The Allstate Corporation (ALL) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to Allstate's Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. John Griek, Head of Investor Relations. Please go ahead, sir.

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, 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 and using Telematics in auto insurance. And now, I'll turn it over to Tom.

Well. Good morning. Thank you for joining us and stay 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, which was a $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 an all five 2018 operating priorities. The first three better serve our customers, achieve target economic returns and capital and grow the customer base are all intertwined, but it does ensure we have profitable long-term growth. Customers were better served as a 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 all Esurance. When you combined that with a significant growth at SquareTrade, policies in force surpassed the $113 million in 2018. The $81 billion investment portfolio generated $3.2 billion in net investment income in 2018, which uses also slightly higher yield on a market-based portfolio in good performance-based results, which was 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 make 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 with in our side -- within our overall strategy. So Allstate 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, homes both in personal liability. We use differentiated products, sophisticated analytics, and telematics in a building in integrated digital enterprise to grow market share in this protection space. Our strategy also protects people from a range rather 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, and it's 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 Company 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 -- a 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 and auto insurance. So, we've been investing in telematics for almost a decade to increase auto insurance pricing sophistication, to 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 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 up underneath the dashboard to establish a connection with the car. We launch Milewise in 2016 in two states 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 to Allstate in a 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 about from New Jersey to New York. So telematics though enables pricing to be based on how you actually drive, and telematics is also based on exactly where, when and how much you drive. So that leads to increase 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 connect with customers. We provide customers with awards for safe driving, safe driving tips that can lower their premiums, decode the maintenance, light needing your car 0:02:13.0 p,9 (inaudible) you know when you have that light comes down to maintenance 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 is your cost of repair and enable you to link to repair facility. So given these benefits, we believe telematics will be integrated into auto insurance -- 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. In a strategic platform as 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. So 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 participant 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 telematics platform enables companies to increase your 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 and industry use Arity, the breadth and depth of data ensured intelligence will grow, more data and a platform allow companies to refine and customize their specific business models, their specific need. So for example, ride-sharing companies can use Arity platform enable them to select safer drivers or better manage your operations. It also lowers the cost of collecting information. So 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. It 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 the 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 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 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 fourth quarter and 6% for the full year, driven by accelerated growth in the Allstate and Esurance brand. 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 and higher premiums earned and lower accident frequency more than offset 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 point 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 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 in 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 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 and 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 businesses expanding 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 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 generate 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 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.

[Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo. Your question please?

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. And as you know, we don't give you -- we don't give breakouts -- in the underlying combined ratio guidance.

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 and within those losses, because we price Allstate auto in total. You have physical damage about half of it and then you've got the injury coverage, just about half of it. And then within those, you have frequency and severity impacting each of those. So those four quadrants 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. So, the issues in industry wide one, we've seen more sophisticated cars costing more to repair. And as a result of that, particularly at the high-end of repairs, more cars are then reaching sort of that capitation level of a total loss. So you'll see across industry trends, not only in the fast track numbers of overall severity up, you'll see that more cars are reaching a total loss threshold, particularly in recent model years. And I'll give you a specific example just to illustrate, because our team in claims, in our actuaries and our product folks, they do a ton of work getting deep into making model and what's driving different trends. So a specific example, take a Camry, which is pretty common vehicle, and we look from 2013 through 2018, what the changes were repairing the front-end impact. And the answer is in that five year window, they've doubled. It's the impact of more sophisticated cars with sensors that are actually helping us on the frequency side, but they're costing more to repair. That added $1,700 alone, just the sensors that help avoid accidents. A really specific component taking on that car specifically is the headlight. Headlight went from $360 in 2013 to over $1,900 in 2018 and I give you the specifics and example for two reason; one, is to give you an idea of what's going on and what we see and make a model. Two, is to illustrate we do go deep on this issue and we look at it very thoughtfully. So that takes you to what you do about it. One lever is rate, which obviously we look at on market-by-market basis, where we need to take pricing. The next would be to be more sophisticated and laser focused on that rate. So how do we get better and better -- making model pricing, which we do today, specific making model pricing. But the more we learn, the deeper we go, the more sophisticated we get into specific making model pricing. And the third one would be working with OEMs and their community on improving the overall cost of repair, because as more and more cars are reaching their total loss threshold, I don't think -- there's anybody to have a sort of disposable vehicles, that in the newer model years and we want to be able to repair cars and return them to customers. And answer to the question about whether it's included, we absolutely include all the factors that we look at in giving guidance and it's included retroactively in all of our financials are open and are 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 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, to hold on for M&A opportunities?

Well, Elyse, we obviously don't comment any transactions that people think we could show or maybe or 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 I'll do the second part first. So whether that's to use -- do share repurchases by companies were better owners than somebody else continue to grow our business. So that part won't change at all, as it relates to that. We have as you know; we've been working hard on improving the long-term economic returns on the annuity business, which have hurt the current book returns. So, 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 have pension fund, put it mostly in equities, because once you get past 10 years, your return on equities is twice what it is in bonds and your risk is lower. So the downside to that is that the regulators require a significant capital requirement for equity because they think about the equities as being volatile on a day-to-day basis, not on a 10-year basis. So 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 and the payout annuity, which would free-up a tremendous amount of capital, of course that we could then use the way we -- I started to talk about. So we're looking at every possible way we can improve every element of our capital deployment each and every day, whether that's the annuity business using reinsurance, using preferred stock, buybacks stock. So it's just a part of life for us. So you should know, we're focused on how do we improve returns annuities and thinks that there's opportunities where we can take advantage of when we run forward.

Thank you. Our next question comes from the line of Gary Ransom from Dowling & Partners. Your question, please.

Good morning. I'd like to dig in on 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 was subset, 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 what we're seeing. So obviously we have a variety of both short and long term strategies to grow and each brand is different and there are differences by geography and by component of the leverage you can have in each of those. So these growth drivers are -- 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 level and quality of our advertising, there's the breadth of our product offering. And so we pursue those, all of those. So Glenn will talk about the auto home life and Allstate brand. If others want to get into Esurance, Encompass, the transportation network companies, Steve can handle that one. And Don obviously has the servicing businesses. But Glenn, why don't deal with Gary's question directly?

Yes, thanks, Gary. So first talking about the agents. It's really; it's a fun part of what's going on right now in terms of our growth. And it's -- I'd call it a system wide growth because you're touching on an important part because you can see the policy growth, you can see the premium growth but what's really happening underneath that is we've got 2,700 more points of sales. And new agents join us to start the -- our new sales people join an agency because they want to win. They don't start it to stay flat, they want to grow and 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 sort of built into the system and we're growing in a healthy way. And 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. And from a telematics standpoint, we grew that by 30% this year. We added over 300,000 connections, active connections to our Drivewise. And on the Milewise side which is the pay per mile, or Tom mentioned before. That's -- I think about it like a startup with small numbers but it's growing like crazy. 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?

Well, this is Tom. By any -- you mean -- I would say that the -- if you look at the Allstate brand, Glenn's got a number of strategies, different states where he thinks he can grow faster. Obviously, retention is always a benefit that we get from -- Esurance you saw 10% growth last year. So we are feeling 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.

Thank you. Our next question comes from the line of Greg Peters from Raymond James. Your question please.

Good morning. The first question is around the homeowners business and I was looking in your statistical supplement. I think it's page 25 where you had talk about gross claim frequency and paid claim frequency and being up almost double digit in the fourth quarter. They are actually for last couple of quarters it's been up pretty strong. But then I looked at the Allstate homeowners underlying loss ratio and 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 I'd like to set a little bit of context. So the Allstate brand homeowner business is very attractive for us, $7 billion of premium, made $470 million of underwriting income in a year, weather a fair amount of catastrophe. So 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 mix there at the quarter-over-quarter versus the year-over-year change. So, yes, it did come down quarter-over -- from the third quarter to the fourth quarter but year-over-year it was up a couple of points in terms of the underlying combined. But to Tom's point, in a year with a lot of catastrophes particularly in the fourth quarter, we produced our recorded combined. And I'd like to go the recorded because we are managing the overall risk over the long-term of catastrophe; it is a big part of what we do. We focus on the underlying. [933] in year that has type of catastrophes we had was pretty strong. And then you have to -- before the fourth quarter you had to go back almost seven years to have a quarter that didn't produced an underwriting profit. So strong work across the system which is the underwriting approach that we take. It's the pricing, the reinsurance which obviously played a part in fourth quarter for us. And our claims approach that we think ultimately get caught, part of your question relative to the underlying I would say, 2018 was an extremely wet year. I mentioned that in the third quarter, continued into the fourth a bit. It was a heavy, heavy rain year. 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 and I guess it's seasonally high in the fourth quarter, but it certainly seemed to be trending up from what I used to think, it used to like to target in a low 70s. The underlying loss ratio seemed to be pushing up close to the hot now 80. 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 we said the lower 70s or below 75 range. And for the quarter it was elevated. Couple reasons for that I think is you see one, given the growth we had in the business during 2018; we have a great portion of new customers. There is some higher loss ratio with newer customers. That's only piece of the dollar. Clearly, we have had the same type of issues in terms of severity that we talked about in the Allstate business. And you look at the opposite to that; we brought our expense ratio down, a large amount over the last three years. So in total we are actually have combined ratio on an underlying base below 100 for the whole year. And for all but the last quarter of the year we had good results. And starting to get profit in the business as we grow. So we feel good about the overall profitability. You are correct. We need to work harder on that --combined ratio and drive it down a little bit from where it is today. And that will accelerate our growth. We feel really good about the growth and the profitability for 2018.

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

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

So by long term, speaking of real long term, I am hanging around real for the long time. Mike, I have 15 plus years that just came down pretty steadily as we had third brake light on the car, antilock brakes, airbags, plus some downs so it's just worked on both frequency and severity for a long period of time. Then it kind of playing it down for a while and I am not -- I don't have the exact years in my head but it's kind of flattened out in about 10 years ago. And wasn't really going up for down much than of course in 2015 and 2016 it just fight way up. Still unclear deck as to why that happens somewhat driven by miles -- in miles driven. Some by economic activity which is related to miles driven. There is also when people speculated it's due to like the big cell phone and stuffs like that, distract driving. I think the answer is it's really hard to get attribution as to why. Glenn talked about the decline in frequency since then which is then in part due to less miles drove but also safer cars and some of the trend that were present earlier in that long -term cycle. So little hard to exactly what it is, as it relates to the forecast for next year, maybe I am sure everybody has heard about this, as you know we try not to go to the component of the guidance. But we do make an estimate of what we think is likely to be and that includes some trends are just external, we don't control. So for example frequency would be one of those. We can't control whether people getting accidents or not. There are some which are partially controllable. And Glenn talked about asset severity and in physical damage or bodily injury; you can control some of that. Some of its inflation is done with the cost of parts where you can try to do a good job making sure your customers get the right amount, not too little much, not too much. And then there are trends we create like price increases and expenses that both Glenn and Steve talked about. So when we're looking at the underlying combined ratio guidance, we look at the trends. We don't know, we can't control, we look at the ones we think we can have some influence on and then the ones we do have influence on. And then we -- as a result of that set our guidance at 86 to 88. It's obvious, of course, that's just a small part of the value created as mentioned doesn't include catastrophe losses. It doesn't include prior reserve changes, it doesn't include things like pension settlement charges, which I think led to some confusion in the third quarter, doesn't include investment income, doesn't include our life businesses make almost $300 million a year. That does include Allstate benefit. So as it relates to doing projection, the business we think it's useful -- is a way to help you understand how we feel a large component of our business is operating. But I always try to caution us against thinking that is the only value creator and the only thing under which shareholders should decide is whether this is a good story or not. And the next -- it was there anything specifically on frequency in the fourth quarter that we can answer for you?

No. I guess it just the answer was there's not really a conclusive long- term trend line to frequency, if you think I understood your answer.

I think it bounces around a lot Mike, -- what you do want to do and what we try to do is just be flexible, quick and adapt to it. So if it goes up you've got to raise prices. If it goes down, you have to make sure it goes down and then maybe you don't raise prices much and you get a little bit of retention and you've seen both of those stories in the last four years.

Okay, great and my follow up are regarding telematics. Thanks for the information and you gave out one stat earlier on the call saying telematics Drivewise policies I think grew 30% year-on-year. Can you give us maybe some more stats or color on what the adoption rate is for telematics? And maybe how we can try to start thinking about the adoption curve longer term? How are you guys going to get these policies into the hands of your policy holders?

When Glenn gave it a number of 30% of the Allstate brand, the Esurance brand was up substantially more than 30%. They really got focused on it this year. We're finding the adoption rate to be relatively high in going up but you have to manage it. So you have to manage the initial conversation. You have to manage the onboarding and you have to manage not just the conversion rate but the retention rate, so you also have to manage the ongoing relationship. So we focus on all of those components. We've made progress on all those components in 2018. We don't give the specific numbers out because that's just too competitive and everybody else does it. As it relates to where it can go, I think most insurers are going to include telematics, most auto insurers include telematics' pricing, and it's just way too powerful. It's every bit as powerful as credit was when that was adapted. So the industry is going to adapt it. We made that call when we decided to build areas of platform that we thought it just -- it's too powerful rating factor and if you go back, just the location, so if you price your auto insurance by where somebody is car's garaged, people figure that out. So they garage at one place and drive it someplace else, because it's cheaper. So not everybody does that but it leads to small inefficiencies in the market and to the extent you can be more efficient than when, where and how they drive, it can give you much better pricing. So it's going to happen. It's hard to tell what the adoption rate will be. But I think you could look at credit as an example and see how that rolled out in the industry over a period of time and basically almost everybody using some form of credit or some proxy for that today.

Thank you. Our next question comes from the line of Amit Kumar from Buckingham Research. Your question please?

Thanks and good morning. I wanted to go back to your example upon auto parts in response to Elyse's question. I think not a day passes that we see new headlines on auto tariffs and tariffs on auto parts and seems like we're getting closer to some sort of conclusions. Have your conversations internally on par with the repair shops changed and how are you thinking about in case we do see some action on that?

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

On the auto tariff discussion you had.

I'll let Glenn talk about what he's doing specifically inside the business. Obviously, tariffs on steel and to the extent parts are made of steel, becomes expensive. And that's relative to the pricing it's obviously indirect. And in terms of the cost to repair bodies -- I think it's time to actually have a conversation about the cost repair versus the cost to buy a car. And if the auto manufacturers are giving away the razor to sell the blades as a way to make profit and it shows up for individual consumers as higher insurance prices which they don't really understand because it's embedded in the fact that Glenn's example that the headlight now costs $1,900 instead of $300, my first car costs less than the $300 and certainly, I'd go and get a better one for $1,900. So I think that's an economic trend between industries that we need to sort out. And Glenn, anything you want to say about the specific parts and body shops?

Yes, we work -- there's a lot of different approaches we take in our claims team does really great job working on agreed pricing with large auto body shop aggregators and there's a number of components that how they're trying to manage overall costs. Specific to the tariffs, it's something we're keeping an eye on similar to other things we look at from an inflationary standpoint. Like we look at the cost of petroleum because a lot of auto parts and certainly roofing materials and homeowner's petroleum based and we look at price of steel to Tom's point, the tariffs would be another inflationary factor we look at because about 60% of auto glass for example comes from China. And you have a significant percentage of metallic auto parts coming from China as well. So as those work through the system, that's essentially an element inflation that we watch.

Got it. That's helpful. The only other question I have is just going back I guess to the discussion on pricing, if you look at Slide -- Page 22 of the stat supplement, it says 25 numbers of locations, the Allstate brand change was only 0.3% for Q4. How should we think about broadly the trajectory of rates from here into 2019 in terms of planned rate actions? Thanks.

Yes, this is Glenn. I'll take that on that. We look at, first of all, I think setting context on it, and we had the same underlying combined ratio two years in a row. We look at our margins and we manage for an attractive return. And I think we've shown that where we went after pricing, when we had to with the frequency spike a few years ago and we showed in the fourth quarter on homeowners where we saw some trends there and had to block the pricing. So on a state-by-state and market-by-market basis, we're going to look at the pricing and keep in mind our competitiveness, our need for rate and act accordingly with it. Where you saw the last couple of quarters with very low rate is we had taken a lot of rate a little bit ahead of the rest of the industry, following that frequency spike. And we were more rates adequate in more places. So it was reflected in good stable rate environment for our customers who help with the retention, helps with the growth. But as that turns, we will on a market-by-market basis make those decisions. I can't project forward obviously for you what rate we'll take but I think our history is good evidence of the fact that we'll take the rate necessary to make sure we're managing our margins appropriately.

Thank you. Our next question comes from the line of Kai Pan from Morgan Stanley. Your question please.

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

Hi, obviously, you're correct in saying that. 2019 is not 2018 and it wasn't the prior 10 years or 11 years how long we've been doing this. And so we look at each year differently. We feel comfortable with 86%, 88%. I would -- there is one word you said that I don't think is accurate which is conservative. We set the range that we think we're going to be in the range. We don't set the range; we think we would be below the range. We pick a number we think is reasonable. This year we revised the range down as you pointed out after the first quarter because frequency was down so much relative to the prior year that we didn't think that we would be in the range anymore. And obviously, we're not -- we were in the middle of the new range. But not where we said beginning of the year. And so that's one of those trends that I mentioned, you just can't forecast. Like that we have no ability to forecast frequency in total, we have our estimates. We look at our trends, Glenn goes by a number of times renewed by --looks at frequently model, make a model, he's going to organize a work on it. But if you said, do we have a solid number that goes into 88, 86 to 88, we make an estimate on that frequency and what we can manage to. And I think that's the other important part. We think we can manage to 86 to 88, depending on what happens in the marketplace. And we think it's in the right place to be because we're earning incredibly high or we don't -- we have very attractive returns on capital at that level. And so we should be growing the business there.

That's very fair. My second question on SquareTrade. The top line growing for the full year, about 80% year-over-year in terms of region premiums. If you excluding Wal-Mart and to what's underlying growth rate has been for that business and also do you have a sort of long-term view on the profitability of the business, because I just wonder when can these rapid gross meaningful, so top line growth would translate to a matured impact on your Allstate earnings?

Well, as Mario mentioned, we set three objectives when we did the acquisition things we needed to do and that included the growth you talked about in the domestic retail business. And we've achieved all three of those objectives. Don, can give you some color on growth, the breadth of the growth as growth rate.

Yes. So when you look at the full year, I mean the company obviously has been growing dramatically, part of that has been new customers as you pointed out. The part of it's been just doing a better job with the customers we have. Having them become more able to serve more of their customers. So if you look at the fourth quarter which was obviously a terrific year, there was a large component of the growth in policies that was the result of the large retailer. But even without that, we still would have had a healthy growth number, just because we're growing the existing books that we have as well. As far as the profitability on a long-term basis, you're right. We did set as one of our measure of success, increased profitability and returns on capital. We've been very happy with the improvements we've seen. But we're trying to do it in a balanced way that builds the business for the future. Tom said in his opening comments that Allstate strategy is to grow by protecting people from life's uncertainties where trade is a key component of that because it's not just auto and home. People need to be protected by from -- it's also other things in their lives that are important. We could probably have made the numbers better. In fact, I know we could have made the numbers better in 2018 by skipping and not investing for the future. But I think, we're seeing the improvement in profitability in a nice balanced long -term sustainable way. Loss rates continue to perform attractively for us. We said earlier that we're going to improve our scale of expenses as we grow the business and the growth has helped us do that. And then we brought our paper in-house. And so we're taking, we're underwriting the risk at all state, which we're obviously capable of doing which helps improve profitability as well. So I'm delighted with the profitability, improvement in profitability. But I think it's the combination of profit and growth working together that's most attractive at this point.

And Kai, so as Don said, look, we create shareholder value by component. So you are right to ask about the components. We think about it that way but we also look in total. And to the extent we think there is another component we can grow, you can say it hurts a total a little bit. We will do it. So for example SquareTrade had really good growth in European telecom business.

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

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

Yaron, I don't know. We don't manage other people's books of business. So we try to just -- we watch what they do. There are some people they run combined ratios higher than we think we need to. We think that the economic rent you can extract in a market relative to value create one that we are very comfortable with. So if we look at our combined ratio whether that be auto or homeowners, we think it's very attractive. There are other people running combined ratios in homeowner insurance which we wouldn't do either and they are growing quite quickly. So we try to manage our own book and look to the -- I don't -- I don't think like these trends that you are seeing in severity will impact other people is our assessment. I can't say when and how to react to that.

Okay. Let me try little differently then. I think heading into 2018 you had said that you saw that your pricing put you now in a competitive advantage and I think that was a little bit of change from the prior few years where you had taken early pricing action. As you look at environment into 2019, how do you think of your pricing relative to the industry in auto?

Glenn can talk about how is thinking about pricing relative to auto but I want to just take it up a little bit to its both growth and profitability. And doing a better job for our customers. I think what you saw in 2018 in terms of our growth was not just pure price increases but the back add for three or four year we've been working hard on the net promoter score. And the benefits of those improvement got overshadowed by the fact that we did what you describe which was raise prices faster than other people so our retention went down. So if you looking at profitable growth it's both what we priced to which Glenn and I talked about, but also how much for our existing business will retain.

Okay.

I'll just add on, as we look at pricing we see competitors as you do in filings. Some are still taking some rates, others aren't. The CPI most recent number which is trailing indicator but was between 5 and 6. And it's come down from much higher than that, and is expected to continue to come down because the filings are different now than they were late 2017 and early 2018 which create that filing change CPI and auto. But the other thing I would look at is, we look at, watch the absolute price change. So we don't start with what the competitive position of particular carrier is. And now we look internally at our competitive position by market and by competitor and so somebody may take a 3% price decrease. But if they are 10% higher than the market and they take, well, they are still higher than the market. So in an absolute level we are looking at our competitiveness on a more granular level than the price changes.

Okay. That's helpful. I appreciate that. And then one on capital deployment, if I can. I think you deployed well more capital than you generated in earnings. I think that's a multiyear trend that we are seeing. How sustainable is that borrowing a change in asset requirement or capital requirements by the regulators?

Yaron, the deployment of capital, you are talking about share repurchases in comparison to earnings?

I am talking about share repurchases, dividends, M&A, of all the development avenues.

So first we use preferred stock to restructure some of the balance sheet. I don't think you should assume that what I heard and it might not be what you were implying were you just generating a lot of capital from the business more than you make. That's not the way we think about it. We think about deploying capital except we don't need to deploy capital, or we can get alternative capital that's cheaper than having it from our shareholders. We do that. There could be, we use a bunch of reinsurance, it could be other alternative capital. It could be preferred stock. So we are always seeking to try to optimize the return on our shareholders capital by using other capital. But we don't have sort of a metric that measures earnings relative to just dividends and share repurchase. So we think about it broader than that. Is that making sense, Yaron?

Yes. I mean the only thing I would add is we've been saying for a long time that we -- our capital position is very strong and we continue to generate capital organically. So it's not given -- we start from acquisition, trying to make individual decisions around acquisitions and buybacks. There is no formula of approaching but we still feel very good about where capital position is even after $2.8 billion that we took in our position.

Jonathan, we will take one more question.

Certainly. Then our final question for the day comes from the line of Ryan Tunis from Autonomous Research. Your question please.

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

We absolutely, Ryan, we don't like to give some underlying combined ratios for the different component. But let me just maybe make a comment about the pretty big headwind. The underlying combined ratio for homeowners which is in the low 60s because there is such large amount of catastrophe that accompany that business. And as Glenn said, we manage it into total. We give you the underlying combined ratio because we can't estimate to the answers. And, yes, the underlying combined ratio was up some in 2018 versus the prior year. It still though, we are still earnings 93 combined, 893 combined ratio maybe 479 also. I don't know that we thought of it as a headwind. Are we taking attention to it? Yes. And Glenn can talk about the underlying combined ratio, some comments --

Yes. So we took it seriously. We talked about it last quarter that we were seeing more non CAT weather. And we had to look at that as we always do by market. We looked at pricing. And so you saw us react with some pricing at 1.1 in the quarter and then you annualize that. That's meaningful move on pricing. And then on top of that, that's rate we get an inflationary factor so the premium is a larger number than what you see in rate. We can't predict to much like and talk about frequency. We can't predict whether we are going to have another significant non-CAT weather year. We know that, we look at trends, our actual results whether you look at five year, 10 years, 15 years. The one year trend looks worse than the five which looks worse than the 10 generally. So if weather patterns are getting worse and here to stay then we are prepared to react to that with the right pricing.

Got you. And then on the auto side, was there a current actually true up at all there, that's slung a loss ratio one way or another on Allstate brand?

Credit or -- are you talking about prior reserve basis--

What was like current year like, reserve release or change in the loss pack in the fourth quarter?

Well, we of course change so why don't we have John take it to that because here I would say one we think the numbers are accurately reflect what we earned in 2018. We make changes in reserve picks for the specific year in which we are operating as we go through the year. Sometimes if you make them in October or you should have made them in June then you got a little bit of catch up and I think that's what you were referring to. But it's not a significant element as it relates to the Allstate brands. Some of the smaller brands can have a little bigger quarterly swing because of those true ups but they are also brand usually big enough or it doesn't make much of a difference. So but and John can help you to sort of any additional details. So thank you for being on the call Allstate strategy. It's obviously to protect people from life's uncertainty. We will continue to reward shareholders by -- decide to be part of our story which is by innovating growing market share and earning attractive return. So thank you all for being on the call. Talk to you next quarter. End of Q&A

Thank you, ladies and gentlemen for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.