Hosted by Bank of America Merrill Lynch. I'm Jay Cohen. I'm the Senior Property Casualty Insurance Analyst. On behalf of Allison Jakubowicz and Matt Palazzola, they work on my team, and Seth Weiss, our Senior Life Insurance Analyst, and his team, which consists of one person, Ian Reid, we're happy to welcome you here. On the property casualty side, most companies are really fighting to improve or defend their ROEs. They continue to face persistently low interest rates in an industry with a lot of excess capacity in nearly all lines of business. It's a tough environment. Over the next two days, we'll hear from about 30 companies and listen to their strategies to drive returns from pricing to underwriting, to capital management to growth. Insurers and reinsurers are using every tool in their toolbox to try to improve ROEs.
This year, we've got a bit of a new format for the companies we cover. For many of them, we'll be doing more of a fireside chat format. Some will still do presentations, some will do a little bit of both, but there will be more interaction. The analyst asking the questions, we don't want to monopolize the conversation. We want to hear from you in the audience. Please feel free to chime in with questions that will drive a better dialogue. Just housekeeping issues, if you have one-on-one scheduled, they can be picked up in the Reid Salon, which is on this floor. The rooms for the one-on-ones are either on five or 38. Great view up on 38, by the way. I'm going to turn it over to our first speaker, and that's Tom Wilson. Tom has been CEO, Chairman, and President of Allstate since 2007.
I guess in that time, there haven't been too many years where it hasn't been all that challenging. This is either a very good or a very tough time to become CEO. Tom's been meeting those challenges. I'll turn it over to him. Tom's going to do some prepared remarks, very short, then I'll come back up and we'll do more Q&A.
Thanks, Jay. Good morning. Thanks for investing your time with us. We hope we'll convince you to invest your money with us. My goal is to help you understand our strategy in our proactive approach to driving shareholder value. To just set the context for a conversation with Jay, I'm going to go through a few slides starting with our strategy. I also have Steve Shebik with me who will join us up here in a minute, and Pat Macellaro, who's with investor relations with us. This is our statement that talks about the fact that we're going to be making some forward-looking statements today. We do a lot on transparency. We pride ourselves on transparency. You can see just about anything you want to see on our website to help you assess the risks of investing in Allstate.
We'll go to the next slide. This chart will be very familiar to those who follow us. It's our consumer-focused strategy, and it's depicted visually here, which breaks down the consumer insurance market into segments based on their preference for type of interaction and their beliefs about insurance companies. On the left-hand side of this chart are consumers that prefer to get local advice and assistance as it relates to their insurance needs. On the right-hand side are customers who are just comfortable taking care of things on their own. We call them self-serve customers. On the bottom half are customers who value insurance and see a difference between the brands. On the top half are consumers that see very little difference between insurance companies. They tend to be very price sensitive.
They're just sort of like, "Give me a name that I recognize." The Allstate brand and about 11,000 local Allstate exclusive agencies and financial reps in the U.S. and Canada serve customers in that lower left. We estimate this is about half of the total consumer market. This is a place of historical strength for us, where we compete primarily with State Farm, Nationwide, Farmers, and regional companies. These customers prefer to have one insurance relationship for all their protection needs, and therefore tend to bundle their purchases. We acquired Esurance, which is in the fourth quarter of 2011, to have a unique value proposition for customers that prefer self-service but still want a brand of product. While our market share is lower in this segment, we're growing rapidly in building product and service infrastructure to support even higher growth.
The largest companies addressed in this segment are GEICO and Progressive Direct. In the upper left are customers that want local advice but do not see a significant difference between insurance companies. They're served by independent agencies that offer products from multiple companies, including our Encompass offering. We have plenty of room to grow market share in this segment as well. The major competitors here are Liberty Mutual Insurance, Progressive, Travelers, and The Hartford. With Answer Financial completing the picture in the upper right, we're the only insurance company that has unique offerings and business models in each segment. Last year, we had five operating priorities, which are shown on the left-hand side of this, to create focus as we implemented our strategy. We achieved each of those priorities in what was really a great year for Allstate.
After a number of years of adverse impact relating to repositioning our homeowners business, we're now seeing good premium growth from all of our brands in which we underwrite risks. In each brand, they had growth in both premiums and policies in 2013. The Allstate Protection Auto recorded combined ratio was 96.4%, which reflects active management of both pricing and loss cost control by all of our brands. Esurance and Encompass segments have auto combined ratios that are higher than we would like. We're adjusting pricing and underwriting to ensure that that growth generates good lifetime value. We may see some deceleration of growth in those two brands in 2014. The Allstate Protection Homeowners underlying combined ratio in 2013 improved to 62.7%, reflecting our continued focus on improving returns and the benefits of good weather.
On a recorded basis, this business went from an underwriting loss of $1.3 billion in 2011 to a profit of over $1.3 billion in 2013, a $2.6 billion swing, which was a function from both better underlying performance in light of catastrophes. Those homeowner underlying results, we are now achieving targeted results that we set out to get four years ago. While annuity returns have improved, the long-term outlook there continues to be challenged by the low interest rates. We continue to position our property liability portfolio with a shorter duration to mitigate the impact of rising interest rates. While this action has pulled forward income because it generates capital gains and lowers our risk profile, but it does reduce the portfolio yield and future operating income. That said, we continue to believe it is the right economic risk-and-return trade-off for our shareholders.
We are also focused on reducing costs so we can deliver the best value to our customers. Last year, we made several important changes to our employee and related benefit programs. Basically, offer more consistent programs across all of our employees, and better aligned with current market rates. The changes had a significant favorable impact on balance sheet, and will lower our cost structure going forward. Our summary financial results for 2013 are shown on the right slide. We finished ahead of 2012 on just about everything, revenues, policies in force, operating income, and achieved the goal we established in 2013 of generating an operating return on equity of 13% in 2014. We achieved that in 2013. These excellent results provide us the flexibility to continue to invest in driving sustainable growth while generating strong cash returns for our shareholders. We had a great year in 2013.
It is time to move forward. The five operating priorities we have established for 2014 highlight the evolution from focusing on strengthening the core business to position ourselves for sustainable growth. The operating priority for 2014 on growth is in units rather than premiums, as the importance of market share growth is now higher than just raising average premiums in homeowners. Secondly, we want to maintain the underlying combined ratio in 2014. That really combines the second and third priorities we had in 2013 and reflects the significant progress we have made in the underlying margins of homeowners. Proactively managing our investment risk and return remains a priority, although the focus is going to shift a little bit in 2014. In 2013, we were working on getting the interest rate exposure on the property liability portfolio down.
This year, we will be focusing on shifting from public fixed income corporate securities to investments that offer higher yielding assets, typically in the private market, where the returns are not as linked to overall market performance. Think of it going from beta to alpha. The 2014 priority to modernize the operating model is a broader and more sustainable approach to the 2013 priority of reducing the cost structure. We will continue to take a look at obviously reducing our costs, but it all starts with the customer, so we are pursuing continuous improvement and streamlining our technology so we can give faster, better, and more cross-section service. To continue increasing shareholder value, focus is now being shifted to building long-term growth platforms. We will continue to look at ways to become even a more integral part of our customers' lives.
The evolution of the Connected Customer telematics and a number of structural and technological changes offers really good growth opportunities. If we look at our growth, we continue to see positive growth momentum across all of our businesses as the benefits of the work we've done over the past few years are materializing. The chart in the upper right corner shows that the trajectory of protection growth from quarter to quarter. The Allstate Brand auto has delivered two consecutive quarters of positive policy growth. That's a year-over-year basis. Because the rate of decline in the homeowners business has gone down as our actions to improve profitability there have been reduced. The negative drag on policy growth from those actions has diminished until we're positioned of growing market share.
We also now have a more engaged exclusive agency force that is well-capitalized and better equipped to serve our customers. Three years ago, we set out to increase the consistency and effectiveness of our Allstate agencies. We did it at the same time that we knew we were going through a period of slow growth because of what we were doing in homeowners. We rationalized our footprint. We made changes to compensation structure. We implemented a number of technology changes to give more timely and comprehensive education to our agencies. We're now seeing the benefits of our agency distribution force is now expanding. We believe our approach to the Connected Customer is another way we differentiate our customer value proposition and position ourselves for future growth. We have both the Allstate Brand Drivewise and in Esurance , we have DriveSense.
They offer interactive products that have the potential to change the insurance market. These offerings enable us to give customers better, more accurate pricing and broaden the services that come from being a customer of our company. Our customer value proposition with these programs is different than some of our competitors. Our product establishes connectivity in the platform in the car that enables to increase customer touch points. We're developing a number of services that go with it, such as enabling drivers to monitor their driving score, become safer drivers, watch their teens, where they drive. Beyond innovations in the Connected Customer space, we have a number of other businesses that provide platforms for growth. When you combine these businesses, we've combined them into what we call our business-to-business platform, and it's led by Kathy Mabe.
Allstate Benefits is one of the largest insurance providers of voluntary benefits in the workplace, generating almost $1 billion of revenue in 2013 and a 9% growth rate over the prior year. We acquired this business in 1999, and now it's three times its size when we purchased it. Allstate Business Insurance provides small business and commercial auto coverage through the Allstate Brand. Allstate Roadside provides 24/7 roadside assistance services to customers. That consists of both the Allstate Motor Club. We have a variety of wholesale programs where we represent about 25% of the domestic auto manufacturers. We expanded this business in 2008 by acquiring GE's Signature business. We also have in here a business called Good Hands Roadside, which is a pay-as-you-go, which has 1.6 million customers in it.
Allstate Dealer Services provides service contracts and products sold in conjunction with auto lending vehicle sales, and it grew over 50% last year. Allstate represents an attractive investment opportunity for a number of reasons. When you invest in it, you get an outstanding personal lines franchise, competitively differentiated strategy focused on those four segments that we talked about. We stay focused on our priorities. We proactively work to adjust, and we have good underlying returns in our auto and home business. That's given us the ability to generate a good return on capital. Last year, our shareholders experienced a total return of about 40%, and you can see we had a large high cash return as well. To summarize, as Jay comes up, we have a competitively differentiated strategy.
We're starting to grow again after a period of repositioning the business, and we believe in balancing risk and return for our shareholders at great value. With that, Jay and Steve are going to join me, and we're going to have a conversation.
Here as well. Pretty fancy set here, huh?
Yeah.
I guess what I'd like to start with is your biggest distribution channel, the Allstate agency channel. Several years ago, you introduced a fair amount of change into that channel from a compensation standpoint, merging agencies. I remember at the time, there was concern how is this going to play out. Now we're three years later, how has it played out? What are you hearing from your agencies?
Well, you're right. There was a lot of concern, not only amongst our agency owners as well as everybody else. It's played out great. We do a couple of things. Every year, we monitor and measure our agency satisfaction, and it was the highest rate it's ever been last year. They're telling us they're happy. Secondly, they're acting like they're happy. They've expanded their businesses. These are local businesses. We think of it as a system. They have cash flow that they need to generate to grow their business. When they generate that cash flow, they then invest in hiring more licensed sales producers, and we added thousands of licensed sales producers inside those agencies last year. They're doing more marketing, so they're growing, they're happier as a result of growing. They're making more money. That makes them even happier.
That gives them the money to invest in doing good work for our customers. We also measure customer satisfaction at a whole bunch of touch points, and our agencies have really improved their performance over the last three years, which leads to increased retention. If you look at our growth rate in the Allstate brand last year, a large portion of it was due to increased customer retention.
I guess I'll switch to a different channel. Talk about Esurance. You've bought that company, I guess, a little over $1 billion. Been losing money for the first year at least. When do we expect the profitability to start to kick in? Clearly, you're focused on growth, and that's fine, but is it five years? Is it three years? Any sense of when you will shift to more of a profit-focused measure for that operation?
Let me go up first to the strategy, then I'll come to the specifically when profitability. We bought Esurance because we thought we were just a better owner than White Mountains was. We're in the personal lines business. We know a lot about it. We have a good brand. We did a couple of things. First is we repositioned the brand on that self-serve segment. Their tagline used to be, "People when you want it, technology when you don't." If you go back to that four square, it sort of applies to everybody. You have to do that if you're trying to appeal to the whole market to make your economics work. We didn't have to do that. We positioned it insurance for the modern world. We repositioned the brand. We're also better at claims, so we've substantially reduced our cost in claims.
We're also better at pricing. We endorsed their brand with the Allstate brand to raise its trust level. That made us a better owner. Now we're starting to expand that business in product and services. I think we're in 16 states with motorcycle, one state with homeowners. We're in 16 states with renters. We're starting to expand the product line as well. All that takes money, which is okay, because as long as you're generating growth and getting good lifetime value. That business, of course, most of your expense is in advertising up front. When we look at the profitability of that business, we look at the loss ratio as opposed to the total profitability. The loss ratio is probably three to four points high right now. That said, it's still generating a return that's economic.
Not as good as we'd like, but still above our cost of capital. We continue to invest in advertising and growth to drive the business. Last year, we were up, was it 30%? Yep, 30% in policies, in force, and premiums. We'll keep investing and keep running a total loss as long as we're generating extra shareholder value. In fact, this year, we're expanding even more. We're pouring more money into marketing and repositioning the brand. We're trying to strengthen the brand by us saying we're better than GEICO.
You've got to look at the long-term economics of this business and the lifetime value of this business you're putting on then.
We do, yeah. We look at what is the cost of advertising to get it. We look at the cost to acquisition. We look at the loss ratio and say how much are we making, excluding the acquisition cost. We look at the retention of it, and the business is retaining at a higher level than we thought it was.
Okay. On the auto side, you've done a great job, honestly, of maintaining a very attractive auto combined ratio. The last several quarters, it looks as if claims severity is ticking up. Pricing may not be keeping pace with it. Yet your goal in 2014 is to maintain overall margins. That's a bit of a struggle. How concerned are you that these loss costs are not going to continue to escalate from here?
Well, first, I'm always concerned because it's a huge source of profitability. One of the reasons, we've run rate combined ratios lowest in the industry for a decade. One of the ways we do that, I say, is I'm paranoid. We spend a bunch of time focusing on it. Just to set it in context, back in the 2009, 2010 period, we leaned pretty heavily on auto profitability because the homeowners business wasn't making any money. We didn't know where weather was going, and we didn't have the business fixed, so we leaned heavily into that. In 2012, we could see that the trajectory was pretty good. Homeowners was going to get fixed. We expanded the risk profile in the auto business to start to grow it again. That creates a little more volatility. That doesn't mean you lose money.
It just means you got to react faster. Last year, you're right, in that loss costs ticked up a little faster than the average premiums went up. If you look at our increases, they were mostly back-end loaded. In our investor supplement, we show the breakout of rate changes by quarter, and you'll see that the rate changes really in the back half of the year rather than the first half of the year. Loss costs were, of course, the whole year. We continue to react. We'll probably take more rate increase this year than we took last year. It's all in the range of, it's not really that big a deal. You're talking about 1% or 2% in change in the rate of growth of average premium, which is, you're talking about $6, $7 per customer per six months. It's not a big deal.
You had mentioned homeowners insurance , obviously it was a tough line of business. You took significant action, not just pricing, but underwriting action. Are you where you need to be in homeowners? Should we expect more action in 2014 and 2015, or is the shift, hey, we can start to grow this business now?
Well, having been in the weather business for 19 years, I would say we're where we need to be based on where the weather is today.
You're not The Weather Channel.
It's always changing. Steve and I spent an incredible amount of time looking at returns on capital, not just by line, but by state, by line, and we are comfortable with where the returns are today, given where catastrophes are today. Last year, in fact, in 2013, catastrophes were really low relative to the prior 5 years. Of course, that business made a tremendous amount of gross dollars last year. We're priced for them to be higher than last year. If they stay at that level, we'll continue to be priced well, and we'll continue to get really high returns. If they go up, weather gets worse, and catastrophe losses go up from here, we'll do what we've done in the past, which is raise prices. I think the average rate in homeowners, Steve, is from like $800-$1,100. Yeah.
Over the last 3, 4 years. Yeah. We'll do what we need to do there.
Can you see if your competition is still raising prices in homeowners? You get a sense of that?
We were out early.
Yeah.
We started in 2008. I think other people probably started 2010. I think the rate of growth will probably come down some next year. Ours came down in 2013.
We still believe we're really well-positioned to start to grow that business. What we tried to do is take the homeowners business from what was a problem to being a competitive advantage.
I got an email yesterday from a fellow analyst of mine wanting to know, he does telecom, this is not your question, but I'm setting it up for something else.
Okay.
When will Insurance companies have devices in people's homes to know when they're broken into or when the heat is on too high? Which I thought was kind of silly, but obviously you have stuff in people's cars, and so I wanted to talk about telematics. I think it very well could be the most interesting technological development in the next five years. Progressive talks a lot about this. They're obviously ahead of the curve. Similarly, with your brand name and your resources, you can pretty easily catch up. What's the game plan for the next couple of years?
Well, I think you're right, first, that I don't think a lot of people focus on it, that telematics is the opportunity to change the game in the insurance space and make it more than just, we'll restore your car or your home when something bad happens. In fact, it'll be about changing it so we can help bad things not happen. Which is a change. If you look at our brand, we've started to reposition our brand to about being good, bringing good things out, not just fixing things. If you look at our website, or again, on YouTube, you'll see some, we call it the good life. We think that the insurance business is going to move from restoration to really be truly protection, including things like connected car, connected home. A huge change, I think, coming.
What it does is the telematics business has really three vectors for us. One is it helps us do a more precise job of pricing, because when we're pricing your auto insurance , we're making an estimate as to how often you're going to have a loss. We do that based on data. To the extent we have more data specifically about you, so if we know, Jay, that you're driving 80 miles an hour up the turnpike, then we know you have a greater probability of having a severe accident, so we charge you differently. Today, without telematics, we don't know that. More precise pricing, and it is every bit as powerful as credit.
Credit is what really took the auto insurance industry from more volatile returns to, if you look at us, Progressive, GEICO, many of the other players, the profitability in that business is much more stable now than it used to be 20 years ago. It's every bit as powerful on pricing. Secondly, that's where Progressive and our offering exists. The second piece is what it can do while you're in the car. Everybody wants a piece of that action. You're in your car four hours or so a week, some people even more. Whether you're a cable company or an auto company, you're a telecom company, everybody wants a piece of that action. We actually, as insurers, have a way to get into the car because we can give you better pricing.
When you take our telematics offering, we say, "If you put Drivewise in your car, we'll save you 10%-30% on your price." That's different than me calling you and saying, "Hey, how would you like to get your car connected? It'll cost you $25 a month, like your cable costs you." We have a different way in. Ours right now, Progressive's offering is called Snapshot. It's the first one. It's all about pricing. They ask for their device back. You take the device out of the car, and you send it back to them. Ours, you leave the device in the car, so we stay connected. That's why we call it Drivewise. We believe that's a place where we can generate extra value for our customers and that they'll pay us for that.
While Progressive has had Snapshot in more cars than anybody else, it's not clear who's got more devices in cars today. It's a big offering for us. We're pushing hard at it. One of the things we will spend a tremendous amount of money on in 2014 is developing several different offerings in the marketplace. Nobody knows where this is going to go. On a routine basis, Steve and I go from feeling like we're two years behind to nobody knows what they're doing, which is probably a good place to be because we're working really hard. We're going to test a number of different offerings in the Drivewise space in 2014 so that we can rapidly expand that business.
As of the end of last year, and we're going to stop disclosing this number, I think as of last year, we were in 300,000 cars, and we were collecting a couple of billion miles a year. The third piece, besides customer value proposition, would be what do you do with all that data? We're not sure yet.
Any chance of working with the car companies to actually connect in as they build a car with certain devices?
Yes. There's two ways you go to market here, and we'll probably have two different offerings. One is the OEMs. Whether it's OnStar or Ford, they all got their own platform. You need to make sure that your application can run on their platform. In the aftermarket space, which is, of course, where most of the cars are, there's really no dominant player. We have a different position on what we're trying to do in the aftermarket.
Can we get, by the way, some mics for the audience? Oh, good. If you have any questions. Questions down here, actually. If you have a question, just raise your hand, we'll get you a mic.
I just wonder, before we get too far away from homeowners and auto, and I'm going to make you restate yourself just a little bit, but to summarize what I'm hearing then is from the auto and the homeowners side, you've basically achieved, over the past several years, you laid out all these targeted goals. You've reached the majority of them, I think it's fair to say, except for needing to tweak Esurance, maybe Encompass a little bit. You're now ready to progress forward, basically in every avenue with growth or look for growth opportunities. I guess what I'm not hearing, and what I want to make sure I'm not missing, is there still a hotspot or a problem spot?
Like we've talked about New York or Florida in the past in auto, or there were quarters where you mentioned that maybe some of the homeowners improvement was attributable underlying to luck or good weather. I'm not hearing that now. Are we at the point where basically everything is within reason where you want it to be?
First, Alison, you heard me correct. Maybe I'll say it another way. We basically for the last four years have been in a fix and run mode. Had to fix it and run it. We're now shifting to a run and build mode. There is some difference, but there's run in both of them. Just like your household, any relationship you have, not everything's perfect. There are certain hotspots in the auto business that we're chasing after trying to get fixed. I'm not particularly liking the results in Michigan these days. The MCCA's got some stuff going on that needs to be fixed. This is a relatively thin margin business that you really got to spend your time focusing on. We have a series of processes that really help us manage it.
Steve, maybe you want to talk about the MOCs and how we do local pricing to show you how we deal with those hotspots.
Yeah. We have 14 different regions. We have management operating committees, which have responsibility either for a single large state or an accumulation of states. As part of that, they focus very carefully on the returns we have in those states by line, by product. They review the results on a monthly basis. They make changes as necessary. A little earlier, Jay asked a question, and Tom answered. We were taking price increases later in the year. If you look at those graphs that we had in our earnings call, we had very benign frequency to very trends. Fourth quarter last year, first quarter this year. We didn't take that many rate changes. I think they were 0.3 points or something. As the year went on, and you start seeing that trend go up, we started reacting in a very safe.
You start seeing like 0.8, 0.7, 0.8, 0.9 as the last couple quarters of the year. That's the kind of way that we react on a real-time basis. In terms of away from the Allstate brand then, you mentioned Encompass. We need to work on the Encompass auto and home yet, and try to get their returns a little better than they were. If you look, they have okay returns, but not consistent with what we would like. Esurance, clearly, as Tom said, loss ratio is running 3 to 4 points higher than we wanted. With that said, they're growing well. Economically, over the period of time, we believe we're making an economic return, but we'd like to get a better return than just the cost of capital on that business.
Question over here. Actually, right behind you, then we'll swing over to this side.
Could you talk about the outlook for investment income and what you're doing? You made some references to, sounds like more private equity. Can you talk about your strategy there?
In the investment world, we have, of course, the thing that's impacting most insurance companies, which is interest rates have been relatively low as the portfolio rolls off. We're losing investment income. If you look at ours, you see really no different there. We accelerated ours, though, this year because, about 18 months ago, we decided we thought rates had a better chance of going up than going down. You don't have to be a genius to figure that out because rates were so low. What we did was we started selling bonds, taking capital gains, front-loading the operating income because we thought rates would go up. That trade, if you marked it to market today, probably made it $300 million-$400 million. We did it because we thought it was the right risk-return profile.
We're not trying to ride a hedge fund or anything. We just look at the risk and the return, and we said it wasn't the right thing to do. We've done that. We've approached our portfolio in a number of ways, even though that hurt us on getting our 13% ROE goal. We said, "You know what? We're not going to be a slave to any goal. What drives shareholder value is cash, get the right cash in house." We've done that when we took our muni portfolio down from $26 billion to $13 billion. We did it when we went long in credit in 2009 and 2010. Those have been, though, more macro calls, which you were able to make in an investment market where you were at the extremes of either the returns or performance.
As we look forward, we think those macro calls, basically beta, are harder to make to get good returns. What we're doing is shifting to more idiosyncratic returns and saying, rather than just thinking about fixed income, we'll make more sector bets. We've changed our risk management practices. We've changed our portfolio management so that we can track it, monitor it, and measure the risk and adjusted return on it. It's really more alpha investing. You see that a little bit. It's not like we figured this out last year. All these things we do over a long period of time. You see that in investment income last year. Last year, investment income was pretty close to flat.
Yep.
A big change in limited partnership income went from-
A couple hundred million, $350 to $550.
Yeah, big increase. That kept it flat because that stuff we had been investing in a couple of years started to pay returns. I think what it will do is generate good return. We expect it to generate good economic returns for us, but it'll be a little more volatile. Some years, the payoffs will because this stuff tends to not always turn out. It's not like clip a coupon in a fixed income portfolio. It'll be a little more volatile. That said, we believe it's a good risk-return trade-off for our shareholders. Let's shift over here to Joshua Shanker.
Thanks. I want to go back to Esurance and talk a little bit about what it means to be economically profitable over the life of the customer. What is the average life of customer? I see retention ratios of 80% here. Do they really stay five, six, seven years? In the advertising expense, you're spending a lot now re-changing the brand, but it's not like you're going to stop advertising. Are you going to keep consistent advertising spending? Is it going to go down over time? Clearly, the policies are supposed to grow, and they grew 30% last year. Hopefully continue to grow. What is the ultimate goal in terms of combined ratio? Are you looking at a 112 or so ex-amortization ? Do you need to get that down to 100? Can you make money slightly over 100?
Finally, on the loss ratio, you've said you've got better claims handling capabilities, but yet the loss ratio sort of hasn't moved. Why hasn't that happened?
A lot in that question, but I expect no less. First, in terms of Esurance's retention ratio, the number you see is a blended retention ratio. In the Esurance space, I assume this is true for other people, but I don't see their numbers. There's a measure we call the NTR, number of times renewed. The first renewal rate is always a lot lower than three or four years out. You get three or four years out, the renewal rate tends to be in the high 90s, mid-90s, something like that. Esurance is around 80, but a lot of that's new business. The new business rate's obviously much lower than that. When you're looking at the retention rate, you got to be careful because there's a huge mix impact in there when you're growing at 30%.
When we look at the lifetime term of those policies, we're comfortable that we're getting a good return, even at existing loss ratios. I would encourage you, as you're looking at Esurance, to look at the loss ratio, not the combined ratio. The loss ratio should be about four points lower than it is today. You could make a case it's three and a half, but we negotiate that one with our teams. That'll give it a higher return on capital than it's getting today. It's not that it's not an adequate return on capital, Josh. It's just I would like it to be higher, and it should be higher because we're good at that business. In terms of advertising, we're going to spend more. In fact, I'll show you something.
Maybe what you could do is you could run. I can show you a couple ads that'll make the point of. I want to make two points here. One is we're trying to take the brand and strengthen it by positioning it differently against GEICO. Maybe run ad five for me, and then if you could run ad three, I think you'll see where we're trying to take the brand and why we're willing to invest in it. These take, like, 30 seconds. I won't. All right. Then we won't run them because we don't have enough time left. If you watch our ads, okay, you'll see Esurance ads. You'll see a substantial amount of media money going into the first quarter, much higher than we've had in the past.
When you see Esurance's results in the first quarter, I'm telling you, they're not going to look as good because we're putting a lot of money into it. You'll see we're running ads that go more directly at GEICO. For example, in one of the ads, it says, "You must think I'm crazy. I save 15% in 15 minutes." Then the ad says, "Yeah, it is crazy waiting 15 minutes. Esurance, you can do it seven and a half. Insurance for the modern world." We're going aggressively at trying to enhance that brand. We're going to spend more money in advertising. It's because we believe the loss ratio is A, economic today, given the retention, and we're willing to invest in growth, even though we don't have loss ratio exactly where we want it.
I'm taking some risk that we're going to continue to write business at slightly above the cost of capital, but not hugely above it. I believe that we can eventually reposition. What are we doing to get loss ratio better? You asked that. It's really about pricing and discount. There's a few states where we lean too heavily on discount, and that lowers your average premium. Then a few states where we aggressively. Esurance was mostly a no prior carrier when we bought it. Meaning no prior Esurance, higher risk. We took it into the preferred pricing space. We're really good at preferred pricing. We sliced it a little thin. That said, we know how to do preferred pricing. We're raising rates there.
The portion that's on all the time.