The Allstate Corporation Q3 2008 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jay Gelb - Barclays Capital - Analyst : Thanks, and good morning. With regard to capital position, given what's going on in terms of financial dislocation overall in the market for the fourth quarter, can you give us a sense of, as of the third quarter you say you don't need additional capital, what could change that view?

Question: Jay Gelb - Barclays Capital - Analyst : Okay. And then, separate issue for auto loss frequency, there was a significant improvement there. With gas now back at around 3 bucks, does that trend reverse or does the economy or the economic slow down, is that going to play a larger role?

Question: Jay Gelb - Barclays Capital - Analyst : Okay. So more driven at this point by the economy rather than gas prices alone.

Question: Jay Gelb - Barclays Capital - Analyst : All right, thanks very much.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : Good morning. I was wondering about the funding agreement sales in the first half at Allstate Financial of $4 billion coupled with the short-term investments going up by about $6 billion in the first half. What drove the funding agreement sales? I thought normally that's a product used to sort of get a few extra basis points out of an excess capital position. But when I see that at the same time that you're raising liquidity, I guess I'm a little confused what the overall strategy was behind it. And you hit the brakes in the third quarter, I just want to make sure there's no sort of hidden concerns related to that product.

Question: Dan Johnson - Citadel Investment Group - Analyst : Thank you, and good morning. Can you help us with all the data you provide us, with just the simple walk through of if we looked at the impact of the realized and unrealized losses in the quarter, the impact that it had on shareholders equity, not only on a net basis, but a gross basis and then between the two of those we likely have a tax as well as a DAK shield that were helping offset that gross loss. Can you sort of walk through those numbers? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Dan Johnson - Citadel Investment Group - Analyst : So with the $3 billion, and then you look on the balance sheet, it looks like the AOCI component went up by about $1.2 billion, so the difference between the $3.3 billion and the $1.2 billion is DAK and tax?

Question: Dan Johnson - Citadel Investment Group - Analyst : Yes. And I guess the question is, has that historically been normal to take roughly a third of those losses and put them back on the balance sheet in the form of DAK, which looks like from one of the supplement pages, looks like $1 billion of DAK was put back on the balance sheet.

Question: Dan Johnson - Citadel Investment Group - Analyst : I'm aware, but I'm trying to think, should I be thinking of we had a $3 billion gross and we put a third of it back onto the balance sheet.

Question: Dan Johnson - Citadel Investment Group - Analyst : Great, thanks very much for that. Then I just have a quick one on, you did a great job of giving us mark to market even adjusting for the OTTI on some of the liquid securities, and I think you got another page where you do a lot of the fixed income securities. Just on that issue, the $10 billion of mortgage loans at the life company, where would we find the valuation of those relative to the either amortized, I guess amortized cost would probably be the best metric for value versus amortized.

Question: Dan Johnson - Citadel Investment Group - Analyst : Great. Thanks very much for taking the questions. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: David Lewis - Raymond James & Associates - Analyst : Good morning, thank you. At September 30, you had a total unrealized investment loss of $4.1 billion. Can you give us a sense of what the further deterioration has been over the past three weeks. I know it's difficult to get those new marks, but just something rough. And your recent discussions since you've talked to the rating agencies with third quarter results, how comfortable are they with your capital position today?

Question: David Lewis - Raymond James & Associates - Analyst : Rating agency.

Question: David Lewis - Raymond James & Associates - Analyst : Just to follow up, Tom, you are sticking with your underlying combined ratio in the 86% to 88% range and, based on my model, that would imply something close to a 90% underlying combined ratio in the fourth quarter. Is that just conservatism on your part or do you see some reason why that's going to rise in the fourth quarter?

Question: David Lewis - Raymond James & Associates - Analyst : Very good, thank you very much.

Question: Matthew Heimermann - J.P. Morgan - Analyst : Hi. Good morning, everybody. A couple questions, maybe one at a time. This may seem a little, maybe this is the wrong time to ask this given everybody's worried about capital, but given your commitment to the financial, Allstate Financial, why isn't this, with all the distress you're seeing around, potentially the right time to think about either adding more scale or adding an asset management capability or something of that sort to actually further your competitive and strategic position?

Question: Matthew Heimermann - J.P. Morgan - Analyst : Okay. And then, just with respect to GAAP versus stat, can you give us a sense of how much normally, I guess, I don't know what normal is, but how much of the market valuation change is actually flowing through the stat balance sheets in terms of life and PC?

Question: Matthew Heimermann - J.P. Morgan - Analyst : Well, I didn't know to what extent, whether change intents to hold influence stat as well.

Question: Matthew Heimermann - J.P. Morgan - Analyst : Okay, that's an easy way to take it. Can you tell me what the change was, what the difference was at 2Q.

Question: Matthew Heimermann - J.P. Morgan - Analyst : Okay, I'll follow up with you, Bob. Then one quick last one if I could sneak it in. Does your change in cost of debt in the public markets affect the marks you took? Did that create any offsets this quarter?

Question: Matthew Heimermann - J.P. Morgan - Analyst : Okay, perfect.

Question: Matthew Heimermann - J.P. Morgan - Analyst : Okay. Perfect. Thank you.

Question: David Small - J.P. Morgan - Analyst : Good morning. Two quick questions. The first is could you just talk us through the capital adequacy of the life company after you downstream the capital that you have talked about in the press release. And what I mean by that is if we think about, if we have another quarter with marks, is that something we're going to see more capital going downstream, could you just elaborate a little bit?

Question: David Small - J.P. Morgan - Analyst : Okay. My second question, in terms of reinsurance buying, do you think you would think about changing how you bought, how you buy reinsurance given that you had such a large storm this quarter? I think you said it was one of the top ten ever. And given how much you spent for reinsurance and looking at the benefits you got.

Question: David Small - J.P. Morgan - Analyst : Would that mean in nonmodel cats that some of the tools would be nonrenewals? You have nonrenewing and buying more insurance?

Question: David Small - J.P. Morgan - Analyst : Okay. And just back to the life for one second. Is 300 RBC a target or do you have a target RBC you could share with us?

Question: David Small - J.P. Morgan - Analyst : Okay, thanks.

Question: Ian Gutterman - Adage Capital - Analyst : Hi, a couple of capital questions. First, to follow up to David's question. The large unrealized loss under 70%, I think it was $1.7 billion, it was over $1 billion, presumably a decent portion of that's inside life company assets. If that rolled over to realized and, therefore, rolled into stat, could the life company need to have another $500 million or $1 billion sent down down the road? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Ian Gutterman - Adage Capital - Analyst : Okay. Very fair. And as far as some of your (inaudible) competitors have raised large amounts of capital to really put the RBC in a very safe place so they don't have to worry about it any more. You guys, because you obviously have the PNC company and the holding company, the structure, I think, is a little different. Should I think of it more as you guys don't need to go and take the RBC to 350 because you have the excess capital with the holding company and, therefore, you could do sort of as needed rather than go and overcapitalize the Company, is that sort of how you think about it, as opposed to putting in $2 or $3 billion today instead of just the $1 billion?

Question: Ian Gutterman - Adage Capital - Analyst : Okay. Can I ask what's your sort of minimum target for the parent company capital? I mean, I guess you have a little bit over $1 billion of annual expense, plus you mention the 900 (inaudible) at the end of next year. Does that apply or you need $2 billion, or is your normal safety margin that you want to be higher than that?

Question: Ian Gutterman - Adage Capital - Analyst : Okay. There's just one last numbers question, do you have preliminary statutory capital for the PNC Company for the quarter?

Question: Ian Gutterman - Adage Capital - Analyst : Not yet, okay. All right, thank you.

Question: Josh Shanker - Citigroup - Analyst : Good morning. My first question, I'll probably have a follow up. Given that Ike particularly and maybe Gustav, did the amount of excess protection you bought on top, was your reinsurance buy is this how you wanted it to work?

Question: Josh Shanker - Citigroup - Analyst : Going into next year, there's a lot of chatter that maybe rises will rise. Would you aim to be buying the same amount of excess protection in 2009 or is that going to be very much cost dependent?

Question: Josh Shanker - Citigroup - Analyst : Okay, well thank you very much.

Question: Terry Shoe - Pioneer Investments - Analyst : Hi. There's been quite a number of questions about the life insurance subsidiary and in the current environment, I think when people think about risk with Allstate, it's all about the balance sheet and invested assets and a very large chunk of your investment leverage, as well as the, what is perceived as risky assets is in part due to your involvement in the life business. Can you give over again, you said you talked about your commitment to it, that the returns are not adequate, that you want to bring it up, why you're committed to your life business, which is now more of a fixed annuity book than anything else?

Question: Terry Shoe - Pioneer Investments - Analyst : Thank you. Another question, there's been a lot of questions about your capital position and you discuss at length your capital position and liquidity position. There was one earlier question about rating agencies. You have very strong ratings and I assume that you have continuous discussions with them. And you clearly are in, as you said, excess capital position from a corporate standpoint. Maybe you can just elaborate a bit more. Is there any threat at all to potential rating downgrades? What would have to happen to threaten your ratings?

Question: Terry Shoe - Pioneer Investments - Analyst : I see across the tape Allstate outlook to negative from stable by S&P, I gather it's more a commentary on the general insurance industry than anything specific to Allstate would be my guess?

Question: Terry Shoe - Pioneer Investments - Analyst : Okay. It just came across. Thank you so much. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Meyer Shields - Stifel Nicolaus - Analyst : It's sort of a comment that I'm hoping will morph into a question. The bang for the buck that you would get from share purchases now is obviously better than it's been in awhile. Do you have any sense as to what could trigger a resumption of the share repurchase program? How should we think about that?

Question: Meyer Shields - Stifel Nicolaus - Analyst : A resumption of the share repurchase program.

Question: Meyer Shields - Stifel Nicolaus - Analyst : Okay. No, that's certainly fair. Within the P&C business, are you seeing any change in the rate of nonpayment for premium for either auto or home?

Question: Meyer Shields - Stifel Nicolaus - Analyst : Nonpayment of premium.

Question: Meyer Shields - Stifel Nicolaus - Analyst : Yes.

Question: Meyer Shields - Stifel Nicolaus - Analyst : Okay, thanks very much.

Question: Josh Smith - TIAA-CREF - Analyst : Thanks for taking the question, just one quick one. On page 51 and 52 of your earnings release, you detail some of your risk mitigation efforts. If I add all these things up, it looks like it's pretty close to zero. How do you want us to think about the effectiveness of your risk mitigating in terms of reducing your losses, either realized or unrealized, in the third quarter and given that the market has turned south in the fourth quarter, would you expect a similar benefit from these risk mitigating activities in the fourth quarter or should it be greater since you started mid-third quarter?

Question: Josh Smith - TIAA-CREF - Analyst : I mean I added the three areas. I looked at your risk mitigating, total income generation, and total accounting, all those add up to basically a net zero, so.

Question: Josh Smith - TIAA-CREF - Analyst : Just to quickly summarize, you're saying that given the down draft at least in the equity markets in the fourth quarter, your solid in the money in your macro hedges.

Question: Josh Smith - TIAA-CREF - Analyst : Thanks a lot.

Question: Brian Meredith - UBS - Analyst : Good morning. Two questions for you. The first one on the reinsurance program, just quickly, have you rethought your use of cat bonds given some of the problems that part of the (inaudible) bond has had recently?

Question: Brian Meredith - UBS - Analyst : Thanks. Tom, the second one would be, you talked about the rate environment and you're trying to get some rates, sounds like others are trying to get rate, but the frequency was this quarter, I sense some others will have rate results in auto insurance. From a regulator's perspective how are they looking at this as far as granting price increases? Are they looking at underlying trends and it's going to be more challenging to get a price increase over the next six months in auto insurance given the favorable frequency?

Question: Brian Meredith - UBS - Analyst : Right.

Question: Brian Meredith - UBS - Analyst : Great, thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Paul Newsome - Sandler O'Neill - Analyst : Good morning. Thank you. My question is a little on different topic. The home insurance business, obviously you had a lot of cats, but it also seems to be deteriorating through ex-cat as well. If you could talk a little bit about that, because to my mind, that was a major factor in the pretty significant improvement of your profitability since like '02. That seemed pretty permanent, but is competition getting the best of you or what else other factors are going on there?

Question: Paul Newsome - Sandler O'Neill - Analyst : Fair enough, thank you guys.

Question: Alain Karaoglan - Banc of America - Analyst : Good morning. First, let me thank you for the very extensive disclosure. Clearly a lot of people have worked long hours and it's very helpful, so we really appreciate it. The second question, the question really relates to -- you guys have done a good job in reducing your exposure to large catastrophe events, but your nonlarge event cats are still fairly high. I heard you're trying to focus on that and reduce it. If we bring the same concept to Allstate Financial, given their results lately, it seems that it's more akin to catastrophe events affecting the company. And you've been wanting to improve the ROE of Allstate Financial before we have had such an event. So going forward, since you want to keep Allstate Financial, should the ROE that you earn on that be a lot higher than what you thought three or four months ago given the volatility, or do you really think with the risk mitigation or what you have learned or what you will bring in you will be able to attain that volatility in the same way you did for the large CAT event sort of? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.