Good morning. Thank you for investing time to understand why Allstate is a good investment. Joining me today is Mario Rizzo, who is our CFO, and Mark Nogal, who leads investor relations for us. Before we begin, this is our statement that says I will be making a number of forward-looking statements. We do not necessarily use GAAP. You have any specific questions, you can go to our website at allstate.com. Let's begin with Allstate's strategy. Our strategy has two components to it, increase personal property and liability market share and expand into other protection products. If you start with that upper oval, the personal property liability business, that is insuring automobiles, homes, motorcycles, boats, personal umbrella. We use differentiated products, sophisticated pricing, we have great claims expertise, and we are building an integrated digital enterprise that lowers expenses.
We are also diversifying our business by expanding our protection offerings, which is highlighted in that bottom oval. We offer customers a wide range of products from life insurance to workplace benefits, commercial insurance, roadside services, car warranties, protection plans on their devices or phones, and identity protection. We leverage the Allstate brand, our customer base, and our capabilities to drive growth in that bottom oval. Some of those businesses also then support the upper oval, the personal property liability. It creates shareholder value through increased customer satisfaction, unit growth, and attractive returns on capital. It also ensures we have sustainable profitability, and a diversified business platform. Our businesses continue to deliver growth and attractive returns. Our strategy is working. We are on pace to meet all of our 2019. We have 5 operating priorities every year. Revenues exceeded $33 billion for the first nine months.
Property liability premium grew 5.9%. We have strong operating capabilities that enable us to generate net income of almost $3 billion over the same nine-month period. adjusted net income was $2.46 billion or $7.32 a share for the first nine months, and you can see that is on the bottom as well. Earnings per share were flat to the prior nine months as higher catastrophe losses reduced income, which was offset by an aggressive share repurchase program. Returns were also attractive as the adjusted net income return on equity was 14.2% over the last 12 months. While we generate attractive returns in total, we also carry the burden of a low return on our annuity segment, which is below our cost of capital, which you can see from this slide.
The annuity businesses earn a 1.5% return on equity, which reduces corporate returns by 3.8 points. That is over the last 12 months. When you exclude the impact of annuities, Allstate's adjusted net income return on equity is 18%. We can talk about why we do that, why we accept that lower return, because it is the right economic choice versus the right financial book choice. The components of this return are shown on the right. Allstate Protection generates returns in the mid to high teens. Allstate Life has low teens returns. Allstate Benefits is in the mid to high teens. Investments and growth are being made in the service businesses, which does have a negative impact on that overall return on equity.
Beginning in 2020, we're going to start establishing long-term return on equity targets, replacing the annual guidance we give on underlying combined ratio in the property-liability business. It's a better measure of performance for four reasons. It's a broader measure for sure, than the underlying combined ratio, which of course just focuses on one part of the business, property-liability. It also excludes investment income, catastrophes, and other protection income. It factors in capital management, it's more correlated with stock price, and it fosters a better comparison with our peers. Let's go back to the top oval on increasing market share and personal property-liability and discuss the components that will accelerate growth and improve our competitive position.
Our strategy starts with the customer. Then it uses people and technology to deliver a differentiated customer experience that includes a competitive auto insurance product and a circle of protection from home insurance to electronic devices to identities. Utilizing people and technology is key to having a competitive auto insurance product, and we're focused on doing that at a lower cost. We're growing today for a number of reasons. We have a great brand. We got good product innovation, good quality. We have pricing sophistication. We have the ability to sell through Allstate agents and sell direct and online through Esurance. We have great claims expertise. So that puts us in a really good position. Of course, one of the things you always want to ask, what's your price?
Determining what's your relative price position in property-liability is complicated, because in Illinois, for example, we have 1 billion possible price points, so trying to compare that to everybody else gets complicated. That said, when you look at it in general, we're not the lowest cost option because for the Allstate brand, it comes with an agent, and an agent costs money. Our relative price position, versus people who have agents, like against State Farm, Nationwide, is very good. We're higher than GEICO because we come with that extra agent. Esurance is generally lower than the Allstate brand because it's self-serve. Encompass, which is sold through independent agents, has broad coverage and is generally our highest priced offering. Our strategy though says you don't have to stay.
You should always be working on reducing your costs. We have a number of ways we're reducing our expenses while still earning attractive returns. The go-to-market business models for our three business brands are being modified to lower our expenses. We're still going to leverage broad distribution, but the product management, the claims, and the operating processes that serve customers are going to use consistent technology platforms and consistent processes, which we expect to lower expenses. We'll continue to build an integrated digital enterprise by utilizing data analytics, technology, and process redesign to further drive down costs, as we've done with QuickFoto claims. We're also leveraging telematics, customer connectivity, and artificial intelligence to serve customers more effectively and efficiently. Cost reduction initiatives will require investments in new technology.
In addition, we're going to put more money into growth initiatives and advertising, which will be funded by some of the expense reductions. In general, we expect our expense ratio to go down. On a longer-term basis, we're going to reinvent the insurance customer value proposition. We were first to the market with features like Declining Deductibles, Accident Forgiveness, Claim Satisfaction Guarantee, and telematics. We've identified four elements of value for our future designs. That's simple quality, rewarding engagement, design aesthetics, and community affiliation. We can use our strong, established place to grow. Of course, established players like us, we have some benefits because we have competitive advantages over new entrants, all the fintechs. We have extensive customer relationships. We got intellectual property that we know how to run our business. We got a deep talent pool.
That said, sometimes you have this burden that you got to get over. One of the things we have as well is making money. You need a clear strategy, of course. You need the desire and the ability to change, which we have. You also need the ability to generate returns to continue to fund that growth. We covered the first two, but let's look at our track record of generating attractive return from home insurance and auto insurance while transforming. The graph on the bottom left shows auto insurance combined ratio for the last 10 years in comparison to our three largest competitors in the overall industry. Allstate's insurance margins are amongst the best in the industry and substantially better than our largest competitor, State Farm, and similar to GEICO and Progressive. We've earned underwriting income every year in the last 10 years.
When people start talking about cycles, we're like, "Well, we make money every year." Allstate's lower combined ratio compared to the industry just in 2018, if you compare us to the industry, that was worth $1.3 billion of underwriting income. The same focus on profitability exists for home insurance, which we repositioned a number of years ago. The graph on the bottom right shows home insurance results and highlights the significant profitability we generate on that risk. The results are significantly better than State Farm, Progressive, and the industry, as you can see from the blue line. This performance generated $750 million more in underwriting income than would've been achieved by the industry average in 2018. Let's shift to the bottom oval. We continue to expand into other protection products and services by leveraging our enterprise capabilities and the Allstate brand through a wide variety of distribution channels.
These businesses are comprised as a group of mostly innovative products that provide Allstate Protection Plans, voluntary workplace benefits, auto warranties, life insurance, Allstate Identity Protection, roadside services. We have agreements with shared economy companies, and Arity, our telematics platform. We distribute those products through, of course, Allstate agencies. We distribute them direct through workplace benefit brokers, major retailers such as Walmart, Costco, and Target, car dealers, and telecom providers. Those businesses have substantially expanded our customer relationships. In just these businesses, we have 100 million policies in force. This generated $3.6 billion of premiums through the first nine months of 2019, and adjusted net income of $320 million. These highly attractive businesses and a track record of innovation shouldn't be overlooked when valuing Allstate.
Oftentimes, we get into a conversation just about auto insurance, and I'm like, "We've got a bunch of other really good businesses as well." To create shareholder value, we also have a proactive investment strategy which balances risk and return. The investment portfolio will be managed on a segmented basis. We match near-term cash flows with fixed income securities and utilize equity investments for longer-term liabilities. Over time, we've increased our position in performance-based investments, which tends to be private equity, real estate, on a variety of both through funds and direct. It's now about 10% of the portfolio, as you can see on the left. In part, that funds the long-term liabilities on that annuity block. I mentioned we get a low return on that. That's because there's high capital requirements on equity for those, but it's like a pension fund.
If you fund it with fixed income, you'll feel good today, and you'll feel broke tomorrow, and we don't believe in that strategy. Performance-based investments do generate higher returns, but they come with more volatility, particularly on a quarterly basis. Of course, it's that volatility that generates the extra returns. A disciplined approach to capital management also increases shareholder value. We have reduced the cost of capital through the issuance of preferred stock, and taking out common stock as a result of that. We have an excellent track record on return of cash to shareholders. Our dividend yield is 1.8% today. We have a history of significantly repurchasing shares. Since 2015, we've repurchased more than 28% of outstanding common shares, providing $9.6 billion to shareholders. Despite this successful strategy and strong results, much to my dismay, Allstate trades at a valuation discount to peers.
The stock currently trades at about $110 a share. That's a $20 discount relative to peers if you use a regression line on return on equity and price to book, as you can see from the graph on the bottom of the slide. The bottom line is Allstate represents an attractive investment opportunity. Our strategy is working. We have long-term growth by increasing market share and personal property liability. We're expanding into other protection businesses. We proactively manage our capital, and we provide great cash returns to shareholders. With that context, let's go to your questions.
Thank you, Tom.
Mario, do you want to come up and you can.
Mario Rizzo, the CFO, will join us as well. Thank you for the overview.
I thought maybe we could start with the, excuse me, the property liability business. I think you've embarked on both growth and expense management initiatives that I think are intertwined. You touched on them a little bit. Maybe first question would be, is this the right time to really look to accelerate growth in auto, where I think the cycle is in very late stages today?
We think it's the right time to grow, for a couple of reasons. One is, we make really good returns. We're really happy with those returns. They're in the, as I said, high teens, maybe higher, depending on what you think economic capital should be. We're also capable of adjusting. One way to think about our auto business is it's kind of like a machine with a bunch of levers in it, right? It's got a price lever, it's got a sophistication lever, it's got a claim lever, it's got a risk tolerance. You pull all those various levers at various times to make sure you make money. We do it quite well because when we showed that chart with underwriting, we've made money in the last decade, in auto insurance, no matter what the environment has been.
We think unless there's some big macro thing, we believe we should continue to grow. There have been three times in the last, I don't know, I've been CEO since, I guess, 13 years, where we chose not to grow. One was the financial crisis. In 2008, I told the team right up, "Look, I need profit. I need profit from auto insurance. I don't know what's going to happen in investment portfolio. Make sure we make money. I don't care if we grow, make sure we make money." We did that. In 2009, 2010, 2011, not because anything we did in auto insurance, but because we wanted to get smaller at homeowners insurance business. We had to get rid of about 2 million homeowners insurance policies to get that line profitability to come down.
That had an indirect slowing of growth in auto insurance. In 2016, we backed off on growth because you had this big bump up in frequency. We didn't know if it was going to keep going or how high it was going to go. We backed off some on growth there. Right now I feel very comfortable growing the business.
Got it. Specifically on the growth side, I think you've mentioned that you're going to make two, or you've disclosed that there are going to be two changes in the agency compensation structure. One, I think to the entire agency force on the variable compensation front, and the other more geared towards the new agents coming on board, where I think you're offering the integrated service program.
Yeah.
Maybe you can talk about both of those programs.
Mario and I can do this together. First I would go up a level. Those are components of what we call Transformative Growth. Transformative Growth is putting those three property-liability businesses where we underwrite together to lower our expenses. We can and should lower our expenses so we have a more competitive price, still earn great returns. This is related to that. Transformative Growth is both doing it more effectively and efficiently. The first is Integrated Service. We have, under the Allstate brand, 11,000 agency owners and about 28,000 or 29,000 people who work for them in their offices every day just selling our stuff. Call it 39,000 people. They do a lot of service work that they don't have to do.
Integrated Service is creating centralized capabilities to take that service work off those agencies because we can do it cheaper, better, and faster centrally. When we do it centrally, we can also get rid of it if we don't need to have it anymore, because there's just some stuff you can mechanize out. That's about reducing costs. It's also about freeing up their time. To the extent you're not spending time changing somebody's address, you can spend time selling new customers. Now to do that, they currently do it, they get paid to do it, and we're going to do it, so they have to pay us to do it. Right now it's mandatory for all new agents. It's optional for other agents. Some agents love the idea.
Other ones are trying to get used to it because they have a family member or friend or something who's doing the service work, and the truth is, we can do it better centrally. Maybe don't even need to do it all. That's about lowering costs and freeing up time. The commission change was, if we're going to grow faster and we're going to put more money that we save in some of our expenses into advertising, which we intend to do, then we need them focused on more doing new business. We took their commissions on new business and raised it, and we took the bonus they got on existing business and it goes away. We basically moved that bonus to all new business. We're incenting them to grow. It's about setting ourselves up to grow at lower expenses.
Mario, do you want to talk about other expense cuts or things?
Yeah. I think, as Tom mentioned in his presentation, part of our focus is to over time take our expense ratio down, which we're doing. Number one is, gives us more space, from a growth standpoint, makes us more competitive. I think to your point, Yaron, around is the time right to grow, I think that is an important part of maintaining the margin that we have by being able to reduce costs over time. I think there's a fair amount of opportunity in driving consistency across our brands.
Whether it's claims or it's product or operations, that over time, we can manage the expense ratio down, allows us to maintain margins, makes us more competitive, and really facilitates that growth conversation.
Actually, it's a good point. This came up in the last quarterly earnings call. I think sometimes people don't see the whole picture. Irfan, when the strategy here will be expense ratio will come down, loss ratio will go up, margins should stay really attractive. When the loss ratio ticks up a little bit, from our standpoint, that's okay as long as expenses went down by that amount or more. You have to really look at the overall combined ratio.
Yeah, you actually see that if you look at our results. Oh, thank you. If you look at our results either for the third quarter of the year, what Tom said is exactly what you see. The loss ratio is up a bit, expense ratio is down, margin is flat and really attractive.
Got it. Is it fair to think of the client base in Allstate brand as a client who actually does want to go into their local Allstate agent office, does want to have the relationship, and if you take away part of that by centralizing it, does it in some ways alienate that same customer?
Well, it's fair to think about the customers that way. If you look at customers and say who wants to do self-serve and who wants to do agents. It's about the penetration in the Allstate customer base is about 1.5 times that the overall customer base. If you said of 100 people, X number want an agent, and you looked at of 100 Allstate customers, it would be 1.5 times X. Clearly, that resonates with people. What we're taking out is low value-added stuff. We've gone through and looked at all the different things. You want financial advice, you want someone to add a card, you want someone to answer a question on your payment. If you want to pay your bill, you don't really care whether somebody does it locally or not.
In fact, sometimes it's easier to just do it on your phone, right?
Right.
We are shifting. I think there is, as technology changes, though, we have to be cognizant that the role of the agent has to change with it. The role of the agent of being the local person who you took your check to, they say it now with the Allstate, is changing. People want to do stuff on the web. They might still want a personal relationship with you.
They might not want to drive by your office. We're working on what does that look like. Because even if you want personal help and advice, just like in investments, there's some people who buy ETFs, other people buy managed funds. Those people who want to buy and want help doesn't mean they don't want technology. They'd like technology to make their life easier, too. We're trying to change the technology stack, which is why putting the businesses together, there's a lot more commonality in the technology stack today than there used to be.
Got it. On the other end of the compensation change, so emphasizing new growth, are you giving the agents new tools as well in order to exercise or execute that growth?
Yes. We have something called Allstate Advisor Pro. We got to do better. We need to do better on lead management. We're going to put more money into advertising. Yes, they have a way to grow. I thought your analysis said it pretty well, though, that they still get paid a lot of money to retain customers. They're economic animals in the end, appropriately so, and they will run their business effectively. I think there is a risk to doing it, yeah. Do we think it's going to drive more growth? Yeah, otherwise we wouldn't do it.
Okay. One thing we saw, switching away maybe from the compensation and expense programs, one thing we saw in the last quarter, both at Allstate and a couple of other peers, was frequency was a little less favorable than it had been. Is that just normal volatility that comes through, or do you think that with gasoline prices being lower, maybe more people on the roads, fuller employment market, that we're maybe starting to see that favorability starting to maybe moderate a bit?
Yeah. Frequency's really hard to predict.
That's why we have you here.
Yeah. We just react to it.
Okay.
What we see, we change. When frequency goes up, we change the dials, and we adjust it, so we make sure we're making money while we're growing. It was up last quarter. What the long-term trend in frequency, of course, was it came down for about 15 or 20 years with anti-drunk driving laws, brakes, third tail light, and then it kind of leveled out for about five years. Everybody kept saying it's still climbing, but it really wasn't. It was flat. In 2015, 2016, it just, boom, popped up. Nobody knew why it popped up. Even today, more miles driven are part of it, weather's part of it. Some people say it's attributed to the fact that the big iPhones came out with the big screens. I don't know. People got more accidents.
What we do is say, what we do know is they got in more accidents. If they get in more accidents, we need to charge more money, and make sure we do that appropriately. We don't really try to predict it, we just try to react to it.
Okay. On the severity front, one thing that we keep hearing more in commercial lines is social inflation. Haven't really heard a lot about that potentially hitting the personal lines. Do you see that? If so, how does it manifest itself?
Social inflation, meaning, lawyers suing for damages.
Yeah. Higher jury awards.
I love the way we can create names for things.
Euphemisms.
Social, whatever it is, yeah. We've been getting sued for a long time on behalf of our customers, and have a really thorough process about how we manage that. Everything from how you take the claim report, when you start collecting information. If you wait until you get sued to collect the information on the file, the information you get is different than the information you get on the day of an accident. It's a down and dirty, granular, do claims right. We've always seen pressure on that. We've been after it for decades. We don't see anything unusual in bodily injury today that tells us that there's some new trend going on in personal lines.
I believe what they say, that there is something unusual. For our case, now, bodily injury severity's up a little bit, so we're on top of that.
You've got to manage that. Whenever severity goes up, there's usually some industry component to it, but there's also something that changes with your processes because you're doing millions of claims a year. You're always trying to get better, and sometimes what you think is better doesn't turn out to be better. You go in, and you have to adjust. Glenn, who runs our Property-Liability business, knows claims cold. We're all over severity, but we don't see any macro trend in bodily injury suits that cause us concern. Do you agree with that?
Yeah, no, I would agree with that. I think as Tom mentioned, with bodily injury, it is around process, right? It's around consistency in process and making sure that you're doing things the same way in handling similar types of claims. I think historically, we've been really good at that. There's a lot of claims, a lot of volume, and we just got to keep looking for opportunities to fine tune what we do it better, and be able to manage our loss cost.
Okay. Maybe shifting gears once more. Company's done three acquisitions in the last few years. SquareTrade, InfoArmor, iCracked, on the kind of consumer services businesses. Can you maybe talk about the appeal of that business, and why that's the area that you're really focusing your inorganic growth?
It's not the only area of focus, I would say. Our strategy, our shared purpose, says we're going to protect people from life's uncertainties. People like their devices sometimes more than their cars today. If I took your phone away from you'd start freaking out. We're like, "Hey, we'd like to insure that." Same with your identities. We wanted to get in the cellphone business. We were looking for somebody to outsource, do the workforce. We came upon SquareTrade, who has a warranty business, which does cellphones and a bunch of other stuff, TVs and all kinds of stuff through the retailers. They were really good at what they did, so we bought them. It was $1.4 billion. That's about $4 a share. It's now three times its size.
It's making money, and it's growing like crazy, and I think it has no value in the stock price right now. I think you should put some value on it because we paid $4 for it of your money, and it's worth a lot more now than it was. The identity protection is a newer version of that. That's just about a year. It's the same thing. Like, you get hacked, and today, the options are really, they give you credit monitoring. I actually believe that if you get hacked by a company, they should give you identity protection because credit monitoring is the tip of the iceberg. That's nothing. If you get hacked, you got people doing IRS stuff on you. They do all kinds of things, not just run up your credit cards. We think that's another area where there's great expansion opportunity.
Okay. Maybe on the flip side of that, we are seeing a lot of carriers looking to expand into the small commercial market.
Maybe even the small end of small commercial. It would seem to me like Allstate's very well-positioned to take market share in that market if it so chose. You have the relationships through personal, you have the direct channel, you have the captive agents. Why is that not necessarily an area that you've really, or at least you haven't publicly talked, I think, about focusing on growth there?
Well, you're right. It is a good opportunity for us. We probably write $500 million worth of business through small businesses, and it's an extension. Allstate agents, there's a store next to them, there's somebody else down there. We've had a number of different runs at it. It's now back to profitability. A couple of runs at it, we had 22 verticals, different kinds of stores and stuff like that, and we mispriced it, and we lost money on it. When we misprice something, we're into profitable growth. We're not into growth unprofitably. You should be able to make. We reduced the size of that business to where it is today, and it is a good opportunity. What's interesting that's happened in the meantime is as we were getting that business positioned, the shared economy business has taken off for us.
Our commercial premiums are up 37% in nine months, over nine months, over $200 million. What we are doing now is working with the shared economy, shared ride companies in particular. What we found is they really like our claims. Like we're really good at claims. They said, "Hey, we'd like you to" That business, so today in the commercial space, we're really focused primarily on the shared economy companies and expanding that. We know we have this other opportunity out there, but given what we're doing with the agents and transforming their businesses, I think it's not likely we're going to get a lot of their attention on commercial in the next 18 months. We're really leaning in heavy on the shared economy piece, and that business is growing. We like that business.
It's a little different business than our personal lines, because when the accident happens, it's a different accident. If you get in an accident, like your friends are in the car or whatever, in this case, somebody was in the car for 10 minutes, you've got to find them. It's a little more complicated, and the limits are a lot higher. We're reserving that at the rate, we think conservatively, at the rate we thought it was going to be when we wrote it as opposed to current experience. We feel good about the business.
Yeah, we do. I think the profit performance, again, we price it on a per mile basis. We really like the performance of the business. To Tom's point, it is different than personal lines. It's different than traditional commercial as well, it's kind of a hybrid model that I think particularly our claims capabilities position us to do well in the business, and we feel good about it.
What a bunch of the shared economy companies are finding, they get into the business, and they're now all of a sudden figuring out that risk management's a big part of their cost structure.
They're like, "Whoa, we need to" We can help them there.
Understood. Want to leave room for some questions from the audience.
How should we think about the disruptive potential of autonomous driving to Allstate? To the extent that you think it is, it does have disruptive potential, how should we think about either things like the timeline, and legal and regulatory sort of preconditions for autonomous driving?
We've been looking at autonomous driving and trying to do forecasts of what impact it'll have on auto insurance for seven or eight years. We do a scenario-based analysis on four quadrants, and one really fast, and one really slow. In some ways, it's slower than we thought. In some ways, it's faster. I think the adoption and the transference of the technology to the companies is happening faster. Autonomous drive isn't just there's nobody in the car, but to the extent you got those little things on the side of your mirrors and all that kind of stuff, lane departure stuff, that reduces frequency. When you're a lag pricer, that's good for your profitability because frequency goes down. Long term, what it does, of course, is fewer accidents, less insurance needed.
The other side to that is, well, when accidents happen, what is the cost of that accident? About half, about 45% is something happening to the car. The other is something happening to people. The people part is just medical inflation, but the car part surprised us in that we thought that with lower accidents, that severity wouldn't go up as much. Our view is that what the auto companies have done is they've built the throwaway car. They've built a car, so if you look at the total losses in the industry today, they're much higher as a percentage of accidents. The reason is because they've held down the cost of the car to sell the car, and they're making more money on selling the parts. It's like giving away the razor, selling the blades.
Cost of a car five years ago, one particular model, up 2% per year, okay? Cost of fixing that car up 7% or 8% a year. What they're doing is they're making, collecting revenue through parts, and I think they figured this out through the recession when volumes went down so much. They figured out, hey, this selling parts, OEM parts, is not that price sensitive. What's happening is cars shift and get more sophisticated. They're being able to charge more for parts, so that's actually had insurance premiums go up. I would've thought they would've been not up as much in the last four years based on our early analysis. I think looking forward, the trends are going to happen. That's why you get into identity protection. home insurance is a growth business because the weather's worse.
If you look at devices, what we've built is Arity, our connected car company. We now collect over 14 billion miles a month. We've risk scored all that stuff. We've got a couple million of our drivers. We think that we'll be able to use our customer connections to build a connected car business, too. That's a longer-term piece.
Unfortunately, we're all out of time. I would've loved to continue this for another hour.
Thank you. It's good. Thank you.
Thank you for a very good presentation.
Thank you for having us. Good. Thank you.