Q3 2019 Earnings Call
We're standing by welcome to be all States third quarter 2019 earnings conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, studies program is being recorded and now I'd like to introduce your host for todays program, John Greek head of Investor Relations. Please go ahead Sir.
Well. Thank you Jonathan good morning, and welcome everyone to all States third quarter 2019 earnings Conference call.
After prepared remarks, we will have a question and answer session.
Yesterday following the close of the market, we should our news release, an investor supplement filed our 10-Q and posted today's presentation on our web site at Allstate investors Dot com.
Our management team is here to provide perspective on these results and discuss the strength and leading competitive position of all states homeowners insurance business.
As noted on the first slide to the presentation or discussion will contain non-GAAP measures, which there are reconciliations in the news release, an investor supplement and forward looking statements about all states operations.
Well states results may differ materially from these statements. So please refer to our 10-K for 2018 and other public documents for information on potential risks.
Getting into fourth quarter, 2019, Allstate plans to announce catastrophe losses every month, removing the current $150 million reporting threshold.
The enhancement to our catastrophe an outfit process increases transparency for analysts and shareholders.
As many of you know this will be my final earnings call as the leader of our Investor Relations team as I've transition to a new role in our PNC finance area.
I'm, leaving Investor relations and the capable hands, a mark Nogle, who will be a great partner for all of you going forward now I'll turn it over to Tom.
Well good morning, Thank you for joining us to stay current on all state.
Let's begin on slide two with Allstate strategy.
Our strategy has two components increase personal property liability market share and then expand it to other protection businesses.
Starting with the upper oval, the personal property liability market provides consumers protection, we ensure their auto is their homes motorcycles boats personal liability.
We use differentiated products sophisticated pricing claims expertise and are building in integrated digital enterprise to lower cost, which I'm sure we'll come up later.
We're also diversifying our business is back spinner protection offerings, and that's highlighted in the bottom mobile.
Say it offers customers a circle of protection, it's a wide range of products do from Allstate life workplace benefits commercial insurance roadside services car warranties protection plans and identity protection.
These growth platforms have extremely broad distribution, including major retailers insurance brokers, worksite auto dealers and manufacturers telcos and directly to consumers. They now comprise about 75% of our policies in force, although a much smaller percentage of our overall premiums.
Leverage you Allstate brand customer base in capabilities to drive growth in these businesses.
Some of these businesses also support the property liability business.
This tragic create shareholder value through customer satisfaction unit growth in attractive returns on capital and also ensures that we have both sustainable profitability in a diversified business platform.
Moving to slide three.
Oh state strategy is delivering growth and attractive returns revenues exceeded 11 billion in a third quarter of 2019 property liability earned premium which grew 5.6% <unk>.
Strong operating capabilities enable us to generate net income of $889 million during the quarter. Adjusted net income was $946 million or $2 in 84 cents per diluted share as you can see on the bottom of slide.
Returns were also attractive with adjusted net income return on equity a 14.2%.
We turn to slide four we also did really well and all of our 2019 operating parties. When we have five but that was as you know they focus on both near term performance and long term value creation.
First three priorities better serve customers grow the customer base and achieve target returns on capital well intertwined to ensure profitable long term growth.
Customers were better served isn't that enterprise net promoter score improved.
Property liability policies increased by 664000 for the prior year border to 33.6 million is the Allstate insurance brands grew 1.9% and 5.9% respectively.
Oh stay protection plans, which of course was formerly square trade grew to 89.8 million total policies in force now exceed 136 million, an increase of 40.7% compared to the prior year quarter returns remain excellent with most individual businesses performing well.
The 89 billion dollar investment portfolio had excellent total returns in generated $880 million net investment income in the quarter.
Shareholder value is also being created by building long term growth platforms, we increased telematics usage in the property liability businesses and that's supported by having industry, leading insurance solutions from equity.
I'll say protection plans is achieving the acquisition goals, we established two years ago and sales in Europe are growing Allstate identity protection, which we acquired a about a year ago integrating its products into our customer value proposition.
Mario will now discuss our results by segment in more detail.
Thanks, Tom.
Moving to slide five you can see that property liability results continue to reflect strong operating capabilities.
Net written premium increased 5.8% in the third quarter or $1.5 billion for the first nine months. This reflects policy growth in the Allstate and insurance brands and higher average premium for auto and homeowners insurance across all three underwritten brands.
As you can see in the middle of the left table total policies in force increased 2% to 33.6 million.
Underwriting income of $737 million was substantially better than the prior year quarter due to lower catastrophe losses.
Moving to the bottom of the table. The property liability recorded combined ratio of 91.6 was 2.3 points better than the prior year quarter, reflecting a planned improvement in the expense ratio offsetting an increase in the non catastrophe loss ratio.
The underlying combined ratio, which excludes catastrophes and prior year Reserve estimates was 85.0 through the first nine months of 2019.
Moving to the right hand table Allstate brand auto and homeowners insurance net written premium increased 4.5% and 6.7% respectively compared to the prior year quarter due to increased policies in force and higher average premium.
[noise] insurance auto insurance policy growth was 5.5%, which combined with average premium increases resulted in total net written premium growth of 8.3%.
Encompass written premium increased 2.6% as higher average premium more than offset a small decline in policies in force.
On the bottom of the table you can see that underlying combined ratios remained strong across our brands.
Insurance reflects primarily auto insurance, which has a higher combined ratio than homeowners. When catastrophes are excluded encompass on the other hand reflects a 60 40 mix of auto and homeowners insurance premiums.
Let's go to slide six which highlights investment performance, which benefited from overall market returns and proactive risk and return management.
The portfolio generated a strong 7.8% return over the last 12 months of which 1.9% was in the third quarter.
Approximately half of this total return came from interest income on the fixed income investment portfolio and returns on the performance based portfolio.
The remainder was due to portfolio appreciation, reflecting lower market yields and higher equity values.
The chart at the bottom shows net investment income for the third quarter of $880 million $36 million higher than the third quarter of 2018.
Market based investment income shown in blue increased to $727 million from $683 million, a year ago, reflecting investment at market yields above the portfolio yield.
Performance based income shown in gray was $202 million in the third quarter $12 million lower than the prior year quarter.
Slide seven highlights results for Allstate life benefits and annuities.
Allstate life shown on the left generated adjusted net income of $44 million in the third quarter $31 million lower than the prior year quarter.
This is largely due to the write down of deferred acquisition costs, driven by lower interest rates and model refinements in connection with the annual actuarial assumption review.
Excluding the impact of the noncash unlock charge in both periods. Adjusted net income was $86 million in the third quarter, an increase of $6 million or 7.5% compared to the prior year quarter.
Allstate benefits adjusted net income was slightly lower than the prior year quarter as higher premiums were more than offset by increased DAC amortization driven by lower projected investment returns related to our annual actuarial review of assumptions.
Excluding the impact of the noncash unlock charge in both periods. Adjusted net income was $32 million in the third quarter, an increase of $1 million or 3.2% compared to the prior year quarter, primarily due to higher premiums.
Allstate annuities on the right generated adjusted net income of $16 million in the quarter, which was $4 million lower than the third quarter of 2018 due to higher contract benefits and reduced investment income.
Adjusted net income of $43 million for the first nine months was substantially below the prior year, reflecting lower performance based investment income in the first quarter of this year.
Let's turn to slide eight.
Service businesses continued to grow the number of consumers protected with policies in force increasing 67.7% to 95.9 million. This is largely due to Allstate protection plan.
Revenues increased 27.1% to $418 million as you can see from the lower left table due to growth and Allstate protection plans and Allstate dealer services as well as the acquisition of Allstate identity protection last year.
Revenues through the first nine months now exceed $1.2 billion.
Adjusted net income was $8 million in the quarter shown in the lower right.
A 7 million dollar improvement over the prior year quarter, largely due to improved loss experience and Allstate protection plans and Allstate dealer services.
Slide nine highlights the continued strength of our capital position and financial flexibility.
In the third quarter, we issued $1.15 billion of 5.1% fixed rate non cumulative perpetual preferred stock. The proceeds from this issuance we used to redeem $1.13 billion fixed rate perpetual preferred stock with an average dividend yield of 6.54%.
These actions will lower annual dividend caused by about $16 million.
We continue to deliver excellent returns to shareholders in the third quarter of 29 team, we returned $775 million to common shareholders through a combination of $166 million in common stock dividends and $609 million of share repurchases.
We have repurchased 6.7% of common shares outstanding over the last 12 months book value per share is up over $9 over the last 12 months.
Now I'll turn it over to Glenn will discuss our special topic of Allstate brand homeowners insurance and how we're positioned to generate industry, leading returns while growing market share.
Thanks Mario.
Homeowners insurance, a great business for Allstate as you can see on slide 10.
I'll take the second largest homeowners ensuring the United States was 6.6 million policies in force.
We have written premiums 7.6 billion in the Allstate brand over 400 million encompass and Esurance is also expanding into homeowners insurance using allstate's capabilities and now it's over 100000 policies in force.
A significant portion of our customers bundle home and auto which improves retention and overall economics of both product lines.
The key message on homeowners insurance is it generates substantial underwriting income and attractive returns on capital.
We achieved these results we target an underlying combined ratio in the low sixtys to handle the volatility that comes with catastrophe losses.
Since 2012, we generated over $1 billion of underwriting income on average annually, including catastrophe losses as a result returns on economic capital or in the mid to high teens.
This profitability also provides diversification to auto insurance profitability.
The graph at the bottom of the page shows homeowners insurance combined ratios for Allstate in the industry since 2012.
As you can see Allstate is consistently outperform performed the industry. The results is that we've earned over half of the industry wide underwriting income in that period.
Turning to slide 11.
Got it Optimizes returns through sophisticated portfolio management.
We've improved returns and decreased homeowners insurance volatility through advanced catastrophe modeling geographic diversification of business and strategic use of reinsurance.
Spread of the business across the country works to our advantage by providing a significant diversification benefit as timing type in magnitude of weather events differ based on geography.
As you can see on the U.S. map, we have a top three market share in 20 states, which are shown in green.
But much lower shares in states, like California, and Florida prone to catastrophes like wildfire earthquakes and hurricanes.
We take a proactive approach to managing our exposure to different types of risks.
We substantially reduced our exposure in California to earthquakes by helping establish the California earthquake authority and 90 96, and we've decreased our underwritten policies enforced there in the last decade.
In Florida, we reduced our market share from about 10% in 2003 to less than 2% today.
We also helped shape than Florida Hurricane catastrophe fund, which provides reinsurance.
And we use a separately capitalized company their castle key and purchasing external reinsurance reinsurance.
The overall objective is to meet customer protection beads needs while.
While optimizing shareholder risk and return.
We underwrite risk directly where we can achieve target returns. We also broker nearly $1.4 billion of other insurers property policies. This allows us to meet our customer protection needs leverage our distribution strength with more customers bundle additional allstate products, but not directly right risks outside.
Out of our rent underwriting appetite.
In total we manage our portfolio of states to target a combined ratio that generates attractive returns for new competitors and homeowners insurance the state level product.
That dynamic makes it difficult for them to achieve the same level of overall profitability or have the resources to expand.
We shipped an extensive amount of catastrophe risk to reinsurance markets, which reduces our capital requirements and protects annual returns.
The reinsurance program covers individual large events utilizing traditional reinsurance and alternative capital.
The current nationwide reinsurance program provides over $4.3 billion of limits above a $500 million retention for any single event.
We also use an aggregate cover in case there are multiple events below 500 million. This provides additional protection in case, the accumulation of those events throughout the year exceed 3.5 billion.
Moving to slide 12.
We're not standing still and we are constantly innovating in this space.
We're focused on customer value and ease of doing business to accelerate growth, we streamlined homeowner quoting process by using both proprietary in third party data sources to increase efficiency inaccuracy.
Using this information we've reduced the number of questions asking the quoting process from over 42 just.
Three when bundling homeowners and auto insurance together.
In many cases after a quote is completely bind coverage theres, an inspection of the home technologies, such as aerial imagery and predictive modeling is enhanced the speed and efficiency those inspections and lowered our expenses.
We continue to enhance the design of our homeowners product, while increasing our pricing sophistication.
Our homeowners product house in home is better able to address severe weather risks and unique customer needs.
For example, the product includes the graduated roof coverage schedule. So it's still provides the ability for customers to first purchase full replacement if they choose.
How sent home now represents 90% of our new business and about 45% of our total policies in force.
The pricing of house in home is more sophisticated than traditional homeowners insurance products with more occupancy and residence characteristics.
We've also improve the efficiency and effectiveness of our claims handling through technology and innovation.
We leverage our scale data and analytics to rapidly deploy more than 700 full time catastrophe resources to quickly help customers when they need it most while mitigating damage and managing costs.
We use aerial imagery.
To improve our efficiency and customer experience, we've expanded virtual claim handling capabilities, including the use of drones airplanes and satellites. So that now nearly 70% of all wind and hail claims have some aspect of the claim handled virtually compared to less than 10% in 2017.
The bottom line is Allstate has a significant competitive advantage in homeowners insurance will continue to leverage our scale pricing sophistication risk management distribution system and claims capabilities to deliver industry, leading returns and market share gains.
We'll now open the line for your questions.
Certainly 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 and you'd like to remove yourself from the Q. Please press the pound key also we'd like to asking the please limit yourself to one question and one follow up you may get back into queue. As time allows our first question comes from the line up at least greenspan.
Wells Fargo. Your question please.
Hi, Thanks, good morning.
My first question I wanted to spend some time on me expense ratio and happy liability. It's been low now for a couple of quarters.
And I know last quarter, you guys had pointed to combination of improvement in process is automation as well as incentive comp, it's driving down the second quarter expense ratio you could just give us a sense. If it's kind of the similar components that 12 down on the ratio in the third quarter and just how we should think about.
Bottling totally that expense level going forward.
Yes, thanks for the question at least as Glenn.
We are debt, we're definitely focused on improving expenses, we've been after this and going after it hard I mentioned a few the examples last quarter where.
We've been able to reduce customer inquiry calls, which is a win win because it's better customer experience because we've eliminated the need for those calls on the front end, but it also is more efficient on the backend.
Mentioned in special topic, there some of the aerial imagery and data and analytics were using in both claims and to reduce inspection. So.
We've gone after some real tangible ways, we can manage expense.
As with any quarter, there's there's a mix of things in there. So similar to last quarter. There is some components of compensation some components of.
Marketing some components of.
Sustainable improvements in the baseline of that but we've made some real tangible improvements that said, we will sustain and we're going after expenses.
Real way, because we think it's a path towards growth, where we can maintain margins.
Can you breakdown give a little bit of color on what might be in the sustainable bucket versus maybe what was kind of onetime in nature and this quarter any expense level.
I don't I don't know that there was a lot of one time.
In this so we've got where it is sustainable as those operational improvements which is.
Meaningful chunk of the change that we've got when you look at some of the compensation components.
We've managed both are.
Ploy compensation and agency compensation overtime, and you reset every year with a new programs. So there's a little bit of benefit in there from that that we were short to our growth aspirations.
In the year, but otherwise we got sustainable expense improvements in here at least one play this time workplace. We were light this quarter was marketing.
Which we will dial up.
As we talked about last quarter, we're dialing up there's some select markets where we.
No that we can generate economic growth.
Said that won't change the overall trend line of expenses should be coming down overtime.
But you know every quarters new quarter so.
Okay. That's helpful. And then my second question on we've seen.
Some of your peers that have seen higher bodily injury severity trends.
Within their auto book of business I was just could you just give us an update on what you're seeing on to be severity side and just.
Have you seen any pockets were trying to pick up and the U.S.
Well, let me give you first so we can't comment on everybody else's numbers, because as you know in bodily injury.
Those are long dated claims it takes three four years, she really getting paid out depending a little ones get closed early the big ones get closed late so you always have some bounce of mix in the paid VI. They have to get underneath that said, we feel good about where our overall bodily injury.
Errors are set and our trend. Thank you talked about that paid trend.
Yeah. So we feel good about where we earned bodily injury as we put into Q running around medical inflation.
As Tom mentioned on the reserving are it's all in the numbers I think would be a headline there because in our reserving actuaries are talented folks. They work very closely with our claims team or underwriters are product organization.
They all work together to ensure that we have right reserves on the books and if you look at the trends over time.
We've had.
A lot more favorable development that unfavorable development through the years, which is good.
Bellwether for you to look at in terms of our overall trends.
Okay. Thank you very much.
Thank you. Our next question comes in the line of Greg Peters from Raymond James Your question. Please.
Good morning, My first question I'd like to revisit.
How your guidance is going to look for 2020, John I know you mentioned in your prepared remarks that theyre going to start disclosing monthly cat loss numbers.
I also remember from a previous presentation.
That you said you were going to shift from an underlying combined ratio target to our target return sort of.
Guidance and.
Just wondering if this is a trailing are are we target do you plan to adjusted for changes in interest rates et cetera, just looking for some color there.
Well, Greg. Thanks, a question, we love the fact yards paying attention to what we say makes it could.
The the monthly cat number Isnt just to clean up what people were like is it above 150, what if it's 149 I always felt like it was confusing stuff. So we just put out my point you can do what you have people everyone's got different things that use it for.
I'll just make.
You are lives easier in us more transparent as it relates to the return on equity as you know, we're replacing the annual underwriting underlying combined ratio guidance with longer term, our ROIC goals are going to better measure.
The overall business results because it includes first it goes our businesses and includes investment comes in a tie in ties directly to reported results which includes catastrophes.
The underlying combined ratio of course, only reflects that property liability businesses and it excludes catastrophes, which bounce around a lot from quarter to quarter and year to year, but out of long term basis as a management team work countable for making sure that we get a good return on homeowners.
With catastrophe is included in that because at the risk our shareholders take so.
What we're going to do when we report full year 2019 results ill give you what we think a long term range is on return on equity.
In that management, we've held accountable to.
What do you define as long range and is this adjusted earnings that song.
Yeah, it'll be on adjusted earning just because the accounting as we move to fair value accounting the book value and in reporting income bounces around a lot with equity investments. So we feel like adjusted.
Net income return on equity as a better measure of what we wanted to do a long term would be sort of what do you expect to do or two to three years, but the goal really is to get you to get people focus in our cheryls folks on what's the overall return we're generating on the capital you haven't focused on the overall sided business as opposed to judge.
One component in while auto insurance in homeowners insurance are extremely important to our business or not the only thing we got going and that the only thing we should be held accountable. So so our OE is just a much better measure under which you can judge how well you think we're doing as the team.
Great. Thank you for that answer my second question is.
Just a follow up on the expense noted from the page nine of your supplement that your agency count was up.
Year over year and sequentially and year license sales professional count was up year over year in sequentially.
And I'm trying to reconcile this with the fact that you're not reporting any restructuring charges, which is unusual considering the improvement you realize and then secondly.
In the and on previous calls Glenn has mentioned something along the lines have been integrated services platform and so.
So the numbers are kind of moving contrary to what I think that would be so maybe you can provide some additional color there.
Well, let me.
Deal with them components, Glenn can talk about what we're doing with our agency platform to make it more effective application, including things like integrated service and what we're doing in compensation to drive drive growth.
As it relates to restructuring, we do end up with some little minor restructuring charges that go through there in the queue someplace.
But theyre not big numbers as we move forward or as we move to integrate does your enterprise. We just record what we think we have to report under the rules if it means.
We have a head count go down because we're using integrated digital enterprise and we have to record a charge that we do it but.
We don't feel like there is one big bucket that's needed at this point that we then carve it out and don't come back and hold ourselves accountable for because it's some other charge.
Yes, so yes. Thanks for the question, Greg and as Tom said, you are you definitely paying attention to the details in there.
So if you look at the agent Council start with that.
Some of that's a reflection of the investment folks are willing to make in the business based on the opportunity thats good opportunity with Allstate and and we are we're growing items and we're profitable and has been successful. So you know agents are putting their nickel staff nickel down. These are small business owners, who are opening up a shop and.
And going out and selling product and serving the needs of consumers.
In terms of the license sales professionals, so thats reflective of their hiring they're doing mostly on the sales side of that now that said I'll I'll mention as Tom said, a comp compensation component leading into next year as well as.
The integrated service that you brought up from a compensation standpoint.
We're we're leaning more of the compensation towards new business production.
We're we're interested in growing so as we increased marketing we've improved our expenses you'd be more effective and cost effective for customers and we lean more into new business production in terms of the compensation as we shift.
That in that direction, we think thats a good system wide approach to go drive growth.
In terms of integrated service.
We have talked about it before it's in the early stage. It's a big system. We have 40000 people in that agency system. When you take the agents and all of their employees licensed and unlicensed sales and service.
And so today, we do that service in a decentralized away a lot of the surface is done and individual offices, which you're not scaling.
He is not ultimately going to be as cost effective as we can do it in a more scaled way. So we built in integrated service model, we're doing that with we're getting into hundreds of agents not thousands of agents at this point. So from a scale perspective, you wouldn't see it showing up in the numbers that you looked at there at this point.
Greg just a the change in agency compensation, we don't expect to raise overall compensation as a percentage premiums.
Correct, Yeah, I was a shift.
Great. Thank you for your answers.
Thank you aren't next question comes from the line up your on cannot from Goldman Sachs. Your question. Please.
Good morning, excuse me.
Can you talk about the increase in property damage frequency and Allstate brand auto.
This quarter I guess I was just little surprise to see that given the more recent trends.
Yeah, you're on it's Glenn So first of all I always like to go back to the overall profitability of auto.
Doing very well, they're 92 combined ratio or some of that as expenses and I'll come back to sort of somebody intentionality, they're up frequency first of all is hard to predict you can't.
You can't predict what's going to happen in the next year next quarter, but you can understand the trends and where things are moving so miles driven were up you saw some change in what had been a declining trend to frequency.
That said it was a little bit mix. So I'll point, you do a few different numbers.
Gross frequency was up two points as you pointed out but paid frequency, which on a short term tail line tends to be pretty accurate was flat and VI frequency was slightly down. So I look at the overall frequency picture and say, it's kind of a mixed story in there and something that we're keeping a close eye on now you go level below that.
And at a local level every state manager is out there looking at their competitiveness there trends there frequency or severity in every state and we're managing the that profitability at that local level. So that's what rolls up into a really favorable return as we've delivered and then lastly on expenses I want to keep going back.
Back to that because.
Part of the reason or the main reason you go after expenses. The way. We are is actually allows you to let the expense the loss ratio float up and deliver the same return and that's what it looks like in our ratios when you're getting back more value to the customers.
Okay, that's helpful and.
And then the second question.
I'm going to homeowners also saw an increase in severity there.
I guess, just given the amount of pricing that the companies.
Because push through over the last year.
Yes, so surprised to see the deterioration in accident year loss ratio from a pretty weak prior year.
Quarter to begin with.
Even with that increase in severity. So can you maybe talk about that dynamic of.
Where's the severity has come from and.
And why the price increases we've seen to date have not been sufficient to offset that.
Homeowners is one of those businesses, where it's really difficult to look at it by quarter.
What happens with severity, because obviously impacted by weather, sometimes its cat, sometimes it's not a cat.
And so you have to really look at on kind of a rolling 12 month basis.
And when you look at our business. It's got great returns, we feel really good about it if you look at the average premium its way up.
And when you go underneath that and as Glenn said, we'd like to segment. This down then I would do we segmented by state we segmented by coverage and in homeowners, depending what kind of loss you have it changes your paid severity a lot and again those tend to be relatively short tail line.
But as so a fire loss.
As a much different severity if the house Burns then obviously if somebody runs into their garage door.
Or.
Hail damage content to be much more expensive because it take could take out a whole roof than some of the pipes. So it really it really depends the mix drives a lot of itself is not as.
As big as water damage so.
What I would say Glenns comments on this special topic, we feel really good bought homeowners like it's a really good business, making really good money.
Much better Okay, and I wanted just underlying way said you know with a 9% share of the market. We've captured half of the overall profits generated in homeowners in the industry. So we feel like that's indicative of good operating expertise and capabilities.
Right No no no pushback from me on that.
Thank you very much and good luck to John in General.
Thanks. Thanks.
They do you aren't next question comes in the line of Jacobs from Barclays. Your question. Please.
Thank you My first question was on commercial auto and the ride sharing.
Agreement with.
The major providers there.
One other competitor in that market has had some issues negatively so just wanted to understand how how allstate is going to position that business.
Hey, Jay Steve So let me, let me start often say.
We call it a shared economy business. So it's not just lunch.
And car sharing we live brought more broadly and so obviously you focused on the largest customer we have.
Handful of others, and we're building entire team technology all around that.
Obviously, we are well aware of other competitors in the industry and.
The particular competitors you talked to pause things in their reserves in 2016 17 year when the industry was kind of early Paul and development.
He started last year.
And your number I think in prior calls I've talked about how we triangulate it our loss reserves on the basis of the prior history that that was provided by the the.
Transmission network company that we've used our own internal.
Personal lines when commercial auto experience and we've also looked at industry experience and our telematics type of information we get we just stay low because remember we have 15 thinks we're ensuring not thought entire country.
So we're comfortable with where we're sitting we're still on recording sensually at the priced a mouth.
It's primarily because the vast majority of the coverage is we'll wait until till coverages. So it's still early 19 months into that first month, I think long tail coverages historically take longer than that develops so it's still coming along lots. We look at it every every quarter as you may remember independently our reserves are reviewed et cetera.
A team that works and claim reserves looking for Mario and not for me. So we had different eyes on it or actual department from our financial Department, obviously the business too. So we're comfortable that we are very answer your.
Good question does it does thank you very much and then on a separate topic.
Thinking about the underlying combined ratio in the in the.
And the protection business.
The underlying underlying loss ratio excuse me, having that showed an increase year over year I. My sense is some investors a little concern about what's going on in terms of price competition in auto and then also the potential for claims inflation to increase so can you just remind us how how all states managing that issue.
You've to restrained.
Underlying loss ratio deterioration.
Jay that may provide some overall context, thanks, Glenn can jump in on the relationship between expenses.
And loss ratio so.
First.
As you know our like auto insurance or large pipeline. It comprises about 65% of our total premiums I. It's obviously an important lead line as well because it helps expand into the homeowners insurance business, which is also highly profitable. So it's a really important question of our you're going to maintain your profitability and auto insurance a keep growing it.
But before we go into the specifics on expenses and loss ratio. Let me just talk about principles for a minute and little bit of our history.
So we have some guiding principles on growth first we only want to grow when we get a good return for our shareholders I mean, it seems simple, but it's not everybody follows that path.
As you know the auto business generates really attractive returns it's in the low nineties.
When you add that and homeowners insurance to they equation, that's a big driver of our return on equity, which was 14.2% for last 12 months, but when you adjust out annuities. It's over 17, so we're getting a really good return on their business.
So what we've put in.
In place has been has been working secondly, we do segment the business by Oh in terms of growth and profitability by business geography customer group and risk. So that we get attractive margins in each segment and that gives us that solid base from which we can be sustainable in terms of grow so if auto margins drop in one state or I want.
Coverage, we had the benefit of good margins and auto insurance another stayed around another coverage or in the homeowners business. Our third principles, we create shareholder focused.
Create shareholder value by focusing on profit and growth at the same time, but we default to profit if necessary.
And so we employ that philosophy across everything we do so for example, let's go to insurance.
And you know when we first bought insurance it was running a combined ratio well over 100 and.
And we invested heavily in that we believe in no now that growth, creating shareholder value because it return on the business. We were writing was higher than our cost of capital be counting however required us to write up all the advertising expenses up front, which resulted in an underwriting loss. So after the first year of course than that.
<unk> expense goes way you capture all the underwriting profit and it's very profitable and so it took a while before that profitable business can offset the negative of first your business, particularly when you're spending $200 million here in advertising. So as a result that growth reduced underwriting income, even though is positive for shareholder value. So we try to think about.
Are we creating shareholder value, our first principle weve, creating shareholder value. When we're doing this we can do it and we chose to do it any sure. It's because we had strong profitability coming from the Allstate brand auto and homeowners business and so they concept the portfolio growth Glen talked about how it applies at the auto insurance level and implies for homeowners.
It also applies across the whole company and debt and so now insurance is two and a half time to size and when we bought it.
A similar situation exists for I'll say protection plans.
So we acquired square trade, which has been renamed I'll say protection plans a couple of years ago for billion for which is equivalent to about four bucks a share.
The Allstate share and as you know now they have businesses over twice the size of that 89 million policies in force. It's got great distribution, it's grown growing the European cell phone business and and now it has reported profits, albeit small reported prospect.
And so valuing that business on an earnings basis, clearly understate shareholder value. So our challenge has been to make sure. We give you the information to see value creation, but not get everybody. So focused on the 65% of the business that that's the only thing that matters in terms of creating shareholder value. So it's a really important question.
How are you growing that two thirds of the business to make sure you make money, but I also want to just take this opportunity to say like don't forget about everything else because there's a third of the rest of the business that drive shareholder value that when we get so focus on just auto insurance margins.
It takes people's eye off the other stuff, which is why we moved our OE, but obviously, we're very focused on auto insurance profit, we feel really good about it.
And we need to make sure recouped in that so Glenn will talk about what Mario mentioned is our intentional strategy to.
Grow the business.
Offer really good value to our customers by reducing our expenses and then having the loss ratio drift up which enables us to maintain margins and still keep clocking that high teens, a return on equity fund that business.
Yes, Thanks, Tom <unk> Gmbh.
You lay out the principles there.
Clearly we're in an environment in auto that that meets those growth principles and so we want to go after that.
That said.
It's environment, we've chosen to grow in but it's a competitive environment. We've we've got.
Significant increases in advertising out there we have an extremely low CPI. So we acknowledge all that in terms of the competition and we're doing things smart as to how we grow.
As opposed to chasing it.
I think you could call our combined ratio now a little bit of a restructured combined ratio because as you point out Jay the loss ratio is off the expense ratio is down I would argue that it's a lot better than the other way around that if you think about sustainability. If we were here having this conversation and we were like a point or two up on expenses and but we had a huge.
Tailwind because frequency to drop through the floor in the quarter I think we'd be having different conversations. So I look at this as a as a positive sustainable way for us to go after growth and and show that we can do it in a way that's going to continue to provide the that.
You know mid high teens return the topped off them.
Next on its very helpful. Much appreciated.
Thank you. Our next question comes on line, though Mike Zaremski from Credit Suisse. Your question. Please.
Hey, Thanks, I guess.
Hang on the.
The expense ratio improvement, which is enabling you to grow more.
There was a media reporter too about shifting certain customer service responsibilities out of the agencies and into call centers, which can service customers potentially more cost effectively I kind of curious if that's part of the reason Asian comp is falling and why it may be a permanent decline or just you can correct me if.
Totally off on that.
First let me go up for a minute, Mike and say.
We want to use technology and our people to do a really great job for our customers and with what you can do and technology today.
You can make your people a lot more productive and making give a great service and spend less money. So you know we've talked in multiple times by quick photo claim with the productivity of a claim adjuster is multiples of what it used to be because they're not driving around from body shop. The body shop, there sitting in front of a computer looking at pictures deciding what should.
Be down with account that customers. So that's ripping through our business, we have lots of ways, we're working on doing that.
And that's what gives us the confidence that we can do a better job for our customers with less expensive Glen talked about integrated service, which is the thing you're referring to and you don't see it in numbers it would be what I would say today. It's not we started with 50 agents. This year, we're getting that process is down we're not going to turn this loose on 20 to me.
<unk> customers.
Until such policies until such time as we make sure works really well because the system. We have works really well our net promoter scores up again this quarter, we like what our agents are doing that said, we think we can do better by leaning into innovation wrangler, So you're not seeing anything on integrated service that.
The media I think you're referring to I mean, there's there's so much Midi out there these days.
It and the weather fake news or not but like there.
Reality is is we are doing everything possible to give our customers great service support our agencies, but do it in a cheaper way and we're all in on that.
Okay, Great that's helpful.
And lastly.
Glenn in your prepared remarks, you you.
You could I might be a little off you talked about the state level.
Profit dynamics, making it difficult for competitors to achieve all states homeowners profitability, maybe you can elaborate on that and also I'm curious if there's any parallels to auto insurance as well. Thanks.
Yes. So thanks for the question on it I think.
The basic premise there is we have a lot of scale and and we've got you know breadth across states and are in our blended are mixed across the state is not only a 50 state view and so we've got to everywhere, but we've also been thoughtful and made choices about where were larger and smaller given the types of risks we face.
Which really challenging for the smaller or newer carrier going into it is getting that type of breadth across the system, where you can offset your highs and lows. It's similar to what you do within investment portfolio, you're you're mixing your investment portfolio in different ways. So that when one things up another ones down and your your.
Getting an overall good return that's really challenging if you're starting out in your only allowed to buy for stocks.
Let me also add to that so, let's just compare homeowners to auto insurance. So homeowners is more volatile on a.
Individually location basis in auto insurance. So you should put up more capital for homeowners insurance, then you should for auto insurance.
In addition, with homeowners insurance you get very little investment income because it's a relatively short tail as opposed to auto insurance you get a decent amount of investment income off at a so as a result of that you have to run a combined ratio in auto and homeowners insurance. That's below that would you run in auto insurance. So your combined ratio in homeowners should always be.
Below you can buy that's not true for everybody, but that so in total you got to get there. The problem is it like Theres hail in Dallas, one year, and then not for two more years, Theres hail and Oklahoma because it got dumped in Oklahoma before I got to Dallas, The next year and so if you're only in Dallas.
And you got to earn that low combined ratio and the hail happens that gets you in that year, it's pretty hard to then hit the money to expand into Oklahoma. So that's what Glenn is talking about it but the businesses.
When you look at the homeowners business and as more people get into it I think it's worth while focusing on what is their actual return on capital in that business as opposed to just its growth.
Helpful. Thank you.
The Q. Our next question comes from the line of Ryan Tunis from Thomas Research. Your question. Please.
Hi, This is Chris Diluent Ryan Tunis.
First question again on a on the expense ratio.
It seems like the expense ratio hasn't changed a lot, but it doesn't seem to be translating into auto policy growth acceleration, yet and it seems like some of that expense improvement came from advertising, which tends to grow.
Gross so I'm wondering what actions are being taking right now.
And where you're investing in growth and going to see that policy growth acceleration.
Sure.
Well first of.
If you look at our auto insurance growth, it's by two points.
Which we think is more than the number of cars and.
Have grown in United States. So we think we're picking up market share, albeit a small amount of market share and we'd like to have more.
So we are investing more in marketing.
But that doesn't change overall trend that Glenn talked about I mean, we're going to our overall trend is reduce expenses be competitive price maintain margins.
At levels that are attractive is it going to be the same level each quarter bounces around a lot depending what frequency happens, but we like the returns of a good it getting returns and auto insurance and we have proven that we can grow it and we're going to work on keep producing expenses. So we can continue to be competitive.
Okay.
And.
On the auto rate increases on you guys have been getting this year. It doesn't seem to have slowed very much in the first nine months.
Right.
Fritz you pass along more savings to customers and grow the business. So can you kind of described the auto pricing environment, right now and how you're thinking about auto pricing.
In terms of growing.
Yes. Thank you Crystal first of all we we manage all of our pricing a state by state basis, and I would say you know in terms of the slowing I would look at it relative to the loss cost trends and so I would say it's slowed we're we've taken over trailing 12.
Months 2.2 auto rate.
Thats translated into an average gross premium of 3%, but if you look at the severity trends running five this quarter, but in the trailing 12 months a.
Higher than that.
We've not had rate that keeps up with that and as we talked about earlier, we've offset it with lower expenses and that's where you get more value to the customer is not taking rate that has to keep all the way off with those type of inflationary factors, but you know as Thomas said several times, we manage this for profitable growth and we're committed to a strong return.
And when we look state by state it that we're looking at our competitiveness, what our price looks like relative to our competitors by different customer cohorts.
In each market, but also what our return on all of its cohorts are in each market and so I think our pricing has trailed the loss trend.
Which is part of.
What we're offsetting with the expenses, it's it's hard crystal too.
And I'm not trying to.
It's really the.
The level of sophistication in pricing today in auto insurance is so high that.
While the numbers overall are important to maintaining looking at the trend in the margins indefinitely look at those in terms of growth a lot of it depends what sales are growing in which new business discount is there's a lot of things, we do a and our competitors due to make sure we capture business, which is generates long term.
Economic growth.
So it's but it's a pretty it's not a robust you're not seeing people take a bunch of rates right now as state firms taken some decreases.
You know given where they are in overall price, we think they probably need to take some price decreases because are pretty high price.
We feel competitively priced right now.
Okay that makes sense and then one more quick one on the auto bodily injury reserve releases this quarter.
Could you just give a little bit on detail on which accident years older coming from and whether that reflects you know the level of severity of being in line with medical inflation.
It is that running at a lower level then you are expecting in those and those years. Thanks.
So kristalose as Mario.
I guess the first thing I'd say is just reiterate what Glenn said in terms of we.
Stablex reserves and look at reserves every quarter, we have some pretty robust processes that we follow we take all relevant facts and circumstances, both internal and external trends into account.
And then we we also take into account any changes in claim handling practice. So we haven't really thorough reserve setting process and we tend to be conservative.
How we set those reserves what you saw this quarter in terms of the releases were predominantly in Allstate brand auto injury coverages and we continue to feel good not only about the severity trends that we're seeing in the current year, but we're seeing favorable development in the prior years that is better.
And what we expected when we established the reserve so it's really coming across a number a number of accident years, but we continue to feel really good about our reserve position and our injury severity trends.
And the amount from each prior year wouldn't really help you sorry, it's because it's what we picked as opposed to what the trend the absolute trends are but when we do the K. There is obviously the triangle.
Yep, Okay, great. Thank you so much for all the answers.
Jonathan will get we have time for one more question.
Certainly our final question then for today comes from the line of Josh Shanker from Deutsche Bank. Your question. Please.
Yes. Thank you I was looking at the policy count numbers and auto and.
It seemed to go to slow down, but I'm wondering if we can.
Sort of break it down to gross policy adds versus.
Gross policy declines are are also customers sticking with you and the new customers have slowed.
How should we parse that out.
Oh, that's a pretty detailed level question, Josh So first overall retention was flat.
This quarter basically for statistical reasons, I mean, it's kind of down slightly but it's basically flat so that means we're keeping.
In total.
As many as a percentage of our customers.
As you are correct in assuming that a new business doesn't have as high retention as people bandwidth you 10 years by Tencent has been with you actually people going with the three four years, they pretty much tend to stay with you really high retention levels. So growth will drive your attention down. Despite the fact that we were growing.
Thing over last.
Couple of years, our retention has gone up because we're doing a better job.
Customer service with our net promoter score up so I don't I think in terms of our overall growth.
You should expect to see more of it come from new business in the future than further increases in retention if that's helpful.
And when I look at the decline AD spend and I guess compensation to agents remember thing that incorrectly.
That directly tie all boats the amount of new business coming in.
I you sound like you're looking at a specific number maybe what we can do is Glenn can answer to the what the new comp. So we're going to we typically spend more money in advertising, we're working on that and we expect to still bring our overall expenses down as we do that overtime I mean, it may not be every quarter, but we're headed down in.
That direction.
And.
Then, but then it can talk about what we're doing on compensation.
And a quick add will make to the marketing because it's come up a couple of times, it's drew on a year over year basis, the marketing was lower on a sequential quarter basis. It was up.
We're comparing to a quarter last year, where there was a new brand launch and so but we are ramping up and were will continue to do that with marketing, but from a compensation standpoint.
As we talked about earlier it really is about shifting towards new business production. You. Ultimately you compensate agents for the service they provide the customers and for going out and and hunting and getting new business.
And were within the confines of that that amount of money that compensation system, we're shifting money towards new business production to incentivize that more in the compensation plan going into next year. So what we're trying to do is going to great customer value proposition will add a good price.
I want good service, we're lowering expenses you should expect to see US continued lower expenses as we go forward from here.
And and then as a loss ratio goes up that just means you're offering greater value, they're paying less for expenses and more for fixed and stuff that got broke.
Thank you for the answers and good luck.
Okay.
Thank you for being on the call. Let me, thank John for being both a transparent and direct source to you or.
Little over three years, he's done a fabulous job, we're excited to see and move on in his career and no Mark will do a great job.
Worked with John So it will be seamless for you and us.
As it relates to all state Yeah, we made really good progress this year on our strategy our operating priorities remain focused on profitable growth and we'll talk to next quarter. Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.