Ladies and gentlemen, thank you for standing by, and welcome to today's program, which is entitled Allstate Announces Agreement to Sell Allstate Life Insurance Company. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. At that time, we would like to ask each of our participants to ask one question, one follow-up. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mark Nogal, Director of Investor Relations. Please go ahead, sir.
Thank you, Jonathan. Yesterday, following the close of the market, we issued a press release announcing Allstate's agreement to sell Allstate Life Insurance Company. After prepared remarks by our Chair, President, and CEO Tom Wilson, and Chief Financial Officer Mario Rizzo, we will have a question-and-answer session with the rest of our management team. The call will last 30 minutes, so we are finished before the market opens. We will not be covering current operating results, so please hold those questions for the 4th quarter earnings call next week. We have posted a slide presentation for use in today's discussion that can be found on our website at allstateinvestors.com. As noted on the first slide, our discussion today may contain forward-looking statements about Allstate's operations.
Allstate's results may differ materially from these statements, so please refer to our 10-K for 2019, the slides, and our most recent news release for information on potential risks. And now I'll turn it over to Tom.
Good morning. Thank you for joining us on short notice. As Mark mentioned, Allstate, we've entered into an agreement to sell Allstate Life Insurance Company and some of its subsidiaries for $2.8 billion to entities formed and managed by Blackstone. For clarity, as we go through the presentation, we'll be referring to Allstate Life Insurance Company as ALIC, and Allstate Life Insurance Company of New York is ALNY. So please deal with our acronyms. Let's begin with an overview starting on slide two. ALIC represents 23%, or approximately 80%, of Allstate's total life annuity GAAP reserves. This transaction has minimal impact on our two-part strategy, which is, of course, to increase market share and personal property liability and expand protection offerings for customers. As you know, we've sold life insurance to customers since 1957.
Over time, proprietary products were developed to include both retirement and investment products such as fixed and variable annuities. Over the last 15 years, we've been reducing the portfolio of proprietary products and using third-party providers to serve customers, so we exited variable annuities, we stopped issuing fixed annuities, and we sold Lincoln Benefit Life. This transaction represents the next step in the process of deploying capital out of spread-based risks. The Allstate agents and exclusive financial specialists will now provide life insurance to customers using non-proprietary products. This does enable us to redeploy $2.2 billion of capital out of the lower growth and return businesses. It also provides increased clarity on the highly attractive returns of Allstate's property liability business with approximately a one percentage point improvement in the adjusted net income return on equity. The second bullet provides background on the life and annuity businesses.
Sales of life insurance have been flat since 2018, and proprietary annuity sales were stopped in 2014. From a corporate perspective, these two businesses represent 11% of total earnings but utilize 1/3 of total GAAP capital. Results this year, of course, as you know, have been negatively impacted by lower investment results and coronavirus mortality losses. We will retain ownership of ALNY, the New York company, with $5 billion, or approximately 20% of the life and annuity GAAP reserves, until it can be sold or risk can be transferred to a third party. This may require us to use some of the deployable capital freed up by the sale of ALIC. The third point here, the entities established by Blackstone, they're just a better owner for these businesses. They'll be well capitalized, which policyholders will continue to be well protected.
The entities won't be issuing new business, and that enables them to lower costs and earn higher returns. Blackstone will manage the assets and has raised capital that has a different risk and return profile than Allstate's common shareholders. The last bullet: this transaction is economically attractive when compared to issuing life insurance and running off the closed block of annuities. It will result in a financial book loss of $3.1 billion, which will be recorded in the 1st quarter of 2021. With the upcoming adoption of the Long-Duration Targeted Improvement accounting standard, a larger loss would have been recorded in 2022. Of course, that assumes if rates remained at or near the same levels. Let me provide some additional background on the businesses being sold and our strategy, and then Mario is going to take you through the terms and results of the transaction.
So if you move to slide three, let's discuss the financial results of Allstate Life and Annuities. And this is really a story of two different businesses, annuities and life. The annuity business has lower returns and greater income volatility than the life insurance business. Allstate Life Insurance has been a steady source of income and diversifies our risk profile, but has had relatively low growth. As you can see under the first bullet point, life insurance is about 1/3 of the assets and capital in the segment. That's just the segment, life and annuities, but 80% of the profits. If you go to the pie chart on the left side of the slide, you can see that life insurance accounts are $12 billion of our investment portfolio, and annuities is $22 billion, which is some portion that's invested in long-dated performance-based assets.
The equity GAAP chart below shows that the annuity business has $4.8 billion of GAAP equity at the end of September, whereas life insurance is about half of that amount. The higher equity balance for annuities in part reflects that we optimize asset liability matching from a risk and return perspective for the long-dated annuities. So our asset liability management strategy for the annuity portfolio is to cash match the near-term liabilities with fixed income securities. And then we invest in performance-based assets for those longer duration liabilities to generate more attractive risk-adjusted returns. And while the performance-based assets generate more attractive economics, they also require more regulatory capital. The upper right-hand chart shows the income generated by life and annuities. Life insurance made $261 million last year, and the annuity business about broke even.
This year's results have been, as I mentioned, negatively impacted by the decline in interest rates, lower performance-based income, and coronavirus mortality claims. The return on equity of these two businesses in comparison to the overall company is shown on the lower right. You can see that life, which is in green, at 13% and 11% in 2018 and 2019, is below the total company of 16%-17%, but still about the cost of capital. The annuity business, however, has returns in equity that hover around zero. Moving to slide four, this is, of course, a slide you know well. Allstate's strategy is to increase personal property liability market share and expand protection offerings as represented by the two ovals on the left. Now, as we pursue this divestiture, our goal of protecting people from life's uncertainties by providing this circle of protection remains unchanged.
Allstate agents and exclusive financial specialists will continue to broaden Allstate's customer relationships, but will use non-proprietary life insurance solutions. Larger life insurance companies have scale. They provide access to contemporary product designs. They have larger risk pools and lower costs, all of which will increase customer value. We have plenty of experience in using non-proprietary products with Allstate agents and exclusive financial specialists. So last year, see on the right there, our premiums and deposits of non-proprietary products were $2.2 billion. Life insurance will now be pulled into that offering. In summary, the sale has no meaningful impact on our strategy, redeploys capital out of lower growth and return businesses. The businesses will be managed by a better owner. It's economically attractive and provides great clarity to the earnings power of our property liability businesses.
Now let me turn it over to Mario to provide more insight into the transaction.
Thanks, Tom, and good morning, everyone. I'm going to flip to slide five. As you can see on slide five, the transaction represents a near culmination of deploying Allstate's capital out of investment spread businesses. Allstate has been reducing exposure to these low risk-adjusted return businesses with long-dated liabilities for over 15 years, as Tom mentioned earlier. In 2006, we reinsured the variable annuity business. In 2010, we exited the broker-dealer channel. In 2013, we stopped issuing structured settlements. In 2014, we stopped issuing all remaining annuity products and sold Lincoln Benefit Life. Total liabilities peaked at $88 billion and will be down to $5 billion after the sale of ALIC. The life and annuities businesses reside primarily in ALIC and ALNY, which operated as one business.
As you can see from the table on the right, approximately 80% of the equity is in ALIC, which reflects the transaction we announced last night, with the remainder in ALNY. ALNY, which contains the remaining $5 billion of liabilities, will be retained until it can be sold or the risk otherwise transferred to a third party. For further insight into the transaction structure, let's turn to slide six. This transaction involves the sale of ALIC, Allstate Assurance Company, and other affiliates to entities managed by Blackstone, as represented by the blue boxes in the diagram on the slide. We are pursuing a subsequent transaction involving the sale or risk transfer of ALNY, which may require us to utilize some of the capital freed up from the ALIC sale, and this is represented by the orange box on the slide.
Let's go through a few additional terms of the divestiture on slide seven. The purchase price is comprised of $2.8 billion in cash, including up to a $400 million pre-closing dividend, which is subject to regulatory approval. Allstate retains any increase or will be required to pay any decrease in the adjusted statutory book value from March 31st, 2020, until close. There is further upside to the deal as Allstate will receive an earnout of up to $250 million over a 10-year period starting in 2025, with annual payments if the 10-year US Treasury yield is above 2.5% for a consecutive three-year rolling period. While there are no financing conditions to close, a few considerations, including the termination of the ALIC support agreement with ALNY, as well as regulatory approvals, are part of the transaction.
As part of the deal, investment portfolio asset transfers will largely be the existing portfolio, except for a portion of the performance-based assets. As such, our performance-based portfolio is expected to increase several percentage points compared to the total as part of the total Allstate portfolio from 9% as of the end of the 3rd quarter. The companies will be well capitalized so that policyholders continue to have good protection. Additionally, Allstate and entities managed by Blackstone will enter into a transition services agreement. Moving to slide eight, let's discuss how the transaction will be recorded in Allstate's financials. ALIC's assets and liabilities will be reclassified as held for sale, beginning with the release of 1st quarter 2021 results, and will be presented as discontinued operations retrospectively.
As you can see by the reporting shown at the bottom of the table within the slide, $34.2 billion of assets and $27.5 billion of liabilities will be classified as held for sale. The investment portfolio will be reduced by approximately $28 billion. Reserves for life contingent contract benefits and contract holder funds will fall considerably. However, they will remain at approximately $7.1 billion as we retain ALNY and include the Allstate benefits business. The estimated GAAP loss on this position will be recognized on the day of signing and presented with Q1 2021 results, with assets held for sale reduced by the amount of the loss accrual. Results will continue to be reflected in GAAP net income until the transaction closes. However, they will be excluded from adjusted net income. Slide nine provides some further insight into the book loss on sale.
Breaking the transaction into the life and annuity components, the expected book loss of approximately $3.1 billion is the result of the annuity business. The loss attributable to annuities, estimated at between $3.3 billion and $3.5 billion, is larger than the total loss we will recognize on the transaction, reflecting the low returns in this business, which have averaged about 2.5% from 2017 to 2019. This annuity book loss is partially offset by a moderate gain in the life insurance business. Despite recognizing a financial book loss of an estimated $3.1 billion, this is lower than the estimated reduction of equity associated with the upcoming adoption of the Long-Duration Targeted Improvement accounting standard if rates remained at or near current levels. Slide 10 provides further clarity on Allstate's attractive return profile.
The sale of Allstate Life Insurance Company increases Allstate's adjusted net income return on equity by approximately 100 basis points, as you can see from the 3rd line in the table. It also increases transparency into the very attractive returns of our core protection businesses in comparison to competitors. Allstate's returns are extremely strong relative to peers, financial service providers, and the broader market, as you can see by the comparisons provided on the bottom of the table. Allstate has a return on equity that is higher than or equal to averages for P&C peers, the S&P Financial Index, and about equal to the S&P 500. We expect our long-term adjusted net income return on equity to be between 14% and 17%.
Allstate's stock price, however, does not reflect our industry-leading return on equity, as can be seen by the price-to-earnings multiples on the top right of the exhibit compared to those on the bottom right. With that context, let's open up the line for questions.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the # key. And once again, we'd just like to remind you to please limit yourself to one question and one follow-up. Our first question comes in the line of Yaron Kinar from Goldman Sachs. Your question, please.
Good morning and congrats on the deal. My first question is around the capital that is available to deploy. So after whatever portion you may have to put back into ALNY, what is your preferred use of funds there? Is it buybacks? Are you seeing any strategic acquisitions that you may deploy into?
Good question, Yaron. So first, I'd like to say we have exceptional financial strength both before and after the transaction, so we didn't have to do this. We have a track record of using capital in a variety of ways, as you point out. Some of it's dividends, some of it's growth, some of it's share repurchases. And in addition to just being well-positioned today, we have extremely strong capital generation. And as you know, that's enabled us to fund all those: fund growth, invest in existing businesses, increase dividends, repurchase shares. We acquired Allstate Protection Products, Allstate Identity, and National General without any changes in our share repurchase programs. And so the protection products and identity protection are growing rapidly.
National General gives us a really substantive growth platform in the independent agent business and immediately adds, of course, about $5 billion of premiums and about a point of market share growth in personal lines. So we're excited about all the growth prospects we have. We have a lot of work to do on those. And so we don't necessarily see us having to go out and buy something else to grow. We don't need to pay down any debt as a result of the transaction, which I think a couple of people brought up. And so we're in good position. As you know, we're in the middle of a $3 billion share repurchase program. When that's completed, then the board gets to decide what else we do with the money. But we've been good stewards of capital.
As you point out, we'll probably have to use a little bit of it to unwind the ALNY stop-loss agreement before the sale. But we still have plenty of capital to do a whole variety of things. I will point out that the increase in return on equity that we quoted at 100 basis points is just this transaction. And it does not assume that we do any additional share repurchases other than what we're doing. Mario, anything you would add to that?
No, Tom, I think you said it well. I mean, we've been saying for a long time that we have a lot of financial strength and flexibility. This transaction doesn't change that perspective at all.
Got it. And then my second question goes to the ROE impact. So I think you're talking about roughly one point from this transaction. I think a year, year and a half ago, you had talked about the drag from the annuities business to the overall consolidated return. And I think at the time you'd called out kind of three and a half points or so of ROE drag. So is the difference between the point that you're talking about today and the three and a half points that you talked about a little while ago, is that the ALNY business, or are there other impacts there that would have muted the ROE move upwards?
Mario, do you want to handle that?
Yeah. Sure, Yaron. So yeah, part of it is ALNY because embedded within the annuity segment was the annuity business that was in ALNY. So that's part of it. The other part of it was what we did there was on a pro forma basis. We just removed the entirety of the segment, both the income and the equity within the segment to get to that number. We are getting proceeds, obviously, for this sale. So we're not going down the same amount of equity. So the math is slightly different. When you take ALNY plus that into account, that'll reconcile between the numbers.
Got it. Thank you.
Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question, please.
Hi, yes. Thanks. So I just wanted to, first off, follow up on the capital side of things as well. So it sounds like you guys said, right, there's going to be some capital that needs to go to ALNY, but then the rest kind of, I guess, in response to your own question, I think you said you don't need to pay down any debt. So it sounds like it'll be the potential, right, for M&A, growth, or share repurchase. So is the plan, once this transaction closes, to then relay kind of how those items could come into play in the back half of the year? Or how could we just think about, I guess, the potential for buybacks or whatever you might do with this capital when you put the plan in place?
Elyse, I understand the thing. I guess I would go back to what I said before, which is if we got a lot of capital, we're really strong. It gives us lots of flexibility. We don't feel strategically like we have to do anything, that we have plenty of growth opportunities with what we have between our National General platform. We feel really good about what we have going in the independent agent channel. We obviously have the Allstate, both agent and direct business, which have now been combined, and we have good growth opportunities there. And so we think we have plenty of things, and the way to drive growth is to lean into what we have.
That said, if something comes along and it looks like a good business and we can get a good price on it, we have a good track record in doing that, whether that's Allstate Benefits with 20 years ago to Allstate Protection Products three years ago, four years ago. But we're not announcing any additional share repurchase as a result of this transaction because, quite honestly, we're still in the middle of a pretty large program right now.
Okay. That's helpful. And then my second question, so you guys have this 14%-17% ROE target, right? It sounds like this was taking 1% off of that, right? So does the target go up? And then I guess ALNY, right, to your previous question, is also a drag on the ROE as you kind of are now in discussions about doing something with that business. Do you guys have any time frame for when you might potentially see a transaction there? Thank you.
So let me give you there were a couple of questions in there. The 14%-17% is an excellent return, as Mario showed on that slide. When we established that target, we did it in part based on the math, what's our current business doing, and thinking, "Okay, well, we were working on it at the time, trying to dispose of these businesses." We also established it by saying, "What's the best way to drive growth and shareholder value?" One of that is, of course, getting a good return. 14%-17% is a really good return for shareholders, as you can see from that chart. Then it's growth. We're committed to driving growth and 14%-17%, and we believe we can drive both of those at the same time in that range.
On Allstate Life of New York, it has an excellent maturity profile on the liabilities. So if you're an asset liability management person, those liabilities are really long-dated. And that gives you the ability to invest in stuff that's got some volatility in it, but gives you higher returns because it's got volatility. And we've got a really good investment portfolio there. That said, New York's a little more complicated than the other states that we operate in. Mario, do you want to just talk about Allstate Life of New York?
Sure, Tom. So Elyse, I couldn't give you a specific timeline, but what I will say is we're continuing to actively explore a whole bunch of alternatives for our Allstate Life of New York business. And much like we said, Blackstone is a better owner of ALIC. We believe, given the annuity profile and the long-dated liability profile of the business, that for the right investor, there would be a better owner of those liabilities than us related to Allstate Life of New York. So we're actively engaged in that process, and we're going to look to do something with the New York business. But I couldn't sit here today and give you a specific timeline.
Thank you.
Thank you. Our next question comes from the line of Greg Peters from Raymond James. Your question, please.
Yes. Good morning. My first question, exiting or de-emphasizing low-return businesses has been a long-term strategy for your management team. I'm curious where and how you draw the line between low returns and your strategy to increase personal property liability market share, and I'm thinking about some of the other businesses like your benefits business or Arity as examples.
I'm not quite clear on the question. I maybe deal with benefits and Arity, Greg, and then if I don't get to your market share question, come back and then follow up, so Allstate Benefits is a really good business for us. We bought it 20+ years ago. It's had 6%-7% compound annual growth over that period. We got a really good market share position. We've got over 4 million customers, and it gets a high ROE, so we like that business. Arity is a different entity. Arity, of course, is our telematics provider, and that has been a user of capital. But if you were to put it out on the marketplace, I believe it would have huge value. I mean, we track, I think, 28 million cars right now. We got hundreds of billions of miles of data.
We are picking up new customers that want to use our services. And now with LeadCloud and Transparent.ly, which we picked up from in the National General thing, it really makes a complete suite of really think of it as integration as a service for insurers and other companies as well, where we can help them avoid all the hundreds of different connections you have to do to get some of the data and to get leads and all kinds of stuff. So we're feeling really good about Arity. I don't believe it's valued in the stock at all. In fact, I think it probably ends up being a negative just because it uses some capital. But so they're two completely different animals. That doesn't really get to your market share question, but I wasn't sure how to bridge from those to.
Well, I mean, listen, my other question is a financial question, so I don't want to waste the follow-up on this. But I was just trying to bridge the gap because I recognize some of your businesses are not generating that targeted return on equity, yet they're incredibly valuable to your strategy of growing personal lines market share. So listen, my second question was a financial question. And I'm just trying to reconcile some of the statements in the press release with what you provide to investors in your financial supplements. So for example, you said in the press release that there's going to be a reduction in your investment portfolio of about $28 billion. And I look at page 32 of your 3rd quarter financial supplement, the life had invested assets of $12.3 billion and annuities had $22 billion.
And then in the release, you mentioned a $3.1 billion book loss in the 1st quarter 2021. Does that flow through the equity disclosure and your annuity segment on page 30 of your quarterly supplement?
I think the difference in the first one is probably Allstate Life of New York. But why don't Mark walk you through the individual pieces around all that? He can take you through that. And then the second piece, it all gets, as Mario talked about, it's held for sale. So I'm not sure how that will show up in the supplement.
Okay. Thanks for your answers.
Okay. Well, maybe we do one last question, Jonathan, and then we'll wrap up.
Certainly. Then our final question for today comes from the line of Josh Shanker from Bank of America. Your question, please.
Yeah. Thank you. Following up a little bit on Elyse's question, the 14%-17% ROE stays, and that's sort of a target now, I guess. You target that based on how much you want to grow. Am I understanding that correctly, that you could have accretive ROE endeavors happen to the business and would allow you just to cut price, I guess, to maintain a 14%-17%? Is that how we should think of it?
Well, we want to do both. So we want to grow as fast as we can, and we're doing a bunch of stuff to do that. As you know, we're transforming growth, National General and others. And we want to commit to do 14%-17%. But you're right. To the extent you have, I guess what we're saying is if you took really high returns in some businesses, we would accept slightly lower returns on those businesses if we could grow as long as we're in the 14%-17% zone. So we think the best way to create shareholder value is growth.
Yeah. And so in terms of trying to think about when you came up with that 14%-17% range, it wasn't too long after that you made the National General announcement. And now we're working on, I guess, doing something about Allstate Life New York. Are all of these things part of a big process that when you set that 14%-17% objective a year ago, or is your strategy for growth changing as you knock these things out and therefore have more flexibility in your pricing?
Our strategy for growth hasn't changed. Each of those items does impact the calculation. So as we said, National General increased our return on equity, but we use debt to do it. So that's what you would expect. But we still think we get a really high return from that business, both economically and financially. This one obviously also has an increase in it. But 17% is not a cap. It's just we said we can deliver 14%-17% on a long-term basis. If we can do better than that for shareholders, we will, as you can see from Mario's slide. But we want you to have confidence that we're going to have industry-leading returns and we can grow the business.
We could obviously have raised our return on equity targets and not invested as much in growth, and we decided that wasn't the right thing to do.
Okay. Thank you.
Thank you. In summary, this sale, first, thanks for getting on. This is just another way we manage risk and return to make sure we can generate good returns for shareholders. It has no meaningful impact on our strategy. This transaction redeploys capital out of lower growth and return businesses. The business is going to be well-managed by a better owner. The transaction is economically attractive, and it provides greater clarity to the earnings power of our property liability business. With that, we'll talk to you February 4th. Thanks very much.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.