Q1 2020 Earnings Call
One on your telephone and now I'd like to introduce your host for todays program Mark Noble head of Investor Relations. Please go ahead Sir.
Thank you Jonathan Good morning, and welcome everyone to all States first quarter 2020 earnings conference call. After prepared remarks, we'll have a question answer session.
Yesterday following the close of the market, we issued our news release, an investor supplement filed or 10-Q as opposed to today's presentation, along with our reinsurance update on our website I don't think investors dotcom.
Management team is here to provide perspective on these results and further context on our response to the Corona virus epidemic.
As noted on the first slide in 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.
Oh States results may differ materially from these statements. So please refer to our 10-K for 2019 and other public documents for informational potential risks and now I'll turn it over time.
Good morning, Thank you for joining us from wherever you are sheltered in place.
Oh, let's jump right in with all states response to the Corona buyers pandemic on slide two.
Oh, so it's been helping customers overcome statues for 89 years, we've learned to act decisively quickly input customers first as a result.
Let the industry and helping customers, we created a shelter in place payback program of more than $600 million.
Special payment plans are being used for customers experienced nature of challenges auto insurance coverage, but it was expanded to cover the use of personal vehicle deliver food medicine other goods for commercial purposes.
I'll say the identity protection is being offered for rate for the rest of the year all U.S. resident given the increased exposure cyber crime.
Business continuity plan were executed virtual sales and support capabilities were expanded and we leveraged our digital innovation such as quick photo claim and virtual said better protect our customers employees and agents.
Employees, and Allstate agency moved to more than 95% working remotely and we alter a number of business practices to support our agents and employees.
At the same time Allstate is financially strong and significant capital and liquidity in February we reduced our public equity holdings by $4 billion to reduce the amount of economic capital back in the investment portfolio. This turned out to be good timing I because it enabled us to reduce the impact of the market during the downturn in mark.
And as Mario will cover later, we will maintain our share repurchase program given the strong capital position.
For our communities the Allstate Foundation announced an additional $5 million that's on top of the money. We normally grants every year, we see substantial yelp deal with endemic in doubled to match for Allstate employees Nate.
Moving to slide three but touch base with Allstate strategy.
You know our strategy has two components.
<unk> personal property liability marketshare and expand into other protection businesses.
There's two parts strategy LEED certified.
Annual operating bars, which is shown on the right side at this stage and we made good progress on around all five.
If you move just like for Allstate had strong operating and financial results in the first quarter.
Total revenues of 10.1 billion declined 8.3% for the prior year quarter due to capital losses, instead of capital gains in the prior year.
If you exclude the impact of the realized capital losses revenues increased 2% driven by a 4.4% increase in property liability insurance premiums, which you can see for the table.
Net income of $513 million decline to the prior quarters increase underwriting income was more than offset by capital losses.
Good charges for pension and postretirement benefits.
Adjusted net income shown in the middle of the table was $1.1 billion into quarter 3054 cents per diluted share, which was significantly above the prior year, reflecting lower catastrophe losses.
Returns were excellent with adjusted net income return on equity improving to 18.2%.
Mario will now discuss the first quarter results in more detail.
Thanks, Tom and good morning, everybody, let's go to slide slide to discuss the strong performance of our property liability segment.
Starting with the chart on the left policy in premium growth continued with excellent recorded and underlying profitability.
Underwriting income of $1.35 billion in the first quarter was $645 million higher than the prior year quarter with a combined ratio of 84.9.
The improvement to prior year was driven by several factors, including lower catastrophe losses increased premiums earned.
Lower auto accident frequency from the decline in miles driven.
Auto accident frequency was significantly lower in the quarter with property damage gross frequency down 12% compared to the prior year quarter for the month of March property damage grows frequency declined 27% compared to the prior year as miles driven drops significantly as states began implementing social distancing.
Measures.
These benefits were partially offset by increased severity and the shelter in place payback expense.
The chart on the right shows our property liability expense ratio overtime, and specifically highlights the $210 million shelter in place payback expense. We have we recorded in the first quarter, which increased the expense ratio by 2.4 points.
Excluding this impact the expense ratio improved by one point compared to the prior year quarter, reflecting continued progress on enhancing the customer value proposition, which is one of the key components of our transformative growth plan.
Let's go to slide six which highlights investment performance for the first quarter.
As you'd expect our first quarter investment portfolio results reflect the impact of the market volatility caused by the Corona virus.
As shown in the table in the middle of the page total return for the first quarter was a negative 2.4% largely reflecting lower portfolio valuations, while the decline in treasury rates supported fixed income prices the significant widening credit spreads more than offset that benefits and interest bearing valuation declines.
Reduced returned by 1.9%.
Lower equity valuations further decreased return by another 1%.
The chart shows net in best investment income of $421 million in the quarter, which was $227 million lower than the prior year.
We recorded a loss of $208 million for performance based results in the first quarter as shown in great.
As you May recall the income on our limited partnerships is typically booked on a one quarter lag.
Performance based income related to fourth quarter 2019 sponsor financial statements was $176 million.
We also recorded write downs of $137 million on four underperforming private equity investment in.
In a typical quarter. This is where our process would have ended.
However, given market volatility and economic disruption. We also recognize declines in the value of limited partnership interest, where we had enough information to make informed estimates rather than solely relying on sponsor financial statements as of December 31st.
This included updating publicly equity publicly traded investments held within limited partnerships to their march 31st market pricing, which reduced investment income by $52 million.
We also did not recognized $195 million of unrealized valuation increases reported in sponsors fourth quarter financial statements. The sum total of these four items generated the 208 million dollar performance based loss in Q1.
Because these investments exhibit exhibit idiosyncratic risk and return future gains and losses are uncertain.
But we believe utilizing this approach in the quarter is a better indication of current value.
Income from the market base portfolio shown in blue was lower than the prior year quarter by $19 million, reflecting the impact of lower reinvestment rates. We expect we expect this trend to continue to the extent reinvestment rates remained below average interest bearing portfolio yields.
Let's turn to slide seven to discuss our portfolio positioning.
We take a disciplined and proactive approach to managing the investment portfolio risk and return profile and our positioning has mitigated the impact of the current crisis.
As you can see in the chart on the left of the page the portfolios largely made up of high quality fixed income securities with substantial liquidity.
We extended the duration of our property liability portfolio last year, which was support which has supported both income and returns in the lower rate environment.
We are conservatively positioned in sectors more susceptible to the pandemic and continue to monitor those exposures closely.
To provide transparency into these exposures, we have enhanced our form 10-Q disclosures.
We also have a 13% allocation to performance based investments and public equity securities down from 18% at year end, 2019, which facts long dated liabilities and capital.
As you can see in the chart at the bottom right in February we reduced our equity exposure by $4 billion, primarily through the sale of public equity securities with proceeds invested in high quality fixed income.
These trades were executed at an average price equivalent of 30 to 81 on the S&P 500 compared to the March month and level of 25 85.
We continue to proactively employed disciplined risk and return framework to the portfolio as economic conditions evolve.
Now, let's turn to slide eight to review results for the light benefits and annuity segments.
Allstate life shown on the left generated adjusted net income of $80 million in the first quarter, an increase of $7 million compared to the prior year quarter, driven by lower operating costs and expenses.
Allstate benefits adjusted net income of $24 million in the first quarter was $7 million below the prior year quarter.
The decline was due to higher operating costs and expenses driven by increased investments in technology and higher DAC amortization.
Allstate annuities shown on the bottom right had an adjusted net loss of 139 million in the first quarter, primarily due to the performance based investment results we discussed earlier.
Corona virus claims did not appear to materially impact any of these businesses in the first quarter, we continue to monitor developments closely.
Now, let's turn to slide nine to talk about our service businesses.
The service businesses continued to increase the number of customers protected with policies enforced growth of 35.4% to 113.7 million.
This is largely due to the increase in Allstate protection clients.
Revenues, excluding the impact of realized gains and losses grew 18.2% to $454 million in the first quarter.
Adjusted net income improved to $37 million in the first quarter, reflecting an increase of $26 million, but an increase of $26 million compared to the first quarter of 2019, driven by growth of Allstate protection plans and improved profitability at Allstate roadside services.
Slide 10 highlights allstate's attractive returns and strong capital position.
While the impact of the Corona virus drove financial market instability and led to a decline in shareholders equity Allstate's diversified business model substantial earnings capacity and strong capital and liquidity enables us to manage effectively through this pandemic.
We have $3.4 billion and parent company, holding deployable assets and $8.8 billion of highly liquid securities salable within one week.
We continued to generate strong returns on capital with an adjusted net income return on equity of 18.2% hasn't the end of the first quarter.
While returning $670 million to common shareholders in the quarter through a combination of $511 million and share repurchases and $159 million in common stock dividends.
We plan to continue share repurchases under our current 3 billion dollar program, which is expected to be completed by the end of 2021.
Now I'll turn it over to Glenn to discuss the Corona virus impact on auto insurance and how we're leveraging data and insights to make decisions.
Thanks, Mario and good morning, everyone. Let's go to slide 11, which looks at the potential impacts of Corona virus on auto insurance.
Profit has been and will be impacted by a reduction in miles driven which will lower overall loss costs.
While this has been significant it'll decline overtime as the economy begins to reopen and there are several assets first the reader reduction of drivers on the road is increased driving speeds, which can lead to increased severity per claim.
We'll also likely incur additional bad debt from some customers who've chosen to take extended payment terms.
On a longer term basis at the global auto parts supply chain instructed or parts prices are raised by auto manufacturers. This could increase repair costs.
The pandemic and economic slowdown will also impact growth.
This loss cost continued to be below prior year that lower required rate increases will limit average premium growth.
On a positive side the shelter in place payment could have a favorable impact on retention.
The impact on new business is unclear since reduced vehicle sales can lower new business, but economic conditions may increase shopping levels.
And we've seen an increased customer interest in telematics, and we're well positioned with both drive wise and mile wise, the latter of which charges customers insurance by mile.
Getting ahead of these trends will be important thing to grow profitably as we continue to manage profitability and competitive position on a market by market basis and will enable us to be precise in our responses.
Let's now move to slide 12.
As a customer at every.
We have access not only to our data, but insights from a much broader dataset selling which is shown on this slide.
Telematics based pricing allows you to factor in things like how much someone drives where they drive and how they drive.
Our telematics products enable us to do that for individual customers, which when combined with a broader set of data enables us to make better judgments market by market.
For example, based on 3.5 billion trips from February through April the upper left graph shows that miles driven declined sharply in mid March and then began a slow increase since then.
You can also see that those states that had should stay at home orders had a bigger decline in driving.
In the upper right you can see there's also a difference between rural areas at the top of the chart, which declined by about 20% and urban areas at the bottom which declined by about 50%.
The bottom left graph shows that while some drivers are not driving it all those are the bars to the left.
About 20% of drivers are actually driving more than they did before mid March.
I'd also provides it drives site score, which is a measure of driving risk the lower the score the higher the risk as you can see on the bottom right. The mean risk has increased despite fewer cars on the road, which correlates to the data that shows some drivers are driving faster.
The net of all of this does that Allstate has the data and business processes to proactively adjust to a changing operating environment.
I'll now pass it back to Tom.
Thank you Glenn.
Should move to slide 13, we want to discuss how we move past the emergency moving people to work from home.
The immediate of creating a shelter in place payback to implementing intermediate term actions and this type of environment. You. Obviously have to look where you step but you also have to decide where you want to walk.
And as we look into the future, there's not that much clarity who's who will move back into offices.
As many people still need to commute to work what happened seed investment markets.
And of course, the answer is nobody knows.
There are so many possibilities you can get frozen into inaction. So we use scenario planning to see with the future path looked like under alternative assumptions.
This came out of Royal Dutch shell and the seventies, there and of course kinda like this you find two things that will be the primary drivers of change.
In this case, we selected the length the depth of the health crisis, which is shown at the top of the box in the bottom that page and the severity of the economic downturn, some disruptive severe which is shown on the vertical axis.
You then create for scenarios to represent a range of possible outcomes.
As you can see from the slide the best case in the upper right Weve labeled cyber leap.
The healthcare crisis is relatively quickly in the economy is disrupted but government support enables us to bounce back quickly.
The worst case and the lower right.
Distracted by the buyers it reflected significant health impact you did lockdowns over the next couple of years.
Finally, GDP is greater than the great depression, but it doesn't last as long because the government fiscal and monetary it.
For each scenario then we look at a range of outcomes, including consumer behavior auto insurance accidents and best regards.
It helps us decide what actions we should do.
Even though we do not know what the ultimate outcome will be.
It also helps inform whatnot.
And it enables us to establish road signs for each scenario, which improves our ability to forecast that direction.
There are of course similar consequences in the scenarios, which helps determine what actions take which is shown on slide 14.
In many of the outcomes revenue growth is constrained because if you are auto accident deteriorating income increased unemployment or lower interest rate.
As a result, we are accelerating our transformative growth plan, which will improve customer value would increase utilization technologies lower costs and new auto insurance products.
And as you know well or the investment markets will be more volatile than many of these scenarios.
As a result were evaluating or asset allocation.
Many of US it found that we can adopt new technologies pretty quickly like who knew you could have so many new Merck team or Skype meetings in one day.
As a result, we're going to maintain a strong commitment telematics and expanding the integrated digital enterprise.
Consumer behavior is also likely to change to focus on the quality and breadth there protection.
And this is where Allstate is headed with the second part of our strategy will provide a broader array protection offering from auto insurance to include things like your phone and your identity.
Now, we'll open the lines for 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 move yourself from the Q. Please press the pound cake. We ask that you. Please limit yourself to one question and one follow up you may get back in the Q as time allows our first question comes from the line of at least Greenspan from Wells Fargo.
Your question please.
Hi, Thanks, good morning.
My first question.
Touching it just on frequency, but provided some pretty good disclosure on the drop in miles driven and I believe you said it started to bounce back from the coal that bolus, though as we're thinking about on Q2, So April and May on kind of today, how do you think about that free.
Quincy benefit that we might see over that period compared to what you saw.
Towards the later stages of March.
Let me start then toss it over Glenn well it is.
Obviously as people start to drive more they'll get it more accidents.
We expect that it to head to head up where it will end up is hard to predict at this point because you don't really know when people are going to go back at the office and how many people will even go back inside it as I've talked to other companies, it's pretty clear to me that we found that we've built the infrastructure.
You do remote workforce Allstate, we've already had about 15% of our people remote before this.
We think we can probably do more so that would obviously lead to fewer people driving to and from work, but it's hard to predict exactly would never comes out.
Glenn do you have anything you want to add to that.
No not too much I think.
As Tom said.
You've got some unknowns in there which would include if you go on the other side of it some pent up demand. If you think about people, who postpone trips to postpone visiting relatives and want to catch up on it. So you could have some sort of fits and starts with some of the long lasting as Tom described downward pressure on.
Driving and therefore frequency, but also some potential short term bubbles, where people want to get out there because they're a little bit star Crazy.
Okay. That's helpful. And then my second question is on on buybacks.
He said you expect to maintain.
That.
So as we think about.
Please note that program I believe it's gone through 2021 should we think about kind of even pace of buybacks from here or would there be odd.
Down over the next couple of quarters for just given the capital positions you kind of expect that to be evenly on maintained as we walk away from 2021.
Mario will you take that question.
Sure Good morning lease thanks for the question so.
I think the place I'd started leases, we feel really good about our capital and liquidity position.
$3.4 billion of holding company assets $8.8 billion readily available liquidity.
$3.7 billion, a dividend capacity out of our insurance companies into the holding company for the year and our businesses are performing really well. So I think I'd say, we expect to complete the program by the end of that by the end of next year, just like our board authorized and we've got a lot of flexibility in terms of how we execute it but we would expect.
So just continue to buy back shares are over that time period.
Okay. Thank you for the color.
Thank you. Our next question comes on the line of Greg Peters from Raymond James Your question. Please.
Good morning.
First question will be on the expense ratio the underlying expense ratio improvement can you talk about what you provide just the basic comment on it in your prepared remarks can you give us more color on that and maybe talk about maybe how that.
What's with the sequential decline in Allstate agencies, and LLC Alice piece and is that part of your integrated services platform rollout.
Oh, Mario why don't you take expenses and Glenn will you take the agent.
Yeah sure morning, Greg.
So when you when you look at the expense ratio in the quarter you saw a one point sequential decline year over year.
In the expense ratio and first thing I'd say is reducing our cost continues to be a core part of our transformative growth strategy.
When you kind of deconstruct, where the improvement came from its about 50 50, not quite between acquisition costs and operating costs and obviously those those are two core parts of our cost structure and we saw improvement in both.
We're going to continue to be focused on reducing those costs going forward to enhance our competitive position facilitate growth and be a core part of transformative growth for us.
Also going to continue to invest in the things we need to invest in for transformative growth things like technology and marketing, but we're we're focused going forward on continuing to reduce costs over time I'll turn it over to Glenn to talk a little bit about the agency part of it.
Yes, hi, Greg Thanks for the question.
In terms of.
LSP counted agent count.
You hit on part of it in your question with.
Integrated service when you look at license sales professionals and Inspite of the word sales being the operative word there they spend only about 40% of their time on sales of about 60% on service that's been historic number and and one of the things. We're committed to is is taking a lot of the transactional work out both through self serve.
Cities as well as integrated service overtime. So that you know, they're increasing that percentage of time, they're selling and not having to do as much that transactional work, so well probably see that change over time and that's it's really part of our overall transformative growth work that we're doing and in terms of the agency count.
We're really focused on growth and growing with quality.
In terms of the agency force so coming into this year I think everybody knew.
Changed compensation, a little bit, where we moved variable compensation from renewal to new.
Part of it and we also increased.
Question for production on our agency force, because we really want to grow with those agents that are that are looking to invest in growing their business.
Thank you for those answers the next.
My follow up question is on the investment portfolio.
First of all.
As an observer I have to acknowledge the brilliance of your decision to sell the public equities in Federateds stunning.
But as I look at the of the adjustments you made to the limited partnerships is is do you think that this is a permanent change to your valuation approach on a quarterly basis or and I guess the other.
Adjacent question was would be that in your adjustments to the first quarter results on Lps.
Does it include an assessment for all of the Lps are 100% will portfolio or what percentage of the portfolio wasn't covered by your valuation this reassessments.
Greg Thank you for the common equity.
Just want to be clear it was done out of risk and return basis. So we just looked at the capital at a five we looked at that perspective outlook can we decided.
It wasn't as good a return on those.
By the capital we had a heads up on equity.
We obviously.
It was good timing.
Wasn't likely new the market crashes coming but it also shows the benefit of having business processes that are metric driven that you stick to on whether that's the way you invest or what Glenn was talking about terms of how our business processes in our metrics work for changing frequency by state and two in pricing.
I'd say Mario will you take the question on.
Counting on that performance based best.
Sure.
So Greg where I guess, what I'd start is as we've said in the past generally.
We record performance based income on a one quarter lag based on the permit partner financial statements has or the part prior quarter rent. So for example in the first quarter, we would have relied on yearend partner financial statements and Thats, but typically how we would you approach the accounting.
However, our accounting policy does require that when a material market event occurs and we have information available to make informed estimates that we need to take that information into account and that's what we did this quarter. So we made the two adjustments the marking the public equity holdings in some of the partnership.
Holdings to March 30, Onest levels, and then suppressing the the increases in unrealized valuation on securities that were reflected in year end financial statements. We did that because that's a that's.
For the accounting policy, because there was a material market event in the quarter.
The other piece was the just our normal watchlist process, where we go through every holding and to the extent, we believe we need to apparel holding we do that and that was worth $137 million in the quarter on for specific holdings. So absent another market disruption of let's say hopefully we avoid.
One this quarter.
We'll go back to what our typical process would be but because there was this disruption event in the first quarter. Our policy required that if we had additional information that we could make good estimates based on we should do that and that's exactly what we did.
Great. Thank you for the answer.
Thank you aren't next question comes from lined up Paul Newsome from Piper Sandler Your question. Please.
Good morning.
Hoping you could talk a little bit about or give us some color on where the.
Acceleration will come in transformed plan.
What will change.
You mentioned you seem to accelerate.
Uh huh.
Thanks, Paul It is obviously, it's a multifaceted program right. The idea is to increase customer access and that was putting together the it using the sharon's capabilities on direct.
Under the Allstate brand to expand there.
It's too.
Due to our cost structure.
And it's to use technology to enable us to launch new products and lower our cost structure. So the.
Glenn can talk about progress on each churns and the Allstate brand.
Thats been great and we're headed down the path to have showed operating under the Allstate brand a direct basis this year.
The on their cost reductions it will accelerate some of the stuff, we do our cost reduction and it will also accelerate some of the work we're doing on building a new technology.
Particularly as it looks things like mile Wise Drivewise.
Before when you sold insurance private mile where I think one but few large companies that do that.
The people Didnt really know is about today.
Shelton pre pay stay back from us or the actions of our competitors people are paying attention now they don't maybe I do want to miles. So we will push harder on the new product effort as well.
Glenn do you want to pick up the shirts, and Allstate brand part and maybe talk as well about the insurance growth in the first quarter since that may be on People's mind as it relates to transform it.
Yes, so I'll start with the the insurance growth piece and then I'll go into the what we're doing as far as to the transformation because really transformative growth and you know the brand changes had nothing to do with the growth in the first quarter.
It was it was actually a three parts story.
Insurance.
Was having increased.
Loss trends in the latter part of last year, we needed to take some pricing and underwriting actions we did.
Which is good because we've gotten the profitability in line as a result, but what typically happens with that as you take a little bit of a hit on your retention and your new businesses that happens and that was happening towards the very ended the year in into January now once those prices had worked their way through we actually reinvested some marketing we were doing pretty well in February.
In early March when quoting kind of fell off the table in the middle of March. So you have these sort of three windows to like a slow start in January some really nice momentum in February early March and then everything fell off the table there for a few weeks.
Unfortunately.
As we've seen from external indices shopping is has returned and is expected to actually accelerate going forward. So we've got we've got some some.
Good optimism there as to how it moves forward in terms of insurance growth in terms of transformative growth and where we're going.
John thing Adkisson, Who's the President insurance and took over now it's our our head of the direct business has been working with both teams and bringing it together and such way that we increase.
Or improve our sales process onto the Allstate brand, we improve our online quote flow.
And.
And so those are already in process and and happening on a day by day basis as a continuous improvement effort.
It is still to come is our our pivot on branding and and how we invest in marketing for the Allstate brand to.
Go to market as both a direct and agency driven brand as well as our work with online leads.
And we'll really could you talk a little bit about what happened with retention.
Also have similar three different.
Periods like this sales.
The quarter.
And we take that.
Sure.
Retention.
I would say no.
Retention really there's no impact yet from Corona virus, because it's kind of a lagging metric.
It includes mid term cancellations.
You're measuring.
The point of when they would have renewed so.
To the extent that we see impact whether favorable or unfavorable from current virus I think we'll see that on a go forward basis from retention standpoint, we still are in a pretty good space from a retention standpoint were down year over year, but often but fairly high watermark on and still running 88.
Retention and auto and feel fairly good about where we are and we continue to work hard to do well for customers I think our response to current a virus and and the multiple areas that we were very quick to respond for customers.
So can and hopefully should help us from retention standpoint, and it's something we continue to work out.
Great. Thanks.
Gradually quarter and thanks for the question.
Thanks, Paul.
Thank you. Our next question comes from a line of David Mcmahon from Evercore. Your question. Please.
Good morning, just a question for Tom on on investments and you mentioned.
Just in terms of reducing the equity allocation during the quarter. You mentioned you looked at the return in the capital required and decided to reduce it.
I guess are there I guess, how are you thinking about the allocation to equities and Lps at 13% of the portfolio going forward do you expect to do more of this and maybe if you could help me understand how much capital that freed up by reducing the 4 billion dollars' worth of equities.
Okay David.
Thank you for the prototype question I'll talk about.
The logic for the equity John can then talk about.
The process, we're looking at in terms of going forward, which you talked about the end is.
Which is really your question, where where should you invest in this kind of environment and the answer is we don't know, but we've got a pretty good prices going to figure out what we think is the best option.
First the equities.
A large portion of the equity portfolio back the payout annuities, which are long dated liabilities. Thank them by the pension plan and so you don't want to be invested in fixed income for a new for annuity second our payout in 10 2030 years. So.
That's appropriately asset liability matching and that sort about a bottom we don't want to move away from that matching because it would be bad long term economically.
And you don't want to try to be picking when you trade in or out and the other hand some of our equity is just our capital.
That we use to support business and that we are the more flexible with and we brought down the.
When we look at economic capital with is the amount of capital, we think we need to put up for a risk.
We thought we had it wasn't a good enough return for us. So that was why we reduce it which is really related to sort of eight equity portfolios. The overall entity not specific asset liability matching.
As it relates to that might have freed up capital David It from a.
From a statutory capital standpoint.
I'd say reduces your capital a little bit, but we're long capitalized it is.
So we don't look at it is we had to free up capital to buy shares back or anything like that we just looking at a pure economics, what's the right thing to do for shareholders and a long term basis.
And it did free up some economic capital.
Statutory capital, but it doesn't really make a difference in the amount of capital we have available to either do share repurchases by somebody like that John do you want to spend a couple of minutes on what we're doing.
The strategic asset allocation.
Yes, Thanks, Tom David Thank you for your question.
As a regular matter of course, we take.
Disciplined approach to investing and really look at the managing boasts the risk and return tradeoffs, we do that boast directly in the investment Department, but then that's highly integrated with the way we think about.
Turn in risk opportunities across the firm as Tom mentioned.
One of the key things that we do is what will first we have a what I believe to be a strong team about 400 investment professionals and that are deeply experienced and we are in a number of different markets look at a price action fundamental economic drivers.
Technical observations across those markets. We also bring in on a regular basis.
Keen insight from people from the outside whether that's from our our dealer relationships whether that's.
Specific.
Consultants or economic research teams that we have subscriptions to try to formulate at any point in time.
Risk return trade off for the portfolio, especially given the business lines that were associated with.
As Tom mentioned.
If you candidly if you go back a little more than a year ago, we started to see that the the return per unit of risk as we perceived in the marketplace was flattening out and we became a little bit more concerned about whether investment markets offer the best opportunity.
What transpired. Since then is that decided became pretty active last year as we've all seen we took that as an opportunity to add duration of the portfolio, which is paying benefits today. So its tantamount to our our desire to be proactive with our investment portfolio integrated to the rest of the the rest of the firm.
As we as we moved into the end of this year run the things that we notice that there was a limit to what.
The central banks could do to continue to push on returns of growth assets are risky assets. We thought that what we've observed in 2019 is not much earnings growth and there was a fair amount of multiple growth and we just thought that that was likely coming into it.
Instead, we really didnt predict that there was going to be an event, but the one thing we all recognize as an enterprise if there wasn't event.
We weren't really give you much compensation for that.
So.
We incorporated this equity trade in February, albeit at very good levels.
The way that we accomplished this on a daily on a regular basis quarterly we sit down and investment group and we go through what we call capital allocation process and we spend two three days if we look at markets and then we share that with the rest enterprise.
Got it. Thanks, Thanks for the comprehensive answer on that one and if I could just just one follow up just on just on the expense ratio that the 23 four in the quarter, how should I think about that for the rest of the year just just given potential.
Potential topline pressure offset by what sounds like ramp up of the transformative growth as of year progresses.
Mario do I take that.
Sure.
What I, what I'd say is I would reiterate look our core part of our strategy is to continue to look to take cost out of the system.
And the general downward.
View of our expense ratio to improve competitive position, having said that you do you did say.
Articulated a couple of.
The items that are going to cause some choppiness in that.
Number one is the outlook on on revenue, which there's uncertainty around that.
But also we're going to continue to make investments in things like I said technology and marketing So I guess, what I'd say.
Focus is still on reducing costs and.
Driving the expense ratio down overtime.
I'd like to sit here today and give you a exact trajectory of what thats going to look like but strategically that continues to be a core part of what we've tried to do.
Great. Thank you.
Well, we tried to as manage it down.
But not to its stupidly right. So like as Glenn mentioned, we have to reposition the Allstate brand to go.
Even more aggressive in to driving the direct growth and that's going across the money. So we'll do what we think economic for shareholders.
And then it we think if we do it on an upfront works out so we achieved our overall objective.
Great. Thanks, so much.
Thank you aren't next question comes on line of Jimmy Bhullar from Jpmorgan. Your question. Please.
Hi, good morning, So a couple of questions first maybe just on the auto business. If you could talk about competition.
As you're looking at the business through the rest of the or everyone's margins were actually obviously pretty strong.
You see at some point companies start to adjust pricing based on sort of whatever the new.
As in terms of driving behavior on have you seen any indication of companies getting a little bit.
Looser on renewal terms.
Recently.
Let me start maybe talk about process, Jimmy and Glenn can fill in some.
Specific thoughts he has.
So it's obviously, we did the shelter in place payback and everybody.
While it relatively quickly that doesn't mean that everybody on the idea. It just means that everybody thought that with margins, where they where it was fair to get back to customers are they said it was our view.
And.
Whether that people will continue to do that or not it's hard to tell what I do know is that.
Because we have business model, which is run by market by line by coverage with all kinds of data both our telematics stayed arrow and historical data claim data and information we get from equity will be incredibly per site in surgical about the way we react.
I can't speak to what other people to Glenn is there anything in the competitive environment.
It is clear it today than it is it's been kind of murkiest.
Okay.
Yes.
Anything you would add to that.
Yes, what I would say as you know, we're clearly going to be in a very benign rate environment that might be an understatement and.
For some period of time, what I haven't seen isn't the competitive environment anybody, making a more durable or permanent change to their premiums, meaning a rate reduction that is over a permanent price filing for rate reduction because I think like.
Yes, I'm sure other see that I just came on fast like I don't think anybody predicted that you know.
Yeah. When we came into this year, we were going to have an event that would.
Dr. mileage down by 50% or whatever the numbers are in by state.
And it can go away fast too. So I think everybody is looking at this I know we are from the standpoint of how do we react in real time make good decisions doing the right thing by market with precision as Tom said.
With our customers in mind, but not do anything that we then have to rebound on and you know we wouldn't be good for anybody to.
Overplay the hand, and then have to go take rate increases afterwards, so I think what you're going to see is a very benign flat rate environment as opposed to negative one.
And then on the.
Sales or topline growth environment in sort of the services benefits or life businesses should we assume that because it could and should sort of sheltered please that you'll see.
Drop off in sales some of these in some of these businesses in the near term.
Oh, well, let me hit Don answer about the services business, particularly.
I'll say protection plans, which as you saw it just continuing to grow incredibly rapidly and I hate for that story to get lost a month I think from the virus art and then.
I would just I think I could summarize it to stay in light that.
We haven't had much growth there and the last couple of years.
And that we're really trying to sell repeat that growth strategy.
Yes.
Sure.
So I think obviously each of the businesses are going to be impacted by.
Different trends some of them will be driven by frequency such as our roadside business.
Some will be driven by.
Auto sales and kind of general economic conditions.
Like dealer services and so forth. So I think every week every business will be impacted by some different factors Allstate protection plans.
Which has continued to have terrific growth.
First on a broader level they've been growing for a number of quarters. So this is not unique to the first quarter 2020, and so we've been really pleased with the overall growth and overall improvement in profitability.
They've been able to exhibit now when you look at the first quarter.
Might look and say well there most of their sales or through retail in retail is suffering.
Which is may be true in general, but you have to get a little bit more nuanced and look at the car types of customers they have.
The types of retailers, we do business with.
To some extent, what's being purchased at retail right now so when you look at.
Square trades kind of largest b to b customers they tend to be the larger one stop shops.
Where people have been going to shop, more frequently and since Corona virus.
Because they want to get all of their purchases done with one stop they can do so second a lot of what's been purchased as people have been adapting to the home environment has been kind of getting home office and set up to some extent entertainment set up because they're going to be stuck in their houses for some period of time.
Which obviously come with the opportunity for extended warranties.
As well as the stimulus check impact.
Which put funds in people's pockets to be able to then go out and spend so when you look at.
What their particular type of customer was looking for the first quarter. After closing buyers saw nice increase.
It's hard to tell whether that will last and how long that will last I think at some point the overall trends and retail.
We'll be a headwind for.
For Allstate protection plans, but at least in the short term.
It's actually been.
Nice tailwind.
I would also say the that new business, which they picked up a number of large accounts recently, both domestically and overseas.
Rollouts of those programs have slowed down a little bit.
As people have been trying to figure out how they're going to get those stores opened.
And there was a slight I would say in the first quarter benefit from claims dip.
As people submitted fewer claims after the virus that for some period of time so.
Overall trends continue to be really strong.
Hard to tell what the impact is going to be on Allstate protection plans long term from the virus, but indeed and kind of the immediate term.
It's been good for their topline.
Okay, and just lastly, any comments you have on long term strategy for the annuity block and the.
The likelihood of us steel lower reinsurance with that.
Business.
Sure, let me jump at that Jimmy.
First on the.
So I'll point out on more longitudinal perspective.
I will say projection thing now has over 100 million policies in force fan I think it was about 30 plus more thought right.
Yes, it's had a tremendous run now.
Not to be swept under the carpet.
It's really a great team.
As it relates annuities.
It's a huge drag on our OE.
Because we as I mentioned earlier, we have a lot of equities behind that portfolio. Because we believe that's the right thing to do so our 18.2% includes eight large gray.
On it from the annuities, if we could find a way to eliminate that right.
We would do so.
But we only want to do it with some place where our customers would be well taken care. Because this is largely written on our paper and we don't want to get somebody a whole bunch or investments and take good luck and we hope you pay the people off when you get there and they do something stupid. So.
We are managing it well as it is today.
Either we will find a solution that could be reinsurance solution could be a sale could be we just keep it.
Got it differently.
In any event.
We'll go away in terms of its drag on our we when the new long dated accounting long dated accurate.
Annuity accounting Im just place where you'll have to mark that market. We don't we think that that accounting is a little rock.
On the other and it will eliminate that drag on overall.
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Thank you.
Thank you. Our next question comes on line up Mike Zaremski from Credit Suisse. Your question. Please.
Hi, Good morning, this is actually Charlie on for Mike.
Can you talk about your commercial lines exposures outside of commercial auto.
Can you talked about business interruption exposure in general whether you're seeing seen claims and if you're policies have.
Buyers exclusions.
Don and your support.
Okay, Hey, Charlie.
So in our business insurance, we do actually have exclusions.
For disruption caused by the pandemic, so we like like many others do.
So there's a lot of noise out there about.
Implementing.
Requirements for insurance companies to go back and provide coverages that were not only excluded.
Explicitly but we're also not price for.
So.
We would be against obviously that having said that are our exposure is relatively small there's about.
60000 policies in total that we have.
That's sort of exposure, which as I said is explicitly excluded.
So it's a relatively small number for a company like Allstate.
Got it thank you.
On the on the shelter in place payback included in the expense ratio in the first quarter.
That imply that charge for the second quarter will be the balance to get to the 600 million you guys talked about and.
Is there potential for further premium reductions either larger discounts per month or an extension of the duration of.
The discount thanks, Mario if you will take the second the first piece and then make sure we talk about all the other thing whether it's bad debts write downs coming up in the quarter.
As it Charlie as it relates to another shelter and placed program. What we said is we're always going to treat our customers fairly this came along quickly we moved within 10 days too.
Get people what was a.
Relatively.
Easier to implement in terms of is ubiquitous across the country ubiquitous by customer everybody got 15% in April may and we felt we needed to do that because they were all struggling the government money not yet can the people's homes. So we've been provides the opportunity, but then you get cash even though they might have.
On on day.
Deferred payment plan with us in so that was done.
Done because we need to our customers need help we need fast.
If if frequency were to stay down.
Because of something that was.
Not continuous so we thought it was shelter in place a longer period time grants and Glenn showed.
If it stayed down there, but we may want to do something else for our customers to reflect the fact that they're not driving as much this time, though to be much more precise.
And there is so we'll use all the data we have.
Two as Glen talked about some people are driving more but doesn't feel like they should get a shelter place payback rightly said in his ferrous to somebody who is not driving that car at all by the same thing about which areas you live in an urban area malaria is yours is what what kind of driving really fast charbonneau not everybody's on Hello.
So we can't get it is precisely with like.
But we are working on a more comprehensive approach.
Should frequency stay down and we will do what we think it's fair estimate Mario do you want to take the second quarter.
Packs and what we've already done.
Sure.
Okay.
So on that with respect to the Sip payment, we so we recorded.
Portion of it in the first quarter the balance will be recorded in the second quarter. So that one is pretty straightforward.
That that'll happen when we.
Kind of decided on the Sip payment one of the things we explicitly factored in was the potential for.
Bad debt.
Expense associated with the special payment plan that we're allowing our customers to to opt into a as we evaluated the number of customers that had opted into that as of the end of March along with our historical bad debt experience.
The impact in the first quarter from a bad debt perspective was was pretty immaterial.
Obviously, we will look at the number of customers that have signed up.
As well as the exposure.
Going forward, we'll take that into account in the second quarter in terms of establishing.
Bad debt prospectively, but first quarter was was reasonably immaterial second quarter, we'll take a look at.
The analysis will updated.
Appropriately and that will record.
Something incremental in the second quarter.
Okay, great. Thank you.
Why don't we do one last question.
Certainly our final question then for today comes from a line of your on Konare from Goldman Sachs. Your question. Please.
Hey, good morning, everybody. Thanks for squeezing me in here.
Just wanted to go back to wide distribution alone but.
Maybe talk about how became agency channel is impacted by shelter in place.
Environment and.
The with customers potentially looking for lower price options as well and with that and maybe also touch on the timing of shifting the agent variable compensation to a more to new business generation and how that has been impacting the salesforce.
Glenn will be the best person answer that question.
Alright, thanks to your on.
First of all.
When you think about the impacts of Corona virus and it gets important you theres all different types of businesses that have.
After close down all the way up through businesses that actually benefit because they're in the type business that that wins in this type of environment.
Agents kind of fall in the middle of that because if you think about.
Their revenue stream it is still significantly renewal compensation our total.
Compensation to the agency force and if you break down to any individual agent range somewhere between a 90, 90 and 100% or in some cases, even above 100%. Some some are growing more.
Post.
Middlemarch versus before so the core of their income remains so you've got that piece.
In terms of how it impacts their business I think that that'll be something to watching something to see I agree that people will be looking for value as they go forward, but I also think our agents have really been able to show their value in this process I don't think there's another time in our company history were I could make the following statement over.
Of course, the last six weeks.
Almost all of our agents have called almost all of their customers.
So you've got this really unique period of time were 80 people are more available to be reached be there. They have more questions and they really want to hear from their trusted advisor.
And see our folks are just committed to that because of a a national crisis and so I think that there's this.
Moment in time, where.
We some portion of our customer base, we'll really see the value of what they've gotten out of their agency relationship and.
And having a trusted advisor.
That said everything Mario and time and others have talked about on this call about transformative growth is we've got to keep taking costs out of our system and and be a more affordable and more competitive value for consumers going forward, which is why we're accelerating the transformative growth plan.
Got it and understood and then maybe one quick follow up my wise.
No you talk about potentially accelerating it I think as of yearend. We're in 14 states.
Any thought as to how quickly you can really expanded program. So it's all 50 states.
And you want to give an update on that.
Yeah. So so we're in 16 states.
And moving as quickly as we can on it certainly the pandemic has.
Shown a light on the value of a pay per mile product and we're seeing a nice uptick in the demand for it you see kind of two effects in the public right now.
One is just the acceptance of the notion of telematics is going up as a result of all of this and two is actually the over demand.
For something like my wise, it's going up we have.
Some states up 30% in terms of their sales since the middle of March and.
Seeing double digit percentages are regularly on a week by week basis of the new business being sold in my wise versus other products. So we think it's a great opportunity. It will absolutely be part of our filings that we're doing broadly across the country to try to expand and do more for consumers as a result, the pandemic.
Okay. Thank you all states in a strong position, we know how to protect our customers from vice uncertainties and we'll continue to do that as we navigate through this crisis. So thank you for participating with our can export.
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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