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The Allstate Corporation (ALL)
Q3 2010 Earnings Conference Call
October 28, 2010 9 AM ET
Robert Block – VP IR
Thomas Wilson – Chairman, President and CEO
Don Civgin – SVP and CFO
Joseph Lacher – President of Allstate Protection and SVP of AIC
Judy Greffin – Chief Investment Officer and SVP of Allstate Insurance Company
Matthew Heimermann – JP Morgan Chase & Co
Bob Glasspiegel – Langen McAlenney
Keith Walsh – Citi
Alison Jacobowitz – Bank of America
Paul Newsome – Sandler O’Neill
Cliff Gallant – Keefe, Bruyette, & Woods
Meyer Shields – Stifel Nicolaus
Brian Meredith – UBS
Vinay Misquith – Credit Suisse
Greg Locraft – Morgan Stanley
Josh Shanker – Deutsche Bank
Sarah DeWitt – Barclays Capital
Previous Statements by ALL
» The Allstate Q2 2010 Earnings Call Transcript
» The Allstate Corporation Q1 2010 Earnings Call Transcript
» The Allstate Corporation Q4 2009 Earnings Call Transcript
» The Allstate Corporation Q3 2009 Earnings Call Transcript
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.