The Allstate Corporation Q3 2012 Earnings Conference Call Transcript

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

Question: Josh Stirling - Sanford Bernstein - Analyst : Hi, good morning and thank you for taking the time. Obviously, it is a real priority for you guys to be out in the field and we all appreciate you not pushing back earnings. The question I would ask, recognizing that you can't comment on an actual estimate -- of course, it would be way too premature -- but you are getting reports of first notice of loss. You are out there in the field talking to customers. You have some sense of the volume of this storm. I would love to get a sense from these operating metrics sort of where you are say in perspective relation to Hurricane Irene last year. And then similarly, you probably are starting to get a sense of the mix and composition of the claims that you are actually going to have to adjust. And I would love to get a sense, especially when we think about severity going forward, is this going to be driven by lots of large total limit losses or are you going to see more sort of modest, far many, but maybe more than previously, but sort of many more sort of smaller losses that are sort of damaged ancillary structures and things like that?

Question: Josh Stirling - Sanford Bernstein - Analyst : I certainly understand. Investors, I think at this point, are sort of obviously dealing with modeling firm estimates. And I think you guys are sort of sophisticated users of the models and you have got a lot of your own data and your own perspective over time. I am wondering what sort of -- to use the phrase sort of known/unknowns -- model errors and sort of historic sort of biases that you think that historically perhaps we have seen that you guys might be watching for as you handicap the estimates themselves. And one topic of conversation I think that people are curious about is whether this has the possibility of being something like Ike, which ended up going further inland and ended up driving sort of surprising levels of losses with what would have been perceived to be modest wind further inland than typically models would have suggested at the time. Thanks a lot.

Question: Josh Stirling - Sanford Bernstein - Analyst : Okay, thanks. Good luck.

Question: Ian Gutterman - Adage Capital - Analyst : Hi, I didn't expect to be in so soon. I guess, first, Tom, when I look at the auto results, obviously very good. I think you said, what was it, a 93.7%, I think, accident year. But if I add on sort of normal cats of a couple points, that is high 95%s, which, again, is a solid result, but I am LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. wondering can that get better? Can we get that -- in the past, we have obviously seen low 90%s, but even at 94%, 95%, is that possible given rates are starting to improve? Or is 96% kind of the best you can do in the current rate environment?

Question: Ian Gutterman - Adage Capital - Analyst : The underlying is what --.

Question: Ian Gutterman - Adage Capital - Analyst : Well, the underlying is ex-cat, so I took the underlying and added 2 points of normal cats to it.

Question: Ian Gutterman - Adage Capital - Analyst : Got it. And that actually led into my final question, which I was going to ask, how is the outlook for that. I believe there was an internal member memo that hit one of the newswires that suggested you are broadening your targets and maybe the tone of that seemed to be a little bit more optimistic about growth going forward. And certainly with competitors -- some of your big competitors having to chase rate to improve their profitability back to where it used to be, it would seem maybe you are in a little bit of a sweet spot here.

Question: Ian Gutterman - Adage Capital - Analyst : Great, thank you. So it sounds like you would be disappointed if we don't see growth in standard auto for 2013? 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 : Very good. Thank you.

Question: Ian Gutterman - Adage Capital - Analyst : Great. Thanks. Very thorough comments, guys. I appreciate it.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : Good morning, everyone. I need a little bit of help on your reinsurance slideshow given that I can't plug this stuff into a spreadsheet. You gave an example of a hurricane going through New Jersey, which seems to have its own cover and there is two different covers, which I don't quite understand how they interact, but I think you talk about a $700 million type loss working its way down to $200 million net. But maybe if you could just give -- if the number was $10 billion in the three states, simply what the gross and net numbers would play out, that would be helpful.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : Okay.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : So if you had a $10 billion sort of loss in the other two states, what would the net number be?

Question: Bob Glasspiegel - Langen McAlenney - Analyst : Right.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : Let's say you had 10% to 12% of that, so $1 billion gross, what would the net be? 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: Bob Glasspiegel - Langen McAlenney - Analyst : Okay. I think others might be interested in that as well. But on the Encompass, it looks like a mini breakout from what has been a troubled line for a long, long time. I mean you are growing premiums and the underlying underwriting is improving. Am I overreacting to this quarter or do you think you have got the horse running the right way around the track?

Question: Bob Glasspiegel - Langen McAlenney - Analyst : I was referring to the underlying profitability, underlying combined ratio.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : Right.

Question: Bob Glasspiegel - Langen McAlenney - Analyst : 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: Brian Meredith - UBS - Analyst : Yes, good morning, everybody. Just two quick questions here for you. The first one, looking at the slide on the underlying margin trends on the standard auto business, looking at the underlying loss trends and what is going on there, I am just curious, maybe you can talk about kind of the difference between the paid loss trend and what you're showing here in the incurred loss trend because the paid loss trend appears like the last couple of quarters it has been above where your average earned premium per policy has been.

Question: Brian Meredith - UBS - Analyst : Yes, very helpful. That was great.

Question: Brian Meredith - UBS - Analyst : Yes, absolutely. And just one quick one on the life insurance business if possible, your investment spreads really kind of improved this quarter. I wonder if there is anything unusual going on there.

Question: Brian Meredith - UBS - Analyst : Great. Thank you very much.

Question: Mike Zaremski - Credit Suisse - Analyst : Hey, thanks. In regards to Hurricane Sandy, it looks like insurance regulators and at least a few impacted states are saying the storm won't technically be classified as a hurricane. Therefore, hurricane deductibles won't apply. So I was curious how the difference between a hurricane versus tropical storm classification impacts Allstate?

Question: Mike Zaremski - Credit Suisse - Analyst : So when you say the kind of estimates that a lot of the reputable firms are putting out there take into consideration that the higher deductibles won't be triggered?

Question: Mike Zaremski - Credit Suisse - Analyst : Okay. And in regards to, Tom, the 13% ROE target on a normalized catastrophe load basis, obviously. So where while most of the increase come from now, given that you guys seem to be getting close to the goal within homeowners, not looking to increase auto profitability? I guess I do recall at the investor day you talked about unlocking capital within the life insurance segment. Maybe you can update us on that. Thank you.

Question: Mike Zaremski - Credit Suisse - Analyst : So I guess as a final follow-up then, so within Allstate Financial, should we be looking at the statutory capital because that amount of capital has kind of been staying the same over the last year. The annuity portfolio has been running off. Traditional life has been growing, so should we expect -- should that number be expected to drift downwards if the current run rates continue?

Question: Mike Zaremski - Credit Suisse - Analyst : Thank you.

Question: Matthew Heimermann - JPMorgan Chase - Analyst : Hi, good morning, everybody. A couple of questions. One, just on homeowners, I was just trying to get a better sense of what the underlying improvement was. On my math, kind of adjusting for the non-cat weather that you've quantified in previous quarters, it looks like year-to-date we have got about 470 basis points of improvement, which is a little faster than I think the run rate you all have talked about in the past. And I am just curious if you could remind us -- I think the differences, there were some adverse weather in 2011, so just remind me if I am thinking about kind of the puts and takes right.

Question: Matthew Heimermann - JPMorgan Chase - Analyst : Well, you have quantified the lower-than-normal cat, and so if I look just at loss ratio, I am getting year-to-date improvement nine months over nine months of about 470 basis points. And I think historically when you have talked about -- so that seems high to me relative to what you have talked about kind of your expectations of core margin improvement. So one, I guess comment on whether or not that perception is correct about how 470 might compare to your run rate expectation. And then secondly, if it is in fact a little bit faster, is that attributable to the fact that 2011 I think in 1Q in particular had some unfavorable weather that might be making that look a little bit better? I am just asking because I want to make sure that, as I think about next year, I am not botching anything up?

Question: Matthew Heimermann - JPMorgan Chase - Analyst : Okay. And then as we play that forward into the next year, do you feel like -- is that something we should expect to continue to help a little bit on the margin as we go into next year or now we kind of -- is the impact going to be less dramatic?

Question: Matthew Heimermann - JPMorgan Chase - Analyst : Okay. That is helpful. Sorry that that took so long for me to ask the question in a way that made sense.

Question: Matthew Heimermann - JPMorgan Chase - Analyst : Yes, that was helpful. Then I guess just one on Sandy, and this just goes to -- and I am going to bring up Katrina, not because I think that should be the baseline when we think about the loss, but because there were a lot of adjusting issues because search is really a big potential loss driver here whether it is insured or uninsured or government insured is a different question. But Katrina right there with some regulatory push to cover flood losses, but wind and there was a lot of gray as to what -- in some cases, that was because there was a lot of gray and there weren't houses left to actually adjust. I am curious when you think about Sandy based on, and I know it is early, but do you -- how is the gray area in this loss, wind versus flood, on the personal line side contrast with kind of your experience with Katrina? Is that something that gives you a lot of pause recognizing that normally when you get big events, the ties usually goes to the policyholders, but I am just curious more whether or not there will be as much gray.

Question: Matthew Heimermann - JPMorgan Chase - Analyst : Right. Thanks for that. Sorry, didn't mean to cut you off if there was more. 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: Adam Klauber - William Blair & Co. - Analyst : Good morning, everyone. How aggressively do you plan on rolling out Drive Wise next year? And is your intent to use that to augment growth, augment profitability or both?

Question: Adam Klauber - William Blair & Co. - Analyst : Okay. Thank you. And one follow-up question. It appears that you will make more money this year than you have in probably four or five years. How is that going to reflect when you think about the buyback for next year?

Question: Adam Klauber - William Blair & Co. - Analyst : Thanks a lot.

Question: Michael Nannizzi - Goldman Sachs - Analyst : Thanks. Most of my questions have been answered. One question I just have, when you look at insured losses that will come out of Sandy, how much of that ends up getting absorbed -- do you think will end up getting absorbed by the National Flood Insurance program? Unidentified Company Representative That's really hard to tell, Mike. We don't really -- it is almost impossible to tell right now. I will tell you, if you want to go way up, the National Flood Insurance program ends up being a net drain on the US government. It really is -- if it was your business, you would seek to restructure that business, charge accurate prices relative to where people's houses were, you would try to expand the coverages so you weren't only ensuring those houses that get flooded two and three times. So there is I think -- and Congress has struggled with that over time, but their losses are -- the net losses will probably end up being bigger than they would need to be if you ran it as a private business rather than as a political entity.

Question: Michael Nannizzi - Goldman Sachs - Analyst : Great. And then just maybe one on Allstate Financial. It seems like -- I mean clearly moving towards a more underwritten profile as opposed to spread business. I mean what is your kind of expectation for that business longer term? It doesn't seem like, other than the life product, doesn't seem like there is a lot of operational synergy overlap with your kind of captive agent platform. Just trying to understand kind of where do you see that business moving as you execute your transitional strategy there.

Question: Michael Nannizzi - Goldman Sachs - Analyst : Thank you very much.

Question: Randy Binner - FBR Capital Markets - Analyst : Hey, thanks for squeezing me in and this is another Allstate Financial question, but I appreciate all the commentary on trying to kind of redeploy capital out of particularly the annuity business into what you perceive to be higher, kind of better risk-adjusted returns in really the other protection businesses. And so I guess just as I think about modeling, to the extent you are successful in kind of getting folks to give up those annuities and then you are able to free up capital from the annuity business, that takes time and then reallocate it, I am just trying to think if there is going to be kind of a doughnut hole or a lag in the earnings that you generate as you kind of transfer that capital around. And so I guess I would be kind of interested in your thoughts on that approach, kind of how that affects 2013 earnings. And then I am not sure if I've heard this in the commentary, but are you thinking about kind of more aggressively trying to go after annuity holders and maybe giving them lump sum payouts or other incentives to surrender?

Question: Randy Binner - FBR Capital Markets - Analyst : So I guess it happens gradually enough over time that there isn't a big block of capital that needs to get upstream and then reallocated and then earned against. It is more of a gradual process because I guess in our model it seems like as you move capital out, there is a little bit of a lag, but it sounds like it is more of a gradual process from your perspective. 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: Randy Binner - FBR Capital Markets - Analyst : All right. That's helpful. Thanks.