Allstate Corp (The) (ALL) — Q4 2017 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Allstate Fourth Quarter 2017 Earnings Conference Call. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Mr. John Griek, Head of Investor Relations. Please go ahead. Well, thank you, Jonathan. Good morning and welcome, everyone, to Allstate’s fourth quarter 2017 earnings conference call. After prepared remarks by our Chairman and CEO, Tom Wilson; Chief Financial Officer, Mario Rizzo; and me, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release, investor supplement, and posted the results presentation we will use this morning in conjunction with our prepared remarks. These documents are available on our website at allstateinvestors.com. As noted on the first slide, our discussion today will contain forward-looking statements about Allstate’s operations. Allstate’s results may differ materially from these statements, so please refer to our 10-K for 2016, 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 or our investor supplement. In the fourth quarter, the company adopted new reporting segments, expanding from four to seven. The new structure provides enhanced transparency and allows for an evaluation of our businesses grouped by like attributes. Also in the fourth quarter, we discontinued the use of the term operating income and have replaced the label with adjusted net income. We are recording this call, and a replay will be available following its conclusion. And as always, I will be available to answer any follow-up questions you may have after the call. Now I’ll turn it over to Tom.

Well, good morning. Thank you for joining us to stay current on Allstate’s operating results. At the beginning of the year, we made several leadership changes in anticipation of Matt Winter’s retirement later this month. Matt has been instrumental in our proactive operating approach and helped maintain our deep bench talent. Matt and the rest of the senior leadership team are here with us today, which includes Glenn Shapiro, who’s assumed leadership of the Allstate brand Property-Liability business. Glenn joined us about two years ago. He has 28 years of insurance experience. He successfully led our claims operation as part of Matt’s team, and they did a number of very innovative things like improving our processes to control costs and introducing new technologies, such as the QuickFoto Claim app. Steve Shebik is our Vice Chair, and he’s taken on responsibility for Esurance, Encompass, Allstate Life, Annuities and Benefits, Business Transformation and D3, our analytics operation. You all know Steve; he’s been with us for 23 years and most recently with our Chief Financial Officer. Mario Rizzo is now our Chief Financial Officer, replacing Steve, so you’re going to see a lot of him. He most recently was the CFO of Allstate Protection and he’s been with us for 28 years. Also here with us today are Don Civgin, who is President of Allstate Service Businesses; John Dugenske, who is our Chief Investment and Corporate Strategy Officer; Mary Jane Fortin, who leads our three Allstate Financial businesses, the Life, Retirement and Benefit businesses; Eric Ferren, our Controller and Chief Accounting Officer. So let’s start on Slide 2. We delivered strong results in 2017 and are positioned for profitable growth. Net income for the fourth quarter of 2017 was $1.2 billion or $3.35 per share, but that did include a one-time $506 million increase to net income as a result of the recently passed tax legislation. Adjusted net income per share was $762 million or $2.09 a share, and that excludes the impact of the tax change and a $125 million goodwill impairment in Allstate Annuities, which related to the change in reportable segments. For the full year, adjusted net income of $2.5 billion was 34% above its prior year and reflects strong performance from our market-facing businesses and investments. The Allstate auto and homeowners insurance margins remain very strong and performance-based investments had outstanding results. Catastrophe losses of $3.2 billion or 26% above the prior year are largely offset by favorable prior year reserve estimates. Adjusted net income return on equity was 13.3%, as you can see on the bottom right. This operational success will support accelerated growth in 2018 while maintaining attractive returns. So let’s go to Slide 3. Now this addresses the impacts of the Tax Cut and Jobs Act for 2017. The immediate impact from tax reform is a one-time $506 million increase to net income, which is driven by a reduction in our net deferred tax liability. This principally relates to deferred acquisition costs, which were already expense for tax purposes at the higher tax rate. It also reflects lower feature taxes on unrealized investment gains. In 2018, we anticipate a corporate tax rate of 19% to 20% compared to our historical effective tax rate in the low 30s. Future auto and homeowners insurance rates filings will reflect the impact of lower tax rates and will be factored into our regulatory filing, but we do not expect it to have a material impact on Allstate’s near-term operating results or competitive position. We are taking advantage of lower taxes to increase growth, enhance the employer value proposition, raise shareholder returns, and improve our local communities. We are investing in growth in many of our market-facing businesses through marketing, distribution, telematics, new products, and technology. Employees will receive $1000 or $2000 choice dollars in 2018 depending on their participation in our medical benefit plan. This money can be contributed to our 401k or health savings account or taken as cash bonus. This structure of employee choice will be incorporated into future benefit design. We’ll also increase employee training and technology literacy to support sustainable employability. This is increasing in importance, particularly in our business as jobs are reconfigured and eliminated by digital technologies and the increased use of computer decision-making using advanced analytics. Reflecting strong operating results and lower tax, the first quarter dividend was increased by 24%, which is up to $0.46 per common share. We also contributed an additional $34 million to the Allstate Foundation in December to expand existing programs. Allstate Agency supports local projects, and you can see this had an impact on fourth quarter expense levels. Turning to Slide 4, we had good results on all five 2017 operating priorities. We better served customers. The Net Promoter Score, which measures how likely customers are to recommend us, increased. Customer retention for Allstate brand auto improved in the second half of 2017 and Esurance auto and homeowners insurance retention increased throughout the year, which will maintain increased growth in 2018. Higher customer satisfaction in part reflects fewer price increases, but we also improved service in a number of areas, such as expanding utilization; the QuickFoto Claim, which can lower settlement times from days to hours as you probably seen in our advertising. We continue to deliver excellent returns on shareholder capital. The Property-Liability reported combined ratio of 93.6 generated $2 billion in underwriting income for the year. Auto insurance underwriting income increased due to lower accident frequency, higher premiums, and favorable prior year reserve re-estimates. Allstate brand homeowners insurance posted a combined ratio of 89.4 despite significant catastrophe losses, making this the sixth consecutive year for a combined ratio below 100. Allstate Life and Benefits generated attractive returns and annuity income was up, but returns are still low. Total policies in force grew to 82.3 million in 2017. Property-Liability policies in force declined due to the impact of the profit improvement actions that began in 2015. SquareTrade policies grew by 10 million or nearly 36% in 2017. Allstate Benefits continued its 17-year track record of growth with policies in force increasing by 7.4% in 2017. Total return on the $83 billion investment portfolio was 5.9%, reflecting strong results in both the market and performance-based portfolios. We also built long-term growth platforms; SquareTrade’s first-year performance was very strong, and the three factors for success we laid out when the acquisition was closed in January. Arity signed its first third-party insurance customer to expand its platform outside the Allstate entities. If you look forward to 2018, going to Slide 5, we are well positioned to accelerate profitable growth. The Property-Liability business is expected to have an annual underlying combined ratio between 86 and 88 in 2018. This range considers the impact of growth and the effect of a lower tax rate that we just discussed. Our priorities for 2018 are consistent with 2017. The first three are to better serve our customers, achieve target economic returns in capital, and grow the customer base; those are obviously all intertwined, and ensure the corporation has multiple pathways to profitable long-term growth. In 2018, Allstate brand Property-Liability, Allstate Benefits, SquareTrade, and Esurance are all expected to contribute to growth. Mario will now go through Property-Liability results.

Thanks Tom. Slide 6 shows Property-Liability results by customer segment and brand. Starting with the table at the top, net written premium was $7.8 billion, a 3.6% increase from the prior year quarter. The recorded combined ratio of 91 was 1.3 points higher than the fourth quarter of 2016. Included in these results were higher catastrophe losses, increased agency and employee compensation costs, as well as an increased donation to the Allstate Foundation. This was partially offset by increased premiums earned, lower underlying loss costs, and higher favorable prior year reserve re-estimates. When we exclude catastrophes and prior year reserve re-estimates, the underlying combined ratio was 85.7 for the fourth quarter of 2017 and 84.9 for the full year. The full year underlying combined ratio, as historically reported, including the Property-Liability and service businesses, was 85.6, which was below our annual outlook range of 87 to 89. As you know, our strategy is to provide differentiated customer value propositions for the four consumer segments of the Property-Liability market. The Allstate brand in the lower left competes in the local advice and branded segment. Net written premium was 4.1% higher in the fourth quarter of 2017 compared to the prior year quarter, primarily due to a 4.2% increase in auto insurance premiums. The underlying combined ratio was 84.8 with favorable prior year comparison, driven by improved loss trends in auto insurance, which had a 94.2 underlying combined ratio two points below the prior year quarter. Esurance in the lower right serves customers who prefer a branded product but are comfortable handling their own insurance fees. The underlying combined ratio for auto insurance continues to improve relative to prior year and was 101 in the fourth quarter of 2017. Esurance net written premium grew by 2.8% compared to the prior year quarter. Our strategy to broaden customer relationships is successful as homeowners insurance policies increased 36.2% in 2017, with written premium increasing 26.7% in the fourth quarter of 2017 compared to the prior year quarter. The underlying combined ratio of 99.8 was 5.2 points better than the prior year quarter with improvements in both auto and homeowners insurance. Encompass, in the upper left, competes for customers who want local advice and are less concerned about the brand of insurance they purchase. We continue to make progress in improving underlying margins. Let’s go to Slide 7 to cover the results for Allstate brand auto insurance. Starting with the top left graph, the recorded combined ratio for the full year was 93.2, generating $1.3 billion in underwriting income in 2017. These results reflect increased average earned premium, lower frequency, and favorable prior year reserve re-estimates, primarily related to injury coverages. The underlying combined ratio of 94.2 in the fourth quarter of 2017 improved by two points compared to the fourth quarter of 2016, driven by a 3.7 point improvement in the underlying loss ratio. The expense ratio was 26.2, 1.7 points above the prior-year quarter. The chart on the top right shows the results of the broad-based profit improvement plan initiated in the second half of 2015. Annualized average premium shown by the blue line increased by 4.5% to $1,022, while underlying loss and expense, shown by the red line increased 2.3%. This resulted in a favorable GAAP of $59 per policy compared to the low 20s experienced in the fourth quarter of 2015. Gross frequency trends for bodily injury and property damage coverages are shown on the bottom chart. In the fourth quarter, frequency continued to perform below the elevated levels experienced in 2015 and 2016, and favorable trends remain geographically widespread. Slide 8 shows the underlying drivers of policies in force for Allstate branded auto insurance. Starting with the graph at the top, overall, policies in force grew sequentially in the fourth quarter of 2017. The bottom two charts highlight both the renewal ratio and new issued applications for Allstate branded auto insurance. The renewal ratio is a bigger influence on total policies in force, and we continue to focus on improving the customer experience. The renewal ratio of 87.8 was an improvement of 0.4 points from the prior year quarter. New issued applications grew year-over-year for the fourth consecutive quarter, increasing 10.3% compared to the fourth quarter of 2016. Executing our trusted adviser strategy, along with expanding distribution capacity and efficiency, will help build growth momentum throughout 2018. Slide 9 shows similar information for Allstate brand homeowners. The top part of the page provides detail on our profitability results. The homeowners recorded combined ratio of 85.4 in the fourth quarter, which generated $252 million in underwriting income, as Allstate’s effective risk and return management strategy drove strong performance despite significant California wildfire losses. For the full year, despite $2.1 billion in catastrophe losses, the reported combined ratio was 89.4; while underwriting income was $725 million for the year, which was a $373 million decrease relative to the prior year. The bottom half of the page provides detail on policies in force, which declined 0.5% in 2017, but grew sequentially compared to the third quarter of 2017. The renewal ratio of 87.5 was unchanged compared to the prior year quarter. New issued applications growth accelerated to 6% in the fourth quarter of 2017. As auto insurance retention and new business levels have improved, we are seeing a favorable impact on homeowners policies in force. Slide 10 provides additional financial highlights for Esurance. Esurance made progress on improving financial results and positioning the business to resume growth in total policies in force. The recorded combined ratio of 100.2 in the fourth quarter, shown on the left chart, was 4.8 points below the prior year quarter, primarily driven by a lower expense ratio. The auto underlying combined ratio for the full year was 100.2, five points below 2016 due to lower expenses. Esurance growth trends are highlighted on the right-hand chart. Net written premiums continue to grow on increased average premium, while policies in force declined compared to the fourth quarter of 2016. Policy growth in homeowners partially offset the decline in auto policies due to profit improvement actions. Slide 11 provides additional highlights for Encompass. Encompass continues to improve underlying profitability while executing growth plans in states with rate adequacy and long-term growth potential. Encompass reported a combined ratio of 106.4 in the fourth quarter of 2017 and was impacted by significant catastrophe losses, primarily due to the California wildfires. The underlying combined ratio was 86.4 for the fourth quarter, which was 4.3 points lower than the prior year period due to improvement in the underlying loss ratio, partially offset by a higher expense ratio. Shown on the right chart, Encompass net written premium declined 7.6%, and policies in force were 14.4% lower in 2017. The decline in premium and policies in force in states with inadequate returns has impacted overall top line trends. Now I’ll turn it over to John.

Thanks Mario. Let’s go to Slide 12, which provides detail on service businesses, a new reportable segment that offers a broad range of products and services that support our customers and enhance our customer value propositions. Our strategy to deliver superior value propositions and build strategic platforms made good progress in the fourth quarter, as policies in force grew to 43 million and revenue growth accelerated to $264 million for the quarter. Net income of $95 million in the fourth quarter of 2017 included a $134 million benefit from tax reform, while the adjusted net loss was $24 million in the quarter. In its first year under Allstate ownership, SquareTrade had very strong performance and achieved the three factors for success we identified when the acquisition closed in January. Policies in force grew to 38.7 million in the fourth quarter of 2017, an increase of 4.6 million policies compared to the third quarter. We executed a 100% quota share agreement this year with our largest third-party reinsurer, which further enhanced the economics of the business. We also continue to invest in accelerating growth, both domestically and internationally. In the fourth quarter, Arity established relationships with insurance and shared mobility companies, expanding its platform outside of Allstate entities. Allstate Roadside Services revenue declined in 2017, reflecting the nonrenewal of unprofitable third-party contracts. An adjusted net loss was realized in the fourth quarter and for the year as the new digital platform, which reduces response time, is not yet profitable. Turning to Slide 13, let’s review our Allstate Financial – Allstate Life, Benefits and Annuities results. As a reminder, these are three new segments, which were historically consolidated into our former Allstate Financial segment. Allstate Life adjusted net income shown on the top left chart was $57 million in the fourth quarter, a $9 million decrease compared to the prior year quarter. This is primarily due to increased contract benefits and operating expenses, partially offset by higher premiums. Premium and contract charges, shown on the bottom left, increased 1.9% in the fourth quarter of 2017. Allstate Benefits adjusted net income shown in the top middle chart on the page was $20 million, a $3 million decrease compared to the prior year quarter. The decrease was primarily due to higher contract benefits and operating expenses, partially offset by higher premiums. Allstate Benefits continued its strong track record of year-over-year top-line growth. Premiums and contract charges, shown on the bottom middle chart, increased 8.3% in the fourth quarter, with 7.4% growth in policies in force in 2017. Allstate Annuities adjusted net income of $55 million in the quarter was an increase of $14 million compared to the prior year quarter, reflecting higher investment income on continued strong results in our performance-based investment portfolio. Slide 14 highlights our investment results. The markets performed well in 2017, driving positive returns across essentially all asset classes, and our portfolio clearly benefited. While we participated in the market momentum, our investment strategies and risk positioning, including the shift to performance-based investments, contributed to our strong results. The components of net investment income are shown in the left chart. Net investment income for the fourth quarter was $913 million, 14.4% or $112 million higher than the fourth quarter of 2016. Market-based investment income, shown in the blue, was stable. Performance-based investment income, shown in the gray, was the primary driver of the increase over 2016, generating $296 million of income in the fourth quarter. Our performance-based investments benefited from higher balances and favorable market conditions, in addition to our performance by select investments and sales into strong markets. The components of annual total return on our diversified $83 billion portfolio are shown in the table on the right. The annual net investment income contribution to returns has been fairly consistent, while realized capital gains and losses and changes in portfolio valuations vary with market conditions and can be either positive or negative. The contribution to total returns from the income statement and portfolio valuation are shown in the bottom rows of the table. As we mentioned last quarter, beginning in 2018, changes in the fair value of our public equity securities will be reported as realized capital gains and losses and included in net income rather than a component of equity in accumulated other comprehensive income. The book value of the portfolio already reflects changes in fair value. However, this accounting change will increase the variability of reported net income, but the long-term economic value creation would be unchanged. Changes in the fair value of our fixed-income securities will continue to be reported as unrealized gains or losses as a component of accumulated other comprehensive income. Slide 15 provides an overview of our capital strength and financial flexibility. As you can see from the box at the top, we have delivered excellent returns, increased book value, and maintained a conservative financial position while increasing shareholders’ ownership in the company by reducing the number of outstanding shares. Adjusted net income return on equity was 13.3% for the 12 months ended December 31, 2017, an increase of 2.9 points compared to the prior year period, and book value per common share of $57.58 increased 13.4%. We returned $1.9 billion to common shareholders in 2017. This includes repurchasing 15.8 shares of our common stock or 4.3% of those outstanding at the beginning of the year. As part of our current share repurchase program, on December 8th, 2017, we entered into an accelerated share repurchase agreement to purchase $300 million of our outstanding shares of common stock. This agreement was completed on January 5, 2018, and we repurchased a total of 2.9 million shares. Additionally, we paid $525 million in common shareholder dividends during 2017. The Board of Directors also approved an increase in the quarterly dividend per common share to $0.46 from $0.37, representing a 24% increase payable in cash in April 2. And now, I’ll ask Jonathan to open the line for your questions.

Thank you. First, on the outlook for the underlying combined ratio in 2018 of 86% to 88%. Clearly, a little higher than 85.6% in 2017. If I look at the midpoint, that would imply I think around $500 million of less underlying profit. Is that driven more by investments in the business relative to tax savings? Or is that more kind of the underlying profitability of the PNC business?

Good morning, Jay. First, we don’t take the midpoint as the specific target we’re shooting for. We just say we can be in that range. And so as you know, it varies. When we do it, we obviously look at our current results, which you mentioned. We’re also looking at that feature additional investments we’re making. As you know, frequency and severity can vary by a couple of percent each year. If you just look at this year, what happened with our frequency declining or what happened in 2015 on the flip side of that. So we think this is a very attractive return on capital at these levels and the best way to do it is to continue to grow shareholder value to grow the top line.

Okay, that’s helpful. Thank you. And then my follow-up question is I know you mentioned it in the release, but the effective tax reform on prior approval states for auto insurance like California, if you could give us a bit more insight on that based on the regulators' comments. I think that would be helpful.

First, thank you for asking the question. It’s a good question that came up in many of your analyst reports. The headline, of course, is said, we don’t expect any material impact on profitability returns on a competitive position. But let me give you some context below that. Obviously, some states have more restrictive pricing regulations. And obviously, we have to fully meet their requirements. And pricing in those cases would be impacted by lower tax rate. But that’s not the complete picture, right? So the biggest component of pricing is fixed. There is loss costs, and they are not impacted by the tax rate at all. If we just look around the industry in auto insurance, for example, you’re talking 70% to 75% of premiums are in that category. And you have about another 20% to 30%, depending on the company, that shows up in expenses. And those are also impacted by the tax rate.

That’s helpful. So it sounds like some people overlook the impact as it’s nearly as hurtful as some people think.

I can’t speak – I looked at CFA’s letter, I couldn’t get to their math. Maybe they have a different way to do it. But I can just tell you that when you’re on, if you think of auto insurance and let’s just assume you have a 5% underwriting margin, it’s a little hard to turn that into a 5% reduction in premiums.

I was hoping you could give us a little bit more color on the investments that you’re going to make? What exactly is going to be accelerated? And if there’s any way to give us a sense of sort of the magnitude of the impact of those accelerated investments?

Hey Paul, it’s Matt Winter. Thanks for the question. Last quarter, before we even knew about this, I talked about the five buckets of initiatives that we had within the Allstate brand to drive new business growth. And I’ll just remind you that, that included things like increasing distribution capacity. And that is points of presence, additional EAs, and additional LSPs, especially in under-penetrated areas, and we will certainly be investing in additional distribution points of presence. Some of growing distribution points of presence has always been a great way to stimulate growth in the business. It’s also expensive because they have enhanced compensation programs, and there’s cost of starting those agencies. But we believe now that that investment is a great opportunity for us. So you should expect to see that distribution capacity increase. On the second area, I talked about was making distribution more productive and efficient through things like technology, data and analytics, improved lead generation, and more sophisticated segmentation, and we certainly believe we have opportunities to invest in all those areas. I would say specifically, in the technology and data analytics area, where we have made great strides. We see a lot of opportunities for increasing fairly dramatically the productivity and efficiency of our agencies and their personnel, their licensed sales professionals. The fourth area I talked about was to offer more competitively priced, higher value products using different pricing techniques and better underwriting to improve those rates. We see an opportunity to invest some of this money in a few areas to both improve the value of the products and ease of understanding those products and selling those products. We see a lot of our opportunity to go from just offering really solid value products to doing it in a way that is remarkably easy and effective for our customers. The fifth area I talked about last quarter was driving more quotes with more segment in marketing. We certainly expect to invest some of the additional money in marketing, but it’s not just throwing more money at the same marketing media. It’s using increased segmentation, focusing on digital marketing capabilities, social media, and some of the tools available to us now to enable us to better target the right customer for us. There’s a wealth of different ways to invest this money to stimulate growth in the business. We believe it’s a complex system. We don’t believe any one single lever is ever effective in stimulating long-term growth, and we expect to pull as many levers as we possibly can to stimulate growth at the right level of margin to create long-term profitable growth.

So is it fair to say that sort of one, two, three, and five would be something that will show up in the expense ratio, and I guess four would show up in the loss ratio? Or be more competitive products?

Well, certainly, increased investments could show up in the expense ratio, assuming you’re not able to sell funding. But a lot of the work that we’re doing is increasing productivity and efficiency in a way that allows us actually to improve our expense ratio and then reinvest some of those savings in other techniques to drive growth. So some of it will potentially show up in increased expenses, but not necessarily one for one in the expense ratio. And don’t forget, the expense ratio is just that – it’s a ratio. So the more we’re able to grow the denominator, the less pressure there is on the ratio itself. As far as the loss ratio, our expectation is that we made tremendous improvement over the last several years in our ability to manage loss costs both through very good improvements in the claims operations as well as the more sophisticated underwriting techniques and segmented rates taking. We don’t expect anything that we’re doing to turn any of that negative. We expect to make continued improvements on the loss ratio side.

Thank you. Congratulations on your retirement, and congratulations to everybody on your new positions.

Thank you, Paul.

Hi, good morning. Your ROE for 2017 of 13% is very impressive, given the elevated CAT this year. What do you view as the right ROE profile going forward, given more normalized CATs, and now you have tax reform?

Sarah, thank you for the comment on it. Yes, 13% is a good number. It should be in the low teens. You can decide where in the low teens that will be. Obviously, it varies by year and by about two of it, but I think as you point out an important fact, which is our homeowners business, the underwriting income was down about $400 million this year because of those high CATs, which was – we’ve only had three years in the last 10 where we spent about $3 billion. So that had a big negative impact. While we benefited, of course, from last level of frequency in auto insurance in the prior reserve releases, that was a cost we had to overcome. It may or may not be during the future. I think the fact is with this balance we have between auto, home, investments, our life businesses, and the other business we are starting, it should create overall profitable growth and give us good ROEs.

Okay, great. Thanks. And then just on U.S. tax reform. I’m just a little confused by some of the comments. I guess how much of tax reform do you expect to drop to the bottom line? Because on the one hand, you say the future on filings will be impacted, but then on the other hand, you say that to be immaterial. So will that benefit drop to the bottom line?

Well – first, there’s not really any specific number, right? Because you’re talking about a system where there are all kinds of different components. It’s not like it just goes through. Think of taxes as expenses if you want to think about it that way. Matt talked about how we have were cutting expenses in some areas to invest in other things like marketing and distribution. Just think of this as another expense reduction. Some of it we can invest in marketing; some of it we can invest in margin. It really just depends. We’re trying to toggle between maximizing shareholder value between profit and growth. Clearly, we think that the best way to drive shareholder value in 2018 is by growing because we like where our returns are. To accept some of it came through to the bottom line, that will be good for shareholders. We feel confident about our results, which is why we increased the dividend by 24%. I was actually kind of disappointed that none of the early stuff regrew back to 24%. I’m like, 'Hey, what happened to the dividend?' But we feel good about the business and the returns that will generate.

Hi, good morning. My first question is on the underlying margin target. If we look at the difference between the old segmentation and the current segmentation, that was about a 70 basis point impact on 2017. So do you effectively – if we add that back then, is the 86% to 88% more or less in line with the target where you saw 2017 at the start of last year? And then combined with that, when you think about and you come to this 86% to 88% target, could you walk us through how you’re thinking about the deterioration that you could see in both the underlying loss ratio or the expense ratio as you came up with that holistic number?

So thanks, Elyse. This is Mario. So first, the 86% to 88% is a total Property-Liability number. It’s not unique to anyone of the businesses. I think when you look at it compared to the 87% to 89% from a year ago, we do expect improvement relative to the guidance we would have given you a year ago. Some of that is because of the continued profit improvement in some of the businesses that we’ve been working on profitability for the last several years. That would include Encompass and Esurance as well as our commercial business. So we factored that all in, and the outcome is the 86% to 88% that we gave you. As Tom mentioned earlier on, we think at that level, with an outlook for accelerating growth, we can generate significant shareholder value operating the business at those levels.

Let me just make a quick comment about the frequency. Remember, in 2016, frequency jumped way up. We were all surprised. We got on it early, and we went to written prices. Previously, it came way down in 2017. So we haven’t forgotten about that volatility when we’re doing our estimates.

Okay, great. And then I know some of the questions that are all in the call did focus on the impact of tax reform and potentially on rate filings. But maybe this is a little bit backwards-looking, but the level of rate that you guys took in the fourth quarter did go up a little bit even if you exclude the rate that you – excluding kind of a rate increase that you guys took in California. I had thought that we might see a little bit of a slowdown in the rate level. Was there anything specific to the Q4, and just how we should be thinking about the level of rate you guys see yourself taking in 2018?

Elyse, this is Glenn. You’re right. It was heavily influenced by California, the higher rate in the fourth quarter. That rate is effective now and in process. We continue to look at our rates on a state-by-state basis. Going back to the question you went into on taxes, the only profit component is impacted by the tax changes. We look on a state-by-state basis. We have indications in states. This will be good for customers. It helps mitigate the indications, but it doesn’t eliminate them. We also factor in loss trend, which in and of itself, is every year, a larger factor than the tax change that we had.

Okay. So you see yourself, I guess, similar commentary to last quarter, with a little adjustment for tax reform as more or less taking rates in line with trend?

Elyse, it’s Matt. Let me just add one thing. You made a comment about the deterioration in the margin that you saw in the fourth quarter. I would just encourage you to go back over the last however many years you’d like to, three, five, or ten years. I think what you’ll notice is that there is almost always historically an increase in the underlying loss ratio in the fourth quarter typically due to bad weather patterns that we see in the fourth quarter and first quarter. What you'll find is that our actual performance this last quarter, from both an underlying loss ratio and underlying combined ratio, was actually quite good. So we don’t look at that as deterioration in our underlying margin; we look at that as normal seasonality and volatility in that area. In the expense component you also referred to, you’ll also see that following really good years, you will see a spike-up in the expense ratio in the fourth quarter, and that’s typically due to our true-ups of our agent bonus plans and our employee incentive compensation plans. So that tends to be somewhat volatile. It’s not a deterioration in our expense efficiency in the business; it’s just reflecting a true-up in some things as a result of having a good year. So I would, if I were you, look at the fourth quarter as not a negative. In any way, we view it as a strong quarter with good, strong fundamentals in both areas.

Okay. Thank you very much. I appreciate the color.

Good morning, everybody. Sorry to beat a dead horse here, but I want to go back to the guidance for the underlying combined ratio. If we take the midpoint of that guidance, it’s about 200 basis points higher than the total results for 2017. And if I understand the comments that you made on the call correctly, really a lot of the acceleration of expense initiatives would be offset by improved productivity. Some of the loss ratio increases could be offset by some of the loss control that you’ve put in the last couple of years. So what would drive that 200 basis point increase? Is it basically frequency?

Well, first, let’s make sure we get everyone there. So if there are still questions out here, we feel very comfortable we can be in the 86% to 88%. We’ve picked a range that we feel is reasonable, one that we can live with. We don’t necessarily pick it just by the midpoint. So that’s where want to be. We just said we want to be in that range. If you look at frequency last year, it was down 4% to 5%, depending on where you want to look at it. If you look at where we were in 2015, you can get the same part of that. It translates directly almost – percentage into – it’s probably about – I guess it’s – about 75% of it shows up in the combined ratio. You can get a year-to-year swing on frequency. Just bad weather, people getting more actions, increased miles driven, new cell phones, what was in 2015, we know that they happened everywhere around the country. We know other people were impacted by it as well. I don’t think anybody can really do attribution on exactly why it happened. So I would just say that it’s normal volatility in there. But I think the broader message is we feel really good about where our profitability is right now. We think the right way to drive shareholder value is through growth, so you won’t see as many price increases that come up next year because at these kind of margins, it’s a very high return on required capital for us. We can drive a lot of shareholder value by growing our business here. You’re starting to see that in the – particularly in the Allstate brand in auto insurance in the fourth quarter, which we started earlier in the year. You’re now starting to see that come through. It hasn’t turned into year-over-year growth, but I believe we’re headed in that direction if we can keep retention where it is, keep driving new business. This is about shareholder value. I think if you just want to get focused on profitability and not think about growth and shareholder value, then I would say probably the better place to go is to look at the trade-out between auto and homeowners insurance. As I said, auto insurance profitability was up this year. If you’re worried about that, look at homeowner profitability. When you add in CAT, then you get the total profitability. We use the underlying combined ratio just to give you a sense of how well do we think the business is running. It is typically a two-point range. Sometimes, with one year or two years, we move to a three-point range because the market is a little more volatile, and we weren’t sure how many price increases we can get. But two points is the range we think we can live with.

Okay, that’s helpful. And if I could ask one more question about tax reform and the impact on the profit provision component of rate filings. So if I understand correctly, ultimately, in most cases, you actually file for a rate increase that is lower than the profit provision. Is that true? And if so, wouldn’t it mean that tax reform ultimately would have very little impact on the actual ability to push forward rate increases if it were necessary?

I’m not sure I was with you on file for rate increase lower than the profit provision. What do you mean by that?

So I think in most cases, you have an indicated rate that is dependent on the profit provision.

I understand what you’re saying. So first, it’s just that we operate in 50 states, and each of those states has its own regulatory environment. There was a good report done, I think, earlier this week or last week on which states are in which category. Some are very restrictive and really look tough, hard-headed. Others, it’s sort of an open market, and you go to compete. In those ones that are very restrictive, you have indications of rates. Sometimes, you file for the whole indication. Sometimes, you get less than that because you’re in negotiation with the regulator as to what to do. So I would say you’re correct in that it is more complex than, 'Oh, I’m going to take your underwriting margin.' Time has changed in tax rate and say, 'That’s what happens to your premium.' Much more complex than that — it's what we want to take, what the competitive situation is, where the regulatory environment is, where loss costs are, and what trends are. It’s a complicated little piece. We have 300 different companies and state combinations. And the bottom line is, we feel okay about where we’re at. We think, with this tax law, it gives us an opportunity to invest in growth. We think that’s really good for our shareholders. We’re excited about this, not concerned about it.

Good morning. And Matt, congratulations on your retirement. A quick question on looking back to 2017, if we could just have one more look at sort of your underlying combined ratio versus target, which came in a couple points better. It sounds like, in your answer to Yaron’s question, frequency was a big surprise, but what else surprised you about the year relative to where you were setting it up?

Thanks Bob, it’s Matt. Well, we’ve had frequency surprise us when it’s been positive, and we’ve had frequency surprise us when it’s been negative. The frequency improvement was due this year to a lot of external and some internal things. So externally, the industry has experienced a decline in frequency. We look at it with the same level of rigor that we looked at when it went up. It’s consistent across risk segments and geographically across rating plans, across customer tenure, and accident types. So both quality and tenure of the customers appears to be not driving that. When we reacted to the frequency spike at the end of 2014, 2015, and early part of 2016, you recall that we took segmented rate. Because we took segmented rate, we impacted the riskier sections and segments of our book more than others. That increased defection rates of those underperforming segments. We did drive lower levels of new business that actually reduced the new business penalty. At the same time, we improved the rate adequacy of all the business that we drove. So it’s the combination of the decline externally and some of the actions we took internally that really improved our frequency results. You see that – if you look at fast track, you can see us following the industry better than industry trends. We’ve been at least 0.5 lower than the industry for PD frequency in each of the last four quarters. We’re not seeing anything dramatically different than the rest of the industry, but I think we are benefiting a little better than everybody else from it. We also, in addition to frequency, remember there was a whole lot of good work done in the claims organization to manage severity costs and loss costs through some of the work that they did with the QuickFoto Claim, enhancing discipline and diligence around bodily injury requiring enhanced documentation. The result of all that work has resulted in an improvement in our overall underlying combined ratio. We see nothing to indicate that, that should be different for us going forward, other than normal volatility that’s environmental. Internally, the same stuff that’s worked for us in the past should work for us going forward.

Jonathan, we’ll take one more question.

Yes. Thank you for fitting me on. I appreciate it. I just want to clarify, on Elyse’s question, the 86% to 88% guidance compares to an 84.9% in 2017 or an 85.6% in 2017?

Josh, this is Mario. The comparable number would have been the 84.9%. That’s on the same basis that the 87% to 89% was established. The 86% to 88% is based on the new segments.

And I guess, tangentially, can you tell us the difference in customer acquisition spend between 4Q 2017 and 4Q 2016? Maybe that will help inform us about how much you’re willing to spend on acquiring new business in 2018.

We don’t break – we don’t disclose customer acquisition cost per policy. We obviously track it and use it. I mean, we just talk about marketing expenses. In the fourth quarter, expenses were up a little bit in part because of the foundation and the agency Matt talked about. It’s probably even if you across the agency comp pressed here is probably about 7.0 point, something like that. We wouldn’t expect that to continue at that level. That said, we are going to increase marketing in 2018 when we reposition our brand. I feel like our advertising needs to be refreshed a little bit. We’re working on that for both the Allstate and Esurance brands. When we do that, we will invest in more marketing. What I can tell you, Josh, is that it’s all economics. We don’t spend money to drive growth to lose money. We will accept a higher loss ratio on some new business until it ages out. We can end up running a combined ratio loss business for our first year in both businesses, both Allstate and Esurance. But we don’t – it’s all economic. We’re all going to get quick returns on it. The point on sort of where are you, we were down a lot in frequency in 2017. We’d like to think this is a new level, and our pricing that we’ve put in place in 2015 and 2016, which reflected higher frequency, was no longer necessary. If that’s the case, we’re going to offer our customers a better deal. We can capture margin, and we can grow which is our shareholder value. The fact of the matter is, you don’t know. I think the message we would like you to take away from 86% to 88% is that we feel good about the business, the profitability of the business. We have good control over the profitability of the business to react to different things that happen in the marketplace. The best thing to do is to keep profitability in that range and grow the business as opposed to drive profitability lower. Obviously, you could – we could have an alternative plan, which will be to drive the underlying combined ratio down further. We do not think that’s the right way to interact shareholder value and the company. We think we’ve gotten ourselves through the dramatic increase in frequency in 2015 and 2016, and it's time to grow again. So let me just close by saying we talked and believe this is great operating results. We’re positioned for growth. We have a 24% increase in the dividend, and shareholders continue to get repurchased cash as well, which positions us in a positive light. We have a bright future. So thanks very much. Have a great quarter.