Allstate Corporation (The) (ALL)

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The Allstate (ALL)

Q2 2011 Earnings Call

August 01, 2011 9:00 am ET

Executives

Robert Block - VP IR

Judith Greffin - Chief Investment Officer of Allstate Insurance Company and Executive Vice President of Allstate Insurance Company

Thomas Wilson - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Member of Equity Award Committee, Chairman of The Allstate Insurance Company, Chief Executive Officer of The Allstate Insurance Company and President of The Allstate insurance Company

Don Civgin - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Allstate Insurance Company and Executive Vice President of Allstate Insurance Company

Matthew Winter - Chief Executive Officer of Allstate Financial, President of Allstate Financial and Executive Vice President of Allstate Insurance Company

Analysts

Dan Johnson - Citadel Investment Group

Jay Gelb - Barclays Capital

Keith Walsh - Citigroup Inc

Vinay Misquith - Credit Suisse

Cliff Gallant - Keefe, Bruyette, & Woods, Inc.

Brian Meredith - UBS Investment Bank

Matthew Heimermann - JP Morgan Chase & Co

Alison Jacobowitz - BofA Merrill Lynch

Michael Nannizzi - Goldman Sachs Group Inc.

Robert Glasspiegel - Janney Montgomery Scott LLC

Joshua Shanker - Deutsche Bank AG

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Allstate Corporation Second Quarter 2011 Earnings Conference Call [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Robert Block, Vice President, Investor Relations. Sir, you may begin.

Robert Block

Thanks, Matt. Good morning, everyone. Thanks for joining us for Allstate's Second Quarter 2011 Earnings Conference Call.

Following our prepared remarks, we will hold a Q&A session, and we ask that you limit yourself to one question and one follow-up, so that we can get to as many of you as time permits. Joining Tom Wilson, Don Civgin and me for the Q&A session will be Judy Greffin, our Chief Investment Officer; Sam Pilch, our Controller; and Matt Winter, President and CEO of Allstate Financial.

Earlier this morning, we issued our press release and investor supplement, as well as filed our 10-Q for the second quarter. We also posted a slide presentation, which will be used in conjunction with our prepared remarks. All these materials are available on our website.

As noted on the first slide, this discussion may contain forward-looking statements regarding Allstate's operations, and actual results may differ materially. Please refer to our Form 10-K for 2010, our 10-Q for the second quarter and our press release for information on potential risks.

This discussion may also contain some non-GAAP measures for which there are reconciliations in our press release and on our website. Following the completion of this call, Christine Ieuter, and I will be available to answer any follow-up questions you may have. Now let's begin with Tom Wilson. Tom?

Thomas Wilson

Good morning. We appreciate your continuing interest in Allstate. And following my remarks, Bob will cover the business unit result, then Don will go through our investment performance and then the financial position beyond the second quarter.

Before I begin a discussion on the results for the quarter, I want to comment on last month's management change at Allstate Protection. A decision was made and we've moved on. We have a strong management team in place. A blend of talented individuals, on both inside and outside the company. I am confident that everyone on the senior team understands what's expected of them. We are all driving toward the same goals off the same plan, a plan to grow our businesses profitably.

Now to the second quarter, we advanced our strategy of broadening our profitable protection relationships with consumers by utilizing both sophisticated risk tools, and then offering differentiated products tailored to specific customer segment, we will create significant shareholder value. Now while the weather hurt our overall financial results for the quarter, it had a much more significant impact on our customers’ lives. This is why we're in business. I want to thank our claim employees and agencies for their dedication to our customers in these difficult times. This is when the value of having protection from Allstate really becomes evident.

Coming into 2011, we have 3 priorities: improve our operating results; grow our businesses profitably; and differentiate Allstate from the competition by focusing on unique customer segment. In the second quarter, our underlying businesses all showed continued progress towards the accomplishment of those priorities.

If you go to Slide 2, we improved our operating results throughout the company. In Property-Liability, the underlying combined ratio which, of course, excludes catastrophe losses in prior year reserve -- reestimate was a very solid 87.5, an improvement of 0.6 points relative to the second quarter of last year. Allstate brands standard auto combined ratio was 98.2 in the quarter, an increase of 3.7 points from last year. This increase was entirely driven by a significant increase in catastrophe losses.

Our underlying margins at Allstate auto improved relative to last year's second quarter, as loss trends moderated and efforts to improve results in Florida and New York take hold.

Homeowner margins excluding catastrophes held firm as we continue to drive towards acceptable levels of profitability. Operating income from Allstate Financial increased 12.8% versus last year, as improvements in the benefit and investment spreads, as well as lower operating expenses all contributed to improved results.

Investments increased portfolio yields through proactive risk mitigation and return optimization. We had realized capital gains in the quarter and unrealized gains increased by $900 million versus the previous quarter.

We obviously continue to proactively manage our portfolio. We did make several moves over the last couple of months, given the uncertainty surrounding the U.S. debt ceiling. Our assumptions are that any dislocation will be temporary and that the commercial banking system will continue to function, given the highly liquid nature of our portfolio and the long duration of our liability, this then obviously only has a limited impact on us. Nevertheless, we did a number of things. We sold treasuries, we put on some additional -- we sold our long treasuries. We put some additional hedges in place. We shifted the focus of our short-term portfolio. We underweighted equity and we continued our shift into corporate credit. We also increased liquidity by building up operating cash. And 2 weeks ago, we issued $400 million in commercial paper, and placed the proceeds in compensating balances to ensure we have cash to take advantage of any short-term investment opportunities.

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