Good day, ladies and gentlemen, welcome to The Allstate Corporation Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will open up a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. 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. Mr. Block, you may begin.
Thanks, Matt. Good morning, everyone, and thanks for joining us today for Allstate's second quarter earnings conference call. This morning, Tom Wilson, Don Civgin, and I will give some commentary on our results, and then we'll open it up for your questions. Assisting us in the Q&A session will be Judy Greffin, our Chief Investment Officer, Joe Lacher, President of Allstate Protection, Sam Fields, Controller, and Matt Winter, President of Allstate Financial. During the Q&A session, we ask that you limit yourself to a question and a follow-up so that we can hear from as many of you as time allows. After the market closed yesterday, we provided our earnings press release investor supplement and filed our 10-Q for the second quarter of 2010. This morning, we also posted a presentation that we will be using today. All of these documents can be found on our website.
As noted on slide one of the presentation, this discussion may contain forward-looking statements regarding Allstate's operations, and actual results may differ materially. Refer to our Form 10-K for 2009, Form 10-Q for the second 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 Nieder and I will be available to answer any additional questions you may have after this call ends. Now let's get underway with Tom Wilson. Tom?
Good morning. We appreciate your continuing interest in Allstate. I'll begin with an overview of our results for the quarter. Bob will then discuss the details of the business unit results, and Don will cover our investment performance and balance sheet position. We'll get to your questions. Our results for the second quarter are a continuation of the positive momentum we established over the last year and a half, despite the ever-present volatility of weather in the financial markets. We generated $441 million of operating income, or $0.81 per share, a sizable increase over last year's results, reflecting lower catastrophe losses, as you can see on slide two. You'll remember that last year we had record second quarter catastrophe losses. In Allstate Protection, the combined ratio was 96.8, 3.2 points below the second quarter of 2009.
The underlying combined ratio of 88.1 remains in line with our annual guidance of 88-90. Allstate Financial continued to take positive steps towards its goal of raising returns while repositioning the business. Operating income was $125 million for the quarter. Investments generated strong returns reflecting our risk mitigation and return optimization strategies. Net investment income flattened sequentially as portfolio yield stabilized. Valuations improved as declining interest rates more than offset wider credit spreads. We produced $145 million in net income, a decline from last year's second quarter results, due primarily to realized capital losses from our risk mitigation programs, which were more than offset with unrealized gains in the portfolio. We ended the quarter with a $400 million net unrealized gain on the investment portfolio versus unrealized losses of $849 million three months ago, and a $7.3 billion unrealized loss one year ago.
As a result of all of our efforts this quarter, our book value per share increased 3% from March 2010, almost 8% from the beginning of the year, and 19% from Q2 2009. We remain focused on our priorities for 2010. Our operating results show continued progress in executing our strategies. Our auto business continues to generate excellent returns. While many of our standard auto growth initiatives are working, they're not generating enough volume yet to increase overall policies in force. Our new business trends are improving as we continue to refine our product and price offerings to our targeted customer segments. We feel particularly good about our cross-line sales efforts, as Bob will discuss. Offsetting these positives is a reduction in the size of Encompass and our California auto business, as well as lower growth in Florida.
Homeowners' profitability remains a challenge as catastrophe losses remained above average this quarter, though not as high as last year. We have made progress and remain focused on improving returns in this line of business. Consequently, we will continue to seek price increases, tighten underwriting standards, and work to build more sophisticated risk management tools. As you know, our strategies to improve the returns in Allstate Financial include reducing the spread-based business by exiting some distribution channels, focusing on the Allstate customer base, and expanding our workplace business. We made good progress in all of these areas. Looking forward, we must stay focused on our goal to generate long-term profitable growth. We will achieve this by retaining more of our existing customers while continuing to increase new business. Our focus on improving customer loyalty is designed to do that, which is to drive improvements in retention and referrals.
Our customer loyalty index results, however, slipped slightly this quarter, as did those of the entire industry. Focusing on the customer, however, remains a key strategy in our efforts to grow profitably. We will continue to introduce new products, new prices, and new marketing support to help us win at the local level. With that, let me turn it back over to Bob for a more in-depth look at the operating results.
Thanks, Tom. On slide three, we show the premium and underwriting income trends for property liability. For the quarter, we experienced modest top-line growth while maintaining our underlying margins within the range of our annual outlook. Total net premium written increased slightly to $6.64 billion from the second quarter 2009. Increases in Allstate brand auto and homeowners net premium written were partly offset by declines in our Encompass brand. Allstate brand standard auto net premium written grew 1.9% in the quarter. Increases in average premium driven by rate actions taken over the last few quarters more than offset a decline in overall unit volume.
New business volume increased 0.4% quarter-over-quarter. It was up 14.3% if you exclude Florida and California, as profit improvement actions in those two markets masked the positive results of growth initiatives targeted at our customer segments, which are gaining traction in the local market level. For example, our effort to cross-sell auto to our monoline property customers is progressing nicely. Both the close rate and the quality of the business is better than average. We are exploring more ways to improve the effectiveness of our cross-sell processes. Auto retention remained level at 89% after increasing slightly in the first quarter. While new business volume increased, it was not enough of an increase to overcome the business lost at renewal. Thus, policies in force fell 1.7% from June 2009 levels and 0.3% from March 2010.
Allstate brand homeowners net written premium of $1.565 billion grew 2.2% quarter-over-quarter. This was driven primarily by an increase in average premium of 6.1% as rate actions work into the book of business. We expect to continue to seek rate changes where necessary to improve the returns over time. The combined ratio for the quarter was 96.8 all in, an improvement from the second quarter of 2009 of 3.2 points. The underlying combined ratio, which excludes catastrophe losses and prior year reserve re-estimates, remains within the range we established for the year at 88.1%. Just a few words on catastrophe losses for the quarter. In the second quarter, we experienced 30 events estimated at $758 million, or 11.6 points, almost matching the record quarter we had last year.
Partially offsetting the current quarter's losses were favorable reserve re-estimates of $83 million for prior years and $39 million for catastrophe losses that occurred in the first quarter of 2010. In total, we had Excuse me, $636 million, or 9.8 points of catastrophe losses in the quarter, an improvement of 2.7 points from the second quarter 2009. In addition to the $83 million of prior year reserve re-estimates for catastrophe losses, we had another $67 million of favorable reserve re-estimates. These adjustments were primarily due to favorable severity trends in auto physical damage. On slide four, we get a look at auto loss cost trends, which in total were within our expectations. Both bodily injury and property damage reported frequencies increased over the second quarter of 2009, 4.2% and 1.9% respectively, as shown on the charts on the left side of the page.
Offsetting these increases were decreases in paid severities for both coverages of 1%-1.5% displayed in the upper right-hand corner. These results, when coupled with the loss cost results of the other auto coverages and an increase in earned premium from rate increases taken over the last several quarters, produced a combined ratio slightly better than the prior year's quarter, and one that is consistent with our experience over the last year and a half. Slide five has similar loss cost information for homeowners, where profit improvement actions continue as catastrophe loss activity remains above average, offsetting a moderation in non-catastrophe loss cost trends. In the top two charts, we show our frequency and paid severity results excluding catastrophe losses. Frequency continues to run ahead of prior year, while paid severity trends remain in negative territory relative to 2009.
In the lower left-hand corner, we show homeowners catastrophe losses as a percentage of homeowners' earned premium. Catastrophe losses in the second quarter 2010 equate to about 35 points of homeowners' earned premium versus an average since 1992 of around 29 points. Finally, in the lower right, the combined ratio came in at 104.4 for the Allstate brand, an improvement of almost 12 points from last year's second quarter. The loss ratio, excluding catastrophe losses, was 47.9, compared to 49.3 for the second quarter 2009, 1.4 points better. Bringing this line of business to acceptable levels of profitability remains a priority. Shifting to Allstate Financial, slide six provides a snapshot of the second quarter's results, which indicate solid progress being made. Premium and deposits totaling just over $1 billion declined substantially from the second quarter 2009 as we shift the focus to underwritten products and away from spread-based business.
Underwritten products, interest-sensitive life, traditional life, and accident and health, grew 12% over prior year, while annuities fell about 60%. Operating income for the quarter was $125 million, or $60 million better than prior year. This increase was driven primarily by lower DAC amortization and improved investment spread, offset somewhat by lower benefit spread. There were some one-off items included in these results, but they netted out to a favorable after-tax effect on operating income of about $10 million-$15 million. For the quarter, Allstate Financial had a net loss of $107 million as we had $226 million of after-tax and DAC realized capital losses, or $353 million on a pre-tax basis. Taking a closer look at those pre-tax realized losses, $179 million related to derivatives
Primarily designed to protect against rising interest rates, there was an offsetting economic benefit with higher portfolio valuations. The $200 million of impairment and change in intent write-downs were $29 million less than the second quarter of 2009. Sales at a gain of $18 million were $145 million less than last year. Now I'll turn it over to Don.
Thanks, Bob. First, I will cover our investment performance for the quarter, and I'll finish with a quick recap on our capital position. As we have in recent quarters, we remain focused on continuing to effectively manage risk and return in the portfolio, and our proactive approach served us well again this quarter. On slide seven, you can see the allocation by asset class for the investment portfolio, which totals $99.9 billion. Fixed income securities remained the largest portion of the portfolio at 82%. We remained long corporate credit, as we have in previous quarters. Consistent with our outlook, we reduced our allocation to municipal bonds by $1.6 billion and commercial real estate by $966 million in the quarter. We benefited by lowering the allocation to equities in the first quarter as the market declined and maintained that underweight position throughout the second quarter.
Slide eight provides trends for investment income and realized capital gains and losses for the last six quarters. Focusing on the top section of the slide, in total, net investment income fell 5.3% from prior year, but was almost level with Q1 2010. We remain in a defensive position relative to the interest rate outlook, with reinvestment proceeds being placed in shorter duration instruments and derivatives being used to manage the overall duration of the portfolio. Shifting to the bottom of the slide, realized capital losses in the quarter amounted to $451 million pre-tax, compared to a $328 million gain in Q2 2009. Total write-downs from other than temporary impairments were comparable to prior year at $306 million, with credit-related impairments trending down by $52 million compared to Q2 2009. The gain from sales was $118 million less at $145 million. The big swing category this quarter was in derivatives.
Instruments used primarily to protect the portfolio valuation from the negative effects of rising interest rates and equity market declines. For this quarter, we had $310 million in losses versus a gain of $419 million in last year's second quarter. While we recorded a loss this quarter, the economic offset of these transactions was positive as the valuation of the portfolio improved as interest rates declined. This improvement in valuation is shown on slide nine. We moved from an unrealized loss position at March 31st of $849 million to a gain of $400 million at the end of the second quarter. In total, fixed income securities improved by $1.7 billion. With credit spreads widening during the quarter, this increased valuation is attributable to declining interest rates, which more than offset our realized losses on derivatives. Equities fell $483 million from March 2010.
After tax and DAC, our unrealized position improved from a small loss to a gain position of $328 million. Finally, on slide 10, the combined impact of our income and the improvement in unrealized capital gains resulted in an improvement in capital to $18 billion, driving book value per share up 3% from March 2010 and 19% from June 2009. Assets at the holding company remained at $3.1 billion, and while our estimated statutory surplus declined slightly to $14.9 billion, we did take a dividend of $200 million from the insurance company up to the holding company. All in all, it was a solid quarter. We continue to proactively manage our portfolio and are focused on executing on our strategic priorities. With that, I'll turn it back to Tom.
Let me do a quick recap before we go to questions. We delivered another profitable quarter despite the weather and volatile investment markets, the result being that we built capital and increased book value per share. Underlying combined ratio outlook for 2010 remains at 88%-90%. Auto continues to produce strong returns. Both homeowners and Allstate Financial showed continued improvement this quarter. Investments posted solid returns as we continue to proactively manage our portfolio, and we continue to take actions designed to grow our business profitably. Let's open it up for questions, Matt.
Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, please press star then one on your touchtone telephone. Our first question is from Keith Walsh from Citi. Your question, please.
Hey, good morning, everybody. First question around auto. We're seeing a few carriers out there offering one-year policies to boost retention. Maybe if you can just talk about the impact, if any, this is having on the market. I've got a follow-up. Thanks.
All right, Keith, this is Tom. I'll give you my view, and then Joe may have a view. I don't see it really having any impact on the market right now.
Yeah. Similar thought, Keith. It's an opportunity. It's the same trade-off we all deal with all the time, we're not seeing it drive enormous shifts.
Okay, great. The second question on the homeowner side, how far along are you guys in optimizing your geographic risk? I guess I have a personal interest in this as you guys dropped me last year in Queens, N.Y. Your agent told me there was hurricane risk there, thanks.
Well, as you know, I'll give you a longer-term perspective, Keith, on where we've gone from. Joe might want to talk about where we're headed too because your question is both a macro question and then obviously a regional and local question on geographic concentration of risk. As you know, we've been working hard to reduce our catastrophe losses, in particular since 2006. We're down about a million policies in homeowners as we've exited things like earthquake insurance, high-risk zones, including N.Y. Of course, there's the 1938 hurricane that went across Long Island, which happened to get dramatic flooding in N.Y., and lots of severe damage. We are getting smaller around the coast, and we'll continue to get smaller around the coast until such time as somebody comes up with a way to predict and price for hurricane risk.
Joe might want to talk some about the work he's doing on improving homeowners at a more micro level than the macro answer I just gave you.
Yeah, Keith, it's a good question and one we're working on. I think there's several fronts we've got to deal with on this issue. One, Tom was talking about was clearly peak risk on big cats, hurricane and earthquake. Another layer is just the returns we've got in those areas. The third is how do we deal with what a lot of times we'll call non-model cats, meaning things other than hurricanes and earthquakes. Returns there, sometimes that's a function of adjusting the coverages, sometimes that's a function of rates, and then just profitability in the underlying book overall. We've got big pockets of the country where we feel terrific about things right now. We've got other pockets that are one or two renewal cycles away from where we need them to be, and we've got other pockets that are further away.
We're banging away at all of those items, and making significant progress. I think you can see improvements in the underlying combined ratio in homeowners. You can see impacts on the written rate that we're taking relative to loss cost trends. We're going to keep pounding away at it. We believe this is a business where you can make an appropriate return on the core piece of it. We've got more angst about the aggregate cat exposures, but we think that there are ways to improve the position, and we're going to keep pounding away at those. It's a slower and more arduous process than we or I think anybody in the industry would like. It's an achievable one.
Thank you.
By the way, if you want to talk about your auto policy, I'm available afterwards.
All right. Thanks a lot.
Our next question is from Bob Glasspiegel from Lang en McAlenney . Two questions, please.
Good morning. Just a question on your comment in your press release, actions to improve Encompass profitability negatively impacted results. Were you talking about top line or bottom line? Maybe you could bring us up to speed on what the actions of Encompass that you're taking are.
Bob, we had some programs inside of Encompass over the last couple of years. We've been working on remediating them, which broadened Encompass' appetite out of its core area of bundled or packaged auto and home for a higher-end segment of the market. We went into a much more standard and near standard monoline segment of the auto marketplace. We expanded distribution there. We got ourselves a little out ahead of our skis and got some profitability problems there. As we've been working on that to fix it, a lot of what you're seeing is an impact in our comments were around top line. We've had to get some of that roll, some of that business off or remediated or move it from a pricing perspective.
We've had to take some actions with some of those more monoline auto distributors, that's got top-line pressure on that business. We're trying to be as laser-focused as we can on that, sometimes as we're shooting at those problem areas, it's rippling a little bit into what I would say is our core wheelhouse. We're trying to mitigate that issue, but it's very much an issue around the profitability, that we've got to deal with before we can get the core healthy and growing again.
Okay. If I could follow up, you made a reference about cat risk management actions paying off, I think. What are the metrics that you're looking at in the quarter that made you happy that you made some progress?
Bob, let me I don't think we meant to imply we thought we had homeowners fixed, that on a non-model cat basis, we're making money because you look at a combined ratio that's above 100, that doesn't even give you return at all, much less an adequate return on your capital. That business, given its volatility, requires a lot of capital. We have a lot of work to do. I think Joe was just pointing out if you look at the trends and the delta, the combined ratio is down from where it was last year. Not where we want it to be, but it's down. I think that's the progress he's talking about.
Yes. The ex cat loss ratio had over a point of improvement. We obviously have improvement in total, but that's some difference in aggregate cat volume. I think as we look at the PML stats that we'll track, we're seeing continued improvement there. Yeah, it wasn't an attempt to suggest that we were at victory. I think, Bob, your question was what are we seeing in the quarter that was showing improvement as opposed to.
Yes.
We achieve victory.
Right. Thank you. I think you answered my question to give me another one, too, as opposed. Thank you.
We're here to help.
Our next question is from Vinay Misquith from Credit Suisse. Your question, please.
Hi, good morning. Two questions. The first question is, could you provide an update on the actions you're taking to improve retention and sales, and what impact that you see they may have on the profitability? Would higher discounts negatively impact profitability? Associated with that, we've seen our two competitors growing PIF, of course, one quite significantly. If you could help us understand their growth versus your growth. Is it just a question of price in the end?
Let me maybe take a little shot at it, then we'll just tag team it here. In terms of retention, as we said, retention was flat this quarter. Customer loyalty, whether it's statistically significant or not, was down a couple of tenths the way we measure it. It bounces around from quarter to quarter. The things we try to do to drive retention and referrals up are obviously treating people well, having a good level of interaction. When we measure our interaction, we're actually doing better now than we've done in the past. The way we are making that real is if people do not do a good job for our customers, and we have them measured down to individual agencies and individual claim adjusters, then they no longer have the opportunity to be part of our team.
In addition to that, we have a number of positive things we've done, like put it into the 401(k) so that our 36,000 employees, part of their retirement is based on getting customer loyalty up. We have a number of other, I'll call them operational programs in terms of how to explain a premium change to everybody, all the things we do every day in the millions of calls we get to make sure we do a better job there. The high discounts that you're referencing really aren't driven as much towards retention. We don't have a retention-based pricing model as you would see State Farm does. Those are around the cross-line sales, Joe may want to make a comment about how that is a twofer in terms of driving retention. I don't think we can comment on other people's growth.
I think you can look at what we have. We're up 14+% if you exclude a couple of places. That said, you can't exclude a couple of places in total because we're supposed to grow in total. We think we're making conscious decisions to do what's right overall, I can't speak for why other people are growing. Joe, maybe you want to talk some about the discounts and the other things you're doing.
A couple of different points on it, Vinay. Your overriding question at the end was, is it just about price? I don't think, and our data suggests, and a lot of customer insights suggest that price is important, but people don't make buying decisions solely on price. If you're fundamentally out of whack on pricing, that's an issue. If you're in the game, there's other things that folks think about. We're focusing on a full breadth of those. Sometimes that's product breadth, sometimes that's ease of access, sometimes it's the customer service that Tom was talking about. It's a lot of things, and we do well and are working on improving a lot of those.
The strength in Your Choice Auto, the ability to have a more effective homeowners product and be able to bundle that, the ability to let discounts for multi-line customers interact, drives increased retention. It drives increased customer satisfaction. In some cases, there's some interplay that we find in loss ratio relative to those items. As you take your question on discounts, if you look at one individual item, sure, if we sell the same customer and we didn't have a discount before, and we do have a discount now, that obviously reduces profitability. The issue is isolating that one item without looking at everything else that sort of works underneath it. I guess the best I can give you without providing competitive intel is we're not moving off of our combined ratio guidance or our combined ratio outlook, the 88%-90%.
What we're doing fits inside of that range. That may help you get a sense of what that's worth.
Hey, Vinay, there's one other comment you might want on growth. You didn't ask about advertising, but I think when you look at growth, you also need to look at advertising. Oftentimes the street looks at distribution channels and relates that to growth as opposed to sort of the entire way you go to market, which includes your distribution channel, but also includes the amount of advertising you do. Obviously, some channels, like direct, require more advertising and can support more advertising because of their economic structure. Also larger sizes can support a fair amount of advertising. You see us continue to do more advertising. We've changed our advertising in this quarter. It is, I won't say a war, but it's pretty close to escalating. We've continued to step up, and you'll see our advertising last year we did a lot of price, so shop and save.
We did that because we felt we were being viewed as too high priced relative to others because of our silence, not because of where we actually were. Last year, we did a lot of shop and save. You save $500 or $350 by switching to Allstate. This year, you'll see us shifting more to value which is the new component we've added to our advertising program with the Mayhem ads is dollar for dollar, nobody protects you better than Allstate. That has a price message embedded in it, but it's really to Joe's point, it's about price and the value you get from it. This set of ads targets a younger group
The continuation of our Dennis Haysbert initiative is targeted to the broader brand positioning.
That's great. My second question was on the capital. This was the first quarter we saw our dividend being paid up to the holding company. Does that indicate management is more comfortable with the capital of the operating subsidiaries? In looking at the capital versus the past, would premium to surplus be a fair metric? Would you be holding more capital now versus the past, since we've gone through a rough period over the last couple of years?
Don will tell you, but I'm not sure, Vinay, if that's really one question or three.
Oh, I'm sorry.
Vinay, first of all, I think the fact that we took a dividend from the insurance company up to the holding company of $200 million is an indication that we are getting more comfortable. I would never say never, but it's nice to return back to kind of the tradition of the insurance companies providing capital to the parent company. Yes, I think it does indicate an increasing level of comfort. As it relates to the level of capital we want to hold, I think we are still very comfortable with the level we have at the parent. I would still argue that this is an environment where having a dollar too much is less painful than having a dollar too little. We'll continue to reassess that number over time. We're quite comfortable with the level today.
Okay, thank you.
Our next question comes from Matthew Heimermann from JP Morgan. Your question please.
Hi, good morning, everybody. Couple questions. First, could you just expand on the conversation or just expand on your comments with respect to California and Florida versus the rest of the country? In particular, I'd be curious if maybe you can talk about differences in PIF trend as well as maybe differences in the rate filings between the rest of the world and those two states.
Yeah, I'll do that. I'm going to sort of balance trying to help you with that and competitive intel. I'm not going to give you everything you're looking for. I'll apologize on the front end. California and Florida had some pretty high new business levels for us last year and have lower new business levels this year for slightly different reasons. California, we've backed off somewhat, just because that's historically a marketplace that can be challenging from a profitability perspective. We feel okay about where our numbers are there now, and we're trying not to let it get into an overheated spot. Some of the growth there has just slowed somewhat. The new business has slowed. Florida, we've got a little bit of a different spot. We're seeing some profitability challenges there. We're responding to those challenges.
They're driven with some underlying PIP and BI trends that we think are heavily environmental. We're working on combating those trends. It is a spot where it causes us some profitability angst, and we're responding to that. Which also causes perhaps a bigger decrease in new business than its more substantive.
With respect, are the retentions dropping in those states, too?
I think retention is up in Florida. The retentions are holding all right in those spots. I'm going to try not to give you too much precision on them. It's a bigger issue around new business. I'd expect in Florida, where we're going to take more aggressive actions, we may see that move a little bit.
Okay. If we just wanted to think about, I don't know what stat you're comfortable giving on this, I'd just be curious if you look at the country, maybe how many states are you seeing positive PIF growth versus states where maybe it's more the status quo and then states where it's dropping?
Let me try to give-
I know the size of state will vary, I'd just be curious.
Let me try to give you this picture, which is a little bit different than what you're asking for. Ex Florida and California, I think we saw a new business up over 10% across the rest of the country. When you track the relative levels of new business, you can see that those are driving the new business trends we're seeing. Other than California and Florida, the aggregate's up 10%.
Okay. Is it fair to say, is the retention in the rest of the country higher than Florida and California?
I'm trying to think through it. I don't believe it's meaningfully different, no.
Okay. If I could sneak just two numbers questions, hopefully that are quick. One is just underwriting tax rate in the quarter, the tax rate on P&C underwriting looked high. Also just curious with the underfunded pension, whether you have any cash contribution requirements in 2010 and 2011.
Maybe follow up with Bob on the underwriting. The tax rate you're talking about, I don't understand what.
It's the investment, the tax is more taxable income.
Yes, taxable.
The investment portfolio.
As you know, we've been shifting.
No, I was just looking at the underwriting only.
Yeah.
I'll follow up. That's fine.
Yeah, we'll get back to you on that one.
Then the pension?
The pension fund, we continue to put cash into the pension fund whenever we need it to keep it properly funded. We put cash in last year. I'm sure we will definitely put in cash this year. Just to make sure, but part of it depends on investment results, but it's not a major driver of operating income one way or the other in terms of how much cash we put in.
Okay. Appreciate it. Thanks.
Our next question comes from Meyer Shields from Stifel, Nicolaus & Company, Incorporated. Your question, please.
Thanks. I want to start with a question on Allstate Financial. As I understand it, two of the core strategic initiatives are to increase sales through the Allstate channel and to focus much more on underwriting spread or benefit spread than investment spread. Neither of those seem to be showing up in the quarterly results. I was hoping that I'd get Matt to talk about that a little.
Well, this is Matt, Meyer. Well, actually, I think they did show up in the quarterly results. The underwritten products, which is, as Bob said, interest-sensitive life, traditional life, and accident and health, actually grew 12% over prior year. The drop that you saw in premium and deposits was on the annuity side, which fell about 60%. I think we did see the exact growth that we referred to. Our two primary strategic prongs are, as you said, to increase underwritten products and de-emphasize spread-based products, number one, and from a distribution channel perspective, to focus on the Allstate agencies and the worksite division. Both of those are the areas we saw growth in.
The de-emphasis of the spread-based products, as Tom mentioned in his remarks, as you know, we reported last quarter that we exited the outside bank and broker-dealer channel, which was almost exclusively a spread-based product channel for us. That had the result of immediately decreasing the amount of spread-based business that was being put on the books. Maybe you could tell me if there's something else that you're looking at that would imply something differently.
Yeah, I guess what I was looking at in terms of the distribution is that premiums and deposits were down almost 10% in Allstate agencies, but flat in independent agents. The profit in the quarter seems to come more from interest spread than benefit spread.
The second piece is going to be a transition, right? The second piece is we had a large portion of our profitability has always been generated from spread-based. Just by the fact that we're reducing the size of the balance sheet there, it'll take a while to come down, Meyer. You can look at the size of the balance sheet, and that should come down. The accounting in that business is a lot like Mr. Coffee. You pour it all in at the top, and it kind of comes out really slowly. Changing the mix of business takes a while for it to come out a different way. Matt, I don't know if you have any other insights into the-
No, I think I know what you're looking at. You're looking at the part of the breakdown on premium deposit by distribution channel, where you show the drop in Allstate agencies from 542 last quarter to 523. That is a conglomerate that includes spread-based products. The drop there was in the spread-based products, and the pickup was in the underwritten products.
If I remember correctly, I think we had a big bank promotion last year. I think we did a lot through the bank and the agency channels but-
That's true. The comparison I just talked about was from prior quarters, from first quarter this year.
Oh, okay.
It just continues to show the decline in the spread-based products.
Okay. That's very helpful. Thank you.
Sure.
If I can throw one to Joe, did you sense in terms of why you've had consistent success in the Allstate distribution channel for auto, why that information hasn't been as helpful with Encompass as we might otherwise expect?
I think we made a miscalculation a couple of years ago on how we used some of that data, in the differences in the behavior within the independent agency channel. When you're dealing with an independent agency channel, you can get subjected much more quickly to adverse selection because you're getting a CSR, customer service rep, inside of the independent agency, effectively sometimes spreadsheeting you. You don't see that the same way in a captive or exclusive agency channel. We put some products and some pricing programs in, we expanded our distribution to a lot of auto specialists that got closer to being bucket shops, which were outside of our Encompass staff's normal agency management expertise. That group tends to exploit that weakness more rapidly than other folks.
The combination of those two things put pressure on us, and we just didn't see it as quick as we should have.
Okay. That's very helpful. Thank you.
Our next question is from Ian Gutterman from Adage Capital. Your question, please.
Hi. I just wanted to follow up on the capital position. I guess first, the stat capital is lower than it was at the start of the year. Can you talk about why you're comfortable with that? Because your leverage ratios are still higher on a stat basis than they were pre-crisis. Related to that, can you just walk through the changes in the quarter, why even after the dividend, it looks like we were down about $300 million, even though you had positive earnings in both segments?
I think the answer to the question, first of all, you answered to some extent the first question with the second, which is the dividend coming up. We've been continually building capital in Allstate Insurance Company for the last couple of years. The fact that it was a little bit higher doesn't particularly concern me. We've let it get a little bit higher. I think we're comfortable with the levels of that and felt it was appropriate to get back to the point of taking dividends out on a more regular basis. That's why we took the $200 million out. We still remain fully capitalized at the Allstate Insurance Company level.
Okay, just to follow up, Don, you were down $500 million in capital sequentially, and only $200 was the dividend. That's why I was trying to clarify why did the other $300.
You're looking at the piece including Allstate Life. That 14.9 is inclusive of what's down at Allstate Life.
There was a loss there.
Yeah. That's not just Allstate Insurance. That's not just Protection's results.
Okay. Basically, the pure Protection was flattish, and Allstate Life was down?
That's probably about right, yeah.
That was because essentially most of the realized loss was rather life companies that are net basis life didn't make money. Is that right?
That's right.
Okay. Got it. Okay, thank you.
Our next question comes from Alison Jacobowitz from Bank of America. Your question please.
Hi, thanks. To the extent you can, given all the detailed comments you gave, I was wondering if you could talk some about how you're feeling about the total company premium growth, Property and Casualty, obviously, for the second half of the year, given where you are in the Florida, California cycle and the fact that we saw some growth this quarter. Also, to the extent that you can comment, how you're thinking about, or have your thoughts changed at all about share repurchase and where you are in that process?
Alison, this is Tom. In terms of the overall growth in premiums for the second half, we don't give forecasts. We don't do the detailed guidance. All we give is a combined ratio of ex cats and reserve releases. I think I would give you just the generic answer, which is we expect to grow the business. We're working hard to grow the business. We don't want to grow the business and throw profitability out the door. It's a balancing act, and it changes from quarter to quarter. Our long-term goal, though, is obviously to grow market share in the Property and Casualty business, and we've talked about all the ways in which we're trying to do that. In terms of share repurchase, Don said it well, which is we're comfortable where we're at.
We're longer capital today than we were at the beginning of the year, which has been one of our objectives for the year. We've always had a track record of giving that money back to shareholders when we think the company no longer needs it. I think over the last 10 or 12 years, we've generated about $28 billion of capital. About $24 billion of that has gone back to the shareholders in the form of dividends and share repurchases. We have no reason to change our stripes on that one. If we have a good use for the money, we'll put it to use. If we don't, we'll give it back.
At this point in the economic climate where we are this year, we feel like it's better to be long capital than to be right at the edge, given that no one's really yet certain where this whole economy will move.
Thanks.
Our next question is from Dan Johnson from Citadel. Your question, please.
Great. Thank you very much. Just a basic question on the investment portfolio. Can you talk a little bit about what we're seeing in new money yields on the let's just focus on the P&C portfolio and what sort of instruments are we investing in and how is duration changing for new investments relative to the average, please?
Dan, it's Judy Greffin. In terms of what we're investing in. As you know, we have reduced our exposure in munis, commercial real estate and to some extent in equities. The reinvest has largely been in corporates and government securities. The yields on the reinvest are generally lower because of the rate environment we're in. Generally lower than the overall yield on the portfolio. Yet not significantly lower at this point. I guess the second part of your question was, or the third part of your question. The yields were generally lower.
Where are we putting the new money?
We're putting the money in corporate.
The duration.
The duration on the portfolio. On the property and casualty side, we're trying to keep it right around four years.
When you say the new money yields aren't much lower, I want to say off the top of my head, the fixed income average was around 3.5% after tax?
On the reinvest?
No, the average portfolio yield. I'm just pulling up the supplement again.
Pretty close.
It's around there, yes.
Yeah. Are we able to put new money to work at four-year duration above 3%?
No, not generally above 3% at four duration. It's around there.
Great. Thank you very much.
Dan, we've also been putting some more money in high yield and stuff. You got to look at it. It's not all govies, right? Obviously.
Yep.
That would be easy to do. I think when you look at investment income as well, you have to look at the mix, and you would see that we've gotten more fully invested as we've moved out of the period last year, where with liquidity improving in the overall portfolio, such that we now have of the $100 billion, about $35 billion is available on a quarter. It's highly liquid, and it's gotten more liquid as the markets have opened up. As that's happened, we've taken some other investments which were highly liquid and moved those into higher yielding securities. There's a lot of stuff going on under the hood there.
Is the cash balance included in the taxable fixed income yield, or is that excluded?
I think-
The cash balance would be excluded from the taxable yield.
Got it. Great. Thank you very much.
Our next question is from Michael Nannizzi from Oppenheimer. Your question, please.
Thanks. Just a question on the portfolio. Your sales during the quarter, do you sell mostly GOs revenue bonds or both?
You're asking about the muni portfolio?
Correct.
Within the muni portfolio, we are targeting certain areas to sell, we have sold some general obligation bonds. Generally, what we're looking at is selling out of things like appropriation-backed obligations, healthcare, more along the revenue bonds, non-essential service revenue.
Those are the bonds you're selling currently?
Those are the bonds that we're selling in the muni portfolio.
Got you.
For the most part. We're selling quite a bit.
You're going to get a broad cast of the portfolio as well. The things that we're focused on, where we'd like to reduce are those.
Are those, okay. How do you think about your ideal exposure to this asset class? Is it as a percentage of the portfolio? Is it relative to GAAP equity? How much weight do you give the tax advantage from these bonds?
I think it's a little bit of all of the above relative to the asset base as well as relative to GAAP equity, that's the way we look at pretty much the whole portfolio. Munis wouldn't be any different than the rest of the portfolio, yet as I think Tom said, and I've said in the past, when we decided that we were going to reduce the balance in the muni portfolio, it was largely because we felt that it was just too large a component of the property and casualty portfolio.
Great, thanks. Can you talk a little bit about the GoodF or Life program? I know there's been a few announcements recently, just kind of give us an update on how that's progressing relative to your plan and how we should think about that program.
Sure, Michael. It's Matt Winter.
Thanks.
First, as you recall, we just launched the pilot program for GoodF or Life in July. We're in the initial stages of testing the product, testing our distribution. As you know, it's a brand new product. It's a bundled product. It's completely electronic application. It's simplified issue. It's done on a signature pad. It's a pretty new process and a pretty new product and a pretty new technology. We're actually using an Allstate worksite division admin platform for it. We have a very deliberate phased in rollout process. We're still in the pilot program. We don't even go to the next regions until September.
Okay.
Then we begin the rest of the national rollout between September and January of next year. Far, though, we've worked out some of the kinks in the process and the kinks in the technology. The feedback from both the customers and from the distributors has been very good. We're pleased with the initial feedback. We're adopting some of the process changes that we learned during the pilot program to make the national launch better. This is not a short-term quick hit. This is part of a fairly long-term, multi-pronged effort to demystify our insurance offerings for the middle-class consumer and to further engage our agency owners in the sale of Allstate Financial products. I wouldn't expect any dramatic quick hit. I would expect this to be part of a sustained effort to transform Allstate Financial within the greater enterprise.
On the commission side, can you just kind of talk about how that works relative to your other life products or your current exclusive agency personalized products?
Well, one of the things that is different about this is we tried to mimic auto commissions in it. We thought that would help in the acceptance rate and the receptivity on the part of the agency owners. It's a 10% levelized commission for the life of the product, 10% of premiums as paid. Unlike the traditional heap commission, this looks and feels more like the auto and helps them build value in their agency. One of the things we wanted to help them understand is that Allstate Financial can truly help them build the value of the book in the same way their auto insurance helps them build that sustainable value.
Michael, let me use it as an example too, how the customer focus makes a difference in terms of what you're doing. This is about thinking about customers as cash flow managers rather than risk managers. If you look at most middle income people, they don't think about how much money should I put to life, how much disability, how much to critical care, how much should I save for retirement, and how do I balance all those things off? The product that Matt and his team have designed does it for them. It says, look, how much money do you have a month? It's got some simple packages, the demystification you talked about. If you don't die, then you get half your money back at 65. It's not a complicated formula.
It's not, here's what the investment portfolio does, here's the asset selection you got to make. It's really simple. It's really fast. It reflects the fact that they don't want to spend a ton of time on something where they're not putting that much money to work. This is about really designing it from the customer back, as opposed to from our risk perspective forward. You'll see that in other things we do, other new products. That's a little bit what Your Choice Auto is about. Some other new products we have coming up in Allstate Protection will be similar kinds of things, which is just make it simple based in on how they think about the world, not how we think about the world.
You referenced the economy in your opening comments, Tom. How does that factor into the rollout, and have you seen the impact of that in the test area of this new product? Thank you for answering my question.
I don't really think it impacts the rollout much. The rollout's going to be when Matt's ready to hit the accelerator, and we're ready to go, and he and Joe feel like the system will put a lot of that product through it. The economy has made people much more risk averse, much more willing to save money and think about the future as opposed to just current consumption. We think from an overall macro perspective, this focusing on their needs, their focus on cash, and to think longer term will be in the sweet spot, but it doesn't really impact the rollout. The rollout will be based on doing it right.
Thanks again.
Matt, we'll take one more question.
Our final question is from Cliff Gallant of KBW. Your question please.
Thank you. Question on just loss trends. In the auto physical side, you saw some favorable development this quarter, and the paid severity trends also look negative. I'm just curious as to what is driving the deflationary trends do you think at this point, and to what degree are you pricing that into your products?
I missed part of your question. Which specific ones were you asking about, Cliff?
Just auto physical damage.
Auto physical damage. We continue to drive our claim processes to be as effective as we can around that. I think we're finding that those processes are working effectively. We had some rollout of some new claim processes over the course of the last 18 months. For a little while, as we brought that new claim system online, that may have slowed us down a shade, and now we're back into our stride. You may see a piece of that running through there. There may be a little bit of it that's economy related in terms of what we're seeing in underlying costs that may be reversing some inflationary trends we saw last year. It's modest numbers overall, we're watching them. Generally, the aggregate loss trends, when you combine frequency and severity, are in line with what we were expecting.
They're in line with what our pricing had anticipated. I don't see a lot of change as a result of those.
In terms of relating that to your pricing, though, when I look at your financial supplement on page 16, where you talk about the historical rate of impact of rates. In the Allstate brand standard auto, it looks like on Allstate's specific % change, the trend has been that it seems like you're seeing less change over each of the last four quarters. Is that an indication that you're just relatively happy with the level of pricing right now for your Allstate brand standard auto?
That'd be a reasonable way to look at it. When we look at what we did over the last 15 months, we've talked about this a little before, if you dial back to the early part of last year, there were big challenges in the economy. We'd seen even more challenges in homeowners than we had right now. There was a lot of pressure from a lot of different functions. The capital conversations as a company we were having with you were ones where you were concerned did we have enough, not did we have too much. We took a conservative view of our pricing there and said, "You know what? We're going to make sure our auto business is performing." We anticipated some adverse loss trends potentially coming around the economy, we made sure we were quick on that.
I think we're seeing some other competitors catch up with some of those observations and trailing where we were a little bit. Our goal was to make sure that business performed well in the environment with all that other uncertainty, and it's done that. The loss trends weren't perhaps as pessimistic as we'd anticipated, and when you look at it over the course of maybe a total view of two years, we're in line with where we'd expect to be, but timing may have been a little accelerated.
Okay. Thank you.
Well, thank you all for your questions. Let me just close here. Second quarter just reflected continued progress on the strategies we've undertaken to drive shareholder value. We've achieved this performance by being good at what we do and taking decisive action. Our plan is to continue to improve shareholder value by raising returns, lowering volatility, and growing our business. Thank you all for investing in Allstate, and we'll see you next quarter.
Ladies and gentlemen