The Allstate Corporation (ALL) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to The Allstate Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation there will be a question-and-answer session [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning and welcome everyone to Allstate's fourth 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 and posted today's presentation on our Web site at allstateinvestors.com. Our management team is here to provide perspective on these results and further contacts on our recently announced transformative growth plan. 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. 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 with Allstate strategy. So as you know, our strategy has two components to increase personal property liability market share and expand into other protection businesses. Starting with the upper oval, we've been a leader in creating differentiated insurance process features, such as declining deductibles new car replacement. We used sophisticated pricing, have strong claims expertise and are building an integrated digital enterprise to lower costs. We're also diversifying our businesses by expanding our protection offerings, which are highlighted in the bottom oval. We leverage the Allstate brand, customer base and capabilities to drive growth in these businesses. So we offer customers a circle of protection that includes Allstate life, workplace benefits, commercial insurance, roadside services, car warranties, protection plans and identity protection. These growth platforms have extremely broad distribution, includes major retailers, insurance brokers at the worksite, auto dealers, manufacturers, telcos and directly to consumers. On the right hand, you can see that this strategy create shareholder value to customer satisfaction, unit growth, and attractive returns on capital. It also ensures we have sustainable profitability and a diversified business platform. You move to Slide 3, Allstate strategy and continue to deliver excellent results in 2019. Revenues were nearly 11.5 billion in the fourth quarter and 44.7 billion for the full year 2019. Net income was 1.7 billion in the fourth quarter and $4.7 billion in the full year. Adjusted net income was 1.02 billion or $3.13 per diluted share in the fourth quarter. For the full year, adjusted net income rose 11.1% compared to the prior year, to $3.48 billion or $10.43 per share. That reflects excellent underlying profitability and lower catastrophe losses. Returns were also excellent with an adjusted return on equity of 16.9%. If you turn to Slide 4, Allstate delivered in all of five 2019 operating priorities, which focus on both near term performance and long-term value creation. The first three priorities, better serve customers, grow our customer base and achieve target returns on capital, they are all intertwined in it just to ensure profitable long-term growth. Customers were better served as Enterprise Net Promoter Score improved at most of our businesses. Total policies in force reached $145.9 million, which is an increase of 20.7% compared to the prior year. Property liability policies, which are now our bigger dollar amounts, increased by $428,000 for the prior year to $33.7 million as Allstate insurance brands grew 1.3% and 2.3% respectively. Allstate protection plans, which of course, was formerly SquareTrade, continued its rapid growth due to the addition of a major retail partner with items in force reaching $99.6 million. Returns remain excellent, driven primarily by strong property liability results. The underlying combined ratio of 85 finished 2019 at the favorable end of our revised full year guidance of 84.5 to 86.5. And you’ll remember as part of our second quarter earnings release last year, we had improved this annual outlook range due to excellent operating results. As you know, Allstate's no longer going to provide underlying combined ratio guidance since return on equity is a better measure of performance, and Mario is going to provide some additional context on this measure. The $88 billion investment portfolio generated $3.2 billion in net investment income in 2019, which reflects higher market base portfolio yields, which was offset by lower performance based results. Performance based results were below expectations for the quarter, but longer term results have been strong. Total portfolio return was 9.2% in 2019. Shareholder value has also been created by building long-term growth platforms. We announced new features of a transformative growth plan, which we’ll discuss next. Arity continued to expand capabilities. Allstate indemnity protection is growing and launches new digital footprint offering and avail a car sharing platform initiated operations. You move to Slide 5, let's discuss the transformative growth plan to increase property liability market share. The plan is build on our strengths and reflects current competitive conditions. Allstate has a significant number of competitive strength, as you know, particularly in property liability we have the Allstate brand, we have pricing sophistication, claim expertise, product breadth and a broad distribution platform that goes from Allstate agents to Esurance's direct capabilities to encompasses independent agents. As a result, we're growing but GEICO and Progressive are growing auto insurance market share faster through massive advertising spending and low cost structures. Our plan also recognizes that customer needs are changing due to increased conductivity and advanced analytics. Our leading positions in telematics and digital auto collision estimates are two examples of how we're embracing these changes. At the same time, a majority of customers prefer Allstate and insurance agent, we hope an Allstate insurance agent, when purchasing a policy, but are comfortable with self service. So we're increasing mobile application capabilities and building low cost centralized integrated service capabilities. We're now accelerating these efforts with a transformative growth plan, which has three components. Expand customer access, improving the customer value proposition by lowering expenses and redesigning property liability products and investing in technology and marketing. Standard customer access will be provided by utilizing Esurance’s direct capabilities to sell Allstate branded products. Esurance has strong direct capabilities, having more than doubled in size since it was acquired a little over eight years ago. As a result, we can further leverage these capabilities by selling Allstate branded policies directly to consumers. This will require us to reposition the Allstate brand and the advertising previously deployed for the Esurance brand will be shifted to the Allstate brand and then the Esurance brand will be phased out in late 2020. Expense reductions will improve affordability, while funding investments in technology and marketing. We'll also strengthen the independent agent platform by merging the Allstate independent agent offering into Encompass. This is a comprehensive plan that will make us a stronger competitor and lead to increased market share. Now let me turn it over to Mario to go through the property liability and investment results.

Thanks, Tom. Let's go to Slide 6, where we highlight strong results within our property liability segment. Policy and premium growth continued and all of the brands had strong underlying profitability. Underwriting income of $1 billion in the fourth quarter was significantly higher than the prior year, driven by lower catastrophe losses and the continued improvement in the expense ratio despite increased marketing investments and the write-off of the remaining Esurance acquisition and tangible related to the brand name. Moving to the table, net written premium increased 4.4% in the fourth quarter and 5.6% for the full year, driven by policy and average premium growth in Allstate brand auto and homeowners insurance and the Esurance brand. Total policies enforced increased 1.3% to 33.7 million in 2019. Underwriting income of $1 billion in the fourth quarter and $2.8 billion for the full year, were substantially higher than the respective prior year periods, driven by continued progress on improving our cost structure, average premium increases and lower catastrophe losses. The underlying combined ratio shown in the bottom left, which excludes catastrophes prior year reserve estimates and the $51 million pre-tax impairment charge related to our decision to utilize the Allstate brand for direct sales, was 84.9 for the fourth quarter. The 2019 results of 85.0, was at the favorable end of the full year guidance range of 84.5 to 86.5. Focusing on the table on the bottom right of the page, you can see our recorded combined ratio trend overtime by line of business, as well as total property liability. Auto insurance profitability remained strong with a combined ratio of 92.8, excluding the Esurance impairment, increased average earned premium and lower property damage and bodily injury frequency offset higher severity in 2019. Property damage severity continues to be impacted by higher costs to repair vehicles, while increase -- which increases the number of total losses. Bodily injury severity increased at a rate above medical inflation indices, but we factor these severity trends into our pricing algorithms. Homeowners insurance continues to generate excellent returns. Lower catastrophe losses were significant in achieving a combined ratio of 88.4 for the year. In total, Allstate has industry leading combined ratios for our property liability businesses. Let's go to Slide 7, which highlights investment performance for the year and the fourth quarter. Our investment portfolio total return for 2019 was 9.2%. Net investment income contributed 3.7% to total return with a stable contribution from interest income on fixed income investments, but a lower contribution from our performance based portfolio. Higher bond and equity valuation contributed 5.5% to total return in 2019. The chart at the bottom shows net investment income for the fourth quarter of $689 million, $97 million lower than the fourth quarter of 2018. Market based investment income shown in blue increased to $735 million and benefited from proactive actions we've taken, including a duration extension in our property liability portfolio. Performance based income shown in gray was lower than recent trend and included lower valuations of $74 million pre-tax on two private equity limited partnerships. Given the performance based portfolios impact on recorded income, let's turn to Slide 8 to review the purpose, makeup and results of these investments. Our performance based strategy delivers attractive long-term risk adjusted returns and is well suited for long dated liabilities and capital. The strategy diversifies our portfolio through idiosyncratic equity returns that complement our market based strategy. The portfolio is broadly diversified by asset type, including private equity and real estate, as well as geography, sectors and partners. We invest in funds, co-invest and have direct investments as well. The $8.7 billion portfolio had a one year return through September of 7.6%, and three and five year returns of around 11%. While idiosyncratic investments generate higher returns, they do create income volatility, as you can see on the right. The portfolio generated $469 million of investment income in 2019, but all of that occurred in the first three quarters. In 2018, the portfolio generated $716 million of investment income and $145 million in the fourth quarter. We continuously monitor the portfolio and do not believe the lower valuations on two private equity investments in the fourth quarter are indicative of the broader portfolio. Slide 9 highlights results for Allstate life, benefits and annuities. Allstate life, shown on the left, generated adjusted net income of $76 million in the fourth quarter and $261 million for the year. The fourth quarter improved by $7 million compared to the prior year quarter, driven by higher net investment income and lower operating costs. The full year income of $261 million was 11.5% below 2018 due to the third quarter write down of deferred acquisition costs in connection with the annual actuarial assumption review, which reflected lower interest rates. Allstate benefits adjusted net income of $16 million in the fourth quarter was $10 million below the prior year quarter. This decline was primarily driven by the write-off of acquisition costs related to the nonrenewal of a large underperforming account. For the full year, adjusted net income of $115 million was $9 million below the prior year. Allstate annuities, shown on the bottom right, had an adjusted net loss of $33 million in the fourth quarter, driven by lower performance based income. Adjusted net income of $10 million for the full year 2019 was below the prior year, reflecting lower performance based investment income in the first and fourth quarters. Let's turn to Slide 10. The service businesses continued to grow the number of customers protected with policies in force increasing 42% to $105.9 million. This is largely due to the increase in Allstate protection plans. Revenues grew 21.9% to $434 million in the fourth quarter, reaching $1.6 billion for the full year 2019. Adjusted net income was $3 million in the fourth quarter and $38 million for the full year. Adjusted net income increased in 2019 compared to the prior year period as improved loss performance in Allstate protection plans and Allstate dealer services were partially offset by continued growth and integration investments at Allstate identity protection. Slide 11 highlights the excellent cash returns provided to shareholders. In 2019, we returned $2.5 billion to common shareholders through a combination of $1.8 billion in share repurchases and $653 million in common stock dividends. We repurchased 16.4 million or 4.9% of common shares outstanding over the last 12 months and increased our book value per share by more than $15 to $73.12. The $3 billion share repurchase program announced in October 2018 was completed in late-January 2020. And yesterday, the board approved a new $3 billion share repurchase authorization to be completed by the end of 2021. We also reduced the cost of capital in 2019 by redeeming multiple series of preferred stock and issued two new series at lower rates, which will reduce preferred dividends by $17 million annually. Let's move to Slide 12 and discuss our long-term return on equity goal. Starting this year, we will no longer provide annual property liability underlying combined ratio guidance, but instead discuss returns on equity. As we've discussed over the past two quarters, this is a better measure of our performance for multiple reasons. It is a broader long-term measure of performance than the underlying combined ratio, which focuses on just one part of one of our businesses and excludes significant items, such as investment income, catastrophes and other protection businesses income. It factors in capital management and is more correlated with stock price and it fosters a better comparison with our peers. On a long-term basis, our adjusted net income return on equity goal is 14% to 17%. This range also aligns with executive compensation as discussed in our annual proxy statement. Now we'll open up the line for questions.

[Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo. Elyse, you might have your phone on mute.

So my first question is on your ROE target, the 14% to 17%. Just a couple questions there, if we can get a sense of what you define as the long-term? And then how you see kind of 2020 coming-in in reference to that 14% to 17%? And then my last question on that thought would be, are you going to go into any particular details on the returns that you're charging within that within property liability versus your life related businesses or services?

First, let me deal with the second question first, we're not going to give out a number for 2020, which goes to your first question. Which is when you look at this kind of like rolling three-year basis like over a three-year period cats go up and down, things go up and down and we should be able to earn 14% to 17% return. We got there by really looking at a couple of things versus what's the level of economic rent we can capture by how good we are in a market we operate in. And so as you know in the property liability business, we run a substantially more favorable combined ratio than the industry and that's for a substantial amount of economic return. We also look at it from what's the appropriate risks -- what's the appropriate return for the risks that our shareholders take, and we feel like 14% to 17% is a good goal for us to have over that three year basis. I don't think you should try to use this to decide what 2020 forecasts are, there’s lot of better ways to do a forecast. We're not going to break it out by component, because our goal here was to get up to the corporate level and say what are we doing in total, because with the underlying combined ratio, we basically zoomed ourselves in including you all into how well was auto insurance doing that we’ve neglected to focus on the other opportunities to do. Obviously, the 14% to 17% includes a whole bunch of components. So the annuities, as we’ve talked about before, are a large drag on that. So if you were to intuit between the 300%-plus drag that has on ROE to the other businesses, you would say the other businesses are higher return. And of course, most of that is property liability but that will change over time. Obviously, the acquisitions, like purchase of Allstate protection plans, obviously, that business is doing extremely well from our standpoint is well above its acquisition targets, but it does put a drag on ROE. Interest rates would go the other way, particularly in the Property-Liability portfolio. So what we did was stand back and say, what do we think is right over time on kind of a rolling three year basis.

And then my second question, you guys rolled out your new growth related optimization efforts in December. Just want to get a sense, as you kind of change your commission structure a little bit. How you envision that playing out in terms of both pick up a new business growth and any kind of drag you see that having on the underlying loss ratio, I guess, specifically to auto book?

Well, let me maybe go up for a minute and ask Glenn to talk about the commission changes you're talking about for 2020, which I think the specific ones you're referring. So transformative growth is a multiyear effort we expect it as both expanding customer access, improving customer value and investing in technology and marketing, to help us grow market share. The improving value will be done two ways, one reducing expenses. And that's expenses across the board and we can talk more about that later if you want, but it's really across the board and redesign the property liability projects. Glenn did make some changes to the commission structure for 2020, which he can talk about.

Elyse, we've got a few things going to stimulate growth in what is a very competitive environment right now. So we're pleased that we're able to keep growing. And to the second part of your question, deliver returns. So I'll answer that part first. Do we expect it to, as we grow to deteriorate returns? I would say no, because we've evidenced that, we're pretty disciplined about that and we've been -- as we've grown, we've kept our eye on the returns. But the specific actions, one, are you referring to the change in compensation. We move some of the compensation variable comp from agent renewals to new business to incentivize growth. We want to pay folks for growing their business. We're also putting more into advertising and managing our lead management platform.

Our next question comes from the line of Greg Peters from Raymond James.

My first question will be around the expense ratio improvement that you guys generated in 2019. I think that's probably the biggest surprise, at least from an outside observer perspective. In some of your previous comments, you said there was some benefit for incentive comp. So I guess my question is, around how much of that 90 basis points was sustainable considering the strong results that you posted last year, is that going to boost up the incentive comp for 2020? And then dovetail the expense ratio improvement with what kind of anticipation, or expectation should we have about continuing improvements? So should we factor in some modest improvement every year? I know you guys are rolling out the integrated services platform, et cetera.

Greg, let me take it incentive. Mario can talk about expenses. So we said incentive comp targets every year. And so we have two measures, one is -- or 2 programs. One is the annual incentive plan, which is management's compensation program and that’s at every year based on how well we did the year before. So it's not like you get a couple of years. We also have obviously a longer term plan, which is our performance stock rewards, which are tied to return on equity. So those you shouldn't expect fall over from one year to another as it relates to expenses. If we exceed the targets established by the board then obviously, we have to put it into the P&L, but presumably that's because we're making more money than everybody thought.

I just would add a couple things. So first, I think we're continued to be pleased with the progress we're making on expenses. And as Tom talked about earlier, it's a core part of our transformative growth strategy. And one of the ways that we're going to further improve the customer value proposition and create the capacity for the growth investments that he alluded to. So our work in this area is not done. We're going to keep focusing on expenses and look to drive down the expense ratio. One thing I'll add with the fourth quarter specifically, the impairment charge related to the Esurance brand was worth about six tenths of a point on the expense ratio. So if you look year-over-year, you see some real meaningful improvement in the expense ratio in the quarter that gets a little bit masked by that non-recurring charge.

Mario, is that where the Esurance expense ratios I think, was up 27.5% in the fourth quarter. Is that what you're talking about?

Yes, it’s in the expense ratio, so worth about six tenths to the overall property liability number, obviously, more of an impact to Esurance specifically.

The second question, I guess, just pivot to the performance based investments. Obviously, it's generated a strong result for you over a long period of time, but there's volatility. And this past year, there was volatility. And for outside observers, can you provide any guidance for us and how we should think about that volatility as we think about 2020, the 2020 outlook?

Let me make an overall comment about investments, and John can go to the more color on performance base, recognizing we don't like to give next year's projections out there. We proactively managed our portfolio and John's created and used a really comprehensive capital allocation framework that helps the investment team decide what and when to invest and it keeps track of the decisions we made and not just investments we made but so we can track those, but also any opportunities missed or any losses we avoided. So we watch our money well and it's on all ports of the portfolio. So John can talks about what we do, how we deploy that and performance base and what it means.

When you go up and think about the whole portfolio, it helps put performance base in context and why we like it. The portfolio is about $88 billion in size, majority of its invested in high quality fixed income instruments and about 18% of that is equity and roughly half of that is performance base. So just to kind of size it within the overall context. We like performance base because it focuses on private markets and really expands our opportunity set investments that we can play with and allows us to create in our belief a more efficient frontier, a more efficient portfolio that's well suited to our overall liability and capital structure. What comes with that is increased volatility on income. And we believe that and we expect volatility, we expected it in the past and we’ll expect it going forward. We believe that we're compensated for that volatility of income. In this particular quarter that volatility, especially if you look at it year-over-year on a quarterly basis, the difference was $97 million and about 74 of that was tied to two investments. That obviously was a disappointment but we've gone back in and we recognize that we look at the underlying investments here. They range from timber and agriculture, to real estate, to private equity, to a number of different investments in there. It's hard to pin down with great precision in any given quarter how that's going to play out. So I would expect continued volatility. We have also gone through, and as part of our regular risk and surveillance processes, looked at all of our holdings as we normally would do and believe that this was not a -- and this was a bit of a one off type of quarter. We remain confident in effort going forward despite this performance in this quarter. We believe we have a strong team. When we look at measuring this, we really look to longer term measures. We look to three, five and 10 year and some of those measures are in the investor supplement, and those tend to be holding true. So we really are changing our overall commitment to it and expect while there may be bumps in the road in any given quarter that long run it's an important part of what we do.

Thank you. Our next question comes from the line of Paul Newsome from Piper Sandler.

I was hoping if you just give us a little bit of an update of how you see the current pricing and competitive trend in auto. Obviously, last year was a pretty competitive year but if you think that things are stabilizing industry wide or not, love to hear your thoughts?

This is Tom, let me make a couple of overall dramatic conversations and then Glenn can talk about what he's seeing in the market by competitor. But our philosophy has been to for, as you know, profitable growth and long-term profitable growth. So we raise prices when we think we need to when the trends show we should do it and so we don't get behind on it. We're not big in terms of reducing price to try to grow like we, I'd like to say around here, anybody can lose their way to increase market share and that's not our plan. The other thing I would say is you always have to be careful of the percentages, because it always depends where you start. So we have some competitors who are higher price than us and they're reducing their prices and other carriers who are lower than us and certain risks, and they're raising the prices. So Glenn can talk about the percentages. And there are obviously some overall macro trends at work in auto insurance pricing but I just -- we have to be careful not to be too specific as to what it means for next quarter sales.

And as Tom said, I think I’ll lead you to one set of numbers that I think tells the story. Our average premium in auto was up 3% year-over-year and our average loss and expense was up 2.5%. So we were disciplined in managing to a positive return and actually made a little progress during a time where, as you said, it was very, very competitive out there. We did see some competitors take sort of broad based rate reductions, which is why the overall CPI is negative, that as Tom said, not a trend we’ll follow or something we subscribe to, we look state-by-state. To your question about what we're seeing more recently is it stabilizing, I would say, I'll give you the qualified yes, there is a little bit more rate activity starting to flow into the market. You're seeing less price reductions or really no price reductions in the recent past and you see some increases out there. So I’ll call it more stable.

Second question, obviously, on the commercial line side of the world, there's a lot of conversation about basically casualty related inflation trends. I recognize that's on a huge part of what you do as an auto and home insurer. But could you talk to whether or not you’re seeing that in the fairly modest pieces that are casualty parts of your business?

Paul, are you talking about bodily injury costs that we're assuming…

Well, actually I'm thinking more pure liability and home insurance business, for example, flips and falls, and lawsuits, and things of that nature?

So not seeing much of a trend on the home side on that, our trend set are more meaningful for us on the home side really are the mix between frequency and severity of our property, first party losses. So we're not seeing really anything on home.

Our next question comes from the line of Yaron Kinar from Goldman Sachs.

First question is around net premiums written growth. I think it's slowed down a little bit. And I guess in particular you see a little bit of a slowdown in the renewal ratios and then new applications, especially in auto. Can we maybe talk about that and maybe how that ties to the transformative growth plan?

First, as I said earlier, it's all about profit growth for us, the transformative growth plan should bring our expense ratio down and enable us to improve our competitive position, which should drive to higher growth in 2019 throughout the other different stories in the Allstate branded business than Esurance business. So Glenn, maybe you can talk about the Allstate branded business. And Esurance for 2019 was still under Steve, now of course under Glenn as part of our transformative growth. But Steve maybe you can pop in on Esurance.

So I'll start us off. And just at a high level, I’d tell you we feel good about the fact we were able to grow in a really competitive market, as has been pointed out before on the call here, negative CPI, premiums up 5.5%, policies in force grew across all major lines. And it's hard work to do that in a competitive environment. So it's challenging. To your point that moved down a little bit in the fourth quarter, but we're still in the upper bounds in that sort of call it the upper third of our long-term trend on both retention and new business. We're coming off the high base here. And we're taking the actions short-term as we build out transformative growth, taking the actions short-term to grow, which I referenced before, of changing agency comp where we're shifting more towards new business, putting more into marketing.

So for 2019, insurance had about 8.5% increase in net return premium. So for the year, it feels good but that trend declined throughout the year and the fourth quarter was only 2.6%. And we did, as you know, we grew fairly rapidly last year also. And so we have that new business penalty and in some states, we took some fairly significant rates more in the second half of the year. So that really slowed down our growth as we went into the third and fourth quarter. Overall, we feel good about the growth we had, we feel good with where the business is positioned going forward but we have to be probable.

And then my second question just goes back to the ROE guidance range for the next three years. I guess what would be the largest components that would drive ROE to the upper end of that range or the lower end of that range? And does that range also contemplate the possibility of this disposition of the annuity business?

I would say there's a number of components here, there's what’s your -- the obvious piece is, what's your combined ratio and underwriting income that's impacted by what your underlying is also what catastrophes are, which as you know bounce around. There's what happens to investment income and we've talked about that today. There's also the amount of equity you have at play and so, we've been building equity but we're still buying shares back, so that has an impact. As it related to the future, this is kind of an is business model approach. We didn't assume anything was going to change as mentioned to Elyse is that things will change in the future, but we still feel like 14% to 17% is the right range. But lots of stuff could change, the interest rates could go up and interest rates go up, for the Property-Liability business, most of that income falls right through the bottom line. And if you look at our investment income over a long period of time, we are down substantially. Now we've made that up by reducing the combined ratio and improving underwriting income, but that will change over time. Obviously the annuities business will be a positive. To extent we decided to invest in growth in an acquisition, that would be a negative. So we felt like in total the 14% to 17% was a good goal for us, but it changes as the world changes then we'll let people know. But it's a three year kind of rolling average for us.

Thank you. Our next question comes from the line of David Motemaden from Evercore ISI.

Just a follow-up on the transformative growth plan and just trying to get some sense for when you think we should start to see the benefits of those changes start to roll through in terms of more competitive product and then an uptick in new applications, better retention and higher PIF growth after we've seen a bit of a deceleration in all those metrics?

David, first, it's a long-term plan. This is going to take us multiple years to do. But there's obviously components of it and some parts will have a bigger impact early and other parts will have a larger impact later in the game. So we expect early in the plan that expense reductions will play a significant role in us improving our affordability for customers, and getting to that second part of improving the value proposition. As you go forward, we would expect that redesigning our technology -- our property liability products will drive more differentiation. So we were first to market with decline the deductibles, first to market with new car replacement. There are other ideas and things we have in place that we think can drive more value, but it's going to take more time to put those into the marketplace. So those in terms of improving the customer value proposition, expenses first redesign products later. The redesign products is later is in part it requires a new technology platform, which is the third piece. We have to invest more in the new technology platforms, particularly our product management platform and our customer experience layer. So that will take us a while to do. We think we can still cut expenses and reduce the overall expense but why we are investing in those and that's our goal. But at the same time, we're going to invest more in marketing earlier in the process, because we believe that will drive growth. And Glenn talked about what he is doing to enhance the Allstate agent value proposition, whether that's increasing new business commissions, or freeing them up by taking low value work out of their offices and putting it into integrated service. The other piece is to expand the access, and that's happening as we speak. So the access to people who called for the Allstate brand who got on to our Web site in Allstate brand, had some restricted rules on it, which we've started to open those up now. So for example, if you called during working hours, you could get a different experience and if you called after working hours, you should have the same experience. Like you're getting online, it shouldn't matter what time of day you do that. So we're changing those rules. What Glenn is also doing is taking the Esurance capabilities, which are exceptionally good in direct. He's putting those together with the Allstate branded capabilities, which do some direct today. And that will then be utilized for the Allstate brand that will take us some time to do. One obviously, you’ve got to put all the operations together, and call centers and get the technology to work the same and get the order -- the flow on the Web site, all to be the same. We also need to reposition the Allstate brand. And so the Allstate brand, of course, is extremely well-known, great unaided awareness, high trust marks, people – it’s one of the great brands of the world and that said, it's not viewed as modern as Esurance is. So Esurance built for the modern world, a little hit a little cleaner. So we are working hard on reposition the Allstate brand so that it brings both of those together so that we both serve our customers with agents when they want them and we serve them direct when they want. So it's a long-term plan but you can see there's -- its front end loaded on some parts and back end loaded on others.

And just with the customer value proposition and some of the increases in the bodily injury severity that popped above CPI, medical CPI, this quarter, which is the first time I think in a bit it has. Have you, I mean, is that already embedded in your pricing? Or is that something that would I guess go the other way against some of these expense saves that maybe able to pass through more competitive rate?

Yes, I'll take that. This is Glenn. And yes, we've seen some of the trends come through that you've heard about from others on bodily injury. It is embedded in our reserve position that we have where we think through these things, as we set our reserves, as we set our pricing strategy. As you've seen over the last couple of years where we've run hot on physical damage severity and yet really hasn't flowed through to the margins, because we're pretty quick at adapting from a pricing standpoint and on a market-by-market basis. So I would tell you we’re watching it, we've got good process. We have a great claims department that looks it, both the technology and the process that they followed to handle claims. And where it goes beyond what claims can manage whereas they're paying claims accurately, we get it into pricing quickly.

And then if I could just speak one last one in, just in terms of the high-end of the ROE guide. And I guess just thinking about potentially like there have been a few transactions in the fourth quarter on the life side, and it seems like there's a pretty vibrant interest, a lot of interest in some of these run off books of annuities or life insurance. Just wondering -- and in Illinois, I believe there's a division of company rule that can allow you to carve out specific reserves out of that Illinois legal entity and divest to a potential acquirer. So just sort of wanted to get an update on your view in terms of, your thinking in terms of like whether you see any opportunities there to potentially reinsure or digest that book and maybe get to a more sustainable high-end of that ROE guide given it has like a 300 bp drag on the ROE?

It is a third question, but this is different than the other ones, I will take. But I also -- let's try to -- there are other people in the house. The answer is, we've been trying to -- we've been working on annuities for a whole bunch of years trying to get it better. We made a lot of progress to extent there is something else we can do it, where it’s use the division statute to get a different solution reinsured. If we can do it in a way that is economic for our shareholders and has a good risk adjusted return, we'll do that. And if we do that, I don't think anybody would be unhappy if we were -- if you looked at, if we were above the upper end of the guidance.

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

Actually two quick follow-up questions, the first I guess is in response to the previous question on the shift in the plan, the new plan. Can you give us any early sort of feedback from agents? Number one on the integrated services platform, and number two, also, what is the feedback on shifting the bonus and/or the commission structure from existing and new businesses?

I mean I think we got it. We were all leaning in towards the steep curve to make sure I heard it was a low light. So I think Glenn can talk about the integrated service and commissions. Maybe let me go back to transformative growth and make comment really on behalf of the customer. So the agents are part of our team. We want them to be successful. We're leaning in hard to make them successful. They drive a bunch of our business and we're going to work hard at making them successful. That said, there's a range of opinions as to what people think about what you're doing. But let me come back to the customer. What we are trying to do with transformative growth is stick with our customer philosophies. And one of our philosophies is you should pay a fair price for the risks you create. We're very sophisticated in the way we do pricing. We get telematics, which is the new end of it with Drivewise. We also have a philosophy that customers should get what they pay for. And as it relates to the auto insurance same things apply. So if you get extra service then you should -- and extra advice from the help of an agent, there should be something you should be prepared to pay extra for. If you want to do all stuff yourself then that's something that's a different price value proposition. So we are working hard to make sure that that agent value proposition is as effective and efficient as it can be. Like people as we said, I think we said when we talked about this, that over half the people want an agent and it's higher as it reflects our customer base. So we want to help them be as successful as they can and that's why Glenn is working on the couple of programs he is.

Yes, I'll just add to it. We talked to our agency force all the time talking to agents every week. We've got national advisory council, regional boards. We spend a lot of time with our agency force. And I’ll give you the range of reactions. So on the -- overall, the facing out of transformative growth, we're going to pull the marketing in from Esurance as the Allstate brand, as you might imagine wildly popular. Like everybody feels really good about the fact that there's going to be more marketing in the pipeline and we're focusing on the Allstate brand. On the commission change, you got folks that they were growing fast and they're built to grow. They liked it a lot, because that leads right into their strength. You got folks that really weren't growing or weren't built to grow, you have a range of folks who are either excited about making that transition and retooling their business, or ones that say I wasn't really ready to retool my business. But they need to in order to earn the commission that goes with the new business, the higher new business commission. As it goes to integrated service, as Tom said, lots of different opinions out there. It really is about freeing people up for growth. And what I can tell you is the folks that are in it are growing faster than the folks that aren't. So we think we're creating something that's going to be really valuable for the agency force.

So if you go back to the customer and what blends higher new business when you ask customers, where does an agent add the most value, it's almost always on either the purchase of the product are doing an insurance review, helping me sort out stuff, very little of is on changing address. And so that's what Glenn's working on.

And very quickly on the lost cost trend, I know you briefly talked about it. But net-net, can you talk about either when you look at the frequency and severity trends. Is the expectation that this is how it sort of remains for the foreseeable future, or what’s your outlook on the loss cost trends here?

So I'll take that. This is Glenn. Let me go up a little bit, because I think if you look at the whole system and you say, there's premiums that come in and how we may changes to those overtime to these expenses that are going out the door, and then you split your loss costs by frequency and severity. Over the past year, three out of those four have been going well for us. Our premium, as I mentioned, autos up 3%, average premium -- home is up 5% average premium, the respective loss and expense on those lines are 2.5 and 4. So we've made up a half a point and a full point in terms of actually improving over the time period. So it's hard for me to say, I can't predict that severity will be flattening or up more over a year, two years from now. But what I can tell you is we've been really disciplined about managing it quickly into each market on a market-by-market basis. Our pricing sophistication, our state management team, has gotten better and better and we're able to react in real time to those changes and manage to the types of returns that we've been able to deliver. So while I can't give you a perfect prediction on where the severities will go, I feel really good about our ability to react to it in real time.

Thank you. Our next question comes from the line of Ryan Tunis from Autonomous Research.

Couple for Glenn. So Tom mentioned it over half of Allstate branded customers one in Asia, I thought that was interesting. In terms of just like the pathway of becoming an Allstate brand customer, what percentage of people I guess start on the Internet, Google insurance or something like that. And is that the lead generation mechanism, I guess just digital or the Internet versus an Allstate agent as a little league coach or something like that?

Ryan, Glenn can give you through some of the percentages we give out but this is not and/or conversation. A lot of times people are like, well, they want to buy direct or through an agent. It's an and. Like, we'll sell to people anyway they want. You want to start online, buy from the agent, call an agent buy online, like we're just there to. Like, we want to sell as much as we can to as many people as we can through as many ways as we can.

It's a challenging question, I'll tell you, because there's a lot of stops in the process where for example, people go online, they start to get a quote and the agency that's nearest to them pops up with that quote and they decide to drop off, make the phone call and that's one path, there's multiple paths people take through. The vast majority of our business is written by a local agent. That said, all the data and research out there tells you that the vast majority of people start their process online and at least get some understanding and then want to talk to somebody about it. So we've got a mix of that and imperfect data for me to give you any more specifics on that.

And then I was hoping if you could give us a bit of a peak on some of these new product initiatives. I guess, in particular, I'm trying to understand the price sensitivity or whatever. I mean, obviously, your captive agent. Are you thinking new business pricing down 10% or something like that? I'm just trying to understand like, how much of a driver do you think that is for potential new issued applications?

I am not sure we understood the question. We're not --maybe you could rephrase it.

So I'll ask it this way. Like two three years ago, travelers who's obviously an independent agent player, they just announced that they were cutting new business prices by 10%. I could see how that could have more of an impact, and like an agency distribution channel versus a captive. I'm wondering if that’s how you see it as well or if you think that -- am I missing something or is there a similar level of price elasticity in captive is what you might see in agent, like could that be a big driver for growth.

Let me maybe start with the last piece and work my way up, and anybody else wants to jump in. So first, it's of course always hard to tell how much price elasticity is within an agency. In general, you would think that an agency that had multiple companies and could share those multiple quotes for you there would be more price elasticity than in a captive agent. That said people can call around the three or four people and get their points of view. So auto insurance in particular is price sensitive. Although, we've talked at length us trying to have profitable growth, I guess what we're trying to do. The redesign of the products is on all of our products, auto, home, and a variety of different products where there are things we think we can do to make them less complicated. And so for example, this year, we rewrote the renter's policy in one state and took its size down by 40%. That gets to less complexity, helping customers understand it, so we're doing the proper. But we also have a variety of other products in the circle, protection we're trying to get to. So we don't sell identity protection today through our Allstate agents. Make sense that we have customers that come to Allstate agents, probably would like to get their identity protected. How do we do that? How do we get the systems to work? How do we get the technology platform do it, how it’s factored into compensation and everything else? It’s something we're working and that’s part of transformative growth on a longer basis. So we have many products we sell through many channels but we don't sell all of our products through all of our channels. And that's part of transformative, because it’s how do we sell more of what we sell already in more of the places that we sell.

Thanks.

We probably have time for one more question. How about one more question.

Our final question then for today comes from the line Michael Zaremski from Credit Suisse.

First question if -- the P&C investment portfolio, the duration has increased fairly measurably over the last few years and up to five plus years now just curious as you continue to see that elongating. Are you kind of at the high end of your kind of the range you're comfortable with versus kind of duration of liabilities?

Mike, it's John. Look, you never know exactly what the future holds. So we're always going to respond to economic conditions, overall risk and environment of our firm and structure of the portfolio that way. I would say that what we've seen in terms of the duration extension in recent time and a lot of that's taken place in the last 18 months was more of a reaction back to strategic norm. As interest rates had been rising prior to that with the cycle that the fed was in, we thought that it was prudent to stay a little bit short and look to recapture higher yields that are better -- when there's a better opportunity. We couple that with a little bit, if you go back 18 to 24 months so the economic situation in the U.S. in the world was different. It was software at that time and it wasn't clear that policymakers were going to engage, they’re in a tightening cycle. We thought that they needed to engage, we also wanted to put a little bit of inflation protector or recession protection back in the portfolio, when you have more duration. If the economy falls off, it tends to help your portfolio and balance it out more. So we did actively highly coordinated internally with all our risk processes, extend the duration. It had a number of benefits that we're pleased with. It did increase income, which is a positive. It also did build in a more balanced portfolio, balance at our risk based assets. And if you look at --this isn't perfect math, but if you look back at where rates were when we did most of extension relative to where they are today, it's been a great price increase in our fixed income securities. Rates are roughly market yields when you include where treasuries were and where corporate are roughly about 100 basis points lower than that time. So going forward, we'll continue to monitor. What I can assure you is that it will be highly coordinated inside. Tom talked earlier about our numerous processes, our capital allocation process with investments. We also work very closely with our enterprise risk group to make sure that these are -- all our moves are well understood. And we believe that proactive management investment portfolio is a way to add value to the enterprise.

Okay, that's helpful. And yes, definitely it's been a great call. Lastly clearly, a lot of questions about the new commission structure. Maybe curious, has policy growth --is it more and more weighted towards maybe a disproportionately smaller percentage of agencies? Is that changed over the years? I know commission structure did change a number of years ago too, and it seems like it worked out okay, as sales didn't fall apart. Maybe you could add any color that'd be great.

I mean, what our strategy is to have all of our agents growing and all of them be productive. As you point out, not all of them get there every year. Sometimes that's what we do in a local market or what the local market conditions. Some of that's what they do or they don't do. So we don't -- this commission change wasn't to address a problem. It was to seize an opportunity. And I think commission is -- we move commissions around frequently, like it's not -- it happens all the time, people do it now all the businesses are in and our goal is to make sure that their objectives are aligned with our objectives. Thank you all for -- let me just close by saying thank you. We had a good 2019. We're focused on transformers growth in 2020. And we'll talk to you next quarter. Thank you.

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