace, which you can see in the top there and it is working.

The Allstate brand serves those customers who prefer to purchase competitively-priced, branded products and want local advice and consult.

In this business, we have introduced several new differentiated products, including Claim Satisfaction Guarantees, Drive Wise, Good Hands Roadside and House & Home.

In the third quarter, premium and unit growth continued to be impacted negatively by our efforts to improve homeowner returns broadly across the country and there are actions to improve profitability in a few large auto states, which, as you know, we started last year.

We did see positive premium growth in total for the Allstate brand as homeowners, emerging businesses and standard auto outside of New York and Florida all contributed to that increase.

Additionally, Allstate Financial's new issued life policies sold through the Allstate agencies to the customers in this segment increased as well and of course, we continue to look for ways to improve the growth trajectory for standard auto, one of our four lines, identifying market opportunities to expand homeowners and emerging businesses and then support our agencies so that they can grow their business profitably.

The self-directed segment that prefers a branded experience, that is served by Esurance, that is the lower right, since they were acquired last October, Esurance has exceeded our growth expectations with policies in force increasing 22% since the beginning of this year.

The GAAP combined ratio remains elevated as one would expect given the amount of new business we are writing and the way the accounting works for direct businesses.

We are closely watching the loss ratio since maintaining auto profitability is one of our core priorities.

Our progress is also evident in the advice and brand-neutral customer segment, that is up top, served by Encompass.

The growth and profit trends for that brand are also positive.

If you move to slide 4, let's review our financial performance for the third quarter.

On a consolidated basis, we generated $723 million in net income on improved underlying margins and lower catastrophe losses while growing premiums.

Operating income of $717 million converts to $1.46 per diluted share and that is our best quarterly result in five years.

Book value per share grew to $42.64 per share.

That is 22.4% better than the third quarter of 2011.

And lastly, we produced a return on equity of 13.6% and 15% on a net income and operating income basis respectively.

That is on a trailing 12-month basis.

Now I recognize we set a goal of 13% operating income return by 2014.

Keep in mind that while we made good progress on improving the profitability of the business, the weather has been fairly good over the last 12 months, so there is more work to be done before we feel like we have achieved that goal.

We also established four priorities for 2012 and we are on pace to achieve all of them.

Maintaining auto margins is critical.

The underlying combined ratio in the quarter was 93.7.

That is an improvement from the third quarter of 2011.

The homeowners underlying combined ratio improved 7 points as rates continue to work into the P&L and weather remained relatively benign and the benefit of our underwriting actions.

This is a result of five years of hard work to reposition this business.

Annuity returns remained relatively flat and the reduction in contractholder funds was lower due primarily to the low interest rate environment.

Going forward, we will continue to look for opportunities to accelerate that reduction.

Property liability insurance premiums grew 5% from the third quarter of 2011, largely due to the acquisition of Esurance.

Both the Allstate brand and Encompass produced positive premium growth rates in the quarter and then customer segments served by the Allstate agencies.

However, auto and homeowner policies declined.

Reversing this trend is a key priority for Matt's team.

Don Bailey's team has done a nice job of repositioning Encompass and growing the roadside business with a new product.

Good Hands Roadside now has over three-quarters of a million members.

We actually changed the disclosure in the investor supplement to see the policies in force in a slightly different way this quarter.

The Allstate Financial team, led by Don Civgin, is growing life sales through Allstate agencies and the benefits business.

Judy's team continues to proactively manage the investment portfolio, which led to solid total return performance of 2.4% in the quarter and 6.3% through September.

Net investment income of $940 million declined 5.4% from last year's third quarter and that is primarily due to reduced Allstate Financial liabilities; lower yields, which, of course, we are all familiar with; and then limited partnership results were down a little bit this quarter as well.

The portfolio net unrealized gain increased in value during the quarter to $5.7 billion at the end of September.

From a capital utilization perspective, we repurchased $153 million of our stock and that is at a slower rate than in the previous quarter.

As we said, in the third quarter, as we move through cat season, we tend to slow that program down a little bit.

We feel good about the results for the year, but also recognize there is a lot more work to be done.

So let's hear from Bob and Steve.

Thanks, Tom.

Let's take a closer look at the details for property liability and Allstate Financial for the third quarter.

Beginning with property liability on slide 5, we show both the top-line and combined ratio results.

Overall, written premium grew 5% from third quarter 2011 to $7.06 billion, primarily due to the acquisition of Esurance.

The growth rate increase from the second quarter 2012 is both the Allstate and Encompass brands also contributed to the positive result.

Looking at the results by line, Allstate brand standard auto declined by 2/10 of 1% from third quarter 2011 and were similar to the second quarter 2012.

Excluding New York and Florida, the two states where we have implemented significant profit improvements over the last 18 to 24 months, Allstate brand standard auto grew by 1.4%.

New issued applications of 460,000 remained slightly below the prior year, but were at the average level produced over the last six quarter, which ranged from 451,000 to 472,000.

The retention ratio remained at 89.0%, down 0.1% from the third quarter 2011.

Policies in-force declined sequentially as the level of new business was not sufficient to offset the renewal losses.

Allstate brand homeowners net written premium of $1.69 billion increased 3.2% compared to the third quarter of 2011.

The favorable impact of rate changes on average premium more than offset the decline in units.

We continue to see great changes in order to achieve our stated return goals.

In addition, we are rolling out our new product, House & Home, now in 17 states, including five states that rolled out in the month of October.

Encompass continued to show positive results in both premiums and units with increases over prior year of 5.3% and 3.8% respectively.

Esurance contributed $282 million in premiums written during the third quarter and increased units sequentially to 962,000, a 22.4% gain, since the beginning of the year.

On the bottom half of this slide, we provide the combined ratio results for property liability and by brand on a recorded and underlying basis.

The recorded combined ratio for property liability was 90.2%, significantly better than the prior year due to primarily to lower catastrophe losses and an improvement in the underlying combined ratio.

Year-to-date September, the underlying combined ratio was 87.4% or 1.5 points better than prior year and below the bottom of the outlook range we provided at the beginning of 2012 of 88% to 91%.

If we match the underlying combined ratio we recorded in the fourth quarter of last year of 90.7%, it would put us in the lower end of that range.

Now this is not a prediction or a forecast, just creating some context for why we didn't adjust the range at this time.

During the third quarter, we completed our annual comprehensive review of the discontinued lines and coverages reserves.

We made some minor adjustments to the reserves for an impact of $42 million.

The recorded combined ratio results by brand indicate significant improvement for both the Allstate and Encompass brands due primarily to reduced catastrophe losses.

The underlying combined ratio also improved for the Allstate brand and Encompass.

For Esurance, the recorded and underlying combined ratios remain elevated.

On slide 6, we provide charts detailing loss trends, rate changes and combined ratio for Allstate brand standard auto.

As shown in the upper left-hand corner, after increasing over prior year in the second quarter, gross frequencies for both bodily injury and property damage declined 1.2% from the third quarter 2011.

In the upper right-hand chart, the calendar year paid severity results for property damage showed a little acceleration from second quarter, increasing 3.9%.

Bodily injury calendar year paid severity rose to 6.8% increase over the third quarter of 2011.

Now bodily injury severity tends to be volatile from period-to-period and the mix of state and report years contributes to it.

But over a two-year period, the increase is in line with inflationary factors.

There is some pressure on the most recent report years, primarily in New York and Florida.

However, the overall loss trends remain well within our pricing actions.

In the lower left-hand chart, we provide the approved rate changes for the last four years.

For the last four quarters, we have averaged about 3% in standard auto rate changes.

And the lower right-hand chart displays the combined ratio trend since the beginning of 2010.

And over the last few years, the combined ratio has remained very consistent in the mid-90%s range.

Slide 7 looks at the underlying combined ratio trend on the top of the page and the underlying margin components on the bottom of the page for standard auto.

In the top chart, you see that we have averaged an underlying combined ratio of 95.1% over the last four quarters and on the bottom of the page, you can observe that the average earned premium, which is the red line, has remained above the average losses line shown in blue, meaning that the margins are getting a little better each quarter.

Maintaining auto margins remains a top priority for us.

On slide 8, we provide similar statistics for homeowners.

In the upper left, we have approved rate changes for the last five years and over the last four quarters, we have received approvals for almost 7% rate increases on a countrywide basis.

We will continue to seek needed rate changes in order to hit our return objectives for this line of insurance.

In the upper right, loss cost trends, excluding catastrophe losses, are displayed.

For the third quarter, frequency decreased 11.4% while paid severity increased 5.8%.

These results led to a reduction in the underlying combined ratio of 7.1 points, as shown on the lower left.

We continue to believe that about half of the improvement in the underlying results is sustainable and half of the results of the milder weather.

On slide 9, we provide -- or slide 9 provides a better look at the underlying loss trends for homeowners.

The top chart gives the underlying combined ratio and one can observe the improvement we have achieved in the last several quarters.

On the bottom, we display the trends for the average earned premium and average losses over time.

The trend for the average earned premium in red reflects the favorable impact of rates increasing steadily since 2010.

The trend for losses in blue is far below the prior years and gives rise to our hesitation to take full credit for the margin improvement we have enjoyed this year.

That said, improving homeowners returns is a priority for 2012 and we have been successful thus far through the first nine months.

Now turning to Allstate Financial where we continue to shift the focus to underwriting products and away from spread-based ones.

The results reflect successful execution of this strategy.

Total premiums and contract charges of $563 million increased 2% in total and 3.6% for underwritten products.

Allstate agency life unit sales contributed to this result increasing 6.9% over the third quarter 2011.

Consistent with the strategy of reducing spread-based products, contractholder funds were reduced by $722 million from the second quarter and $2.2 billion from year-end 2011.

Given the low interest rate environment, we have not made as much progress in reducing annuity liabilities as we would have liked and we continue to explore a variety of options to execute this strategy.

Net income for Allstate Financial was $131 million for the third quarter, down $61 million from the third quarter of 2011.

The primary reasons for this reduction were realized capital losses in 2012 versus realized capital gains in 2011, along with lower operating income results.

Last year, we executed a sales program designed to harvest gains accounting for much of the difference.

Operating income was $97 million for the quarter.

During this quarter, we completed our comprehensive review of assumptions for deferred policy acquisitions, or DAC, deferred sales inducement costs and secondary guarantee liability balances.

This resulted in a $27 million pretax charge to income.

In 2011, we conducted this review in the first quarter of the year resulting in a $6 million pretax charge to income.

Looking at the operating returns by line, life insurance declined 2.2 points to 9% from year-end 2011 due to worst mortality experience in the last several quarters and the impact of the annual DAC unlock study.

Accident and health continued to produce solid returns at 16.6% as of September 2012.

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 interest rate environment, delivering strong investment results with a total portfolio return on a GAAP accounting basis of 2.4% for the quarter and 6.3% through the first nine months of the year.

On slide 11, you can see longer-term trends in the composition of our portfolio.

We ended the third quarter at $93 billion in amortized costs and a fair value of $99 billion reflecting improved valuations, which, along with portfolio income and improved underwriting cash flows from our property liability business, more than offset the ongoing reduction from Allstate Financial's spread-based business.

The chart on the left-hand side of the slide helps to illustrate the results of our proactive steps to enhance the profile of our portfolio from a risk and return perspective.

Note that the drop in the portfolio's amortized costs resulted primarily from our planned reductions in Allstate Financial's liabilities.

As we headed into the financial crisis, we proactively reduced financial sector and real estate-related exposures while increasing the liquidity of the overall portfolio.

Coming out of the crisis, we have favored the strong fundamentals and stability of credit, including high yield, over public equities.

During the most recent quarter, we opportunistically reduced risk by selling $722 million of structured securities, realizing a loss of $119 million.

The securities increased in value over the course of the year justifying the sale into a strong market.

Collectively, these actions have resulted in a strong well-positioned portfolio.

We have been proactively managing interest rate risk by optimizing our fixed income portfolio's position on the yield curve focusing on intermediate-term securities.

This will reduce reinvestment risk and lessen the sensitivity of our portfolio's value to increases in interest rates.

On the right-hand side of the slide, you can see the result of these actions in the scheduled maturity profiles as they shift away from the due after 10 years category.

We are contemplating reducing our interest rate risk in the property liability portfolio further by selling additional long-dated securities and reinvesting shorter on the yield curve.

We expect gains to be realized in the sales and the portfolio yields to decline as these sales and reinvestment are executed over the next several quarters.

If we turn to slide 12, it highlights our portfolio income and yield trends.

For the third quarter of 2012, net investment income was $940 million and total portfolio yield was 44.3%, below both the prior quarter and third quarter of 2011.

You may recall 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, which brought us in line with the reporting practices of other peers.

Although investment income on limited partnerships of $22 million was below the prior-year quarter, this income is $177 million higher on a year-to-date basis.

The increase reflects the change in classification, as well as an improvement of $50 million in limited partnership performance.

Excluding limited partnership results, the portfolio yield was comparable to last quarter and the third quarter of 2011.

On slide 13, you can see that we realized losses of $72 million in the third quarter of 2012 compared to a realized gain of $264 million in the third quarter of 2011.

Our portfolio management actions and other trading activities generated approximately $24 million in net trading losses, including the $119 million loss from the sale of structured securities I mentioned earlier.

Impairment in cat writedowns were $46 million and continue to trend significantly lower than prior-year periods.

Derivative results in the current year reflect reduced usage as we are managing more of our rate risk in the cash market through portfolio positioning on the yield curve.

In the third quarter of 2011, interest rate derivative valuation losses reflect a significant decrease in rates in that period.

We finished the quarter in a strong capital position as shown on slide 14.

Shareholders' equity of $20.8 billion increased $2.5 billion from year-end 2011.

Statutory surplus rose to $17 billion and deployable assets at the holding company level reached $2.3 billion at the end of the third quarter.

We continue to buy back our stock purchasing $153 million during the quarter.

That leaves $166 million as of quarter-end on our current $1 billion buyback authorization.

Our book value per share came in at $42.64 and the strength of our operating performance improved portfolio valuation and active capital management.

Now let's go to the question-and-answer session.

Okay, Matt, if you can start the Q&A, please.

(Operator Instructions).

Josh Stirling, Sanford Bernstein.

Hi, good morning and thank you for taking the time.

Obviously, it is a real priority for you guys to be out in the field and we all appreciate you not pushing back earnings.

The question I would ask, recognizing that you can't comment on an actual estimate -- of course, it would be way too premature -- but you are getting reports of first notice of loss.

You are out there in the field talking to customers.

You have some sense of the volume of this storm.

I would love to get a sense from these operating metrics sort of where you are say in perspective relation to Hurricane Irene last year.

And then similarly, you probably are starting to get a sense of the mix and composition of the claims that you are actually going to have to adjust.

And I would love to get a sense, especially when we think about severity going forward, is this going to be driven by lots of large total limit losses or are you going to see more sort of modest, far many, but maybe more than previously, but sort of many more sort of smaller losses that are sort of damaged ancillary structures and things like that?

Hey, Josh, this is Tom.

You are correct in saying it is way too early.

Even on loss counts, it is a little difficult because sometimes people have cell phones.

They can get access to it; sometimes they don't.

I can tell you we are very busy.

We also do, as you know, flood adjusting for the federal government.

We have [write your own flood].

We are one of the bigger handlers of that program as well.

So we take all of those claims in, anybody calls us, a customer, we go out and see them.

So it is really too early to tell either the volume or the mix or the severity.

What I can tell you is when we do our estimate, we will try to give you as much information as we can at that point in time.

I can tell you that, from a risk management standpoint, we are down in policy count in all of the affected areas by a reasonably substantial amount.

And if you are interested in that, Matt can give you some more details on it, but we are -- the actions we have taken over the last five years in places like New York, New Jersey, all up along the East Coast have reduced the policy counts we have there in the sort of 10% to 30% range.

And that will obviously impact what our losses are relative to what they would have been, but what you really want to know is what are they going to be and I can't give you any more clarity than that.

I certainly understand.

Investors, I think at this point, are sort of obviously dealing with modeling firm estimates.

And I think you guys are sort of sophisticated users of the models and you have got a lot of your own data and your own perspective over time.

I am wondering what sort of -- to use the phrase sort of known/unknowns -- model errors and sort of historic sort of biases that you think that historically perhaps we have seen that you guys might be watching for as you handicap the estimates themselves.

And one topic of conversation I think that people are curious about is whether this has the possibility of being something like Ike, which ended up going further inland and ended up driving sort of surprising levels of losses with what would have been perceived to be modest wind further inland than typically models would have suggested at the time.

Thanks a lot.

Josh, maybe I can give you a comment on the models and then a suggestion maybe on how I can help you sort out what you are trying to get to, which is what's the impact on us.

We do obviously have our own models, we buy all the models from everybody else and we have our own policy data actually loaded into that, so we have a wide range.

Matt and his team have done a number of scenarios, but I'd tell you it is a really wide range, so the number could be low, it could be higher.

What I think you could do to give yourself some comfort as to how big it could be would be look at -- go to the website and put in gross losses into the reinsurance section and it has got the interactive model, which will tell you what the net ought to be and you can see that, at certain levels, our reinsurance programs kick in, which caps our exposure.

Okay, thanks.

Good luck.

Oh, Bob tells me it is not interactive.

Sorry.

I guess the interactive part will be you will have to (inaudible).

I thought we were a little more sophisticated than that, Josh.

Sorry.

But Bob can help you.

We can help, yes.

It's all interactive.

Ian Gutterman, Adage Capital.

Hi, I didn't expect to be in so soon.

I guess, first, Tom, when I look at the auto results, obviously very good.

I think you said, what was it, a 93.7%, I think, accident year.

But if I add on sort of normal cats of a couple points, that is high 95%s, which, again, is a solid result, but I am wondering can that get better?

Can we get that -- in the past, we have obviously seen low 90%s, but even at 94%, 95%, is that possible given rates are starting to improve?

Or is 96% kind of the best you can do in the current rate environment?

First, I just wanted to give one point of clarification.

The information we provide is calendar year, not accident year.

(inaudible) underlying (inaudible).

The underlying is what --.

The underlying you say.

Well, the underlying is ex-cat, so I took the underlying and added 2 points of normal cats to it.

Okay.

The way we look at the auto business is it generates really good returns for us.

So a return on capital at that level, we have shown some slides before depending on what you want to assume in terms of capital levels, is in the 20% range plus or minus.

That is a really attractive return on capital.

We would like to grow that business at those kind of returns, so I would rather see us grow it, maintain auto profitability than squeeze a few extra dollars out of margin.

Got it.

And that actually led into my final question, which I was going to ask, how is the outlook for that.

I believe there was an internal member memo that hit one of the newswires that suggested you are broadening your targets and maybe the tone of that seemed to be a little bit more optimistic about growth going forward.

And certainly with competitors -- some of your big competitors having to chase rate to improve their profitability back to where it used to be, it would seem maybe you are in a little bit of a sweet spot here.

Let me maybe provide an overview on growth in total and then Matt and Don can give you some more detailed perspectives on both the Allstate brand, Esurance and Allstate Financial because I think you have to think about it in toto if you think about our strategy.

So, of course, our strategy of focusing on those four segments have competitively differentiated products in those segments targeted to those customers.

The largest segment, as you point out, is the advice and brand focused one that is served by the Allstate agencies.

The overall policies in-force are down there, which is largely as a result of the homeowners actions we have taken, which was intentional on our part to improve returns in that business.

Along with that, standard auto is down a little bit partly due to the homeowners, partly due to New York and Florida.

Matt can talk about what his opportunities are there to grow.

I think the biggest opportunity is to improve customer retention because these new business levels are kind of running about where you would expect them to be.

We have expanded the disclosure, as I mentioned earlier and you can see Good Hands Roadside, which serves that segment largely, is up substantially.

But we don't count it as a policy since they don't pay us until they actually use it.

The advice and brand-neutral segment that is served by Encompass, their independent agencies, is up slightly.

We need to recapture some lost marketshare there.

Esurance is that self-serve branded segment.

We are growing at a rate as fast as we are comfortable with and then Allstate Financial is growing the life policies sold to that lower left-hand segment and our benefits business.

Matt, do you want to make some comments more specifically to the -- I guess you were after standard auto, so we can zoom in there.

Sure.

It's Matt.

I will comment a little bit first on some of the drivers.

So Tom mentioned our two primary drivers that have impacted growth have been our homeowners return improvement actions and some of the auto profitability issues in New York and Florida.

And I will take it up one higher level and I will say that I think our fundamental approach to the marketplace is to be very proactive and very disciplined.

And sometimes that creates a first-mover disadvantage on us where we are first to take action where we see a need to do risk mitigation.

We are first to take rate where we see emerging environmental and economic trends and we are first to take proactive action that actually can sometimes impact our growth prospects.

So I think you know that we have about 16 states where we are either closed for homeowners new business or have significant new business restrictions in them.

I think Sandy is a good indication of why we did that and it will prove to have been a good move for us to reduce our exposure in some of these coastal areas, but all of those actions, whether they are profitability actions in New York and Florida on auto or these homeowner actions, have an impact on our ability to grow.

And as Tom said, you can't take all these profitability actions, you can't do the non-renewals, you can't do reinspection, you can't tighten underwriting without some impact on our retention.

And that is really what we see as our prime opportunity for growth at this point because we think we were early in most of these actions and we were proactive.

And as a result, I think we are further along on that timeline and we are at the point of stabilization and we are at the point where we are beginning to see pockets of growth.

You mentioned broadening the target.

We have several growth initiatives out there, including broadening the targets and price optimization work, some additional work to analyze our ability to grow even faster in selected areas and so we have those pockets of growth emerging.

We have about 20 states right now that had positive year-over-year growth in standard auto and our hope is, over 2013 and 2014, we will dramatically improve that number without losing any of our discipline on the profitability side.

So our first-mover disadvantage I think, at some point, will work into a first-mover advantage where we will emerge out of this cycle faster than some of our peers and we will be able to take some of the growth opportunities that are presented to us, which I think are many at this point.

Great, thank you.

So it sounds like you would be disappointed if we don't see growth in standard auto for 2013?

I don't remember saying that exactly, but you will draw your own conclusion.

Very good.

Thank you.

Ian, good morning, it's Don.

Let me just give you a quick update on Esurance.

As Tom said, of course, we acquired Esurance so that we could grow in that self-directed segment in a profitable way.

That has been the goal is to grow marketshare profitably.

Since the acquisition, we have done a number of things.

We have linked the brands together, so it is Esurance and Allstate Company, which has played well.

We have clarified their position in the market through their features and their technology.

We have developed a new ad campaign and we have thrown a lot of weight behind the new ad campaign intentionally and here is how I would characterize where we are today.

I think we are very happy with the results we are seeing.

The response rate with new quotes is up dramatically.

The conversion rate is up, the retention rate is up.

I mean you can see it, over a 22% improvement in policies since just the beginning of this year.

That is a big number.

What you are also seeing though is a high combined ratio.

Part of that is intentional.

The advertising model -- the accounting model is such that we have to expense that advertising in the quarter we take it even though the value of the policy continues to linger on through retention.

And so we are watching the GAAP combined ratio, but, I will be honest, we are more interested in the economic combined ratio.

If we are convinced that we are writing good business that will be profitable over its life and we are, then we are comfortable tolerating the GAAP loss ratio being over 100 for some period of time.

We also have a little bit of an elevated loss ratio in the third quarter.

Gary and his team are watching it closely.

We are working together to make sure that we have all our resources between Allstate and Esurance on the job.

I am confident that number will get back in line, but, all in all, I will tell you that the growth prospects for Esurance are going so far very well and I think we are very optimistic about the future.

Great.

Thanks.

Very thorough comments, guys.

I appreciate it.

Bob Glasspiegel, Langen McAlenney.

Good morning, everyone.

I need a little bit of help on your reinsurance slideshow given that I can't plug this stuff into a spreadsheet.

You gave an example of a hurricane going through New Jersey, which seems to have its own cover and there is two different covers, which I don't quite understand how they interact, but I think you talk about a $700 million type loss working its way down to $200 million net.

But maybe if you could just give -- if the number was $10 billion in the three states, simply what the gross and net numbers would play out, that would be helpful.

Bob, I can give you a call back later and we can walk through the steps.

The three contracts -- the contracts in New Jersey all work together.

Okay.

So I will give you rough numbers, but it is about $150 million retention and then it is 95% reinsured up to the top of the contract.

But we can walk through it.

But that's New Jersey.

That is New Jersey property losses only.

That does not include auto.

Right.

And then, of course, and as I said, auto floods is covered and this hit 21 states.

So it is a big storm, but we can help you sort it out.

So if you had a $10 billion sort of loss in the other two states, what would the net number be?

First, I assume you are talking about $10 billion at an industry level.

Right.

Not with us.

Let's say you had 10% to 12% of that, so $1 billion gross, what would the net be?

I think it is highly dependent on the mix of which states and what type of losses, but if you want and you come up with two or three different scenarios, Bob can show you how those would work through the reinsurance program and you can come up with an estimate on it.

Okay.

I think others might be interested in that as well.

But on the Encompass, it looks like a mini breakout from what has been a troubled line for a long, long time.

I mean you are growing premiums and the underlying underwriting is improving.

Am I overreacting to this quarter or do you think you have got the horse running the right way around the track?

I would agree.

I think, first, this business is a good business for us to be in serving that customer segment.

Second, as you know, that business is probably down $700 million or so in premium over the last three or four years and so it has got some room to come back.

Some of that, of course, was intentional because we were in places we didn't want to be from a cat management standpoint, but there is room to grow that business.

Three, we do have new leadership there.

Don Bailey has got a new leader in place there.

We like the results that he and the team are now driving, so I would hope to be able to see it continue to grow.

I am not sure what breakout is.

We all have different assessments of breakout, but I think if you look at what is going on in that customer segment and the companies who serve that segment largely through independent agencies, I think we are well-positioned to grow, yes.

I was referring to the underlying profitability, underlying combined ratio.

Oh, the breakout in the profitability.

Right.

Sorry.

I thought you meant breakout in growth.

Profitability has gotten better.

I like the trends.

I would like to see it -- I would like to see a combined ratio come down a little bit.

I would like to see the business grow as well.

So I don't think we are going to -- that business, as you know -- we have had that business -- shortly after we bought it, we took the combined ratio down from 117 down into the low 90s.

I don't expect it to get into the low 90s at this point in the cycle given where the competitors are, but I think it can be better than it is today and I think the business can grow at the same time.

Thank you.

Brian Meredith, UBS.

Yes, good morning, everybody.

Just two quick questions here for you.

The first one, looking at the slide on the underlying margin trends on the standard auto business, looking at the underlying loss trends and what is going on there, I am just curious, maybe you can talk about kind of the difference between the paid loss trend and what you're showing here in the incurred loss trend because the paid loss trend appears like the last couple of quarters it has been above where your average earned premium per policy has been.

Brian, it's Matt.

So you have all the issues that come up with paid loss trends and I guess BI paid severity is a good example of that.

So you look at BI paid severity and it looks fairly dramatic.

But as Bob said in his opening comments, about half of that increase can be accounted for as the change in the mix of claims settled by report year and a shift in the state mix and the other half is consistent with the medical CPI.

So we do have, I guess, some distortion that is always present when you look at the paid versus incurred.

But I think if you look, and I am assuming you are referring to the bottom chart on page 7 of the presentation, the underlying margin trend.

I think if you look at that consistent pattern over the last several quarters with the nice trend line between earned premium and the losses, I think our goal is to manage that and our goal is to look at the loss trends in aggregate.

I think it is somewhat dangerous to focus on the attribution analysis of each component.

We have a term Tom and I throw around a lot here is false precision and we can get trapped in our own math and we look at it and we do the attribution analysis and we try to understand each of the drivers, whether they are medical inflation or whether they are report year or shift in state mix.

But then we look at the aggregate loss trends and the aggregate premium trends and we look at our rates that we are taking and our attempt is to manage some of those levers so that each of those on one quarter, one is going to go up, the other is going to go down.

It is like pushing on a balloon and our job is to manage the overall size of the balloon and how much air is in there and the pressure being exerted on it.

And I think history will show that our team is exceptionally good at managing that.

They manage each of the components.

They manage loss trends very carefully while maintaining a good customer experience and good customer treatment.

And they are very proactive in looking at emerging economic and environmental trends and taking rate where it is appropriate and warranted and mandated and justified.

And so I wouldn't get too caught up in the paid volatility.

I would get a little more focused on the underlying trends and that is why we have tried to show them to you in the slide presentation.

Yes, very helpful.

That was great.

Brian, it's Bob.

Just a couple of things to keep in mind.

Remember while you are looking at the paid severity trends, you also have to look at the frequency trends.

Frequencies are down and the fact that bodily injury and property damage together make up about 45% of the standard auto losses.

So there are other coverages that are in there -- coalition comp, uninsured motorist and everything -- where the trends are good as well.

You are looking at two of the big covers, but there is still other pieces to that puzzle and also, the fact that I think you can tell from our reporting on reserves, our reserves are reasonable and they are accurate.

Yes, absolutely.

And just one quick one on the life insurance business if possible, your investment spreads really kind of improved this quarter.

I wonder if there is anything unusual going on there.

Our investment spreads, Brian, did get a lot better.

I think you see several things going on.

Some of it is what you would expect, so we continue to work on crediting rates and that is being offset somewhat by the lower yields in the portfolio and the continuing lower asset levels.

But the investment spreads, the biggest impact, is the option valuation from the equity indexed annuities.

So I think if you look at apples-to-apples, you are going to have to take that out.

And then you get back to what I said, which is the crediting rates offset by yields and the asset levels.

Great.

Thank you very much.

Mike Zaremski, Credit Suisse.

Hey, thanks.

In regards to Hurricane Sandy, it looks like insurance regulators and at least a few impacted states are saying the storm won't technically be classified as a hurricane.

Therefore, hurricane deductibles won't apply.

So I was curious how the difference between a hurricane versus tropical storm classification impacts Allstate?

First, if you are interested in the science of it, a hurricane is it gets its energy from the water.

The winter storm or northeaster gets its energy from the temperature differential in the air.

And so that is why it has been classified that way.

The tropical cyclone deductible probably will not be triggered up in the northeast and we are prepared for that, and that is what is fair and accurate for our customers.

It may or may not -- I am not sure where we are down in the far Southern states.

There may be a few states, but the damage is much less severe down there than when where the hurricane turned in.

So when you say the kind of estimates that a lot of the reputable firms are putting out there take into consideration that the higher deductibles won't be triggered?

You know, I don't know, Mike.

Not everybody has a tropical cyclone deductible.

I don't know how good their models are on that.

It is, of course, very complicated because even when you have it in the marketplace, not every policy has it on it.

And so I would say to the extent it is not triggered, industry losses obviously would be higher than when it is triggered because that is a higher deductible than you would have on a normal all-peril policy.

But I don't think it would substantially alter the numbers which are such big, wide swath anyway now, you know, that the ranges are billions of dollars.

So I don't think it would impact it much.

Okay.

And in regards to, Tom, the 13% ROE target on a normalized catastrophe load basis, obviously.

So where while most of the increase come from now, given that you guys seem to be getting close to the goal within homeowners, not looking to increase auto profitability?

I guess I do recall at the investor day you talked about unlocking capital within the life insurance segment.

Maybe you can update us on that.

Thank you.

First, my entire team is raising their hands saying they are going to deliver it.

They each want -- first, I think I would say we are above that target for the last 12 months.

And I think that is reflective of where we would hope it would come from, which is maintaining auto margins, improving returns in the homeowner business, and getting returns up in the life business.

Then, of course, there were two things that happened this quarter which we wouldn't expect to happen every quarter.

One is low [path] and the other is the change in the investment spread we just talked about.

So we still have work to do to fill up the profits ahead of that.

So homeowners, we feel very good about where it is at.

Matt and his team are working hard on it.

We have been at this for a while, as you know.

We are definitely in a much better position.

We are doing a good job on auto profitability.

We do have a little bit of a headwind in the life business with low interest rates, which starts to drift over into the property casualty business.

We are going to work to manage our way through that and still achieve our goal, but there is a little bit of a headwind there.

To the extent we can reduce the size of the annuity business faster, we will seek to try to do that.

It was down about almost $4 billion over the last year, I think it is like $3.8 billion, but it was only down about $700 million in the last quarter.

So you can see that rate of decline is down a little bit and that is because of low interest rates and people don't want to surrender their policies.

So Don and his team are hard at work trying to figure out other ways we can reduce the size of the annuity business, not the life business.

The life business is getting good returns for us -- the life insurance business.

So to the extent we can reduce that business, that, of course, frees up capital and we get a higher return out of that as well.

So we have a little more work to do on all fronts.

But we are feeling good about where we are at.

So I guess as a final follow-up then, so within Allstate Financial, should we be looking at the statutory capital because that amount of capital has kind of been staying the same over the last year.

The annuity portfolio has been running off.

Traditional life has been growing, so should we expect -- should that number be expected to drift downwards if the current run rates continue?

As the size of -- as Steve pointed out, the size of that portfolio is down about $20 billion or so in the last three or four years.

As that size of that portfolio comes down, I would hope we could have dividends out of that business, which would be the statutory capital, yes.

Thank you.

Matthew Heimermann, JPMorgan.

Hi, good morning, everybody.

A couple of questions.

One, just on homeowners, I was just trying to get a better sense of what the underlying improvement was.

On my math, kind of adjusting for the non-cat weather that you've quantified in previous quarters, it looks like year-to-date we have got about 470 basis points of improvement, which is a little faster than I think the run rate you all have talked about in the past.

And I am just curious if you could remind us -- I think the differences, there were some adverse weather in 2011, so just remind me if I am thinking about kind of the puts and takes right.

Matt, it's Matt.

I am trying to understand your question a little bit.

Are you asking about what component is sustainable and what component is based upon the lower-than-normal cat quarter?

Well, you have quantified the lower-than-normal cat, and so if I look just at loss ratio, I am getting year-to-date improvement nine months over nine months of about 470 basis points.

And I think historically when you have talked about -- so that seems high to me relative to what you have talked about kind of your expectations of core margin improvement.

So one, I guess comment on whether or not that perception is correct about how 470 might compare to your run rate expectation.

And then secondly, if it is in fact a little bit faster, is that attributable to the fact that 2011 I think in 1Q in particular had some unfavorable weather that might be making that look a little bit better?

I am just asking because I want to make sure that, as I think about next year, I am not botching anything up?

Well, that is true.

So we had some unfavorable weather that exacerbates the year-over-year view, but also I think -- I think the other way of looking at this is that this is a fairly volatile business and trying to do it over year-over-year while we are declining in selected areas on the coast is a little distorted because we are changing the mix of the housing, we are changing the risk profile of the homeowners business as an overall block.

And so trying to compare year-over-year as if it is a stagnant steady mix is a little distorted.

I think we are changing the risk profile of the business a little.

House & Home, as you know, it has gone in -- it was 12 states in third quarter.

As I think Tom mentioned, another five in October, so 17 states.

That has a different risk profile and we underwrite roofs differently.

We assess the risk differently using some tools that we are used to using on the auto business.

And so while we are seeing normal year-over-year improvements where you could back out some of the things, we are also seeing a changing homeowners business, which I think is going to continue to improve.

And so I would say that the quality of what is there is higher than it was even a year ago.

And I think a lot of what you are seeing that you can't get to mathematically is a result of that change in quality in the business.

Okay.

And then as we play that forward into the next year, do you feel like -- is that something we should expect to continue to help a little bit on the margin as we go into next year or now we kind of -- is the impact going to be less dramatic?

Well, it will be less dramatic.

As we put in House & Home, we tried to put it in in the highest leveraged areas first and so we clearly wanted to maximize the early impact of the shift and a lot of our efforts on nonrenewal and reduction of homeowners in the coastal areas and high-risk areas is well into the latter part of the timeline.

So I would not straight-line it.

I think you will see a continued improvement as a result of those two efforts, but not at the same pace as we have currently experienced it.

Okay.

That is helpful.

Sorry that that took so long for me to ask the question in a way that made sense.

No, no, no.

I am sorry I was struggling with where you were going with it.

So I wanted to make sure I was answering what you were truly asking.

Yes, that was helpful.

Then I guess just one on Sandy, and this just goes to -- and I am going to bring up Katrina, not because I think that should be the baseline when we think about the loss, but because there were a lot of adjusting issues because search is really a big potential loss driver here whether it is insured or uninsured or government insured is a different question.

But Katrina right there with some regulatory push to cover flood losses, but wind and there was a lot of gray as to what -- in some cases, that was because there was a lot of gray and there weren't houses left to actually adjust.

I am curious when you think about Sandy based on, and I know it is early, but do you -- how is the gray area in this loss, wind versus flood, on the personal line side contrast with kind of your experience with Katrina?

Is that something that gives you a lot of pause recognizing that normally when you get big events, the ties usually goes to the policyholders, but I am just curious more whether or not there will be as much gray.

Let me give you a quick answer because I want to make sure we get a couple other questions in here.

Of course, it is too hard to tell.

I haven't been on the ground out there, so it is hard for me to see.

I will tell you that, as it relates to Katrina, we did very well on wind versus flood.

We were proactive about our approach to that and of course, the issue there was a house on the coast, big hurricane comes, house is gone.

Was it the wave and then the wind came or was it the wind and then the wave came and trying to sort that out.

That doesn't appear to be the situation here, but it is way too early to tell what the issues will be.

I will tell you that we have a history though of doing what is right for our customers and giving them what they pay for.

Right.

Thanks for that.

Sorry, didn't mean to cut you off if there was more.

That's all right.

We can go to the next question.

Adam Klauber, William Blair.

Good morning, everyone.

How aggressively do you plan on rolling out Drive Wise next year?

And is your intent to use that to augment growth, augment profitability or both?

Well, we don't disclose which states we are going to do it in, Adam, but I will tell you we like what we see.

The customer uptake is a little higher than we thought it would be initially.

We think we have a slightly different offering than other people because the device stays in the car as opposed to coming out of the car, which gives us the ability to have a different customer relationship, which says that it should work on both the elements you've talked about.

Okay.

Thank you.

And one follow-up question.

It appears that you will make more money this year than you have in probably four or five years.

How is that going to reflect when you think about the buyback for next year?

Well, obviously, I can't comment on what we will make this year because we are still trying to sort through Sandy, but I would like it to be the case obviously.

And let me maybe just go up to capital.

We are obviously well-capitalized.

Today, we have plenty of capital, any which measure you want to put it at.

We also generate substantial capital and we have access to capital in the marketplace.

So we have three sources of funds from which we could buy back shares or use our capital to grow the business.

Obviously, our preferred option is to grow the business, particularly in the auto business where we are getting very high returns.

Occasionally, we make what I would call modest acquisitions, whether that be Esurance or Encompass or the benefits business we bought and we have gotten good returns on those, but those tend not to be a big portion of our utilization and capital.

Of course, as you know, about 80% of the capital we return to shareholders through dividends or share repurchases and that has been our history for a long time.

When you look at dividends, we, of course, make the decision -- the Board makes the decision every quarter.

Right now, when you look at our dividend rates, whether that be payout or yield, they look a little low relative to where our stock price is and earnings are, so we will consider that in the beginning of the year as to what we should do with the dividend.

And then on share repurchases, we are not obviously done with the current program.

When we are, we will look at all the sources of capital we have, either the capital on our balance sheet today, our capital generation potential or ability to access capital because, as you know, there is some pretty attractive markets today in what are equity light securities to use that to restructure and lower our cost of capital.

So that is the way we think about it.

When we get done with this one, which we are pretty close on, we will be thinking our way through that.

Thanks a lot.

Michael Nannizzi, Goldman Sachs.

Thanks.

Most of my questions have been answered.

One question I just have, when you look at insured losses that will come out of Sandy, how much of that ends up getting absorbed -- do you think will end up getting absorbed by the National Flood Insurance program?

That's really hard to tell, Mike.

We don't really -- it is almost impossible to tell right now.

I will tell you, if you want to go way up, the National Flood Insurance program ends up being a net drain on the US government.

It really is -- if it was your business, you would seek to restructure that business, charge accurate prices relative to where people's houses were, you would try to expand the coverages so you weren't only ensuring those houses that get flooded two and three times.

So there is I think -- and Congress has struggled with that over time, but their losses are -- the net losses will probably end up being bigger than they would need to be if you ran it as a private business rather than as a political entity.

Got it.

I can't give any estimate for the exact number.

I just have no idea.

Great.

And then just maybe one on Allstate Financial.

It seems like -- I mean clearly moving towards a more underwritten profile as opposed to spread business.

I mean what is your kind of expectation for that business longer term?

It doesn't seem like, other than the life product, doesn't seem like there is a lot of operational synergy overlap with your kind of captive agent platform.

Just trying to understand kind of where do you see that business moving as you execute your transitional strategy there.

Well, we look at it a couple of ways, Mike.

First, we look at it strategically as it relates to our customers and then we look at it to say where do we get a decent return.

So strategically, as it relates to those personal touch (inaudible) that's down in the lower left hand quarter who want advice in a relationship and want branded products, they want to buy all things, more things from one person rather than multiple because they don't just feel like having 15 different relationships.

Life insurance, some retirement products obviously fit into that category and so -- and we do well there.

The life sales I think are up, Don, 6% or 7% this year so far and we like what we have there in terms of bundling that together.

That is good for the customer.

That said, that doesn't mean we need to make everything we sell.

So we sold the VA business in 2006.

Our fixed annuity business today, we use a lot of outsourced products.

We have some proprietary products still in that channel, but we use outsourced products.

We could -- on the annuity business, if we don't like the returns we get on it, we will just sell an outsourced product with someone who has a different return objective on it.

On the life insurance business itself, just life insurance policies, we are getting pretty good returns on our capital well above our cost of capital there and so we have done that.

But we try to separate into two things -- what do we need to do for our customers and then what do we need to do for our shareholders.

And we manage our way through that and that is why we are taking the size of that annuity business down is we don't need to have shareholder capital employed in that to execute our strategy.

Thank you very much.

Randy Binner, FBR.

Hey, thanks for squeezing me in and this is another Allstate Financial question, but I appreciate all the commentary on trying to kind of redeploy capital out of particularly the annuity business into what you perceive to be higher, kind of better risk-adjusted returns in really the other protection businesses.

And so I guess just as I think about modeling, to the extent you are successful in kind of getting folks to give up those annuities and then you are able to free up capital from the annuity business, that takes time and then reallocate it, I am just trying to think if there is going to be kind of a doughnut hole or a lag in the earnings that you generate as you kind of transfer that capital around.

And so I guess I would be kind of interested in your thoughts on that approach, kind of how that affects 2013 earnings.

And then I am not sure if I've heard this in the commentary, but are you thinking about kind of more aggressively trying to go after annuity holders and maybe giving them lump sum payouts or other incentives to surrender?

On the last part of your question, the answer would be yes, we are actively looking at that.

On the 2013 earnings capital generated from accomplishing that, I would say not likely to have a meaningful impact on overall earnings.

So just you could do the math.

For every $100 million of earnings, Allstate Financial -- even if you redeploy it into -- some of that business we could redeploy it and get a higher return than what it is getting today even in investing, but it would not be meaningful for us.

So I guess it happens gradually enough over time that there isn't a big block of capital that needs to get upstream and then reallocated and then earned against.

It is more of a gradual process because I guess in our model it seems like as you move capital out, there is a little bit of a lag, but it sounds like it is more of a gradual process from your perspective.

I would say -- I am sure there is a lag, but it is not -- in terms of the overall scope and projections of the Company, if you were to change auto frequency by half a point, it would have a bigger impact than this would.

So you are right, but I would just say as it relates to Allstate Financial, we are approaching it as a do it smart, do it when you can and so don't look for sort of a simple easy solution where it all goes -- you just change it all and you have got to kind of do it by line.

So Don has got the annuity business broken into a whole bunch of different segments, something he cares more about than others and those that are the biggest in the whole, he is working harder on than those that are earning a positive or above cost of capital return.

So it is highly segmented, this strategy.

All right.

That's helpful.

Thanks.

Let me close and just say first thank you.

We had a good quarter; we are on track for all of our four priorities.

Those of you who are still in the queue, Bob is available today working all day, so feel free to reach out or he will reach out to you.

And as it relates to Sandy, we are working hard to do what our customers pay us for.

We will provide additional perspective on loss estimates when we can give you a more informed perspective.

So thank you very much 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.