Allstate Corp (The) (ALL) — Q4 2018 Earnings Call Transcript

Well, thank you, Jonathan. Good morning, and welcome everyone to Allstate's fourth quarter 2018 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, investor supplement, and posted today's presentation on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. As noted on the first slide of the presentation, our discussion will contain some 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 2017 and other public documents for information on potential risks. We are expanding the quarterly earnings call to not only review quarterly operating results but to highlight other value creation initiatives. Today, we will do a deeper dive on our success in using telematics in auto insurance. And now, I'll turn it over to Tom.

Well. Good morning. Thank you for joining us and staying current on Allstate. Let's begin on Slide 2, Allstate continued to deliver strong operating results while building the future. We achieved all of our five 2018 operating priorities, and we generated excellent returns. The Property-Liability underlying combined ratio of 85.8 for 2018 was better than the range we established with you at the beginning of the year. For 2019, the Property-Liability business is expected to have an annual underlying combined ratio between 86 and 88. And so, if you move down the table at the bottom, revenues excluding realized capital gains and losses were $10.4 billion for the quarter and $40.7 billion for the year, driven by increased insurance premiums in the Allstate and insurance brands. Adjusted net income was $430 million, or $1.24 per diluted share in the fourth quarter. For the full year, adjusted net income of $2.9 billion was 15.6% higher than 2017, which reflected strong insurance margins. Net income return on equity was 10.5% and adjusted net income return on equity was 14.8%. If you could turn to Slide 3, we delivered on all five 2018 operating priorities. The first three to better serve our customers, achieve target economic returns on capital, and grow the customer base are all intertwined, but they do ensure we have profitable long-term growth. Customers were better served as our net promoter score improved across all of our major businesses. Higher customer retention across the three underwriting brands was a key driver of growth last year. Returns remain excellent. Property-Liability policies increased by 784,000 in 2018, which was a 2.3% increase for the Allstate brand and a 10% growth at Esurance. When you combine that with significant growth at SquareTrade, policies in force surpassed $113 million in 2018. The $81 billion investment portfolio generated $3.2 billion in net investment income in 2018, which reflects slightly higher yield on a market-based portfolio and good performance compared to a very strong 2017. The total portfolio return was 0.8% in 2018, reflecting the stable contribution from net investment income that was offset by lower fixed income equity values, particularly at the end of the year. We also made progress in building long-term growth platforms in 2018. I'll discuss telematics next, and Mario will discuss SquareTrade's performance. We also accelerated our expansion into personal identity protection with the acquisition of InfoArmor in October. These operating priorities will remain unchanged for 2019. Before we discuss telematics, let me set the context within our overall strategy. So Allstate's strategy is to grow by protecting people from life's uncertainty. We start with the upper oval; the personal Property-Liability market has four consumer segments and provides protection by insuring automobiles and homes. We use differentiated products, sophisticated analytics, and telematics in building an integrated digital enterprise to grow market share in this protection space. Our strategy also protects people from a range of uncertainties, which are shown in the bottom oval. We leverage our brands, our customer base, investment expertise, distribution, and capital. It began in 1957 with life insurance. In 1999, we acquired Allstate Benefits, which provides protection products, such as life and disability insurance to employees at the work site. That business is now four times its size from when we bought it, with 4.3 million policies in force and adjusted net income of $119 million in 2018. We purchased SquareTrade in 2017, began offering insurance to transportation network companies last year as well, and recently closed the acquisition of InfoArmor. This strategy creates shareholder value through customer satisfaction, unique growth, and attractive returns on capital. It also ensures we have sustainable profitability and a diversified business platform. If we turn to Slide 5, this quarter, as John said, we want to highlight the value created from the use of telematics in auto insurance. We've been investing in telematics for almost a decade to increase auto insurance pricing sophistication, improve the customer value proposition, and leverage our capabilities in data to create a new source of growth and profit. So let's start with what we do now. We began to use telematics in auto insurance in 2010, and we now have a suite of products in the market. Drivewise and DriveSense are telematics-based offerings from Allstate in insurance and represent the bulk of our proprietary connection. These products either use a customer's mobile phone or an OBD port device, which goes underneath the dashboard to establish a connection with the car. We launched Milewise in 2016 in two states and expanded to four more states last year, which allows customers to pay for insurance by the mile. StreetWise is offered through our online insurance aggregator Answer Financial in conjunction with Arity to enable other insurance companies to benefit from telematics-based insights. Arity is a telematics service provider for Allstate, separate from the auto insurance companies. Moving to Slide 6, auto insurance pricing will eventually be significantly influenced by telematics information because it's just better than existing approaches. From a pricing standpoint, if you look at the top of that chart, auto insurance policies today are priced by who you are, such as age or gender, and where you live, which is a proxy for where you drive. For example, if your car is registered in Montana, there's a low likelihood you'll be commuting from New Jersey to New York. So telematics, though, enables pricing to be based on how you actually drive, and it is also based on exactly where, when, and how much you drive. This leads to increased pricing accuracy, lower subsidization between risks, and creates a highly personalized risk-based price. Telematics will be required to effectively price auto insurance. Allstate is also using telematics to improve the customer experience by staying connected with customers. We provide customers with awards for safe driving, safe driving tips that can lower their premiums, and we can decode the maintenance light needing your car so you know when you have that light on that maintenance is needed. If you have one of our OBD port devices in your car, we can tell you specifically what's wrong, how serious it is, what your cost of repair is, and enable you to link to a repair facility. So given these benefits, we believe telematics will be integrated into auto insurers' business models in the future. As a result, we created Arity outside of the insurance companies to create more value for shareholders. So we turn to Slide 7. In 2015, we defined a strategic platform to help us design Allstate's business model, and you can see that in our 2015 annual report we lay that out. A strategic platform is a system of capabilities, assets, information, and shared intelligence. These platforms have tended to be broad and flexible and create multiple uses for a wide range of customers and partners. In our definition, we would consider Apple, Facebook, and Amazon's Marketplace to be examples of platform businesses. Companies that control strategic platforms generate high economic returns. These returns reflect the benefits of reduced friction and cost between participants and the ability to improve returns through increased knowledge and analytics. Platforms are also rapidly scalable. The transportation system can benefit from such a platform. So the telematics platform enables companies to increase their speed to market in a connected car world. If you want to price auto insurance with telematics, you need data, which is enabled by a platform. As more companies in the industry use Arity, the breadth and depth of data ensure intelligence will grow; more data and a platform allow companies to refine and customize their specific business models to their specific needs. For example, ride-sharing companies can use the Arity platform to select safer drivers or better manage their operations. It also lowers the cost of collecting information. Just like with credit scoring data, it's inefficient to have many companies collecting the same information. We decided to build Arity as a telematics platform to capture important economic benefits. There is little downside to us since we need to build these services for ourselves because we are so far ahead of most of the industry. Today, Arity has 12.5 million active connections, of which more than 1.5 million are through Allstate entities. They analyze over 300 trips per second and create a proprietary driving score that can be used by insurers or shared mobility companies. Arity's scale continues to grow, and it's now adding 10 billion miles of driving data per month. Arity generates substantial advantages for Allstate's insurance operations today, and we're actively working with other insurers to help them utilize telematics in auto insurance. We'll keep their information confidential, but all parties benefit from the network effect of a consistent and large data set. It's Arity's growth that will also provide us with new sources of revenue from the transformation of the personal transportation system. Now I'll turn it over to Mario, who will discuss our quarterly and annual results in more detail.

Thanks Tom. On Slide 8, you can see that property-liability results remain strong. Net written premium increased 6.8% in the fourth quarter and 6% for the full year, driven by accelerated growth in the Allstate and Esurance brands. Allstate brand auto insurance net written premium grew 5.7% in 2018, reflecting a 2.7% increase in policies in force and higher average premium. Esurance brand net written premium grew 12.7% in 2018 and policies in force increased 10.4%. The recorded combined ratio of 97 was 6 points higher than the prior year quarter due to higher homeowners insurance combined ratio, primarily from catastrophe losses related to Hurricane Michael and the California wildfires. The auto insurance combined ratio remained solid, with higher premiums earned and lower accident frequency more than offsetting higher physical damage severity. The underlying combined ratio, which excludes catastrophes and prior year reserve reestimates, was 86.8 for the fourth quarter of 2018. This was 1.1 points higher than the prior year quarter, primarily due to non-catastrophe weather-related losses in Allstate and Encompass brand homeowners insurance. The underlying combined ratio of 85.8 for the year was within the revised annual outlook range of 85 to 87. Allstate brand auto and homeowners insurance continue to deliver attractive returns and generated underwriting income of $1.7 billion and $472 million, respectively, in 2018. Turning to Slide 9, let's review Allstate Life, Benefits, and Annuities. Allstate Life, shown on the left, generated adjusted net income of $68 million in the fourth quarter, up 19.3% from the prior year quarter, as a lower effective tax rate and higher premiums more than offset higher contract benefit. Allstate Benefits' adjusted net income, shown in the middle chart, was $25 million in the fourth quarter. The $5 million increase from the prior year quarter was primarily driven by increased premiums and a lower effective tax rate, partially offset by higher expenses. Allstate Annuities, on the right, had adjusted net income of $31 million in the quarter, which was $24 million lower than the prior year quarter. This was primarily due to lower performance-based investment income. Moving to Slide 10, our service businesses continue to provide strategic and economic value. SquareTrade's written premium increased 107.1% to $323 million in the fourth quarter of 2018, and revenues increased to $137 million. Adjusted net income was $9 million in the fourth quarter of 2018. Arity continues to invest in advancing our telematics platform. In the fourth quarter, Arity had revenues of $24 million, primarily related to affiliate contracts. Allstate Dealer Services revenue was $105 million for the quarter and $403 million for the year. Adjusted net income was $6 million in the fourth quarter of 2018, benefiting from improved loss experience. Allstate Roadside Services revenue was $74 million for the quarter, with an adjusted net loss of $7 million, in line with the prior year quarter. InfoArmor is the newest addition to the Service Businesses segment, contributing over 1 million policies in force. Slide 11 takes a closer look at the acquisition measures of success for SquareTrade. SquareTrade is delivering on the three objectives supporting its acquisition, and as domestic policies in force increased, loss experience improved and the business expanded beyond US retail. SquareTrade written premium increased 81.5% to $773 million in 2018 due to the continued growth in US retail as SquareTrade became the exclusive protection plan provider for a leading US retailer in the second half of the year. Adjusted net income was $23 million in 2018, reflecting a full-year improvement of $45 million. Slide 12 highlights our investment results. We proactively managed the investment portfolio considering market conditions, the nature of our liability, and risk appetite. As a result, we have a high-quality, market-based investment-grade bond portfolio that generates substantial annual income and cash flows. We also have a performance-based equity portfolio that generates higher returns and longer dated liabilities. The chart at the lower left shows net investment income for the fourth quarter was $786 million, lower than the fourth quarter of 2017. Market-based investment income increased and reflects higher purchase yield and a modest duration extension for the property-liability fixed income portfolio, partially offset by reduced allocation to high yield bond. Performance-based investment income generated $145 million of income in the fourth quarter. Performance-based income for 2018 was solid, with a yield over 9% but the fourth quarter was below the prior year quarter, reflecting a lower number of sales of underlying investments and more moderate asset appreciation. The components of total return are shown in the table on the right. The negative 0.2% return in the quarter includes the stable contribution from investment income, reduced by lower fixed income and equity valuation. The total return for 2018 was 0.8%. Slide 13 provides an overview of returns and capital. We continue to generate attractive returns on capital. Adjusted net income return on equity, shown on the left, was 14.8% in 2018, an increase of 1.4 points compared to the prior year. Our capital position remains strong, and we returned $1.2 billion to common shareholders in the fourth quarter, bringing the total cash return to shareholders to $2.8 billion for the full year, as you can see in the chart on the right. As part of the $3 billion share repurchase authorization, we executed a $1 billion accelerated share repurchase program in the fourth quarter. Additionally, in 2018, we completed the acquisitions of InfoArmor for $525 million and PlumChoice for $30 million and redeemed $385 million of our preferred shares. We continue to take a proactive approach to managing our capital. Now, we'll open up the line for questions.

Hi. Good morning. My first question is just on the severity trends that you're seeing within your auto book. PD severity remained elevated for the second consecutive quarter. If you can just tell us, is it the same factors that you saw driving that last quarter? And then within your underlying margin guide for 2019, are you assuming that severity trends will remain elevated?

Elyse, this is Tom. So Glenn will answer for the Allstate brand; if you want to go into the other brands, let us know. As you know, we don't provide breakouts in the underlying combined ratio guidance. Glenn?

Yes. So, thank you, Elyse. I want to start with just a little bit of context on it, and then talk about the issue itself and actions from it. So from a context standpoint, as you know, the losses represent about 70% of the combined ratio. Within those losses, because we price Allstate auto in total, you have physical damage about half of it, and then you have the injury coverage, just about half of it. Within those, you have frequency and severity impacting each of those. Right now, we actually see three of them performing as expected or well—favorable severity in both injury and physical damage, and then the injury lines are performing as expected as you can see in our reserve releases. No question, there's pressure on the physical damage part of it, and they are similar trends to what we saw in the prior. The issues in the industry are widespread. We've seen more sophisticated cars costing more to repair. As a result of that, particularly at the high end of repairs, more cars are reaching the total loss threshold. So you'll see across the industry trends, not only are the fast track numbers of overall severity up, but you'll see that more cars reach a total loss threshold, particularly in recent model years. I'll give you a specific example just to illustrate because our team in claims, our actuaries, and our product folks do a ton of work getting deep into making model specific pricing. Take a Camry, which is a pretty common vehicle, and we look from 2013 through 2018 at what the changes were for repairing the front-end impact. The answer is in that five-year window, they've doubled. It's the impact of more sophisticated cars with sensors that are helping us on the frequency side, but they're costing more to repair. That added $1,700 alone, just for the sensors that help avoid accidents. A really specific component would be the headlight, which went from $360 in 2013 to over $1,900 in 2018. I offer this specific example for two reasons; one, to give you an idea of what's going on and what we see with specific makes and models, and two, to illustrate that we do a deep dive on this issue and we look at it very thoughtfully. That takes us to what we do about it. One lever is rate, which obviously we look at on a market-by-market basis where we need to take pricing. The next would be to be more sophisticated and laser focused on those rates. The third action would be working with OEMs within their community to improve the overall cost of repairs because more cars are reaching their total loss threshold, and we want to be able to repair cars and return them to customers. And answering your question about whether it's included, we absolutely include all the factors we look at in giving guidance, and it's included retroactively in all of our financials and projected in there.

Okay. That's very helpful. And then my second question—throughout—very recently we've seen a whole host of transactions in the annuity space as companies have entered into deals that have helped to free up capital. Could you let us know your thoughts? Would Allstate be interested in entering into a transaction with their annuity exposure? And if you did, if there was a transaction that was able to free up capital, would you be more likely to use that for share repurchase or potentially hold on for M&A opportunities?

Well, Elyse, we obviously don't comment on any transactions that people think we could show or might be thinking about, so I have no comment on that. What I can tell you is we've always been very aggressive about managing our capital. As far as the second part, whether we use that for share repurchases or grow our business, that part won't change at all. We have, as you know, been working hard on improving the long-term economic returns on the annuity business, which have hurt the current book returns. Specifically, for the payout annuities, which are long-dated liabilities, some, 20, 30, 40 years, the right way to invest behind those liabilities, much like you would with a pension fund, would be putting it mostly in equities because once you get past 10 years, your return on equities can be twice what it is in bonds and your risk is lower. The downside to that is that the regulators require significant capital because equities are seen as volatile on a day-to-day basis, not a 10-year basis. We've been working with the National Association of Insurance Commissioners to come up with horizon-based capital standards, particularly as it relates to equities in payout annuities, which would free up a tremendous amount of capital that we could then use as I started to discuss. We're looking at every possible way we can improve every element of our capital deployment each and every day, whether that’s through annuity business, using reinsurance, preferred stock, buybacks, etc.

Good morning. I'd like to dig into Allstate brand PIFF growth. You've talked in the past about how it takes time to energize the agents, but we're now seeing more improvement and I'd like to just ask how is that growth spread among the agents? How is that subset of growing agents building throughout the past year? So maybe that's one part of the question, and another part of the question is, is there any change in the quality of your new customers? Are they more bundled or, as you talked about, more of them using telematics in that process? So sort of two parts of the spread among the agents and then the character of the new customers?

Okay. Gary, good morning. Let me go up a minute and then come back down to Glenn, if he can answer your specific question on the agency owners, breadth of distribution, and what we're seeing. We obviously have a variety of both short and long term strategies to grow, and each brand is different. There are differences by geography and by component of leverage you can have in each of those. Customer satisfaction is up in all of our brands last year, and retention is up in all of our brands last year, so that's a big driver of growth. Obviously, distribution is one you mentioned. There's also the quality of our advertising and the breadth of our product offerings. We pursue all of those. So Glenn will talk about the Allstate brand's auto, home, and life. If others want to get into Esurance or Encompass, Steve can handle that one. And Don obviously has the servicing businesses. Glenn, why don't you deal with Gary's question directly?

Yes, thanks, Gary. So first, talking about the agents. It's really a fun part of what's going on right now in terms of our growth. I would call it a system-wide growth because you're touching on an important part. You can see the policy growth, and you can see the premium growth, but what's really happening underneath that is we've got 2,700 more points of sales. New agents join us to start—they join agencies because they want to win; they don't start to stay flat; they want to grow. We're attracting them because right now, we're competitive in the market. There's good health in the system as Tom said. We're retaining more customers, which is helpful to the growth, and with those additional points of contact, we have good momentum built into the system, and we're growing in a healthy way. We're competitive in the market. You also asked about the new business coming in and how it's bundling and yes, by telematics. So quickly on those: bundling has been very favorable; we're bundling more of our new business than we have historically. We also have more people buying full coverage than we've seen historically; both of those are good bellwethers for the quality of business. From a telematics standpoint, we grew that by 30% this year; we added over 300,000 active connections to our Drivewise. On the Milewise side, which is the pay per mile mentioned before, that's, I think, about like a startup with small numbers but it's growing rapidly. In the fourth quarter alone, we over doubled the size of Milewise as an offering for us. So it's an exciting area where we're growing our business.

Just as a follow up, are there any areas right now where the PIFF growth is lagging but has the potential to do better in the future?

This is Tom. By any—I would say that if you look at the Allstate brand, Glenn's got a number of strategies and different states where he thinks he can grow faster. Retention is always a benefit that we get from—Esurance saw a 10% growth last year, so we feel good about that. It's back on the—again decent market share gain. Encompass, less so, so that would be one where I would say we still need to come up with a sustainable growth plan that drives items in force.

Good morning. The first question is around the homeowners business. I was looking in your statistical supplement. I think it's page 25 where you had talked about gross claim frequency and paid claim frequency being up almost double digit in the fourth quarter. They have actually been up pretty strong for the last couple of quarters. But then I looked at the Allstate homeowners underlying loss ratio and it improved in the fourth quarter. So I am trying to sort of bridge the gap there and understand what happened?

Greg, good morning. Let me—first let me again set a bit of context. The Allstate brand homeowner business is very attractive for us, $7 billion of premium made $470 million of underwriting income in a year that experienced a fair amount of catastrophe. It's a business we like and does well. Obviously, things bounce around from quarter-to-quarter, and Glenn can talk about this specific question.

Yes, Greg. I think there is a mix in there at the quarter-over-quarter versus the year-over-year change. Yes, it did come down quarter-over-quarter from the third quarter to the fourth quarter but year-over-year was up a couple of points in terms of the underlying combined. To Tom's point, in a year with a lot of catastrophes, particularly in the fourth quarter, we produced our recorded combined ratio. I’d like to go the recorded because we are managing the overall risk over the long-term from catastrophe; it is a big part of what we do. We focus on the underlying ratio. In a year with the types of catastrophes we had, it was pretty strong. Before the fourth quarter, you had to go back almost seven years to have a quarter that didn't produce an underwriting profit. So we had strong work, which is the underwriting approach we take. It's pricing, the reinsurance, which obviously played a part in the fourth quarter for us, and our claims approach that we think ultimately gets caught. To your question relative to the underlying, I would say 2018 was an extremely wet year. I mentioned that in the third quarter of 2018. It continued into the fourth a bit. It was a heavy, heavy rain year, and we got some pricing for that. We reacted to it. We saw the 1.1 growth rate in the fourth quarter, which is rate not premium because we do have the automatic inflationary factors in the policies as well.

Thank you for that answer. And then, Tom, I know you highlighted the success of Esurance, and I was looking at the underlying loss ratio. I guess it's seasonally high in the fourth quarter, but it certainly seemed to be trending up from what I used to think was a target in the low 70s. The underlying loss ratio seemed to be pushing up close to the high 80s. I am wondering if there is anything that I should be thinking about with that loss ratio and underlying loss ratio as it relates to future growth in that business.

So, Greg, this is Steve. You are absolutely right. Our targets have generally been in the lower 70s or below 75 range. For the quarter, it was elevated. A couple reasons for that: given the growth we had in the business during 2018, we have a greater portion of new customers. There is some higher loss ratio with newer customers driving that. That's only part of the issue. Clearly, we’ve had the same type of issues regarding severity that we talked about in the Allstate business. The opposite of that is we brought our expense ratio down a large amount over the last three years. Overall, we actually have a combined ratio on an underlying basis below 100 for the whole year. And for all but the last quarter of the year, we had good results, and we're starting to see profit in the business as we grow. We feel good about the overall profitability. You're correct; we need to work harder on that combined ratio and drive it down a bit from where it is today. That will accelerate our growth. We feel really good about the growth and profitability for 2018.

Hey, good morning. My first question is about auto accident frequency. Can you remind us what Allstate's long-term trend has been on frequency, and does that differ from your estimate of 2019 frequency? If it does, could you talk to why?

So by long-term, speaking of real long-term, I have been around for 15 plus years. Essentially, it's come down fairly steadily as we had third brake lights on cars, antilock brakes, airbags, and so on. It just worked on both frequency and severity for a long period of time. Then it kind of flattened out about 10 years ago. It wasn't really going up for down much, then of course in 2015 and 2016 it shot way up. There is still some uncertainty regarding why this has happened, with some relationship to miles driven and economic activity, which is related. People speculated that it's due to cell phone use and distracted driving. I think the answer is, it's really hard to get attribution for those factors. Glenn talked about a decline in frequency, which is in part due to fewer miles driven, but also safer cars and some of the trends that were present in the long term cycle. It's tough to say exactly what will happen. As it relates to the forecast for next year, I think everyone's aware we try not to go into component guidance. However, we do make an estimate of what we think is likely, including external trends that we don't control. For example, frequency would be one of those. We can't control whether people are getting accidents or not. There are some parts of it that are partially controllable, and Glenn discussed severity in physical damage or bodily injury. We can control some of those elements. We can try to manage prices and expenses, as both Glenn and Steve talked about. When we're looking at the underlying combined ratio guidance, we look at trends—those that we can't control, those we can, and then we set our guidance at between 86 to 88. It's obvious that this is just a portion of the value created. It doesn't include catastrophe losses, prior reserve changes, pension settlement charges, which I think led to some confusion in the third quarter, nor does it include investment income. It's a useful way for us to inform you how we feel about that large component of our business is performing, but I always want to caution us against thinking this is the only value creator shareholders should consider.

Okay, great. My follow-up is regarding telematics. Thanks for the information you provided earlier on the call. You gave one statistic earlier saying telematics Drivewise policies grew 30% year-on-year. Can you provide some more statistics or color on what the adoption rate is for telematics? And how can we think about the adoption curve longer-term? How are you guys going to get these policies into the hands of your policyholders?

When Glenn gave it a number of 30% for the Allstate brand, the Esurance brand was up substantially more than 30%. They really focused on it this year. We're finding the adoption rate to be relatively high and increasing, but you have to manage it. You need to manage the initial conversation, the onboarding, and not only the conversion rate but the retention rate as well. We're focused on all of these elements. We've made progress on all of those components in 2018. We don't provide specific numbers out because that's too competitive and others may use it. Most insurers are going to include telematics; it's going to happen. It's too powerful of a rating factor—a core part of how insurers manage risk. Look at credit as an example—everyone is using some form of credit or proxy for that today. If you sample the pricing of auto insurance by where someone garages their car, there could be inefficiencies in pricing. To the extent that you can be more efficient on where, when, and how they drive, that will yield much better pricing.

Thanks, and good morning. I wanted to go back to your example about auto parts in response to Elyse's question. It seems like we're getting closer to some sort of conclusions with the ongoing auto tariffs on auto parts. Have your conversations internally with repair shops changed, and how are you thinking about it if we do see any action on that?

I'm sorry, I missed the action on what? What was that I missed?

On the auto tariff discussion you referenced.

I'll let Glenn talk about what he's doing specifically inside the business. Obviously, tariffs on steel and parts made thereof will affect costs. In terms of repair costs, I think it's time to talk about the cost of repairs versus the cost of buying a car. Manufacturers might give away razors to sell blades; consumers see higher prices embedded in the fact that Glenn's example illustrated, showing the headlight now costs $1,900 instead of $300—all of a sudden my very first car would cost less than that. It’s an economic trend between industries that we need to sort out. Glenn, anything you'd care to add regarding specific parts and body shops?

Yes, we work—a number of approaches are taken, our claims team does a great job working on agreed pricing with large auto body shop aggregators and they manage overall costs through various components. Specific to tariffs, we keep an eye on them, just like other inflationary factors like the cost of petroleum because a lot of auto parts as well as roofing materials for homeowners is petroleum-based, and the price of steel is of course a related factor. So as those aspects play out, they become notable inflationary factors we watch.

Got it. That's helpful. My only other question is regarding pricing. I think you indicated you would expect rates to change over the course of 2019.

Yes, this is Glenn. We closely assess pricing relative to competitors as you do in filings. Some are still taking rates, while others are not. The CPI most recent number is between 5 and 6. It's down from much higher levels and is expected to continue to drop because the filings today are different from late 2017 and early 2018, which created that filing change. But we look at absolute price changes. We don't begin with the competitive position of everyone else's price increase, but we focus on our competitiveness by market and specific competitor; someone may drop rates, but if they are still above the market, they're at a disadvantage.

Thank you and good morning. My first question follows up on your guidance for 2019. The range is 86%-88%, the same as a year ago, but the operating environment is a little different. Pricing today is less than a year ago, and the loss trend is frequency better today, but severity would seem to be worse. So just wondering, do you build in the same level of conservativeness to the initial guidance, which could still end up at the lower or better end as we did in 2018? Or is this operating environment completely different?

Hi, obviously, you're correct that 2019 is not 2018, and it wasn't the prior 10 or 11 years we've been doing this. We look at each year differently. We feel comfortable with 86% to 88%. One word you stated that isn’t accurate is conservativeness; we set the range we think we will be in. This year we revised the range down because frequency was down significantly compared to the prior year, and we didn’t believe we would be in the range anymore. So that’s one of those trends that, you can't forecast, and we honestly don’t have a solid number that leads to 88% or 86%. We make estimates based on frequency and elements that we can manage to, and we believe it is in the right place considering our returns.

That's very fair. My second question is on SquareTrade. The top line was about 80% year-over-year growth in written premiums. If you exclude Walmart, what’s the underlying growth rate been, and do you have a long-term view on the profitability? I just wonder when this rapid top line growth would translate to a material impact on your Allstate earnings.

As Mario mentioned, we set three objectives when we did the acquisition—things we needed to do included the growth you discussed in the domestic retail business. We have achieved all three of those objectives. Don, can give you some color on growth and share with you the growth rate.

When you look at the full year, the company has been growing dramatically, part of that has been new customers. Additionally, we’re serving our existing customers effectively. If you look at the fourth quarter, there was a significant component of the growth in policies being the result of a large retailer. Nevertheless, even without that, we still would have had healthy growth from our existing policy book. As far as long-term profitability, you're correct in pointing out we're aiming for increased profitability with our operations for SquareTrade. We're trying to achieve it in a balanced way to build the business for the future, but we're happy with the improvements we've seen thus far. Loss rates continue to perform attractively for us. We noted previously that we would improve our scale of expenses and as we grow the business. Growth has helped us do that. We've been bringing our paper in-house, meaning we're underwriting risks at Allstate, which has naturally improved profitability. Overall, we are delighted with the improvements in profitability, and it’s essential to create a balance between profit and growth in success.

As Don said, we create shareholder value component by component. You should observe, we think about the total but we also look into each aspect. If there's another element we can grow, you can say it hurts a total a little bit; we will pursue that. For example, SquareTrade had notable growth in our European telecom business.

Hi, good morning. First question is on industry pricing in auto. Are you surprised to see that rate filings aren't showing much improvement given the severity trends in the second half of the year?

Yaron, I don't know. We don't manage other people's books of business, we just focus on our operations. We watch what they do; some companies drive combined ratios higher than we think we require. We regard our combined ratios, whether in auto or homeowner insurance, as very attractive. There are other companies with combined ratios in homeowners' insurance that we wouldn't use, and they're growing rapidly. We monitor our own book and look to ensure that we extract optimal economic rent relative to the value we're creating. I can't say how quickly these trends in severity will impact other players in the market.

Okay. Let me phrase that differently then. I think heading into 2018 you had said that you saw that your pricing had put you in a competitive advantage, and I think that was a shift from prior years where you had implemented early pricing actions. How do you think your pricing will position you versus the industry in auto for 2019?

Glenn can talk about how he's thinking about pricing relative to auto, but I want to broaden this to reflect on growth and profitability, and the improvements for our customers on every level. What you saw in 2018 was not just pure price increases, but the hard work we’ve done on our net promoter score over three or four years helped with growth overall, despite temporary issues related to pricing increases that may have pulled our retention down.

As we assess pricing, we see competitors are diverse in their filings. Some companies are still taking rates while others are not. The most recent CPI is between 5 and 6. It has decreased from higher levels and is anticipated to continue dropping, due to the differences from early to late 2017 filings. We monitor absolute price changes to assess our competitive positioning—someone can take a 3% price decrease but if they're still 10% higher than the market, they’re still higher than market average.

Thank you and good morning. I wanted to touch on your guidance for 2019. The range of 86%-88% is the same as last year, but the operating environment is different. Pricing is lower than a year ago, while severity appears worse. Is there a level of conservativeness in your guidance that could shift lower or potentially higher by end of 2018? Or is this year's operating environment completely different?

Well, obviously, you're correct that 2019 is not 2018. And it wasn't for the prior 10 or 11 years. We look at every year differently. We feel comfortable with the range of 86%, 88%. The term conservative is something I don't agree with; we set the range based on reasonable estimates. This year, we revised the lower range down following the first quarter because frequency was down so substantially that we didn't believe we would be in the range anymore. It's important to highlight trends still involve some uncertainty. We maintain a solid number of estimates, and we're confident in that 86 to 88 range considering the environment we're operating in.

Hey, thanks. Just a couple. It's interesting that in the past, the homeowners haven't been so detrimental on an underlying basis, but this year it actually was a big headwind. Just curious when you think about your guidance for next year, what type of directionally you're contemplating for margins in home?

We absolutely, Ryan, we don't like to give the underlying combined ratios for different components. But I would say about the big headwind, the underlying combined ratio for homeowners is in the low 60s, while there was a sizable amount that accompanied that business. To Glenn’s point, we manage it for the total. We give you the underlying combined ratio since we can’t estimate to total terms. Yes, in 2018 we faced significant weather related occasions, but overall our ratios were strong.

We take it seriously. We discussed it last quarter—non-CAT weather has been a rising concern. We had to address it, and you’ve observed the significant pricing adjustments. The 1.1 growth rate is meaningful, and annualized, it would impact the rate positively. One cannot predict the same uncertainty with significant non-CAT weather; we’ll respond appropriately and maintain competitiveness while managing risk.