The Allstate Corporation (ALL) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Allstate Corporation Third Quarter 2010 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Robert Block, Vice President, Investor Relations. Sir, you may begin.

Thanks, Matt. Good morning, everyone, and thanks for joining us today for Allstate’s third quarter earnings conference call. This morning, Tom Wilson, Don Civgin and I will give some commentary on our results. Then we’ll open it up for your questions. Joining us for the Q&A are Judy Greffin, our Chief Investment Officer; Joe Lacher, President of Allstate Protection; Sam Pilch, Controller; and Matt Winter, President of Allstate Financial. During the Q&A session, we ask you that you limit yourself to one question and a follow-up so that we can hear from as many of you as time allows. As is our practice, yesterday, we provided our earnings press release, investor supplement, and filed our 10-Q for the third quarter of 2010. We also posted a presentation that we will be using on today’s call. All of these documents can be found on our website. As noted on Slide 1 of the presentation, this discussion may contain forward-looking statements regarding Allstate’s operations and actual results may differ materially. So refer to our Form 10-K for 2009, Form 10-Q for the third quarter, and our most recent press release for information on potential risks. Also, this discussion may contain some non-GAAP measures for which there are reconciliations in our press release and on our website. This call is being recorded and a replay will be available shortly following the completion of the call. Christine Ieuter and I are always available to answer any additional questions you may have after this call ends. Now I’ll turn it over to Tom Wilson for his perspective on the quarter.

Well, Good morning. Thank you for investing your time to hear about Allstate and the progress we’re making to deliver value for shareholders. I am going to start with a quick overview of results for the quarter. Then Bob will go through each business units, and Don will cover our investment performance, balance sheet and capital positions. Then we’ll open it up for your questions. In the third quarter we were again successful in executing strategy that creates shareholder value despite a weak economy. So, while we begin, go to Slide 2. In total, we generated $367 million in net income on $7.9 billion of revenue. There was an increase in net income of $146 million. That was primarily due to less realized capital losses this quarter than in Q3 2009. Operating income was $452 million or $0.83 per share, which was $86 million below the same quarter last year. And that’s a result of lower operating income from Allstate Protection, our property-liability segment. Property-liability had an underlying combined ratio of $89.2 million for the quarter, bringing the full year or the nine months up to $88.8 million. That’s squarely in the middle of our annual outlook of $88 million to $90 million that we provided in February. We did experience an increase in (inaudible) third quarter but remain comfortable with loss trends. Growing Allstate Protection is critical to our success. While we are able to largely maintain revenues from prior year levels, we need to generate more unit growth. The Standard Auto policies in force declined from $17.8 million last year to $17.5 million this year, as strong growth in new business in most of the country was offset by declines in several large states where we have taken action to improve profitability. These actions also had a negative impact on improving customer loyalty in the quarter. Since our major competitors also had declines in customer loyalty this quarter, it was really a missed opportunity for us to improve our relative position. Efforts to improve returns in homeowners and Encompass independent agency business also had a negative impact on growth. New business growth was a result of several things, it was up 2.4%; increased advertising a successful edition of the Mayhem campaign to our marketing programs and targeted pricing actions to improve our auto competitive position. Homeowners’ profitability remains a concern although progress is being made as our rate actions work into the numbers. Catastrophe losses this quarter were low relative to other third quarters, but we had no major hurricane losses. The amount of non-model cat losses remained at high levels. We continue to see price and tight underwriting standards while we deployed better risk management tools in order to generate acceptable returns. Allstate Financial continues to generate strategical reposition its business while raising returns. Operating income of $108 million was below the last two quarters due to several positive one-time items earlier in the year. Premium deposit volume was down as expected as we shift from spread-based businesses to mortality-morbidity products. Allstate Financial did grow both the worksite and Allstate agency businesses where premiums and deposits on underwritten products were up 33% and 2% respectively compared to Q3 2009. Allstate Financial also completed its focus to win cost reduction efforts. Investments had another great quarter from total return perspective as the portfolio continues to generate substantial [cache] and proven value. The net unrealized gain in the portfolio rose to $2.7 billion. This gain reflects lower interest rate and improved valuations on structured securities. While lower interest rates do translate into higher valuations, it puts pressure on operating income. We’ve continued to reduce our municipal bond and real estate holdings, which also puts downward pressure on operating income. Don will cover the impact to that in a few minutes. The net result of this operating performance was to raise book value per share to $35.48, that’s up 6.7% over the last three months, and is almost 10% higher than the year-ago. And now I’ll let Bob go through the results in greater detail.

Turning to Slide 3, here are the property-liability premium and underwriting income results. In the third quarter, we produced a net premium written of almost $6.8 billion, which was a slight decline from Q3 2009. Total net written premium for the Allstate brand increased slightly but was more than offset by a decline in our Encompass brand. Within the Allstate brand, our Standard Auto net written premium fell by 0.5% after small increases in the first two quarters of the year. Increases in new issued applications of 2.5% and average premium of 1.4%, both compared to prior year’s quarter were more than offset by a decline in retention resulting in the premium shortfall. Total units also fell 0.3% sequentially and 1.7% from third quarter 2009. Homeowner net written premium increased quarter-over-quarter by 2.4%. Increases in average premium driven by approved rate increases and retention were more than enough to offset the 4% decline in total units. The recorded combined ratio for the third quarter was 95.9%, 1.2 points higher than the third quarter 2009. The underlying combined ratio, which excludes the effects of catastrophe losses and prior-year reserve re-estimates was 89.2, right in the middle of our annual outlook range we provided at the start of the year. Catastrophe losses for the quarter were $386 million or a recorded basis. This result was made up of $371 million of current quarter losses in 29 events, $57 million of additional losses from events occurring earlier in the year, primarily second quarter hailstorms and a $42 million reduction of prior year reserves. While the catastrophe loss was much less than the first two quarters, it was still relatively high for the third quarter given the absence of a major hurricane loss. A few words on prior year reserve re-estimates. Besides the $42 million reduction in catastrophe loss re-estimates, the third quarter included a $22 million increase for discontinued lines, primarily for environmental reserves, as we completed our annual reserve study for the discontinued lines for the coverages. It also includes a $70 million litigation accrual charged to homeowners. On Slide 4, we provide a look at auto loss cost trends which in total remain within our expectations. On the left hand side of the exhibit, we provide the quarterly frequency results for bodily injury and property damage. In both cases, the level of frequency is elevated relative to the previous five years. In the upper right hand corner, we displayed the paid severity change over time. Here the results remain very good with only slight increases in the quarter. When these results are combined with those of the remaining coverages in auto, the result is a combined ratio that is fairly flat for the quarter compared to the third quarter of 2009. On Slide 5, we show similar loss information for Homeowners. On the top half of the exhibit you can see the frequency excluding catastrophe losses was 2.3% less than the third quarter 2009 results. The paid severity, excluding catastrophe losses, increased 2.1% compared to the third quarter of 2009. With the increase in average earned premium for rate increases working into the results, the underlying loss ratio, which excludes catastrophe losses and prior year reserve re-estimates improved again this quarter. We continue to execute on our profit improvement actions designed to get homeowners to an acceptable level of profitability. Shifting to Allstate Financial, Slide 6 displays the top and bottom line results for the last two years by quarter. The trends continue to reflect positive momentum in our efforts to produce higher returns, shift our focus to underwritten products versus spread-based products, and serve our customers through Allstate agencies, and the Allstate workplace division. Premium and deposits on underwritten products increased 8.6% compared to the third quarter of 2009, while annuities declined consistent with our strategic direction. Operating income for the quarter was $108 million or $13 million more than the third quarter of 2009. I would describe this quarter’s result as relatively clean in terms of one-off items. When we adjust the first two quarters of 2010 for these kinds of items, the operating income drops back to a range of $110 million to $115 million for those quarters. The benefit spread was slightly lower due to higher but typical immediate annuity benefits this quarter compared to the third quarter of 2009 which had favorable results for that product. The investment spread increased to $127 million reflecting decreased interest credited to contract holder funds, partly offset by lower net investment income. Operating costs were slightly elevated this quarter due to higher marketing costs and certain acquisition related expenses associated with growth in the workplace division premium. The expense reduction actions associated with the Focus to Win program initiated in 2009 are now substantially complete and the program has met our target. For the quarter, Allstate Financial recorded net income of $85 million versus a net loss of $38 million last year. Realized capital losses were significantly lower this quarter compared to the third quarter of 2009. At this point, I will turn it over to Don.

Thanks, Bob. I am going to cover our investment performance for the quarter, and the status of our capital position at the end of September. As you can see on Slide 7, the value of our investment portfolio increased to $102.2 billion in the third quarter, largely reflecting the benefit of the decline in interest rates during the quarter. We continue to be proactive in risk management activities and again this quarter, we reduced exposures in our municipal bond and commercial real estate portfolios while also protecting against an increasing rate environment. We reduced municipal bonds by $2.4 billion of amortized cost in Q3. The reductions targeted sectors and higher risk geographies. Commercial real estate reductions totaled $484 million of amortized cost and this was accomplished through a combination of maturities and prepayments with some offset due to refinancing activity. The total portfolio maintained a defensive position against interest rate increases. Reinvestment proceeds were placed in shorter duration instruments with derivatives being used to further manage the overall duration. That said, the continuation of lower rates in combination with our risk mitigation and duration management continues to adversely affect investment income. On Slide 8, you can see that net investment income fell to $1.0 billion, a 4.2% sequential drop and a 7.3% decline from Q3 2009. Property-liability investment income dropped 8.4% sequentially and 12.9% from Q3 2009 on reinvestment of the proceeds from our risk mitigation rate management and investing activities and lower yielding and shorter duration securities as well as the timing of equity dividends. Allstate Financial investment income dropped 2.2% sequentially and 5% from Q3 2009, primarily the result of a drop in average portfolio balances. Our return optimization program included purchasing high yield corporate and asset-backed securities which have only partially offset the significant decline in interest rates. We continue to focus our investing activity to optimize both risk and return opportunities. Net realized capital gains and losses shown on the bottom of the slide improved this quarter. We posted a pretax loss of $144 million compared to a loss of $519 million in Q3 2009. Other than temporary impairments were $167 million in the third quarter, less than half the amount experienced in Q3 2009. And they were concentrated primarily in the RMBS and CMBS portfolios. Trading activity and risk mitigation actions drove net realized capital gains from sales of $319 million in the quarter, $118 million more than last year’s third quarter. Most of the gains came from the fixed income portfolio, in particular, public corporates, municipal bonds, and agency paper. Equities contributed about a third of the gain. The derivatives loss for this quarter at $285 million was slightly better than the loss in Q2 2010 and $76 million better than Q3 2009. We added additional breakout on this page to show our derivative experience by key risk. Our interest rate hedges produced a loss of $181 million this quarter, a $100 million less than Q2 2010 and $219 million less than last year. These losses reflected the continued cost of protecting our portfolio from rising interest rates. Our equity hedges lost $115 million as equities rallied about the same as last year’s Q3. All these detail can be found in our 10-Q filing. On Slide 9, you can see that our unrealized net capital gain position improved by $2.3 billion on a pretax basis from Q2 2010 and is $5 billion better than Q3 2009. After tax and after-tax and DAC we stand at $1.3 billion, $964 million better than Q2 2010. Virtually every asset class participated in this improvement as we benefited this quarter from the declined interest rates and higher equity markets. The improvement in the portfolio valuation more than offset the cost of our risk mitigation programs. While our net unrealized gain position is clearly a substantial improvement from levels over the past two years in terms of our book value, the current low rate environment that creates this unrealized gain is also the reason we’ve been actively working to reduce exposure rates – increases in rates. Finally on slide10, we provide you with a look at our capital position on both the GAAP and Stat basis. Our overall GAAP equity climbed to $19.3 billion in the third quarter, a little more than 15% increase since yearend. Our current estimates of statutory surplus for Allstate Insurance Company and Allstate Life Insurance Company shows stabled increase in capital levels in these companies. During the third quarter, the holding company received a $400 million from AIC bringing the total for the year to $600 million. With that I’ll turn it back to Tom.

Okay, before we move to your questions, let me summarize the quarter, really with six items. One was disappointing, one was mixed and four were strong performance. Let me start with the disappointing. Our auto retention was down as we started managing in a couple of big states, that offset the benefits from more marketing and the result was that items in a forced and our standard auto business did not grow this quarter. That’s the disappointing part. The mixed, Homeowners is making progress although we’re still at a high level of (inaudible). In a good category our property liability combined ratio was in the middle of the range that we gave to you in February for both the quarter and the nine months. And this is – our auto combined ratio has been in the positive zone, that’s below 100 for over a decade. Investment results, we had great investment results, risk mitigation making a lot of progress on that and our return optimization obviously we’ve stated the right stuff as we get a good increase in the value of our portfolio. Allstate Financial is focused to win program is done, and it’s got a balanced approach of raising returns and book value is up 7% for the quarter and 15% for the year. So that’s a summary of the quarter. Let’s to turn to your questions.

Okay Matt, do you want to start the question and answer session.

Thank you sir. (Operator Instructions). Our first question is from Matthew Heimermann from JP Morgan. Your question please. Matthew Heimermann – JP Morgan Chase & Co: Hi good morning everybody. Couple of questions, first, just with respect to the policies in force and retention. Could you give a little bit more color maybe on those dates, if not specifically maybe generally that are affecting the retention, and also just would continue to be curious how much of the PIF decline your seeing is also tied to what also be a customer that potentially is leaving because of the homeowners underwriting actions. The second question I have was just on the G&A. I was curious if whether or not there was a tick up in ad spend just because it’s a falling cost for balls (ph) picking up and based all play etcetera. And then the last one quickly was just, there is obviously it’s in the press that America is potentially looking to (inaudible) you’ve been mentioned I don’t know if that’s realistic or not, but be curious what the strategic rational would be for that given its predominant property.

Well thank you Matt, good morning. I’ll take all three of those even though I think 50% of over Bob’s request. I can deal with the last one easier and then I’ll get Joe will take on the states – question of the state’s retention, what’s happening with homeowners both as we improve property bill and as we seek to increase cross line sales. On the (inaudible) we obviously don’t comment on acquisitions and if we were to buy it, we would have a strategic rationale for it, given that property is not a high focus area for us in terms of growth right now. I wouldn’t put that at the top of anybody’s list. In terms of ads, we’re doing quite well there. Not only is it just been fall proof policies, we’ve increased our spend to be more competitive as GEICO and Progressive increase their spend. And Joe, do you want to take the retention and growth?

Yes. From a retention in growth perspective Matt, we talked a couple of times in the last couple of quarters about some specific states where we’ve been targeting profitability, focuses, I think we’ll give you a little bit of an outline of it in the Q. We’ve seen some issues in the states we’ve pushed prices up a little bit, some underwriting actions. We see some of that rippling through new business in Florida and California. We see some of that rippling through retention in California and a couple of other states. It’s driven again by trying to get our selection mix from an underwriting perspective in the right spot and getting our pricing where we wanted to be. From a homeowner’s perspective, there is some impact but not a big impact on the homeowner’s actions that we’re taking. We have talked before about a preferred package discount that we’ve used from a pricing perspective that makes is more attractive to have your auto and home with us and that helps mitigate some of that issue. Matthew Heimermann – JP Morgan Chase & Co: Well I guess just to follow, it sounded like even that we’ve talked about some of these actions that PIF, in your comments at least it sounded like maybe it was a little softer you had hoped it would have been, so I guess if that – one is that true and if it is, I guess where – what types of accounts or I guess where is it general across the Board issue or it may be flipped a little bit more or is there some more specific kind of type of customer?

I’m trying to hone in on the part of the follow-up question. If you’re reading that it’s below our expectation from comments this quarter, I’m not sure that’s exactly where I’d say it is. We’re seeing a little more of a retention impact that we’ve seen in prior quarters and we’re seeing consistent trends on new business with what we’ve seen in the past. And it’s not a huge change in the retention impact, it’s a little bit.

Matt, let me just add one thing to that which is we believe in talking about results in total. We’ll be happy to give you the components of it to make sure you know we understand and you can have a better understanding. On new business, while its up 2%, there are many states where it’s up double-digits. So we just – so we think our marketing programs are working back to the ads program. And just we’ll give you the number in total. Matthew Heimermann – JP Morgan Chase & Co: That’s fair and I guess I would also argue that margins are important too, so.

Thank you, we think so. Totally agree with you. Matthew Heimermann – JP Morgan Chase & Co: Sure, bye.

Our next question is from Bob Glasspiegel from Langen McAlenney. Your question please. Bob Glasspiegel – Langen McAlenney: I guess if I could follow-up, good morning, I guess if I could follow-up to Bilbao (ph) question. You’re up to $3.5 billion of cash at the holding company. This acquisition in corporate development factor into where you would stand on initiating a buyback program?

Well I don’t know where this Bilbao drumbeat is coming from but it wouldn’t be us. Let me start with (inaudible) Bob because we all probably talk about it. We obviously have been doing good job of building capital whether that’s statutory capital or book value from a GAAP basis. We feel good about that. As we’ve said the first thing we use with the capital to make sure our business is sound and stable and in a good position and given the economy and investment markets over the last year and a half, we’ve done everything to keep ourselves in the right position and fully capitalize it. Second then we obviously try to deploy that in growth of the business. The easiest place to do that would be to do it or the less – the most opportune place would be do it by growing our business organically and we’d love to do that. We’ve also said if there are acquisitions that we think fit, we’ll do those. You’ve seen what we’ve done over time on acquisitions, so we’re not in the market all time buying all kinds of stuff. We do try to buy sensibly what we think will grow us to the workplace business. It was number three when we bought it, its number two now. We’re liking its trend. So we try to be smart about what we buy. And obviously then we return it to the shareholders. We’ve talked before about our dividend policy which I have my Board look at every quarter. We do that based on sort of a percentage of earnings. I think you should expect to continue to set dividend policy based on the amount of money we make. Then if we have capital above that, then we’ve always bought – buy a stock, where we’ve not announced a stock buyback program today. I’m not about to because I’m feeling we’re in pretty good shape but if you can look at our track record, I’m giving returning capital to shareholders, it’s been great. So I think you should expect a same philosophy to apply going forward. Bob Glasspiegel – Langen McAlenney: Okay, then to just to follow-up your stat cap little went up by I guess $600 million if we add back the dividends which was a decent bit more than your GAAP income this quarter. Do you have – what were the key drivers of the difference between stat and GAAP?

Are you talking about which entity? Bob Glasspiegel – Langen McAlenney: The insurance companies.

The insurance company had an improvement in the unrealized position as well. Bob Glasspiegel – Langen McAlenney: Okay. And that that through the stat capital and the unrealized.

Yes, we had – remember we pick up the improvement in equity at AIC. Bob Glasspiegel – Langen McAlenney: Okay. Thank you.

Our next question is from Keith Walsh from Citi. Your question please. Keith Walsh – Citi: Hi, good morning, everybody. I guess first for Joe, I saw the press release a few weeks back about the Idaho service center. And I just want to know if this is more indicative of a maybe a more aggressive push into the directs market, maybe you could put a little color around on that why you’re opening that up, and maybe just update us on direct? And I’ve got a follow-up.

Okay. Let me maybe talk first about the call center. We obviously have opened a call center in San Antonio. We opened one in Idaho just recently. That’s in part because not only we do direct business, but we handle all kinds of the service related work on behalf of our agencies, because people want to be there 24/7. And we’ve had an opportunity – we could open those anywhere in the world. We’ve been seeking to opening them in the United States at this point as we think it’s just the right thing to do. When you look at our customers, they say they will think higher of our company that – a better company that puts jobs in the US even if it costs a little more money. Now, of course, everybody wants a good price, so we have to make sure we continue to use the right kind of labor around the world, which we’ve been very active in. Joe, maybe you want to make a comment about the growth of direct and how it gets in.

Yes. And I’ll echo the same things. We use all our service center capabilities to service multiple channels, so this is not purely related to direct. We are growing our direct business and are enthusiastic about those prospects and continue to do so. I think we gave you a little bit of information in the Q. As you can see, that business was growing north of 15% for us in the quarter and we feel good about it, and we’ll continue to keep our marketing and our operational capabilities lined up to facilitate doing that more so. We want to service customers in the ways they want to be serviced and meet their needs and the value propositions that resonate with them, and that will continue to be a focus for us as long as it is for customers.

Hi Keith, this is Tom. I think sometimes – I’m going to reiterate, underline and expand a little bit about something that Joe said. When you look at – the key thing is to look at the customer segment and say what is it that they want and make sure to you’re delivering. So there’s a whole bunch of customers who want a personal touch from somebody, who want a relationship, and we have a CC who can do that quite well with our agencies. There are other people who are more self-directed and wanted to direct. So we try to deal with customers as to how they want to – a lot of time as people get focused on distribution without focusing on the customer. We think you got to focus on the customer first, then figure out what distribution works for them. Keith Walsh – Citi: Okay. And then, Tom, my second question just more broadly, the inconsistency in the results is clearly an outlier to your peers. Can you help us understand why that is, because I’m just having a hard time with that? Thanks.

Maybe if you can give me a little clarification on inconsistency. Keith Walsh – Citi: Inconsistency, you got weather related losses this quarter. I didn’t see that out of TRV or PGR. The PIF numbers are clearly up and down sequentially when we look at it. The overall earnings results is just pretty inconsistent across the board. So we can go on and on offline if you want, but maybe we can start there.

It sounds like you’re frustrated, I’m sorry for that. What I can tell you is that we give you a combined ratio for the year that’s ex-cats in prior reserves releases, which of course are impossible to forecast. And we’ve been dead in the middle of that or as long as we’ve been doing. And so I feel good about 89.2. As it relates to catastrophe losses, when you are as broad as we are across the country, you subject to all those. So some of the companies you mentioned have a more narrower focus in terms of where their homeowners businesses. Keith Walsh – Citi: Okay, thanks.

Our next question is from Alison Jacobowitz from Bank of America. Your question please. Alison Jacobowitz – Bank of America: Hi, thanks. I was wondering if you could talk a little bit about the frequency in auto this quarter, it sequentially seems to spike up a little bit with 7% in a couple of areas. And also, if it’s possible, could you give us some color on the growth. I know that several states are holding you back. Can you clarify a little bit of this if you can where you are in that process or where you think are and when that pressure might start to ease up?

Why don’t – Joe, why don’t you take both of those.

Relative to the frequency, Alison, we are seeing a bit of an uptick in frequency. We are – continue to look at it. It’s generally spread across a broad set of geographies, across a broad set of customer vintages if you will, 10 year we have with customers, and across most ways that we can look at it. We are seeing a little bit of that spike, be an increase in claims that are closed without payments, which might be a little bit of a tail impact on some of what we’ve seen in prior periods. We made a big shift in our claim system over the past couple of years, which is at the – which is done basically, but it does impact some of the prior period claim practices. So a little bit of that frequency we think there might be some noise out of that. But even if you take the noise out, there is a bit of an uptick. We’ve seen some increases in gas purchases and miles driven which would be some correlation to that. I’m not sure where to point where we declared a long-term trend, but we’re watching it. Relative to the growth question, we don’t give forward-looking growth guidance or production guidance. What I will tell you is that we’re focused on over the long term growing our business. We are focused on preserving a strong track record of having very powerful margins and we’ll keep those two items in mind as we march forward. I think in the comments we’ve given you is that we’ve got new business up double digits in states other than California and Florida where we’re seeing new business decline year-over-year. We focused on some specific profitability actions in those geographies and that will work its way through the system at least the new business relative to the year-over-year. We’ve been talking about this for three quarters, so you don’t have a year-over-year problem in another quarter or a quarter-and-a-half, that’s just algebra. But in terms of where we’re projecting going forward, I’m going to avoid doing that. Alison Jacobowitz – Bank of America: Okay, thanks.

Our next question is from Paul Newsome of Sandler O’Neill. Your question please. Paul Newsome – Sandler O’Neill: Great, and good morning. I apologize if I’ve missed it, but the little litigation charge that was in home insurance what was that and maybe you could talk about the A&E charge as well.

I’ll give you a quick – Paul, this time, I’ll give you a quick uptake on the lawsuit and Don maybe you want to take A&E. As it relates to lawsuit it was a potential class action suit in filed in a state court. You’ll remember that they changed this Class Action Fairness Act which removed class action some state courts to federal courts, because we thought that we know that federal courts deal with them in a more balanced approach. This is one of the ones we had left that was from a state court, it was down in Texarkana, Arkansas. It was related to the way in which we calculate the amount paid to fix homeowners’ claims. A number of other carriers that work for us down in that court had settled claim, had settled their amounts at what we think are amounts higher than, and this actually would cover 48 states, because we won this issue in many any other states, just in this particular state court we thought it was better to settle and move on.

And on the A&E Paul, we do an annual analysis of those reserves. And we – as in previous years, we did it this year and added about $18 million. Paul Newsome – Sandler O’Neill: Any reason for that?

No particular reason, no. No specific reason.

It may sound like we’ve got some big claim out there or some are worried about. As you remember in the environmental thing, I think about 65%, 70% of its – they’re incurred by not reported. So off the amount we have up for environmental, we don’t actually have specific claims. But if you’ll look at the trends what comes in, what you have to payout and you make changes. And in this day and age, you put a point and you see it. Paul Newsome – Sandler O’Neill: I’d like to if you could focus on the Encompass brand and the efforts that – a little bit more in the efforts you are trying to make that more profitable and maybe talk a little bit about the sort of the long-term viability of that operation. This has been I believe a certainly a not less profitable in the core business for as long as I can remember.

Paul, let me have Joe take that as to where it say. But let me just say from a standpoint, remember we bought that business back in 1999, we’ve looked at it every which way to Sunday and we’ve had a good return on that business because we bought it so cheap. Paul Newsome – Sandler O’Neill: Cheap is good.

So, when we look at it, Paul. I would encourage you to think about the Encompass business right now is having sort of two parts in it. There is core target that it has long been its target of a bundled auto and home targeting sort of a mass affluent customer base below the real high end that you see in some high value at homeowners players. And we do well in that product. It does – it’s positioned well inside of agencies, they like the product, they like its performance. We sit into a well-defined niche there. And broadly, are happy with the performance, on any given day, any given quarter we might want it do a little bit better whether its growth or profitability. Then there is a second part of the business, a couple of years ago we tried to expand our targeting to produce more auto business through that brand, we ended up adding groups of agencies that were more specialize in auto, broaden the product capability to target that monoline auto. And it sounds that our approach both for a combination of distribution and a combination of how we priced and structured the product and managed the underwriting wasn’t effective in that marketplace. And it hurt us from a profitability perspective. What you’re seeing right now running through the numbers is the impacts of unwinding that latter part of the book of business. Now as we do that it had a little bit of ripple over effect into the quarter. So that’s getting splashed with the cleanup if you will, as we move through that we will continue and are continuing to focus on the core niche were Encompass has been effective. I’m very confident that we can be effective in that space, grow that business, make reasonable returns on it. And then it’s something that’s desired by independent agents as distributor and has a customer proposition. We just have to finish the cleanup of that auto specialist strategy. Paul Newsome – Sandler O’Neill: Is this split 50-50 or is it, how big is one versus the other?

It got as big at one point as close to 50-50. I’m going to decline to give you the specifics on exactly where it is right now. Paul Newsome – Sandler O’Neill: Okay, thank you.

Our next question comes from Cliff Gallant from KBW. Your question please. Cliff Gallant – Keefe, Bruyette, & Woods: Good morning. Two questions, one the ad spending, the elevated level that we saw in the quarter. Should we expect that going forward? And then two, during the quarter State Farm had an announcement regarding drywall lawsuits and it looked like they were trying to move towards some kind of settlement. And I was wondering if you had any update on that issue?

Good morning Cliff. In terms of the ad spend you’ve seen us increase at this quarter because we felt that was worthwhile to take the risk and see what kind of growth we get, as long as we keep in growth out of it, we’ll keep doing it. When we think it’s not economic, then we won’t do it. As it relates to drywall, we don’t really have anything to talk about other than what we’ve said publicly before which is we don’t think there is exposure. If you’re talking about Chinese drywall, we don’t think there is just always we think to say product liability issue not a homeowner issue. Cliff Gallant – Keefe, Bruyette, & Woods: Thank you.

Our next question is from Meyer Shields from Stifel Nicolaus. Your question please. Meyer Shields – Stifel Nicolaus: Thanks. I want to drill down a little bit into a comment that you made about wanting long-term growth in Allstate brand. I know if we look back about a year a year plus, the capital was really constrained and I think that translated into a focus on maximizing current underwriting profits probably at the expense of growth. If I understand you correctly, is that concerned now waiting so that you can focus more currently on growth?

So it’s really a cap of question Meyer, let me take it which is if you have follow-up as to what you think, what Joe was doing up, we should go there as well. But as it relates to capital you’re correct in the assumption that we’ve – I don’t know that we felt capital was constrained, everyone has got their own word around that. But we ran comfortable with the economic or investment outlook really starting in 2008. So at that point we chose to protect margins at the expense of growth. You are seeing the consequences of that both in ‘09 and ‘10 as we try to work through that because this has long trends in it, you can’t sort it, because so much of our businesses renewal, it’s hard to kind of turn that thing on a dime. But you are correct in sort of what you see today. Do you have anything more specific on the growth that you want Joe to answer? Meyer Shields – Stifel Nicolaus: I think so, in the past you’ve given ratios of competitor rate increases, decreases in auto and how you saw that playing out. I’m wondering, whether that’s still trending positively?

Can you expand that a little bit, I’m trying to make sure I understand that how you’re asking the question. Meyer Shields – Stifel Nicolaus: I guess what I’m wondering is whether your expectation for the next, I don’t know short term, call it 12 months is that your competitive profile will improve due to other companies rate increases?

That becomes yes a hard one for us to say here in this environment and forecast for you both what we’re going to do from a pricing perspective and what other folks are going to do from a pricing perspective. I’d love at a date forecast it because we’d find that to be useful. But from a competitive perspective I think that’s a conversation could be tough for us to have here. Meyer Shields – Stifel Nicolaus: Okay, thanks very much.

Our next question is from Brian Meredith from UBS. Your question please. Brian Meredith – UBS: Yes, good morning. I guess just quickly here, the underwriting expenses are in the property casualty area up about 10% in the quarter, up 12% last quarter. Is that the ad spend coming through or is there anything else running through there?

Pension costs too. Brian Meredith – UBS: Pension cost, okay. How much of the pension cost addition?

I don’t think we disclose it but if you want to follow-up with Bob, I’m sure he’d be happy to give it to you. Brian Meredith – UBS: Okay, great. And then so quickly if I take a look at average rate and premium per policy, the year-over-year growth kind of decelerated in the quarter. Is that just a function of just getting more competitive out there from a rate perspective at Allstate? Is there something else that I am missing?

If you look at the, it’s almost a follow-up to the prior conversation, now we’re looking through the back windows. Brian Meredith – UBS: Yes.

opposed to the forward one. Yes, we’ve talked about it before and we have been a little more focused on being more competitive sometimes, in some cases that’s being taking rates down, in other cases it’s been not taking them up at the same rate we have before. And that the bulk of what’s driven through there. Brian Meredith – UBS: Got you. And then the last one, Tom you made reference to the customer loyalty kind of being down a little bit in the quarter. Can you talk about initiatives right now that you’ve gotten place to try to keep that kind of moving up, that are headed into other direction?

Yes, Brian same things we’ve been doing which is – first it was a down a little. Brian Meredith – UBS: Yes.

So you get into, I just think it was missed opportunity because everybody else was down too and we need to move it up because if we move it up, retention will go up. If retention goes up growth will go up and that will be good for all of us. The programs we have in place just to refresh your memory, we changed their reward system, so both our agencies and our employees benefit from higher customer loyalty. Agencies in that some of their bonuses pay down retention. Our employees and that the profit sharing plan is down, we switch it from profits to customer loyalty. So people for 1K matches dependent getting up. So we have the reward side. On the accountability side, we’ve continued to increase the accountability for results and if people don’t take good care of our customers and they can’t be part of our team. We also have a number of programs underway, underneath that to help us improve loyalty, everything from calling people doing protection reviews, calling them when their bill is late to having better and clear communication with watch themselves called insurance made simple. So there is a whole bunch of things we do along the way which support both accountability and recognition. One of the challenges we had this quarter was the benefit of all those programs, rewards, accountability and new initiatives did not offset the impact that reasonably large increases in price had in a couple of the big states. So as price goes up, obviously people get unhappy. And you have to make them even more happy and we just didn’t accomplish that. That said, we didn’t make as much progress in the other parts of the country as we need to. So it will stay a big focus for us. Brian Meredith – UBS: Thank you.

Our next question is from Vinay Misquith from Credit Suisse. Your question please. Vinay Misquith – Credit Suisse: Hi good morning. The first question is on the capital position. Stock capital has increased nearly $2 billion since the end of 2008, and your GAAP capital has increased $8 billion. Just curious about whether in fact that you’ve announced to buyback, has that been held back by the S&P negative outlook and are you waiting for that to be removed before you make them to announcement on that front?

Vinay, I’ll make a quick comment, and Don may want to make a comment as well. We are appreciative of the recognition that capital has gone up and we think it is a big thing and it should be driving shareholder value more than it is. And at current book value multiples, we are in my estimation a bargain. But as it relates to capital levels, we run it based on what we think, not what other people think. So our – we set up capital, we look at economic capital and we think we have plenty of economic capital. We have, S&P can have a negative outlook I’m not sure why given that we think we have excess capital as to obviously you and other people on this call. So their outlook is not keeping us back from doing anything, I don’t need their approval to buy back shares or pay dividend or do anything else. Vinay Misquith – Credit Suisse: Fair enough. So what’s rolling back from buying back stock right now?

Just that where we started, which is all things hit the right time. Vinay Misquith – Credit Suisse: Okay. The follow-up question is in terms of the actions taken to improve profitability, I think it’s had a negative impact our retention in California, Georgia, New York and North Carolina, and also in Florida. Can you give us a sense for what inning are we in terms of rate increases, or in terms of these actions taken to improve profitability?

I think Joe answered that which is we don’t look forward, we increase prices when we think we need to. There is a number of trends that are, each of our states is different, you remember in California we had to take some big decreases I think in 2008. And so we’ve not even back to where we were when we got started with this. In some of the bigger states that have personal injury protection, you’re seeing a number of industry things going on where fraud is way up in places like Florida and New York. So it’s hard to predict what inning you’re in. I can only tell you that our approach in what Joe and his team do is when they see a problem, they go and fix it. And we try to keep balance, we try to keep rate increases small as opposed to large and infrequent and we’ll continue to do the same thing in the future. Vinay Misquith – Credit Suisse: And on the homeowner’s side, the trailing 12 month rate increases seemed to be only 6%. Do you think that you would like to take a higher rate increase given that the combined ratio was 100% this quarter in homeowners?

I’ve been consistent in saying we need to get a better return from it. Vinay Misquith – Credit Suisse: Okay, and what’s the timeline that you propose to take rates up in that line?

We’re not going to go.

We don’t give projections on what we’re doing. Vinay Misquith – Credit Suisse: Okay, alright. Thank you.

It is useful Vinay that remember that the homeowners had the litigation settlement that ran through that number this quarter. So that’s a significant number we had. Vinay Misquith – Credit Suisse: Yes, that four points on the combined ratio and the combined ratio was 104.7. So even if you take that out, that’s a 100%. This quarter I don’t think it was a really bad quarter in terms of cash. So I am a little surprised that it was 100%. And so I was just wondering whether you plan to take rates up, say maybe 10% in that line to get it more to the high 80s, low 90s combined ratio.

Vinay, we’ve been very consistent saying we need a lower combined ratio, higher return and homeowners, I think actually when I summarized the quarter, I said that that was – it wasn’t in my disappointing, it was in my mixed category. It wasn’t at the four positives but we’re not there yet but it isn’t like you can just wave a magic want and all of a sudden charge people a lot more money given the regulatory structure and the customer relationships we’re trying to manage. So we try to do it on a balanced way. Joe talked earlier about the success we’re having with giving larger discounts on auto insurance to monoline, homeowner customers, that’s working quite well for us. So we want to do this is in a way that accelerates the overall growth of the company and both in terms of the size of the company as well as improve returns. Vinay Misquith – Credit Suisse: Okay, fair enough. Thank you.

Our next question is from Greg Locraft from Morgan Stanley. Your question please. Greg Locraft – Morgan Stanley: Hi thanks. I wanted to cover a couple of things. Number one, how are you feeling on the pension at this point in time, it was underfunded by over $1 billion at the end of last year?

We obviously have plenty of cash. So of course I would tell that we go good about the pension and that it’s an obligation of the company, we put a lot more money into it this year. And we obviously have plenty of capital to keep the pension hold. So it depends what you mean feel about the pension. We obviously would like returns to go up on that portfolio and we’ve had good returns so far this year but we’re like everybody else, we still suffer from the downturn in equity values that happened really last three or four years. Don, you have any other comments you want to.

No, nothing else. Greg Locraft – Morgan Stanley: Okay, great. And just if you could refresh, how much will you put into the pension this year and then how are you thinking about funding, from a company contribution perspective next year?

Let us follow-up on that Greg. I just don’t remember.

Yes, you can – we’ve funded when we needed. There is obviously a tax advantage to putting money in early and letting it roll but then the downside to it is you lose a little bit of investment income of the company. But you’re talking about our contributions have usually have been in the hundreds and millions of dollars. So I wouldn’t – it’s not a meaningful numbers in terms of the overall operating income of the company. Greg Locraft – Morgan Stanley: Okay, great. Second, is the debt level of the company, you guys have done a nice job deleveraging for several quarters now, how low do you think this could go? I mean I think your target is low 20s and it seems like you guys are getting pretty darn close to that right now.

I guess if you do the math on GAAP, that’s how it gets to deleveraging. If you do the math on economics, we’ve been right where we’ve always been and on GAAP its 23.5 when we all said that feels probably right, we obviously don’t have need for extra capital today. So we don’t need to go and borrow it down. It’s always looking at how he wants to optimize our capital structure and both that’s within the existing $6 billion of debt or any – whether he wants to move out of the things. And you’ve seen us do that over time everything from issue preferreds to debt and tied to overall capital of the company, because we don’t have any plans, we’re not announcing anything today as to what we’re going to do. Greg Locraft – Morgan Stanley: I guess I was just wondering, is that 23.5, I mean is there a governor below which you guys would, I guess take out more debt in order to kind of hold the ratio flat, or do you not – do you look at it more or less, you don’t look at it as much on a GAAP basis, is what you’re implying?

That’s right. Greg Locraft – Morgan Stanley: Okay, great. Last is on the investment income line, that was one of the ones that we were sort of surprised on. And I’m just wondering how do we think about modeling that going forward? How much is coming due or maturing and what does the new reinvestment rate looks like?

Judy is so happy, she got a question.

Yes.

Because she has been sitting here patiently waiting for someone to jump on it. Well we thought maybe Don had done such a good job of explaining to you, you didn’t have any questions. Judy?

So maturities are I believe disclosed on page eight of the notes. So you can take a look there and see what we’ve got coming off over the next several years. With regard to income and many factors affecting investment income. First, we’re in a low-rate environment, rates are down as everybody knows 100 to 150 basis points, 50 basis points in the quarter alone. We also have our proactive stand on risk mitigations and we’ve been doing that for a couple of years. We think it gives us a lot of flexibility in the portfolio better positions us going forward. We’ve been focused largely on commercial real estate and municipals for the past year or so. And I’d say that those programs are largely complete. We’ve also done some durations, shortening or duration management within the portfolio and this quarter in particular we took a hard look at the cash duration in the property and casualty portfolio and made some moves to shorten the cash duration, because we felt we were using a derivatives to a great extent more than we needed to in that portfolio and decided to bring down the cash duration and that impacted the income as well. And then just normal trading activity in this low rate environment also impacted investment income. When you look at how to manage it going forward, you talk to any portfolio manager that has fixed income in their portfolio, you’ve got a situation where rates are low, they could stay low for an extended period of time. And then you’re looking at less income as a portfolio manager. Rates could decline further which value of the portfolio would go up but you end up with earning less and then if rates rise, the values of portfolio could fall – would fall but you’d earn more income and I guess, the actions that we’re taking put us in a position where we feel that we have the flexibility to be proactive in managing the portfolio and driving shareholder value. Greg Locraft – Morgan Stanley: Okay, thanks, very thorough. A follow-up on that is the increase in the expense line that goes into this and this is just on the P&C side, is that because of the unwind of derivatives, or I didn’t fully explain how the lack of using derivatives caused this number to step down so much.

What expense line are you talking, are you talking about underwriting expense, are you talking about investment expense? Greg Locraft – Morgan Stanley: I’m talking about investment expense, it went up I think $3 million year-over-year which was a heck of a jump if you look at the last several quarters in the supplement.

This is Bob. Why don’t you and I talk about that offline and we can get behind those numbers. Greg Locraft – Morgan Stanley: Okay. So the two – the number you put up though is much more indicative of what the future run rate is going to be out of investment income and then we can model the maturities, and reinvestment rate per your guidance?

You can model it, I would take out per guidance. I mean as Judy said what we’re trying to do is manage for total return in an environment that could go flat out, go up, go down and we’ve shortened duration we’re staying on the balls of our feet so that we can move quickly, but and harvesting gains, because we’re not just writing it down and having the gains and have the gains go away if interest rates go up, we’re trying to protect ourselves if they do. Greg Locraft – Morgan Stanley: Okay, great. Thanks guys.

Our next question is from Josh Shanker from Deutsche Bank. Your question please. Josh Shanker – Deutsche Bank: Thank you. Given the pace of frequency trends in auto I’m wondering if the rate actions you have taken, prior are anticipating these frequency increases, or where we stand in terms of your current rate outlook related to what frequency is doing?

I’d love to tell you that we can look forward, six to nine months and figure out what frequency is going to do, but we don’t. The actions we’ve taken in the past are functions of what we thought was going on and maybe a short term view of where we think frequency might be headed. My comments before suggested that we’re seeing some of these increases in the relatively recent periods parts of them, when we look period-over-period we think are little bit attributable to the claim system changes we made over the past couple of years and parts of it appeared to be more broad and environment. And we’re going to watch and see what’s happening with those trends, see if in fact they are trends if they’re near term anomaly. And we’ll factor that into our pricing approach which will include all the things we talked about in terms of managing margins and thinking about how we run this business relative to the entire impact of the corporation.

Hey Josh, its Tom. In a longer-term basis, I think for 20 years, if you look at 20 years frequency came down as we’ve got safer cars and better drunk driving laws, older drivers, more cars per household. The whole bunch of things drove that trend. If you look over the shorter period of time, it looks much flatter. So that puts Joe’s comments in perspective, 2010 looks like 2007. Josh Shanker – Deutsche Bank: That’s good. And so thinking then about the competitive nature of the market with the rates environment where it is, coming into the New Year I’m sure you’re doing some budgeting. Given the seasonality of shopping behavior and I know you guys have a new ad campaign out there that’s running a lot. Are you planning on increasing the budget for advertising for first quarter ‘011?

That would be a competitive piece of information we wouldn’t want to give out. Josh Shanker – Deutsche Bank: Okay, well thank you very much.

Our final question today is from Sarah DeWitt from Barclays Capital. Question please. Sarah DeWitt – Barclays Capital: Hi, good morning. I wanted to follow-up about your appetite for M&A. Can you elaborate on this and talk about if you have any desire to expand internationally, because there have been some reports about Allstate being interested in RBS’s PNC business. Thank you.

Good morning Sarah, this is Tom. I’ll come back to what has been our stock answer for that which isn’t going to be very specific to what you asked, which is we look at everything that comes across the market, sometimes we got out proactively look for stuff, we tend to be relatively conservative in the price we will pay unless, and try to only buy things when we think we can add lots of values. So when bought the Workplace Division a decade ago, we thought we could expand it geographically across the country. When we did that, we thought we’d get expanded to sales of Allstate agencies, we did that. We thought we could expand it from small carrier, small companies to large companies, we did that. And when we bought CNA business had a combined ratio of 117, and while Joe’s is not happy with its combine ratio at 100. It’s been substantially below 100 since we bought it and we’ve made good money on that. So that’s kind of the approach we have. If you – to answer your question about international versus domestic. Much more interested in take – ceasing the opportunity available in the domestic market than international. But if something was appropriately priced and we thought we could add value, we always look at it. Sarah DeWitt – Barclays Capital: Great, thanks for the answer.

Okay, thank you all for taking the time. We are sticking with our strategy, being focused on the customer and its driving all of our activity both with Joe and his team at Allstate Protection with Matt and his team at Allstate Financial. And we’re being active and risk mitigation and return optimization with Judy and her team. So all that productivity has created more shareholder value. So book value again is up this quarter and we feel good about that. So we have a great management team. We’ll continue to success, work successfully to increase the value of your investment. Thank you and we’ll see you next quarter.

Ladies and gentlemen thanks for participating in today’s conference. This concludes the program. You may now disconnect. Good day.