Allstate Corp (ALL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate third-quarter 2013 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 turn the conference over to your host, Mr. Steve Shebik, Chief Financial Officer.

Sir, you may begin.

Thank you, Matt.

Good morning, everyone.

Thanks for joining us today for Allstate's third-quarter 2013 earnings conference call.

After prepared remarks by Tom Wilson and me, we will have a question-and-answer session.

Last night, we issued our press release and investor supplement, filed our 10-Q for third-quarter 2013, and posted a slide presentation to be used in conjunction with our prepared remarks.

These are all available on our website.

This presentation may contain forward-looking statements regarding Allstate's operations.

Allstate's results may differ materially from these statements, so please refer to our 10-K for 2012, our 10-Q for the third quarter, 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 are recording this call and a replay will be available following the conclusion of the call.

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

Now I'll turn it over to Tom.

Good morning, and thanks for investing your time with us.

I will start by covering the third-quarter results as they relate to our strategy and then our 2013 priorities.

Bob Block is not with us today as he is attending to a health issue, so Steve will cover both the business performance and capital sections of the presentation.

Also today, with us here today are Matt Winter, who, of course, leads Allstate personal line; Don Civgin, who is responsible for Allstate Financial and Esurance; Judy Greffin, our Chief Investment Officer; Don Bailey, who leads the emerging businesses; and then Sam Pilch, our Corporate Controller.

If you look at the quarter in total, we generated very strong results and really reflects the broad and comprehensive approach we have taken to creating shareholder value.

Operating income was strong and we made progress on all of our 2013 operating priorities.

Growth improved, and we made progress on balancing risk and return and deploying capital to enhance returns.

Starting with slide 2, it summarizes our third-quarter results.

Revenues increased to $8.5 billion, which is up 4.1%.

That reflects a 5.3% growth in net written premium, with contributions from all of the customer segments and businesses.

Net income of $310 million declined from the prior-year quarter, primarily due to the $475 million after-tax loss from the pending sale of Lincoln Benefit Life.

Operating income of $713 million was essentially equal to the last year's third quarter, while operating income per diluted share increased as a result of our share repurchase program.

Our book value per common share increased both with and without fixed income unrealized gains and losses.

On slide 3, we show the four distinct customer segments that drive our competitively differentiated approach to the market and a result in each.

The three brands where we underwrite risk -- that is Allstate, Encompass, and Esurance -- all grew net written premium.

Answer Financial also increased its nonproprietary premium.

For the Allstate brand, which serves customers who prefer local advice, assistance, and a branded experience, policies declined by 0.4% from the prior-year quarter as growth in standard auto was offset by continued reductions in homeowner policies.

Allstate brand standard auto policies increased 1.1% versus a year ago and 0.6% versus last quarter, reflecting continued improved retention and strong new business growth.

We have made substantial progress in improving returns in homeowners, and as a result, the decline in homeowners' policies has lessened.

Total homeowner policies declined by 3.2% from a year ago and 0.3% versus last quarter.

We are beginning to take steps to position this line so it becomes a competitive advantage for us, as opposed to a drag on overall growth.

Actions taken to position high-performing agencies for success, including more effective compensation programs, is also working, and agencies are expanding.

The profitability improvement in this segment was a combined ratio of 86.4 and an underlying combined ratio of 85.4.

The Esurance brand, which is in the lower right, serves the self-directed brand-sensitive customer and continues to generate significant premium and unit growth as it successfully leverages the benefits of being part of Allstate.

Increased advertising that is more effective, better pricing for preferred-risk auto customers, and improved claim practices are designed to acquire and retain profitable lifetime value customers.

The combined ratio remained high at 116.8, in part reflecting the high levels of marketing spend, the expensing of acquisition intangibles, and the impact of higher loss ratios from new business.

The Esurance team is working to adjust pricing and underwriting to ensure that this growth will generate long-term profitability.

These actions caused growth to decelerate in the third quarter, if you look from month to month, and we expect growth to decline somewhat in 2014.

The Encompass brand, which is in the upper left, serves consumers who want local advice, but a choice of products and services.

That continued to show positive growth, with policies up 7.2% compared to the prior-year quarter.

Strategically, we remain focused on household penetration with our unique packaged product that represents about 75% of Encompass' volume.

The combined ratio in the quarter was 93.6, an improvement of 6 points from the prior-year quarter, with an underlying combined ratio of 92.5.

The improvement in the combined ratio reflects favorable reserve re-estimates.

On slide 4, we show a progress report on our five 2013 operating priorities.

I have already covered the grow insurance premiums priority for property liability and that's the first five sub-bullets there.

Allstate Financial's premiums and contract charges also increased by 3.7% over the third quarter of 2012.

The growth of premiums and contract charges for underwritten products was 4.4%, with Allstate Benefits growing approximately 10% compared to the prior-year quarter.

Our second priority is to maintain auto profitability.

The Allstate brand had a standard auto combined ratio of 94.9, which was 3 points higher than last year's third quarter, due to lower favorable reserve re-estimates.

When you look at the underlying combined ratio, it was 94.6, which is 0.9 points higher than the prior-year quarter.

That increase reflects modest increase in frequency and severity and a higher expense ratio, which is offset in part by higher average premiums.

Esurance and Encompass had combined ratio improvement in the quarter where compared to the prior-year quarter, but more work is required to improve returns in these two brands.

Our third priority is to focus on returns in homeowners and annuity.

We continue to make progress on raising returns in homeowners with an Allstate brand homeowners combined ratio of 65.3, with an underlying combined ratio of 61.8, which is 4.4 points better than the prior-year quarter.

With the underlying combined ratios tracking towards the low 60s for the last several quarters, we believe we are now positioned to focus on building a sustainable competitive advantage in homeowners.

Annuity returns improved in the quarter, but the long-term outlook is still challenged by low interest rates.

Given our favorable strong underlying results for the quarter, it is reasonable to ask if we will end the year below our 2013 annual outlook of 88 to 90.

We believe annual outlooks are the appropriate way to manage expectations of profitability, so we are not providing a change to the range for just the fourth quarter.

We will announce an outlook range for 2014 when we report the full results for this year.

Our fourth goal is to proactively manage investments.

Net investment income benefited from higher income on our investments in limited partnerships in the quarter.

We continue to position the property-liability portfolio with a shorter duration to mitigate the impact of rising interest rates, and Steve will take you through some graphs that make that very clear.

And while this action generates current capital gains and lowers our risk profile, it obviously reduces the portfolio yield and future operating income.

Total return for the quarter was 1% on modestly higher net investment income and really minimal changes in the overall valuation of the portfolio.

The fifth priority is to reduce our cost structure so we can give customers greater value with a differentiated offering.

During the quarter, we reduced the cost structure through simplification and process improvement initiatives.

We also restructured our employee and retiree benefit programs to make benefits more consistent amongst employees and adjust to current market practices.

Our property-liability expense ratio increased in the third quarter compared to the same period last year, but has sequentially improved since the first quarter this year.

Investments are being made in technology and to expand Esurance's geographic and product footprint.

Now, let me turn it back to Steve.

Thanks, Tom.

On slide 5, we provide financial highlights for property-liability and Allstate Financial.

Property-liability had earned premium of $7.0 billion, which grew 4.1% from the third quarter of 2012, with a combined ratio of 90.0.

The underlying combined ratio for the quarter was 86.9, 0.9 points better than Q3 2012, and the year-to-date underlying combined ratio was 87.2, better than our full-year outlook range.

Catastrophe losses were $128 million, $78 million below the third quarter of 2012 and the lowest third-quarter losses since 2002.

As a result, net income was $656 million in the third quarter, 2.7% higher than the prior-year quarter.

The combined ratios on a recorded and underlying basis for each brand are shown on the right side of the exhibit.

The Allstate brand continues to generate solid profitability, as the positive effects of rate changes and low catastrophe losses more than offset the modest increases in loss costs.

The Encompass recorded combined ratio for the quarter improved from the prior-year quarter, reflecting favorable reserve re-estimates.

The Esurance combined ratio of 116.8 improved 1.7 points from the prior-year quarter; however, it remains elevated, as Tom noted.

Allstate Financial, on the bottom left, had a 3.7% increase in premiums and contract charges in the quarter, compared to the third quarter of last year, helped by underwritten products increasing 4.4%, including an approximately 10% increase for Allstate Benefits.

The benefit spread declined in the quarter due to an increase in reserves related to our annual review of reserve assumptions, partially offset by improved mortality in life insurance.

The investment-spread decline reflects a $169 million pretax gain in the prior year, associated with updating and input use in the valuation of certain embedded derivatives.

Operating income, which excludes this gain, improved 30.9% from the prior-year quarter, due to lower credit interest on spread-based liabilities and improved mortality in life insurance, partially offset by a higher charge associated with our annual comprehensive review of DAC and reserve assumptions.

The net loss was $360 million in the quarter, due to the loss on the pending disposition of Lincoln Benefit Life.

On slide 6, we provide net written premium and policies in force trends by brand and in total.

For total property-liability, in the upper left, net written premium increased 5.3% from the third quarter of 2012 and overall policies grew 0.8%.

Our strategy to provide unique products and services to distinct consumer segments is working, as both net written premium and policies grew for each brand, compared to last quarter.

Moving to the upper-right chart, total Allstate brand grew as standard auto net written premium increased 3.3% from prior year, while policies increased 1.1% compared to the third quarter of 2012 and 0.6% compared to last quarter.

Allstate brand homeowners net written premium grew 5.5%, while unit volume declined at a slower rate than last quarter.

The results for both of these lines reflect favorable trends in retention and new business.

On the bottom two charts, you can see the growth trends for Encompass and Esurance.

Both continued to grow, compared to the prior-year quarter, in both written premium and policies.

While growth trends have improved, we have maintained overall margins.

On slide 7, the charts on the left side of the slide show the earned premium and loss per policy trends, while the charts on the right-hand side show the combined ratio trends.

For standard auto, losses per policy increased at a rate just slightly higher than the earned premium per policy, as you can see in the upper left, where the blue line is above the red line.

Essentially, moderate increases in frequencies and severities were offset by rate increases.

The combined ratio for standard auto remained consistently profitable, as shown in the upper right chart where the red bar is generally around a 95 combined ratio.

For Allstate brand homeowners, shown in the bottom half of this slide, loss cost per policy decreased, while earned premium per policy increased, with the blue line substantially below the red premium line.

This resulted in an improvement in underlying combined ratio of 4.4 points to 61.8.

The recorded combined ratio for the quarter was 65.3, a 7.6-point improvement from the prior-year quarter, reflecting the improved underlying margin and lower catastrophes.

The combined ratio trends are shown in the lower right-hand chart, and you can see our underlying 12-month average is about 63, the lowest point in all quarters shown.

On slide 8, third-quarter investment results reflect actions we have taken to reduce interest rate risk in our property-liability portfolio, maintain alignment with Allstate Financial's changing liability profile, and reposition our public equity portfolio.

The carrying value of our portfolio totaled $80.5 billion, compared to $97.3 billion at year-end.

The decline is primarily in our core debt portfolio, reflecting the $12.2 billion reclassification of Lincoln Benefit Life's investments to held for sale due to LBL's pending sale, as well as lower fixed-income valuations, driven by the significant rise in interest rates since the beginning of the year.

The equity and owned component of our portfolio continues to grow.

We expect to earn higher, but more variable, returns over time on this part of our portfolio.

On the top of slide 8, you can see net investment income totaled $950 million in the third quarter and total portfolio yield was 4.5%, both below prior quarter, but better than the third quarter of 2012.

Low re-investment yields and a smaller asset base, driven by reductions in Allstate Financial's spread-based liabilities, resulted in lower income in our core debt portfolio.

The decline was partially mitigated by $36 million in pre-payment fees and litigation proceeds.

Our equity and owned portfolio continued to benefit from strong limited partnership earnings, which increased by $84 million compared to the prior-year quarter and more than offset the decline in the core debt portfolio income.

At September 30, 2013, limited partnership valuation included approximately $400 million of cumulative appreciation that has been recognized in our income, but has not been distributed.

This amount is carried on our balance sheet as an asset, but is subject to variability in the ultimate realization.

If cash proceeds are less than this valuation, it will negatively impact future operating income.

Moving to total return, the total return for the quarter was 1.0%.

Net investment income was the primary driver as treasury rates were relatively stable for the quarter.

And attribution of the change in net unrealized capital gains for the first three quarters of the year is provided on the bottom right of the slide.

The fixed-income valuation decline, driven by a significant increase in treasury rates, was the overwhelming driver of the $2.7 billion decline in unrealized gains for the first half of the year.

For the third quarter, positive equity valuations and realized loss activity offset the impact of the additional modest declines in fixed-income valuations as the net unrealized position held relatively steady.

Slide 9 depicts trends in our property-liability and Allstate Financial portfolios separately.

You can see a declining earned yield trend on our property-liability core debt in the graph at the top left, reflecting maturity reinvestment and our ongoing risk reduction activity.

Through our rate risk reduction actions, we have positioned the portfolio to be less sensitive to an increase in interest rates and a pullforward of future income through realization of gains on the sale of longer-term securities.

In the scheduled maturity graph in the upper right, the two declining red bars at the longest maturities represent that only -- reflect that only 15% of our current portfolio is due after seven years, versus 32% at the end of last year.

The current yield on intermediate corporates, which is our targeted reinvestment proxy, is approximately 1.75% to 2%.

Given the shortfall relative to the portfolio yield, maturity and sales activities have and are expected to continue to result in a decline in net investment income for the core debt portfolio.

At the bottom of the page, you can see that Allstate Financial's net investment income has declined as result of the managed reduction of the spread-based liabilities, a trend that will be accelerated with the sale of Lincoln Benefit Life.

Over the past few years, Allstate Financial's investment cash flows have been used largely to fund [liability] outflows, rather than being reinvested, so the portfolio yield has not declined as much as the property-liability portfolio.

Further, our future investment income will continue to be impacted by the pace of the liability outflows and reinvestment activity.

The exhibit provides a pro forma view of portfolio results, exclusive of LDL-related assets.

As you can see on the bottom left chart in the last column on the table, the core debt portfolio yield remains essentially unchanged, around 5%, but the investment income is approximately $140 million lower, excluding the LDL-related assets.

The chart on the bottom right shows the ongoing decline in the Allstate Financial portfolio as we continue to reduce spread-based liabilities.

Moving on to slide 10, we provide a roadmap of items that impacted the results this quarter.

Last quarter, we announced the sale of Lincoln Benefit Life, which is a business serving customers in the upper left customer quadrant with life and annuity products where we did not have a competitive advantage.

Lincoln Benefit Life is treated as held for sale beginning this quarter, with its assets and liabilities collapsed into separate lines on the balance sheet.

The estimated $475 million after-tax loss on sale is reported in loss on disposition on our income statement.

We expect this transaction to close early in the first quarter of 2014, subject to regulatory approval.

After closing, we will have lower financial risk and additional deployable capital of approximately $1 billion.

This capital will be freed up in Allstate Life Insurance Company, and a number of steps will be necessary for us to move it to the parent company post-closing.

As discussed last quarter, we made changes to our pension and postretirement benefits, which caused the liabilities to be remeasured in July.

This resulted in a change in our liabilities favorably impacted shareholders' equity by $658 million; a curtailment gain related to changes in our retiree life favorably impacted net income by $118 million; and a pension settlement charge including operating of $49 million.

We will also perform an annual remeasurement of our pension liability during the fourth quarter and are likely to have additional settlement losses of a similar or greater magnitude at that time.

Our annual review of the discontinued lines and coverage reserves resulted in a negative after-tax impact totaling $86 million, compared to a negative impact last year of $25 million.

This year's review resulted in a pretax increase to asbestos reserves of $74 million, environmental reserves of $30 million, and other exposures of $30 million.

I have already mentioned our annual comprehensive review of DAC and reserve assumptions to Allstate Financial, which negatively impacted operating income by $44 million this year, compared to a negative impact of $21 million last year.

Slide 11 shows our capital position at September 30, compared to the same period a year ago.

We remain in a strong capital position at the end of the third quarter.

This quarter, we returned $608 million to shareholders.

We repurchased 2.1% of our outstanding stock, or 9.8 million shares, and paid a $0.25 per share quarterly dividend.

We have $589 million remaining on our share repurchase authorization.

As we continue to execute our capital management plan, our balance sheet has changed, as we have previously described.

We issued $800 million of subordinated hybrid debt and $385 million of perpetual preferred stock in the third quarter, bringing our total preferred stock to $673 million.

Our estimated statutory surplus at September 30, 2013, is $17.3 billion in total, with $13.9 million estimated for the property-liability companies.

Holding company level assets were $2.8 billion.

Net income return on common shareholders' equity was 9.0% and 12.0% on an operating income basis.

Operating income ROE declined, due to higher capital levels at September 30, 2013, and lower operating income for the trailing 12-month period, primarily reflecting higher catastrophes caused by Superstorm Sandy in the fourth quarter of 2012.

Net income ROE declined primarily due to lower operating income in the loss and disposition of Lincoln Benefit Life.

Overall, a strong quarter, and we should make good progress on the execution of our customer-focused strategy and 2013 priorities.

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

(Operator Instructions).

Bob Glasspiegel, Janney Capital Markets.

It seems like -- first of all, let me wish Bob Block a speedy recovery, so we can beat him up and have fun with him again soon.

On the agent count, are we in the position that you could be able to grow that over the next three to five years?

Tom, what's your outlook there?

Bob, first, thanks for the comments about our own Bob.

He is listening, so I'm sure he will be happy to hear that you want to beat him up.

Let me make a comment, then I'll turn it over to Matt.

First, when you look over a longer period of time, three to four years, we knew we were going into this slow growth segment with trying to fix homeowners.

We knew that would impact auto, and we also knew that we needed to help our most successful agencies become more successful, and those that could not get there needed to find another way to earn a living and not take care of our customers.

So, we made a whole bunch of changes.

Some -- and then, of course, we always have turnover.

So we went down from, like, over 11,000 to, like, 9,000, as you point out, of agency owners.

And that helped build up the size of the average agency from about 1,800 policies to over 2,500, which gives them more skills capabilities, which gets to the other point that I would like to make.

This is really about the number of feet on the street we have.

So it is a number of agents -- agencies we have, as well as the number of people, licensed sales professionals, they have in their offices, and that number has continued to go up, in part because we have built a system which is very supportive of them, everything from new technology rolled out to the compensation programs to the way in which we help them grow their businesses.

So Matt can talk about the specific plans he has to grow, but I think you are correct in that we are in position now to begin to grow distribution in the Allstate agency channel.

Bob, it's Matt.

Thanks for the question.

As Tom said, we look at total sales professionals, including exclusive agents, our licensed sales professionals, our exclusive financial specialists, the Allstate independent agents, so we are looking at the number of points of presence on the street capable of selling the Allstate products.

But we are not just looking at it in terms of numbers.

As Tom said, we're looking at it in terms of numbers, productivity of those existing points of presence, and the geographic distribution to ensure that we have appropriate market penetration.

One of the consequences of shutting down the Allstate direct operation and shifting all of the Allstate assets, the Allstate brand assets, to an agency model is that various geographies in the past were covered by the direct operation and did not have sufficient Allstate agencies on the street.

That's part of the heartland.

That is part of pieces of New England, and so we have fairly aggressive initiatives underway to put points of presence where they need to be so we can appropriately serve customers throughout the United States.

So you should expect to see not only numbers improve, productivity improve, but the geographic distribution change over time as we analyze it from a market potential and a market penetration perspective, as well.

Thoughtful answers.

Just a follow-up.

You had year-over-year growth in PIF and Allstate brand auto, and certainly Esurance is showing good growth, so both of those units seem to be bucking the trend of the aggregators, which some of your competitors are starting to complain about.

Did you see that at all as an issue in Encompass or are you just less immune to the aggregators' impact because of your [parenthetic] product mix?

Bob, this is Tom.

I would say if you're talking about aggregators like Answer Financial, it continues to grow.

It, of course, has a relationship with Esurance where it takes a lot of the quotes that Esurance does not close and then gets those customers placed with somebody else so that we can still serve them, and as you saw, their premiums were up this quarter as well.

As it relates to each individual market, we are seeing the competition change in each segment, so many people in the lower left with the Allstate agencies are starting to pursue similar strategies to us in terms of product differentiation and bundling.

In the Esurance side, you are not seeing people pursue the bundling, and we are just getting started there.

We just rolled out in one state homeowners, but Esurance has not only the potential of a good, low-cost model and an ever-increasing strength in its brand to be able to then broaden the product suite from there.

And Encompass has a specific focus, so rather than just try to sell standalone auto policies, it's really trying to sell both in auto and a home policy together, which is our package policy.

So we think getting the right customer value propositions for each segment is the way to compete.

Thank you.

Adam Klauber, William Blair.

Just following up on some of the auto questions, your new issued applications are up roughly 15% in the Allstate brand.

Could you talk about -- and that's a big jump from what it was a couple quarters ago.

What has driven that big jump in applications?

That's number one.

But also, number two, within those applications, are those more within your core preferred or is that moving more to the standard market for auto?

I will get Matt to talk about new business, but let me just point out that the biggest driver of growth in this quarter -- actually, this year in auto -- is retention.

So new business is obviously important to us, but the retention has moved up by about 7/10 of 1 point, so I will ask Matt to talk first about new business, but then he will probably want to talk some about the broad-based improvements we have in retention as well, because that's another factor driving your question or your comment.

Adam, it's Matt.

Thanks for your question.

As Tom said, auto growth this quarter and auto growth generally is driven in large part by increased new business and better retention.

On the new business side, what we have seen is roughly three-quarters of the lift came from improvements in our close rate and the remaining quarter is driven by quoting more customers.

So if you look at the close rate component, I would say the vast majority of that has to do with continued enhancement of our pricing methodology, our agency re-engagement, and increased home availability.

All of those combined to improve our close rates.

On the quote volume piece, it is certainly what we just talked about with Bob.

It's increased points of presence and it's re-engagement of the agency for us that is driving more quotes through the sales funnel.

When you get to the renewal side, we saw widespread improvement in renewal rates, but the majority of the improvement on that side, on the retention side, in September -- through September is a result of New York and Florida improvements.

Now certainly, it's not only those two, but those were the two biggest levers on the retention side.

A number of other factors, like increased homeowner availability, customer experience initiatives, we have much better rate management in place, so there is less rate disruption, and all of that has contributed to the retention improvement, as well.

So, I'm not asking for a prediction, but as -- particularly as your homeowner product becomes more competitive going forward, does that have the potential of continuing to pick up your standard auto retention going farther?

Certainly, without predicting, as I have said on a previous call, that 80% of our new house and home sales are coming with at least one auto, so it's a system, as we said before.

We talked about home availability impacting both the new business side and the retention side, since we are able to keep a stronger relationship with the customer.

But it is also customer experience, rate management.

It's the level of advice and service provided by the Allstate agency.

And of course, it's just sheer numbers of feet on the street capable of representing the Allstate brand and serving our customers.

Thanks a lot.

Jay Gelb, Barclays.

First, just wanted to circle back on the positive PIF growth year over year in the Allstate brand.

That's the first time, I believe, in about five years, so the question I have been getting is the sustainability of that trend, the positive growth going forward.

Morning, Jay, this is Tom.

I think if you look back over the last, say, eight quarters and do a trend analysis, you will see that the negative impact on homeowners peaked about a year ago at about 6.5% down by quarter in terms of the number of policies are down.

As we said, this quarter, it has come down to 3.5%.

And if you look at the trend analysis on price changes in homeowners, you'll see that has also come down.

So that trend line should continue, which as Matt pointed out is helpful to not disrupting our current customers, and then, in addition, as they roll out house and home, that should drive the auto line up.

So the auto line that you're pointing to has a similar trend line.

You can do the same kind of math.

If you just look at it, it has continued to go.

I think we should be able to, and our goal is to, pick up share in all of our brands, and we are clearly picking up share in Esurance and Encompass.

The Allstate channel is not yet to the point where it's picking up share in its segment, but I believe that the broad-based system and approach that Matt is taking will do that.

Okay, and then on loss cost trends within the Allstate brand standard auto, it is the second quarter of losses exceeding earned premium growth, and both frequency and severity were higher in 2Q.

I am just trying to get a sense of what's driving that.

Matt can talk about profitability management specifically and what he's doing there.

A couple of general comments I would make is that, first, frequency bounces around a lot, as do paid severities, in BI in particular, depending which cases you are settling, and we feel good about the reserves we have up, which are a little different than paid.

So we feel good that we have accurately reported the profitability, and frequency is just within its normal range.

But Matt can talk about what he does to adapt to that going forward.

I would say we have, though, an organizational system, which over the last 10 years, if you look at our profitability in auto, we know how to adjust and adapt, if you look back at our performance.

Matt, you can talk -- will talk about what he does with the specific trends you're talking about, and he may have some comments about specific places he is working on.

Sure.

So as Tom said, we looked at it fairly carefully.

We are confident it is not a quality of business or a systemic issue.

It is normal volatility.

It is within our three-year historical ranges and it's within our expectations.

We manage to the overall combined ratio targets, knowing that the individual components will move over time.

One of my favorite sayings, and one of the ways we manage this business, is you can't stop the waves, but you can learn to surf.

And that is how we think about it.

The waves are the normal volatility in the business.

It's movement of BI, it's PIF fraud, it's economic changes, it's competitor actions, it's weather changes.

And we're set up not trying to fight those waves or not trying to prevent them from recurring, but to ride them.

And so, we use pricing, we use sophisticated pricing methodologies, we use rate actions, we use underwriting actions, we use process changes, and most importantly, we use our 14 market operating committees, and 15 including Canada, to give us early warning and detection of the movement of those waves, so that we are able to react appropriately to them, quickly get out in front of them, and be able to ride them.

In my opinion, having watched this team over the last several years, is we have a bunch of tremendous surfers out there, who are very good at reading the waves and getting on top of them, and I think the team overall does a remarkably good job of managing that.

So these ins and outs in volatility, frequency, and severity, while we always explore them and research them to make sure they are not systemic, they do not concern us.

Okay, and then, a separate one for Don.

In terms of getting the freed-up capital from the sale of Lincoln Benefit Life up to the holding company for share buybacks, how quickly could that occur?

Jay, this is Tom.

That's really a question for Steve, I think.

Okay, so first, we have to close the deal, which is, we believe, early first quarter of next year.

We have dividend limitations, which we will have to get state regulatory approval to actually move the cash up to the Allstate Insurance Company, and again, from the Allstate Insurance Company up to Allcorp.

There are other alternative ways we might be able to move the capital through a repurchase of some of the equity ownership of Allstate Life -- from Allstate Life by Allstate Insurance Company, which could get us up another level, but we still have to pay dividends up to Allcorp.

So, it all requires regulatory approval is the bottom line.

We're in a strong capital position, so we're hopeful that when we apply for that, that we'll get favorable results.

All right, thank you.

Mike Zaremski, Credit Suisse.

First question, Tom, in regards to the goal of reducing Allstate Protection's expense ratio over time, I was curious if the major initiatives to drive that decline are already in motion, because I know there's been a lot of expense initiatives.

And related, is part of the reason for the initiative due to the desire to bring Allstate's costs down closer to competitors who are gaining market share?

Mike, a couple of things.

First, I would say we're always trying to reduce expenses around here, so the challenge we have had in reduce -- and we have done that over the last four or five years.

The challenge we had in terms of the expense ratio was that the topline was going down, so you had to reduce expenses faster than your topline was going down, particularly when it relates to the number of policies you have so we weren't offsetting inflation in terms of our other costs.

So that was our first challenge.

Second, what are we doing now?

We are continuing that.

We have a different approach to it, so we are really looking at more continuous improvement actions to continue to take costs out.

Our costs, though, it depends how you slice and dice it.

We look at it by segment, and so when you look at the lower left, that's a different cost structure than the lower right, and when you -- so if you're looking out, you have to really look at the costs relative to State Farm, Nationwide, Farmers, because those are the people writing the same kind of value proposition.

So you can't say that the agency expense is too high because the agency does a lot of work, and our customers love our agencies and they're happy to pay for our agencies.

Those customers on the lower right want to do it themselves, and so you have to make sure your expenses are right there relative to Geico and Progressive Direct.

So we look at the expenses relative to the customer value proposition that we deliver to people.

When you look -- we think we can do a better job in all of our segments, so there's lots -- we always should be able to take costs out with the improvements in technology, data management, and global sourcing.

So that's part of why we are saying it's part of our effort, which is we're supposed to deliver good value for our customers.

When you look at it by component, and if you look at advertising expenses, we think we are very efficient and effective, whether that's our quote rates that you heard are up or it's the close rates at Esurance.

So we feel good about the advertising promotion.

When you look at technology, which is another large component of our expenses, we actually, I think, were in the top quartile, in terms of best, in terms of cost per line of code delivered, because of the way we do it.

That said, we think there are ways we can simplify our processes.

We still have too many processes that are legacy based and too much what I just like to call built-up wax, so you should expect our expense ratio to come down over time.

I would like you to think about it relative to the customer value proposition that we are delivering, not just who is growing and who is not growing.

Okay, that's very helpful and thorough.

Last question is in regards to investment income levels.

You guys give great disclosure; thank you.

But there is still a lot of moving parts, so I was hoping to get some guidance.

So in the 10-Q, there looks to be about $56 billion of assets maturing through 2014, between P&C and life, and if we -- probably at least 100 basis point lower -- higher yield than current new money rates, I'd guess.

And there is also a lot of life insurance spread-based liabilities moving off the balance sheet, so I guess at the end of the day, I'm just trying to -- if you net out everything together, what is the dollar amount of investments we should be sizing up as needing to be reinvested at potentially lower new money rates through 2014?

I will get -- Judy will answer the question on that.

First, I agree.

It's difficult to project investment income with what's both going on in the markets, what we are doing with Lincoln Benefit, and what we are doing from a risk and return standpoint.

So that is why we try to have as much transparency as we can.

The number sounds high to me in terms of what's rolling, and Judy will talk about that, but let me maybe just say our philosophy on this is we're going to make the appropriate risk/return trade-off for our shareholders, not do something just to maintain operating income so that we make somebody's estimates for operating earnings if it's a bad idea for our shareholders.

A good example of that is shortening that Steve showed you on the property-liability portfolio.

We could have had higher and would have had higher operating income this year, had we not shortened that portfolio.

We're not trying to trade interest rates.

We just didn't think it was a good risk/return trade-off to be longer than seven years, so we sold about as much of that as we could.

So as you are thinking about our investment performance, you should, obviously, look at how much we deliver in operating earnings per share, because that is what you and we are all held accountable for, but also think about it in terms of the total return and say do you think we are getting the right total return relative to the risk that we have taken.

Judy, can you take on the $56 billion number?

Sure, so not sure where you're getting the $56 billion number, but if you look in our notes, we do outline the maturity profile of the overall portfolio on page 10 of the notes, and in one year, it's about $2.5 billion.

In longer than one, less than five, it's closer to $22 billion.

Plus Steve also outlined for the property and casualty company in the presentation, that also shows what's coming off in the property and casualty portfolio, which is significantly less than the $56 billion.

When you think about what's going on in Allstate Financial, as Steve said and what we have said in previous quarters, that's largely a cash matched book.

And LBL really doesn't change that, the sale of LBL, so as Steve said, we are going to lose about $12 billion in assets under management when LBL goes way.

But that doesn't really change our maturity profile as much as -- I would think of it more as a cash matched portion of the book is going away and the balance of the portfolio stays largely in line with where it should be.

When you said the 100 basis points, that's about right.

Our portfolio yield at this point is a little over 3% and our reinvest proxy is investment -- is intermediate corporate, so that's about -- between 1.75% and 2%, so it is about 100 basis points differential, but it's not anywhere close to the $56 billion that you're mentioning (multiple speakers) run off.

Okay, I will check my math.

Thank you for that.

It's helpful.

Paul Newsome, Sandler O'Neill.

I wanted to see -- maybe ask about Esurance and whether or not some of the changes you have made and some of the things that you've experienced the last couple of quarters have changed your thinking about scale in that business, and whether or not your view of how big you need to get there has changed?

In order to be scale profitable.

Paul, this is Tom.

Make sure I understand the question.

Our view of scale, we think Esurance is of scale today, but we're more than willing to invest a fair amount of money in advertising, which we break out in the disclosures, which is more than it would support if you didn't want to grow it, but we actively think there's a great opportunity to grow the business because we have a unique value proposition, which we are continuing to build out.

So maybe help me think through a little more on the scale piece.

I guess advertising is part of that scale, right?

Eventually, the all-in costs have to get to the point where we are profitable.

Has your thinking there changed when we're going to get to the point where it's all-in profitable?

Yes, that's helpful.

Thank you.

I have a better sense for where you are trying to go with it.

First, we think -- we look at it in the way Don runs his business, and you can talk about it in a second here with Gary Tolman, is we have to have profitable lifetime value by customer cohort, so what we write in a particular year.

Given that you have large upfront advertising expenses, obviously the first year you lose money, and then you make money after because your advertising expenses are not required, really, for retention, so you have a large loss.

As it relates to the total P&L, what I have said to Don is as long as you are writing lifetime value business, which gives us a good return on capital, I'm prepared to keep funding the growth because it's a good economic deal for our shareholders, even if the advertising costs are such that they more than offset the earnings you get from retention business.

So I am willing to run an overall loss at Esurance as long as we are growing economic value for the shareholders.

We obviously could stop that at any time we wanted, and it would -- the combined ratio would drop down into a profitable standpoint.

Don, you might want to just talk about how you are managing and thinking about lifetime value.

Yes, Paul, first of all, I do agree with Tom.

I don't it's a matter of balancing scale and profitability.

It's more growth than profitability.

And so, with PIF up over 30% more than prior year, that gets called into question.

So when you look at the combined ratio that they are running, underlying is about 111.5.

Because of the accounting model, there are three things going on.

First is the advertising gets expensed upfront, as Tom said.

We run it, as Tom said, based on the lifetime value of the business we are writing, so we're running it for economics.

We take into account the acquisition cost.

That is running in line with what we expect.

Retention is running in line with what we expect, if not a little better, so we feel good about that.

The second issue is the loss ratio.

And I will be honest, the loss ratio continues to be a little bit higher than we would like.

Gary and the team are on it.

It's a few states.

We're taking the right actions on pricing.

If you look at the supplement, you will see we have been consistently taking pricing actions, where necessary, throughout the year.

So I feel comfortable we will get that back in line, but that's the second reason the combined ratio is high.

I think the third one is just investment in expenses.

We're building out states.

We are building out product lines.

As Tom said, we sold our first homeowners' policy last week in a bundled fashion.

Got motorcycle, we have got renters, and that requires a lot of upfront work to get those filings done and get the product ready to go, including technology investment.

So I feel good about that.

I feel good about the advertising response, a little bit of work to do still on the loss ratio.

But overall, all those things put together, so long as we are making money on an economic basis, we are going to continue to grow the business.

Paul, let me -- this is Tom -- let me maybe make one other comment.

If you look at the increase in premiums in average rates that we show in the supplement, you can see that in the Allstate brand auto, if you just add up the last four quarters, you can't really add them up, but it's easier math, but it's a little less than 2%.

If you look at Esurance, it's a little less than 6%, and if you look at Encompass, it's a little less than 6%, too.

So both of those latter two businesses, we believe we still have work to do to improve profitability in the auto business.

Not so much work that we want to shut growth off completely, but you may see growth in those two lines come down next year as we work harder to deal with the issue that Don talked about in terms of loss ratio.

At the same time, you should see the trend that Jay talked about in the Allstate brand go the other way.

And of course, remember that the Allstate brand, in terms of total items in force, is about 15 times the size of those two individually and, of course, seven to eight times the combination of them.

So we don't need as much growth, so if we give up X points of growth in Esurance and Encompass because we're trying to manage a loss ratio, we don't need nearly that percentage increase in the Allstate channel to get overall growth.

And we're trying to grow not only in each channel, but we are trying to grow the overall Company.

That was perfect.

Second question, and I actually know the answer, but I'm going to ask it anyway, the new accounting.

I have been asking everybody if they want to comment on the new GAAP accounting that's coming down the pike.

Are you talking about insurance contracts and IFRS?

Yes, sir, the new FASB proposal.

Sam has been actively involved in shaping that.

I think I would comment that it is not the answer you just gave us, which is perfect.

I'm going to write that down, Paul, that we gave you a perfect answer.

But we don't think it's a perfect answer.

Sam might have a view as to -- we have been very public about our statements on it.

Good morning, Paul, Sam Pilch.

Yes, we filed a comment letter with the FASB and the ISB last week and our view that the proposed accounting standards are radically different than the current.

In fact, there is very little carryforward, if any, from the current standards to the proposed.

The framework of the standards is to contribute to solvency measurement and performance, and have deviated from historical performance reporting for financial purposes.

So we have strong views that are different than proposed, and we advocate improvements to the current model, but not of any great significance, very targeted.

That respond to your request?

That's also perfect.

Thank you.

Josh Stirling, Sanford Bernstein.

So, good quarter.

New auto apps were up almost 20%, even though you raised pricing in standard auto by something like 3% last quarter.

Obviously, that's great.

You are not seeing much of a trade-off there.

But against this, folks like Progressive seem to be sort of selectively reducing pricing and Travelers is talking about a big double-digit reduction to auto new business.

And so, I guess that tees up two important questions.

The first is how does more competitive pricing in the independent agency channel actually affect you in your exclusive channel?

And second, I think driving a lot of this is people's -- companies talking a lot about price elasticity, and I am wondering what you think your elasticity looks like in the exclusive channel and how you think that compares to the independent.

Thank you.

Josh, I would go this way.

First, we don't think it's all about price.

If you are in -- if you go back to our quadrant, if you are in the upper end of the -- upper side to those, it's clearly more price sensitive because those customers are, like, just give me a name I recognize, so they tend to be a little more price sensitive.

We have tried to design our value propositions to recognize price is important, but that value is equally important.

We don't get as much leakage between independent agencies, pricing, and the captive channel.

When you look at where our business comes from or where it goes, there is not -- obviously, people who want local advice go to the same kind of person, but we don't see a huge amount of pressure.

If somebody in the independent agency channel takes their price down, we don't see a big change there.

As it relates to overall pricing, I would say we are sort of in line this year with our -- if you look at our top three competitors, top seven states, we look in line with those people, not a big difference.

Progressive might be at the low end; Geico and State Farm would be slightly higher, but in the range of hard for a customer to tell.

If you are talking about 0.5 points on $1,000 a year or $900 a year, you are talking about $5, so it doesn't really matter from a price elasticity standpoint.

As it relates to what other people do in the future, I think Matt described how we run our business.

We do the same thing in Esurance and Encompass, which is highly specific.

We watch our costs, look at our value proposition to make sure it's fair to our customers, so everyone --

And as it relates to Travelers taking a big decrease, I think theirs was also related to a different product.

And Don Bailey may have some comment, but I think you are starting to see more people move to product differentiation.

So if you look over a longer period of time, competition, first it was on sophisticated pricing, then it moved to advertising, particularly in the branded channels.

And now, it's moving to product differentiation.

That's helpful.

If I can ask just one more quick question, severity last year, everybody was generally concerned about it.

It led to a bunch of price increases.

Your guys' metrics, they are still going up, of course, but seem to be moderating a bit.

And there was some commentary coming from other companies that suggested maybe the severity spike that everybody feared hasn't materialized, and I'm wondering if you guys have any color around that or whether people are just reacting to noise.

I think I would go back to Matt's comment that to the extent we have cost pressures and we think they are real, we increase our prices.

If we think it is just noise, we don't.

If you look at our overall pricing, it has been less than 2% over the last 12 months, so we're feeling okay about where we are at.

Thank you.

Maybe do one more question.

Mike Nannizzi, Goldman Sachs.

Just on -- wanted to square the deployable capital.

So it looks like about $2 billion of runrate; LBL, $1 billion at some point in the future.

I remember you had talked about the preferred issue that you -- balance-sheet rightsizing you did late last year, creating another certain amount of capital, plus the HoldCo cash of about $1 billion.

Just want to think about, first off, how much of the preferred capital movement, capital generation, is yet to come, and how should we think about the right amount of liquidity you need to hold onto on a go-forward basis, once you clear all these decks, and then just one follow-up.

Thanks.

I will let Steve answer the preferred questions.

So on the preferred stock, we have issued somewhat over $600 million so far.

We are planning to issue about $1.5 billion, as the market allows over the next several months.

The proceeds of that will generally be used for general corporate purposes, but we do have $950 million of debt maturing next spring and summer and we need the cash to pay that down.

Okay, and then the timeline for the remainder of the -- how much cash should we think about you hanging onto at the Holding Company on a runrate?

Okay, this is Tom.

So Mike, what we do is every year we wait until we get the statutory -- we try to look at our capital plan in January, February, and then let shareholders know what we are going to do for the next 12 months.

So we still have about $600 million left on our current share repurchase program, so we are out buying that back.

And then, in February when we get done with how the year turned out, where was -- where is statutory capital, and then we look forward and say, how do we feel about earnings, profitability of the business, and therefore we then come up with a share repurchase dividend plan out of that, which is based on how much cash we think we need.

Obviously, we don't think we need $2.8 billion at the Holding Company, so maybe, let me actually close around that, which is to say if you just look at the quarter, a bunch of things have come together at the same time and they all happened to show up in the P&L, which really reflects our broad-based approach to try and drive shareholder value.

So we are -- we have been maintaining profitability in the auto business.

We've dramatically improved profitability in the homeowners business.

Obviously, this quarter with cats incredibly low, it really showed up, but we think it shifted to a more sustainable position, which gives us that strength, Mike, that you're talking about in terms of earnings power, in terms it gives us confidence to do it.

At the same time, we have made some strategic moves to -- which give us increased capital called the sale of Lincoln Benefit Life.

At the same time, we are working to improve the strength of the balance sheet by issuing things like preferred, really at little cost to the shareholders in terms of current earnings.

And at the same time, we are buying back a bunch of stock and paying what is a great cash-on-cash return to shareholders, which cash on cash is both dividends and then the shares we buy back, so it's a very strong sort of thing.

And we are going to be in a better position, I believe, at the end of this year on that.

And we still have plenty of capacity to fund the growth that you are now starting to see.

So we feel good about the way everything came together.

You wouldn't expect it all to hit the P&L all at once -- in one quarter, but it did, and we feel like we have been successful in driving shareholder value, which relates into increasing the value of your shares.

Thank you very much for investing your time to continue to learn more about our performance, 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.