Patrick Macellaro - Vice President-Investor Relations Thomas Joseph Wilson - Chairman & Chief Executive Officer Steven E. Shebik - Chief Financial Officer & Executive Vice President Matthew E. Winter - President Judith P. Greffin - Executive Vice President and Chief Investment Officer, The Allstate Corp.

Don Civgin - President-Emerging Businesses, Allstate Insurance Co..

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker) Josh D. Shanker - Deutsche Bank Securities, Inc. Daniel D. Farrell - Piper Jaffray & Co (Broker) Sarah E. DeWitt - JPMorgan Securities LLC Jay Arman Cohen - Bank of America Merrill Lynch Robert R. Glasspiegel - Janney Montgomery Scott LLC Cliff H. Gallant - Nomura Securities International, Inc.

Michael Nannizzi - Goldman Sachs & Co. Paul Newsome - Sandler O'Neill & Partners LP Ian J. Gutterman - Balyasny Asset Management LP.

Good day, ladies and gentlemen, and welcome to The Allstate Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Pat Macellaro, Vice President of Investor Relations. Please go ahead..

Thank you, Jonathan. Good morning and welcome, everyone, to Allstate's third quarter 2015 earnings conference call. After prepared remarks by Tom Wilson, Steve Shebik and myself, we'll have a question-and-answer session.

Yesterday afternoon we issued our news release, filed our 10-Q for the third quarter and posted the results presentation we will use this morning, along with our third quarter 2015 investor supplement. All of these documents are available on our website at allstateinvestors.com.

Our discussion today will contain forward-looking statements regarding Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2014, the slides and our most recent news release for information on potential risks.

Also, this discussion will contain some non-GAAP measures for which there are reconciliations in our news release and our investor supplement. We're recording this call and a replay will be available following its conclusion and I'll be available to answer any follow-up questions you may have after the call. Now, we'll turn it over Tom..

Good morning. Thank you for investing time to keep up on our progress at Allstate. I'll cover an overview of results and then Pat, Steve will go through the details. Our operating team is also here to provide additional perspective when we get to the dialogue section. Let's begin on slide 2.

We had good overall earnings this quarter, primarily reflecting the continued strength of our homeowners' insurance business. As you know, we repositioned this business so the underlying combined ratio would support good annual returns, even with high catastrophe losses.

This quarter, we also benefited from lower catastrophe losses than this quarter last year. This continued strength in homeowners has also led us to reduce the capital requirements for this line, which has now become a competitive advantage. We also made progress in improving auto insurance returns.

As you know, in the fourth quarter of last year the combined ratio on this business began to rise, which reflected an increased frequency of losses and higher severity per claim. As a result, we instituted a comprehensive program based on the business model and practices that have been highly successful, really the last 14 years.

That, of course, includes raising auto insurance rates for the first nine months of 2015, the approved rate increase. This is in absolute dollars, was about twice the amounts achieved in the average of two prior years.

That increase in improved rates has begun to be realized in premiums earned, but of course, the impact will continue to increase over the next year as policies renews. We also made underwriting standards more restrictive, which has the effect of reducing the higher loss ratio new business.

As a result, Allstate brand auto policy growth declined at 3.1% with larger reductions at Esurance and Encompass. Given the cost trends we and others are experiencing in auto repairs, there is also a heightened focus on both effectively and efficiently managing claim loss costs.

We also reduced advertising expenses and took some other actions so that the underwriting expense ratio in the quarter declined by 1.4 points to 24.9. Now, all of these actions are well thought out. We balanced short-term profitability and long-term economic value creation per share holders.

In addition, they are tightly integrated and implemented in a highly targeted and local manner. The recorded combined ratio for the quarter is 93.6, which generated $491 million of underwriting income. The underlying combined ratio for the first nine months of 2015 was 89.1.

That's slightly above the outlook we established at the beginning of the year of 87 to 89. We now expect a full year underlying combined ratio to be no higher than 89.5. Common shareholders received $2.6 billion in cash so far this year, due in part to an 8% reduction in a number of shares outstanding.

If you move to the box, on the bottom of the slide, operating income was $610 million or $1.52 per share, which is 9.4% higher than the prior year quarter, which you can see in that little red box. Premiums earned were up 4.7%, reflecting an increase in average premiums and a 2.3% increase in the number of items in force.

The overall return on equity was 12% on both an operating and net income basis. Let's move on to slide 3. We'll go through the results for the individual segments. Our five operating priorities for the year are shown at the top and those have not changed.

The Allstate brand in the lower left is our largest segment, of course, and it comprises about 90% of premiums written and serves customers who prefer branded product and value, local advice and assistance. This business continued its moderate growth across all the product lines, as you can see from the first line in that box.

Total policies in force are 2.5% higher than last year's third quarter. Auto insurance growth did decline slightly in the quarter. Homeowner's policy growth up slightly and other personalized policies grew at 3%.The underlying combined ratio for this segment was 88.3, as you can see in the red box at the bottom.

Esurance, on the lower right, serves customers that prefer branded product but are comfortable handling their own insurance needs. Growth continued to slow in the segment and was 3.7% versus the prior year.

The reduction in auto insurance growth as a percentage absolutely was not offset by the high percentage growth in other product lines, such as homeowner's insurance. The underlying loss ratio did improve and was 105.3 for the third quarter.

Encompass, in the upper left, is the smallest segment that we underwrite for and competes for customers that want local advice but are less concerned about the choice of insurance company. Encompass primarily sells a packaged auto and homeowner's insurance policy through independent agencies.

This business has gotten smaller and policies in force are down 5.7% from a year ago due to lower retention and less new business. We took aggressive action to improve profitability in both auto and home homeowner's insurance. The underlying combined ratio is 90.9 for the quarter.

Answer Financial in the upper right serves brand neutral, self-serve customers and competes in a relatively small segment of the market with aggregators such as Google Compare. Total nonproprietary written premiums of $443 million for the first nine months of 2015 are 11.2% above the same period in a prior year.

Now, overall operating results were in line with our expectations and we remain committed to increasing shareholder value by generating good returns, growing profits and providing cash to shareholders. Pat will now go through the Property-Liability results in more detail..

Thanks, Tom. Let's start by taking a look at the Property-Liability P&L on slide 4. Starting with the chart on the top of the slide, Property-Liability net written premium was $8.1 billion in the third quarter of 2015.

It was 4.2% higher than the third quarter of 2014, reflecting the combination of policy and average premium increases, predominantly from Allstate brand auto and homeowners. For the first nine months of 2015, net written premium grew by 4.5%, while policies in force grew by 2.3%.

Property-Liability policies in force were 34.7 million at the end of September. I should note this excludes 5.6 million Allstate Financial policies and 2.1 million Good Hands Roadside relationships. Catastrophe losses of $270 million in the third quarter of 2015 were $247 million lower than the prior year quarter.

Recorded combined ratio for the third quarter of 2015 was 93.6, which is one-tenth of a point worse than the prior year quarter. First nine months of 2015, the recorded combined ratio was 95.8, which was 0.6 of a point worse than first nine months of 2014.

The underlying combined ratio for the third quarter of 2015 was 89.3 and the underlying combined ratio for the first nine months of 2015 was 89.1, both elevated over the results we experienced in 2014.

Property-Liability operating income of $550 million in the third quarter of 2015 was half a percent below the prior year result, while the $1.3 billion of operating income through the first nine months of 2015 was 5.9% below the first nine months of 2014.

Bottom of the slide contains growth trend information as well as a view of the Property-Liability recorded and underlying combined ratio trends. Premium and policy growth trends are in the chart on the bottom left. We mentioned the drivers of premium trend shown in the blue line earlier.

The red line represents policy in force growth and shows the slowing policy growth trend that's being driven by auto profit improvement actions in all three brands. Policy in force grew by 772,000, or 2.3% from the third quarter of 2014.

Exhibit on the bottom right displays the Property-Liability recorded and underlying combined ratios for the third quarter of 2015. Both the recorded and underlying combined ratios were impacted by higher auto losses in the third quarter of 2015 versus the prior year quarter.

Slide 5 highlights margin trends for Allstate brand auto and Allstate brand homeowners. The chart on the top left of the slide provides a view of quarterly underlying margin performance for Allstate brand auto.

Third quarter results were impacted by higher frequency and severity than the prior year quarter, resulting in a 5.2 point deterioration in the underlying combined ratio from what we experienced in the third quarter of 2014.

On a sequential basis, the combined ratio was 0.3 of a point higher in the third quarter of 2015 versus the second quarter of 2015. The chart on the right highlights the trends driving the change in the underlying combined ratio.

Annualized average earned premium per policy, shown in the blue line, is beginning to pick up momentum given rate increases implemented throughout 2015. Average underlying losses and expenses per policy increased compared with the third quarter of 2014, influenced by higher frequency and severity but lower expenses per policy.

Similar information is shown for Allstate brand homeowners on the bottom of this slide. On the bottom left, you can see the impact of low catastrophes in the homeowner's recorded combined ratio, which was a 72.5 in the third quarter of 2015.

The underlying combined ratio of 60.9 in the third quarter of 2015 was 0.9 of a point higher than the prior year quarter and about equal to this year's second quarter. On a trailing four-quarter average basis, the underlying homeowner's combined ratio was a favorable 61.8.

The components of the third quarter homeowner's underlying combined ratio are in the chart on the bottom right. Average earned premium per policy increased to $1,079 or 1.5% over the prior year quarter.

Underlying losses and expenses per policy increased 3% in the quarter compared to the third quarter of 2014, but the difference between premium and underlying losses and expenses per policy is essentially the same in the two periods. Slide 6 provides an update on our multifaceted auto profit improvement plan.

Last quarter, we discussed the four components of our plan to lower auto margins, three of them to adjust to higher accident frequency and one of them to adjust to higher claims severity. First, we sought approval for higher auto rates across the country in response to higher loss trends.

Second, we implemented underwriting changes wherever we identified specific underperforming segments of business, including ongoing correct classification programs to accurately price policies. Third, we focused on claims operational excellence and precision given cost trends. And fourth, we reduced expenses across the organization.

While these actions in total will improve auto margins, they will also slow growth. Detailed results for these initiatives are shown on the bottom two tables. Allstate brand approved auto rate increases in the third quarter of 2015 were 1.6% of prior year-end total Allstate brand auto net written premium, or $277 million.

This brings the total for the year to 3.4% or $600 million in net written premium. An outcome of these profit actions that auto growth in the Allstate brand is beginning to slow. Property-Liability expense ratio decreased by 1.4 points in the third quarter of 2015 compared to the prior year quarter, reflecting expense actions taken across the company.

You can see the impacts by underwriting brand in the chart on the lower left. The bottom right hand chart shows the net written premium amounts generated by the auto rates we received approval for in the first three quarters for the past three years for the Allstate brand.

You can see the total we've implemented through the first nine months of 2015 is significantly higher than both 2013 and 2014. We know that not every customer will renew their policy and that some customers will decide to change the level of their coverage, which will result in lower levels of premium in aggregate than what is shown on this chart.

This is common customer behavior and why we believe premium change is a key process that's enhanced by an Allstate trusted advisor. Cumulatively, the rates we received approval for in 2014 and through the third quarter of 2015 will be worth $816 million in earned premium through the third quarter of 2016.

This analysis only includes rates approved through September 30. As we continue to evaluate and run our business on a local market by market basis, we continue to aggressively pursue rate increases and adjust our actions going forward to ensure appropriate auto returns.

Slide 7 highlights combined ratio and top line trends for both Esurance and Encompass. The chart on the top of this page includes combined ratio results for both companies.

Esurance's recorded combined ratio of 106.5 in the third quarter of 2015 was 10.1 points lower than the same period a year ago, given decreased investment in marketing along with the 3.7 point improvement in the loss ratio. Esurance's underlying combined ratio of 105.3 for the third quarter improved by 7 points.

Encompass's recorded combined ratio of 101.3 in the third quarter of 2015 was 8.4 points lower than the prior year quarter, and benefited from an 11.1 point decline in catastrophe losses. Encompass's underlying combined ratio was 90.9 in the third and 92.7 through the first nine months of 2015.

As you can see in the two charts on the bottom of this page, growth is being impacted by profit improvement actions. In Esurance, policies in force and net written premium both grew by 3.7% in the third quarter of 2015 compared to the prior year quarter.

These growth rates are lower than recent quarters, given impact from rate increases, underlying – underwriting guideline adjustments and decreased marketing in select geography to manage risks. Both new business and retention in Esurance have been impacted by these actions.

In Encompass, net written premium declined by 3.5% in the third quarter of 2015 compared to the third quarter of 2014. This 5.7% decline in policies in force was more than offset by higher average premiums from increased rates and underwriting actions.

As with the Allstate brand, we continue to evaluate our results and adjust actions to ensure we are generating appropriate returns in both of these businesses going forward. And now, I'll turn it over to Steve who will cover Allstate Financial investments and capital management..

Thanks, Pat. Slide 8 provides an overview of Allstate Financial's results for the third quarter, as highlighted on the top of the slide.

Premiums and contract charges increased 5.1% when compared to the third quarter 2014, driven by growth at Allstate Benefits' accident and health insurance business as well as increased traditional life insurance renewal premiums. Operating income for the third quarter was $138 million, 10.4% higher than third quarter of 2014.

The increase in operating income compared to prior year quarter was driven primarily by higher returns on performance based investments, which were partially offset by higher mortality and a lower return from the fixed income portfolio.

We reduced the maturity profile of Allstate Financial's investment portfolio in the third quarter by selling longer term fixed income securities that backed long-dated immediate annuities.

The proceeds from these sales will be invested over time in higher returning performance-based equity investments to improve the long-term economic results from this block of business. This will include private equity, real estate, infrastructure, timber and agricultural related investments.

Although these investments are expected to deliver higher returns, the timing of those returns is difficult to predict and will result in a greater degree of variability in our earnings. Additionally, we will have to increase the capital allocated to this business.

While these sales generated net realized capital gains, investment in operating income will be reduced prospectively by lower yields on the reinvested proceeds. Moving to investments results on slide 9, the portfolio total return shown in the chart on the top left was flat for the quarter.

The consistent earnings from the interest bearing portfolio were offset by lower valuations, driven primarily by wider credit spread disproportionately on high yield bonds and a global equity market selloff, as you can see reflected in the chart in the upper right.

The charts at the bottom provide investment income and portfolio yields for Property-Liability and Allstate Financial portfolios. The Property-Liability yield reflects prior duration shortening and ongoing investment in the low interest rate environment.

The Allstate Financial yield is higher and is more stable due to its longer duration and use of its cash flows primarily to fund annuity reductions. Slide 10 illustrates the strength of our capital position and highlights excellent cash returns common shareholders received in the quarter over the first nine months of 2015.

We are executing our customer focused strategy from a position of financial strength and strategic flexibility. Our deployable holding company assets total $3.1 billion at September 30, 2015.

Book value per common share for the third quarter of 2015 of $47.54 was down slightly from the same quarter a year ago, reflecting primarily reduced unrealized net capital gains. During the quarter, we return $920 million in cash to common shareholders through a combination of dividends and common share repurchases.

We repurchased 12.9 million common shares for $798 million in the third quarter and have repurchased 8% of our beginning of year common shares outstanding for $2.2 billion in the first nine months of 2015.

Since the beginning of 2011, we have repurchased 32% of year-end 2010 outstanding common shares, representing an $8.2 billion return of capital to common shareholders. As of September 30, we had $1.1 billion remaining on our current repurchase authorization, which is expected to be completed by July 2016.

Now, let's open up the call for your questions..

Certainly. Our first question comes from the line of Ryan Tunis from Credit Suisse. Your question, please..

Hey, thanks. Good morning. I guess my first question is just on the expense ratio here in Allstate brand. It was down over a point year-over-year, and I think the previous guide was you're trying to get about 0.4 of a point from your expense save initiatives.

Does that imply that the expense ratio improvement should moderate from the point plus we saw this quarter over the next few? And I guess along those lines, if trend continues to be adverse, how much room is there to further cut expenses beyond the 0.4 of a point that you called out last quarter? Thanks..

Well, the number should decline. It won't stay up at 1.4 decline versus prior year. There were a couple of things that happened in there. First, we reduced advertising expenses in the quarter because we just don't want to grow as much, so there is no sense in advertising if we don't want to grow.

Secondly, there were some incentive compensation adjustments, which adjust for the full year, which has really nine months' worth of change in it versus the three months. But we can talk about the things we are doing. Matt can mention what we are doing to keep overall expenses in line, but it's obviously always a component of focus for us..

Yeah, hi. It's Matt, Ryan. Thanks for the question. As Tom said, there were some one-time items that we saw in the quarter, but there are also some more systemic longer term work that we have been doing.

In addition to the advertising cuts Tom referred to, we've had a multi-year effort on continuous improvement and process efficiency, which is really starting to take hold now, and that's allowed us to get some increased efficiency out of the system.

It allowed us to absorb some of the growth without increasing personnel costs, and we should expect that to continue long term.

Some of the cost reductions had to do with some technology costs that we slowed down some very long-term initiatives that we had while we retained the focus on the shorter term ones that were essential to continuing to operate the business.

So as Tom said, we won't be able to continue at the current level, but we do believe that long-term there is some additional cost reductions and efficiencies that we can continue to drive in the business..

Okay. That's helpful. And then just shifting gears on frequency, I figured I'd try. I guess thinking back to last year, I think October was when we first started seeing the elevated frequency trend. I was just wondering if maybe you could comment on how this October compares to when we first started seeing it a year ago..

We couldn't comment on that, Ryan..

Okay. Thanks so much, guys..

Thank you. Our next question comes from the line of Josh Shanker from Deutsche Bank. Your question, please..

Yes, thank you very much.

So, looking at the monthly numbers, Tom, do you see improvement in terms of the rates that you're getting in? How should we think about 4Q a little bit in terms of the trend, and balance that with seasonality of 4Q? And I know that you're not going to give us guidance for 2016 just yet, but I thought three months ago you were confident that you could probably maintain the 89% ceiling and I guess you're going to go a little bit above that.

How should investors think about positioning themselves going forward?.

Okay, you're correct in saying we'll wait until the full year is printed before we do an outlook for next year. We are – as you point out, we had about a year ago actually, the frequency in severity started to take off and as always, we are highly focused on maintaining returns on capital.

That said, we always try to do that with looking at the long-term economics and, of course, that is driven by retaining customers, which lead to higher profitability and higher growth. So when you have a rapid spike in cost like that, we need to obviously recover those costs quickly.

I feel very good about the pace at which Matt and his team are executing; Don and his business are going at it. I would say this is the first time it's really happened across the country all at once in a long time. That said, we see this movie every year multiple times in individual states.

So it's not like we haven't been through this movie multiple times before. We know how to manage it. It does have an impact on growth, which you can see more dramatically in the Encompass and Esurance brands than you see in the Allstate brand this quarter. You should expect to continue to see some impact on growth.

That said, we are not doing it so aggressively that we're giving up long-term returns. As it relates to the combined ratio and the guidance, obviously after the second quarter, we were at the upper end of the range. We were at 89.1 versus a range of 87.89.

We had a range of forecast at that time and we said we thought we could be at the high end of the range. We thought we still had a chance to be in the range and we continue to work aggressively to try to achieve that. That said, we did indicate we didn't think the low-end range was achievable.

Since then, we've now printed another three months and we're now still at 89.1 and we also have a range of forecasts, and when we look at that, we said there are some outcomes where the fourth quarter could be higher so that we could end up the full year at 89.5, which is half a point higher than the upper end of the range before.

And as most of you know, the fourth quarter is historically quite volatile, particularly as it relates to winter weather. But we feel comfortable that all of our forecasts are going to leave us below 89.5. So I feel good about where we are at. I think we are aggressively going after short-term actions.

I don't think we're throwing out long-term value creation. That said, we're getting after it because we know that the biggest driver to shareholder returns is return on equity..

That's great, Tom. And just about the winter weather in the fourth quarter, I've thought about this a few times. I mean, December may have some inclement driving conditions, but it seems to me that October and November should be pretty mild driving months.

How do you account for the difference maybe between fourth quarter and first quarter seasonality in the loss ratio? I would think that first quarter winter weather would be worse than fourth quarter, or maybe I'm not thinking about this right..

I would say there's a whole bunch of things that relate to it. Obviously, you zoomed in on weather. In addition to weather, there is the darkness. So, it gets darker earlier so more of the traffic is driven in the dark in the fall, and obviously in the first quarter.

But then you have weather, you have precipitation, you have near ice conditions versus ice conditions in the first quarter. So there is a whole bunch of moving factors there. I kind of look at both of them and just say they're both highly volatile. Those are busy times of the year when people are driving a lot and you do get more action.

So there's more range. I don't think there is any El Nino effect or anything like that that we're factoring in. It's just going to be what it's going to be..

Well, thank you for the answers..

Thank you. Our next question comes from the line of Dan Farrell from Piper Jaffray..

Hi and good morning. Just wanted to talk a little bit more about the shift....

Hey, Dan, we lost you..

Hey, Jonathan, let's go to the next question..

Certainly. Our next question comes from the line of Sarah DeWitt from JPMorgan..

Hi, good morning..

Good morning, Sarah..

On the frequency trends, has the absolute level of auto loss frequency stabilized versus the second quarter? And to what extent are you concerned that it could increase further and you will need to take rate increases to another level?.

I'll let Matt answer that question..

Yeah. Thanks for the question. Components of it have stabilized and components of it appear to still be volatile. And so, at this point, we are assuming the trend line continues to go up at its current levels. We'd like to see multiple quarters at the same level before we call it as stabilized and take our foot off both the rate lever.

So we continue to operate as if the frequency will continue. Our plans are to continue to take rate wherever justified and indicated and wherever we're able to in those states after we go through our examination.

So, I would say that we haven't leaned back and relaxed yet and said it's all over, but it appears to be operating in a narrower range than it was, I'd say, this time last year when we saw such an out of proportion spike in one quarter..

Yeah. I would add on to that. What you see are our numbers across the country. Matt and I were talking last night about how certain parts of the country have not had as big an increase as other parts. So it's possible that while some portions of the country may level out, other portions may increase to catch up to where the rest of the country is.

So, we are – as Matt points out, our team is being very cautious about calling a victory..

Okay, great, thanks. And then on the last call I believe you said you thought you could get back to target auto margins of a 94% to 96% combined ratio in mid to late 2016.

And now that you have one more quarter of frequency data, do you still feel confident in that?.

Sarah, I remember doing the – yes, we can get to the 94% to 96% because we ran there for 14 years. I don't remember making a call on the quarter. I think the call on the quarter will be dependent on a couple of things. The trend you just pointed out, which is, we'll have to see where that goes.

Secondly, as we increase rates we are having a great success in doing that today. Our competitors are doing it. There is not a lot of noise in the marketplace yet. But if frequency continues to go up for two years or three years, obviously there will be increased scrutiny.

So we have complete confidence that we can run this business with the margins that it's been run at historically. We don't have a good, clean call as to when we will be at that level..

Great. Thank you..

Thank you. Our next question comes from the line of Alison Jacobowitz from Bank of America Merrill Lynch..

Hey, it's Jay Cohen, actually. If you could just follow up on the last question.

The frequency you saw in the third quarter, is it fair to say it was generally within your expectations, you weren't surprised by what you saw?.

Jay, it's Matt. That's a tough question. As Tom just said, on a countrywide basis for the entire system, I would say that's accurate. I don't think there was anything that caught us off guard. There are state-by-state geographic fluctuations in there that do continue to intrigue us.

I won't say surprise us, but we are trying to figure out why some of the fluctuations exist in certain geographies. But overall, as a system-wide basis, I think you're right. My opinion, third quarter was very similar to what we had seen in second quarter from a frequency standpoint.

I had actually expected or hoped that we'd get a little more stabilization in some of the components. But it certainly didn't shock us or look to be a spike that was totally unexpected..

Yeah. It also varies, obviously, by coverage. So we were talking about BI, bodily injury, looks a lot like the level that it started to achieve in the fourth quarter last year. Physical damage is a little bit higher. So as Matt points out, the good news is we have great visibility and transparency and we act to it.

The bad news is, like all things in frequency, you can't predict it..

Got it. And the second question is what are you seeing your competitors doing now? Obviously some have talked about higher claims trends as well, others have not.

Are you seeing a general broad competitor response at this point?.

I'll give you – what we do is we look at our numbers. We make the changes based on what's happening to our book of business so that we can earn the appropriate returns. Matt, you might want to make a comment about what you're seeing in the marketplace..

Yeah, as Tom said, we make the call based upon what we are seeing in that market and our rate need and indication. However, in every single case, we also do run recent rate filings from our competitors to get a sense for whether or not we are out of sync or whether or not we should be looking closer at the numbers.

And what I have been seeing as I look at those is that we have a broad range of our competitors taking very similar rates to us.

It obviously varies depending upon their starting point, but we've seen several competitors taking much more in certain geographies and some less in others, but on a countrywide basis, I would say that we do not appear to be out of sync with our competitors.

Which is why, in addition to the fact that our agents are able to help our customers manage through these premium increases, I think one of the reasons that retention has held and that our quote and close ratios have held is because we're not alone in this rate taking..

Thanks for those answers, guys..

Thank you. And we do have Dan Farrell from Piper Jaffray back in the queue..

Thank you very much, guys. And I apologize for the issue with the line. My question was with regard to Allstate Financial and some of the changes you are making with the shift in fixed income to risk assets. And I was just wondering what's the lag going to be in getting some of the income from those assets? I realize there will be more volatility.

And then secondly, you mentioned some additional capital being allocated. How do you view the ROE impact for that segment with the additional capital? Thank you..

I'll provide some oversight as to the strategy and Judy can talk about the timing of income. So, Dan, we have about a $5 billion block of really long-dated liability structured settlements for people who were severely injured, buyout annuities, immediate annuities that have maturities of 30 years, 40 years.

If you look at the right way to invest behind those liabilities, it would be to A) make sure you have enough cash so that in the next five years to seven years you always got enough money to pay those people. But after that, then you want to invest for long-term return.

And so, when we look at that second portion, the investment pool, we said given today's interest rates where they are, we think buying 30-year bonds to satisfy those liabilities is not the right use of our capital that we should invest in higher return assets.

They have more volatility on an annual basis, but when you look at the volatility on a 10-year or 15-year basis, it's actually lower than the volatility and investing in, in theory, lower risk assets like fixed income. In doing that, though, there is a higher capital charge from the regulators.

We've chosen to do the right thing long-term to generate capital for our shareholders and economics for our shareholders even though it requires putting up more capital and having a negative impact on return on equity now because we believe that's the right thing to do. Judy can talk about the shift.

So what we did is we sold a bunch of long-dated bonds and had some capital gains and now Judy is going to get that capital reinvested into other investments. So you might want to talk about the reinvestment plan and then how long it will take to get the money back..

Sure. As Tom said, we did sell some longer duration bonds out of the immediate annuity block and initially what we're doing is we're reinvesting into primarily public equities and shorter duration fixed income.

The long term goal, as Tom said, is to get it into performance-based assets, which we like because it's a little bit more idiosyncratic, brings idiosyncratic risk into the portfolio plus we underwrite each one of those investments and bring them into the portfolio, as Tom said, for the long-term.

The kicker is that it takes a while to get those investments, especially the ones that we really like in this environment. What we're doing, though, as I said, was initially putting it into this other mix, public equities and shorter duration fixed income, so we're ready when we do find those higher performing more idiosyncratic investments.

In terms of timing, we have had some success over the past couple of years finding those investments but what we're finding in this environment is that we're getting money back almost as quickly as we can put it out because the environment has been so favorable for realization, but we're keeping our head down and trying to find them, and we'll continue to do that going forward..

So, Dan, we've made the choice that choose the best long-term economics, if that has a short-term negative impact on operating income, which this will, or return on equity. That's the best choice for our shareholders because we believe in long-term to generate cash. That's what drives shareholder value.

And we decide not to be – make economic decisions based on keeping operating earnings per share up on a quarterly basis. As long as we're transparent, we've found our shareholders to be quite receptive to that approach..

Great. Thank you very much for the details..

Thank you. Our next question comes from the line of Bob Glasspiegel from Janney. Your question, please..

Good morning, Allstate. I'm going to push Jay's question which Matt answered a little bit harder on your upping the range. When you were at Barclays in September, Tom, you said if you saw anything you would have made an adjustment by now, which I thought was a pretty optimistic comment given that you had seen two months of the third quarter.

Was there something in September or October that caused you to now do it? Or is there something that isn't taking hold as quickly as you would like? I think all your actions are right and I have 100% confidence you are going to get the underwriting back.

But just want to make sure there wasn't anything in the short-term data that caused the change from the Barclays conference commentary..

Well, when we had the Barclays conference, there was – we have a range of projections and those projections were largely based off what we had seen through the second quarter.

So even though we are a couple months into the quarter, you don't have things like severity and reserve changes and as clean a shot as you'd like on what the full year will look like. Obviously, you get three quarters of the way through the year you ought to have a pretty good sense of where the year is coming out.

So the range has come in some, Bob, is what I would say. It's narrowed down. The frequency continued to be up in the month of September. So, that also impacted our view, but don't read it as a huge change from where we were before.

I was very clear when we were at 89 once for six months we weren't going to get to 87 because we didn't think we were going to run at 85 for the next two quarters after we had run at 89. So I was very clear, we're not going to be at the bottom end of the range. We still think we've got a shot at the upper end of the range.

If I had a clear indication we're going to be above 89, at that point I would have said so. We didn't have a clear indication. Now, we look at it and say we have a pretty clear indication. We're going to be below 89.5. Who knows what October, November and December will bring to us. We're constantly updating severities.

There are some things that are – in terms of severities, that whether it's on the physical damage side where given the dramatic spike in frequency, it had both a stress on the number of people we have in the system and just the system itself – from itself, body shops are busier, auto parts. So we had to sort through what that was doing to cost.

Matt and his team are working hard on that. And then on body injury, as you know, those are long-dated claims. So we want to make sure you get the reserves right and given the bump, the volatility in both frequency and severity and bodily injury, we've had to look hard at those. So, we feel good about the forecast.

I don't think you should read it as a huge change. We provide the outlook to give you a sense of where the business is and, as you know extremely well, it is not the only impact to operating EPS. So we try to just do it to give you a sense for the business..

Well, I had you at 89.3, so it certainly isn't a big change from my perspective. I just wanted to make sure there wasn't something startling in September that got you off your – if we had changed it, we would have done it by now, comment.

If I could just pivot to life with a quick follow-up, what's the size of the redeployment and what's the yield loss?.

So it was roughly $2 billion of long duration fixed income, and if you look at the portfolio yield on the portfolio, Bob, it's about 5.60%.

These were longer duration assets, so you probably should think of them as being a little bit higher yielding than the 5.60% overall yield, and then the redeployments into three-year corporates and equities, so you're probably looking at a proxy of around 2.25 until we get the performance based assets into the ground..

Those are pre-tax numbers right?.

Yes..

Great. Thank you..

Thank you. Our next question comes from the line of Cliff Gallant from Nomura..

Good morning. I had a question about – I think one of your competitors in some states are allowed something called premium trend pricing.

I was wondering what your comment is on that as an underwriting tool, particularly in a time like this?.

As an underwriting tool, Cliff, or as a pricing tool?.

As a pricing tool..

Okay. Sorry..

It's Matt, Cliff. Yeah, I can say that we've evaluated the use of monthly rating factors in the past. We continue to look at it. In some situations when you have slow and steady increase in the cost of insurance, it works to your advantage.

In situations like we're in now where you have spikes in either frequency of severity, it really doesn't do anything you can't do by just taking rate as indicated in those states. So we continue to look at it. We also know that not every state would permit it. We believe that most of the states that permit it are file and use states anyway.

So if we're on top of our indication, if we're monitoring as we do on a monthly basis, we should be able to do anything that that technique allows you to do and do it more targeted, more segmented in a more responsive fashion. That puts everything in an auto play mode.

Ours is more of a hands on the wheel mode and that is what we believe is most appropriate in times of volatility and significant changes that we have as we do today..

Cliff, I think often it's interesting as you watch people analyze our results and other people's results. Everybody is looking for an answer to why. Like, why yours? Why theirs? I would say and this is like it's one of these complicated 1000-piece puzzles.

There's a variety of things that we all do differently, and the thing to look at really is the way in which Matt's talked about, the way we run this business in a highly targeted, highly local, highly analytical fashion. We use as many tools as possible to compete effectively and get our returns back.

So, I don't think there is any one silver answer as to is it geographic spread, is it monthly rating thing, is it telematics? There's a whole bunch of things that go into this complicated business. I would just say we're highly focused on making sure we make money..

Okay. If I could be allowed a follow-up.

I was curious with the accident forgiveness program if there any – are you contemplating any changes to that? Do you think that that might be contributing to the frequency numbers?.

No. I can give that as a short answer..

Yeah..

It's just not used the – it's not used to such an extent. It's priced appropriately. We monitor it carefully. And that's not a causal factor..

Okay, okay. And I'm sorry, I will ask one more. On Esurance, we've seen such a slowdown in the growth rate. And I'm just curious and from a – how is that slowdown affecting the organization? I know sometimes when you have such a go-go strong growth company and it slows that it can have an impact on how things work day-to-day..

Yeah, it's Don. Let me try to address that. I think there's an interesting twist to the question on how it's impacting the company. I mean, when we put the two businesses together, obviously, the strategy was to use Esurance to address the self-serve market that was still brand sensitive.

The business is roughly twice the size it was when we bought it and we've been running it with an eye towards investing for that growth. So we've said consistently, we're running it based on lifetime economic value. That said, the business is about twice the size now.

And so, as a larger part of the Allstate portfolio, we do want it to get to the point where that size begins to generate appropriate profitability as well. So, I feel really good about where they are as a business. They had a great quarter. They are on the right path.

They've done a terrific job of getting – in spite of the drop in marketing, getting the company still to grow. If you look at their combined ratio and loss ratios, they had a really strong trend over the last few quarters. Loss ratio is down pretty dramatically again this quarter. Expenses are down largely due to marketing.

So I think they've done a good job. Now, having said that, they are still growing. They are still expanding states, they are still expanding products. In the Q, we disclosed, we've still got almost 2.5 points of investment in expansion of their business. So I don't view this as a business that should grow 3% for the rest of eternity.

I think this was an important inflection point to consolidate the gains we've had from a volume point of view and get the business to the point where operationally and from a loss ratio perspective is profitable, but we have not stopped investing in that business for growth in any way.

And so, if I circle back to then how does the team feel, I think they feel fabulous. They're proud of the combined ratios they're running. They're proud of the fact that they are still growing in spite of lower marketing and the focus on profitability.

So, all-in-all, we are delighted with what we've set out to do in the last three years or four years and where they are right now..

Yeah. And I would say we built a strong team there. So some of the people are those that we acquired and Jonathan Adkisson, who runs it, who's been there for a long time, run it well. The financial person has been there a long time.

We brought in some new claims capabilities because, as Don pointed out, you grow twice in size, you get twice as many claim people. Plus we have more Esurance eyes on Esurance cars as opposed to using third parties. So I feel like this is actually a really good time to consolidate our skills and capabilities to go to the next level of growth..

Thank you for taking the questions..

Thank you. Our next question comes from the line of Michael Nannizzi from Goldman Sachs..

Thanks.

Just wanted to just touch on the expense – can you quantify, Tom, how much of the expense ratio increase was – or expense ratio decline was a reduction in advertising?.

Hey, Mike. That shows up in the Q. There's a table in the Q you can get to the specific number..

Okay. And so I guess....

But, Mike, I will tell you. I don't think – we cut advertising, but we're not doing it in such a fashion that it hurts our long-term brand or market position. We just felt like we shouldn't continue to lean in and advertise and drive quotes when in fact we had tightened underwriting standards..

Got it. And then – so, certainly, I mean, the expense ratio improved, the loss ratio is up – year-over-year it's up sequentially.

I mean, is that a lever that you feel like you can continue to pull, like is this a manageable level of expenses for the enterprise to run at in the near-term?.

Well, Matt mentioned what we're working to do. I don't think you – it'll probably go up some over the course of time. We're not trying to – it's not like we're – we really are focused on making sure we do everything possible to get our short-term goals without throwing out our long-term growth or long-term strategy.

So whether that's technology, advertising, investing in expanding products like homeowners at Esurance or expanding our benefits business into Canada, we're pushing hard on all of those things. So, I think you should expect to see us manage between those. Are we always focused on cost? Yes.

Did we decide in this quarter because we take our outlooks seriously, and we said, let's just not spend the money if we don't need to. So we didn't..

Got it. Okay. Thank you..

Thank you. Our next question comes from the line of Paul Newsome from Sandler O'Neill..

Good morning. This is actually meant as a little bit of a softball question.

Could you talk about just how the trajectory of improvement would happen for the price increases over time given the accounting for insurance and the fact that you've got a mix of six-month and one month policies? I am just wondering if maybe people – at least some people out there maybe have gotten a little ahead of themselves in terms of how quickly the underlying combined ratio improves given the efforts that you are doing, just the natural lag..

Paul, first, I always think your questions are thoughtful. So there's two lines to look at. If you go back to Pat's slide, there's a blue line and the red line.

The blue line is the increase in the earned premiums and, of course, what that – it starts with the rate increases, which we show on the bottom of that slide, then it goes to what you actually write.

There's usually a little bit of leakage between there because what happens is customers raise their deductibles, which actually improves – it still gives you the same impact as raising prices, it just doesn't show up in the blue line, it shows up in the red line in that the severities go down a little bit.

But then you have it written and then it takes a while to come through earned. You can track those two, written and earned, and do some analysis of that and actually determine how it burns through. You could also do the same thing in between the rate taken. And so you could build a model that would help you on that part.

The trickier part of your question is what to do with the red line. And the red line is our cost, which is obviously frequency and severity, that bounces around obviously by quarter. So you have to kind of – what we tend to do is smooth it with various portions of time.

We look at it on the latest quarter, we look at latest month, we look at it over six months, 12 months, and you'd have to look at the frequency and severity. I think it's unclear yet where, as Matt pointed out, let's just call it, the top of frequency is.

It's hard to tell, but what we do know is as long as it continues to go up, our blue line will continue to go up. So what we tend to do is look at the difference between those and what we are trying to do is have the earned premium go up faster than the – what we would – the combination of frequency and severity go up.

And you can't (56:41) see when those lines cross. And when they cross, then that's when you get the automatic drop in the combined ratio. So I can't give you a specific quarter because none of us really know what will happen with the red line. What we do know is as long as the red line is going up, so is our blue line.

And our blue line should go up by more than the red line..

Thank you. And then separate question. I personally cover a lot of regional insurers and they seem to be mostly independent agent channel personal line type businesses there. They are similar and they seem to be frankly having quite a bit of trouble with a lot of scale issues.

Given that sort of environment, given what we have seen with frequency, any thoughts longer-term about your independent agent channel, whether or not it needs more scale or not?.

Well, it's a good question.

First, I would start with, the independent agency channel exists because there are some customers who don't really care which insurance company they have, don't necessarily have the highest level of trust in insurance companies, and trust a local advisor to help them select between those companies and give them the right coverage because they don't want to do it themselves.

So, as long as those customers exist, the function and role of the independent agencies will continue to be important. That role over the last 30 years has gotten smaller. That used to be a bigger portion of the market, but it leveled out at about 30% of the market or so.

As technology has helped people do more self-serve and that kind of stuff, it could be under a little more pressure, but I think you will continually see people that don't want to do work themselves and don't necessarily have a trusted brand in mind that they want to pick from.

As it relates to scale on the independent agency company that service that channel, scale does matter. It matters more and more each year whether that's on data technology, ability to negotiate lower cost with people.

So, I think you will continue to see a reduction in the share of small carriers really in all four of the channels, which is why we are trying to be in all four of those so we can leverage our scale across all of those. That said, it is a slow process because many of the companies you're talking about tend to be mutual companies.

Over about half of the business is held by mutual companies and they tend to have an extremely high level of capitalization. And so they can wait a long time before they have to get out of the business. And we'll take one last question and then we'll wrap up..

Certainly. Our final question then comes from the line of Ian Gutterman from Balyasny. Your question, please..

Hi, thanks.

Matt, do you view ISO fast-track data as a reasonable proxy for the loss trends you are seeing?.

Reasonable proxy? I'll get in trouble no matter how I answer that. We look at fast track data. Ian, it's informative. I think it's directionally correct. And I think it is – it shows us – it confirms for us what we're seeing in the marketplace.

But like almost every third party data source, and this is true for all the rate services that are out there, we look at those all the time and there are some data issues with them. There are some reporting issues from certain states. So, I don't think that they are ever determinative. They are only good indicators..

Okay. The reason I asked is it – the data seems to suggest that there is more of a geographic bias to what's going on than what you guys have suggested the past few quarters. I was curious if you agree with that part of it.

Has anything changed in what you've seen over the last quarter to suggest that maybe this isn't as uniform as you thought in the past that maybe it is a little bit more in certain pockets like California and some other areas..

Yes. So, Ian, I don't think I ever said it was uniform. I said it was country-wide. But it varied by geography and, yes, I do agree with that.

I think as the Dowling report, the IBNR weekly from the middle of October talked about the geographic differences explaining much of the discrepancy and frequency trends across underwriters, I think we do see that.

We certainly see pockets, and Tom referred to it on this call already of pockets of geographies where the frequency trends are hitting harder than others. I referred to it on my last call too.

Miles driven is not uniform across the country and when you look at the Department of Transportation reports, there are geographic differences of the miles driven, Northeast actually not up so much, other areas of the country up significantly more. So, yes, I do think geographic differences explain some of it. We see geographic differences.

When I say it's country-wide, what I'm referring to, it is widespread. It's not as if this is a localized issue where we did something wrong or we fail to implement the rating plan properly in a state. That's why I refer to the country-wide impact. It is everywhere, but it is at different levels in each geography..

Got it. I got that..

In a sense, what we are seeing, you see the one movie, which is the movie we report, which has country-wide numbers. We have 50 movies, 100 movies, 200 movies we are watching. And we adjust for each of those movies. So whether it is a particular state, a particular risk class or a particular product line, so we are always adjusting.

And that's the way our process in business model works..

Thank you all for your questions and insights. I'll try to be respectful of your time. Just know we continue to balance both the short-term and long-term initiatives so we are creating shareholder value and driving long-term growth. So thank you all and we'll talk to you next quarter..

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..