Allstate Corporation (The)

Ladies and gentlemen, thank you for standing by, and welcome to the Allstate Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. John Greek, Head of Investor Relations. Please go ahead, sir.

Well, thank you, Jonathan. Good morning and welcome, everyone, to Allstate's third quarter 2019 earnings conference call. After prepared remarks, we will have a question and answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q, and posted today's presentation on our website at allstateinvestors.com. Our management team is here to provide perspective on these results and discuss the strength and leading competitive position of Allstate's homeowners insurance business. As noted on the first slide 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 Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2018 and other public documents for information on potential risks. Beginning in the fourth quarter of 2019, Allstate plans to announce catastrophe losses every month removing the current $150 million reporting threshold. The enhancement to our catastrophe announcement process increases transparency for analysts and shareholders. As many of you know, this will be my final earnings call as the leader of our investor relations team as I've transitioned to a new role in our P&C finance area. I'm leaving investor relations in the capable hands of Mark Nogle, who will be a great partner for all of you going forward. Now I'll turn it over to Tom.

Well, good morning. Thank you for joining us to stay current on Allstate. Let's begin on slide two with Allstate's strategy. So our strategy has two components, increase personal property liability market share, and then expand into other protection businesses. Starting with the upper oval, the personal property liability market provides consumers protection. We ensure their autos, their homes, motorcycles, boats, personal liability. We use differentiated products, sophisticated pricing, claims expertise, and are building an integrated digital enterprise to lower costs, which I'm sure will come up later. We're also diversifying our businesses by expanding our protection offerings, and that's highlighted in the bottom oval. Allstate offers customers a circle of protection. It's a wide range of products from Allstate Life, workplace benefits, commercial insurance, roadside services, car warranties, protection plans, and identity protection. These growth platforms have extremely broad distribution, including major retailers, insurance brokers, worksites, auto dealers and manufacturers, telcos, and directly to consumers. They now comprise about 75% of our policies in force, although a much smaller percentage of our overall premiums. We leverage the Allstate brand, customer base, and capabilities to drive growth in these businesses. Some of these businesses also support the property liability businesses. This strategy creates shareholder value through customer satisfaction, unit growth, and attractive returns on capital. It also ensures that we have both sustainable profitability and a diversified business platform. If you move to slide three, Allstate's strategy is delivering growth and attractive returns. Revenues exceeded $11 billion in the third quarter of 2019. Property liability earned premiums grew 5.6%. Strong operating capabilities enabled us to generate net income of $889 million in the quarter. Adjusted net income was $946 million, or $2.84 per diluted share, as you can see on the bottom of the slide. Returns were also attractive with adjusted net income return on equity of 14.2%. If we turn to slide four, we also did really well on all of our 2019 operating priorities. And we have five of those, as you know. They focus on both near-term performance and long-term value creation. The first three priorities, better serve customers, grow the customer base, and achieve target returns at capital, are all intertwined to ensure profitable long-term growth. Customers were better served as the enterprise net promoter score improved. Property liability policies increased by $664,000 from the prior year quarter to $33.6 million as the Allstate and insurance brands grew 1.9% and 5.9% respectively. Allstate protection plans, which of course was formerly Square Trade, grew to $89.8 million. Total policies in force now exceed $136 million, an increase of 40.7% compared to the prior year quarter. Returns remained excellent, with most individual businesses performing well. The $89 billion investment portfolio had excellent total returns and generated $880 million in net investment income in the quarter. Shareholder value is also being created by building long-term growth platforms. We increased telematics usage in the property liability businesses, and that's supported by having industry-leading insurance solutions from Arity. Allstate Protection Plans is achieving the acquisition goals we established two years ago, and sales in Europe are growing. Allstate Identity Protection, which we acquired about a year ago, is integrating its products into our customer value propositions. Mario will now discuss our results by segment in more detail.

Thanks, Tom. Moving to slide five, you can see that property liability results continue to reflect strong operating capabilities. Net written premium increased 5.8% in the third quarter or $1.5 billion for the first nine months. This reflects policy growth in the Allstate and insurance brands and higher average premium for auto and homeowners insurance across all three underwritten brands. As you can see in the middle of the left table, total policies in force increased 2% to $33.6 million. Underwriting income of $737 million was substantially better than the prior year quarter due to lower catastrophe losses. Moving to the bottom of the table, the property liability recorded combined ratio of 91.6 was 2.3 points better than the prior year quarter, reflecting a planned improvement in the expense ratio, offsetting an increase in the non-catastrophe loss ratio. The underlying combined ratio, which excludes catastrophes and prior year reserve estimates, was 85.0 through the first nine months of 2019. Moving to the right-hand table, Allstate brand auto and homeowners insurance net written premium increased 4.5% and 6.7% respectively compared to the prior year quarter due to increased policies in force and higher average premium. E-surance auto insurance policy growth was 5.5%, which combined with average premium increases resulted in total net written premium growth of 8.3%. Encompass' written premium increased 2.6% as higher average premium more than offset a small decline in policies and force. On the bottom of the table, you can see that underlying combined ratios remain strong across our brands. E-surance reflects primarily auto insurance, which has a higher combined ratio than homeowners when catastrophes are excluded. Encompass, on the other hand, reflects a 60-40 mix of auto and homeowners insurance premiums. Let's go to slide six, which highlights investment performance, which benefited from overall market returns and proactive risk and return management. The portfolio generated a strong 7.8% return over the last 12 months, of which 1.9% was in the third quarter. Approximately half of this total return came from interest income on the fixed income investment portfolio and returns on the performance-based portfolio. The remainder was due to portfolio appreciation reflecting lower market yields and higher equity values. The chart at the bottom shows net investment income for the third quarter of $880 million, $36 million higher than the third quarter of 2018. Market-based investment income, shown in blue, increased to $727 million from $683 million a year ago, reflecting investment at market yields above the portfolio yield. Performance-based income, shown in gray, was $202 million in the third quarter, $12 million lower than the prior year quarter. Slide seven highlights results for Allstate Life, Benefits, and Annuities. Allstate Life, shown on the left, generated adjusted net income of $44 million in the third quarter, $31 million lower than the prior year quarter. This is largely due to the write-down of deferred acquisition costs driven by lower interest rates and model refinements in connection with the annual actuarial assumption review. Excluding the impact of the non-cash unlock charge in both periods, adjusted net income was $86 million in the third quarter, an increase of $6 million, or 7.5%, compared to the prior year quarter. All state benefits adjusted net income was slightly lower than the prior year quarter, as higher premiums were more than offset by increased DAC amortization, driven by lower projected investment returns related to our annual actuarial review of assumptions. Excluding the impact of the non-cash unlocked charge in both periods, adjusted net income was $32 million in the third quarter, an increase of $1 million, or 3.2%, compared to the prior year quarter, primarily due to higher premiums. All state annuities on the right generated adjusted net income of $16 million in the quarter, which was $4 million lower than the third quarter of 2018 due to higher contract benefits and reduced investment income. Adjusted net income of $43 million for the first nine months was substantially below the prior year, reflecting lower performance-based investment income in the first quarter of this year. Let's turn to slide eight. Service businesses continue to grow the number of consumers protected, with policies in force increasing 67.7% to 95.9 million. This is largely due to Allstate protection plans. Revenues increased 27.1% to $418 million, as you can see from the lower left table, due to growth in Allstate protection plans and Allstate dealer services, as well as the acquisition of Allstate identity protection last year. Revenues through the first nine months now exceed $1.2 billion. Adjusted net income was $8 million in the quarter, shown in the lower right, a $7 million improvement over the prior year quarter, largely due to improved loss experience in Allstate protection plans and Allstate dealer services. Slide nine highlights the continued strength of our capital position and financial flexibility. In the third quarter, we issued $1.15 billion of 5.1% fixed rate non-cumulative perpetual preferred stock. The proceeds from this issuance were used to redeem $1.13 billion of fixed rate perpetual preferred stock with an average dividend yield of 6.54%. These actions will lower annual dividend costs by about $16 million. We continue to deliver excellent returns to shareholders. In the third quarter of 2019, we returned $775 million to common shareholders through a combination of $166 million in common stock dividends and $609 million of share repurchases. We have repurchased 6.7% of common shares outstanding over the last 12 months. Book value per share is up over $9 over the last 12 months. Now I'll turn it over to Glenn, who will discuss our special topic, of Allstate brand homeowners insurance and how we are positioned to generate industry-leading returns while growing market share.

Thanks, Mario. Homeowners insurance is a great business for Allstate, as you can see on slide 10. Allstate is the second largest homeowners insurer in the United States with 6.6 million policies in force. We have written premiums of $7.6 billion in the Allstate brand, over $400 million in Encompass. And e-surance is also expanding into homeowners insurance using all state's capabilities, and now has over 100,000 policies in force. A significant portion of our customers bundle home and auto, which improves retention and overall economics of both product lines. The key message on homeowners insurance is it generates substantial underwriting income and attractive returns on capital. To achieve these results, we target an underlying combined ratio in the low 60s to handle the volatility that comes with catastrophe losses. Since 2012, we've generated over a billion dollars of underwriting income on average annually, including catastrophe losses. As a result, returns on economic capital are in the mid to high teens. This profitability also provides diversification to auto insurance profitability. The graph at the bottom of the page shows homeowners insurance combined ratios for Allstate and the industry since 2012. As you can see, Allstate has consistently outperformed the industry. The results is that we've earned over half of the industry-wide underwriting income in that period. Turning to slide 11, Allstate optimizes returns through sophisticated portfolio management. We've improved returns and decreased homeowners insurance volatility through advanced catastrophe modeling, geographic diversification of business, and strategic use of reinsurance. Our spread of the business across the country works to our advantage by providing a significant diversification benefit as timing, type, and magnitude of weather events differ based on geography. As you can see on the U.S. map, we have a top three market share in 20 states, which are shown in green, but much lower shares in states like California and Florida prone to catastrophes like wildfire, earthquakes, and hurricanes. We take a proactive approach to managing our exposure to different types of risks. We substantially reduced our exposure in California to earthquakes by helping establish the California Earthquake Authority in 1996, and we've decreased our underwritten policies enforced there in the last decade. In Florida, we reduced our market share from about 10 percent in 2003 to less than 2 percent today. We also helped shape the Florida Hurricane Catastrophe Fund, which provides reinsurance. and we use a separately capitalized company there, Castle Key, and purchase external reinsurance. The overall objective is to meet customer protection needs while optimizing shareholder risk and returns. We underwrite risk directly where we can achieve target returns. We also broker nearly $1.4 billion of other insurers' property policies. This allows us to meet our customer protection needs leverage our distribution strength with more customers, bundle additional all-state products, but not directly write risks outside of our underwriting appetite. In total, we manage our portfolio of states to target a combined ratio that generates attractive returns. For new competitors in homeowners insurance, the state-level profit dynamic makes it difficult for them to achieve the same level of overall profitability or have the resources to expand. We shift an extensive amount of catastrophe risk to reinsurance markets, which reduces our capital requirements and protects annual returns. The reinsurance program covers individual large events utilizing traditional reinsurance and alternative capital. The current nationwide reinsurance program provides over $4.3 billion of limits above a $500 million retention for any single event. We also use an aggregate cover in case there are multiple events below $500 million This provides additional protection in case the accumulation of those events throughout the year exceeds 3.5 billion. Moving to slide 12. We're not standing still, and we're constantly innovating in this space. We're focused on customer value and ease of doing business to accelerate growth. We've streamlined the homeowner quoting process by using both proprietary and third-party data sources to increase efficiency and accuracy. Using this information, We've reduced the number of questions asked in the quoting process from over 40 to just three when bundling homeowners and auto insurance together. In many cases, after a quote is complete and we bind coverage, there's an inspection of the home. Technology such as aerial imagery and predictive modeling has enhanced the speed and efficiency of those inspections and lowered our expenses. We continue to enhance the design of our homeowners' product while increasing our pricing sophistication. Our homeowners' product, House and Home, is better able to address severe weather risks and unique customer needs. For example, the product includes a graduated roof coverage schedule, though it still provides the ability for customers to purchase full replacement if they choose. House and Home now represents 90% of our new business and about 45% of our total policies in force. The pricing of House and Home is more sophisticated than traditional homeowners insurance products with more occupant and residence characteristics. We've also improved the efficiency and effectiveness of our claims handling through technology and innovation. We leverage our scale, data, and analytics to rapidly deploy more than 700 full-time catastrophe resources to quickly help customers when they need it most while mitigating damage and managing costs. We use aerial imagery to improve our efficiency and customer experience. We've expanded virtual claim handling capabilities, including the use of drones, airplanes, and satellites so that now nearly 70% of all wind and hail claims have some aspect of the claim handled virtually, compared to less than 10% in 2017. The bottom line is Allstate has a significant competitive advantage in homeowners insurance. We'll continue to leverage our scale, pricing sophistication, risk management, distribution system, and claims capabilities to deliver industry-leading returns and market share gains. We'll now open the line for your questions.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Also, we'd like to ask you to please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question comes from the line of Elise Greenspan from Wells Fargo. Your question, please.

Hi. Thanks. Good morning. My first question, I wanted to spend some time on the, you know, expense ratio. in property liability. It's been low now for a couple of quarters. And I know last quarter you guys had pointed to, you know, a combination of improvement in processes, automation, as well as incentive comp as driving down the second quarter expense ratio. If you could just give us a sense if it's kind of the similar components that drove down the ratio in the third quarter and just how we should think about, you know, modeling through that expense level going forward.

Yeah, thanks for the question, Elise. This is Glenn. We're definitely focused on improving expenses. We've been after this and going after it hard. You know, I mentioned a few of the examples last quarter where, you know, we've been able to reduce customer inquiry calls, which is a win-win because it's better customer experience because we've eliminated the need for those calls on the front end, but it also is more efficient on the back end. I mentioned in the special topic there some of the aerial imagery and data and analytics we're using in both claims and to reduce inspection. We've gone after some real tangible ways we can manage expense. As with any quarter, there's a mix of things in there. Similar to last quarter, there's some components of compensation, some components of marketing, some components of sustainable improvements in the baseline of that. We've made some real tangible improvements that we will sustain and we're going after expenses in a real way because we think it's a path towards growth where we can maintain margins.

Can you break down, give a little bit of color on what might be in the sustainable bucket versus maybe what was kind of one time in nature in this quarter in the expense level?

I don't know that there was a lot of one time in this. So we've got, you know, where it is sustainable is those operational improvements, which is, you know, a meaningful chunk of the change that we've got. When you look at some of the compensation components, we've managed, you know, both our, you know, employee compensation and agency compensation over time. And, you know, you reset every year with a new program. So there's a little bit of benefit in there. from that that we were short to our growth aspirations in the year. But otherwise, we've got sustainable expense improvements in here.

At least one place, Tom, one place we were light this quarter was marketing, which we will dial up. As we talked about last quarter, we're dialing up. There's some select markets where we know that we can generate economic growth. That said, that won't change the overall trend line of expenses should be coming down over time. But, you know, every quarter is a new quarter, so.

Okay, that's helpful. And then my second question, we've seen some of your peers that have seen higher bodily injury severity trends within their auto book of business. Could you just give us an update on what you're seeing on the BI severity side and just, you know, have you seen any pockets where trends pick up in the U.S.? ?

Well, let me give you, first, we can't comment on everybody else's numbers because, as you know, in bodily injury, those are long-dated claims. It takes you, you know, three, four years to really get them paid out. Depending, you know, the little ones get closed early, the big ones get closed late. So you always have some bounce of mix in the paid BI numbers. that you have to get underneath. That said, we feel good about where our overall bodily injury reserves are set and our trends. Glenn can talk about the paid trends.

Yeah, so we feel good about where we are in bodily injury. As we put in the queue, you know, we're running around medical inflation. You know, as Tom mentioned on the reserving, you know, it's all in the numbers I think would be a headline there because, you know, our reserving actuaries are, you know, talented folks. They work very closely with our claims team, our underwriters, our product organization. They all work together to ensure that we have the right reserves on the books. And if you look at the trends over time, we've had a lot more favorable development than unfavorable development through the years, which is a good bellwether for you to look at in terms of our overall trends.

Okay. 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, I'd like to revisit how your guidance is going to look for 2020. John, I know you mentioned in your prepared remarks that they're going to start disclosing monthly cap loss numbers. I also remember from a previous presentation that you said you were going to shift from an underlying combined ratio target to a target return sort of guidance. And I'm just wondering if this is a trailing ROE target. Do you plan to adjust it for changes in interest rates, et cetera? Just looking for some color there.

Well, Greg, thanks for the question. We love the fact you're always paying attention to what we say. It makes us feel good. The monthly CAT numbers, just to clean up what people were like, is it above 150? What if it's 149? We just felt like it was confusing stuff, so we just put out monthly. You can do what you people – everyone's got different things they use it for. So it'll just make your lives easier and us more transparent. As it relates to the return on equity, as you know, we're replacing the annual underlying combined ratio guidance with longer-term ROE goals. ROE is a better measure. of the overall business results, because it includes, first, it includes all our businesses, it includes investment incomes, and it ties directly to reported results, which includes catastrophes. The underlying combined ratio, of course, only reflects their property liability businesses, and it excludes catastrophes, which bounce around a lot from quarter to quarter and year to year. But on a long-term basis, as a management team, we're accountable for making sure that we get a good return on homeowners' with catastrophes included in it because that's the risk our shareholders take. So what we're going to do when we report full year 2019 results is give you what we think a long-term range is on return on equity and that management should be held accountable to.

What do you define as long-range? And is this adjusted earnings that it's on?

Yeah, it'll be on adjusted earnings just because, you know, the accounting, as we move to fair value accounting, The book value in reported income bounces around a lot with equity investments. So we feel like adjusted net income return on equity is a better measure of what we want to do. Long-term would be sort of, you know, what do you expect to do over two to three years? But the goal really is to get people focused and our shareholders focused on what's the overall return we're generating on the capital you have and focus on the overall side of business. as opposed to just one component. And while auto insurance and homeowners insurance are extremely important to our business, they're not the only thing we got going and not the only thing we should be held accountable to. So ROE is just a much better measure under which you can judge how well you think we're doing as a team.

Great. Thank you for that answer. My second question is, you know, just a follow-up on the expense. You know, I noted from the page nine of your supplement, that your agency count was up year over year and sequentially, and your licensed sales professional account was up year over year and sequentially. And I'm trying to reconcile this with the fact that you're not reporting any restructuring charges, which is unusual considering the improvement you've realized. And then secondly, You know, in a previous call, Glenn has mentioned something along the lines of an integrated services platform. And, you know, so the numbers are kind of moving contrary to where I think they would be. So maybe you can provide some additional color there.

Well, let me deal with some components. Glenn can talk about what we're doing with our agency platform to make it more effective and efficient, including things like integrated service and what we're doing in compensation to drive growth. As it relates to restructuring, we do end up with some little minor restructuring charges that go through. They're in the queue someplace, but they're not big numbers. As we move forward, as we move through an integrated digital enterprise, we just record what we think we have to record under the rules. If it means we have head count go down because we're using integrated digital enterprise and we have to record a charge for that, we do it. But we don't feel like there's one big bucket that's needed at this point that we then carve it out and don't come back and hold ourselves accountable for because it's, you know, some other charge someplace.

Tom Penna- Yeah. So, yeah, thanks for the question, Greg. And as Tom said, you're definitely paying attention to the details in there. So, if you look at the agent counts, I'll start with that. Some of that's a reflection of, you know, the investment folks are willing to make in the business based on the opportunity. You know, and there's a good opportunity with Allstate and we are, you know, we're growing items and, you know, we're profitable and have been successful. So, you know, agents are putting their nickel down. These are small business owners who are opening up a shop and going out and selling product and serving the needs of consumers. In terms of the licensed sales professionals, that's reflective of their hiring they're doing, mostly on the sales side of that. Now, that said, I'll mention, as Tom said, a compensation component leading into next year, as well as the integrated service that you brought up. From a compensation standpoint, we're leaning more of the compensation towards new business production. You know, we're interested in growing, so as we increase marketing, We've improved our expenses. We can be more effective and cost-effective for customers. And we lean more into new business production in terms of the compensation as we shift in that direction. We think that's a good system-wide approach to go drive growth. In terms of integrated service, we have talked about it before. It's in the early stage. It's a big system. We have 40,000 people in that agency system when you take the agents and all of their employees, licensed and unlicensed sales and service. And, you know, so today we do that service in a decentralized way. A lot of the service is done in individual offices, which you're not scaling. It's not ultimately going to be as cost-effective as you can do it in a more scaled way. So we built an integrated service model. We're doing that with, you know, we're getting into hundreds of agents, not thousands of agents at this point. So from a scale perspective, you wouldn't see it showing up in the numbers that you looked at there at this point.

And, Greg, just a the change in agency compensation, we don't expect to raise overall compensation as a percentage of premiums. Eric Coyle, Correct. Yeah, it was a shift, yeah.

James Bledsoe, Great. Thank you for your answers.

Thank you. Our next question comes from the line of Yaron Kunar from Goldman Sachs. Your question, please.

Good morning. Excuse me. Can you talk about the increase in property damage frequency in all three brand auto this quarter? I guess I was just a little surprised to see that given the more recent trends.

Yeah, hi, Aaron. It's Glenn. So first of all, I always like to go back to the overall profitability of auto. We're doing very well there, 92 combined ratio. Some of that is the expenses, and I'll come back to sort of some of the intentionality there. Frequency, first of all, is hard to predict. You can't predict what's going to happen the next year, next quarter, but you can understand the trends and where things are moving. So, miles driven were up. We saw some change in what had been a declining trend of frequency. That said, it was a little bit mixed, so I'll point you to a few different numbers. Gross frequency was up two points, as you pointed out, but paid frequency, which on a short tail line tends to be pretty accurate, was flat and VI frequency was slightly down. So I look at the overall frequency picture and say it's kind of a mixed story in there and something that we're keeping a close eye on. Now you go a level below that and at a local level, every state manager is out there looking at their competitiveness, their trends, their frequency, their severity in every state, and we're managing that profitability at that local level. So that's what rolls up into a really favorable return as we've delivered. And then lastly on expenses, I want to keep going back to that because part of the reason or the main reason you go after expenses the way we are is it actually allows you to let the loss ratio float up and deliver the same return. And that's what it looks like in our ratios when you're giving back more value to the customers.

Okay, that's helpful. And then the second question, going to homeowners, also saw an increase in severity there. I guess just given the amount of pricing that the company has pushed through over the last year, I was so surprised to see the deterioration in accident-year loss ratio from a pretty weak prior year quarter to begin with, even with that increase in severity. So can you maybe talk about that dynamic of where the severity has come from and why the price increases we've seen to date have not been sufficient to offset it?

Homeowners is one of those businesses where it's really difficult to look at it by quarter, what happens with severity, because it's obviously impacted by weather. Sometimes it's cats, sometimes it's not a cat. And so you have to really look at it on kind of a rolling 12-month basis. And when you look at our business, it's got great returns. We feel really good about it. If you look at the average premium, it's way up. And when you go underneath that, and as Glenn said, we like to segment this down. Not only do we segment it by state, we segment it by coverage. And in homeowners, depending what kind of loss you have, it changes your paid severity a lot. And again, those tend to be relatively short tail lines. So a fire loss has a much different severity if the house burns than obviously if somebody runs into their garage door. Or hail damage can tend to be much more expensive because it could take out a whole roof than some leaky pipes. So it really depends. The mix drives a lot of it. Theft is not as big as water damage. So what I would say is Glenn's comments on this special topic, we feel really good about homeowners. Like it's a really good business, making really good money, much better. And I want to just underline what he said. With a 9% share of the market, we've captured half of the overall profits generated in homeowners in the industry. So we feel like that's indicative of good operating expertise and capabilities.

Right. No pushback from me on that. Thank you very much, and good luck to John in the new role.

Thanks, Jeroen. Thank you. Our next question comes from the line of Jay Gell from Barclays. Your question, please.

Thank you. My first question was on commercial auto and the ride-sharing agreement with the major providers there. One other competitor in that market has had some issues negatively, so just wanted to understand how Allstate is going to position that business.

Hey, Jay, Steve. So let me start off and say... We call it a shared economy business, so it's not just ride sharing and car sharing. We look more broadly, and so obviously you focused on the largest customer we have, but we have a handful of others, and we're building an entire team technology all around that. Obviously, we are well aware of other competitors in the industry, and the particular competitor you talked about strengthened their reserves in the 2016 and 17 year when the industry was kind of early. and development. We started last year. As you remember, I think in prior calls, I talked about how we triangulated our wash reserves on the basis of the prior history that was provided by the Transition Network Company, that we used our own internal, both personal lines and commercial auto experience. And we've also looked at industry experience and our telematics type We do this at the state level because, remember, we have 15 states we're insuring, not the entire country. So we're comfortable with where we're sitting. We're still recording essentially at the priced amount for the reserves, primarily because the vast majority of the coverage is for long-tailed coverages. So it's still early, 19 months into that first month. You know, you think long-tailed coverages historically take longer than that to develop. So it's still coming along for us. We look at it every quarter. As you may remember, independently, our reserves are reviewed and set by a team that works and claims reserves working for Mario and not for me. So we have different eyes on it from our actual department, from our financial department, obviously from the business too. So we're comfortable where we are. Does that answer your questions?

It does. It does. Thank you very much. And then on a separate topic, Thinking about the underlying combined ratio in the protection business, the underlying loss ratio, excuse me, having that show an increase year over year, my sense is some investors are a little concerned about what's going on in terms of price competition in auto and then also the potential for claims inflation to increase. So can you just remind us how Allstate's managing that issue to restrain investors underlying loss ratio deterioration?

Yeah, Jay, let me provide some overall context, and Glenn can jump in on the relationship between expenses and loss ratio. So, first, as you know, our auto insurance, our largest product line, it comprises about, you know, 65% of our total premiums. It's obviously an important lead line as well because it helps us expand into the homeowner's insurance business, which is also highly profitable. So it's a really important question of are you going to maintain your profitability on auto insurance so you can keep growing it. But before we go into the specifics on expenses and loss ratio, let me just talk about principles for a minute and a little bit of our history. So we have some guiding principles on growth. First, we only want to grow when we get a good return for our shareholders. I mean, it seems simple, but not everybody follows that path. And as you know, the auto business generates really attractive returns. It's in the low 90s. When you add that and homeowners insurance to the equation, that's a big driver of our return on equity, which was 14.2% for the last 12 months. But when you adjust out annuities, it's over 17. So we're getting a really good return on that business. So what we've put in place has been working. Secondly, we do segment the business in terms of growth and profitability by business, geography, customer group, and risk. so that we get attractive margins in each segment. And that gives us that solid base from which we can be sustainable in terms of growth. So if auto margins drop in one state or on one coverage, we have the benefit of good margins on auto insurance in another state or on another coverage or in the homeowner's business. Our third principle is we create shareholder focus or create shareholder value by focusing on profit and growth at the same time, but we default to profit if necessary. And so we employ that philosophy across everything we do. So, for example, let's go to insurance. And, you know, when we first bought insurance, it was running a combined ratio well over 100, and we invested heavily in that. We believe and know now that that growth created shareholder value because the return on the business we were writing was higher than our cost of capital. The accounting, however, required us to write off all the advertising expenses up front, which resulted in an underwriting loss. So after the first year, of course, then that advertising expense goes away. You capture all the underwriting profit, and it's very profitable. And so it took a while before that profitable business can offset the negative of first-year business, particularly when you've spent $200 million a year in advertising. So as a result, that growth reduced underwriting income, even though it's positive for shareholder value. So we try to think about, are we creating shareholder value? Our first principle, we're creating shareholder value when we're doing this. We can do it, and we chose to do it on insurance because we had strong profitability coming from the Allstate brand auto and homeowners business. And so that concept of portfolio growth, Glenn talked about how it applies at the auto insurance level. It applies for homeowners. It also applies across the whole company. Um, and, uh, and so now insurance is two and a half times the size of when we bought it. Um, a similar situation exists for all state protection plans. So, uh, we acquired square trade, uh, which has been renamed all state protection plans a couple of years ago for a billion four, which is equivalent to about four bucks a share, uh, uh, the all state share. And as you know, now that business is over twice its size, we've got 89 million policies in force. It's got great distribution. It's grown, growing the European cell phone business. And now it has reported profits, albeit small reported profits. And so valuing that business on an earnings basis clearly understates shareholder value. So our challenge has been to make sure we give you the information to see value creation, but not get everybody so focused on the 65% of the business that that's the only thing that matters in terms of creating shareholder value. So it's a really important question. How are you growing that two-thirds of the business to make sure you make money? But I also want to just take this opportunity to say, like, don't forget about everything else because there's a third of the rest of the business that drives shareholder value that when we get so focused on just auto insurance margins, it takes people's eye off the other stuff, which is why we moved to ROE. But obviously, we're very focused on auto insurance profit. We feel really good about it. and we need to make sure we keep doing that. So Glenn will talk about what Mario mentioned is our intentional strategy to grow the business, offer really good value to our customers by reducing our expenses, and then having the loss ratio drift up, which enables us to maintain margins and still keep clocking that high team's return on equity from that business.

Yeah, so thanks, Tom. As you lay out the principles there, clearly we're in an environment in auto that meets those growth principles, and so we want to go after that. That said, it's an environment we've chosen to grow in, but it's a competitive environment. We've got significant increases in advertising out there. We have an extremely low CPI, so we acknowledge all that in terms of the competition, and we're doing things smart as to how we grow as opposed to chasing it. I think you could call our combined ratio now a little bit of a restructured combined ratio because, as you point out, Jay, the loss ratio is up, the expense ratio is down. I would argue that it's a lot better than the other way around, that if you think about sustainability, if we were here having this conversation and we were like a point or two up on expenses but we had a huge tailwind because frequency had dropped through the floor in the quarter, I think we'd be having a different conversation. I look at this as a positive, sustainable way for us to go after growth and show that we can do it in a way that's going to continue to provide that mid-high teens return that Tom talked about.

Excellent. It's very helpful. Much appreciated.

Thank you. Our next question comes to the line. Mike Zaremski from Credit Suisse. Your question, please.

Hey, thanks. I guess... Staying on the expense ratio improvement, which is enabling you to grow more, there was a media report or two about shifting certain customer service responsibilities out of the agencies and into call centers, which can service customers potentially more cost-effectively. I'm kind of curious if that's part of the reason agent comp is falling and why it may be a permanent decline, or just you can correct me if I'm totally off on that.

First, let me go up for a minute, Mike, and say we want to use technology and our people to do a really great job for our customers. And with what you can do in technology today, you can make your people a lot more productive and make them give a great service and spend less money. So, you know, we've talked multiple times about quick photo claim where the productivity of a claim adjuster is multiples of what it used to be because they're not driving around from body shop to body shop. They're sitting in front of a computer looking at pictures, deciding what should be done with the customer. So that's ripping through our business. We have lots of ways we're working on doing that, and that's what gives us the confidence that we can do a better job for our customers with less expenses. Glenn talked about integrated service, which is the thing you're referring to, and you don't see it in the numbers. it would be what I would say today. It's not, you know, we started with 50 agents this year. We're getting the processes down. We're not going to turn this loose on 22 million customers until such, or policies until such time as we make sure it works really well, because the system we have works really well. Our net promoter score was up again this quarter. We like what our agents are doing. That said, we think we can do better by leaning into innovation rather than going, so you're not seeing anything on integrated service. That the media I think you're referring to. I mean, who knows? There's so much media out there these days. I don't know whether it's fake news or not, but the reality is we are doing everything possible to give our customers great service, support our agencies, but do it in a cheaper way. And we're all in on that.

Okay, great. That's helpful. And lastly, Glenn, in your prepared remarks, you I might be a little off. You talked about the state-level profit dynamics making it difficult for competitors to achieve all states' homeowners' profitability. Maybe you can elaborate on that, and also I'm curious if there's any parallels to auto insurance as well. Thanks.

Yeah, so thanks for the question on it. I think the basic premise there is you know, we have a lot of scale, and we've got, you know, breadth across states, and our blend and our mix across a state is not only a 50-state view, and so we've got it everywhere, but we've also been thoughtful and made choices about where we're larger and smaller, given the types of risks we face. What's really challenging for the smaller or newer carrier going into it is getting that type of breadth across a system where you can offset your highs and lows. It's similar to you know, what you do with an investment portfolio. You know, you're mixing your investment portfolio in different ways so that when one thing's up, another one's down, and you're getting an overall good return. That's really challenging if you're starting out and you're only allowed to buy four stocks.

Let me also add to that. So let's just compare homeowners to auto insurance. So homeowners is more volatile on an individual location basis than auto insurance, so you should put up more capital for homeowners insurance than you should for auto insurance. In addition, with homeowners insurance, you get very little investment income because it's a relatively short tail, whereas opposed to auto insurance, you get a decent amount of investment income off it. So as a result of that, you have to run a combined ratio in homeowners insurance that's below that which you run in auto insurance. So your combined ratio in homeowners should always be below your combined. That's not true for everybody. But that, so in total, you got to get there. The problem is that like there's hail in Dallas one year and then not for two more years. There's hail in Oklahoma because it got dumped in Oklahoma before it got to Dallas the next year. And so if you're only in Dallas and you got to earn that low combined ratio and the hail happens to get you in that year, it's pretty hard to then have the money to expand into Oklahoma. So that's what Glenn's talking about. But the business is, when you look at the homeowner's business and as more people get into it, I think it's worthwhile focusing on what is their actual return on capital in that business as opposed to just its growth.

Helpful. Thank you.

Thank you. Our next question comes from the line of Ryan Tunis from Autonomous Research. Your question, please.

Hi, this is Crystal Lewin for Ryan Tunis. Our first question, again, on the expense ratio. It seems like the expense ratio has improved a lot, but it doesn't seem to be translating into auto policy growth acceleration yet. And it seems like some of that expense improvement came from advertising, which tends to drive growth. So I'm wondering what actions are being taken right now where you're investing in growth and going to see that policy growth acceleration in the future?

Well, first, if you look at our auto insurance growth, it's about two points, which we think is more than the number of cars and have grown in the United States. So we think we're picking up market share, albeit a small amount of market share, and we'd like to have more. So we are investing more in marketing. But that doesn't change the overall trend that Glenn talked about. I mean, we're going to Our overall trend is reduce expenses, be competitive in price, maintain margins at levels that are attractive. Is it going to be the same level each quarter? You know, it bounces around a lot depending on what frequency happens. But we like the returns. We're good at getting returns in auto insurance. And we have proven that we can grow it. And we're going to work on keep reducing expenses so we can continue to be competitive. Okay.

On the auto rate increases that you guys have been getting this year, it doesn't seem to have slowed very much in the first nine months despite efforts to pass along more savings to customers and grow the business. So can you kind of describe the auto pricing environment right now and how you're thinking about auto pricing in terms of growing?

Yeah, thank you, Crystal. You know, first of all, we manage all of our pricing on a state-by-state basis. And I would say, you know, in terms of the slowing, I would look at it relative to the lost cost trends. And so I would say it's slowed. You know, we've taken over trailing 12 months, 2.2 auto rate. That's translated into an average gross premium of 3%. But if you look at the severity trends running five this quarter, but in the trailing 12 months, you know, higher than that, we've not had rate that keeps up with that. And as we talked about earlier, we've offset it with lower expenses. And that's where you give more value to the customer is not taking rate that has to keep all the way up with those type of inflationary factors. But, you know, as Tom has said several times, you know, we manage this for profitable growth and we're committed to a strong return. And, you know, when we look state by state at that, we're looking at our competitiveness, what our price looks like relative to our competitors by different customer cohorts in each market, but also what our return on all of those cohorts are in each market. And so I think our pricing has trailed the loss trend, which is part of what we're offsetting with the expenses.

You know, it's hard, Crystal, to – and I'm not trying to – it's really the – The level of sophistication in pricing today in auto insurance is so high that while the numbers overall are important to maintaining, looking at the trend in the margins and definitely look at those. In terms of growth, a lot of it depends what sales you're growing in, what your new business discount is. There's a lot of things we do and our competitors do to make sure we capture business, which generates long-term economic growth. So it's, uh, but you know, it's a pretty, it's not a robust, you're not seeing people take a bunch of rates right now, you know, state farms taken some decreases, uh, but you know, given where they are in overall price, we think they probably need to take some price decreases because they're pretty high priced. Um, we feel competitively priced right now.

Okay. That makes sense. And then one more quick one on the, um, auto bodily injury reserve releases this quarter. Could you just give a little bit more detail on which accident years those are coming from and whether that reflects, you know, the level of severity being in line with medical inflation? Is that running at a lower level than you were expecting in those years?

Thanks. So, Crystal, this is Mario. You know, I guess the first thing I'd say is just reiterate what Glenn said in terms of, you know, when we establish reserves and look at reserves every quarter, We have some pretty robust processes that we follow. We take all relevant facts and circumstances, both internal and external trends into account. And then we also take into account any changes in claim handling practices. So we have a really thorough reserve setting process and we tend to be conservative in how we set those reserves. What you saw this quarter in terms of the releases were predominantly in Allstate brand auto injury coverages and we continue to feel good not only about the severity trends that we're seeing in the current year, but we're seeing favorable development in the prior years that is better than what we expected when we established the reserve. So it's really coming across a number of accident years, but we continue to feel really good about our reserve position and our injury severity trends.

And the amount from each prior year wouldn't really help you. It's because it's what we picked as opposed to what the absolute trends are. But when we do the K, there's obviously the triangles around there.

Yep. Okay. Great. Thank you so much for all the answers.

Hey, Jonathan, we have time for one more question.

Certainly. Our final question then for today comes from the line of Josh Anker from Deutsche Bank. Your question, please.

Yes. Thank you. I was looking at the policy count numbers in auto, and it seemed like they were just slowed down. But I'm wondering if we can Sort of break it down to gross policy ads versus gross policy declines. Are all three customers sticking with you and the new customers have slowed? How should we parse that out?

That's a pretty detailed level of question, Josh. So first, overall retention was flat this quarter basically for statistical reasons. I mean, it's kind of down slightly, but it's basically flat. So that means we're keeping in total as many as a percentage of our customers. You're correct in assuming that a new business doesn't have as high retention as people have been with you 10 years. By the time somebody's been with you, actually people have been with you three, four years, they pretty much tend to stay with you, really high retention levels. So growth will drive your retention down. despite the fact that we were growing over the last couple of years, our retention has gone up because we're doing a better job on customer service with our net promoter score up. So I think in terms of our overall growth, you should expect to see more of it come from new business in the future than further increases in retention, if that's helpful.

And when I look at the decline in ad spend and, I guess, compensation to agents, or maybe I'm saying that incorrectly, or is that directly tieable to the amount of new business coming in?

Uh, I, you sound like you're looking at a specific number. Maybe what we can do is Glenn can answer for you with a, with the new comp. So we're going to, we said, we're gonna spend more money in advertising. We're working on that. And we expect to still bring our overall expenses down as we do that over time. I mean, it may not be every quarter, but, uh, we're, we're headed down in that direction. But Len can talk about what we're doing on compensation.

And a quick add I'll make to the marketing, because it's come up a couple of times. It's true on a year-over-year basis, the marketing was lower. On a sequential quarter basis, it was up. We're comparing to a quarter last year where there was a new brand launch. But we're ramping up, and we'll continue to do that with marketing. From a compensation standpoint, as we talked about earlier, it really is about shifting towards new business production. Ultimately, you compensate agents for the service they provide to customers and for going out and hunting and getting new business. And we're within the confines of that amount of money, that compensation system. We're shifting money towards new business production to incentivize that more in the compensation plan going into next year.

So what we're trying to do is we want a great customer value proposition. We want a good price. We want good service. We're lowering expenses, and you should expect to see us continue to lower expenses as we go forward from here. And then as the loss ratio goes up, that just means we're offering greater value. They're paying less for expenses and more for fixing stuff that got broke.

Thank you for the answers, and good luck with that.

Okay. Okay. First, thank you for being on the call. Let me thank John for being both a transparent and direct source to you for a little over three years. He's done a fabulous job. We're excited to see him move on in his career and know Mark will do a great job. He's worked with John, so it'll be seamless for you and us. As it relates to Allstate, we made really good progress this year on our strategy, our operating priorities, Remain focused on profitable growth, and we'll talk to 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.