Allstate Corp (ALL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate Corporation fourth 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 like to introduce your host for today's conference, Mr. Robert Block, Senior Vice President Investor Relations.

Sir, you may begin.

Thank you, Matt.

Good morning, everyone.

Thank you for taking time today to be part of our fourth quarter 2012 earnings conference call.

We will begin with some brief commentary on our results from Tom Wilson, Steve Shebik and me, followed by a question and answer period.

On the call with us are Don Bailey, head of Emerging Businesses and Encompass; Don Civgin, head of Allstate Financial and Insurance; Judy Greffin, our Chief Investment Officer; Sam Pilch, our Controller; and Matt Winter, Head of Auto, Home and Agencies.

And last night we issued our press release and investor supplement and well as posted a slide presentation to be used in conjunction with our prepared remarks.

These are available on our website.

We plan to file our 10K for 2012 by the end of February.

Beginning with the first slide, this discussion may contain forward-looking statements regarding Allstate's operations.

Actual results may differ materially from those statements, so please refer to our 10K for 2011, our 10Q for the third quarter 2012 and our most recent press release for information on potential risks.

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

We were recording this call, and a replay will be available following its conclusion.

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

Now let's begin with Tom.

Good morning, and thanks again for your interest in Allstate.

Today, I will cover our results in relationship to our strategy in 2012.

Then I will cover our priorities for 2013, Bob will cover our business unit results, and Steve will cover investment performance and capital management.

But before we go through 2012, let me just update everybody on Sandy and the progress we've made in helping our customers restore their lives.

As you know, Sandy was a huge storm that affected an enormous, heavily populated area, and of course many of you personally.

We were one of the first insurance companies on the scene to help our customers.

With our Mobile units, we often got to customers' homes before they even called us.

We received about 170,000 claims to date, and we've closed 98% of the claims reported.

And we paid out about 95% of our expected net losses.

Now we did update our initial loss estimate, which was as you will remember, $1.075 billion to $1.117 billion that's a $42 million increase.

And our losses, of course, would have been significantly higher had we not taken the actions we did to reduce our catastrophic exposure over the prior six years.

And of course, while the numbers are large, the real significance is the fabulous work that Allstate has done for our customers, whether that's our claim professionals, local agency owners or the thousands of other team members across the country that sort of rose to the occasion helping those people rebuild their lives.

We are very proud of what we got out and accomplished, and we know our customers are happy as well.

Our customer-focused strategy is to provide unique products and services to distinct customer segments, which is based on their preferences for price, service and delivery channel.

That's shown on slide 2 -- there's the four segments we have there.

The Allstate brand serves customers who prefer local advice and assistance and branded products -- that's in the lower left side of that slide.

In 2012, we introduced our expanded -- or expanded new products and services like Claim Sat Guarantee, Drive Wise, Good Hands, Roadside and House and Home to differentiate Allstate from the competition.

The Allstate brand profitably grew the top line in 2012, primarily on the strength of increased average premium for auto and homeowners.

It generated a total underlying combined ratio in the mid-80s.

Now policies enforced did decline for the full year, but in the fourth quarter, we began to reduce the negative impact of auto profitability improvement actions in New York and Florida and our long term program to raise returns in the homeowners business.

Allstate brand premium growth did accelerate at the end of the year in auto, homeowners, emerging businesses and Canada.

Esurance, which served the self-directed customer segment in the lower right, continued to exceed expectations from a top line perspective of producing net written premiums over $1 billion for the year and unit growth at 31% year-over-year.

The combined ratio remains elevated given the rapid growth, but we continue to monitor the long-term profit estimates and adjust pricing as needed, and we are comfortable with the economics of that business.

The advice-seeking brand neutral customer segment is in the upper left.

That's served by Encompass, which of course distributes through independent agencies.

Our strategy is to serve this market with a differentiated package policy that gained traction throughout 2012 with top line growth at 5.3% compared to 2011 and 8.2% in the fourth quarter versus the fourth quarter of 2011.

The underlying combined ratio is 96 for the year, but given the property risk in that business, we need to further improve profitability in that segment.

And answer financials in the upper right, that serves self-directed brand neutral customers.

It's brokering policies some leads received from Esurance and third parties.

This business generated nonproprietary agreements which don't show up in our topline of over $400 million for the year.

This represents an increase of 9% from 2001(sic).

These results show that our strategy of providing differentiated products and services to unique customer segments is working.

We also had strong operating results in 2012 as shown on slide 3. On a consolidated basis, we generated $2.3 billion in net income as an increase of $1.5 billion from 2011.

Operating [congrued] at $2.1 billion.

Our book value per share rose over 17% to $42.39 per share, that's at the year end 2012.

We produced a net income return of equity at 11.9% and an operating income ROE of 12.4%.

The underlying property liability combined ratio was 87.2, which compares favorably to our outlook range of 88 to 91 set at this time last year, and that was a result of both excellent execution and favorable weather.

As we discussed throughout 2012, we have four priorities for that year.

One, maintain auto profitability; two, raise returns in homeowners and annuity businesses; three, we want to grow insurance premiums, and four, proactively manage our investments and capital, and we accomplished all of those goals last year.

We maintained auto profitability with an Allstate brand Standard Auto combined ratio of 96.1, which was a slight increase over 2011 that's primarily due to the effects of Sandy.

The underlying combined ratio for the Allstate brand Standard Auto is 94.0, which is compared to 95.3 in 2011.

Homeowners profitability was improved with an underlying combined ratio for the Allstate brand homeowners of 65.1 -- that's a 5.8 point improvement from 2011.

The recorded combined ratio for the year was 88.0, which included Sandy and the other catastrophes that we experienced throughout 2012, but it was helped by prior year catastrophe reserve [basis].

This result shows our efforts over the last four years are working.

We also benefited from milder than expected weather outside of catastrophes which we do not expect to be the case in 2013.

Annuity returns also improved on strong limit of partnership income results.

That said, low interest rates will continue to put negative pressure on the returns from this line.

In total, property liability net premiums grew 4% from 2011 as we just discussed.

Additionally issued life insurance policies through the Allstate agencies increased 9.3% for the year, while Allstate benefits grew new business written premium by 6.5% over the prior year.

Our investment portfolio generated a total return of 7.3%, reflecting proactive portfolio actions and the decline in interest rate.

And portfolios have been supported by strong limited partnership results, mostly offsetting the downward pressure caused by lower reinvestment rate.

From a capital management perspective, we purchased $910 million worth of our shares in 2012.

That was after completing the $1 billion buyback we started last year in 2011.

And then we initiated another $1 billion buyback in December to be funded by issuing a like amount of subordinated divestitures.

When you add in dividends, we returned over $1.3 billion to share holders.

Reflecting the confidence in the execution of our strategy and operating plans, we raised the quarterly dividend by 13.6% to $0.25 per share for the first quarter of this year, and we authorized an additional $1 billion share buyback to be completed by the end of the first quarter of 2014.

Looking forward for 2013, our priorities are similar to last year's, but with an increased emphasis on growth.

If you go to slide 4, they're to grow our insurance premiums, maintain auto profitability, raise returns in homeowners annuity businesses and proactively manage our investments.

We're adding a fifth priority, which is to reduce our cost structure.

Now, effective expense management's always been a part of our disciplined approach to business, and we always work hard on keeping our expenses down, but given the difficulty economic climate our customers are facing, we're adding this priority to heighten our focus on what customers are really willing to pay for.

Finally, in keeping with our practice to provide you an outlook for our property liability underwriting -- underlying combined ratio in 2013, we've set a range of 88 to 90, which is 1 point narrower than last years.

This outlook reflects the more stable base of auto profitability and the actions taken to [divine] to raise home owner rates.

Partially offsetting is an expectation for higher non catastrophe frequency with more normal weather.

And with that, I will turn it to Bob to cover the details of the business unit results.

Let's review the results for property liability and Allstate financial.

On slide 5, which provides the details for property liability net written premium and policies enforced, for Allstate brand Standard Auto at $15.7 billion, net written premium was essentially flat for the year.

We did post positive premium growth over prior year for the fourth quarter of 2012.

Increased average premium and slightly higher renewal ratio more than offset a small decline in new issued applications.

Units declined 0.9% in 2012 from 2011, but sequentially were flat to the end of the third quarter of 2012.

We received approval for rate increases averaging 3.1% on a Countrywide basis over the course of 2012, in keeping with our priority of maintaining auto profitability.

Allstate brand homeowners increased net written premium in the fourth quarter and the year by 3.4% and 2.8% respectively.

The quarter's result was driven by a 7.1% increase in average premium on a gross written basis and an increase in new issued applications, partially offset by a decline in retention.

Approved rate changes averaged more -- over 6% in 2012 on a Countrywide basis as we seek to improve the margins in home owners.

Emerging businesses in Encompass, Canada and Esurance all contributed positive net written premium growth in 2012.

On slide 6, we provide a break down of our combined ratio for the year and for the fourth quarter -- just a few points.

For the year, we recorded a combined ratio of 95.5, an improvement of 7.9 points from 2011 as we maintain our margins in auto and significantly improved our margins in homeowners.

The Allstate and Encompass brands saw material improvements in the recorded underlying ratios in 2012, much of it coming from lower catastrophe losses.

2012 property liability underlying combined ratio was 87.2, better than the range of 88 to 91 which we provided at the beginning of 2012.

In addition to maintaining discipline and pricing in claims management, we benefited from very favorable non catastrophe weather during the year.

Our 2013 underlying combined ratio outlook range is 88 to 90 and represents an improvement from the outlook we provided in 2012.

It also factors in a return to more normal noncat weather trends for the year.

Loss cost trends for the Allstate brand Standard Auto modestly improved in the fourth quarter of 2012.

On slide 7, reported frequencies for bodily injury and property damage, which are shown in the upper left chart, declined 2.1% and 3.7% for the quarter from the fourth quarter of 2011.

For the year, frequencies for both coverages declined relative to 2011.

Paid severity, shown in the upper right, also moderated in the quarter with bodily injury increasing 5.2% and property damage increasing only 0.4%.

For 2012, the paid severities for bodily injury and property damage increased 4.1% and 3.0% respectively.

When you add the results from the other coverages in auto with our rate actions over time, you get a fairly steady combined ratio result, as shown by the graph in the lower right hand corner of slide 7.

Maintaining auto profitability remains a critical priority for us and one in which we have a history of success as depicted on slide 8. In the top chart, we have posted an Allstate brand Standard Auto underlying combined ratio of 95 or better in every quarter but two for the four years shown in the chart.

The chart on the bottom shows the improved results for averaged earned premium, which is the red line, and the very favorable loss trends in 2012, which is in the blue line, which we expect to moderate in 2013.

A similar set of charts are included for homeowners on slides 9 and 10.

Non catastrophe loss cost remained below prior year levels in the fourth quarter as reported frequency declined 10% while paid severity increased 6% compared to the fourth quarter of 2011, shown in the upper right on slide 9. With the loss cost trends declining and average earned premium increasing 9% in the fourth quarter, the underlying combined ratio continued to improve to 62.4 in the fourth quarter of 2012, a 4.6 point improvement from the fourth quarter of 2011.

For the year, the underlying combined ratio was 65.1, 5.8 points better than 2011.

Referring to the chart on the bottom of slide 10, average earned premium has steadily increased due to the impact of our rate actions taken over the last several years.

The loss trend has been very favorable for the entire year, a trend we expect to moderate in 2013.

Moving to Allstate financial on slide 11, we continued to focus on growing underwritten products sold through Allstate agencies and Allstate benefits, further reducing the concentration of spread based products.

This shift will improve returns.

Total premiums in contract charges on underwritten products increased 3.8% for the year and 4.9% for the fourth quarter.

In 2012, issued life insurance policies sold through Allstate agencies increased 9.3% for the year and 11.9% in the fourth quarter relative to comparable periods in 2011.

New net written premiums produced by Allstate benefits rose 6.5% for the year compared to 2011 and 13.3% for the fourth quarter when a significant portion of the business is written as part of the annual enrollment season.

Allstate financial generated net income of $541 million, a decline from 2011's net income of $590 million, driven by after tax net realized capital loses in 2012 compared to realized capital gains in 2011, partially offset by a reserve release in 2012 associated with a non-routine valuation adjustment for derivatives imbedded in equity indexed annuities and a 4.3% increase in operating income.

The increase in operating income was due to an increase in the investments spread, driven primarily by the reclassification of equity method limited partnership income from realized capital gains to invested income beginning in 2012, partially offset by decreased benefit spread and increased expenses.

For the quarter, net income was $166 million, a $31 million increase from the fourth quarter 2011 with operating income of $144 million, a $14 million or 10.8% increase from the prior year quarter.

Operating income return on equity of 8% declined 30 basis points in 2012 from 2011, and higher operating income was more than offset by the growth of capital due to the accumulation of undistributed profits.

Lastly, ongoing efforts to reduce exposure to spread base business drove a decline in contract holder funds of just over $3 billion, bringing the balance in contract holder funds to $39.3 billion at year-end 2012.

We continue to review options to reduce the size and improve the returns of the spread base businesses.

With that, let's hear from Steve.

Thanks, Bob.

We delivered strong investment results in the fourth quarter and for the year as we balanced the portfolio yield, risk and return objectives in the current low interest rate environment while proactively positioning the portfolio for an eventual rise in interest rates.

On slide 12, you see our portfolio total return of 7.3% for the year, driven by significant fixed income and equity appreciation coupled with stable net investment income.

The returns reflect positive contributions across the entire portfolio.

For the fourth quarter, net investment income was $1.033 billion and the annualized portfolio yield was 4.7%, reflecting increase over both the prior quarter and the fourth quarter of 2011.

The increase includes the impact of our change in classification of equity method limited partnership results to net investment income from realized capital gains that Bob noted a bit earlier.

Excluding limited partnership results, net investment income was above the prior quarter, reflecting higher equity dividends, but lower than the fourth quarter of 2011, consistent with the smaller Allstate financial portfolio and impact of lower reinvestment yields.

Also on this slide is the size and composition of our overall portfolio.

We ended 2012 with a carrying value of $97 billion reflected in the improved valuations, which more than offset the ongoing reduction of Allstate financial's spread base business.

Through 2012, we continue to favor the stability of corporate credit, including an increased allocation to high yield bonds.

Slide 13 highlights trends in the portfolio unrealized gain, yield, maturity profile.

The chart on the upper left shows the trend in pre-tax unrealized net capital gains.

We ended 2012 with unrealized gains of $5.55 billion, reflecting increase of $2.67 billion over year-end 2011.

The increase was primarily in the fixed income portfolio and resulted from tighter credit spreads and lower interest rates.

In the fourth quarter we further reduced interest rate risk in our property liability portfolio by shifting out of longer maturity assets.

These and similar future actions will better position a portfolio for an eventually rise in interest rates.

The sale of longer term security pulls forward future income to the realization of gains.

We expect this activity to contribute to decline in our property liability portfolio yield and net investment income.

The chart on the upper right illustrates a shift in our fixed income maturity profile resulting from our proactive management of interest rate risk over the past several years.

Our actions to reposition the fixed income portfolio include shifting out of longer term municipal and corporate bonds and shorter term, lower yielding treasuries in intermediate term bonds.

We expect our continued reinvestment in the current low rate environment portfolio actions to reduce interest rate risk in the ongoing reduction of Allstate financial's liabilities to further pressure investment income and portfolio yields going forward.

We finished the quarter in a strong capital position as you can see on slide 14.

Shareholders' equity of $20.6 billion increased $2.3 billion from year-end 2011.

Statutory surplus rose $17.2 billion, and deployable assets at the holding company level were $2.1 billion at year-end.

Our book value per share came in at $42.39, 17.2% higher than at year end 2011 on the strength of our operating performance, improved portfolio valuation and active capital management.

We returned $1.3 billion to shareholders during 2012 through dividends and share repurchases.

Yesterday the board increased our quarterly dividend to $0.25, a $0.03 per quarter or 13.6% increase.

We completed the November 2011 share repurchase program during the fourth quarter and began repurchases under a new $1 billion program authorized by the Board in December to be financed through hybrid security issuances.

The Board also authorized an additional $1 billion repurchase program yesterday, bringing our total buyback program to $2 billion to be executed through March 2014.

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

Thank you, sir.

(Operator Instructions)

Jay Gelb, Barclays.

First, I want it point out that I believe it's the first time that Allstate brand premiums were in positive territory on growth for the first time in 11 quarters.

So I want to get your perspective on whether you feel that trend could continue in light of [pith] growth still being negative.

This is Tom.

I will give you a perspective, and Matt might want to jump in as well.

First, you're right, the premiums have gone up.

That is, as we pointed out, largely a result of higher average premiums in the home owners business.

The actions we have taken over that period of time and actually beginning before 11 quarters ago was to reduce our catastrophe exposure by getting smaller home owners.

You know we're down 1.2 million home owner policies in the last four years, and that has obviously had an impact on our auto business.

As the actions we took in New York and Florida, which were proactive and fast that we went at that one hard, which hit both of our -- also hit auto growth.

Matt has a number of plans going on to turn that around, and maybe let's make comments about the strategy to movement, both -- I think what you're really after is items and policies as opposed to premiums.

Jay, it's Matt.

Thank you for pointing that out first.

The way we look at this is, the last several years have been a stabilization year as we -- a couple of stabilization years as we wanted to ensure that we were charging an appropriate rate and getting the appropriate returns on the business.

We are continuing to focus on top line and pith, and we will continue to do that as long as we are able to do that in an economic matter.

We look at a couple of indicators.

We look at, on the home owners side, we look at new business, and we look at retention, and as you see in page 28 of the sup, new business was up 5.8% above prior year in the fourth quarter and the trend was extremely positive.

We started first quarter at minus 11.4%, second quarter was minus 5.7%, third quarter flattened out and fourth quarter, we were at positive 5.8%.

Add to that the retention side of it, and as we've slowed down the non renewal actions and as we've focused more intensively on the customer experience, we've seen the gap to prior year in retention improving each quarter, and it improved in the fourth quarter to just minus 0.6 On the home owners side, you take that boost in new business, retention getting better, non renewal actions declining, greater focus on customer experience, the impact of House and Home which we rolled out to 17 states in 2012 and we have another 12 additional states planned for this year, and in those states, production is up extremely strong.

And so we have a good story on the home owner's side, and not only does that help home owners revenue and pith, but it helps auto as well due to the bundling.

And you look at the same two factors on the auto side, and although new business continues to run below prior year, the gap got smaller in the second half of 2012, if you look at the first half versus prior year versus second half versus prior year.

It's dramatically different.

First quarter I think we were down almost 11%, second quarter down 3%, and then third and fourth, it was down 1.3%.

So clearly moderating on the new business side.

And retention improved.

As you can see on page 28 of the sup, the retention trend has been pretty stable at 89% the past three quarters.

We got a boost from Florida in the fourth quarter where their retention improved, and we stabilized things in Florida and New York, as Tom said.

So we think we are pretty well positioned to change the momentum and change these trend lines.

We have been moderating a lot in the last quarter.

And we are cautiously optimistic.

Thank you for that insight.

I also want to touch base on the comment about expense management.

The P&C expense ratio was 26.5% in 2012.

That's up from around 25% in the 2010 time frame.

Is that a good way to think about it in terms of where Allstate wants to get the expense ratio back to?

A better way to look at it is by segment.

Look at the expense ratio for Esurance.

You will see that's substantially higher than net average, and that's because, of course, it's all front-end loaded with advertising expenses.

Then you can look at the Allstate agency piece, and then you can look at the Encompass piece.

And our goal is to have a highly competitive expense position in each of those segments which is relative to the way in which you go to market and the services you provide to your customers.

So for example, in the Allstate agency channel, our agencies provide ongoing service and counseling for our customers, which is why they get a renewal commission.

You don't have that in the Esurance business model because those customers don't want that.

You have really to look at it by segment.

Makes sense.

Thank you.

Mike Zaremski, Credit Suisse.

Great.

First question regards to the 88 to 90 underlying combined ratio guidance.

So that's -- I believe this year was lower than 88.

You guys are hoping to maintain auto, or the goal is to maintain auto and drive continued improvement in home owners.

That would -- I guess basically is the delta there kind of the -- you guys don't expect the lower noncat weather to occur, and if so, can you size up what benefit you guys had from that in the full year?

Good, good question, Mike.

Let me address.

88 to 90, last year we had 3 points spread; this year it's a 2 point spread.

That's largely based on our confidence that the actions that Matt's team has taken to New York and Florida are working, and we like what we see there, so we can have a narrower range.

Secondly, you say okay, but your range is still above where you are this year.

I think you really have to -- it is the weather.

It's a reflection of a return to more normal frequency in the auto and home owner business.

December was an incredibly strong month for us.

If you look at the underlying combined ratio in home owners for the fourth quarter was like 62 and change.

I don't think the business is operating at this point at that big delta version where it was last quarter -- the fourth quarter of last year.

Some of this weather -- doing a variance analysis on weather is -- it's possible but there's some art to it.

And so our range is a range we expect to be in.

That's why we establish it to give you some confidence as to where we have gone.

And we typically are in there and so we made an estimate as to what the weather would be and said we will be in the 88 to 90.

And in regards to the investment portfolio, it sounds like Steve talked about preparing for higher interest rates, but then so shifting the reducing interest rate sensitivity.

What kind of new money yields are you guys expecting in the near term versus the existing portfolio yields?

Let me give you an overview from corporate risk standpoint, and Judy will talk about what she is doing to implement that.

Overall, when we look at the corporate risk profile and look at interest rates, caps, underwriting risk, inflation, a whole variety of things, and from our risk management perspective, we are assuming rates will rise.

We don't think they are going to run away tomorrow, but we think they will go up over time.

As we usually do, we try to get out ahead of these things and be proactive about it.

We are not -- we only have moderate level of concern about inflation, which is another thing of course that can hurt insurance companies.

What we are doing is reducing our interest rate risk.

We started that in the fourth quarter, we'll continue it throughout this year, and that means basically taking capital gains on the portfolio and pulling operating income forward.

So you can take capital gains today or you can get the higher interest rates.

We believe the economic smart thing to do is to pull those gains forward, and so we run the company economically, not just for operating EPS.

Judy can talk about what she has done to the portfolio and what she is reinvesting in.

So when you look at the portfolio, currently the -- just looking at the fixed income yield on the property and casualty portfolio, it's around 3.8, and that's a good estimate of what you should think about in terms of where the portfolio is in some of the activities that we are doing.

The reinvest that we are looking at is as Tom said shorter duration.

A good proxy would be 3 to 5 year maturities and investment grade corporate probably yields around 1.2% to 2% is a good way to think about it.

Okay.

Thank you.

Josh Shanker, Deutsche Banc.

Congratulations on the Esurance growth.

Not so surprising the first quarter, but I noticed every quarter it's been strong, and when I look at Geico and Progressive, there is a heavy seasonality to when they add policies.

Can you talk about the marketing there and whether you expect at certain point it will normalize to a seasonality or not?

I will get Don to answer that part.

Let me first, Esurance, we're really happy with Esurance.

It fits with our customer focus strategy.

We didn't think -- while we had an offering in that lower right hand quadrant with the Allstate brand, we aren't really taking share.

We need a sharper, better focused customer offering to serve the self-serve customer, and we thought we could leverage a bunch of our capabilities at Allstate, which we have done other times whether that be with Encompass or the benefits business.

So net-net, we like with a we've done, and we like -- 30% growth is good, and Don can talk about the seasonality and perhaps talk about the other things you are doing to drive growth in the business.

Surf around the acquisitions.

Hi, Josh.

First of all on the seasonality question, the seasonality Esurance has historically followed their marketing spend, so there has been a higher first order customer acquisition in the past.

I think that will probably moderate in the future.

They've increased their advertising spend a fair amount.

And I think we will spread that out through the year going forward.

As far as the marketing spread and the efficiency throughout the year, remember, this wasn't just -- when we completed the acquisition of the fourth quarter of last year, we began a new ad campaign heralding the fact that Esurance and Allstate were now connected.

That campaign began at the beginning of 2012 and the impressions have been building as the year has gone on.

It was less effective the first day it ran than it was the last day it's run through the year, and I think the momentum that's built has been very strong.

So the campaign is working quite well.

And it's hard not to be happy with written premium growth going up 30% for the quarter on an apples to apples basis if you adjust for the acquisition date last year.

The policies are going up 31% for the year, so that's strong as well.

And I think from my perspective, we acquired Esurance so we can really compete effectively against Geico and Progressive in that customer segment.

And our goal was to grow that business economically.

The GAAP combined ratio gets in the way of looking at things economically for you, but we were convinced the growth we're getting economic when you spread the advertising expense over the life of the customer, and we want to see how far we can take.

But clearly it's doing what we wanted, which is taking market share in an economic way.

And so the ad spend you expect will be consistent throughout the year?

No.

I don't know it will be completely consistent quarter to quarter.

I just don't think we will have as much seasonality as they've had historically in the past.

Okay.

And the other question, capital management, obviously you have $2 billion share repurchase on the table right now.

Presuming amenable noncat weather and reasonably low amount of catastrophes, could there be more buy back in 2013 if the weather complies?

Josh, this is Tom.

We've always shown an ability and willingness to deploy capital back to shareholders either through dividends or share repurchases.

$2 billion is a pretty big program when your market caps is $21 billion.

We're pretty comfortable at that.

I think working through this is probably what you should expect for 2013.

Okay.

Thank you for the answers.

Vinay Misquith, Evercore Partners.

Thanks.

So the first question is on the net investment income if I could just have a clarification.

I believe the old money rates that you have right now is 3.8% and new money rate's 1.5% to 2.0%.

That's on the P&C portfolio.

Curious, how much of fixed income assets are maturing this year and next year and so -- yes, that would be helpful.

So the old money rate is really just the portfolio rate you referenced, so that's around 3.7% to 3.8%.

And the way that we were estimating maturities [prepaid] in calls for 2013, in the property and casualty portfolio is between $1.5 billion and $2 billion with the piece of that being maturities which will actually happen and then we have to estimate the calls in prepays.

That's why we have the range.

If you are trying to get an estimate for investment income, top of that will be the roles we do intentionally on our part to reduce interest rate risk.

So we will be selling securities, and we have been throughout the last fourth quarter, and we'll be selling them this year and taking capital gains, which will then be reinvested.

That's on top of what you talked about.

Sure.

So just to get the numbers right.

The $1.5 billion to $2 billion is per quarter?

No, that's for the total year for the property and casualty portfolio.

But that excludes what Tom just talked about, and that activity -- when we look at that activity, we think it's going to be in the range of -- we think that activity is going to -- is going to be on top of the calls of maturities.

Okay.

How much of a negative impact do you think that will have on the investment [model]?

We are not -- here is what I say, we are trying not to do the earnings guidance by line.

And so, what you can do -- the way to get an estimate is to look at our capital gains each quarter as we go forward, and then you can adjust as you look forward based on how much we sold that quarter and what you think we will reinvest in.

The timing of it, how much we do will depend on what we think about the future trends and interest rates where we are at and the pace of it.

That is a -- we are living through that one.

We are letting you know our intention is to sell bonds, realize gains and accelerate it in some operating capital gains.

We don't really have a forecast for what we will do this year.

Okay.

The second question is an Esurance.

The growth was great, but the business is running at 108 I believed for combined ratio.

Do you think it can get to 100 or maybe a 96 by this year, or is it going to be next year?

I will give you the directions I have given to Don, and Don can talk about the actual number.

We look at the loss ratio, and we say where is the loss ratio relative to what it needs to be to be economic.

We also look at that loss ratio by age of business, and we look at that loss ratio by state.

And so there is several different cuts on it with a goal of making sure that there is enough profit coming off the difference between premiums and the loss ratio to pay for all of this up-front expenses.

And so to the extent that it is, and Don can talk about cost of acquisitions and stuff like that, we will continue to fund that business for growth.

Esurance hit our underwriting combined $192 million this year in terms of negative to it and I'm good with that because it was all economic.

We can't continue to invest in growth in that business, which means the combined ratio will be over 100, but if you are making money on it by segment, by sale, by age, by state, then we don't worry as much about what the total combined ratio is at the top because of the way the advertising expenses are accounted for.

I'll maybe add a couple of things.

We can -- this is going to sound bad.

We can actually make the combined ratio what we'd like it to be by adjusting the advertising.

So I think what you are talking about is the GAAP combined ratio, and the better thing to focus on is what Tom talked about, which is the economic combined ratio.

Their accounting model is different than Allstate's.

Most of their expense is front-loaded on advertising, and that gets expensed in the quarter and you take the advertising expense.

But then the second term and the third term and the fourth term, the profitability goes up substantially because you don't have the commission we have on the Allstate side.

What we look at is over the life of the policy we are writing, is that business economic?

At the moment, that business is quite economic for us.

And so as Tom said, we are happy to feed the growth of that by investing in the advertising up front.

It's going to depend on making sure the retention remains strong.

And I would tell you the retention has gone up this year.

And so nobody likes to run 108, I don't like it either, but I think you have to go below that number and try to understand why it's running 108.

If it's running 108 for good reasons, we will continue doing it.

Okay, thank you.

Paul Newsome, Sandler O'Neill.

Thank you for the call and congratulations in the quarter.

I was wondering if you could talk more about Encompass and what structurally is the reasons why the profitability differs from your enforced Allstate branded business.

Good morning, this is Tom.

I will make a quick comment, and then Don can talk about the strategies we're using to grow the business profitably.

The [cover score] serves the customers who want local advice but want choice between carriers.

So we sell through independent agents.

The cost structure associated with selling through independent agents is higher than the cost structure of selling through captive agents, and it's pretty obvious as to why that would be the case.

And so we run a higher expense ratio there, but that's because that's what customers want.

We made a couple of changes to improve that business, the biggest of which was a new management team, and Don can talk about what we are doing to leverage that management team's skills and how we expect to grow the business.

I will tell you I'm not completely satisfied that the profitability is where we need it to be because the combined ratio is still a little high and there is a lot of property in that packaged policy.

You need a pretty low combined ratio on that property business.

We made good progress and we are seeing some signs of life in that business.

I'm happy about it.

Yes, Paul.

This is Don.

We made good progress over the last couple of years in that business, as Tom said.

A new management team, but we re-established our focus on the package product.

For us, the strategy is it's about customers and it's about our agents.

On the customer side, we are committed to the package product, which is the 12 month policy.

One premium, one bill, one property deductible, and we think that differentiates in the marketplace for our customers which are in that mass affluent segment.

From an agent's standpoint, we've recommit ted over the last couple of years to them as well in terms of ease of doing business, being consistent in our underwriting appetite, upgrading our technology platforms, and that has led to a significant increase in the number of engaged agents we have.

We distributed for about 2800 agents in the United States, there is about 37,000 total in the independent agent space.

About 1700 of those we would consider active.

So we've got more runway with our current agents.

And we've got probably less than 1% market share in the segment that we chase.

We think some of the recent trends for us certainly can continue if we continue to run the business the way we have been.

Great.

Thank you very much.

Bob Glasspiegel, Langen McAlenney.

I think Warren Buffett has thrown out a $1500 per customer at Geico benefit to Berkshire.

I don't know whether you've thought through what a customer is worth to you in lifetime benefits, but if you used his $1500 as what one of your customers is worth on your 240,000 policies that you added, you probably added $350 million of value to the firm, which will be a third of your purchase price.

How do you think about a value of a customer in lifetime benefits to the Company?

Bob, I don't know where Warren Buffett gets $1500, so I can't speak to the math.

I will assume he has whatever his numbers are.

I tend to think of our customers not in economic terms as to how much we can make off them, but as to how do we fully meet their needs and capabilities and how do we differentiate ourselves so we keep winning them.

Just because you got them once doesn't mean you are going to keep them.

And when you start putting numbers on them and say this person is a $1500 sign, it seems odd to me.

That's just not the way we think about it.

We think about it as we are trying to always do a good job, we've got to drive retention up.

So you see retention going up in the Esurance business because of the work we are doing, the way we serve our type of customers.

Matt talked about retention in his businesses.

I'd like to keep them all forever, and that's our goal, and I don't know if that makes them worth $1500 or more, but I know it's good for our share holders.

Okay.

Somehow you have to size your ad spend versus the customers that you get, so you have to put a number on it at some point, but I hear it's the softer and maybe a softer process in your current mind set.

If I could pivot to the life company, I am interested on where this company stands relative to Matt's and yours goal that you articulated to get $1 billion of dividends out of it over the next four years, I think which was a couple of years ago.

It looks like the stat surplus is down, but you said that the ROE had some pressures because of more capital.

I guess the final question is where does the life company stand in your overall strategy?

It looks like there are people out there willing to pay pretty good prices for life companies today, which I'm sure you're mindful of.

What's the overall game plan with the unit?

A lot of -- as usual, you thought it through in a very thorough way.

I will try to give you -- maybe I will start at the end and see if I get the details as well.

First, our strategy at Allstate financial has been to focus on underwritten products.

If we go back ten years, it was to make it bigger and broader, and we were pushing hard at both the annuity business and the life business, expanding through both our captive channels and independent agencies.

Given -- in about the middle, about 2005 or so, we said this annuity business doesn't look like it's giving us the kind of returns we like.

We thought fixed annuities in returns were low, and variable annuities, we thought the returns were too speculative and we started to shift.

So we sold the VA business in 2006, and we started shutting the -- slowing down the size of our annuity sales.

Had we been prescient enough, I would have stopped them all and maybe sold them at that time.

It would have been a good idea because the deals we see now, people selling annuities, I'm not sure they are great transactions.

So where we are today is focused on the underwritten products, be supportive of the Allstate agency customer rates that lower left who they want to buy everything from one person if they can.

Also we have a great position in the workplace benefits business.

And as we mentioned, that business is growing quite well.

We really like that business, and it gives good returns.

So both in the underwritten products, the returns are above our cost of capital, and so we're focusing on growing those businesses.

At the same time, to get the cost of the return on equity up, we've also been trying to reduce the size of the fixed annuity business since that's the one we have left.

And we have been pretty aggressive.

I think we are down about $3 billion this year.

We'd like it to go down faster.

We were looking at every which way we can to make it go down faster because it's just low ROE business.

What we have learned along the way is we can separate the decision from serving our customers, from putting our capital to work so we sell VAs to our customers today, and they're just made by somebody else.

We sell a bunch of fixed annuities today made by somebody else.

Looking forward, what our goal is, is to try to get returns up on the life business.

That includes getting [capper] out of there.

We have -- when you include the bank last year, I think we got back about $367 million.

This year we expect to get more back.

I'm setting objectives for Don.

(laughter) And so we are expect over the next couple of years to be a net generator of capital for us to continue to work to try to reduce the size of the fixed annuity business and then to continue to focus on helping support the Allstate agencies and the benefits business.

Is that helpful?

Very helpful.

So selling it or spending it off, nowhere near your radar screen.

If we could do something with the fixed annuity business, we'd be happy to do it.

But the deals people have been making don't look that attractive to me.

If we had an attractive way to reinsure some of that, that's not really a spin-off the way you are thinking of it, in a capital market standpoint.

I'm thinking of it in a -- how do we get our returns up in that business, and that's our goal.

Get returns up for Allstate financial, we will do it in as effective and efficient a way as we can.

Great answer.

Thank you.

Ian Gutterman, Adage Capital.

I was wonder if you could give us a sense of what you think ad spend will be for the Allstate brand '13 versus '12?

I'm sorry, say that again, Ian?

Advertising spend, do you expect advertising spend to be flat, down, up versus 2012?

I'd rather not comment on that because other people listen to the call and figure out what we are doing in ad spend.

I would underline that Matt is focused on growth.

And to the extent we think it's economical, we're willing to invest in it as long as we can come in with our combined ratio target overall.

And it's a pretty -- as you know, it's a pretty aggressive advertising market today.

But it's also shifting.

You're seeing people move out of big ads that are done on major TV to more electronic communications and stuff like that.

We have -- Sanjay Gupta joined us as our chief marketing officer last year, and we also have a great advertising team with Lisa [Packman] and others so we feel like we've got the right weapons.

And we fire them when we think they are going to drive growth.

Got it, great.

And then to the growth question, Matt obviously talked a little bit earlier about New York and Florida being important states, but I'm talking specifically about auto here.

There is challenges in both states.

I'm curious how those are impacting you either favorably or adversely.

Florida with the pith reform, has that been an impediment to trying to grow or do you think you have gotten ahead of the market to figure out how to address that?

And New York with all of the losses from auto and Sandy, I assume there's going to be price increases coming.

How does that affect your ability to grow?

Let's take them individually, because although they are typically grouped together, they tend to have some things in common, but some things occur differently.

Florida is a difficult environment due in part by the pith issues that you referenced, but it's just a tricky environment.

One where you have to be very disciplined and very cautious, and as you grow, you need to do so in a really disciplined manner.

I talked with one of the other calls about the first mover, a disadvantage you sometimes get by seeing things before others see them.

In Florida and New York, that's really an advantage.

So we are watching trends emerge and we stay on top of them very aggressively.

So you can see in Florida on page 23 of the sup that we've continued to improve the margins in Florida as the year-over-year loss ratio ended 2012 several points below 2011 levels.

That gives us some flexibility to start looking at growth.

We have seen, as I said, stabilization and retention there.

But we have to be cautious in the growth there, and we will do so deliberately and cautiously so that as we grow and if we're able to grow, we were doing so profitably and not exposing ourselves inappropriately on the risk side.

In New York as you said, Sandy creates some opaqueness to some of the results.

We have to see what happens.

Clearly with some of the requirements that we not terminate policies, that influenced the retention rate so we have to see how that shakes out.

We are optimistic there, too.

You have seen Standard Auto there continues to decline but at a slower rate than seen in the third quarter.

And if you take out Sandy, and I think we tried to break this out for you on page 23 of the sup in New York, the loss ratio excluding Sandy improved compared to the fourth quarter of 2011.

So we are seeing, if you ex out Sandy, we were seeing nice improvement there.

So we think we're fairly well positioned in New York as well.

You think you can get enough rate -- just given the moratoriums you can get enough rate for the cat load -- probably higher cat load to still grow?

I can't predict what rates we will get or we will take.

We strive always to ensure that we have a proper economic return on the business.

And we will manage our relationships there and our rates to ensure that happens.

Great.

Thanks, guys.

Michael Nannizzi, Goldman Sachs.

Thanks.

Bob, could you elaborate a little bit on -- on you mentioned -- we talked about noncat weather, I think we talked more on the home owner side.

Can you talk a little bit about kind of the large loss activity or the lack of large loss activity in the fourth quarter, how much that benefited Standard Auto just to try to reconcile everything about those going forward and one follow-up.

Thanks.

Lack of large loss activity favorably impacting auto in the fourth quarter?

Yes.

You said weather was benign I guess in --

It was.

If you look at the frequency trends, we had a nice decrease in the fourth quarter relative to 2011.

So the frequency trends continue.

That is when we look forward is something that we are not necessarily counting on when we look at 2013.

I think everybody in the industry has experienced a better weather pattern in 2012 than they had in the past few years.

I think that's really what we are seeing on that.

And on the large losses, I think what is sometimes causes us to hesitate, and I'm not making a reserving expert, but to the extent that frequency goes down because of the weather, those tend to be smaller average claim sizes.

So as a result of that, your severity tends to go up a little bit when your frequency goes down.

Actually, the large losses didn't really go down.

Somebody is going to get in an accident and really hurt themselves or somebody else, they are usually going to do a weather.

Variability in the weather tends to take out small claims.

I think if you look at paid pure premium the way Bob laid it out on the slide, we get a sense for -- we feel like the fourth quarter is pretty good.

We don't think you can always count on frequency being down, and so that's why we picked the numbers we picked.

Got you.

And one piece of the disclosure I was trying to figure out was, if we have the cats in home owners and auto and cats overall, is there -- do you guys disclose or do we have available the cat number in the other segment and what did that look like in 4Q and maybe for the year, just trying to understand the underlying there.

The way the supplement was structured this quarter, they reformatted a few things, and one of the things that is not -- is no longer in there specifically is cat losses on the other personal lines.

I'm working with accounting to get that number.

You are, kay.

We will follow-up with you after then.

Thank you.

And then one last quick one.

Investment income, looks like you are down year-over-year about 7% just on the fixed maturity piece.

I'm guess there is some being moved to alternatives and equities.

Trying to understand whether or not that piece of decline should accelerate just given sounds like some harvesting and continued repositioning and how just -- how generally should we think about what you are going to be doing there?

Thanks.

This is Tom.

I think your numbers are correct.

We don't want to do a forecast of investment.

Everything depends on what happens to rates and reinvestment rates and how much we decide to reduce interest rate risk.

I think the general direction you described is the tone we are trying to give you.

I think investment income is likely to, excluding what we get off limited partnerships in the alternative investments, is likely to go down next year because rates are low and we are harvesting gains in reducing our interest rate risk.

The direction is right.

Everyone has to make their own estimate as to how much it will go down.

Fair.

Thank you very much.

May we do one last question?

I think we are at the top of the hour.

Ray Iardella, Macquarie.

Thank you for squeezing me in.

Maybe a question more sort of longer term thinking, Tom, when you think about the 13% ROE goal by 2014.

Maybe talk about whether or not you need to improve the P&C combined ratio of the 88 to 90 given some of the pressures of investment income, and if not, maybe talk about the levers maybe outside of the life business that you have to get your ROEs up to that goal.

It's a good question, but a complicated one, but I'll try to do it quickly.

Driving profitable growth is our goal, and we were highly focused on the return on equity.

13% was the goal we set in 2010, early 2010.

It is still our goal.

Some the actions we took and had planned on to get there, it worked well and we are on the way there.

There other things are not as far along as we would like to get to that goal.

We picked the 13% because, I don't know if you were at that meeting or not, but because that's the return we had gotten over a long period of time out of the business.

There were four key assumptions, one that we could maintain auto profitability, two that we could improve returns in home owners, three that we could get the Allstate financial ROE up to 9% to 10%, and four that investment income would be essentially flat.

We are comfortable with the first two.

Auto profitability is still doing well.

As we said, we like what we've got going in home owners, and at the time, getting the improvement from where we were -- so getting to 13%, about 70% of it was in the home owners business.

We have been like laser focused on getting that done, and Matt's team has been pushing forward on work that's really, we've been working on for four or five years to try to get there.

That one we feel very good about as we feel good about the sustainability of our auto margins.

In terms, we made less progress on AF because the interest rates have come down, and that of course impacts the third one as well.

So we are focused on doing what is economic as well as getting 13%.

So for example, lower rates, doing what we are doing to reduce interest rate risks, makes that fourth lever even harder to accomplish.

But as I said, we're going to do what's economic for the share holders.

And if we think it's right risk for return tradeoff, we will do it, and we are still shooting for 13%, but I'm not going to be a slave to an operating EPS number and put our share holders at risk for interest rates moving up and the unrealized going from $5.5 billion to being wiped out.

If we can capture some of that for our share holders today, we will.

It's a complicated model.

We are still working on it.

It our goal is to get share holders a 13% return.

There is a lot of lever we could pull.

You mentioned many of them.

And we're working our way at it.

Okay.

Thank you very much.

Let me just close.

2012 was a year where you all had the ability to see through cat losses to the underlying strength of our business model.

We have a clear and focused strategy which is to differentiate ourselves versus the competition and focus on the needs of each customer segment.

We are executing well.

We will proactively address any of those challenges that come our way, including the ones we talked about, with the goal of creating value for our share holders by doing a great job for our customers.

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

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

This much concludes the program.

You may now disconnect.

Good day.