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The Allstate Corporation (NYSE:ALL)

Q3 FY08 Earnings Call

October 23, 2008, 09:00 AM ET

Executives

Robert Block - VP of IR

Thomas J. Wilson - Chairman, President and CEO

Don Civgin - Sr. VP and CFO

James E. Hohmann - President and CEO, Allstate Financial

Judy Greffin - Sr. VP and Chief Investment Officer, Allstate Insurance Company

George E. Ruebenson - President, Allstate Protection, Allstate Insurance Company

Samuel H. Pilch - (Interim) VP and CFO

Rick Simonson - Head of Investments

Analysts

Jay Gelb - Barclays Capital

Robert Glasspiegel - Langen McAlenney

Daniel Johnson - Citadel Investment

David Lewis - Raymond James & Associates

Matthew Heimermann - JPMorgan

David Small - JPMorgan

Ian Gutterman - Adage Capital

Joshua Shanker - Citigroup

Meyer Shields - Stifel Nicolaus

Josh Smith - TIAA-CREF

Brian Meredith - UBS

Paul Jisimus - Sander O'Neil

Allan Kervin - Bank of America

Operator

Good day, ladies and gentlemen, and welcome to the Allstate Corporation Third Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Block, Vice President of Investor Relations. Sir, you may begin.

Robert Block - Vice President of Investor Relations

Thanks, Matt. Good morning, and thanks for joining us today. Last night we issued our press release detailing our third quarter financial results, as well as the majority of our investor supplement. These documents are available on the Investor Relations portion of the Allstate website.

Today, Tom Wilson, Don Civgin, our new CFO and I will offer some thoughts on the quarter after which we will open up the call for your questions. To help with that conversation during the Q&A session, we have Judy Greffin, our Chief Investment Officer; Jim Hohmann, Head of Allstate Financial; Sam Pilch, our Controller; George Ruebenson, Head of Allstate Protection; and Rick Simonson, Head of Investments. We ask that you limit yourself to one question and one follow-up, so that we can accommodate as many inquiries as time permit.

Please note that the following discussion may contain forward-looking statements regarding Allstate and its operations. Actual results may differ materially. For information on factors that could cause such differences refer to our 2007 Form 10-K, the second quarter 2008 Form 10-Q and yesterday's press release. We will discuss non-GAAP measures for which you will find reconciliations in the press release and investor supplements on allstate.com.

This call is being recorded and your participation will constitute consent to any recording, publication, webcast, broadcast of your name, voice, and comments by Allstate. If you do not agree with these conditions, please disconnect now. A replay will be available shortly following the conclusion of this call. Our remarks are current only as of the time and date of the call. And finally, Investor Relations will be available to answer inquiries after the call.

Now let me turn it over to Tom Wilson. Tom?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Good morning. I'll begin about riding [ph] an overview of the quarter. Then Dan will discuss liquidity in capital we're going to flip the conversation little bit since that's been one of markets key focal points, then Bob will go through the detail of the earnings before we open up for questions.

This quarter we faced significant challenges with two severe hurricanes and the substantial reprising of credit risk. But the wisdom of our proactive approach to risk mitigation serves this wellness environment and we remain a strongly capitalized company with significant excess liquidity.

Furthermore, the bedrock of our company are high performing property and casualty operation continued to deliver good underlining margins and operating cash flow. Despite these efforts, we recorded a loss of $923 million for a quarter reflecting pretax catastrophe losses of $1.8 billion and realized capital losses of $1.3 billion. As you will see as we go through the details the third quarter looked a lot like the second quarter just with more severe weather and an increasingly negative investment market.

Let's start with catastrophe losses. We experienced 35 catastrophic events including four hurricanes in the third quarter. Two of those hurricanes, Gustav and Ike, we expect to be amongst the top 10 most costly hurricanes in the United State. And as you know, we've been moving aggressively to reduce our catastrophe exposure. We've been doing DAC by reducing our market share in coastal areas, purchasing reinsurance, and raising deductibles. These actions have been good choices since our losses on Gustav and Ike would have been about twice as high without them.

Continuing on with our challenges the financial markets were extremely difficult with widening credit spreads and lower equity prices. As you know the Lehman Aggregate credit spread rose from 129 at June 30 to 176 at the end of September, which caused most of the decline in the evaluation of our portfolio. This reduced earnings and increase the unrealized loss in our portfolio.

As we've discussed last quarter we have been proactively mitigating our risk reducing our holdings and financial services companies and real estate backed-securities and instituting a series of macro hedges to reduce or cut-off the pay of losses. These actions served as well this quarter as Don will discuss and we'll continue to be expanded as we go forward from here.

Our decision to protect margins in the property and casualty business and the expensive short-term growth provided stability to our overall performance. The underlying combined ratio of 85.9 that excludes catastrophes in prior year reserve we estimate was essentially equal to both last quarter and last year. This provided excellent returns in strong cash flow to offset the turmoil in the external environment.

One of the consequences however, was DAC we did not grow market share despite our continuing efforts to reinvent protection retirement for the consumer.

Allstate financials results are explainable, but not acceptable. We are redoubling our effort to improve returns in the fixed annuity business, while leveraging the parts of this business that generate good returns.

The net result for the quarter is, we did what we do best. We take care of our customers. We protect the strength of our company, and executed a strategy that will generate long-term value for shareholders despite the unprecedented external challenges. As a result of this proactive approach we have strong liquidity and capital position.

Don will now cover both investments liquidity and capital.

Don Civgin - Senior Vice President and Chief Financial Officer

Thank you, Tom. And before I start, let me just say that I'm excited to being a part of the team at Allstate. It's a company with a terrific history and a very promising future. And I am both excited to be here and fully engaged to help the team shape the future.

I want to cover three main topics; liquidity, capital, and the investment portfolio. With respect to liquidity we have and continue to proactively and aggressively manage liquidity.

Our position at the end of the third quarter was strong. We have $5.4 billion of our portfolio in same day next day cash. That's about 5% of the total. And we have about $33.4 billion roughly one-third of the total, which is or can become liquid within one quarter even in today's challenging markets.

We continue to generate strong underlying cash flows from underwriting and investments. We have over $2 billion on a year-to-date basis. Our $1 billion credit facility is undrawn, and we have no commercial paper outstanding.

We also have no debt obligations maturing until December of 2009 at which point we have $750 million and after that, we have nothing until 2012. And we have manageable fixed charges at corporate of about $275 million a quarter.

We made the decision to suspend our share repurchase program. We don't expect to complete it by the previous target date of March 2009. We will reevaluate the situation as market conditions develop in the future. The amount that was remaining under the authorization had been just under $1 billion.

Our priority is and has been to maintain and enhanced the strong liquidity that we have. Allstate also has a strong capital positions as well. We have approximately $5 billion at corporate at the end of the third quarter. We are using 1 billion of DAC to fully capitalize the life insurance company.

We have a long history of conservatively managing capital. As an example this past year, we took a fairly modest approach to share buybacks because of our concerns about the investment markets. So the reasons we've been able to maintain our capital strength include our proactive cat risk management, which is paid off substantially.

Allstate's risk mitigation and return optimization program as it relates to the investment portfolio. Our aggressive push to enhance liquidity overtime, and our proactive decision to suspend our share repurchase program.

On top of that, our disciplined approach to maintaining a very strong underlying margins in Allstate protection that served us well. That said, we are fully aware that these are unusual times and with respect the fact that nobody can predict the future. So while we are in a strong capital position, we are also vigilantly looking for opportunities to preserve and further strengthen our capital base during these turbulent times.

With respect to the investment portfolio our $105 billion investment portfolio remains highly diversified at the end of the third quarter. We mark-to-fair value our assets in a manner that's historically consistent. In accordance with GAAP all these marks are reflected in our balance sheet. And those marks related to assets that have had permanent declines in value or that we are not planning on holding to recovery go through our income statement. Again this is consistent with our past practice.

I would point out that GAAP does not have as mark-to-fair value or liabilities, which prevents us from having a completely mark-to-fair value balance sheet. We're proud of the transparency of our financial disclosures and have a substantial amount of detail in the press release today regarding the portfolio, but I want to point out a few what I think are the most important points.

Between the second and the third quarter the total value of our investment portfolio declined by $8.6 billion. Roughly half of that amount has nothing to do with the investment returns instead, being primarily the results of retirements and institutional products at Allstate Financial, as well as the reduced securities lending portfolio.

Of the remainder, $1.3 billion pretax was due to realized losses of which the largest components were $666 million from impairments, and $453 million from change of intent. The majority of the credit impairments was due to widening interest rates spreads on fixed income securities reflected in the increase in the Lehman Aggregate that Tom referred to. Significantly, a large portion of the fixed income securities that were impaired during the quarter are still performing in line with our expectations.

The $453 million of intent charges relate through our proactive decision, not to hold some assets to recovery. $392 million of the intent charges relate the second quarter decision, while $61 million relates to decisions made in the third quarter. As Tom said, we've been successful in economically reducing our exposure due to our proactive actions and we have sold close to one-third of these assets during the third quarter DAC price is close to our 630 marks.

The reminder of the reduction in our investment portfolio during the quarter were approximately $3.3 billion is due to unrealized losses. As we've noted in past earnings calls the unrealized gain or loss position can change meaningfully from quarter-to-quarter. Consistent with GAAP and our intent to hold these assets to maturity these marks do not run through our income statements.

Our ability to hold these assets to maturity is supported by our highly liquid position. The increase in unrealized net capital losses during the quarter was primarily driven by widening credit spreads and equity market declines. And a further breakdown of these details is available in the press release itself.

During the third quarter, we, like all financial institutions had to deal with the difficult investment environment. However, our proactive decision making over prior quarters has helped us to maintain our strength today, as it relates to liquidity capital and the underlying help of the investment portfolio.

Now I'll turn it over to Bob.

Robert Block - Vice President of Investor Relations

Thanks Dan. Let me provide some highlights for the business units beginning with property liability. From the top line perspective, our results mere the trends that we have experienced in the last several quarter.

Net written premium declined 1.5% from the third quarter 2007 is the economy weighed heavily on new car and home sales. Resulting in declines in new business applications in both of our primary lines of business.

In the fourth quarter, we will introduce Your Choice Auto in California, last of the major states to get this innovated product. Retention results were mixed and as a result we had a decline in the number of cars and home and shirt [ph] at the end of the quarter.

On a positive note, based on observations of competitive pricing actions in the third quarter, pricing remains competitive, but rational in the auto space. We filed and gained approval for rate changes in 12 states for the Allstate brand standard auto, averaging about 3.8% and the 17 states for homeowners averaging of minus 11.5%. The homeowner price reduction implemented in California, overshadowed rate changes in the other 16 states, which averaged a positive 3.9%.

Encompass also gained approval for positive rate changes in the quarter, and we continue to execute our strategy of maintaining price disciplines in order to produce long-term profitable growth. We also saw a nice increase in our specialty line products premium written as our emerging businesses efforts gain traction in the markets.

Switching discussion to margins, we recorded a combined ratio of 112.7% in the quarter, compared to 91% in the third quarter 2007. The increase of 21.7 points is entirely due to catastrophe losses. The underlying combined ratio was slightly better than prior year that remains at the low-end of our annual guidance, further evidence of the effectiveness of our profitability growth strategy.

This has been an extraordinary year for catastrophes with 35 events in the quarter, it brings the total number of events that we've experienced over 100 for the year. Among the 35 events estimated at $1.8 billion in net loses, were estimated loses from hurricanes Gustav were 459 million and Ike were at 944 million.

Estimated net loses from hurricane Ike, which covered number of states, did trigger 245 million of reinsurance recoverables from our Texas contracts. We estimate that had we've not taken the actions we did over the last several years to address our exposure to catastrophic losses, the estimated cost of Gustav and Ike would have been about double.

Looking at loss cost trends for Allstate brand standard auto, frequency declined by 11.8% for property damage, and 13.7% for bodily injury from prior year's quarter. This represents a significant downward move and one that may not be sustainable, but one that we are watching and analyzing very closely.

Paid severities for property damage fell 0.3% and rolled 6.4% for bodily injury compared with the third quarter of 2007. Both results are slightly better than the last few quarters. All in the x-cat combined ratio for Allstate brand standard auto was 89.1% or 0.6 point better than the third quarter of 2007 reflecting our strategy to maintain margins was driving for profitable growth.

Quickly reviewing the loss trends for homeowners, excluding catastrophes, we saw a rise in non-GAAP frequency partially offset by a decline in paid severity. The results are 1.8 point increase in the x-cat combined ratio at 75.1%. We will continue to be diligent on price and claims management in addition to managing our exposure to catastrophic events.

Finally, as we always do we conducted a bottoms of review of our reserves for discontinued lines and coverages during the third quarter and made no material adjustments to the reserves.

Now turning to Allstate Financial, net premiums and deposits fell in the quarter from $2.3 billion in the third quarter of 2007 to $1.9 billion for this year's quarter. We issued no institutional products in the quarter versus $500 million last year. So excluding institutional products we grew premiums and deposits by about 5% primarily in fixed annuities.

Since we are focused on returns rather than volume, top line results maybe more volatile in the future depending upon market conditions.

From a profitability prospective, we indicated last quarter that the run rate for operating income will decline substantially from recent historical levels. In the quarter, we posted operating income of $88 million a decrease of 59 million from the third quarter of 2007. The decline was due to lower investment spreads as we held more investments in short-term, adverse mortality results in life and annuity products, and elevated operating expenses partially offset by a lower amortization of deferred acquisition costs.

We posted a net lost $196 million as we experienced significant after-tax realized capital losses. This compares to $70 million net income from the third quarter of 2007.

We're not satisfied with Allstate Financial income levels. We're reviewing every line of business, product line and distribution channel. Profits will be improved by raising return requirements on fixed annuities to reflect the new reality of credit spreads and a higher cost of capital by lowering expenses and by improving investment margins, being fully invested in lengthening the portfolio.

Now this last point, we are not doing right now to given our negative economic outlook.

And now I'll turn it back to Tom.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Let me summarize the quarter before we open for questions. First, our proactive risk mitigation philosophy serve the company well in a quarter with severe weather in full credit market. Despite this, we had a loss for the quarter and our share price declines with a drop in financial company valuations.

Consequently, we will continue to enhance and expand our proactive approach to risk mitigation to drive both short-term and long-term shareholder value. Secondly, our property and casualty business is maintaining excellent underlying performance and will be at the favorable end of our commitments to shareholders.

We are highly focused on raising returns in Allstate Financial fixed annuity business, and will bring the same rigor, aggressiveness, and focus to this just as we've... have done on hurricanes and investments.

Lastly, we remain financially strong, which will enable us to continue to serve customers and execute our strategy of reinventing protection retirement for the consumer.

We'll now start with the dialog portion of today's call.

Robert Block - Vice President of Investor Relations

Matt if you could start the Q&A session.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Jay Gelb of Barclays Capital. Your question please.

Jay Gelb - Barclays Capital

Thanks and good morning. With regard to capital position given what's going on in terms of financial dislocation. Overall, in the market for the fourth quarter, can you give us the sense of... as of the third quarter, you say you don't need additional capital, what could change that view?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Good morning, Jay. Well first, we feel that we are extremely well capitalized at the end of third quarter, and if you look at the amount of capital we hold at the parent company, than a large portion that we believe is excess to that which we need because we have the individual subsidiaries capitalize at the appropriate levels, particularly given a bill... we're going to move $1 billion down into Allstate Life Insurance Company at this month. So those two that Allstate Insurance Company, Allstate Financial are well capitalized will be less with around $4 billion at the holding company level, which we believe some of that is excess. So you could do your own modeling as to, what do you think will happen to statutory capital, but remember our capital requirements are based on statutory capital not GAAP capital. So the big switch in unrealized gains and losses runs through GAAP, but does not run through statutory capital.

Jay Gelb - Barclays Capital

Okay. And then the suffered issue for auto loss frequency. There is a significant improvement there. With gas now back at around 3 bucks is that trend reverse or does the economy or the economic slowdown, is that going to play a larger role?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well, I think you are right on both things that clearly miles driven are down, and a fewer cars on the road, the fewer people that get hurt and have accidents, that is of course in part due to happens to gas prices, but perhaps the bigger driver is economic conditions and with unemployment at 6.1% and most people believe it is headed north of seven, we think that they are trying to probably continue as you see it this quarter. I don't... you won't get the same kind of percentage decline, I mean at some point, people have to go out for the server [ph] and do make mistakes. But, we don't expect to see a rapid increase in frequency next year.

Jay Gelb - Barclays Capital

Okay, some more driven at this point by the economy rising gas prices along?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

That's correct, yes.

Jay Gelb - Barclays Capital

All right. Thanks very much.

Operator

Our next question is from Bob Glasspiegel from Langen McAlenney. Your question please.

Robert Glasspiegel - Langen McAlenney

Good morning. I was wondering about the funding agreement sales in the first half, at Allstate Financial $4 billion coupled with the short-term investments going up by about $6 billion in the first half. What droves the funding agreement sales? I thought normally, that's a product used to sort of get a few extra basis points out of an excess capital position. But, when I see that, at the same time that you're raising liquidity, I guess I'm a little bit confused what the overall strategy was behind it and you hit the breaks in the third quarter. Just want to make sure there's no sort of hidden concerns related to that product?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Good morning Bob, it's Tom Wilson. I'll give you a part of the answer, and then Jim maybe can answer the specifics about the stuff we issued in the first half of the year. You're correct in the way we evaluate the institutional markets liabilities, which is the way to leverage our skills, capabilities, and balance sheet to get attractive returns. Earlier this year when the credit markets started to freeze up, we decided we were going to get highly liquid on our investment portfolio to be able to have that money available to pay-off the institutional liabilities that were coming due and in fact, in some cases we call those early.

Because we specifically didn't want to get into the position of having the self stuff that we didn't want to sell to fund liability. So that's and I have ask Jim to run that book really has they separate asset liability, management cash flow thing and they not merger together when things about using liquidity from other parts of the company or other parts of Allstate Financial sales to fund it.

So what you see there is really try to run it as a standalone business because I believe that those companies that start to move from line to line embed subsidies in it and usually get themselves in trouble to because they haven't figured it out how long this stuff connects. So that's their philosophy that we use, Jim, maybe you want to talk about the specific things we issued in the second quarter.

James E. Hohmann - President and Chief Executive Officer, Allstate Financial

Thank you. In the second quarter basically, couple of things that we were doing is as we were looking at the opportunity that within the market. So we start some opportunities issue at spreads that we thought would likely not be there in the future. We also had some extendable institutional markets products that were actually being, I guess you would say being called in the market side, but flip in the market. So essentially what we were doing is we were doing some issuance that was allowing us to retire some of those, which we have done, we've actually taken down the size of the book by about 25% between the end of the year, than where we stand today. And then we also have a dealt substantial cash as we matched out the potential liquidations that we would have of those liabilities over the next 18 months.

Operator

Our next question comes from Dan Johnson from Citadel Investment. Your question please.

Daniel Johnson - Citadel Investment

Thank you, and good morning. Can you help us with all the data you provided us, with just a simple walk through... if we looked at the impact of the realized and unrealized losses in the quarter, the impact that it had on shareholders equity, not only on a net basis, but a gross basis and then between the two of those we likely have a tax, as well as a back shield that were helping offset that gross loss. Can you sort of walk through those numbers?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Morning Dan, Tom Wilson well it's a broad and long question and it seems we can attack various pieces certainly [ph]. First, as Don mentioned about half of the change in the total value of the portfolio was due to change in market conditions. So about $4 billion rose of the change in the portfolio was due to... primarily due to a higher credit spreads, a little bit due to lower equity prices. So, hat was the big driver of the change in the portfolio. We did have some write-offs for credit impairments embedded in there as well. So that's the big first piece.

When you look at the components of that, of course some of it goes into realized and some of it goes into unrealized. In this quarter $1.3 billion went into realized and Don took you through the various pieces of that in terms of how the accounting works. Some of that, I will just point out is, because we actually sold stuff, but the largest portion of that are things we didn't sell that are continuing to perform.

We don't think that will be worth weather on a books for today, in the future or we don't intend to hold them to maturity. So despite the fact that they are still performing as the market values come down we mark them to market and they go through realized losses even though we still hold them. So and Bob can take you through, some... how that work through that piece.

When you look at the unrealized portion that tends to bounce around a lot because when you have $100 billion portfolio as you know it goes up and down. It has been, this was about $3.3 billion decline in unrealized, which wasn't the biggest loss we've ever had, I think biggest loss was at 2002.

Don Civgin - Senior Vice President and Chief Financial Officer

2004 second quarter; we had about $3.4 billion change.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Okay. So we had, so that said $3.3 billion is high, but it is largely due to the change in credit spreads stuff. We don't intend a whole and in fact we intend and need to continue the whole of those assets to get the cash flow often, so that they can pay-off the liabilities that we have behind us.

You know, and also I spot DAC in Texas, so when we write-off unrealized, when we for book purposes so the balance sheet for equity when we take the $3.3 billion reduction in equity, it's okay, well we actually sold that stuff. We would have some tax savings on that so it wouldn't be a dollar per dollar loss to equity. We report that and of course we're always looking like other people are to make sure that we actually have the way we talk to capture those tax savings associated. So I think we feel comfortable with that. We are not in the position of Fannie and Freddie and that's what you are referring to were they had a significant portion of their capital with deferred tax perhaps never to be realized. So we're not in that camp. And that follows really the tradition of that policy of writing that up or down as it relates to the future profitability.

Daniel Johnson - Citadel Investment

So with the $3 billion I mean you look on the balance sheet. It looks like the AOCI [ph] component went up by 1.2 billion. So the difference between the 33 and the 1.2 billion is back in tax.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Yes.

Daniel Johnson - Citadel Investment

Yes. And I guess the question is, has that historical, you've been normal to take roughly a third of those losses and put them back in the balance sheet in the form of that which looks like from one of the supplement pages. If take $1 billion dollars in that was put back on the balance sheet?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Wellkeep in mind Dan, the debt is going to unrealized not going to the income state.

Daniel Johnson - Citadel Investment

Yes. I'm aware but it's... I'm trying to think or should I be thinking of report. We have $3 billion gross and we put a third of it back onto the balance sheet?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well yes, you should and you might have why did you that? I guess, right now for the balance sheet and the answers no. It's because the change in... you have to go back to the in the... why did the value change? Value changed because credit spreads went way up, not because cash we're receiving is any different, whether liability payments we have to make in the future are any different.

So it's really market value adjustment and because we don't mark the liability to market, you don't get the opposite side there. So I know it seems high, but I think you have to look at the entire pictures which is going to start economically. And we still expect to get the same cash. With that, we've got in the last quarter and we still expect to pay-off the team on our liability to get last quarter. It shows that, if you want to sell these securities today, which we do not intend to. Then, you would get less money for. If we would settle the securities and you were just somehow be able to cash out the liabilities as the market value then you wouldn't have a bigger change there.

Daniel Johnson - Citadel Investment

All right, great. Thanks very much for that. And I just have a quick one on you did a great job of giving us some mark-to-market, even adjusting for the OTTI and some of the liquid securities and I think you've got another page and there where you do a lot of the fixed income securities. But, just on that issue, the $10 billion of mortgage loans at the life companies, where would we find the valuation of those relative to the either amortized cost... yeah I think amortized costs, would probably be the best metric. The value versus amortized?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

The mortgage loans are not mart-to-market. We do look at those of course credit impairment all the time, Judy maybe want to make a comment on the portfolio that overall size that add the number of loans that we have in it and how it's performing?

Judy Greffin - Senior Vice President and Chief Investment Officer, Allstate Insurance Company

The commercial mortgage portfolio has about a little under a 1000 loans in it the average balance on the loans is a little over 10 million it's highly diversified by geography and property type. We currently have no delinquencies on the portfolio.

Daniel Johnson - Citadel Investment

Great, again thanks very much for taking the questions.

Operator

Our next question is from David Lewis from Raymond James. Your question please.

David Lewis - Raymond James & Associates

Good morning, and thank you. At September 30 you had a total unrealized investment loss of $4.1 billion can you give us a sense of what the further deterioration has been over the past three weeks? I know it's difficult to get those new marks, which is something rough and your recent discussions since you've talked to the writing hedges with third quarter results. How comfortable are they with your capital position today?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

David, this is Tom. First I'm not going to give you a daily mark-to-market, I didn't see a daily mark-to-market as Judy and Rick can done so we look at it every day. If you just look at trends in October you would see of course that credit spreads went way up until about the 10th or so. And since the 10th you've seen a kind of the credits spreads up kind of bounce around a little bit, but still very high level. You have seen a little bit of light at the end of the tunnel in the money markets in terms of LIBOR rates coming down in the last couple of days. So there appears to be a little bit of thawing. I will tell you that the first in the equity markets have now performed well, but our macro hedge is a way in the money at this point. Not only because equity prices are down but because balls are up so much. So we are feeling pretty good about the tail management strategy. But this is the kind of thing, it bounces around by... when you've got $100 billion as you all know as investors. It bounces around the last month day-to-day. We take action based on what we think the, sort of proactively looking forward thinking about the economy, what we invest in but we don't necessarily make huge changes every day. And David, did you have a second part of questions?

David Lewis - Raymond James & Associates

The rating agencies?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

The rating agencies, I don't think we'll have that some.

David Lewis - Raymond James & Associates

And I just to follow up, Tom, you are sticking with your underlying combined ratio in the 86% to 88% range and based on my model, that wouldn't imply something close to 90% underlying combined ratio on the fourth quarter. Is that just conservative some on your part or do you see some reason why that's going to rise in the fourth quarter?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

We try to give the range once a year if during the course of the year. We think it is changed enough to warrant letting you all know. We changed it, but I don't want sort to move into sort of quarterly forecast of the combined ratio, and you can look at the patterns, people. We do that to help you view an indication of where we think the business is going. By the time we get this far into the year and you can look into frequencies we think people can make pretty good forecast for the next quarter on their own. So and given that we're... think we're going to be in that range we didn't see any reason to go, you know, narrow order change it somehow.

Robert Block - Vice President of Investor Relations

We did David this is Bob. We did indicate that we expect to be at the lower end of that range.

David Lewis - Raymond James & Associates

Yes, we really hits the lower end and that still is going to be your highest rate. But, you don't see anything necessarily the change or kind of trend thought there?

George E. Ruebenson - President, Allstate Protection, Allstate Insurance Company

Dave this is George Ruebenson, no we don't. Frequencies continue to be very benign. The question before how do we see a spike, I doubt it there might be some movements. It's been more volatile than it's been historically. On the other hand we've seen over the last 20 years a very, very consistent decline in property damage frequency for a lot of demographic reasons, cars are better that type to think. I would not read anything into deterioration in the fourth quarter.

Typically, we have a little higher loss ratio in the fourth quarter because of the weather driving patterns that type of things. But, this is very, very moderate. And we are committed to defending the margin.

You saw, as Bob mentioned in the opening comments that we continue to take rates wherever we think it is necessary. The good news for us is that we are not in the same position as our competitors. We do not have to take rapid rate increases to protect the margins, but above all, I want to leave you with the ideas that margin preservation is the number one priority for us.

David Lewis - Raymond James & Associates

Very good. Thank you very much.

Operator

Our next question is from Matthew Heimermann from JPMorgan. Your question please.

Matthew Heimermann - JPMorgan

Hi, good morning, everybody. A couple of question maybe one at a time. This may seem a little, maybe this is the wrong time to ask given everybody to way on a capital, but given your commitment to the financial... Allstate Financial. Why is it this, with all the distress you're seeing around potentially the right time to think about either adding more scale or adding or adding an asset management capability or something of that sort to actually further your competitive and strategic position?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Matt, Tom Wilson. I think, let me go broadly and then comes down acquisitions in total and then comedown to Allstate Financial. I think in this environment you will see some good opportunities come along. That we believe prices will be lower than they have been historically. I would say we are interested and look at those or perhaps a little more cautious about stepping out and taking large big bets at this point in time. So we do it and if, we look at them all and if we think it's a good price and we think we can do it without moving our proactive risk mitigation process then we'll do it.

You don't see both property and casualty, and financial companies coming to market I believe. Property and casualty companies are a little easier to value though, but you don't have the huge embedded investment portfolio. So when you are buying whether it's an asset manager or mutual fund company with equity funds or if you were to buy a life company that has all fixed income and anywhere in that spectrum, given the volatility in the market, it's a lot harder to value those companies today, which makes it a little more difficult.

So we remain focused on it, but a little more cautious than perhaps we were... would have been two years ago. So offset today is I think price will be a lot lower.

Matthew Heimermann - JPMorgan

Okay. And then with respect to GAAP versus DAC can you give us a sense of how much, normally for I guess... I don't what normal was. How much of the market valuation changes is actually following through this DAC balance sheets on in terms of life in BC [ph]?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Sam do you think, we've done...

Samuel H. Pilch - (Interim) Vice President and Chief Financial Officer

The difference between unrealized, are you talking about unrealized?

Matthew Heimermann - JPMorgan

Well, I didn't know to what extent whether it change intent the whole influence stat as well?

Samuel H. Pilch - (Interim) Vice President and Chief Financial Officer

Yes, the difference between unrealized and realized. I'm sorry. The difference between GAAP and DAC are unrealized at the end of the quarter is about $186 million after-tax.

Matthew Heimermann - JPMorgan

Okay. That's an easy way to take it. Can you tell me what the change was? What the difference was at 2Q?

Robert Block - Vice President of Investor Relations

I'll need to follow-up.

Samuel H. Pilch - (Interim) Vice President and Chief Financial Officer

I can get that, if you wait a minute.

Matthew Heimermann - JPMorgan

Okay. I'll follow-up with Bob. And then just one quick last one if I can pick it in. Does your change in cost to debt in the public market effect the mark you took, did that created any offset this quarter?

Robert Block - Vice President of Investor Relations

No. We don't mark the liability side of our balance sheet to the market. We don't like to banks whether that does... the spreads go up and they report a gain and we don't do that.

Matthew Heimermann - JPMorgan

Okay, perfect. Thanks, guys.

Robert Block - Vice President of Investor Relations

And there was a point, actually about, when you look at the whole liability side. So, if you look at the whole liability side. So if you look to fixed annuities and everything else, none of that gets mart-to-market either.

Matthew Heimermann - JPMorgan

Okay, perfect. Thank you.

Samuel H. Pilch - (Interim) Vice President and Chief Financial Officer

Now, with respect to Don's remark, the value that you mentioned roughly $200 million, it was in the earnings release. What it represents though is the difference between the GAAP recognized change in intend losses and the losses recognized was DAC. So that's the difference and its not related to the unrealized.

Operator

Our next question is from David Small with JPMorgan. Your question please.

David Small - JPMorgan

Hey, good morning. Two quick questions, the first is could just talk us through the capital adequacy of the life company after you downstream the capital that you talked about in the press release. And that when I mean by that is if we think about and we have another quarter with marks is that sometime we're going to see more capital going downstream, could you just elaborate a little bit?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

David, Tom Wilson, our RBC ratio will be slightly above 300%

David Small - JPMorgan

Okay. And then my second question. In terms of reinsurance buying, do you think you would think about how you buy reinsurance, given that you have such a large storm this quarter, I think you said, it was one of the top 10 ever? And it just doesn't given how much you spend for reinsurance and looking at the benefits you got?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

We are always looking at, how we buy reinsurance and where the programs are. We did get back about a quarter of $1 billion on our reinsurance from Ike which turned out, which is what we wanted to do, we wanted to cat those losses at a certain level. At all those losses then, in Texas we would have got even more back but until we always looking to move it around. I would say though that in general next year, George is approaching reinsurance buying it at about the same levels of protection as he has this year.

The one thing we have been looking hard it which you didn't ask is, on the non-model cats, which has been the bigger driver of our cat losses this quarter. Those relative pricing faster those tend to move around by region faster, but this is a second year in a row, we have had high non-model cats and so we are evaluating how we want to deal with that part. There is a lot of different ways you can do that.

But, said you would be bringing the same tools to non-model cats that was brought there, hurricane and earthquakes. Hurricanes of course we have talked about all the different things. Earthquakes were basically discussed out of the business other than fire following in California. So we are looking at the non-model cat piece if thing, how do we bring more stability to that given that we have had two bad years there.

David Small - JPMorgan

Would that mean in non-modeled cats that some of the tools were would be non-renewals? I mean why you have non-renewing and buying more reinsurance?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well certainly we could look at reinsurance, it tends to be pretty expensive when you're at that lower level relative to the risk in the capital we have. So we've look at it and think we can handle the volatility. In terms of the other tools you can obviously decrease your market share and in this particular case it becomes more about, much more about geographic concentration in certain discuss [ph] that tend to get a lot hale and stuff. But we're not looking at massive non-renewals like we did in Florida or shifting a bunch of stuff to the Windstorm pool in Texas.

This becomes much more a precision game which you manage your way through overtime as opposed to massive changes in non-renewal, which you don't, so it just might mean you know priced our business up. And we don't write it much business in this particular zip code. We made change... tried to change the pricing on deductible. So its more attractive for people to make higher deductible to put more risks mitigations into their reference around their home.

So the same powered basic tools like you shouldn't expect to see in same kind of mass of movement as you go. It's just, I was always pointing out, when you look at catastrophes, in non-modeled cats in the last couple of years, we've got hit pretty hard. So we're trying to bring the same tools experienced and expertise to bear on controlling those losses just like we have done on make the cat.

David Small - JPMorgan

And then just back to the life for one second was this 300 RBC a target or do you have a target RBC you could share with us?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

That's the actual number. That's close to what the actual number. We've moved to billion or about to move $1 billion and as we executed the trade yet. But, that will bring it to $300. If you look at the other companies, you look at other people's life rate. As you look at the guidelines from the rating agencies to look at our mix of business. We feel that a very comfortable position to be in.

David Small - JPMorgan

Okay. Thanks.

Operator

Our next question is from Ian Gutterman of Adage Capital. Your question, please?

Ian Gutterman - Adage Capital

Hi, a couple of CapEx questions. First a follow-up to David's question. Did the large unrealized loss under a 70%, I think was $1.5 billon or was over 1 billion. Presumably, decent a portion that's inside life company assets. If that rolled over to realize and therefore, rolled into stat, and could the life company need to have another 500 million or 1 billion set down, down the road?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well I mean, if you build through all the assumption that you made obviously, stat capital was down and if your liability don't go down, you need to put more money in. I would tell you how we focused on managing Allstate Life Insurance Company's capital to make sure it has good solid ratings and to make sure that we put money and when we're going to get that return on it. So there's a lot of leverage you can hold along the way. I don't know that I would automatically go to the... it's just a matter of time until something that's unrealized, becomes realized for statutory services because again, statutory accounting is, if you're getting your cash in, you don't have to mark that stuff to market because that's not... we don't mark the liabilities market.

Ian Gutterman - Adage Capital

Okay, that's fair. And as far as some of your pure play life competitors have raise margin amounts of capital to really put... to put RBC in a very safe place, they don't have to worry about it anymore. You guys, because you obviously have the PNC Company the holding company, the structure thinks a little different, should I think a bit a more as, you guys don't need to go in and take the RBC to 350 because you have the success cap and holding company there, for you can do a sort of... as needed rather than going over capitalized the life company is that sort of how you think about it as opposed to putting in 2 or 3 billion today that are just 1 billion?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well, we look at capital first and foremost economically. How much capital do we think we need, economically to support the business. We also look at it with respect to what the rating is required and then we look at of course from regulatory standpoint which stands the lowest of those numbers. And we feel good at the level we're at impart because of that business itself in terms of it's mix of business is kind of large block of life insurance got long paid liabilities.

So, we get very conservative investment portfolio, so the rating agencies obviously look for some level of support from the holding company as you point out and there is $1 billion capital support agreement from the holding company to Allstate Life Insurance Company. But, we are not using that in this particular case and we don't think it needs.

Ian Gutterman - Adage Capital

Okay. Can I ask what's your, sort of minimum targets for the parent company cap and I guess you have a little bit over a billion of annual expense plus you mention that I've heard that did it get in next year. Is that apply... you need 2 billion or is your normal safety margin that you want to be higher than that?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

There is of course no magic number. And I think changes over time depending what you think about think about the prospects of your businesses going forward. But, let me tell you how we think about the holding company. The holding company today has fixed dividend charges of about $900 million a year. And then we have interest payments that we also take care of a couple of hundred million.

Don Civgin - Senior Vice President and Chief Financial Officer

It's a side effect, dividends are 900 and interest are about 350.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Okay. So interest of 350 and then of course we have all the capital we've talked about out there which will be about $4 billion after we fund Allstate Life Insurance Company. That company had total debt outstanding about $5.6 billion. Now we also own Allstate Insurance Company and I'll say Life Insurance Company which generate substantial amount of earnings in and of themselves, which helps support that self. We feel like at the levels we're at we have excess capital and we're well positioned. If market continues to stay in its current depressed state but these things move around by time.

So I would say, I'd like to have that amount of capital there today, and I probably keep a little more there today than I would have three years ago, when the market was chugging ahead and we not had any unrealized gains or losses in. We've got $1.5 billion dividend that were Allstate Life Insurance Company. Given that, we're now putting that money back in, I feel like we need to maintain more money at the holding capital level. But, there is not a specific number that I would say to you. Its static, hang on to this number or evaluation purposes.

Ian Gutterman - Adage Capital

Got it. Okay. And then just one last numbers questions, do you have a preliminary statutory capital for the PNC Company for the quarter?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

No.

Ian Gutterman - Adage Capital

Not yet, okay. All right, thank you.

Operator

Our next question is from Josh Shanker from Citi. Your questions please.

Joshua Shanker - Citigroup

Good morning, my first question probably a follow-up. Given Ike in particular... Ike particularly maybe Gustav. Did the amount of excess protection you bought on top, was your reinsurance buy is this how you wanted to work?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

All right, Josh. Good morning. We always like to get our money back. Just before I ask that it worked well in terms of the way we controlled the growth losses. So we feel good about that. And the interesting thing about these two hurricanes is sort of like nobody paid attention to them because you have the economic turmoil and then you have the presidential elections. So nobody seemed to pay attention, but we are happy with the way it worked. We'll do nice and George, do you have anything, you want to that add to that?

George E. Ruebenson - President, Allstate Protection, Allstate Insurance Company

Yes, the only other think that I would add as Tom mentioned or as Bob mentioned, I can't remember in the opening comments is that over the last couple of years, in addition to reinsurance, we've taken dramatic cat management action. Our exposure in the cat management areas is down between 33% and 42% compared to where we were less than two years ago.

So when all is settled down, and when the estimate are correct for both of those hurricanes, you'll probably see or you will see rather than our loses are less than our statewide market share. Even if you go to the gross loses, so we've been pretty happy with the way that our PML actions have worked. The answer to the question about the reinsurance, what we wanted to do with capital losses and 500 million, we thought was a reasonable deductible as you would think with that way. Because the reinsurance we put in to protect us, form anything severe like Katrina that we had a couple of years ago. So yeah, we're pretty happy with the program.

Joshua Shanker - Citigroup

And going into, next year is a lot, maybe prices will rise. Would you aim to buying the same amount of excess protection in 2009 or is that going to be very much cost dependent?

George E. Ruebenson - President, Allstate Protection, Allstate Insurance Company

At the Monte Carlo event where the prices are set for the year usually in reinsurance, there was a lot of conversation about excess capacity, whether that continues or not, I really don't know but at that point in time, they were saying that they thought the prices would actually decline.

Now, how many reinsured losses that will be for the hurricanes, I really don't know. But we have three year placements so, if you look at it on the calendar year basis for '09, we do not see any real increases in the reinsurance cost. If we do, obviously we think that there will be minimal but the intent right now, is to stay with the same basic program. And then see should we do anything on some of the small losses.

Joshua Shanker - Citigroup

Okay. Well, thank you very much.

Operator

Our next question is from Terry Sue [ph] from Pioneer Investment. Your question please?

Unidentified Analyst

Yes, Hi. There has been a quite number of questions about the life insurance subsidiary and in the current environment, I think when people think about risk with Allstate, it's all about the balance sheet and investment assets and a very large chunk of your investment leverage, as well as the what is perceived as risky assets, it is in part due to your involvement in the life business. Can you go over again? You said you talked about your commitment to it that the returns are not adequate that you want to bring it up. Why you're committed your life business, which is now more of a six annuity book than anything else?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Good morning, Terry. Let me maybe step back a little bit and what we have done is we set our strategy is to reinvent [ph] protection retirement for the consumer. We defined ourselves, just focusing on a consumer and providing to them our protection both in terms of the auto, their house, their boats, their lives and those things, as well as helping save through retirement. We think that makes sense for a couple of reasons, one is there is... we are good at most of those things despite the fact that the credit markets have currently cycled down. We are good in investing money if you look at our investment results book.

While we are not happy with what's happened in the marketplace we feel like we have skills and capabilities to do that if you look at the consumer piece of it you will of course selling more things to people improves your relationship in your retention across the board. And then you are also have the demographic trend of people needing to save for retirement which is a growth opportunity and I think that actually that opportunity will be increased as we go forward particularly as you look at their need to have guarantees in safe places and places they trust so we are still committed to it in terms of strategy, the fixed annuity piece. I think uses about third of the capital.

So it's not the biggest piece of that business. It is the biggest underperforming piece of that business. And clearly with the reevaluation of credit spread in today's environment. And I believe what is a higher cost of capital associated with participating in those businesses. You're saying that today in terms of PE's and price of book of other life companies you need to clearly drive those returns up and that's we're focused on. But we're not going to change our macro strategy based on a bumping credit spreads and what is the worst environment ever. That said we will change the way we operate in the way we go to market in that business to make sure we can make money.

Unidentified Analyst

Thank you. Another question. There has been a lot of questions about your capital position and you discussed that length, your capital position and liquidity position. There was one earlier question about rating agencies. You have very strong ratings and I assume that you have continued discussions with them. And you clearly are, and as you said excess capital position from corporate standpoint. Maybe you can just elaborate a bit more is there any threat at all to potential rating downgrades. What would have to happened to threaten your ratings?

Don Civgin - Senior Vice President and Chief Financial Officer

Well Terry, it's Don. Let me just see if I can add little color to that. We do have high investment grade ratings now from AM Best, S&Ps, and Moody's. All three of them have been very caution about the insurance industry for general reasons. And they continued to be that way so the investment markets primarily, but also the catastrophe losses and so forth.

We have met with them recently. On the regularly scheduled basis we do that throughout the year. We discussed with them our capitalization levels both at the holding company and to the main insurance companies. We've declared our intent to think capacity to fully capitalize life insurance business. We reiterated all the information we shared with you. And to be honest we're waiting for their decision so it's...

Unidentified Analyst

I see across the tape Allstate outlook to negative from stable by S&P. I gathered it's more a commentary on the general insurance industry then anything specific to Allstate. Would be my guess?

Don Civgin - Senior Vice President and Chief Financial Officer

You have the advantage of reading it before I did, but my suspicion is that's true.

Unidentified Analyst

Okay. It just came across.

Don Civgin - Senior Vice President and Chief Financial Officer

Okay.

Unidentified Analyst

Thank you so much.

Operator

Our next question is from Meyer Shields from Stifel Nicolaus. Your question please.

Meyer Shields - Stifel Nicolaus

Thanks. Just a sort of a comment that I'm hoping will morph into a question. The bank you get share repurchases now is obviously better than it's in while. Give any sense us to what could trigger or resumption of the share purchase program and how should we think about that?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Meyer, could you say that again what we trigger a...

Meyer Shields - Stifel Nicolaus

Resumption of the share purchase program.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Resumption. I think increased stabilization in the financial market will be the biggest thing. So, if crisis price come down, we start feeling like liquidity is up in the marketplace. Some of this is about valuation, but some of this is about liquidity and for those of you who are involved in the credit market is very difficult to sell just about anything these days. So to maintain account liquidity levels we have may not be hurculie and tape but it's been hard and we worked very hard at it and so every dollar counts. So it's really more a comment about sort of the breadth and depth of the trading available in the financial markets so, if those financial markets opened up, I think you could expect to see us change our view. Clearly, we think the stock is cheap today, I mean you can liquidate a company like ours sort of more than book value. So we think it is cheap but we are really, go back to our philosophy which is protect the house at all costs.

Meyer Shields - Stifel Nicolaus

Okay. Now that's certainly fair, within the PNC business are you seeing any change in the rate of non-payment of premium rather auto or home?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

I'm sorry, documented premium, non-payment premium.

Meyer Shields - Stifel Nicolaus

Non-payment premium.

Don Civgin - Senior Vice President and Chief Financial Officer

I'm sorry delinquencies in payments.

Meyer Shields - Stifel Nicolaus

Yes.

Don Civgin - Senior Vice President and Chief Financial Officer

Nothing that substantial right now. One of the advantages we have in a recessionary time is that, if you want to drive a car or you want to live in a house you have to have insurance. It's not like consumer products where you can defer some of these things so we're one the first things that people do pay. Now what we have seen is people migrating to different policy forms cutting back a little bit on the coverage and raising their deductibles is the way to manage it.

Meyer Shields - Stifel Nicolaus

Okay. Thanks very much.

Don Civgin - Senior Vice President and Chief Financial Officer

Sure.

Operator

Our next question is from Josh Smith from TIAA-CREF. Your question please.

Josh Smith - TIAA-CREF

Thanks for taking the questions just one quick one on page 51 and 52 of your earnings release details some of your risk mitigation efforts. I had all these things out but look likes it is pretty close to zero how do you want us to think about the effectiveness of your risk mitigating in terms of reducing your losses, it is either realize or unrealized for the third quarter and given that the market has turned south in the fourth quarter it would... would you expect to similar benefit for these risk mitigating activities in the fourth quarter or should it be greater?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Yes--

Josh Smith - TIAA-CREF

Since you started mid of quarter?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Josh are you talking about from an income standpoint?

Josh Smith - TIAA-CREF

I am talking, I mean added the three areas. I looked at your risk mitigating, total income generation and total time and all those add up to basically a net zero, so --

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well I am not sure of all the numbers you've added up, but, I guess here is a way I think about it and Rick might want to make the comment about risk mitigation as it relates investment portfolio. It's always very difficult to determine that benefit of that which you've done at any particular point in time so you lifted aside what you think make sense and do it and then you try to attack but for example the fact that we reduce our holdings in banks by 36% from the end of last year. Clearly has served this well. Does that translate into a number in the P&L or even in the unrealized losses that it would be bigger of perhaps today than it was but you can't really say that. You don't put that number down anywhere. As a fact that we avoided substantial losses in Fannie and Freddie as we were... I think less than 60 million bucks and more taking a hundred to million dollars shot. How do you measure that piece of it. So, we do try to look at it from all the different ways but also try to do what we think is economically the right thing to do from the risk and returns standpoint. Now in terms of the specific program in the impact that shows up in the balance sheet. Maybe you want to, any specifically you want to talk about whether it's a risk mitigation program or the macro hedges.

Rick Simonson - Head of Investments

Yeah. I mean the reason where we are in the macro hedges is to protect against tail risks. It's not a dollar for dollar risk mitigation that we're doing. So, the stock market has fallen 39% this year-to-date. And we set our macro hedges with the best information, analytically we can put together late in the second quarter.

We put together our program and a strength price that we thought was pretty that we got the rebound 25% and we didn't see a heck of a lot of value up growing to that hedge in the third quarter. It has really spite in the first three weeks of the fourth quarter.

Credit spreads were target of our risk medication thinking but in actual fact, there aren't that many instruments out there that are efficiently executable to protect against credit tale risks and so we were only able to put on and think three quarter to a billion to a billion dollars in credit option instruments. So, that obviously we have a big income portfolio and just unable to go and credit that way which was why we let that credit heavily in the so called micro or individual securities sales programs where we got off about 1.1 billion in the early part of third quarter before the credit markets really ceased up.

So if you think about where we would have been today in the absence of tackling these risk mitigation dimensions that we would clearly be in less attractive shape. Though, we think this was successful program. Its our first stab with combined macro and just like PML in hurricane land, we learn every year from our success and what we can do better. So we will continue to reshape these macro hedges as the economics and market forces make them look more attractive to us.

Josh Smith - TIAA-CREF

Just to quickly summarize, you're saying that given the down draft at least in the equity markets in the fourth quarter, your saw the money in your macro hedges?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Yeah.

Rick Simonson - Head of Investments

Yes, but also just keep in mind, I want to comeback to the reinsurance question and we haven't made any money and the interest rate has been put in place. But we look at that and if that's what in caused to hedge off the risk, so when you add that up on a sheet yourself has a negative. Yeah, that's a negative, but we shut the risk of world carrier that you got to reinsurance, some of they said to George. We still buy it if it that's a right place. No, we start with doing one of the risk. If we don't want to risk as long as we get a fully distributive price, we trade the risk away. We don't try to get cute and say, for another 5 basis points, we'll do it, I won't do it, and that's where people get in trouble. So it is...some of these things are just risk reduction and we feel good about them and we'll continue do that.

Josh Smith - TIAA-CREF

Thanks a lot.

Operator

Next question is from Brian Meredith with UBS. Your question please.

Brian Meredith - UBS

Hey, good morning guys. Two questions for you. The first one on the reinsurance program and just quickly, any as you at least thought where use of cat bonds given some of the problem that part of them will we bond has had recently?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Good morning, Brian. I think we're always looking and that thing will probably unwind as my guess and we'll have to just buy it as reinsurance from some other place. So economically we're going to be just fine with it. We would like to see alternative sources of capital brought into the reinsurance market. So to the extend, things like this can make long-term sense. I think you'll see as it continue to support.

Brian Meredith - UBS

Great, thanks. And Thomas second one would be, you talk about the rate environment and you're trying to get some rate, and like others are trying to get rate but, is this stay a little bit as frequency was at this quarter. My sense of this, others are going to have decent results in auto insurance. From a regulators perspective, how are they looking at this as far as granting price increases. Are they looking at to the underlying trends and it' s going to be more challenging to get a price increase over the next 6 months in auto insurance given the favorable frequency?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

We're assuming that the frequency stays stable it's necessary for rate increase goes away.

Brian Meredith - UBS

Right.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

And so commissioner are obviously very tuned to the fact that we have very high gas prices, but as someone mentioned earlier, gas prices are starting to decline. And I think that there is some political pressure always to make sure that you rate. The reason that we have been taking rates whenever we see an indication and Bob in the opening comments we're looking at about low to mid single-digit increases. That does not cause much disruption in the marketplace. Nor dose it cost much consolation for regulators so, by virtue of the fact that we did not take decreases going back a years or two years ago we're in a better position than our competitors who have got to take high single digit with double digit increase to improve the margin. We are very happy with where our margins are and as long as we can continue to increase it moderately we don't see any big political backslash.

Brian Meredith - UBS

Great thank you.

Operator

Our next question is from Paul Jisimus of Sander O'Neil. Your question please.

Paul Jisimus - Sander O'Neil

Good morning thank you. My question is little on different topic. The home insurance business obviously had a lot of cat but it also seems to be deteriorating sort of x-cats as well. And if you could talk a little bit about that because to my mind that was a major factor in the pretty significant improvement of your possibility since like over two the team pretty permanent but is competition getting the best of your or what're other factors are going on that?

Robert Block - Vice President of Investor Relations

Hey Paul it's Bob. Actually the x-cat margin went up just slightly from third quarter of '07 to third quarter '08. And even excluding the cash this is still a weather policy. And I think others have noted that there is been a little bit more non-cat weather related loses in the third quarter as travelers made their comment as well yesterday. So I don't see that we're getting out of much of margin deterioration. If you also look I think we took rate increases in the 16 of the 17 states averaging about 4% so we're pretty focused on trying to maintain margins. Our best track results are better than the competition so when you look at the whole package I don't think you come to the conclusions that particular line x-cat is deteriorating significantly.

Paul Jisimus - Sander O'Neil

Fair enough. Thank you guys.

Robert Block - Vice President of Investor Relations

Sure.

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Thanks, Paul.

Operator

Our final question today is from Allan Kervin form Bank of America. Your question please?

Allan Kervin - Bank of America

Good morning. First, let me thank you for the very expansive disclosure. Clearly, a lot of people have worked long hours and it's very helpful so we really appreciate it. The question really relates to, you guys have done a good job in reducing your exposure to large catastrophe events but your non large event caps are still fairly high. I heard it on that you're trying to focus on that and reduce it and if you bring the same concept to Allstate Financial given the results lately, it seems that it is more akin to catastrophe events affecting the company and you've been wanting to improve the ROE Allstate Financial before we've had such an event. So, going forward since you want to keep Allstate Financial should the ROE that you are on that be a lot higher than what you just thought 3 or 4 months ago given the volatility or do you really think with the risk mitigation or what you have learned or what you will bring in. You will be able to think that volatility in the same way that you did for the large cap event sort of?

Thomas J. Wilson - Chairman, President and Chief Executive Officer

Well, thank you for the question. I would say, first I always have high profit expectation and so and return expectation from all of our businesses and certainly the... but I have shortened up the timeframe under which I am willing to let them escalate to the level that is substantially above where they are because of this. I mean, to a certain extent you even look at test reasons. So you know it. We didn't do it kind of happened to it.

I don't believe that we make our choices as we go or we decide what business turns right, what investment to make until takes time you get surprise. You need to reevaluate what's your returns ought to be that should be a higher return business side agreed that if it's not going to be a higher return business, it'll be substantially smaller than it is today. And because, we are going to get returns up in that business, so we bring the same kind of that as we have the other thing.

So I don't disagree. I think, if you look more broadly, I think the cost of capital for financial service in total is going up and I think that's what you're seeing the repricing of all the stocks. We perhaps think, we've been unfairly slept along with that, but I do think you'll see higher cost of capital for financial services in total.

Let me close in just couple of thoughts. We have a great franchise at Allstate as we protect to fair about 17 million households that we're really tied to fabric of the financial system and we have great strategy. We've good people here, good capital, all of which enables us to deliver good returns for a shareholders. We do expect this economic climate to remain difficult. So we'll continue to be aggressive and proactive in both risk medication and return optimization in our portfolios and our operating businesses.

We are hopeful that the fixed income markets will get back to work because, that is what we need to do today. Everybody has been stopped and waiting another day, just saves you more losses. It's about time for America to get back to work in the capital markets. And we're hopeful that will start to improve the conditions as we move throughout this year and at the next year. But in that environment and then in the difficult economic environment, as George talked that having options for people to buy things like value policies and everything. Being focused on the consumer really won't work first and should further improve our competitive positions.

So thank you all for participating in today's call and we'll see you in next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day. .

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Source: Allstate Corp. Q3 2008 Earnings Conference Call Transcript
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