Allstate Corp (ALL) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Allstate third-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Pat Macellaro, Vice President of Investor Relations. Please go ahead.

Thank you, Jonathan. Morning. Welcome, everyone, to Allstate's third-quarter 2015 earnings conference call. After prepared remarks by Tom Wilson, Steve Shebik and myself we'll have a question-and-answer session.

Yesterday afternoon we issued our news release, filed our 10-Q for the third quarter and posted the results presentation we will use this morning along with our third-quarter 2015 investor supplement. All of these documents are available on our website at AllstateInvestors.com.

Our discussion today will 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 2014, the slides and our most recent news release for information on potential risks.

Also this discussion will contain some non-GAAP measures for which there are reconciliations in our news release and our investor supplement. We are 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 after the call. Now I will turn it over to Tom.

Good morning. Thank you for investing time to keep up on our progress at Allstate. I will cover an overview of results and then Pat and Steve will go through the details. Our operating team is also here to provide additional perspective when we get to the dialogue section.

Let's begin on slide 2. We had good overall earnings this quarter primarily reflecting the continued strength of our homeowner's insurance business. As you know, we repositioned this business so the underlying combined ratio would support good annual returns even with high catastrophe losses.

This quarter we also benefited from lower catastrophe losses than this quarter last year. This continued strength in homeowners has also led us to reduce the capital requirements for this line which has now become a competitive advantage.

We also made progress in improving auto insurance returns. As you know, in the fourth quarter of last year the combined ratio on this business began to rise, which reflected an increased frequency of losses and higher severity per claim.

As a result we instituted a comprehensive program based on the business model and practices that have been highly successful really the last 14 years. That of course includes raising auto insurance rates.

For the first nine months of 2015 the approved rate increase, this is in absolute dollars, was about twice the amounts achieved in the average of the two prior years. That increase in improved rates has begun to be realized in premiums earned, but of course the impact will continue to increase over the next year as policies renew.

We also made underwriting standards more restrictive which has the effect of reducing the higher loss ratio new business. As a result Allstate brand auto policy growth declined to 3.1% with larger reductions at Esurance and Encompass.

Given the cost trends we and others are experiencing in auto repairs, there is also a heightened focus on both effectively and efficiently managing claim loss costs. We also reduced advertising expenses and took some other actions so that the underwriting expense ratio in the quarter declined by 1.4 points to 24.9.

Now all of these actions are well thought out. We balance short-term profitability and long-term economic value creation for shareholders. In addition, they are tightly integrated and implemented in a highly targeted and local manner.

The recorded combined ratio for the quarter was 93.6 which generated $491 million of underwriting income. The underlying combined ratio for the first nine months of 2015 was 89.1, that is slightly above the outlook we established at the beginning of the year of 87 to 89. We now expect the full year underlying combined ratio to be no higher than 89.5.

Common shareholders have received $2.6 billion in cash so far this year due in part to an 8% reduction in the number of shares outstanding.

If you move to the box on the bottom of the slide, operating income was $610 million or $1.52 per share, which is 9.4% higher than the prior year quarter which you can see in that little red box. Premiums earned were up 4.7% reflecting an increase in average premiums and a 2.3% increase in the number of items in force. The overall return on equity was 12% on both an operating and net income basis.

Let's move on to slide 3; we will go through the results for the individual segments. Our five operating priorities for the year are shown at the top and those have not changed. The Allstate brand in the lower left is our largest segment of course and it comprises about 90% of premiums written and serves customers who prefer branded product and value, local advice and assistance.

This business continued its moderate growth across all the product lines, as you can see from the first line in that box. Total policies in force are 2.5% higher than last year's third quarter. Auto insurance growth did decline slightly in the quarter, homeowners policy growth was up slightly and other personal lines policies grew at 3%.

The underlying combined ratio for this segment was 88.3, as you can see the red box at the bottom. Esurance on the lower right serves customers that prefer branded product but are comfortable handling their own insurance needs. Growth continued to slow in this segment and was 3.7% versus the prior year.

The reduction in auto insurance growth as a percentage -- absolute was not offset by the high percentage growth in other product lines such as homeowners insurance. The underlying loss ratio did improve and was 105.3 for the third quarter.

Encompass in the upper left, is the smallest segment that we underwrite for and competes for customers that want local advice but are less concerned about the choice of insurance company. Encompass primarily sells a packaged auto and homeowner's insurance policy through independent agencies.

This business has gotten smaller and policies in force are down 5.7% from a year ago due to lower retention and less new business. We took aggressive action to improve profitability in both auto and homeowners insurance. The underlying combined ratio was 90.9 for the quarter.

Answer Financial in the upper right serves brand neutral self-serve customers and competes in a relatively small segment of the market with aggregators such as Google Compare. Total nonproprietary written premiums of $443 million for the first nine months of 2015 are 11.2% above the same period in the prior year.

Overall operating results were in line with our expectations and we remain committed to increasing shareholder value by generating good returns, growing profits and providing cash to shareholders. Pat will now go through the property liability results in more detail.

Thanks, Tom. Let's start by taking a look at the property liability P&L on slide 4. Starting with the chart on the top of this slide, property liability net written premium of $8.1 billion in the third quarter of 2015 was 4.2% higher than the third quarter of 2014 reflecting the combination of policy and average premium increases predominantly from Allstate brand auto and homeowners.

For the first nine months of 2015 written premium grew by 4.5% while policies in force grew by 2.3%. Property liability policies in force were 34.7 million at the end of September. I should note this excludes 5.6 million Allstate Financial policies and 2.1 million Good Hands Roadside relationships.

Catastrophe losses of $270 million in the third quarter of 2015 were $247 million lower than the prior year quarter. Recorded combined ratio for the third quarter of 2015 was 93.6, which is 1/10 of a point worse in the prior year quarter. For the first nine months of 2015 the recorded combined ratio was 95.8 which was 6/10 of a point worse than the first nine months of 2014.

The underlying combined ratio for the third quarter of 2015 was 89.3 and the underlying combined ratio for the first nine months of 2015 was 89.1, both elevated over the results we experienced in 2014.

Property liability operating income of $550 million in the third quarter of 2015 was 0.5% below the prior year result while the $1.3 billion of operating income through the first nine months of 2015 was 5.9% below the first nine months of 2014.

Bottom of the slide contains growth trend information as well as a view of the property liability recorded and underlying combined ratio trends. Premium and policy growth trends are in the chart on the bottom left.

I mentioned the drivers of premium trend shown in the blue line earlier. The red line represents policy in force growth and shows the slowing policy growth trend that is being driven by auto profit improvement actions in all three brands. Policy in force grew by 772,000 or 2.3% from the third quarter of 2014.

The exhibit on the bottom right displays the property liability recorded and underlying combined ratios for the third quarter of 2015. Both the recorded and underlying combined ratios were impacted by higher auto losses in the third quarter of 2015 versus the prior year quarter.

Slide 5 highlights margin trends for Allstate brand auto and Allstate brand homeowners. The chart on the top left of the slide provides a view of quarterly underlying margin performance for Allstate brand auto.

Third-quarter results were impacted by higher frequency and severity than the prior year quarter resulting in a 5.2 point deterioration in the underlying combined ratio from what we experienced in the third quarter of 2014. On a sequential basis the combined ratio was 3/10 of a point higher in the third quarter of 2015 versus the second quarter of 2015.

The chart on the right highlights the trends driving the change in the underlying combined ratio. Annualized average earned premium per policy, shown in the blue line, is beginning to pick up momentum given rate increases implemented throughout 2015.

Average underlying losses and expenses per policy increased compared with the third quarter of 2014 influenced by higher frequency and severity but lower expenses per policy. Similar information is shown for Allstate brand homeowners on the bottom of the slide.

On the bottom left you can see the impact of low catastrophes in the homeowner's recorded combined ratio which was the 72.5 in the third quarter of 2015. The underlying combined ratio of 60.9 in the third quarter of 2015 was 9/10 of a point higher than the prior year quarter and about equal to this year's second quarter. On a trailing four quarter average basis the underlying homeowners combined ratio was favorable 61.8.

The components of the third-quarter homeowners underlying combined ratio are in the chart on the bottom right. Average earned premium per policy increased to $1,079, or 1.5% over the prior year quarter.

Underlying losses and expenses per policy increased 3% in the quarter compared to the third quarter of 2014, but the difference between premium and underlying losses and expenses per policy is essentially the same in the two periods.

Slide 6 provides an update on our multi-faceted auto profit improvement plan. Last quarter we discussed the four components of our plan to lower auto margins; three of them to adjust to higher accident frequency and one of them to adjust to higher claims severity.

First, we sought higher -- we sought approval for higher auto rates across the country in response to higher loss trends. Second, we implemented underwriting changes wherever we identified specific underperforming segments of business, including ongoing correct classification programs to accurately price policies. Third, we focused on claims operational excellence and precision given cost trends. And forth, we reduced expenses across the organization.

While these actions in total improve auto margins they will also slow growth. Detailed results for these initiatives are shown on the bottom two tables.

Allstate brand approved auto rate increases in the third quarter of 2015 were 1.6% of prior year end total Allstate brand auto net written premium or $277 million. This brings the total for the year to 3.4% or $600 million in net written premium. An outcome of these profit actions that auto growth in the Allstate brand is beginning to slow.

Property liability expense ratio decreased by 1.4 points in the third quarter of 2015 compared to the prior year quarter, reflecting expense actions taken across the Company. You can see the impacts by underwriting brand in the chart on the lower left.

The bottom right-hand chart shows the net written premium amounts generated by the auto rates we have received approval for in the first three quarters for the past three years for the Allstate brand. You can see the total we have implemented through the first nine months of 2015 is significantly higher than both 2013 and 2014.

We know that not every customer will renew their policy and that some customers will decide to change the level of their coverage which will result in lower levels of premium in aggregate than what is shown on this chart. This is common customer behavior and why we believe premium change is a key process that is enhanced by an Allstate trusted advisor.

Cumulatively the rates we received approval for in 2014 and through the third quarter of 2015 will be worth $816 million in earned premium through the third quarter of 2016. This analysis only includes rates approved through September 30.

We continue to evaluate and run our business on a local market-by-market basis, we continue to aggressively pursue rate increases and adjust our actions going forward to ensure appropriate auto returns.

Slide 7 highlights combined ratio and top-line trends for both Esurance and Encompass. The chart on the top of this page includes combined ratio results for both companies.

Esurance's recorded combined ratio of 106.5 in the third quarter of 2015 was 10.1 points lower than the same period a year ago given decreased investment in marketing, along with the 3.7 point improvement in the loss ratio. Esurance's underlying combined ratio of 105.3 for the third quarter improved by 7 points.

Encompass' recorded combined ratio of 101.3 in the third quarter of 2015 was 8.4 points lower than the prior year quarter and benefited from an 11.1 point decline in catastrophe losses. Encompass' underlying combined ratio was 90.9 in the third quarter and 92.7 through the first nine months of 2015.

As you can see in the two charts on the bottom of this page, growth is being impacted by profit improvement actions. In Esurance policies in force and net written premium both grew by 3.7% in the third quarter of 2015 compared to the prior year quarter.

These growth rates are lower than recent quarters given impact from rate increases, underlying -- underwriting guideline adjustments and decreased marketing in select geography to manage risk. Both new business and retention in Esurance have been impacted by these actions.

In Encompass net written premium declined by 3.5% in the third quarter of 2015 compared to the third quarter of 2014. The 5.7% decline in policies in force was more than offset by higher average premiums from increased rates and underwriting actions.

As with the Allstate brand, we continue to evaluate our results and adjust actions to ensure we are generating appropriate returns in both of these businesses going forward. And now I will turn it over to Steve who will cover Allstate Financial investments and capital management.

Thanks, Pat. Slide 8 provides an overview of Allstate Financial's results for the third quarter as highlighted on the top of the slide. Premiums and contract charges increased 5.1% when compared to the third quarter 2014 driven by growth in Allstate Benefits accident and health insurance business as well as increased traditional life insurance renewal premiums.

Operating income for the third quarter was $138 million, 10.4% higher than third quarter of 2014. The increase in operating income compared to the prior year quarter was driven primarily by higher returns on performance based investments which were partially offset by a higher mortality and a lower return from the fixed income portfolio.

We reduced the maturity profile of Allstate Financial's investment portfolio in the third quarter by selling longer-term fixed income securities that back long dated immediate annuities.

The proceeds from these sales will be invested over time in higher returning performance-based equity investments to improve the long-term economic results from this block of business. This will include private equity, real estate, infrastructure, timber and agricultural-related investments.

All of these investments are expected to deliver higher returns. The timing of those returns is difficult to predict and will result in a greater degree of variability in our earnings. Additionally, we will have to increase the capital allocated to this business.

While these sales generated net realized capital gains, investment and operating income will be reduced prospectively by lower yields on the reinvested proceeds.

Moving to investments result on slide 9, the portfolio total return shown in the chart on the top left was flat for the quarter. The consistent earnings from the interest-bearing portfolio were offset by lower valuations driven primarily by wider credit spreads, [disproportionately] on high yield bonds and a global equity markets sell off, as you can see reflected in the chart in the upper right.

The charts at the bottom provide investment income and portfolio yields for property liability and Allstate Financial portfolios. The property liability yield reflects prior duration shortening and ongoing investment in the low interest rate environment. The Allstate Financial yield is higher and is more stable due to its longer duration and use of its cash flows primarily to fund annuity reductions.

Slide 10 illustrates the strength of our capital position and highlights the excellent cash returns common shareholders received in the quarter and for the first nine months of 2015. We are executing our customer focused strategy from a position of financial strength and strategic flexibility.

Our deployable holding company assets totaled $3.1 billion at September 30, 2015. Book value per common share for the third quarter of 2015 of $47.54 was down slightly from the same quarter a year ago reflecting primarily reduced net unrealized net capital gains.

During the quarter we returned $920 million in cash to common shareholders with a combination of dividends and common share repurchases. We repurchased 12.9 million common shares for $798 million in the third quarter and have repurchased 8% of [beginning of year] common shares outstanding for $2.2 billion in the first nine months of 2015.

Since the beginning of 2011 we have repurchased 32% of yearend 2010 outstanding common shares representing an $8.2 billion return of capital to common shareholders. As of September 30 we had $1.1 billion remaining on our current repurchase authorization which is expected to be completed by July 2016. Now let's opened up the call for your questions.

(Operator Instructions). Ryan Tunis, Credit Suisse.

I guess my first question is just on the expense ratio here on Allstate brand. It was down over 1 point year over year and I think the previous guide was you were trying to get about 4/10 of a point from your expense save initiatives.

Does that imply that the expense ratio improvement should moderate from the point plus we saw this quarter over the next few? And I guess along those lines, if trend continues to be adverse, how much room is there to further cut expenses beyond the 4/10 of a point that you called out last quarter? Thanks.

The number should decline; it won't stay up at 1.4 decline versus prior year. There were a couple things that happened in there. First, we reduced advertising expenses in the quarter because we just don't want to grow as much. So there is no sense advertising if we don't want to grow.

Secondly, there were some incentive compensation adjustments, which were -- adjust to the full year which has really nine months worth of change in it versus the three months. But we can talk about the things we are doing, Matt can mention what we are doing to keep overall expenses in line. But it is obviously always a component of focus for us.

Hi, it is Matt, Ryan, thanks for the question. As Tom said, there were some one-time items that we saw in the quarter, but there are also some more systemic longer-term work that we have been doing.

In addition to the advertising cuts Tom referred to, we've had a multiyear effort on continuous improvement and process efficiency which is really starting to take hold now. And that has allowed us to get some increased efficiency out of the system, it allowed us to absorb some of the growth without increasing personnel cost. And we should expect that to continue long-term.

Some of the cost reductions had to do with some technology costs that we -- we slowed down some very long-term initiatives that we had while we retained the focus on the shorter-term ones that were essential to continuing to operate the business.

So as Tom said, we won't be able to continue at the current level, but we do believe that long-term there are some additional cost reductions and efficiencies that we can continue to drive in the business.

Okay, that is helpful. And then just shifting gears I guess on frequency, I figured I would try. I guess thinking back to last year I think October was when we first started seeing the elevated frequency trend. I was just wondering if maybe you could comment on how this October sort of compares to when we first started seeing it a year ago.

We couldn't comment on that, Ryan.

Okay. Thanks so much, guys.

Josh Shanker, Deutsche Bank.

So looking at the monthly numbers, Tom, do you see improvement in terms of the rates that you are getting in? How should we think about 4Q a little bit in terms of the trend and balance that with seasonality of 4Q?

And I know that you are not going to give us guidance for 2016 just yet, but I thought three months where you were confident you could probably maintain the 89% ceiling and I guess you are going to go in little bit above that. How should investors think about positioning themselves going forward?

Okay, you are correct in saying we will wait until the full year is printed before we do an outlook for next year. We are -- as you point out, we had -- about a year ago actually the frequency in severity started to take off. And as always, we are highly focused on maintaining returns on capital.

That said, we always try to do that with looking at the long-term economics. And of course that is driven by retaining customers, which leads to higher profitability and higher growth. So when you have a rapid spike in costs like that we need to obviously recover those costs quickly.

I feel very good about the pace at which Matt and his team are executing it, and Don and his business are going at it. I would say this the first time it is really happened across the country all at once in a long time.

That said we see this movie every year multiple times in individual states. So it is not like we haven't been through this movie multiple times before. We know what -- how to manage it, it does have an impact on growth which you can see more dramatically in the Encompass and Esurance brands than you see in the Allstate brand this quarter. You should expect to continue to see some impact on growth. That said, we are not doing it so aggressively that we are giving up long-term returns.

As it relates to the combined ratio and the guidance, obviously after the second quarter we were at the upper end of the range, we were at 89.1 versus a range of 87 to 89. We had a range of forecasts at that time and we said we thought we could be at the high end of the range. We thought we still had a chance to be in the range and we continue to work aggressively to try to achieve that.

That said, we did indicate we didn't think the low end of the range was achievable. Since then we have now printed another three months and we are now still at 89.1. And we also have a range of forecasts and when we look at that we said there are some outcomes where the fourth quarter could be higher so that we could end at the full year at 89.5 which is half a point higher than the upper end of the range before.

And as most of you know, the fourth quarter is historically quite volatile, particularly as it relates to winter weather. But we feel comfortable that all of our forecasts are going to leave us below 89.5.

So I feel good about where we are at. I think we are aggressively going after short-term actions. I don't think we are throwing out long-term value creation. That said we are getting after it because we know that the biggest driver to shareholder returns is return on equity.

That is great, Tom. And just about the winter weather in the fourth quarter. I mean I have thought about this a few times. I mean December may have some inclement driving conditions, but it seems to me that October and November should be pretty mild driving months.

How do you account for the difference maybe between fourth quarter and first quarter seasonality in the loss ratio? I would think that first-quarter winter weather would be worse than fourth-quarter -- or maybe I am not thinking about this right.

I would say there is a whole bunch of things that relate to that. Obviously you zoomed in on whether. In addition to whether there is the darkness. So, it gets darker earlier so more of the traffic is driven in the dark in the fall than -- and obviously in the first quarter.

But then you have whether, you have precipitation, you have near ice conditions versus ice conditions in the first quarter. So there is a whole bunch of moving factors there.

I tend to look at both of them and just say, they are both highly volatile, those are busy times of year when people are driving a lot and you do get more action so there is more range. I don't think anything -- I don't think there is any El Nino effect or anything like that that we are factoring in, it is just it is going to be what it is going to be.

Thank you for the answers.

Dan Farrell, Piper Jaffray.

Just wanted to talk a little bit more about the shift (technical difficulty).

Hey, Dan, we lost you.

Jonathan, let's go to the next question.

Sarah DeWitt, JPMorgan.

On the frequency trends has the absolute level of auto loss frequency stabilized versus the second quarter? And to what extent are you concerned that it could increase further and you will need to take rate increases to another level?

I will let Matt answer that question.

Yes, thanks for the question. Components of it have stabilized and components of it appear to still be volatile. And so at this point we are assuming the trend line continues to go up at its current levels. We have -- we would like to see multiple quarters at the same level before we call it as stabilized and take our foot off the rate lever.

So we continue to operate as if the frequency will continue. Our plans are to continue to take rate wherever justified and indicated and wherever we are able to in those states after we go through our examination.

So I would say that we haven't leaned back and relaxed yet and said it is all over. But it appears to be operating in a narrower range than it was I would say this time last year when we saw such an out of proportion spike in one quarter.

I would add onto that what you see are our numbers across the country. Matt and I were talking last night about how certain parts of the country have not had as big an increase as other parts.

So it is possible that while some portions of the country may level out, other portions may increase to catch up to where the rest of the country is. So we are, as Matt points out, our team is being very cautious about calling a victory.

Okay, great, thanks. And then on the last call I believe you said you thought you could get back to target auto margins of a 94% to 96% combined ratio in mid to late 2016. And now that you have one more quarter of frequency data do you still feel confident in that?

Sarah, I really member doing the -- yes, we can get to the 94% to 96% because we ran there for 14 years. I don't remember making a call on the quarter. I think the call on the quarter will be dependent on a couple things. The trend you just pointed out, which is we will have to see where that goes.

Secondly, as we increase rates we are having great success in doing that today. Our competitors are doing it. There is not a lot of noise in the marketplace yet. But if frequency continues to go up for two or three years obviously there will be increased scrutiny.

So, we have complete confidence that we can run this business with the margins that it has been run at historically. We don't have a good clean call as to when we will be at that level.

Great, thank you.

Alison Jacobowitz, Bank of America Merrill Lynch.

It is it Jay Cohen actually. I'd like to just follow up on the last question. The frequency you saw in the third quarter, is it fair to say it was generally within your expectations, you weren't surprised by what you saw?

Jay, it is Matt. Well, that is a tough question. As Tom just said, on a countrywide basis for the entire system I would say that is accurate. I don't think there was anything that caught us off guard.

There are state-by-state geographic fluctuations in there that do continue to intrigue us. I won't say surprise us. But we are trying to figure out why some of the fluctuations exist in certain geographies. But overall as a system-wide basis I think you are right.

My opinion, third quarter was very similar to what we had seen in second quarter from a frequency standpoint. I had actually expected or hoped that we would get a little more stabilization in some of the components. But it certainly didn't shock us or look to be a spike that was totally unexpected.

It also varies obviously buy coverage. So we were talking about BI, bodily injury, looks a lot like the level that it started to achieve in the fourth quarter last year. Physical damage tends to be -- is a little bit higher.

So as Matt points out, we're -- the good news is we have great visibility and transparency and we act to it. The bad news is, like all things in frequency, you can't predict it.

Got it. And the second question is what are you seeing your competitors doing now? Obviously some have talked about higher claims trends as well, others have not. Are you seeing a general broad competitor response at this point?

I will give you -- so from -- what we do is we look at our numbers. We make the changes based on what is happening to our book of business so that we can earn the appropriate returns. Matt, you might want to make a comment about what you are seeing in the marketplace.

Yes. As Tom said, we make the call based upon what we are seeing in that market and our rate need and indication. However, in every single case we also do run recent rate filings from our competitors to get a sense for whether or not we are out of sync or whether or not we should be looking closer at the numbers.

And what I have been saying as I look at those is that we have a broad range of our competitors taking very similar rates to us. It obviously varies depending upon their starting point. But we have seen several competitors taking much more in certain geographies and some less in others.

But on a countrywide basis I would say that we do not appear to be out of sync with our competitors, which is why in addition to the fact that our agents are able to help our customers manage through these premium increases, I think one of the reasons that retention has held and that our quote and close shows have held is because we are not alone in this rate taking.

Thanks for those answers, guys.

Dan Farrell, Piper Jaffray.

I apologize for the issue with the line. My question was with regard to Allstate Financial and some of the changes you are making with the shift in fixed income to risk assets. And I was just wondering what's the lag going to be in getting some of the income from those assets? I realize there will be more volatility.

And then secondly, you mentioned some additional capital being allocated. How do you view the ROE impact for that segment with the additional capital? Thank you.

I will provide some oversight as to the strategy and Judy can talk about the timing of income. So, Dan, we have about a $5 billion block of really long dated liability structured settlements for people who are severely injured, buyout annuities, immediate annuities that have maturities of 30, 40 years.

If you look at the right way to invest behind those liabilities it would be to, A, make sure you have enough cash that in the next five to seven years you have already got enough money to pay those people. But after that then you want to invest for long-term return.

And so, when we look at that second portion of the investment pool we said, given today's interest rates where they are we think buying 30-year bonds to satisfy those liabilities is not the right use of our capital. That we should invest in higher return assets.

They had more volatility on an annual basis, but when you look at the volatility on a 10- or 15-year basis it is actually lower than the volatility in investing in, in theory, lower risk assets like fixed income. In doing that though there is a higher capital charge from the regulators.

We have chosen to do the right thing long-term to generate capital for our shareholders and economics for our shareholders even though it requires putting up more capital and having a negative impact on return on equity now because we believe that is the right thing to do.

Judy can talk about the shift. So what we did is we sold a bunch of long dated bonds and had some capital gains and now Judy is going to get that capital reinvested into other investments. You might want to talk about the reinvestment plan and then how long it will take to get the money back.

Sure. As Tom said, we did sell some longer duration bonds out of the immediate annuity block. And initially what we are doing is we are reinvesting into primarily public equities and shorter duration fixed income.

The long-term goal, as Tom said, is to get it into performance-based assets which we like because it is a little bit more idiosyncratic, brings some idiosyncratic risk into the portfolio plus we underwrite each one of those investments and bring them into the portfolio, as Tom said, for the long-term.

The kicker is that it takes a while to get those investments, especially the ones that we really like, in this environment. What we are doing though, as I said, was initially putting it into this other mix, public equities and shorter duration fixed income, so we are ready when we do find those higher performing, more idiosyncratic investments.

In terms of timing, we have had some success over the past couple of years finding those investments. But what we're finding in this environment is that we are getting money back almost as quickly as we can put it out because the environment has been so favorable for realizations. But we are keeping our head down and trying to find them and we will continue to do that going forward.

So, Dan, we have made the choice that choose the best long-term economics. If that has a short-term negative impact on operating income, which this will, or return on equity that is the best choice for our shareholders because we believe in long-term generate cash, that is what drives shareholder value.

And we decide not to be -- make economic decisions based on keeping operating earnings per share up on a quarterly basis. But as long as we are transparent we have found our shareholders to be quite receptive to that approach.

Great, thank you very much for the details.

Bob Glasspiegel, Janney.

Good morning, Allstate. I am going to push Jay's question which Matt answered a little bit harder on your upping the range. When you were at Barclays in September, Tom, you said if you saw anything you would have made an adjustment by now, which I thought was sort of a pretty optimistic comment given that you had seen two months of the third quarter.

Was there something in September or October that caused you to now do it? Or is there something that isn't taking hold as quickly as you would like? I think all your actions are right and I have 100% confidence you are going to get the underwriting back. But just want make sure there wasn't anything in the short-term data that caused the change from the Barclays conference commentary.

Well, when we had the Barclays conference there was -- we had a range of protections and those projections were largely based off what we had seen through the second quarter. So even though we're a couple months into the quarter you don't have things like severity and reserve changes and as clean a shot as you would like on what the full year will look like.

Obviously you get three quarters of the way through the year you've got to have a pretty good sense of where the year is coming out. So the range has come in some, Bob, is what I would say. It has narrowed down. The frequency continued to be up in the month of September so that also impacted our view.

But I don't -- don't read it as a huge change from where we were before. I was very clear when we were at 89.1 for six months we weren't going to get to 87 because we didn't think we were going to run at 85 for the next two quarters after we had run at 89.

So I was very clear -- we're not going to be at the bottom end of the range. We still think we have got a shot at the upper end of the range. If I had a clear indication we were going to be above 89 at that point I would have said so. We didn't have a clear indication.

Now we look at it and say we have a pretty clean indication we are going to be below 89.5. Who knows what October, November and December will bring to us. We are constantly updating severity.

There are some things that are, in terms of severities, that whether it is on the physical damage side where given the dramatic spike in frequency it had both a stress on the number of people we have in the system and just the system itself -- body shops are busier, auto parts -- so, we had to kind of sort through what that was doing to cost. Matt and his team are working hard on that.

And then on bodily injury, as you know, those are long dated claims. So you want to make sure you get the reserves right. And we have given the bump the volatility in both frequency and severity in bodily injury we have had to look hard at those.

So we feel good about the forecast. I don't think you should read it as a huge change. We provide the outlook to give you a sense for where the business is. And as you know extremely well, it is not the only impact to operating EPS, so we try to just do it to give you a sense for the business.

Well, I had you at 89.3, so it certainly isn't a big change from my perspective. I just wanted to make sure there wasn't something startling in September that got you off your, if we had changed it we would have done it by now, comment.

If I could just pivot to life with a quick follow-up. What is the size of the redeployment and what is the yield loss?

So it was roughly $2 billion of long duration fixed income. And if you look at the portfolio yield on the portfolio, Bob, it is about [560]. These were longer duration assets of you probably should think of them as being a little bit higher yielding than the 560 overall yield. And then the redeployment into three-year corporates and equity. So you're probably looking at a proxy of around 2.25.

Great. Those are pretax (multiple speakers)?

Until we get the performance based assets into the ground.

Those are pretax numbers, right?

Yes.

Great. Thank you.

Cliff Gallant, Nomura.

I had a question about -- I think one of your competitors in some states are allowed something called premium trend pricing. I was wondering what your comment is on that as an underwriting tool, particularly in a time like this?

As an underwriting tool, Cliff, or as a pricing tool?

As a pricing tool.

Okay, sorry.

It is Matt, Cliff. I can say that we have evaluated the use of monthly rating factors in the past. We continue to look at it. In some situations when you have a slow and steady increase in the cost of insurance it works to your advantage.

In situations like we are in now where you have spikes in either frequency of severity it really doesn't do anything you can't do by just taking rate as indicated in those states. So we continue to look at it. We also know that not every state would permit it.

We believe that most of the states that permit it are file and use states anyway. So if we're on top of our indication, if we are monitoring it as we do on a monthly basis we should be able to do anything that that technique allows you to do and do it more targeted, more segmented in a more responsive fashion.

That kind of puts everything in an auto play mode. Ours is more of a hands on the wheel mode and that is what we believe is most appropriate in times of volatility and significant changes that we have as we do today.

Cliff, I think often it is interesting as we watch people analyze our results and other people's results. Everybody is looking for an answer to why -- like why yours, why theirs. I would say this is like this, one of these complicated 1,000 piece puzzles. There is a variety of things that we all do differently. The thing to look at really is the way in which Matt has talked about, the way we run this business in a highly targeted, highly local, highly analytical fashion.

We use as many tools as possible to compete effectively and get our returns back. So I don't think there is any one silver answer as to is it geographic spread, is it monthly rating thing, is it telematics. There is a whole bunch of things that go into this complicated business. I would just say we are highly focused on making sure we make money.

If I could be allowed a follow-up. I was curious with the accident forgiveness program if there any -- are you contemplating any changes to that? Do you think that that might be contributing to the frequency numbers?

No. I can give that as a short answer. It is just not used. It is not used to such an extent. It is priced appropriately. We monitor it carefully and that is not a causal factor.

Okay, okay. I'm sorry, I will ask one more. On Esurance, we've seen such a slowdown in the growth rate. And I'm just curious, how is that slowdown affecting the organization? I know sometimes when you have such a go-go strong growth Company and it slows that it can have an impact on how things work day-to-day.

Yes, it is Don. Let me try to address that. I think there is an interesting twist to the question on how it is impacting the Company. When we put two businesses together, obviously the strategy was to use Esurance to address the self-serve market that was still brand sensitive.

The business is roughly twice the size it was when we bought it. And we have been running it with an eye towards investing for that growth. So we've said consistently we are running it based on a lifetime economic value.

That said, the business is about twice the size now. So as a larger part of the Allstate portfolio, we do want it to get to the point where that size begins to generate appropriate profitability as well. So I feel really good about where they are as a business. They had a great quarter; they were on the right path. They have done a terrific job of getting, in spite of the drop in marketing, getting the Company still to grow.

If you look at their combined ratio and loss ratios, they had a really strong trend over the last few quarters. Loss ratio is down pretty dramatically again this quarter; expenses are down largely due to marketing. So I think they have done a good job.

Now having said that, they are still growing. They are still expanding states, they are still expanding products. In the Q we disclosed we have still got almost 2.5 points of investment in expansion of their business. So I don't view this as a business that should grow 3% for the rest of eternity.

I think this was an important inflection point to consolidate the gains we've had from a volume point of view and get the business to the point where operationally and from a loss ratio perspective, it was profitable. But we have not stopped investing in that business for growth in any way.

And so, if I circle back to then how does the team feel, I think they feel fabulous. They are proud of the combined ratios they are running, they are proud of the fact that they are still growing in spite of lower marketing and the focus on profitability. So, all in all we are delighted with what we set out to do in the last three or four years and where they are right now.

And I would say we have built a strong team there. So some of the people are those that we acquired to [Jonathan Atkinson] who runs it who has been there for a long time, run it well. The financial person has been there a long time.

We brought in some new claims capabilities, because Don pointed out you grow twice in size you've got twice as many claim people. Plus we have more Esurance eyes on Esurance cars as opposed to using third-parties. So I feel like this is actually a really good time to consolidate our skills and capabilities to go to the next level of growth.

Thank you for taking the questions.

Michael Nannizzi, Goldman Sachs.

Just wanted to just touch on the expense rate. Can you quantify, Tom, how much of the expense ratio increase was a reduction in -- expense ratio declined was a reduction in advertising?

Hey, Mike, that shows up in the Q, there is a table in the Q you can get to the specific number.

Okay.

Mike, I will tell you I don't think -- we cut advertising but we didn't -- we are not doing it in such a fashion that it hurts our long-term brand or our market position. We just felt like we shouldn't continue to lean in and advertise and drive quotes when we in fact we had tightened underwriting standards.

Got it. And then -- so, certainly, I mean, the expense ratio improved, the loss ratio is up, year over year it is up sequentially. I mean is that a lever that you feel like you can sort of continue to pull, like is this a manageable level of expenses for the enterprise to run at sort of in the near-term?

Well, Matt mentioned what we are working to do. I don't think you -- it will probably go up some over the course of time. We're not trying to -- it is not like we are -- we really are focused on making sure we do everything possible to get our short-term goals without throwing out our long-term growth or long-term strategy.

So whether that is technology, advertising, investing in expanding products like homeowners at Esurance or expanding our benefits business into Canada. We are pushing hard on all of those things.

So, I think you should expect to see us manage between those. Are we always focused on cost? Yes. Did we decide in this quarter because we take our outlooks seriously and we said let's just not spend the money if we don't need to. So we didn't.

Got it, okay. Thank you.

Paul Newsome, Sandler O'Neill.

This is actually meant as a little bit of a softball question. Could you talk about just sort of how the trajectory of improvement would happen for the price increases over time given the accounting for insurance and the fact that you have got a mix of six and one month policies?

I am just wondering if maybe people -- at least some people out there maybe have gotten a little ahead of themselves in terms of how quickly the underlying combined ratio improves given sort of the efforts that you are doing, just sort of the natural lag.

Paul, first I always think your questions are thoughtful. So there is two lines to look at if you go back to Pat's slide, there is a blue line and a red line. The blue line is the increase in the earned premiums. And of course what that -- it starts with the rate increases which we show on the bottom of that slide, then it goes through to what you actually write.

There is usually a little bit of leakage between there because what happens is customers raise their deductibles which actually improves -- still gives you the same impact as raising price, it just doesn't show up in the blue line, it shows up in the red line in that the severities go down a little bit.

But that you have it written and then it takes a while to come through earned. You can track those two written and earned and do some analysis of that and actually determine how it burns through. You could also do the same thing in between the rate taken. You could build a model that would help you on that part.

The trickier part of your question is what to do with the red line. And the red line is our cost, which is obviously frequency and severity, that bounces around obviously by quarter. So you have to kind of -- what we tend to do is smooth it with various portions of time, we look at it on the latest quarter, we look at latest month, we look at it over six months, 12 months. And you'd have to look at the frequency and severity.

I think it is unclear yet where, as Matt pointed out, let's just call it the top of frequency is. It is hard to tell, but what we do know is as long as it continues to go up our blue line will continue to go up.

If you look -- so what we tend to do is look at the difference between those and what we are trying to do is have the earned premium go up faster than the -- what we what -- the combination of frequency and severity go up. And you [can] see when those lines cross and when they cross then that is when you get the automatic drop in the combined ratio.

So, I can't give you a specific quarter because I can't -- none of us really know what will happen with the red line. What we do know is as long as the red line is going up so is our blue line. And our blue line should go up by more than the red line.

Thank you. And then separate question. I personally cover a lot of regional insurers and they seem to be mostly independent agent channel personal line type businesses there. They are similar and they seem to be frankly having quite a bit of trouble with a lot of scale issues.

Given that sort of environment, given what we have seen with frequency, any thoughts sort of longer-term about your independent agent channel, whether or not it needs more scale or not?

Well, it is a good question. First, I would start with the independent agency channel exists because there are some customers who don't really care which insurance company they have, don't necessarily have the highest level of trust in insurance companies and trust a local advisor to help them select between those companies and give them the right coverage because they don't want to do it themselves.

So as long as those customers exist the function and role of the independent agencies will continue to be important. That role over the last 30 years has gotten smaller; that used to be a bigger portion of the market. But it kind of leveled out at about 30% of the market or so.

As technology has helped people do more self-serve and that kind of stuff it could be under a little more pressure. But I think you will continually see people that don't want to do work themselves and don't necessarily have a trusted branded line that they want to pick from.

As it relates to scale on the independent agency companies that service that channel scale does matter. It matters more and more each year whether that is on data, technology, ability to negotiate lower cost with people.

So, I think you will continue to see a reduction in the share of small carriers really in all four of the channels, which is why we are trying to be an all four of those so we can leverage our scale across all of those.

That said, it is a slow process because many of the companies you're talking about tend to be mutual companies, over about half of the business is held by mutual companies. And they tend to have an extremely high level of capitalization. And so, they can wait a long time before they have to get out of the business. Okay we will take one last question and then we will wrap up.

Ian Gutterman, Balyasny.

Matt, do you view ISO fast-track data as a reasonable proxy for the loss trends you are seeing?

Reasonable proxy. I will get in trouble no matter how I answer that. We look at fast-track data. Ian, it is informative. I think it is directionally correct and I think it is -- it shows us -- it confirms for us what we are seeing in the marketplace.

But like almost every third party data source, and this is true for all the rate services that are out there, we look at those all the time. And there are some data issues with them, there are some reporting issues from certain states. So, I don't think that they are ever determinative, they are only good indicators.

Okay. The reason I asked is it -- the data seems to suggest that there is more of a geographic bias to what is going on than what you guys have suggested the past few quarters.

I was curious if you agree with that part of it. Has anything changed in what you've seen over the last quarter to suggest that maybe this isn't as uniform as you thought in the past, that maybe it is a little bit more in certain pockets like California and some other areas.

Yes, so, Ian, I don't think I ever said it was uniform, I said it was countrywide, but it varied by geography. And, yes, I do agree with that. I think as the Dowling report, the IBNR weekly from the middle of October talked about the geographic differences explaining much of the discrepancy in frequency trends across underwriters, I think we do see that.

We certainly see pockets. And Tom referred to it on this call already of pockets of geographies where the frequency trends are hitting harder than others. I referred to it on my last call too. Miles driven is not uniform across the country. And when you look at the Department of Transportation reports there are geographic differences of the miles driven, Northeast actually not up so much, other areas of the country up significantly more.

So, yes I do think geographic differences explain some of it. We see geographic differences. When I say it is countrywide, what I'm referring to -- it is widespread. It is not as if this is a localized issue where we did something wrong or we failed to implement a rating plan properly in a state. That is why I refer to the countrywide impact -- it is everywhere, but it is at different levels in each geography.

In a sense what we are seeing, you see the one movie which is the movie we report which has countrywide numbers, we have 50, 100, 200 movies we are watching and we adjust for each of those movies. So whether it is a particular state, a particular risk class or a particular product line, so we are always adjusting and that is the way our process and business model works.

Thank you all for your questions and insights. I will try to keep -- be respectful of your time. We just know we continue to balance both the short-term and long-term initiatives so we are creating shareholder value and driving a long-term growth. So thank you all and we will talk to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.