Q4 2019 Earnings Call
Ladies and gentlemen, please stand by your conference call will begin momentarily. Once again, please stand by your conference call will begin momentarily.
Since at least continue to hold.
[music].
Thank you for standing bottoming and welcome to the old steep fourth quarter 2019 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
Good question. During this session you'll need to press Star 100 telephone we ask that you. Please limit yourself to one question and one follow up as a reminder, taste program is being recorded and now I'd like to introduce your host for todays program Mr. Mark normal head of Investor Relations. Please go ahead Sir.
Thank you Jonathan Good morning, and welcome everyone to all States fourth quarter 2019 earnings Conference call.
After prepared remarks, we'll have a question and answer session.
Yesterday following the close of the market, we issued our news release and Investor supplement and posted today's presentation on our website that allstate investors Dot com.
Management team is here to provide perspective on these results and further context on a recently announced transformative Brooklyn as noted on the first part of the presentation. Our discussion will contain non-GAAP measures for which there are reconciliations in the news release and Investor supplement and forward looking statements about all states operations. All these results may differ materially from these statements. So please.
For two our 10-K for 2018 and other public documents for information on potential risks and now I'll turn it over to Tom.
Good morning, Thank you for joining us to stay current on all state.
Let's begin on slide two with Allstate strategy.
As you know our strategy has two components increased personal property liability marketshare and expand into other protection businesses, starting with the upper overall, we've been a leader in creating differentiated insurance prices features such as declining deductibles or new car replacement.
Sophisticated pricing gifts drug claims expertise in a building an integrated digital enterprise to lower cost.
We're also diversifying our business is by expanding our protection offering switches are highlighted in the bottom oval, we leverage you Allstate brand customer base and capabilities to drive growth in these businesses.
So we offer customers a circuit protection that includes Allstate life workplace benefits commercial insurance roadside services car warranties protection plans and identity protection.
These growth platforms have extremely broad distribution includes major retailers insurance brokers at the Worksite auto dealers manufacturers telcos and directly to consumers.
On the right hand, you can see that this strategy strategy create shareholder value to customer satisfaction unit growth in attractive returns on capital. It also insurance, we have sustainable profitability in a diversified business platform.
We move to slide three Allstate strategy continued to deliver excellent results in 2019 revenues were nearly 11 and a half billion in the fourth quarter and 44.7 billion for the full year 2019.
Net income was 1.7 billion into fourth quarter and $4.7 billion in the full year.
Adjusted net income was 1.2 billion or 3013 cents per diluted share in the fourth quarter.
For the full year adjusted net income rose 11.1 per cent compared to the prior year.
To $3.48 billion or a $10.43 per share it reflects excellent underlying profitability and lower catastrophe losses.
Returns are also excellent within adjusted return on equity of 16.9%.
If we turn to slide for Allstate deliberate and all five 2019 operating priorities, which focus on both near term performance and long term value creation.
First three priorities better serve customers grow our customer base in achieving target returns on capital, they're all intertwined and it just to ensure a profitable long term growth.
Customers were better served as the enterprise net promoter score improved at most of our businesses.
Total policies in force reached 145.9 million is an increase of 20.7 per cent compared to the prior year.
Property liability policies, which you know are bigger dollar amounts increased by 428000 down 428000 for the prior year to 33.7 million.
As Allstate insurance brands grew 1.3% and 2.3% respectively.
I'll say protection plans, which of course was formerly square trade continued its rapid growth do. The addition of a major retail partner with items enforce reaching 99.6 million.
Returns remain excellent driven primarily by strong property liability results. The underlying combined ratio of 85.0 finished 2019, if the favorable end of our revised full year guidance of 84 to 80 684.5 to 86.5 and you will remember as part of our second quarter earnings release.
Last year, we had improved this and your outlook range due to excellent operating results.
As you know all states no longer to provide underlying combined ratio guidance since return on equity is a better measure performance.
Mario it's going to provide some additional context on this measure.
The 88 billion dollar investment portfolio agenda, Tripointe generated $3.2 billion net investment income in 2019, which reflects higher market base portfolio yields which was offset by lower performance based results performance based results were below expectations for the quarter, but longer term results have been strong total portfolio.
<unk> return was 9.2% in 2090.
Shareholder value is also be creating created by building long term growth platforms, we announced new features of a transformative growth band, which we'll discuss next.
He already continue to expand capabilities Allstate identity protection is growing and launches new digital footprint offering.
In a bail a car sharing platform initiated operations.
Move to slide five let's discuss the transformative growth plan to increase property liability market share the plant builds on our strengths in reflects current competitive conditions I'll say has a significant number of competitive strengths is you know, particularly in property liability. We have the Allstate brand, we have pricing sophistication and claim expertise product.
Brett in a broad distribution platform that goes from Allstate agencies to insurance is direct capabilities to encompasses independent agents.
As a result, we're growing but geico and progressive are growing auto insurance marketshare faster through massive advertising spending and low cost structures.
Plan also recognizes that customer needs are changing due to increased kind of activity in advanced analytics.
Our leading positions in it telematics in digital auto collision estimates are two examples of how we're embracing these changes.
At the same time, a majority of customers prefer it all see in insurance agent, we hope and Allstate insurance agent purchasing a policy, but are comfortable with self service. So we're increasing mobile application capabilities and building low cost centralized integrated service capabilities.
We're now accelerating these efforts with a transformative growth plan, which has three components expand customer access.
Improving the customer value proposition by lowering expenses and redesigning property liability products and investing in technology and marketing.
Expanded customer access will be provided by utilizing issuances direct capabilities to sell all state branded products insurance has strong direct capabilities, having more than doubled in size. Since it was acquired a little over eight years ago.
As a result, we can further leverage these capabilities by selling Allstate brand their policies directly to consumers. This will require us to reposition the Allstate brand and the advertising previously deployed for the insurance brand will be shifted to the Allstate brand and then the E shirts brand will be phased out in late 2020.
Expense reductions will improve affordability, while funding investments in technology and marketing.
We will also strengthen the independent agent platform by merging the Allstate independent agent offering into encompass. This is a comprehensive plan that will make us a stronger competitor and lead to increased market share now let me turn it over to Mario to go through the property liability in investment results.
Thanks, Tom Let's go to slide six where we highlight strong results within our property liability segment.
Coliseum premium growth continued and all of the brands had strong underlying profitability underwriting income of $1 billion into fourth quarter was significantly higher than the prior year, driven by lower catastrophe losses, and a continued improvement in the expense ratio despite increased marketing investments and the write off of the remaining issues.
Since acquisition intangible related to the brand name.
Moving to the table net written premium increased 4.4% in the fourth quarter and 5.6% for the full year driven by policy, an average premium growth it Allstate brand auto and homeowners insurance and the insurance brand.
Total policies enforced increased 1.3% to 33.7 million in 2019.
Underwriting income of $1 billion in the fourth quarter and $2.8 billion for the full year were substantially higher than their respective prior year period, driven by continued progress on improving our cost structure average premium increases and lower catastrophe losses.
The underlying combined ratio shown in the bottom left which excludes catastrophes prior year reserve estimates and a 51 million dollar pretax impairment charge related to our decision to utilize the Allstate brand for direct sales was 84.9 for the fourth quarter.
2019 result of 85.0 was that the favorable end of the full year guidance range of 84.5 to 86.5.
Focusing on the table on the bottom right at the page you can see are recorded combined ratio trend overtime by line of business as well as total property liability.
Auto insurance profitability remains strong with a combined ratio of 92.8, excluding the insurance impairment.
Increased average price average earned premium and lower property damage and bodily injury frequency offset higher severity in 2019.
Property damage severity continues to be impacted by higher costs to repair vehicles, well, while increasing which increases the number of total losses bodily injury severity increased at a rate above medical inflation indices, but we factor would be severity trends into our pricing algorithms.
Homeowners insurance continues to generate excellent returns lower catastrophe losses were significant in achieving a combined ratio of 88.4 for the year.
In total Allstate has industry, leading combined ratios for our property liability businesses.
Let's go to slide seven which highlights investment performance for the year and the fourth quarter.
Our investment portfolio total return for 29 team was 9.2%.
Net investment income contributed 3.7% to total return with a stable contribution from interest income on fixed income investments, but a lower contribution from our performance based portfolio.
Higher bond and equity valuation contributed 5.5% to total return in 2019.
The chart at the bottom shows net investment income for the fourth quarter of $689 million $97 million lower than the fourth quarter of 2018.
Market based investment income shown in blue increased to $735 million and benefited from proactive actions, we've taken including a duration extension in our property liability portfolio.
Performance based income shown in gray was lower than recent trend and included lower valuations of $74 million pre tax on to private equity limited partnerships.
Given the performance based portfolios impact on reported income, let's turn to slide eight to review. The purpose makeup and results of these investments.
Our performance based strategy delivers attractive long term risk adjusted returns and is well suited for long dated liabilities and capital.
The strategy Diversifies, our portfolio through through idiosyncratic equity returns that complement our market based strategy.
The portfolio is broadly diversified by asset type, including private equity in real estate as well as geography sectors and partners. We in bus we invest in funds coinvest and have direct investments as well.
The 8.7 billion dollar portfolio had a one year return through September of 7.6% and three and five your returns of around 11%.
While idiosyncratic investments generate higher returns they do create income volatility as you can see on the right.
The portfolio generated $469 million of investment income in 2019, but all of that occurred in the first three quarters.
In 2018, the portfolio generated $716 million of investment income and 145 million in the fourth quarter.
We continuously monitor the portfolio and do not believe the lower valuations on to private equity investments in the fourth quarter are indicative of the broader portfolio.
Slide nine highlights results for Allstate life benefits and annuities.
Allstate life shown on the left generated adjusted net income of $76 million in the fourth quarter and $261 million for the year.
The fourth quarter improved by $7 million compared to the prior year quarter, driven by higher net investment income and lower operating costs.
Full year income of $261 million was 11.5% below 2018 due to the third quarter write down of deferred acquisition costs in connection with the annual actuarial assumption review, which reflected lower interest rates.
Allstate benefits adjusted net income of $16 million in the fourth quarter was $10 million below the prior year quarter.
This decline was primarily driven by the write off of acquisition costs related to the Nonrenewal of a large underperforming accounts.
For the full year adjusted net income of $115 million was 9 million was $9 million below the prior year.
Allstate annuities shown on the bottom right had an adjusted net loss of $33 million in the fourth quarter driven by lower performance based income.
Adjusted net income of $10 million for the full year 2019 was below the prior year, reflecting lower performance based investment income in the first and fourth quarters.
Let's turn to slide 10.
The service businesses continued to grow the number of customers protected with policies in force, increasing 42% to 105.9 million.
This is largely due to the increase in Allstate protection plans.
Revenues grew 21.9% to $434 million in the fourth quarter, reaching $1.6 billion for the full year 2019.
Adjusted net income was $3 million in the fourth quarter and $38 million for the full year.
Adjusted net income increased in 2019 compared to the prior year period has improved loss performance in Allstate protection plans and Allstate dealer services were partially offset by continued growth and integration investments at Allstate identity protection.
Slide 11 highlights the excellent cash returns provided to shareholders.
In 2019, we returned $2.5 billion to common shareholders through a combination of $1.8 billion in share repurchases and $653 million in common stock dividends.
We repurchased 16.4 million or 4.9% of common shares outstanding over the last 12 months and increased our book value per share by more than $15 to $73.12.
The 3 billion dollar share repurchase program announced in October 2018 was completed in late January 2020, and yesterday. The board approved a new 3 billion dollar share repurchase authorization to be completed by the end of 2021.
We also reduced the cost of capital in 2019 by redeeming multiple series of preferred stock and issued two new series at lower rates, which will reduce preferred dividends by $17 million annually.
Let's move to slide 12, and discuss our long term return on equity goal.
Starting this year, we will no longer provide annual property liability underlying combined ratio guidance, but instead discussed returns on equity.
As we've discussed over the past two quarters. This is a better measure of our performance for multiple reasons.
It is a broader long term measure of performance than the underlying combined ratio, which focuses on just one part of one of our businesses and excludes significant items, such as investment income catastrophes and other protection businesses income.
It factors and capital management and is more correlated with stock price and that fosters a better comparison with our peers.
On a long term basis, our adjusted net income return on equity goal is 14% to 17%.
This range also aligns with executive compensation as discussed in our annual proxy statement.
Now, we'll open up the line for questions.
Certainly ladies and gentlemen, if you have to be question. At this time. Please press Star then one and as a reminder, please limit yourself to one question and one follow up you may get back into queue. As time allows all our first question comes from the line up at least Greenspan from Wells Fargo. Your question. Please.
At least you might have your phone on mute.
Hi, Yes, I'm, sorry, I'm good morning convey to hear me.
Yes, Ken.
So my first question is on your target.
He just 17% just a couple of questions. There we can get a sense of what you define as the long term and then how you see kind of 2020 coming in in reference to that 14% to 17% and then my last question on that front with the are you going to go into any particular details on the returns that you're.
Targeting within that within property liability overseas, you like related businesses or services.
Leased thanks for the question.
Let me deal with the second question first we're not going to give out a number for 2020, which gets to your first question, which is what kind of look at this kind of like rolling three year basis is like over a three year period catch go up and down things up and down and we should be able to earn out 14% to 17% return we got there.
By really looking at a couple of things versus what's the level of economic rent. We can capture by how good we are in the market, we operate and so as you know in the property liability business, we run a substantially more favorable combined ratio than the industry and that's where a substantial amount of economic return.
So look at it from what's the appropriate risks or what's the appropriate return for the risks that our shareholders take and we feel like 14 is 17% is a good goal for us to have over that three year basis. We don't yeah. I don't think you should try to use us to decide what 2020 forecasts are there's lot of better ways to do a fourq.
Yes.
We're not going to break it out by component because our goal here was to get up to the corporate level and say what are we doing in total because with the underlying combined ratio, we basically resumed ourselves in a including you all into you know how well was auto insurance doing that we've elected to vote.
So on the other opportunity to do obviously that 14 is 17 includes a whole bunch of components. So the annuities as we've talked about before our large drag on that so if you are to intuit between the 300 plus percent drag that has on our OE. The other business as you would say the.
Other businesses are higher return ER and of course, most of that as property liability, but that will change over time, obviously the acquisitions like the purchase of Allstate protection plans.
Obviously, we have that business doing extremely well from our standpoint, as well above its acquisition targets, but it does put a drag on our OE.
Interest rates would go the other way, particularly in the property liability portfolio. So what we did was stand back and say what do we think is right over time I kind of a rolling three year basis.
Okay. That's helpful. And then my second question you guys rolled out.
Growth related optimization efforts on December.
Just want to get a sense you know as you kind of changed your commission structure a little bit.
Hi, how you envision that playing out in terms of both a pick up a new business growth and any kind of drag you see that having an underlying loss ratio I guess, specifically Q auto book.
Well, let me maybe go up for a minute and then as lend to talk about the commission changes you're talking about for 2020, which I think those specific ones, you're referring so transformative growth is a multiyear effort.
We expect it has both expanding customer access improving customer value and investing in technology and marketing.
To help us grow market share.
The improving value will be done two ways, one reducing expenses and that's expenses across the board and we can talk more about that later on but that's really across the board and redesign that property liability products blend did make some changes to the commission structure for 2020, which you can talk about.
Yeah. Thanks weeks, we we've got a few things going to stimulate growth in what is a very competitive environment right. Now. So you know we're pleased that we're able to keep growing and to the second part of your question deliver returns. So I'll answer that part first do we expected to as we grow.
Road to deteriorate returns you know I would say no because weve evidenced that we're pretty disciplined about that and we've been as we've grown we've kept our our eye on the returns but.
The specific actions one are you referred to the change in compensation, we moved some of the compensation variable comp from agents.
Renewals to new business to incentivize growth you know, we want to pay folks for growing their business. We're also putting more into advertising and managing our lead management platform.
Okay. That's helpful. Thank you very much.
Thank you. Our next question comes from the line of Greg Peters from Raymond James Your question. Please.
Good morning, My first question will be around the expense ratio improvement.
You guys generated in 2019, I think that's probably the biggest surprised at least from an outside observer perspective.
In some of your previous comments you said there was some benefit for incentive comp. So I guess my question is.
Around how much of that 90 basis points was sustainable considering the strong results you posted last years I can a second a boost up the incentive comp for 2020, and then you know dovetail the expense ratio improvement with you know, what's what kind of anticipation or expectations should we have about.
Continuing improvements so should we factor in some modest improvement every year I know you guys are rolling out the integrated services platform et cetera.
Thank you, let me take incentive comp Mario can talk about expenses. So we said incentive comp targets every year.
So and so we have to two measures one is the <unk> two programs. One is the annual incentive plan, which is management's compensation program and that said every year based on how well we did the year before so it's not like you get a couple of years that we also have obviously a longer term plan, which is our.
Performance Stock Awards.
Which are tied to return on equity so dodos.
I wouldn't expect fall over from one year to another as it relates expenses, if we exceed the targets established by the board than obviously, we have to put that into the personnel, but presumably that's because we're making more money than everybody thought.
Yeah, Greg Thanks for the question its Mario I, just would add a couple of things. So first I think we're continue to be pleased with the progress, we're making on expenses and as Tom talked about earlier.
It's a core part of our transformative growth strategy and one of the ways that we're going to.
Further improve the customer value proposition and create capacity for the gross growth investments that he alluded too.
So you know our work in this area has not done we're in a keep focusing on expenses and look to drive down the caught the expense ratio one thing I'll add with the fourth quarter specifically.
The impairment charge related to the issuance brand was worth about six tenths of a point on the expense ratio. So if you look year over year, you see some real meaningful improvement in the expense ratio in the quarter.
That gets a little bit masked by that nonrecurring charge.
Mario is that where the easterns expense ratios I think was up 27.5% in the fourth quarter is that we were talking about yeah. It's in the expense ratio. It's worth about six cents to the overall property liability number obviously more of an impact to insurance specifically got it great. Thanks. The second question I guess, that's the pivot.
The performance based investments you know obviously, it's generated a strong result for you over a long period of time, but there's volatility.
And you know this past showed there was volatility and and Ford outside observers can you provide any guidance for us and how we should think about that volatility as we think about 2020, the 2020 outlook.
So Greg Thanks, Let me make an overall comment about investments and Jack and go through the more color on foreign space, recognizing we don't like to get Nextshares projections out there yeah, we proactively manage your portfolio John's created in use is really comprehensive capital allocation framework that helps.
Investment team decide.
What and when to invest in it keeps track of the decisions. We've made not just not just the investments we've made but so we can track those but also any opportunities list or any losses, we avoided so we watch our money well and that's on all parts of the portfolio. So John can talk about what we do how we deploy that input.
Form it's based on what it means.
Yeah. Thanks for the question Greg when you when you go up and think about the whole portfolio. It helps put performance space in context, and why we like it portfolios what 88 billion in size. It's majority of its invest and high quality fixed income instruments and the about 18% of that is equity and roughly half of that is performance base. So just.
To kind of size it within the overall context, we like performance based because it focuses on private markets and really expands our opportunity set of investments that we can we can play with and allows us to create and our belief a more efficient frontier more efficient portfolio that is well suited to our overall liability and.
Capital structure.
What comes with that is increased volatility on income and we believe that and we will we expect volatility will expected in the past Anil expected going forward. We believe that were compensated for that volatility of income in this particular quarter.
Thats volatility, especially if you look at it year over year on a quarterly basis.
Difference was 97 million at about 74 of that was tied to two two investments.
You know that obviously was a disappointment, but we've gone back in and we recognize that we look at the underlying investments here they range from timber in agriculture to real estate to private equity to a number of different investments in there it's hard to pin down with great precision in any given quarter, how thats going to play out so I would expect continue evolve.
Till the.
We have to also gone through and as part of a regular risk in surveillance processes looked at all of our holdings as we normally would do and Weve that this was you know was not in this was a bit of a one off type type of corridor.
We remain confident an effort going forward. Despite despite this.
The performance in this quarter, we we believe we have a strong team when we look at measuring thus, we really look to longer term measures. We look to three five and 10 year and some of those measures are and then in the investor supplement and those tend to be holding true. So we really are changing our overall commitment to.
And expect while there may be bumps the road at any given quarter that long run it's an important part of what we do.
Got it thanks for your answers.
Thank you. Our next question comes from the line, though Paul Newsome from Piper Sandler Your question. Please.
Good morning.
I was hoping you could just give us a little bit of an update us how you see the current.
Pricing.
Trend in auto.
Obviously last year was pretty competitive here.
But.
You think that things are stabilizing industry wide or or not love to hear your thoughts.
<unk>. This is Tom let me make a couple of overall dramatic conversations and then plan can talk about what he's seeing in the market by competitor but.
Our our philosophy has been to four as you know a profitable growth and long term profitable growth. So we raise prices when we think we need to or when the trends show, we should do it and and so we don't get behind on it we're not big on terms of reducing price.
To try to grow like we'd we'd like to say around your anybody can lose their way to increase market share and that's not our plant.
The other thing I would say you always has to be careful led the percentages.
Because it always depends where you start.
So we have some competitors, who are higher price in us and they're reducing their prices and other carriers who are.
Lower than us on certain risks and they they're raising the price or so.
Thank you talked about the percentages and there are obviously, some overall macro trends at work in auto insurance pricing, but I guess, we have to be careful not to be too specific as to what it means for next quarter sales.
Yeah, Thanks, and as Tom said, I think I'll lead you to one set of numbers that I think tells the story in our average premium in auto was up 3%.
Year over year, and our average loss and expense was up two and a half. So we were disciplined and managing to a positive return and actually made a little progress during a time, where as you said it was very very competitive out there. We did see some competitors take sort of broad based rate reductions, which is why the overall CP.
<unk> is negative that as Tom said not.
The trend will follow or something we subscribe do we look state by state.
To your question about what we're seeing more recently that stabilizing I would say I'll give you a qualified yes, there is a little bit more rate activity starting to flow into the market you are seeing less.
Price reductions or really no price reductions in the recent past and you see some increases out there. So I'd call. It you know more stable.
Fantastic second question, obviously on the commercial line side of the World, There's a lot of conversation about.
Decently casualty related.
Inflation trends I recognize that's on a huge part of what you do is auto and home and sure but could you talk to two whether or not you are seeing need that in.
Fairly modest pieces that are casualty parts of fuses.
Paul how are you talking about bodily injury costs is that is that where zoom and actually I'm thinking more pure liability the home insurance business for example.
Slips and falls and lawsuits and things of that nature.
Yeah, so not not seeing much of a trend on the home side on that art art trends that are more meaningful for us on the home side really are you know the mix between frequency and severity of our of our property first party losses. So we're not seeing really anything on home.
Thank you.
Thank you aren't next question comes from the line of Yara can there from Goldman Sachs. Your question. Please.
Good morning, everybody.
First question is around.
Premiums written growth I think it's slowed down a little bit and I guess in particular, you see a little bit of a slowdown in renewal.
Ratios and new applications, especially in auto can maybe talk about that maybe how that ties to.
The transformative growth plan.
Sure. We can first as I said earlier, it's all about profitable growth for us the transfer on growth plan should bring our expense ratio down.
And enable us to improve our competitive position, which should drive to higher growth.
In the late in 2019 throughout the year, there's different stories and the Allstate branded business than the east assurance business. So Glenn maybe you can talk about the Allstate branded business and.
Insurance for 2019, who is still under Steve right now of course under Glenn as part of our transfer our growth. It's Steve maybe you can pop in on insurance.
So yeah, I'll start us off and just at a high level I tell you know we feel good about the fact, we were able to grow in a really competitive market. It's as has been pointed out before on the call here you know a negative CP VI premiums up 5.5% policies in force grew across all major lines and it was it.
It's hard work to do that in a competitive environment. So it's challenging to your point that moved down a little bit in the fourth quarter, but we're still in the upper bounce in that sort of call. It the upper third of our long term trend on both retention and new business, we're coming off the high base here and we're taking the actions.
Short term as we build out transformative growth, taking the actions short term to grow which I referenced before.
Changing agency copper, we're shifting more towards new business, putting more to marketing.
So for us for 2019.
Sure its head about 8.5% increase in net written premium so for the year. It feels good but that trend declined throughout the year in the fourth quarter was only about 2.6% and we did as you know we grew fairly rapidly last year also so we had a good business penalty and in some states. We took some fairly significant rates more.
In the second half of the year, so that really slowed down our growth and as we went into the third and fourth quarter. Overall, we feel good about the growth. We had we feel good it with a businesses position going forward, but we had we have to go probably.
Okay. That's helpful. Thank you and then my second question just goes back to the ROI guidance range for the next three years.
I guess, what would be the largest components that would drive our we have to the upper end of that range or the lower end of that range and does that range also contemplates the possibility of this disposition of the annuity business.
Hi, your I know, obviously, there's a number of components here. There's you know what what you're right. The obvious pieces, what your combined ratio and underwriting income.
Thats impacted by but your underlying is also what catastrophes are which as you know bounce around a there is what happens to investment income and we've talked about that at length. Today. There's also the amount of equity you have a at play.
And so you know, it's where we've been building equity, but we're still buying shares back so that has an impact.
As it relates to future. This is kind of in as his business model approach. We didn't assume anything was going to change and as I mentioned to lease is that.
Things will change in the future right, but we still feel like 14 Seventeens right range.
But lots of stuff could change right. The interest rates could go up or and if interest rates go up for that property liability business. Most of that income falls right through the bottom line.
And if you look at our investment income over a long period of time, we're down substantially now we've made that up by reducing the combined ratio in improving underwriting income but.
That will change overtime, obviously, the annuities business would be a positive they extent, we decided to invest in growth in an acquisition that would be a negative. So we felt like in total to 14 to 17 was a good goal for.
Goal for us, but you know if it changes as oil changes then we'll let people know, but it's a three year kind of rolling average for us.
Thank you very much.
Thank you. Our next question comes from the line up David and I mean from Evercore ISI. Your question. Please.
Hi, Thanks, just just to follow up on.
The transformative growth plan and just trying to get.
Some sense for when a when you think we should start to see.
The benefits of those changes.
Start to start to roll through in terms of more competitive product and then an uptick and and new applications, a better retention and higher PPIF growth. After we've seen a bit of a deceleration in all of those metrics.
Yeah.
David first it's.
It's a long term plan. This is going to take us multiple years to do but theres, obviously components of it in some parts will have a bigger impact early and other parts will have a larger impact later in the game. So we.
We expect early in the plan that expense reductions will play a significant role in us improving our affordability for customers and getting to that second part of improving the value proposition.
As you go.
Forward, we would expect that redesigning our technology, our property liability products will drive more differentiation. So you know, we're first and markowitz.
Decline it deductibles first mark with new car replacement there are other ideas and things we haven't place that we think can drive more guy, but it's going to take more time to put those into the marketplace. So those so in terms of improving the customer value proposition expenses first redesigned products later the reason redesign.
Products is later is in part it requires a new technology platform, which is that third piece, we have to invest more in the new technology platforms, particularly our product management platform and our customer experience layer. So that will take us a while to do we think we can still cut expenses, a and reduce the overall expense load.
Why we are investing in those and that's our goal but at the same time, we're going to invest more in marketing.
Earlier in the process, because we believe that will drive growth in Glen talked about what he is doing to enhance the allstate agent value proposition, whether that's increasing new business commissions are freeing them up by taking low value work out of their offices and putting it to integrated service.
The other pieces to expand.
The access.
And that's happening as we speak.
So the access to people, who called for the Allstate brand or got on their website and I'll say brand add some restricted rules on it which we've started to open those up now.
So for example, if you called.
During working hours, you could get a different experience and a few calls after working hours. We like you know you should have the same experience like you're getting on line. It shouldn't matter what time of day you do that so we're changing those rules now what Glenn is also doing is taking the sharon's capabilities, which are exceptionally good indirect.
He's putting those together with the Allstate brand it capabilities, which do some direct today.
And that will then be utilized for the Allstate brand that will take us some time to do one obviously you've got to put all the operations together and call centers and get the technology to work the same and get to order flow on the web site all to be the same Oh, we also need to reposition the Allstate brand.
And so the Allstate brand of course is extremely well known great unaided awareness high Trustmarks.
People is one of the great brands the world.
And that said, it's not viewed as modern as insurances. So insurance built for the modern were little hip little cleaner.
So we are working hard on reposition the Allstate brand so that it brings both of those together so that we both serve our customers with agents when they want them and we serve them direct when they want so it's a long term plan, but you can see there's it's front end loaded on some parts and back end loaded on others.
Got it and just just with the customer value proposition and some of the increases in the bodily injury severity that popped above CPI medical CPI. This quarter, which is the first time I think it a bit. It has had have you I mean is that already embedded.
In your pricing or is that something that would I guess go the other way.
Against some of these some of these expense saves that may or may be able to pass through through a more competitive rate.
Yes, so I'll take that this is Glenn and yeah, we've seen some of the trends come through that you've heard about from others on bodily injury is embedded in our reserve position that we have we're you know we think through these things as we set our reserves as we set our pricing strategy as you've seen over the last couple of years, where we've.
Ron Hot on physical damage severity and yet it really hasn't.
Flowed through to the margins because we're pretty quick at adapting from a pricing standpoint, and on a market by market basis. So I would tell you we're watching that we've got good process.
We have a great claims department that looks at both the technology and the process that they followed to handle claims and you know where it goes beyond what claims can manage whereas they are paying claims accurately we get into pricing quickly.
Okay, Great and then if I could just sneak one last one in just just in terms of.
The high end of the are are we guide.
And I guess just thinking about.
Essentially.
Like there've been a few transactions in the fourth quarter.
On the life side and it seems like Theres, a pretty vibrant interest for a lot of interest in some of these runoff books of annuities or life insurance.
Just wondering.
And in Illinois, I believe there's a there's a division of company rule that can allow you to carve out specific reserves out of that Illinois, legal entity and and divest to a potential acquire or so just sort of wanted to get an update on your view in terms of.
Your thinking in terms of like whether whether you see any opportunities there to.
Potentially reinsurer divest that book and maybe get to a more sustainable high end to that or are we guide given it has like a 300 bip drag on the aren't we.
It is a third question, but [laughter] different than they otherwise I will take it but I also let's try to yeah. There are other people on the and the sorry, Yeah, Paul I apologize.
The the answer is you know we've been trying it we've been working on annuities for a whole bunch a years trying to get a better we made a lot of progress makes sense or something else. We can do whether that's a use a division statute to get a different solution.
Reinsured, if we can do it in a way that is economic for our shareholders and as a good risk adjusted return we'll do that.
And if we do that I don't think anybody would be unhappy if we were if you looked at if we were above the upper end of the guidance.
Great. Thank you.
Do you aren't next question comes from the line to Amit Kumar from Buckingham Research. Your question. Please.
Good morning on two quick follow up question.
The first I guess is in response.
The previous question on.
On the shift in.
The new plan.
Give us any.
Feedback from agents number one on the integrated services platform and number two.
Also what does the feedback on shifting.
Bonus and commission structure.
A new businesses.
Let me I'm at I think we got it we were all leaning in towards the speaker to make sure I heard who is a low lights up.
Glenn can talk about integrated service and commissions.
Maybe let me go back to transform the growth.
And make comment really on behalf the customer. So the agents are part of our team we want them to be successful are leaning in hard to make and successful they drive a bunch of our business and we're going to work hard and making them successful that said, there's a range of opinion, just what people think about what you're doing but let me come back to the customer what what we're trying to do it transfer.
<unk> growth is stick with our customer philosophies.
And our one of our philosophy is a you should pay a fair price for the risk to create we're very sophisticated in the way we do pricing we have telematics, we which is the new ended that with Dr. wise. We also have a philosophy that customer should get what they pay for a as it relates to the auto insurance. So same thing supply. So if you.
Get extra service, then you should and extra advice from help of an agent that should be something you should be prepared to pay extra for if you want to do all stuff yourself and that's something that's a different price value proposition. So.
We are working hard to make sure that that age and value proposition is is effective in fish and is it can be like people. As we said I think we said when we talked about this that a you know over half the people want an agent and and that's hires likes that reflects our customer base. So we.
Want to help them be unsuccessful as they can and that's why Glenn is working on that couple of programs. He is.
Yeah, I'll just add to it you know we talk to our agency force you know all the time talking to agents every week, we've got National Advisory Council regional boards.
We spent a lot of time with our agency force.
Yeah, I'll give you the range of reactions. Thanks, so on the overall the big thing out of transformative growth. The we're going to pull the marketing in from insurance. It at the Allstate brand as you might imagine wildly popular like everybody feels really good about the fact that you know there's going to be more marketing in the pipeline and we're focusing on the Allstate brand on the commission.
Range, you've got folks that they were growing fast and they are built to grow they like it a lot because liens right into their strength you got folks that weren't really weren't growing or weren't built to grow you have a range of folks who either excited about making that transition and retooling their business or ones that say I wasn't really ready to reach by business and and.
But they need to in order to earn the commission that goes with the new business the higher New business Commission.
As it goes to integrated service.
Yeah, as Tom said lots of different opinions out there. It really is about freeing people up for growth and what I can tell you is the folks that are in it are growing faster than the folks that aren't so we think we're creating something that's going to be really valuable for the agency force.
So the if you go back to the customer.
And what blends higher new business when you ask customers, where it has an agent add the most value is almost always on either the purchase of the product are doing and insurance review, helping me sort out so very little of is on changing address.
And so that's what funds working on.
That's a fair comment and very quickly on the loss cost trend.
I I know you briefly talked about it but net net can you talk about either when you look at the frequency and severity trends.
It was the expectation that this is how it sort of.
We remain for the foreseeable future what's your outlook on the loss cost trends here. Thanks.
So I'll take that Glenn.
You know I liked it let me go up a little bit because I think if you look at the whole system and you say you know there's the premiums that come in and how we make change those over time, it's expenses that are going out the door and then you split your loss costs by frequency and severity.
Over the past year three out of those four been going well for US we are premium as I mentioned autos up 3% average premium home is up 5% average premium the respective loss and expense on those lines or two and a half in four so we've made up a half a point and a full point in terms of actually improving over there.
Time period, so it's hard for me to say I can't predict that severity will be you know.
Flattening or are up more.
Over a year or two years from now, but what I can tell you is we've been really disciplined about managing it quickly into each market on a market by market basis, our pricing sophistication. Our state management team has has gotten better and better and we're able to react.
In real time to those changes and manage to the types or returns that we've been able to deliver so well I can't give you a perfect prediction on where the severity of go I feel really good about our ability to react to it in real time.
Got it thanks for the answers.
Thank you. Our next question comes from the line of Brian students from Autonomous Research. Your question. Please.
Thanks, Good morning.
Glenn.
Tom mentioned it over half of all say burn customers wanted Asian I thought that was interesting.
So just like the pathway is becoming an allstate brand customer what percentages.
What percentage of people I guess start on the Internet, Google insurance or something like that in.
Is that the lead generation mechanism I guess, just digital or the internet versus.
On all cities and there's a little league coach or something like that.
Right Glenn can can give you to some of the percentages, we give out but this is not a and or conversation a lot of times people like while they want to buy direct or through an agent, it's and it's an and like we'll sell people anyway. They want.
To start online Fyfe and agent knock on agent Fine line like what we're just there to like we want to sell as much as it can too many people who can't there's many ways you can.
Well, it's a challenging question I'll tell you because.
There's there's a lot of stops in the process, where for example people go online they start to get a quote and you know the agency that's near us to them Pops up would that quote and they decide to drop off make a phone call.
And that's one path theres multiple paths people take through the vast majority of business is written.
By local agent.
That said.
All the data and research out there tells you that the vast majority of people start their process online and at least get some understanding and then want to talk to somebody about it. So we've got a mix of that and imperfect data for for me to give you any more specifics on that.
And then I was hoping you can you give us a little bit peak on some of these new product initiatives I guess in particular, I'm trying to understand the price sensitivity or whatever.
I mean, obviously your cap the captive agents.
Wow.
Are you thinking.
New business pricing down, 10% or something like that I'm, just trying to understand like how much of a driver do you think that is.
Potential newish it applications.
Right I'm not sure we understood. The question we're not.
Maybe could rephrase it yeah.
At this way like two or three years ago travelers, who is obviously an independent agent.
Player.
They just announced that there were cutting new business prices by 10% I could see how that could have more of an impact and I got in an agency distribution channel versus the captive.
I'm I'm wondering if that's how you see it as well or do you think that.
Am I missing something or is there a similar level of price elasticity and.
And captive is is what you might see at age and thank you could that be a big driver for growth.
Let me maybe start with the last piece and work my way up and everything else wants to jump in so first there there. It's of course always hard to tell how much price elasticity there is within an agency.
In General you would think that an agency that had multiple companies and could share those multiple quotes view there would be more price elasticity and in a captive agents that said people going no color on the three or four people and get their points of view. So auto insurance in particular is price sensitive although weve talk.
At length to us trying to have profitable growth. That's what we're trying to do the redesign of the products is on all of our products auto home in a variety of different price, where there are things. We think we can do to make them less complicated.
And so for example, this year, we wrote the renters policy in one state and took its size down by 40% that gets to less complexity, helping customers understand it. So we're doing the problem, but we also have a variety of other products in the circuit protection were trying to get too. So we don't sell identity.
Protection today through our Allstate agencies, you know makes sense that we have customers that come to us at agents, probably but like the other Denny protected how do we do that how do we get the systems to work how do we get the technology platform do it has been factored into compensation and everything else. It's something we're working and that's part of transformative growth.
Longer basis so.
We have many products, we sell through many channels, but.
We don't sell all of our products through all of our channels.
And that's part of transforming because it's how do we sell more of what we sell already in more of the places that we sell.
Thanks that gets you acquire I think that gets her.
Okay.
We have probably have time for one more question.
One more question.
Our final question then for today comes from the line up Michaels Rimsky from Credit Suisse. Your question. Please.
Hey.
Morning.
First question.
If I the PMC investment portfolio.
Duration.
Has increased fairly measurably over the last few years up to five plus years now.
I was just curious is do you continue to see that Elongating or are you kind of at the high end of your kind of the range, you're you're comfortable with versus kind of the duration of liabilities.
Yeah, Hey, Mike It's John Thanks for the question.
Looking at you never know exactly what the future hold so we're always going to respond to economic conditions overall.
Risk environment of our firm and structure the portfolio that way.
I would say that what we've seen in terms of the duration extension in recent times and a lot of that's taking place in the last 18 months was more of a reaction back to strategic norm as interest rates had been had been rising prior to that with the feds, but the cycle that the fed was and we thought that it was prudent to stay a little bit short.
And look to recapture higher yields at or better when there's a better opportunity, we coupled that with <unk>.
A little bit if you go back you know 18 to 24 months of that economic situation in the U.S. in the world was which different it was softer at that time and it wasn't clear that policymakers, we're going to engage there in a tightening cycle, we thought that they they need to engage we also wanted to put a little bit of inflation protect or recession protection back in the portfolio.
Oil when you have more duration, if the economy falls off it tends to help your portfolio and balance it out more so we did.
Actively highly coordinated internally with all our risk processes extend the duration.
They had a number of benefits that you know that we're pleased with it did it did increase income, which it which is a positive. It also did build in a more balanced portfolio balances or risk based assets.
And if you look at you know this isn't perfect mess, but if you look back at where rates were when we did most extension relative to where they are today.
It's been a a great.
Price increase in or fixed income securities rich or roughly market yields. When you include where treasuries were and where corporates are roughly about 100 basis points lower than than that time. So you know going forward. We'll continue to monitor what I can assure you is that it'll be highly correlated inside you know talk Tom talked earlier about our numerous process.
It is our capital allocation process with investments. We also worked very closely with.
Our enterprise risk group to make sure that these are all at all or moves are well understood and.
Will we believe that proactive management investment portfolios as a way to add value to the enterprise.
Okay. That's helpful definitely it's been a great call.
Lastly, clearly a lot of questions.
The New commission structure now may be curious.
Has has policy growth.
Is it been you know as it is it more and more weighted towards a maybe a disproportionately a smaller percentage of of agencies.
Is that does that change over the years I know commission structure to change.
And number of years ago, two and and it seems like it worked out okay sales didn't fall apart.
Maybe you could any color there would be great.
I mean, what Glenn.
What our plans strategies have all of our agents growing and all of them be productive you point out not all of them get there every year I, sometimes that's what we do in a local market or what mark local market condition. Some of that's what they do or they don't do so we don't this commission change wasn't to address a problem.
It was too sees an opportunity.
And I think you Commission is we've moved commissions around frequently like it's not.
It's it's it happens all time people do it now all the businesses are and what our goal is.
Their objectives are aligned with our objectives.
Thank you all four but let me just close by saying. Thank you you know we had a good 2019 or we're focused on transformative growth in 2020.
And we'll talk you 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.
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