Allstate Corp (The) (ALL) — Q2 2019 Earnings Call Transcript

Thank you, Jonathan. Good morning and welcome everyone to Allstate's second quarter 2019 earnings conference call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q and posted today's presentation along with our reinsurance update on our website. Our management team is here to provide perspective on these results and cover a special topic. Mary Jane Fortin, President of Allstate Financial Businesses will provide an overview of Allstate annuities and how the business has been substantially reduced in size over the last 13 years and how we have managed the remaining liabilities to maximize shareholder value. The special topic last quarter was about how we match capital to risk at a granular level to ensure we maximized economic returns. Our first special topic at the beginning of this year was how telematics is being utilized in auto insurance and how Arity our telematics business is a leading innovator. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2018 and other public documents for information on potential risks. Now, I will turn it over to Tom.

Well, good morning. Thank you for joining us to stay current on Allstate. Let's begin on Slide 2, Allstate's strategy to protect people from life's uncertainties. The strategic objectives are to grow Personal Property-Liability market share and expand other protection businesses. So we start with the upper oval. The Personal Property-Liability market provides consumers protection by ensuring a wide range of assets, automobiles, homes, motorcycles, boats, and other personal assets and then their personal liability. We use highly recognized brands, sophisticated pricing, differentiated products, claims expertise, and telematics to deliver unique customer value propositions. We're also building an integrated digital enterprise that lowers costs and better serves customers. As shown in the bottom oval, this strategy also includes providing consumers protection plans, life insurance, voluntary workplace benefits and identity protection. We also have a rapidly growing shared economy commercial insurance business that serves freight sharing companies and our telematics provider Arity. These businesses are enhanced by leveraging our brands, customer base, investment expertise, distribution, claims capabilities and capital. It's not just what you see in the oval, this is real. For example, we're rebranding SquareTrade products in the United States to fully utilize the Allstate name, which both leverages and expands our reach since these products are sold to major retailers. Our claims capabilities are helping us to implement and grow the commercial insurance business with ride-sharing companies. Collectively, the protection businesses in the bottom oval have tremendous value. It can be overlooked by investors who focus only on the Property-Liability oval. This strategy creates shareholder value, customer satisfaction, unit growth and attractive returns on capital. It also ensures we have sustainable profitability in a diversified business platform. Moving to Slide 3, we had a strong first half of the year. We made progress in all five of our 2019 operating priorities. Revenues exceeded $11 billion, with Property-Liability premium up almost $0.5 billion over last year's second quarter. The service businesses revenue was up 26.6% to over $400 million for the three months. Net income was $821 million and adjusted net income was $2.18 per share. As a result of this strong performance, we improved the 2019 Property-Liability underlying combined ratio by almost 1.5 points, which is about $500 million of underwriting income better than the original guidance. Adjusted net income return on equity was 13.5% for the last 12 months. Adjusted net income return on equity is a broad measure of our overall performance and that includes investments, Allstate life, benefits, annuity and the service businesses. Since this represents the returns we generate from all capital, it's the best measure for our average. So as a result in 2020, we will establish long-term adjusted net income return on equity targets. Consequently, we will not use the Property-Liability underlying combined ratio to provide annual guidance on operating results, but we will continue to use it in our dialogue on it. We're making this change since we're committed to being a leader in the amount and quality of our financial disclosures to enable users to assess our performance and investment potential. Turning to Slide 4, we made good progress in all five 2019 operating priorities. The first three better serve our customers, achieve target economic returns on capital and grow the customer base are intended to ensure profitable long-term growth. Customers were better served as the Enterprise Net Promoter Score improved. As a result of that, policy renewals increased in the Allstate and Encompass brands, which is a key driver of growth, although the increases in improvement have slowed. Returns remain strong which we discussed with all the businesses performing well except one portion of Allstate annuity, which Mary Jane will cover. Total policies in force now have reached 129 million, an increase of 46.8% compared to the prior year. SquareTrade policies grew by 84 million reflecting substantial expansion last August with a large US retailer. Property-Liability policies increased by 772,000 from the prior year to 333.6 million as the Allstate and Esurance brands grew 2.2% and 8.4%, respectively. Proactive risk and return positioning of the $86 billion investment portfolio resulted in total returns of 7% for the last 12 months and generated $942 million in net investment income for the quarter. Performance-based investment income increased significantly from the first quarter of this year. Shareholder value beyond current earnings is being created through increased telematics usage and greater sophistication at Arity. SquareTrade is expanding into Europe and InfoArmor identity protection offerings are being integrated into our strategies. Glenn will now discuss our Property-Liability results in more detail.

Thanks Tom. Moving to Slide 5, you can see that Property-Liability results remain strong. Net written premiums increased 5.9% in the second quarter for almost $1 billion through the first six months compared to the prior quarter. This reflects policy growth in the Allstate and Esurance brands and higher average premium for auto and homeowners insurance claims across all three underwritten brands. As you can see in the middle of the left table, total policies in force increased 2.4% to 33.6 million. Moving to the bottom of that table, the Property-Liability recorded combined ratio of 95.8 was 1.4 points higher than the prior year quarter primarily due to catastrophe losses. This was partially offset by a reduction in operating expenses due to a combination of sustainable operational efficiencies achieved through focused efforts on streamlining processes and automation and lower incentive compensation given higher growth targets this year. The underlying combined ratio, which excludes catastrophes and prior reserved estimates was 84.3 for the first six months of 2019, below the annual guidance which assumes higher frequency of auto insurance claims. Auto physical damage severities were higher than expected. However, this was offset by planned reduction and expense ratio. As a result of this performance, we're improving the guidance range by 1.5 points to 84.5 to 86.5 for the full year of 2019. This revised range assumes lower auto claims frequency and higher physical damage severity as well as investments in growth initiatives, the logic of which we'll cover on the next slide. Moving to the right-hand table, Allstate brands auto and homeowners insurance net written premium increased 5% and 6.5% compared to the prior year quarter respectively. Auto policies in force were up 2.5% over the prior year and average premium was up 2.7% compared to the prior year quarter. Homeowners policies increased by 1.6% and average premiums grew by 5.6% over last year. Esurance's auto insurance policy growth was 8.1%, which combined with average premium increases resulted in total net written premium growth of 9.6%. Encompass written premium increased 1.1%, a higher average premium more than offset the decline in policy in force. On the bottom of the table, you can see the underlying combined ratios remain strong across our brands. And this strong performance means that investments in growth will increase shareholder value. Turning to Slide 6, investments in profitable growth are focused on Allstate brand Property-Liability insurance. Attracted margins support investment growth for five reasons. First, auto and home insurance generates very attractive returns on capital as you'll see towards the end of our prepared remarks. Allstate has earned an underwriting profit in auto and home insurance for each of the last eight years, reflecting a focus on profitability, operational excellence, and timely response to external conditions. Current results are strong with a recorded combined ratio of 93.7 in the Allstate brand over the last 12 months. Allstate has operational strengths, including pricing sophistication, branding, and expanding total sales producers by 11% in the past two years. We also have successfully tested different combinations of growth levers in six markets over the last nine months to provide us a roadmap to the best possible execution. This comprehensive program is highly targeted by geography, product, and customer segment. We use a wide variety of tools including advertising, customer experience initiatives, pricing sophistication, telematics, and new agency technology. While we're expanding these initiatives, they won't have a significant impact on 2019 policy in force growth. Unit growth is expected to accelerate in 2020 and 2021. This will slightly increase expenses from the current lower levels and have a small impact on combined ratio. But this is factored into the improved outlook for the underlying combined ratio we just discussed. On a longer-term basis, we're working to reduce other expenses that will provide us flexibility to positively impact growth and competitive position while maintaining attractive returns. As always, we'll focus on producing strong returns for our shareholders and we'll react quickly to any market conditions as they emerge. We're building off a position of operational strength to compete both with large well-known competitors and smaller regional competitors to achieve our strategic objective, which is increasing market share in the Personal Property-Liability market. Mario will now discuss results for service businesses and investments in more detail.

Thanks, Glenn. Let's go to Slide 7, which provides detail on our service businesses. Consistent with the strategy to grow non-Property-Liability protection businesses, the service businesses continued to rapidly grow the number of consumers protected, with policies in force increasing 82.8% to 89.7 million. This is largely due to SquareTrade. We will be changing SquareTrade's branding to Allstate for domestic distribution channels, as we believe that increases sales and provides additional brand exposure without advertising investment. As a result of unit growth, revenues grew to $405 million as you can see from the lower left table. Adjusted net income was $16 million in the quarter shown on the lower right, a $14 million improvement over the prior year quarter largely due to improved loss experience at SquareTrade. We recognized a $55 million pre-tax impairment charge in the second quarter following our decision to phase out domestic use of the SquareTrade brand name. Arity continues to invest in advancing our telematics platform and had a small loss. Total mileage analyzed is now about 14 billion miles per month and captures more than 400 trips per second. Allstate roadside services revenue was $73 million for the quarter, with an adjusted net loss of $3 million, slightly better than the prior year quarter. Allstate dealer services revenue grew 14% compared to the second quarter of 2018 and adjusted net income was $7 million. InfoArmor had revenues of $23 million with over 1.2 million policies in force. The adjusted net loss of $6 million was related to growth and integration investments. Slide 8 highlights our investment results. Investment results were also good in the quarter as we were positioning for modest US growth by extending duration on the fixed income portfolio and appropriately matching long-dated liabilities with equity investments, which increased income and valuations. The portfolio generated a strong 7% return over the last 12 months, of which 2.8% was in the second quarter. Net investment income was $942 million, which included a rebound in performance-based results. The components of total return are shown in the chart on the left. The blue bar represents net investment income, which is included in adjusted net income and has varied between 80 and 110 basis points per quarter. Net investment income contributed 3.8% to GAAP total return over the last 12 months with a stable contribution from interest income on fixed income investments and a more variable contribution from our performance-based portfolio. Valuations shown in grey and red vary on a quarterly basis due to investment market volatility. Since we have ample liquidity, we accept this volatility as it enables us to earn a higher risk-adjusted return. As you can see from the last two bars, portfolio valuations have been up this year, reflecting lower interest rates, tighter corporate credit spreads, and higher equity market valuations. Increases in investment valuations have added 3.2% to our GAAP total return of 7% over the last 12 months. The chart at the right shows net investment income for the second quarter of $942 million, which was $118 million higher than the second quarter of 2018. Market-based investment income shown in blue increased to $731 million from $696 million reflecting investments at higher new purchase yields in 2018 and a duration extension of the Property-Liabilities fixed income portfolio. The performance-based portfolio generated investment income of $261 billion in the second quarter, which was $85 million higher than the prior year quarter reflecting strong private equity asset appreciation and gains on the sales of underlying investments. The performance-based portfolio also generated $37 billion realized capital gains comparable with the prior year quarter. Our trailing 12 months performance-based GAAP total return is 9.3%. And now Mary Jane will provide an overview of Allstate's life, benefits, and annuities and a special topic on the annuities business.

Thanks Mario. Let's turn to Slide 9. Allstate life, shown on the left generated adjusted net income of $68 million in the second quarter, $12 million lower than the prior year quarter primarily driven by higher contract benefits. Allstate benefits adjusted net income shown in the middle chart was $37 million in the second quarter, $1 million higher than the prior year quarter as increased revenue was offset by higher operating costs and expenses. Allstate annuities on the right generated adjusted net income of $52 million in the quarter, which was $8 million higher than the second quarter of 2018 due to increased performance-based investment income. The special topic begins on Slide 10. The annuity business grew out of a corporate strategy in the mid-90s of running retirement savings businesses such as fixed and variable annuities. We built a broad based business and sold a wide range of annuities through six different distribution channels: banks, broker dealers, Allstate agencies, independent agencies, institutional brokers, and structured settlement brokers. In 2006, we decided not to pursue growth throughout the main areas because we did not have the festival competitive position. The highly competitive market constrained returns and liability structures that did not properly compensate for risk. As a result, we began a systematic process of exiting these businesses as market conditions permitted. The variable annuity business was reinsured with Prudential in 2006, which enabled us to avoid the downdraft on equity prices that began in 2008. During the financial market crisis, we continued to reduce the size of the business. We acted as a broker dealer and bank distribution channels in 2010. We stopped issuing structured settlements in 2013 and in 2014, stopped issuing all remaining annuity products from Sold Lincoln Benefit Life. You can see the impact now on the balance sheet in the lower chart where annuity liabilities have been reduced from $75 billion to $18 billion, a 76% decrease. The result is our risk return profile has significantly improved and we have freed up capital. Also, the annuities now have two primary sources of income: $7 billion of deferred annuities and $11 billion of long-term immediate annuities. We aggressively manage these businesses to maximize long-term shareholder value, even if this means negative impacts on current returns. We do this in four ways: operational improvements and cost reduction, using a low-risk asset liability management strategy, investing in long-term assets to generate income for long-dated liabilities such as structured settlements, and actively managing capital. As a result, adjusted net income from the deferred annuities is acceptable with returns below the middle double digits while the immediate annuities have a lower return on capital. So let's go through the four approaches on Slide 11, which provides more detail on our multifaceted approach to improve the long-term economics of this business. We have decreased crediting rates given the declining interest rate environment and contractual features such as maturity dates and limitations on additional deposits that have been in force. Approximately 84% of deferred annuities were declared at crediting rates of contractual minimum. Operational enhancements, lower costs and reduced risk include expanded use of offshoring and simplifying administrative processes. We are leveraging the best sources of analytics available to identify the pieces that wouldn't meet to reduce those payments. At the same time, asset liability matching risk as carefully controlled by positioning the portfolio to have ample liquidity for the subsequent seven years. Expected cash requirements beyond seven years are invested in performance-based assets to generate attractive risk-adjusted returns for the long-dated structured term annuities, some of which are expected to pay out over decades. The risk and return map is laid out in the table in the middle of the slide. The table shows US corporate bond and US equity returns since 1920. The volatility of these asset classes over different time periods is represented by the standard deviation. So let's start on the top line where you can see in grey, the corporate bonds at lower returns on a one-year time horizon than equity. But the volatility has also been much lower. When you extend the time periods to 10 and 20 years, the relative return of bonds remains significantly below that of equity. But the volatility convergence results in much better risk-adjusted return for equity. As a result, with a long investment horizon, equities are a much better choice if you can handle the interim volatility, which we have done by ensuring your cash matches to seven years. This investment strategy was favorable from an economic perspective but requires additional regulatory capital, which negatively impacts reported financial results. As a result, we actively manage capital to further improve the returns on our annuity business. Today, the NAIC equity investment capital requirements focus on short-term reserves similar to the volatility shown in the one-year column table. We are leading industry efforts with the NAIC to recognize the long-term risk reduction associated with the most balanced fixed income and performance-based portfolio. Utilizing horizon-based investment risk metrics should right-size regulatory capital requirements. We also continue to review strategic options to reduce exposure and improve returns with the business. And now I'll turn it back over to Mario.

Thanks, Mary Jane. Let's turn to Slide 12. We continue to generate attractive returns on capital with adjusted net income return on equity of 13.5% for the 12 months ended June 30, 2019. The annuity segment, however, generates returns that are below our cost of capital. As you can see from the table on the left, this reduced corporate returns by 3.7 points for the latest 12-month period. When you exclude the impact of annuities, Allstate's adjusted net income return on equity is currently 17.2%. The components of this return are shown on the right. Allstate protection generates returns in the mid to high teens, depending on the geography and product. Allstate life has consistent low teens returns. Allstate benefits is in the mid to high teens. Investments in growth are being made in the service businesses. Beginning in 2020, Allstate will establish long-term return on equity targets, replacing the focus on the annual Property-Liability underlying combined ratio. This broader and longer-term measure of performance will increase the operating focus on investments, life benefits, and the service businesses, which in total deploy more than 50% of economic capital when you include the investments back into the Property-Liability business. Today, some of the non-Property-Liability businesses such as Allstate benefits, SquareTrade and InfoArmor get limited focus from the market despite the fact that they have substantial value. Just the purchase price of SquareTrade and InfoArmor is worth approximately $5.75 per share. This measure also factors in capital management actions and is highly correlated with stock price and consistent with guidance that our peers provide. Slide 13 highlights the continued strength of our capital position and financial flexibility. Shareholders' equity of $24.5 billion at the quarter's end reflects an increase of $1.35 billion over the second quarter of 2018. Book value per share increased to $67.28 or 13.7% since the second quarter of 2018, reflecting strong income generation and appreciation of the investment portfolio. We returned $664 million to common shareholders in the second quarter of 2019 through a combination of $166 million in common stock dividends and $498 million of share repurchases, which includes the settlement of the accelerated share purchase program. As of June 30, there was $1.6 billion remaining on the common share repurchase program. Now let's open it up for questions.

Yes. Good morning. I had a question on market conditions. You mentioned in the queue that advertising insurance has less favorable economics. I wondered if you could comment on what you're seeing in shopping behavior or volume or conversion that might be causing that.

Gary, this is Tom. We manage the advertising expenses at quite a granular level down to whether it's top of the funnel or bottom of the funnel, which state, where we are at pricing, and what we're doing with pricing. I don't think you should take away from that comment that we're not interested in growing insurance or that we don't think we have a competitive product because that advertising is not working. There's just a small blip down, I think down like 4% or something like that.

Yeah, 4%. So Gary, to follow up on that, what we did this year was, following what Tom said, we went through our economic model, we looked at where we are in terms of the market. Entering the year, we had a few states where we thought we would touch and go on the profitability we want to achieve. If you notice in the second quarter, auto took some reasonable rates, and we took substantially more rates in property also for the first and second quarter. We got the book, we think where profitability going forward looks good to us. And so we think that will create a better opportunity for us to advertise and grow. It never makes sense to spend money on advertising when you think in some of the larger markets you may be a little bit off the placement.

All right, yeah, that's helpful. I was wondering if you could comment on whether you're seeing anything in the Allstate brand as well, I mean, it's different distribution. But are there any trends you're seeing either in shopping behavior or quoting or conversion?

I think it'd be just – first, Gary, all the industry stuff is somewhat directional, but I don't think it's as specific as what we actually achieve ourselves. Glenn can talk about where we're growing and in which markets. The market is slightly more competitive because people are doing the logical thing, which is if they are overpriced and higher than we are, some of them are coming down. But that doesn't mean that because the percentage change is negative, they are still cheaper than us. So it really – customers buy in dollars, not in percentage change. Sometimes they shop based on percentage change. But we're seeing – there's not been a huge change in shopping behavior. Glenn, maybe you want to talk about our actual results.

Yeah, I'll just add Gary that we've had good quoting. In fact, our quoting has been favorable the last year. You can see that new business results over a pretty high base here, we were up slightly a tenth of a point. So we felt good about where we were there. So we're seeing still good active movement in the market, as Tom said. You can look at the CTI numbers, and it was near double digits 18 months ago; now, it's under a point. So it's a relatively flat rate environment, there has been some increase in advertising by some of our competitors.

That said, we have more points of presence now of 2500 points of presence year-over-year and the quoting activities have been good. We feel good about our ability to compete. This is a market we're excited about. We think there's an opportunity to grow. That's why Glenn went through the quoting, more money on there to invest in it like we think this is a great opportunity, we're in a great returns. Our brand is strong, our pricing is good, we’re ready to go.

Thank you very much for those answers.

Good morning. My first question, I'll focus back on Slide 12 of your investor presentation around return on equity. I was hoping maybe you could expand further on how your new approach to guidance might look. One of the concerns or issues that I imagine you're dealing with is the potential changes in the denominator book value because of the quarterly mark to market adjustments for your investment portfolio. And of course, then maybe at the end of next year, you're going to be adjusting book value for the yet to be announced adjustment related to long-duration contracts in your annuity business.

Mario can answer the second piece. Let me just give you an overview – we're doing it because we think it's a better way to talk to you about how we're doing in total. As you said, when you look at just the underlying combined ratio and that becomes the whole focus of the conversation, it suggests an important, significant part of the business but it's not the whole business. It was perhaps more important when the frequency of auto actions went up in 2015 and people wanted to make sure we were reacting to that. So we've done that. We've been doing it for 13 years. But when you step back, Greg and look at the impact on stock price, ROE is correlated to stock price. That's the measure we'd like to be held accountable to. We obviously manage our divine combined ratio. But if you look at the underlying combined ratio, we have a very low underlying combined ratio. Other people have a higher underlying combined ratio yet they have a higher multiple than we do. So there's not as good a correlation. It's really about communicating to you all in the broadest way we can. There will obviously be some ups and downs as we deal with different accountings, but this accounting boost and more fair value and the whole balance sheet. So that bounces around. But that's just a math and explanation issue in conversation we can have with you as to how we're doing and what we're doing. Mario, you might want to talk about the new accounting principles.

Yeah, sure. Good morning, Greg. So the first thing I'd say is just kind of reiterate to what Tom just said at the end. So the ROE guidance we give you will take into account not only the projected profitability of our businesses but also the denominator to your point and the amount of capital we have to hold, which will include whatever accounting standards happen to be in place at that time. So we're going to factor both into the guidance we give you. In terms of the long-duration accounting standards, we're obviously well aware of it. The initial guidance came out in August, we've been monitoring it ever since. The FASB just this month indicated that they may potentially be deferring implementation by a year or so, so it's still a little while away. For us, as we've been disclosing for a number of quarters now, the impact will be material in our financial statements. It will principally impact our new segment and will really do it in two ways. The first is through updating assumptions like mortality, morbidity and lapse assumptions on a regular basis and that'll affect retained earnings when we implement it. And then the ongoing impact will actually affect the income statement. The second part is re-measurement of our liabilities using a more current interest rate as opposed to the assumptions that were put in place at the issuance of the policy. Again, that's going to impact the balance sheet through AOCI. So we're focused on it, we're looking at it and when we have something to report, we'll give you more information on that. But in the interim, the ROE guidance we give you will factor those kinds of things.

Great, thank you for that answer, Tom and Mario. I'd like to pivot for my second question to Glenn's comments around the expense ratio for the Property-Liability business. I noted with interest in your results, really the pretty big improvement in both the Allstate brand expense ratio and the Esurance expense ratio. I think Glenn, in your prepared comments, you talked about maybe some headwinds or some upward pressure in the back half of the year. But maybe you could spend a minute and talk to us more about what you're doing at the organization to drive improved efficiency in the expense ratio and what we should be thinking about that trajectory as we look out to 2020 and beyond.

Yeah, thanks Greg, I appreciate the question. I guess I'd reframe headwinds as opportunities because what we're looking to do is invest and grow the business which is a great return business. We have made some good structural movement on expenses. To turn that into some real tangible examples for you, operationally, we've done some things like automation; we're using aerial imagery and available data in the market instead of going out and inspecting homes from an underwriting standpoint. So you can just think about the cost trade-off of doing that. We have improved customer experience by providing better information up front, a streamlined onboarding process, and as a result, we have a 20% reduction in inquiry calls. That's great for the customer. But it costs money to answer the phone and it ends up taking our costs down. Our procurement team has done a really nice job of leveraging our scale, improving our contracts and what we pay third-party providers. As you mentioned, Esurance's expenses are down. And that's been, Steve talked about before, some on the marketing and acquisition side of things. We have some sustainable components to all of that. And as I mentioned in the prepared remarks, part of it is a smaller piece of this is executive compensation where we had higher targets this year for growth. Now you take that and if you take a small amount of that, you create this virtuous cycle to where you achieve expense advantage and take a small amount of that and you invest in growth, you grow really high-margin business, and it's ultimately a great win for the shareholders.

Thank you for your answers.

Hey, thanks. My first will be a follow-up to the expense efficiencies you're speaking to. I'm curious, so the structural expense efficiencies, do you feel these are kind of Allstate competitive advantages or do you feel it's a first mover advantage and the rest of the industry is kind of moving in that direction as well over time? It feels like – it kind of seems like we've been talking about these things for a while, it seems like it came pretty fast in terms of – into the income statement.

Mike this is Tom. I think some are advantages. I think in other places, we're still trying to get our expenses down to where other people are. So I don't think we're perfect by any measure. I would say in the claims area, which was not included in the expense ratio we're talking about, I believe we're ahead. If you look at what we're doing with quick photo claim and what we're doing with drones on adjusting houses, we appear to be faster and farther in integrating that into our business processes than our competitors. But I say I believe because I don't go and sit in the Progressive or State Farm or GEICO calls when we're looking at the industry, we think we're ahead there. There are other parts where we need to get more effective and efficient. So you've seen that at Esurance, we brought the marketing spend down, we don't have the brand consideration for that brand yet at a point where it is efficient and effective as the GEICO brand; as they spend $1.7 billion, we spend a lot less than that. So the difference is getting smaller as we spend real dollars. But we're not where they are. When you look first at the competitors, we're in the hunt, we're competing aggressively. But we're all working to try to reduce our expenses even better, because we can do that. One of the things we mentioned up front is we're building an integrated digital enterprise, which is about how do we use technology, data analytics and importantly process design to reduce the expenses across all of our brands. That will lead to some additional changes in the future as we try to cut out expenses by leveraging stuff across anything would all add to that.

I think the only thing I might say is we've mentioned advertising for Esurance; they have actually spent a lot of hard work, getting their other operating costs down. So you look, they brought into about half of that decline in their expenses over the last year, has been other operating expenses for you believe are sustainable, that's based on customer experience, improved digitization edition, just off the growth. You've got to believe that 18 months and scaling, so we feel good, our position and the team is really focused on continuing that trend.

Okay, that's very helpful. And my last question is switching gears; homeowners' paid claim severity is more volatile and seems like less credible than versus the auto side. Any color on how to think about what's going on with home paid claim severity given the increase to 11.7% this quarter? Thanks.

Well, you're right that it's more volatile. Glenn can talk about what we've been doing on average price, which I think is important to recognize. But it bounces around. Over a time period like 12 months, it should work its way out. Paid claim costs a lot cost a lot more than someone running into their garage door. So it messes up the severity; it is seasonal but over time it works its way out, and that's what you reflected depression. But Glenn, do you want to talk about how you're taking severity and what you're doing to maintain margin?

Yeah, it's a great point; Tom's making. Unlike auto, the variation in perils creates a lot of movement in that. But we look at the overall trend. If you look at homeowners over the past six years, we produced, on average, a 16% underwriting profit and an 84 combined ratio, but the last 12 months was a 98, so 2% underwriting profit. It's volatile, we've had a lot of weather in there and we've been recognizing that in price, and you can see in the year-over-year, and I always go to the average premium as opposed to the filed rates because there's a material difference between those because we have inflationary factors in. Average premium is up 5.6%. So we're definitely taking weather patterns seriously, and we're looking at rate and what we need to do from a pricing standpoint to make sure we continue to deliver those long-term profitable margins that you're talking about.

Thank you.

Hey, guys, good morning. I guess just taking a step back on the expense ratio. Just looking at just auto, I think Allstate's always been around a 25% expense ratio company, it was about a 24 this quarter, which is clearly good. Some of your top competitors, I think, are around 20 or even a little bit lower than that. I'm curious, Tom; do you have a number in mind for what you think Allstate could achieve over the next few years on the expense ratio?

Lower is better. We have a target, but they're not targets that we disclose. We are working hard on things like getting great digital enterprise, using technology, and putting common processes in place across all of our brands to get that down. And we're working hard. That doesn't mean Ryan that if we see an opportunity to invest, as Glenn said, to get really attractive business, we're not going to do that. We will not be a slave to just getting that down. Our objective function is to increase shareholder value, which is a combination of both ROE and growth. If we think we should invest to capture above cost of capital growth, we will do that. We get really good returns in that business. If you saw, is it possible that our investments in growth will go up? Yes, we said they're going to go up in the second half. It doesn't mean we're not reducing expenses that we're working hard on expenses on a whole bunch of products.

Understood, and then my follow-up was on the Slide 11 ROE, on some of that new stuff. I mean, first of all, just to clarify, the ROE goal will include any type of drag that's coming from the non-P&C business like the annuities, like that's something that you have to – you're going to include and have to battle against.

Ryan, we'd like to get people's opinions on that as to what works for you. We want to give you an ROE goal, we think it should be in total because it ties to the thing. It came up earlier that to the extent things change like the accounting for annuities and new write-offs and stuff like that, we have to have a conversation with you to say, this is we think it's a better measure. It'll give you more insights into how we're doing including your buying back stock and everything else. We can't – we're not going to give you the underlying math around the goal that we do, and we'll establish a long-term target, which we said is where we can run the business. But there'll be a lot of dialogue about it. This is about increasing discussion and dialogue, shifting to a better measure.

Understood, and I agree that total ROE approach makes sense. But presumably, the easiest way to improve that total ROE would seem to be a separation of the annuities business or at least in the immediate annuities block. I'm just curious, are there any legal entity complications that would come with you trying to part ways with that business?

There are lots of ways to accomplish it legally. There's now a separation law that's been passed in Illinois, which gives us some additional opportunities. That may not be the first place we choose to use the separation of ROE; we have some other places we prefer to use it first. But the bigger issue on that one is finding sources of capital that believe that we do that you should invest on a long-term basis, take care of your customers and make sure that they are protected but that they get the right return. It's a combination of – you clearly have complications of which company is embedded in. You can always use reinsurance, but then you get complications of the capital stuff that Mary Jane talked about. We think that the regulatory capital required to have performance space investment in long-dated structured settlements is just wrong. You wouldn't invest in pension funds like that. Nobody does, and regulation supports you not doing that. To the extent the regulation supports you being advanced, we think it's bad for policyholders, so we're just going to keep working the issue. There's no silver bullet; there was no silver bullet when we started on this. When I started in 2006, we just keep working. But ‘and then on the ROE thing, that may – the accounting will basically adjust to probably more than what's economic. That's not the exact way you want to get to high ROE on annuity by writing up equity. But that's what will end up happening with this principle when it gets put in place.

Thanks so much.

Hey, thanks. This is Rob Katz for Yaron. The midpoint of updated underlying combined ratio guidance has two points of deterioration compared to one half of '19. You talked about rate increases earning in through homeowners in the second half of '19. I was wondering if you could walk through the offsets. I know you mentioned potentially higher severity and, of course, the increased investments in future growth?

Let me first – we're in a really good return in the Property-Liability business today. The underlying combined ratios and the recorded combined ratio all generate extremely high returns. We're quite comfortable where we're at. We don't see this as waving the flag that we think profitability is going to be worse or their profitability is not going to be attractive shell. Let me start there: this is a really good business with really high returns that we like. As it relates to the quarter-by-quarter stuff of what you're comparing it – we kind of look at really the underlying combined ratio on a 12-month basis. You can't really look at on a quarterly basis to the bounces around a lot. What we've said is that the reduction of the guidance from the beginning of the year, where we gave guidance, we're down now a point and a half, that's worth about $0.5 billion. That's a $1 billion. That is reflected back; if frequency is down from last year, we're assuming frequency will stay down. Severity of auto particularly the physical damage coverage is up versus last year and up a little more than we thought when we did the original guidance. We factored that in. We factored in the additional growth we're doing. We don't give the components to that by quarter, and you really have to be looking at it on an annual basis. The key message is, we feel really good about profitability. We like where we're at. We don't see any big changes in the market coming, whether it be frequency or severity that we haven't anticipated that goes into that number.

Okay, thank you. Just switching to the investment portfolio, was the extension in duration more of a strategic decision to offset the lower yield environment?

Yeah, it's John Jablonski here. As you know, we had stated that we manage our portfolio dynamically. You can see that historically we've done a number of things to do that. When you go back a couple of years, we've built up our performance-based portfolio, from time to time we will favor one asset class over another. More recently, we looked at potentially slowing growth in the economy in the US and around the world coupled with higher interest rates as interest rates crept up last year. We thought that it made sense in the spirit of dynamically managing the portfolio to shift emphasis a little bit. Thankfully, we did a lot of that move; we extended duration last year, about a year between last year and the beginning of this year. It benefited returns this year, as interest rates have fallen pretty substantially. I don't view that as really taking additional risk; it's really more balancing the portfolio closer to our long-term objective. Going forward, we've the Fed meeting today; I think there will be some interesting information coming out of that. But what I can promise you is that we will work together as a team to look at where the best opportunity is across the marketplace. Just a couple of tidbits of information: a lot has been said about where interest rates are now and what does that mean for performance portfolio going forward. I'll just remind everyone that back in 2016, the 10-year hit a 1.37%, it's hovering a little bit above 2% right now. In the period that ensued thereafter, we were still able to return good returns in the portfolio, and that comes from all the things that we've talked about historically: a good balance of different types of assets, market-based or performance-based, around the world and active management. I would also point out that this year has been an attractive year for assets year-to-date; only roughly 2% of the time have both the bond market and stock market appreciated this much if you go back 100 years. So just taking that into consideration, we're happy that we manage it dynamically. Maybe somewhat comforting news on that though is that when you look back at those periods historically, it's not as if the bottoms dropped out in markets after that; the 12 months that have ensued after these periods, historically, it's been okay in the market, so we're watching all of this information leading on our team internally leading on our experts and expert managers to figure out the best way from here.

Awesome, that's really helpful. Thanks.

Yeah. Hey, good morning, everybody. Thanks. My first question is, seems like a really basic question. So I must be missing something pretty basic. So I apologize. The goal here is to grow more, and you have got investments to make that happen. You talk a lot about the investments around this country, so I guess, what I'm missing is, this quarter expense ratio was down because of lower incentive comp agents, which sounds like incentive comps would drive growth. So what am I missing there? Why would that come down?

Yeah, Michael, this is Glenn. I would say I wouldn't lead with incentive compensation on it. I would list that somewhere down the list of things that drove the expenses. So we talked about some of the operational improvements that have been made and that has moved to expenses. But we also acknowledge that a piece of it is in management center compensation is part of that because of higher growth goals this year, but as we talked about in this call, we were working hard, we have been, and we're seeing some of these things come to fruition. We'll continue to look at expense opportunities because we consider it a virtuous cycle; you reduce expense; you invest a portion of that reduction in growth; you grow really high margin business and that's our target.

From a philosophy standpoint, we should do better every year. Like a bank, we raise the targets, and their advancement is not yet at this target, so they're not getting paid on that. So that's like, okay. They're not dis-incentivized; they're hustling to get the higher target. So what is the fact on this give them good targets, balance targets, give them the resources to get it done. It's not – it's not as direct or main line as choosing our strategy.

Okay, thank you for your answers.

I guess the other piece I wanted to ask.

Hey, Paul, could you speak up please? We can't hear you.

My apologies; I wanted to maybe beat the expense ratio horse just one more time. I was hoping you can look out further into what sort of pieces you'd be looking for to moderate prospectively in terms of the expense? Is it any sort of commission levels involved in that or is it all just operating expenses?

Well, Paul, we don't get the components out. But in total, our customers want to pay less to get more. What we have to do is both figure out how to use less money, but then also how to improve the customer experience. We are, for example, Glenn has an effort going to build some integrated service capabilities, where we will move work out of agencies into centralized centers, which eventually may even actually be done when not needed anymore. Because once we centralize and we can figure out how to redesign the processes to make them that needed much as we've done with as Glenn was talking about getting rid of the 20% of the inquiries. There’s a variety and so that will lower costs. At the same time, we're investing in new technology for the agencies of Allstate Advisor Pro, which enables us they have a much more wholesome, broad conversation with customers about their needs and what kind of protection they have. It’s a question of managing both the expenses down and the value. Glenn, anything you would add – do you want to add anything on the great service?

Sure. I guess just the – I guess the point of detail I'll put on that is if you think about our system, the value that we provide to customers, we think it's a really big differentiator as trusted advisors. We have agents across the country and people some towns that are providing them great advice on their insurance. That's the good news. The opportunity is that there's some inefficiencies in providing the service in a decentralized way like that. So when you aggregate some of the transactional service components that customers don't value as much as that advice and you can do it at scale, we could take meaningful costs out of that system. So as Tom described, I think that's a great opportunity as we move forward.

And my follow-up was about maybe any update thoughts you have on M&A? I think you obviously expand the service businesses; there is some talk of expanding the business, commercial businesses, any thoughts have updated in the M&A?

I would say, consistent with what we talk about first – we look at stuff all the time, we're kind of sticky. We have to better own. When we look at companies, we're like is there a reason for that we add value and we make this a better company. We believe that the partnership we put together with SquareTrade has helped lead to that dramatic growth. We believe in the partnership that we're building with the InfoArmor team, where great growth is going to start selling that stuff to Allstate benefits. It's a lot about distribution, we've to figure out how we get the Allstate name on it. There's a lot of things we can – it’s the middle of those ovals. That's really what the acquisitions have to do. We don't have anything specific on the list today that doesn't – isn't consistent with the strategy. Should you talk that you had, and you just talked about. There’s – well, just as it comes up, you'll find us to be prudent, thoughtful. The other things we will do is as we've done with SquareTrade and InfoArmor, say, here's our measure of success. We acquire the company, here are the three things we think we need to do with that. Then about every six to nine months, we go through that with you and say here's how we're doing. It's about being strategic, deploying shareholders capital well, and then being fully transparent.

Great, thank you. Congratulations on the quarter.

Thank you. Our strategy is to both grow our market share and Personal Property-Liability. We're hard at working that and then grow our other protection products, which we've had great success on this quarter. At the same time, making sure we deliver what we need to do on our annual operating priority. Thank you. I will continue to work hard on shareholders behalf.