Allstate Corp (The) (ALL) — Q4 2015 Earnings Call Transcript

Thank you, Jonathan. Good morning and welcome, everyone, to Allstate's fourth quarter 2015 earnings conference call. After prepared remarks by Tom Wilson, Steve Shebik and myself, we'll have a question-and-answer session. Yesterday following the close of the market we issued our news release and investor supplement, and posted the results presentation we will use this morning in conjunction with our prepared remarks. All of these documents are available on our website at allstateinvestors.com. We plan to file our 2015 Form 10-K later this month. As noted on the first slide, our discussion today will contain forward-looking statements regarding Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2014, the slides and our most recent news release for information on potential risks. Also, this discussion will contain some non-GAAP measures for which there are reconciliations in our news release and in our investor supplement. We're recording the call today and a replay will be available following its conclusion. I'll be available to answer any follow-up questions you may have after the call. And now, we'll turn it over to Tom Wilson.

Well, good morning. Thank you for investing time to keep up on our progress at Allstate. I'll cover an overview of the results and then Pat and Steve will take you through the details. Our comments today are more detailed on four topics to make sure we provide you with good transparency. I will spend some time discussing our rationale for 2016’s underlying combined ratio outlook, Pat will provide more detail on the auto profitability plan, Steve will discuss the asset liability investment decisions including Allstate's financial operating income and the impact that has on operating income. And then Steve is also going to provide some perspective on the overall investment portfolio. That will include both the investments including limited partnerships and energy. Also in the room today to answer any questions on any and all topics are Matt Winter, our President; Don Civgin, who leads our Emerging Businesses; Judith Greffin, our Chief Investment Officer; and Sam Pilch, our Corporate Controller. So let's begin on Slide 2. We finished 2015 with a strong fourth quarter that was driven by our repositioned homeowners business, continued progress in executing our auto insurance profit improvement plan and reducing expenses. The underlying property liability combined ratio for the fourth quarter was 87.4, which brought the full year result to 88.7, which was within the original annual outlook range we gave last year at this time. The recorded combined ratio in the fourth quarter was 92.0, which generated $611 million of underwriting income. The comprehensive program we implemented shortly after a significant increase in auto accident frequency and claim severities includes seeking higher approval for auto insurance prices, making changes to our underwriting standards to slow new business growth and addressing underperforming segments that do both of those and reducing expenses. This proactive approach, however, did not offset the impact to the external trend and underwriting profits from our auto insurance declined significantly in 2015. Continued strong results from homeowners insurance and moderate catastrophe losses resulted in operating income of $1.60 per diluted common share for the quarter and $5.19 for the full year. And the return on equity on an operating income basis was 11.6% in 2015, down 1% from the prior year. Common shareholders received $691 million in cash during the fourth quarter and $3.3 billion for the full year through a combination of common share dividends and share repurchases. If you move to the chart on the bottom of the slide, revenues were up 1.2% for 2015 and property liability premiums grew by 4.8%. Net investment income declined 8.8% compared to the prior year, and that reflects a smaller balance sheet, which is due to the sale of Lincoln Benefit in April of 2014 and the continued downsizing of our annuity business, lower interest income which resulted from shortening the duration of our fixed income portfolio, and a slight decline in income from performance-based investments. Net income for the year was $2.055 billion, which was $5.05 per diluted common share. If you go to Slide 3, it shows our full year operating results for our four property liability customer segments. So total policy in force growth across all brands was 1.3% in 2015 as you can see at the top and the recorded combined ratio was 94.9. The Allstate brand, which is in the lower left, is our largest segment and comprises 90% of premiums written and it serves customers who prefer a branded product and value local advice and assistance. Allstate brand total policies in force in 2015 were 1.7% higher than 2014. Auto insurance, which is on the left-hand side of that box, new business and retention were both impacted by profit improvement actions but policy still increased by 2.1% for the year. Homeowner policies grew over the prior year at a rate of 1.1% and other personal lines grew by 2.7% compared to 2014. The underlying combined ratio was a strong 87.4 for this segment at year-end 2015, as you can see in the red box at the bottom. Esurance in the lower right serves customers that prefer a branded product but are comfortable handling their own insurance needs. Growth was slow throughout 2015 in this segment as our focus shifted to profit improvement. Policies in force were 1.4% higher at the end of 2015 than the prior year and net written premiums grew by 6.6%. The underlying loss ratio in Esurance improved by 1.2 points in 2015 and they neared 75.4. As a result, the underlying combined ratio declined to 108.4, which includes about 4 points due to a number of expansion initiatives. Encompassed in the upper left competes for customers that want local advice but are less concerned about their choice of insurance company. This business decreased in size in 2015 as policies in force declined by 8.2% from a year ago due to lower new business and retention, which is largely a result of price increases and underwriting changes. The net written premium decline of 2.8% for 2015 reflects higher average premiums from increasing rates to improve returns. The underlying combined ratio was 92.6 for 2015, which was 1.1 points better than the prior year. Answer Financial in the upper right that serves brand-new self-service customers is essentially an aggregator that does not underwrite insurance risks. Total non-proprietary written premiums of $581 million in 2015 were 10% higher than the prior year. So let us go to Slide 4, looking forward to 2016 we expect our annual underlying combined ratio to be in the range of 88 to 90. That range is comprised of a number of key assumptions. First, we assume that we will continue to improve auto insurance profitability across all three brands given the profit improvement actions we undertook in 2015, and that will continue in 2016. We do expect modest increases in both auto accident frequency and claim severity, which reflects the broad-based trends we experienced in 2015. Third, we assume the homeowners underlying combined ratio will increase slightly from last year's level and as our profit improvements are realized as we start to realize the benefit of the lower combined ratio we will continue to invest to generate long-term value, which will likely increase our expense ratio. As you know, of course, predicting frequency and loss trends in a rapidly changing external environment is difficult. As a result we put a range on our outlook every year. Now what you also know is that we react quickly to trends whether they are positive or negative to adapt our business priorities, so we are building long-term shareholder value. So our operating priorities for 2016 are designed to build long-term value and as you can see, they are generally the same as 2015. Serving our customers and generating returns on shareholder capital are our top two priorities and they are central to our plan. When we do these well, we grow insurance policies in force. We intentionally slowed auto insurance growth in 2015 to improve auto margins since new business typically has a higher loss ratio than more tenured business. New auto insurance volumes in the Allstate brand declined by 24% in the fourth quarter as a result of tighter underwriting, lower advertising and increased prices. While these actions are necessary, they are also flexible. So our appetite for new business will increase as the auto profit improvement efforts translate into a lower combined ratio. The largest factor in overall growth, however, is the rate at which we retain customers. The auto retention rate declined in the fourth quarter in part reflecting higher auto insurance prices. We are implementing actions to reduce the impact that will have on growth, but what competitors do in their pricing is also a major driver and that is not controllable. So our 2016 growth plans and prospects vary by customer segment. Growth in the Allstate brand auto insurance will depend on the timing of the successful implementation of auto profitability action and competitors’ pricing actions. The sooner we see a lower combined ratio, the sooner we will increase new business. We do have growth plans in place for homeowners and other personal lines policies given the attractive returns on those products. We expect Esurance and Allstate Benefits to continue to grow in 2016. Encompass had a decline in policies in force in 2015 and is not yet in a position to grow. So we are still committed to growing policy in force across the company but it will be more difficult in 2016 than it has been in the past. Pat will now go through the property liability results in more detail.

Thanks Tom. Let's start with a review of our Property-Liability results on Slide 5. Beginning with the chart on the top of this page, Property-Liability net written premium of $30.9 billion in 2015 grew $1.3 billion or 4.2% over 2015. The recorded combined ratio for the year of 94.9 increased one point versus 2014 driven by an increase in auto losses, which was partially offset by lower expenses, strong homeowner underlying margins and catastrophe losses of $1.7 billion, which was 13.7% lower than 2014. As Tom mentioned earlier, the year-end 2015 underlying combined ratio of 88.7, while 1.5 points higher than 2014, finished within our original annual guidance range given the strong results in the fourth quarter. Net investment income for the Property-Liability segment decreased 4.9% from the prior year due primarily to lower performance-based investment income. Property-Liability operating income in 2015 was $1.9 billion, which was 8.2% lower than 2014. The chart on the lower left-hand side of this page shows Property-Liability net written premium and policy in force growth rates. The red line representing policy in force growth versus the prior year shows a slowing growth rate of 1.3% given the actions in place across all three underwriting brands to improve auto margins. Even with these headwinds, we grew policy counts by 449,000 to 34.6 million in 2015 compared to 2014. The Allstate brand accounted for almost all policy growth in 2015 as Esurance policy growth slowed and Encompass policies were lower than 2014. These policy growth results exclude 5.6 million Allstate Financial policies, which grew by 6.1% in 2015 driven by 11.1% policy growth in Allstate Benefits. Average premium increases to reflect higher costs resulted in the net written premium trends you see shown by the blue line. The bottom right-hand side of this page shows property liability recorded and underlying combined ratio results. The recorded and underlying combined ratios both finished the year strong compared to results earlier in the year given our actions to improve auto returns. The underlying property liability combined ratio in the fourth quarter of 2015 was 87.4 and was 2.1 points lower than the fourth quarter of 2014.

Thanks Pat. Slide 9 provides an overview of Allstate Financial's results for the fourth quarter and full year 2015, as highlighted on the top of the slide. Overall we have made good progress and narrowed Allstate Financial's focus and positioned the business to support long-term value creation. In 2015, we continued our efforts to fully integrate the life and retirement business into the Allstate brand customer value proposition, and repositioned the investment portfolio supporting our immediate annuities. Premiums and contract charges in 2015 increased 4.2% when excluding the impact of the 2014 results of Lincoln Benefit Life Company driven by 5.7% growth in Allstate Benefits' accident and health insurance business as well as a 7.3% increase in traditional life insurance premiums. Operating income for 2015 of $509 million was 16.1% lower than 2014 driven primarily by higher life insurance claims, the disposition of LBL and lower investment income. In the fourth quarter, operating income of $98 million was $30 million below the prior year quarter driven by a lower fixed income yield and a decrease in performance-based long-term investment income. The bottom half of the slide depicts the liabilities and investments of our immediate annuity business. The approximately $12 billion of liabilities payout over the next 40 plus years our investment strategy is to match near-term cash flows with fixed income and commercial mortgages. However, for longer-term liabilities we believe equity investments provide the best risk-adjusted returns. As such in the third quarter we sold approximately $2 billion of long-duration fixed income securities to make the portfolio less sensitive to rising interest rates. Sale proceeds were invested in shorter duration fixed income and public equity securities, which will lower net investment income in the near-term. Over time, we will shift the majority of the proceeds to performance-based investments that we expect to deliver attractive long-term economic returns although income will be volatile from quarter to quarter.

Thank you. Now we will open it up to take your questions.

Hey, thanks. Good morning. My first question I guess is just on the expense side. I appreciate there's a good amount of flexibility there whether it's advertising expenses or slower incentive comp. But I guess in the base case that you highlighted in your guidance that assumes I guess some step-up in severity and frequency. How should we think about the Allstate brand expense ratio?

I'll make an overall comment and Matt might have some perspective as well. First, you should expect the expense ratio to go up because we this year to make our goal, we did cut advertising; I wanted to improve some of the effectiveness to the advertising stuff anyway which moved through advertising. And then we took some nice to do technology stuff and differed it and decided not to do it and cut some other expenses. And if you look at it, over the quarters you can see we increasingly reduced our expenses throughout the year which was a focus. That said, there were a number of things we're investing heavily in one investment in terms of either long-term growth or short-term growth, everything from technology I mentioned to things like telematics. Matthew, you want to add anything to that?

I think the only thing I would add Ryan, is that as Tom said in his prepared remarks, as we see the combined ratio in each local geography getting to an appropriate point in our loss ratios, getting where they need to be in the profit improvement actions fully taking hold in rate burning in. We will want to be able to stimulate growth in selected areas as long as we're earning appropriate return and growth requires some investment. And so, part of the expense ratio this year will be influenced by our growth plan and when we're able to turn on growth in certain areas and when we want to invest. We're focused on long-term value creation. And long-term value creation does require some investment, but it requires investment with appropriate levels of profitability. And so, it's flexible, it will go up; the degree it goes up will depend upon thoughtful analysis of whether or not we add appropriate profitability, appropriate margin, and whether or not we're going to earn an appropriate return on the investment.

Okay. That's helpful. And then my follow-up is just, I guess in the supplement, you guys a few quarters ago started breaking out gross versus paid frequency. In a way I understand it as you incur the losses based on what the gross frequency is and that's also what I think you guys tend to talk about what the investment community tends to talk about. But the paid frequency number has been running significantly below the gross, over the past several quarters. I'm just wondering how we should think about that, is there a possibility that you've been overestimating what frequency is?

At first, we believe our reserves are accurately established. We assess this through various methods, looking at both gross and net figures. We consider the initial amounts assigned to claims and adjust those as they develop further, ensuring we account for future changes. We analyze paid amounts, incurred amounts, and incurred but not reported claims to arrive at a figure. For instance, physical damage claims typically settle within about 90 days, which moves quickly through the process. However, for injuries, it can take around four years to pay out 80%, resulting in a longer trend line that leads to more process adjustments each year. This variability can cause fluctuations in our estimates. Overall, we believe we have properly reserved amounts and don’t think there is any discrepancy; the figures we have are correct.

Thanks. I'll stop there.

Yes. Thank you very much. A two question. Tom, the first one's a revisiting last quarter actually. We talked about the 4Q auto acts and seasonality that did not seem to appear this quarter. In the end, is it just a dream or is there something really there or what do you think?

Josh, it's Matt. I'm going to refer you to a page in the appendix that we put in there. If you look at the presentation slide 14, there is a whole bunch of drivers of the combined ratio and whole bunch of drivers, are these in frequency. Some of them are controllable, some of them are uncontrollable. Some of them we can manage and some we can't. Even within the ones that are somewhat manageable like new business quality and volume of new business and geographic mix, there's also some things that you just can't predict. Seasonality and weather especially is one of those completely unpredictable pieces of this puzzle. And so, when we look at year-over-year, you can look back; we have some charts to show fourth quarter seasonality that tend to spike up, and then you have last year where we had almost no catastrophes and benign weather and this year a much more normalized catastrophe year. But I would say also a more normalized weather environment. Seasonality is one of those high-level generalities that tends to pan out over multiple years, but you can have dislocation and aberrations in that on a year-by-year and quarter-by-quarter basis. So, I would not draw trend line conclusions based upon one or two quarters and how they appear versus previous quarters.

And Josh, I don't know if I'm reading into your question but it sounded like frequency was actually up quite a bit in the fourth quarter. So, I couldn't tell what your underlying assumption is. Matt has a slide in there as well and the increase in frequency in the fourth quarter.

I want to reflect on past experiences, as I've consistently expected the fourth quarter to be a challenging comparison each year. Regarding my other question, I listened to your prepared remarks, and while I understand you plan to invest for the future, which may slightly alter homeowner dynamics, you achieved an 88.7% underlying combined ratio overall for 2015. With a 5.5% rate increase anticipated on the auto side and guidance suggesting an underlying combined ratio of 88% to 90% for 2016, it seems difficult to believe that the underlying combined ratio could be worse in 2016 than it was in 2015. Are you being conservative in your projections, or do you genuinely believe that 89% with a slight margin around it is the appropriate range?

We think it's the right range. I think we've been doing this since I became CEO. I think it's like maybe the ninth or 10th year that I've done this. We've never missed it. So, we do it so that we think it's the right range but that's reasonable. You get a point swing either way from frequency and severity. I mean you can get, as Matt mentioned, you can't predict frequency and to be honest, it's really difficult to predict severity within a point. So, that alone gives you two points spread. There have been some years, Josh, where we've had a three-point spread but that was when we weren't sure how quickly the homeowners business was going to take hold and we did quite well. We got ahead of that and it was faster than we had done in our modeling. But we do a lot of statistical modeling around this. We think it's about right. I mean if you are right, we will see a lot of rate come through that $1.1 billion. And if loss cost and which is the result of frequency and severity keeps going up which is what we have in our projections, we'll put more in rate increases. So, no, we think it’s the right number. I am not, we set it up to get there and if you want to assume your case, then that would in the middle of the range. We don't get to a precise; so we do at this tangible point. It's like I like to give just round numbers and we think 88 to 90 will be in that range.

All right. Well, good luck and I hope it will be even better than that.

Thanks, and good morning and congrats on the trend. Maybe two quick follow-up on Josh's question. First of all, just going back to the discussion on guidance and rate increases, how should we think about future rate increases, you've obviously have meaningful rate increases over the past few quarters. Are you factoring in that based on where we stand, that number to diminish or continue to ramp up from here?

It will be reflective of our results in the cost basis. So, if frequency and severity continue to increase, you'll continue to see us going to individual states with targeted rate increases. If it moderates, and I think we should expect to see it come down but we can't we don't know for sure.

So, I guess, related to that is what are you considering for frequency and severity here?

We have a plan in place regarding frequency and severity, but when we moved away from EPS guidance, which I felt didn’t quite fit our business, we decided to provide guidance on an underlying combined ratio that excludes catastrophe. We believe we can fairly predict that it will be around 88 to 90. We can manage increases in frequency and severity with the premium hikes we anticipate for next year.

Okay.

We don't give out the specific sub-components. They just end up being, it helps people do their models but it turns our conversations into one of modeling as opposed to the pace of the business. We feel good about the business where it is, we'd like to make more money in auto insurance even though the returns are above our cost of capital. We've made much higher returns in that at our competitive position and strength enabled us to do that and we are headed down that path. When we get there, we will be dependent on what happens with the external environment.

Good morning, Allstate. Observing that you have met your forecast for nine consecutive years suggests that you tend to be conservative in your projections, as it's uncommon for anyone to be that accurate in their forecasting. My question is about...

We have a solid system and an excellent, goal-oriented team that knows how to deliver on our commitments. If you had asked me last year about our forecast range of 87 to 89 and if I thought frequency and severity would exceed five points, I would have said no. The reality is that frequency is hard to predict. However, given the strength of our system and the transparency of our management process, we believe we can manage within an 88 to 90 range next year, which is our target. If we surpass that, it will be due to our effective responses, but we do not plan for numbers below that range. It's important for us to be balanced, thoughtful, and transparent with our shareholders. We aim to avoid under-promising and over-delivering as this could create unnecessary concern, but we also do not want to over-promise and under-deliver. Our goal is to align our forecasts with what we believe our system can achieve, and we think an 88 to 90 range is fair. We are neither overly optimistic nor overly conservative; it’s a balanced approach.

I hear you. My question is, I understand all your profit moves and am encouraged by the fourth quarter underlying showing some improvement, which suggests that you are on track. I guess I understand what you are doing in Allstate brand and Encompass, on insurance, trying to slow the growth dramatically, certainly fits within your profit objective and it seems like its own way to go to achieve your short-term plan. But I guess my question is are you where you want to be in scale in that business in long-term and what is your overall sort of long-term game play in insurance, how big you have to be in that business to be a long term player?

Let me make an overall long-term comment and then Don can give you some specifics. So, insurance is twice the size from when we bought it three years ago. So, and we think it is of scale at a billion six because if you look at normal direct marketing company should be 10% of your premium you would spend on advertising and at a $160 million, that's enough media weight to make sure people hear you. If you're half that size, you don't, you just don't have enough throw weight in the marketing world. So, I think it's upscaled today. That said, we have good growth plans and I don’t want you to think that this is the backing off of insurance growth. Don can talk about the things we're doing to get into homeowners and motorcycles and Canada and new markets. So, there is plenty of growth up there. We just were managing this year to some objectives that Don had set with the teams. Don, maybe you want to comment about it?

Yes, Bob. It's important to remember that when we acquired the insurance business, our strategic goal was to target the self-serve, rent-sensitive customer and enhance our value proposition against competitors like GEICO and Progressive. We intended to focus on economic performance rather than GAAP accounting. In the direct model, all marketing expenses occur upfront, so the first year or quarter can appear poor during growth, but subsequent years typically yield profits as the business retains customers without additional marketing costs. As Tom mentioned, the business has now doubled in size since we acquired it over four years ago, significantly impacting Allstate's reports. However, this growth has put pressure on the loss ratio, leading us to decide to slow down growth this year while enhancing efficiency both in marketing and operations. I'm very pleased with the response and performance of the business. Even though we've dramatically slowed growth, it is still increasing by 4% to 5% in the fourth quarter and at a higher rate for the year. Given our reduced marketing efforts, this remains a solid growth rate. Additionally, the underlying combined ratio has improved by over eight points compared to last year in the quarter. We feel confident about our current position. As Tom reiterated, the business has reached a scale where it can grow meaningfully and economically at this size. Our goal is to aggressively grow the business in the future, balancing profitability with growth. About a year or 18 months ago, we felt our balance was off, but we're aligning it now and feeling positive about our progress. I also want to emphasize that, as Tom noted, we made significant investments in 2015 reflected in the combined ratio, but these benefits won't be realized this year. We are expanding our offerings in homeowners, renters, and motorcycles, as well as increasing our auto presence to 43 states and one province in Canada. We are heavily investing in our capabilities for the future, developing features, and expanding our reach. In summary, we have ambitious growth plans moving forward, and while we are investing substantially, we will ensure we maintain a balance between economics and current reported results.

Good morning, thank you. The first question is about capital management. It seems that we are investing significantly in our future capabilities, adding features and expanding our reach. The answer to your question is that we have very ambitious growth plans ahead. While we are making substantial investments, we also aim to balance this with the economic considerations and our current reported results.

So, if we look back over the last couple of years, we set up our share buyback program really on the basis of the capital that we have available. We sold Lincoln Benefit Life which we'd both on capital and also the proceeds from the sale. So, we move that up to the parent company $1.2 billion in 2013 and 2014. So, in 2015 we used a fair amount of backup, increased that buyback program but what may normal had been to a $3 billion level we're talking about. In addition, as I mentioned in my prepared remarks, we've done a fair amount of work at kind of bringing our risk profile down in the corporation which once again has freed up some capital. We do need to grow the business at the moment as we said I like that we are going to pool in more money into our investment portfolio to back that into the equity-type investment. We will need some to put some money aside, it should grow the business and will also we have to pay our dividend obviously and what we free up essentially from net income, we pay out on a year lag generally in and our share buyback.

Okay. So, we're looking more probably like payout ratio run 100% levels?

We approach it differently than the banks. We assess how much capital we require, then determine our earnings and available resources, rather than calculating it as a percentage of our earnings.

Okay. It's great. I have a second question for Tom. The change on Slide 4 regarding your operating priorities shows a decrease of 16. One of the priorities is to better serve customers through innovation and efficiency. Can you provide some examples of that? Also, regarding the long-term growth platform you mentioned in terms of acquisitions, I'm curious about what platform Allstate currently lacks that you would like to expand into and what the goal of your acquisition is.

Let me address the last question while Matt takes the first one. Regarding our priorities, they are all significant, and there's no debate over their order. Matt will cover the customer aspect, which is certainly crucial to us, but it's equally important as the other priorities. We have added acquisitions to our long-term growth strategies, aiming to enhance those efforts. Additionally, we see a potential for growth, especially in the Allstate agency channel, as well as some opportunities in insurance to offer adjacent products and services. This aligns with our goal of becoming a trusted advisor within the Allstate agency channel. We see opportunities for further sales, whether by entering new business areas or acquiring platforms that can integrate with what we already have. That's the thinking behind our acquisition strategy. We haven't specified any targets, and we won't be discussing that right now. Matt, do you want to elaborate on the customer component?

Sure, Kay. So, you correctly pointed out that it's customer base. So, it's all about customer centricity and using innovation effectiveness and efficiency not just to manage financials and manage margins but to better serve our customers. And there are three primary tracks of work going on under that category. The first is Tom just mentioned just trusted advisor and trusted advisor is all the work we have underway to help our agency owners and their staff and our exclusive financial specialists better serve our customers through personalized customized tailored solutions geographically based, that are advised based, not product push, that are solutions as opposed to transactions and based on long-term value relationships. And so, we have a lot of work underway there. And that goes to both the effectiveness of our agency system as a distribution model and the efficiency with which we put through product. The second major line of work that we have underway, is we refer to it as our continuous improvement, others refer to it as lean engineering. And we have installed continuous improvement in a good portion of the company already. It's a set of management principles and practices that empower frontline employees, get them involved in root cause problem-solving, to create flow of information, creating an environment where they are engaged in their work and we have seen dramatic increases in productivity and efficiency of those operations that we've installed continuous improvement. We've also seen customer satisfaction and employee engagement in those areas. The third, and this is on really the innovation side the track of work we have underway, we refer to it as integrated digital enterprise but you've also heard me refer to it as a set of projects that take data predictive analytics and emerging technologies and combine those capabilities to better serve customers. And that includes a range of things that both use internal sources of data as well as external sources of data to provide more predictive guidance to our agency owners in serving their customers, to help them better serve those customers, tell them what the next logical product for them might be. And to use those emerging technologies to deliver that in a way that's more accepted by the customer, more intuitive to the customer, and is more respectful of the customers' time and energy. And so, you will continue to see a lot of focus there. As Tom referred to in his opening remarks, as he explained why the expense ratio may float up a little bit, we will continue to invest in all these core initiatives because they are all about long-term value creation. If we're able to better serve our customers through innovation effectiveness and efficiency, we will create a more valuable organization and we are all about that. And so, I thank you for asking the question.

Thank you very much.

It's actually Jay Cowan as you could probably tell by the voice. Two questions. One is, you're obviously taking action as you've talked at length about to improve the auto profitability and you suggested that certainly the effect will depend partly on what your competitors do. Question is, what are your competitors doing, what are you seeing out there? And then secondly, relative to miles driven, arguably one of the reasons is lower fuel prices, would you suspect that oil going from 100 down to 40 has a bigger effect than oil going from 40 to 30, in other words the effect one might suggest would be declining over time.

Jay, its Matt. Those are two really good questions. First of all, what we are seeing part of our competitors, some of our competitors is a significant rate action in the filings that we're reviewing. As we make our filings, we see competitor rate filings as well. Some of them are quite significant, some of them are more moderate; most of it depends upon if you look back three or four years the level of rates they started this period. And so those who had a greater GAAP to cover in order to deal with the frequency and severity pressure are taking greater rates. So, we expect that to generate some increased turmoil in the environment and it will certainly generate shopping behavior in the industry, and shopping behavior can be a positive or negative depending upon how you approach it, where you positioned and its all part of competition. So, we believe we are well positioned. We believe we are prepared for it. We believe we are monitoring their actions, but we are mostly focused on what we need to do to earn appropriate returns and serve our customers. And so, I would say our primary focus is always on managing our own business with an eye towards what the competitors are doing as opposed to trying to react to the competitors all the time which I find can just drive you crazy. On your second question, it's a great point. There is a point of diminishing impact with gas prices on miles driven. We've always said that we thought the unemployment rate and economic activity had even a greater impact than the gas prices because economic activity impacts employment driving and gas prices typically impact only discretionary driving activities because if you have to go to work you have to go to work and you're going to pay $3 a gallon or you're going to pay $1.90 a gallon. If you are thinking about a vacation this summer and you're deciding whether to stay at home or drive down to Florida, if gas is at $1.60, it's probably going to influence you differently than if gas was at $3.50 a gallon. Now, there is a point at which though it's just plain cheap and it's no longer a question and I think we're probably at that point. So, I think you are correct in that from what we look at we think the biggest influence of the drop in gas prices has already occurred and it's unlikely that that will drive much further increase in miles driven. But that being said, we also don't know what economic activity is going to look like and what all the other influences on frequency will look like.

So, thank you all. I will leave you with a couple of thoughts. Allstate has been an extremely strong operating platform. First, that enables us to react quickly to whatever peers in the world. Secondly, we proactively manage our risk and return on a consolidated basis, whether it's catastrophes, auto margins, investment returns or our capital structure; we look at it in total. And thirdly, we are focused on long-term value. We pay attention to current earnings because it is set along the way, but we will not give up the long-term value equation because we believe that's what shareholders want which is creating long-term economic cash value. Thank you very much. We will talk to you next quarter.