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Allstate Corp (NYSE:ALL)
Q2 2019 Earnings Call
Jul 31, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Allstate Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] . And now I'd like to introduce your host for today's program to John Griek, Head of Investor Relations. Please go ahead, sir.

John Griek -- Head of Investor Relations

Well, thank you, Jonathan. Good morning and welcome everyone to Allstate's second quarter 2019 earnings conference call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement filed our 10-Q and posted today's presentation along with our reinsurance update on our website at allstateinvestors.com.

Our management team is here to provide perspective on these results and cover a special topic. Mary Jane Fortin, President of Allstate Financial Businesses, will provide an overview of Allstate Annuities and how the business has been substantially reduced in size over the last 13 years and how we have managed the remaining liabilities to maximize shareholder value.

The special topic last quarter was about how we match capital to risk at a granular level to ensure we maximize economic returns. Our first special topic at the beginning of this year was how telematics is being utilized in auto insurance and how Arity, our telematics business, is a leading innovator. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstate's operations.

Allstate's results may differ materially from these statements. So please refer to our 10-K for 2018 and other public documents for information on potential risks. And now, I'll turn it over to Tom.

Tom Wilson -- Chair, President and Chief Executive Officer

Good morning and thank you for joining us to stay current on Allstate. Let's begin on slide 2. Allstate strategy is to protect people from life's uncertainties. The strategic objectives are to grow personal Property Liability market share and expand our protection businesses. So we start with the upper oval the personal Property Liability market provides consumers protection by insuring a wide range of assets, automobiles, homes, motorcycles, boats, other personal assets and then their personal liability. We use highly recognized brand, sophisticated pricing, differentiated products, claim expertise in telematics and deliver unique customer value propositions.

We're also building an Integrated Digital Enterprise that will lower cost and better serve customers. As shown in the bottom oval, this strategy also includes providing consumers protection plans, life insurance voluntary replaced benefit and indemnity protection. We also have a rapidly growing share of economy commercial insurance business that serves ridesharing company and our telematics provider here.

These businesses are enhanced by leveraging our brands, customer base, investment expertise, distribution claims capabilities and cap on. It's not just what you see in the oval that's real. So for example, we're rebranding Square trade products in the United States to fully utilize the Allstate name, which both leverages and expands our reach into these products to solve the major retailers. Our claims capabilities are helping to significantly grow the commercial insurance business with a ridesharing income. Collectively, the protection businesses in the bottom oval have a tremendous value. It can be overlooked by investors who focus only on the Property Liability oval. This strategy creates shareholder value through customer satisfaction, unit growth and attractive returns on capital.

It also ensures we have sustainable profitability in a diversified business platform. Moving to Slide 3, we had a strong first half of the year, made progress in all 5 of our 2019 operating priorities, revenues exceeded $11 billion with Property Liability Premiums up almost $0.5 billion over last year's second quarter.

The Service Businesses revenue was up 26.6% to over $400 million in the 3 months. Net income was $821 million and adjusted net income was $2.18 per share as you can see on the chart on the bottom. As a result of this strong performance, we improved the 2019 Property Liability underlying combined ratio audit by 1.5 point, which is about $500 million of underwriting income better than the original guidance. Adjusted net income return on equity was 13.5% for the last 12 months. Adjusted net return on equity is a broad measure of our overall performance since it includes investments, Allstate Life, Benefits annuity and the service business.

Since this represents a returns we generate on our capital, it's the best measure of our operating results. As a result, in 2020 we will establish long term adjusted net income return on equity targets. Consequently, we will not use the Property Liability underlying combined ratio to provide annual guidance on operating results. But we will continue to use it in our dialogue on performance. We're making this change since we're committed to being a leader in the amount and quality of our financial disclosures to make either steps or performance and investment potential.

Turning to Slide 4, we made good progress in all 5 2019 operating priorities. The first 3 better serve our customers, achieve target economic returns on capital and grow the customer base are intertwined to ensure profitable launch of growth. Customers were better served as the enterprise Net Promoter Score improved as a result of their policy renewals increased in the Allstate and encompass brand which is a key driver of growth. Although the increases in improvement have been slow. Returns remained strong, which we discussed with all the businesses performing well except one portion of Allstate Annuities which Mary Jane will cover.

Total policies enforcing our exceed 129 million, an increase of 46.8% compared to the prior year. Square Trade policies grew to 84 million reflecting the substantial expansion last August, with a large US retailer. Property Liability policies increased by $772,000 compared to prior year 333.6 million as the Allstate and insurance brands grew 2.2% and 8.4% respectively.

Proactive risk and return positioning of the $86 billion investment portfolio resulted in the total return of 7% for the last 12 months and generated $942 million net investment income for the quarter. Performance-based investment income increased significantly in the first quarter of this year. Shareholder value beyond current earnings is being created to increase telematics usage and greater sophistication at Arity, SquareTrade is expanding into Europe and InfoArmor indemnity offerings are being integrated into our strategies.

Glenn will now discuss our property liability result in more detail.

Glenn Shapiro -- President of Allstate Personal Lines

Thanks, Tom. Now moving to slide 5, you can see that Property Liability results remained strong. Net written premium decreased 5.9% in the second quarter. We're almost $1 billion through the first 6 months compared to prior-year quarter. This reflects policy growth in the Allstate Esurance brands and higher average premium for auto and homeowners insurance call across all 3 underwritten brands.

As you can see in the middle of the left table, total policies in force increased 2.4% to 33.6 million. Moving to the bottom of that table the Property Liability recorded combined ratio of 95.8 was 1.4 points higher than prior year quarter, primarily due to catastrophe losses. This was partially offset by a reduction in operating expenses due to a combination of sustainable operational efficiencies achieved through focused efforts on streamlining processes and automation and lower incentive compensation given higher growth targets this year.

The underlying combined ratio, which excludes catastrophes and prior year reserve reestimates was 84.3 for the first 6 months of 2019 below the annual guidance which assumed higher frequency of auto insurance claims. Auto physical damage severities were higher than expected. However, this was offset by planned reduction and expense ratio. As a result of this performance, we are improving the guidance range by 1.5 points to 84.5, 86.5 for the full year 2019. This revised range assumes lower auto claims frequency and higher physical damage severity as well as investments in growth initiatives, the logic of which we'll cover on the next slide. Moving to the right-hand table Allstate Brand auto and homeowners insurance net written premium increased 5% and 6.5% compared to prior-year quarter respectively. Auto, policies in force are up 2.5% over the prior year and average premium was up 2.7% compared to the prior year quarter.

Homeowners policies increased by 1.6% and average premiums grew by 5.6% over last year. Esurance's auto insurance policy growth was 8.1%, which combined with average premium increases resulted in total net written premium growth of 9.6%. Encompass written premium increased 1.1%, a higher average premium more than offset the decline in policies in force. On the bottom of the table, you can see the underlying combined ratios remained strong across our brands and this strong performance means that investment and growth will increase shareholder value.

Turning to slide 6 investments and profitable growth are focused on Allstate Brand property-liability insurance attractive margins support investment groups for five reasons. First, auto and home insurance generates very attractive returns on capital as you'll see toward the end of our prepared remarks. Allstate has earned an underwriting profit on auto and home insurance for each of the last eight years, reflecting its focus on profitability, operational excellence and timely response to external conditions. Current results are strong, the recorded combined ratio of 93.7 in the Allstate brand over the last 12 months.

Allstate has operational strengths including pricing sophistication, branding and we've expanded total sales producers by 11% in the past two years. We also have successfully tested different combinations of growth levers in six markets over the last nine months to provide us a roadmap to the best rollable execution.

This comprehensive program is highly targeted by geography, product and customer segment. If we use a wide variety of tools, including advertising customer experience, initiatives, pricing sophistication, telematics and new agency technology. While we are expanding these initiatives, they won't have a significant impact on 2019 of seeing force growth.

Unit growth is expected to accelerate in 2020 and 2021. This will slightly increase expenses from the current lower levels in have a small impact on combined ratio. But this is factored into the improved outlook for underlying combined ratio we've just discussed.

On a longer-term basis, we're working to reduce other expenses that will provide us flexibility to positively impact growth and competitive position while maintaining attractive returns. As always, we'll focus on producing strong returns for our shareholders and we'll react quickly to any market conditions as they emerge.

We're building up a position of operational strength to compete, both with large, well-known competitors and smaller regional competitors to achieve our strategic objective, which is increasing market share in the personal Property Liability market. Mario will now discuss results for service businesses and investments in more detail.

Mario Rizzo -- Chief Financial Officer, Executive Vice President

Thanks, Glenn. Let's go to slide 7, which provides detail on our service businesses. Consistent with the strategy to grow non-property, liability protection businesses, the service businesses continue to rapidly grow the number of consumers protected with policies in force, increasing 82.8% to $89.7 million.

This is largely due to SquareTrade. We will be changing SquareTrade's branding to Allstate for domestic distribution channels as we believe an increase in sales can provide additional brand exposure without advertising investment. As a result of unit growth. Revenues grew to $405 million as you can see from the lower left table. Adjusted net income was $16 million in the quarter, shown on the lower right, a $14 million improvement over the prior year quarter, largely due to improved loss experience at SquareTrade. We recognize the $55 million pre-tax impairment charge in the second quarter following our decision to phase out domestic use of the square trade brand name. Arity continues to invest in advancing our telematics platform and had a small loss. Total mileage analyzed is now above 14 billion miles per month and capture is more than 400 trips per second. Allstate Roadside Services revenue was $73 million for the quarter with an adjusted net loss of $3 million, slightly better than the prior year quarter, Allstate Dealer Services revenue grew 14% compared to the second quarter of 2018 and adjusted net income was $7 million.

InfoArmor had revenues of $23 million with over 1.2 million policies in force. The adjusted net loss of $6 million was related to growth and integration investments. Slide 8 highlights our investment results. Investment results were also good in the quarter as we were positioning for modest US growth by extending duration on the fixed income portfolio and appropriately matching long dated liabilities with equity investments, which increased income and valuations.

The portfolio generated a strong 7% return over the last 12 months, of which 2.8% was in the second quarter. Net investment income was $942 million which included a rebound in performance based results. The components of total return are shown in the chart on the left. The blue bar represents net investment income, which is included in adjusted net income and has varied between 80 and 110 basis points per quarter.

Net investment income contributed 3.8% to GAAP total return over the last 12 months with a stable contribution from interest income on fixed income investments and a more variable contribution from our performance based portfolio. Valuations shown in gray and red vary on a quarterly basis due to investment market volatility.

Since we have ample liquidity, we except this volatility as it enables us to earn a higher risk adjusted return. As you can see from the last two bars, portfolio valuations have been up this year, reflecting lower interest rates tighter corporate credit spreads and higher equity market valuations. Increases and investment valuations have added 3.2% to our GAAP total return of 7% over the last 12 months. The chart at the right shows net investment income for the second quarter of $942 million, which was $118 million higher than the second quarter of 2018. Market-based investment income shown in blue, increased to $731 million from $696 million reflecting investment at higher new purchase yields in 2018 and a duration extension of the Property Liability fixed income portfolio.

The performance-based portfolio generated investment income of $261 million in the second quarter, which was $85 million higher than the prior year quarter, reflecting strong private equity asset appreciation and gains on the sales of underlying investments.

The performance based portfolio also generated $37 million in realized capital gains comparable with the prior year quarter, our trailing 12-month performance based GAAP total return is 9.3%. And now Mary Jane will provide an overview of Allstate Life Benefits and Annuities and a special topic on the annuities business.

Mary Jane Fortin -- President

Thanks, Mario. Let's turn to slide 9. Allstate Life, shown on the left, generated adjusted net income of $68 million in the second quarter, 12 million lower and prior-year quarter, primarily driven by higher contract Allstate Benefits, adjusted net income, shown in the middle chart very $37 million in the second quarter, $1 million higher than the prior year quarter as increased revenue was offset by higher operating costs and expenses. Allstate Annuities, on the right, generated adjusted net income of $52 million in the quarter. This is 8 million higher than the second quarter of 2018 due to increased performance-based investment income. The special topic begins on slide 10. The annuity business grew out of a corporate strategy in the mid 90's of broadening into retirement savings businesses such as fixed and variable annuities. We built a broad-based business offering a wide range of annuities through six different distribution channels: banks, broker dealers, Allstate agencies, independent agencies, institutional brokers, construction settlement brokers. In 2006, we decided to not [Indecipherable] growth in these areas, because we did not have the sensible competitive position. The highly competitive market to straight return but the liability structure, it did not properly compensate the risk. And as a result, we began the systematic process of exiting these businesses as market conditions permit.

Invariable annuity business was reinsured Prudential in 2006 which enabled us to avoid the downdraft on equity prices that began in 2008. During the financial market crisis, we continued to reduce the size of the business. We exited the broker dealer and bank distribution channels in 2010. We stopped registering structured settlements in 2013 and in 2014 stopped registering all remaining annuity products and we sold Lincoln Benefit Life. You can see the impact this had on the balance sheet in the lower chart for annuity liabilities have been reduced from 75 billion to 18 billion, a 76% decrease.

The result is our risk return profile has significantly improved and we freed up capital. Often annuities now have two primary sources of income: $7 billion in deferred annuities and $11 billion of long-term immediate annuities. We aggressively manage these businesses, maximize long-term shareholder value, even if this means a negative impact on current account insurance, and we do this in four ways: operational improvements and cost reductions, using a low risk asset liability management strategy, investing long-term assets to generate income for long dated liabilities such as structured settlements and actively managing capital. And as a result, adjusted net income from the deferred annuities is acceptable with returns in the low these middle double digit. While the immediate annuities have a low return on capital. So let's go through the four approaches on slide 11 which provides more detail on our multifaceted approach in through the long-term economics of this business. We have decreased crediting rates given the declining interest rate environment in contractual features such as maturity dates and locations on additional deposits has been enforced. Approximately 84% of deferred annuities was declared rate contracts have crediting rates contractual minimums. Operational enhancements, lower cost and reduced risk and include expanded use of offshoring and simplifying administrative processes. We are leveraging the best sources of [Indecipherable] statistics available to identify the alluded to reduce our payment. And at the same time asset liability matching risk have been carefully controlled by positioning the portfolio, to have ample liquidity for the subsequent 7 years. Expected cash requirements beyond 7 years are invested in performance-based assets to generate attractive risk-adjusted returns for the long-dated structured settlement annuity, some of which are expected to pay out over decades.

The risk and return app is laid out in the table in the middle of slide. The table shows US corporate bond and US equity returns since 1920 and the volatility of these asset classes over different time periods, which is represented by standard deviation. So let's start on the top line where you can see in grey, a corporate bond at lower returns on a one-year timeline in equity. With the volatility has also been much lower. When you extend the time period to 10 and 20 year, the relative return of bonds remains significantly below that of equity but the volatility converges, which results in a much better risk adjusted returns for equities.

And as a result with a long investment horizon, it is a much better choice to be invested in equities if you can handle the interim volatility, which we have done by insuring their cash match in 7 years. This investment strategy while favorable from an economic perspective, acquired additional regulatory capital, which negatively impacts reported financial results. And as a result, we actively match capital, to further improve the returns on our annuity business. Today, the NAIC equity investment capital requirement focus our short rate supply, similar to the volatility shown in one year column table.

We are leading industry efforts with the NAIC to recognize the long-term risk reduction associated with a more balanced fixed income and performance-based portfolio. Utilizing horizons based investment risk metrics should rightsize regulatory capital requirements and we also continue to review strategic options to reduce exposure and approve returns of the business.

And now, I'll turn it back over to Mario.

Mario Rizzo -- Chief Financial Officer, Executive Vice President

Thanks Mary Jane. Let's turn to slide 12. We continue to generate attractive returns on capital with adjusted net income return on equity 13.5% for the 12 months ended June 30th, 2019. The annuity segment however, generates returns that are below our cost of capital. As you can see from the table on the left, this reduced corporate returns by 3.7 points for the latest 12-month period. When you exclude the impact of annuities, Allstate's adjusted net income return on equity is currently 17.2%. The components of this return are shown on the right. Allstate Protection generates returns in the mid to high teens depending on the geography and product.

Allstate lights has consistent low teens returns. Allstate benefits is in the mid to high teens. Investments in growth are being made in the service businesses. Beginning in 2020, Allstate will establish long-term return on equity targets, replacing the focus on annual Property Liability underlying combined ratio. This broader and longer term measure of performance will increase the operating focus on investments, Life, Benefits and the Service businesses which in total deploy more than 50% of economic capital when you include the investments back in the Property Liability business.

Today some of the non- Property Liability businesses such as Allstate Benefits, SquareTrade and InfoArmor gets limited focus from the market despite the fact that they have substantial value. Just the purchase price of SquareTrade and InfoArmor is worth approximately $5.75 per share. This measure also factors in capital management actions is highly correlated with stock price and consistent with guidance that our peers provide. Slide 13 highlights the continued strength of our capital position and financial flexibility.

Shareholders equity of $24.5 billion at the quarter end reflects an increase of $1.35 billion over the second quarter of 2018. Book value per share increased to $67.28 for 13.7% since the second quarter of 2018, reflecting strong income generation and appreciation of the investment portfolio. We returned $664 million to common shareholders in the second quarter of 2019 through a combination of $166 million in common stock dividends and $498 million of share repurchases, which includes the settlement of the accelerated share repurchase program.

As of June 30 there was $1.6 billion remaining on the common share repurchase program.

Now let's open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Gary Ransom from Dowling Partners, your question please.

Gary Ransom -- Dowling & Partners Securities -- Analyst

Yes, good morning. I had a question on market conditions. You mentioned in the Q that advertising and Esurance has less favorable economics and I wondered if you could comment on what you're seeing in shopping behavior or volume or conversion that might be causing that.

Tom Wilson -- Chair, President and Chief Executive Officer

Gary this is Tom. So we manage the-- Steve may have a point of view there as well. We manage the advertising expenses quite in a quite granular level down whether it's top of funnel bottom of funnel, which state where we are pricing. What we're doing, frankly. I don't think you should take away from that comment that we're not interested in growing in Esurance, that we don't think we have a competitive product if that advertising is not working. And there's just a small blip down, I think we're down like 4% or something like that. Yeah [Indecipherable] percent.

Glenn Shapiro -- President of Allstate Personal Lines

Yeah, so, Gary. Just to follow up with that. What we did this year was following what Tom said, you go through economic model if you look at where we are in terms of the market. So we had it-- entering the year, we had a few states where we thought we were a little touch and go and the profitability we won't achieve. So if you noticed in the second quarter in auto we took some reasonable rates. We took substantially more rates and property also for the first and second quarter. So we've got the book we think. We are-- the profitability going forward looks good to us and so we think that won't be a better opportunity for us to advertise and grow. You never make sense to spend million advertising when you think in some of the larger markets you may a little off.

Gary Ransom -- Dowling & Partners Securities -- Analyst

All right. Yeah. That's helpful. I was wondering if you could comment if you're seeing anything in the Allstate brand as well. I mean it's different distribution but is there are any trends you're seeing either in shopping behavior or quoting or conversion?

Tom Wilson -- Chair, President and Chief Executive Officer

I think if we just-- first Gary, all the industry stuff is somewhat directional, but I don't think it's as specific as what we actually achieved on ourselves with. Glenn talked about where we're growing, in which markets. There is-- the market's slightly more competitive because people are doing the logical thing which is, if they are overpriced in, or higher than we are, some of them are coming down, but it doesn't mean because the percentage change is negative that there's still cheaper than us.

So it really customers buying dollars not percentage change and sometimes they shop based on a percentage change, but we're seeing there has not been a huge change in shopping behavior. Glenn maybe want to talk about our actual results.

Glenn Shapiro -- President of Allstate Personal Lines

Yeah, I'll just add Gary that we've had good [Indecipherable], in fact you are quoting has been favorable to last year. You can see that new business results over a pretty high base year were up slightly at a 10th of a point. So we felt good about where we were there. So we're seeing still good active movement in the market as Tom said, you can look at the CTI numbers and it was near double digits 18 months ago now it's under a point. So it's a relatively rate flat environment. There has been some increase in advertising by some of our competitors. But that said, we have more points of presence now, up 2500 points of presence year-over-year and the quoting activity has been good and we feel good about our ability to compete.

Mario Rizzo -- Chief Financial Officer, Executive Vice President

Yeah so there's a mark we are excited about. We think there is an opportunity to grow. That's why when we went the-- putting more money and there to invest in it. Like, we think this is a great opportunity. We're in a great returns. Our brand is funding. Our pricing is good. We're ready to go.

Gary Ransom -- Dowling & Partners Securities -- Analyst

Thank you very much for those answers.

Operator

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

Greg Peters -- Raymond James & Associates -- Analyst

Good morning. My first question. I'll focus back on slide 12 of your investor presentation around return on equity. I was hoping maybe you could expand further on how your new approach to guidance might look. One of the concerns or issues that I imagine you're dealing with is the potential changes in the denominator book value because of the quarterly mark-to-market adjustments for your investment portfolio and of course then maybe at the end of next year you're going to be adjusting book value for the yet to be announced adjustment related to long duration contracts in your annuity business.

Tom Wilson -- Chair, President and Chief Executive Officer

Let me-- Mario can answer the second piece. Let me just give you, we're doing it because we think it's a better way to talk to you about how we're doing in total. As we said, when you look at just the underlying combined ratio, and that becomes the whole focus of the conversation. Then it's focusing on-- an important it's significant part of the business, but it's not the whole business and it was perhaps more important when the frequency of auto actions went up in 2015 and people want to make sure we were reacting to that, so we've done that, but we've been doing it for 13 years. We've always been in there, but when you step back, Greg and look at the, the impact on stock price. ROE is correlated stock price. That's the measure we'd like to be held accountable to. We obviously manage underlying combined ratio. But if you look at underlying combined ratio, we have a very low underlying combined ratio. Other people have a higher underlying combined ratio.

Yes. They have a higher multiple than we do, so there is not as good a correlation. So it's really about communicating to evolve in the broadest way we can. There will obviously be some ups and downs as we deal with different accounting as the accounting boost some more fair value and the whole balance sheet so that balances are up, but that's just a math in the explanation issue in conversation. We can have a review as to how we're doing and what we're doing. Mario, you might want to talk about the new accounting issue.

Mario Rizzo -- Chief Financial Officer, Executive Vice President

Sure. Good morning, Greg. So the first thing I'd say is just kind of reiterate what Tom just said at the end. So that the ROE guidance we give you will take into account not only the projected profitability of our businesses, but also the denominator, to your point, and the amount of capital we have to hold, which will include whatever accounting standards happen to be in place at that time.

So we're going to facctor both into the guidance we gave you in terms of the long duration accounting standards. We're obviously well aware of it. The initial guidance came out in August. We've been monitoring it ever since. The FASB just this month indicated that they may potentially be deferring implementation by a year or so.

It's still long ways away for us as we've been disclosing for a number of quarters now. The impact will be material in our financial statements. It will principally impact our annuity segment and I really do it in two ways. The first is through updating assumptions like mortality, morbidity and lapse assumptions on a regular basis that will affect retained earnings when we implement it. And then the ongoing impact will actually affect the income statement. The second part is remeasurement of our liabilities using a more current interest rate as opposed to the assumptions that were put in place at the issuance of the policy. Again that's going to impact the balance sheet through AOCI. So we're focused on it. We're looking at it and when we have something to report, we'll give you more information on that.

But in the interim, the ROE guidance we give you will factor those kinds of things in.

Greg Peters -- Raymond James & Associates -- Analyst

Great, thank you for that answer. Tom and Mario. I'd like to pivot from my second question to Glen's comments around the expense ratio for the Property Liability business. I noted with interest in your results. Really, the pretty big improvement in both the Allstate brand expense ratio in the Esurance expense ratio and I think, Glenn, in your prepared comments you talked about maybe some headwinds or some upward pressure in the back half of the year, but maybe you could spend a minute and talk to us more about what you're doing at the organization to drive an improved efficiency in the expense ratio and what we should be thinking about that trajectory as we look out to 2020 and beyond.

Glenn Shapiro -- President of Allstate Personal Lines

Yeah. Thanks, Greg. I appreciate the question. I guess I'd reframe headwinds as opportunity because what we're looking to do is invest in growth business, which is a great return business. So we have made some good structural movement on expenses and to turn that into some real tangible examples for you. Operationally, we've done some things like in automation we're using aerial imagery and available data in the market instead of going out inspecting homes from an underwriting standpoint.

So you just think about the cost trade off of doing that.

We have improved customer experience by providing better information upfront a streamlined on-boarding process and as a result, we have a 20% reduction on inquiry costs. So that's great for the customer. But it costs money to answer the phone and it ends up taking our cost down. Our procurement team has done a really nice job of leveraging our scale in improving our contracts and what we pay third-party providers as you mentioned Esurance's expenses are down and that's good.

Then Steve talked about before, some on the, on the marketing and acquisition side of things. So we have some sustainable components to all of that and as I mentioned in the prepared remarks, part of it a smaller piece of it is incentive compensation, where we had higher targets this year for growth. Now, you take that and if you take us a small amount of that you create this virtuous cycle to where you achieve expense advantage. You take a small amount of that and you invest in growth, you grow really high margin business and it's ultimately a great win for the shareholders. Give them that one.

Greg Peters -- Raymond James & Associates -- Analyst

Thank you for your answers.

Operator

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

Michael Zaremski -- Credit Suisse. -- Analyst

Hey thanks . I'll-- My first will be a follow-up to the expense efficiencies you're speaking to. I'm curious. So these structural expense efficiencies, do you feel, these are kind of Allstate competitive advantages or do you feel you just, it's a first mover advantage and the rest of the industry is kind of moving in that direction as well over time.

I feel like--- it feels like it kind of-- You've been talking about these things for a while. It seemed like it came pretty fast in terms of into the income statement.

Tom Wilson -- Chair, President and Chief Executive Officer

Mike, this is Tom. I'll give you, I think, some are advantages. I think other places, we're still trying to get our expenses down to where other people are. I don't think we're perfect by measure. I would say in the claims area, which was not included in the expense ratio we're talking about, I believe we are ahead. If you look at what we're doing with plane, what we're doing with drones, adjusting houses, we appear to be faster and farther in integrating that into our business processes than our competitors. But I'd say, I believe, because I am dose it in the progressive or State Farm or Geico or Hindsight. But when we're looking at the industry, we think that we're ahead there. There is other parts where we need to get more effective and efficient.

So you've seen that at Esurance, we brought the marketing spend down. We don't have the grand consideration for that brand yet at a point where it is efficient and effective as the GEICO brand as they spend $1.7 billion, we spend a lot less. So the difference is getting smaller as we spend real hours, but we're not where they are. So I would say that when you look versus the competitors, it's, we're in the hunt we're competing aggressively, but we're all working to try to reduce our expenses even better because we kind of needed it.

So one of the things we mentioned up front is we're build Integrated Digital Enterprise, which is about how do we use technology, data analytics and importantly process design to reduce the expenses across all of our brands and that will lead to some additional changes in the future as we try to cut out expenses by leveraging stuff across all things. Anything you could all add to that?

Glenn Shapiro -- President of Allstate Personal Lines

The only thing I might say we've mentioned advertising [Indecipherable] insurance. They have actually spent a lot of hard work, getting their other operating cost down. So you look they've brought it about half of that decline in their expenses over the last year and their other operating expense, we believe, are sustainable. As based on customer experience, improvements digitization. In addition, just the growth, you've got, that's 18 months and scaling. So we feel good our position and that the team is really focused on continuing that trend.

Michael Zaremski -- Credit Suisse. -- Analyst

Okay, that's very helpful and my last question is switching gears. In homeowners, paid claim severity is more volatile and it seems like less trendable than-- versus the same-- than the auto side Any color on how to think about what's going on with home paid claim severity given it increased to 11.7% this quarter? Thanks.

Tom Wilson -- Chair, President and Chief Executive Officer

Well, you're right that it's more volatile. Glenn can talk about what we've been doing in average price, which I think is important to recognize. But it bounces around, but over time over like rolling 12-month period it should work its way out but fire claim cost a lot. it costs a lot more than someone running into their garage door. So and it messes up the severities of it. So it does-- it is seasonal, but over time, it does work its way out and that's what you reflect into the pricing that, Glenn you maybe want to talk about how you're taking to very- what you're doing to maintain margins.

Glenn Shapiro -- President of Allstate Personal Lines

Yeah, it's a great point, Tom is making is that home unlike auto, the variation in parallels creates a lot of movement in that, but we look at the overall trend. If you look at homeowners over the past 6 years we produced on average at 16% underwriting profit 84% combined ratio but last 12 months was a 98%, so 2% underwriting profit. So it is a volatile we had a lot of weather in there and we've been recognizing that price and you can see in the year-over-year and I always go to the average premium as opposed to the filed rates because there's a material difference between those.

Yes, we have inflationary factors average premiums up 5.6%. So we're definitely taking weather pattern seriously. We're looking at rate and what we need to do from a pricing standpoint to make sure we continue to deliver those long-term profitable margins that we got now.

Analyst

Thank you.

Operator

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

Ryan Tunis -- Autonomous Research -- Analyst

Hey guys. Good morning. I guess just taking a step back on the expense ratio, just looking at just auto I think Allstate has always been around a 25% expense ratio company. It was about a 24% this quarter, which is clearly good. Some of your top competitors I think are around 20% or even a little bit lower than that. I'm curious, Tom, you have a number in mind for what you think Allstate could get to in the next few years on the expense ratio?

Tom Wilson -- Chair, President and Chief Executive Officer

Lower is better target and we have our targets, but do not target that we've [Indecipherable] We, are working hard, and I think that a [Indecipherable] Enterprise using technology make putting- having processes in place across all of our brands to get that down and we are working on it. It doesn't mean though Ryan that if we see an opportunity to invest as Glenn said, to get really attractive business, we're not going to do that. We will not be a slave to just getting that down where our objective function is increase shareholder value, which is a combination of both ROE and in growth. And so if we think we should invest to capture above cost of capital growth, we will do that.

And we get really good returns in that business. So if you saw- it is possible that our investments in growth will go up? Yes, we said they're going to go up in the second half does that mean we're not reducing expenses that we're working hard on expenses on a whole bunch of fronts.

Ryan Tunis -- Autonomous Research -- Analyst

Understood. And then my follow was on the slide 11 ROE on some of that new stuff, I mean first of all, just to clarify the ROE goal will include any type of drag that's coming from the non-PFC business like the annuities like that's something that you have, you're going to include and have to battle against?

Tom Wilson -- Chair, President and Chief Executive Officer

Thank you. We'd like to get people's opinions on that, as to what works for you. We know we want to give you an ROE goal. We think it should be in total, because it ties to the, I think, but as- it came up earlier to the extent things changed by the accounting for annuities and you write off stuff like we just have a conversation with you all to say- and this is, we think it's a better measure and it give you more insight into how we're doing, including you're buying back stock and everything else. So we can't- We're not going to give you the underlying map around the goal that we do, and we'll establish a long-term target, which we said this is where we can run the business. But there'll be a lot of dialog about. This is about increasing discussion and dialog in shifting to a better a better measure.

Ryan Tunis -- Autonomous Research -- Analyst

Understood. I agree. The total ROE approach makes sense, but presumably the easiest way to improve that total ROE, would be, it would seem to me to be a separation of the annuities business or at least in the immediate annuities block. And I'm just curious, are there any legal entity complications that would come with you trying to part ways with that business?

Tom Wilson -- Chair, President and Chief Executive Officer

There are lots of ways to accomplish it legally. There is now a separation law that's been passed in Illinois, which gives us some additional opportunities. That may not be the first place we choose to use the separation law like how we have some other places we prefer to use it first. But the bigger issue on that one is finding sources of capital that believe that we do that, you should invest on a long-term basis, take care of the customers and make sure that they have, they're protected. But then they get the right return.So, and it's a combination of clearly a complications of which company is embedded in if you can always use reinsurance, but then you've got complications of the capital stuff that Mary Jane talked about. We think that the regulatory cap over prior to the half performance-based investments in long-dated structured settlements is just wrong. You wouldn't invest in a pension fund like that. Nobody does and regulations don't in fact support you not doing that and to the extent the regulation supports you being at bonds. We think that's bad for policyholders. So we're just going to keep working the issue. We, there is no silver bullet, there is no silver bullet when we started on this 2006 as we, we're just keep working-- and then on the ROE thing, the accounting will basically adjust to probably more than what second half.

So that's not exact way you want to get the high ROE on annuities despite writing up equity, but that's what will end up happening with this accounting principle when it gets put in place.

Ryan Tunis -- Autonomous Research -- Analyst

Thanks so much.

Operator

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

Rob Cox -- Golden Kinar -- Analyst

Hey, thanks. This is Rob Cox for Yaron. So the midpoint of updated underlying combined ratio guidance has 2 points of deterioration, compared to 1.5, '19. So you talked about rate increased earning through homeowners in 2 half ' 19 and I was wondering if you could walk through the offsets. I know you mentioned potentially higher severity and of course the increase investments in future growth.

Tom Wilson -- Chair, President and Chief Executive Officer

Let me first, we are in a really good return in the Property Liability business today, the underlying combined ratio, the recording combined ratio all generate extremely high returns and so we're quite comfortable with where we're at. And so we don't see that as a waving the flag that we think profitability is going to be worse or in that profitability is not going to be attracting shareholders. This is a really good business with really high returns and we like. As it relates to the quarter by quarter stuff, what you're comparing is what we had versus- we haven't looked at really the underlying combined ratio on a 12 month basis. You can't really look at it on a quarterly basis is a bounces around the that and what we've said is that the reduction of the guidance from the beginning of the year when we gave guidance, we're down now 0.5 -- at $0.5 million. $0.5 billion up and that is , reflects the fact that frequency is down from last year and we're assuming frequency will stay down. Severity of auto particularly the physical damage coverage is up versus last year and up a little more than we thought when we did the original guidance.

So we've factored that in and we factored in the additional growth doing so. It's, we don't get the components of that by quarter and we really have to look at the end of it, but key methods we feel really good about profitability. We like where we're at. We don't see any big changes in the market coming whether there be frequency of severity that we have anticipated that go into that number.

Rob Cox -- Golden Kinar -- Analyst

Okay, thank you. And just switching to the investment portfolio, was the extension in duration, more of a strategic decision to offset the lower yield environment?

Unidentified Speaker

Yes. Rob, it's Jeff Jessica [Phonetic] here. We, as you know, we have stated that we met, we dynamically manage our portfolio and you can see that historically, we've done a number of things to do that. You go back to a couple of years, we've built up our performance based portfolio. From time to time, we will favour one asset class versus another. More recently, we looked at potentially slowing growth in the economy in the US and around the world, coupled with higher interest rates. As interest rates crept up last year, and we thought that it made sense in the spirit of dynamically managing the portfolio to shift emphasis a little bit. Thankfully, we did a lot of that move, we extended the duration last year about a year between last year and beginning of this year and it benefited returns this year as interest rates have fallen pretty substantially.

I don't know that I would view that as really taking additional risk. It's really more balancing the portfolio more closely to our long run objective. Going forward, you know, we had the Fed meeting today. I think there'll be some interesting information that will come out of that, but what I can promise you is that we will work together as a team to look at where the best opportunity is across the marketplace.

Just a couple of two bits of information. A lot has been said about where interest rates now and what does that mean for the performance portfolio going forward. And yeah, I'll just remind everyone that back in 2016, the ten year [Phonetic] hit a 137. It's hovering a little bit above that 2% right now and in the period set that asset we were still able to return good returns in workflow and that comes from all the things that we've talked about historically, a good balance of different types of assets, whether it's market base are performed space around the world and active management.

We also point out that this year has been, it's been an attractive year for assets year-to-date. Only roughly 2% of the time at both the bond market and the stock market appreciate it this much, if you go back 100 years. So we're just taking that into consideration and we are happy that we manage it dynamically. Maybe somewhat comforting news on that though is that when you look back at those periods, historically, it's not as if the bottom's dropped out in markets after that. The 12 months they have-- it stood after these periods, historically. It's been OK in the market. So we're watching all these information leading on our team internally and leading on our experts and external managers to free up [Indecipherable].

Rob Cox -- Golden Kinar -- Analyst

That's really helpful. Thanks.

Operator

Thank you. Our next question comes from the line of Michael Phillips from Morgan Stanley, your question please.

Michael Phillips -- Morgan Stanley -- Analyst

Yeah. Hey, good morning everybody. Thanks. My first question is, it seems like a really big question, so I must be missing something pretty vacant. So, I apologize. The goal here is to grow more and you've got investments to make that happen. And you talked a lot about the investments are on the expense ratio, I guess, but what I am missing is this quarter expense ratio was down because of lower incentive comp agents, which sounds like incentive comp would drive growth. So what am I missing then? Why would that come down?

Glenn Shapiro -- President of Allstate Personal Lines

Yes, Michael, this is Glenn. I would say I wouldn't lead with incentive compensation on it. I would list that somewhere down the list of things that drove the expenses. So we talked about some of the operational improvements that have been made and that has moved expenses, but we also acknowledge that a piece of it is in management expenses, expense for management incentive compensation is part of that because higher growth goals this year, but we're, as we talked about in this call, we were working hard. We have been and we're seeing some of the things come to fruition, and we'll continue to look at expense opportunities because we consider it a virtuous cycle. You reduce expense, you invest a portion of that reduction in growth, you can grow really high margin business, and that's our target.

Tom Wilson -- Chair, President and Chief Executive Officer

And from a philosophy standpoint, we should do better every year. I would like think we raised the target and that there are management not yet at this target so they are not getting paid out of it. That's like OK.

They're not getting dissatisfied. They are hustling to get the higher target. So what affect them is getting good targets, balance targets give them the resources to get it done. So this is not it's directly mainline is you're not paying me so I'm not going to sell.

Michael Phillips -- Morgan Stanley -- Analyst

Okay, thanks. Thanks for that. I guess on the severity, still rising a bit and still kind of is, anything. Do you see any impact there from, and I think this has been asked before, but maybe just any updates here. Any impacts from tariffs that may be impacting the consequence.

Glenn Shapiro -- President of Allstate Personal Lines

So this is Glenn, Michael. Indirect, it can be in there. But we've seen a trend of increasing parts prices. Now, you start, you look at tariffs in the 60% of the glass and more than half of replacement sheet metal parts do generate out of China, so you get a significant amount of impact in that space, but parts prices have been rising for the last 10 years at a much faster rate than the price of cars, and we've talked about that in past calls, because you start getting into a math exercise where if the parts price accelerate faster than the price of the car, therefore repair accelerated faster than the cars and more cars reach that capitation level of it's not economic to repair them and you have more total losses.

So we continue to see that trend. As we look at the past 12 months, and I know this quarter was a bigger number and some of that's the year-over-year comparison, not reflective of the absolute dollars as they move, but we've seen essentially a six-ish percent trend in property damage severity compared to a long-term trend of 4% percent. And so as we talk about our numbers and including in the guidance that we just dropped by a point and a half, we have factored in what we believe is going to happen in the auto fiscal damage phase going forward. So all the numbers are in there financially in terms of which should expect to see.

Jonathan, we'll take one more question.

Operator

Certainly, then our final question comes from the line of Paul Newsome from Sandler O'Neill. Your question please.

Paul Newsome -- Sandler O'Neill -- Analyst

I guess the other piece I want-

Tom Wilson -- Chair, President and Chief Executive Officer

Hey, Paul. Could you speak up, we can.

Paul Newsome -- Sandler O'Neill -- Analyst

My apologies. I wanted to, to maybe beat the expense ratio horse just one more time, and I was hoping you could look at further into what sorts of pieces, you'd be looking forward to to moderate prospectively in terms of the expense. Is it, is there any sort of commission levels involved in that or is it all just operating expenses?

Tom Wilson -- Chair, President and Chief Executive Officer

well, Paul, we don't give the components out but in total, our customers want to pay less to get more. And so what we have to do is both figure out how to use less money, but then also how to improve the customer experience. So we are, for example, Glenn has an effort going to build some integrated service capability where we will move work out of agencies into centralized centers, which eventually may even actually be done, not needed anymore because once we centralize and we can figure out how to redesign processes to make them not needed much as we've done when Glenn was talking about getting rid of the 20% of the inquiries.

So there is a variety- and so that will lower costs. At the same time, we're investing in new technology for the agencies of Allstate Advisor Pro which enables them to have a much more wholesome, broad conversation with customers about their need and what kind of protection they have. So it's a question of managing both the expenses down and the value.

Glenn, anything you would add? You want to add anything of great service or--

Glenn Shapiro -- President of Allstate Personal Lines

I guess just the point of detail I'll put on that, if you think about our system, the value that we provide to customers. We think it's a really big differentiator. As trusted advisors, we have agents across the country and people, some downs that are providing them great advice on insurance. That's the good news. The opportunity is that there is some inefficiency in providing the service in a decentralized way like that. So when you aggregate some of the transactional service components that customers don't value as much of that advice and you can do it at scale, you could take meaningful cost out of that system. So, as Tom described , I think that's a, that's a great opportunity as we move forward.

Paul Newsome -- Sandler O'Neill -- Analyst

My follow-up was about maybe any updated thoughts you have on M&A and I think you obviously expand the service businesses. There is some talk of expanding the business, commercial businesses. Any thoughts updated [Indecipherable]

Tom Wilson -- Chair, President and Chief Executive Officer

Well, it's, I would say consistent before we talk about first. We look at SEP all the time. We're kind of thinking and the, and so we have to, we have to be a better around. Like when we look at companies we're like, is there a reason for that we add value and we make this a better company. So we believe that the partnership we put together with SquareTrade is- help lead to that dramatic growth. We believe in the partnerships that we're building with the InfoArmor team. We have great growth. We are going to start selling that stuff through Allstate Benefits. We look at distribution, we have to figure out how we get the Allstate name on it. So there's a lot of things we can--, it's the middle of those ovals. That's really what the acquisition has to do.

We don't have anything specific on the list today that doesn't, isn't consistent with this strategy, the talk that you've had that you just talked about, so there is, as it comes up, you will find us to be prudent, thoughtful and then the other thing we will do is, as we've done with SquareTrade and InfoArmor say here's our measures for success.

We acquired the company through the two 3 things we think we need to do with it. And then, abut every 6 to 9 months, we go through that with you and say, here's how we're doing. So it's is about being strategic, to point shareholders capital well and be fully transparent.

Paul Newsome -- Sandler O'Neill -- Analyst

Great, thank you. Congratulations on the quarter.

Tom Wilson -- Chair, President and Chief Executive Officer

Thank you. So our strategy is to both grow market share and personal property-liability. We're hard at work on that and then for our other protection products, which we had great success on this quarter and the same time making sure we deliver what we need to do on our annual operating priorities.

So, thank you. We will continue to work hard on our shareholders behalf.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

John Griek -- Head of Investor Relations

Tom Wilson -- Chair, President and Chief Executive Officer

Glenn Shapiro -- President of Allstate Personal Lines

Mario Rizzo -- Chief Financial Officer, Executive Vice President

Mary Jane Fortin -- President

Unidentified Speaker

Gary Ransom -- Dowling & Partners Securities -- Analyst

Greg Peters -- Raymond James & Associates -- Analyst

Michael Zaremski -- Credit Suisse. -- Analyst

Analyst

Ryan Tunis -- Autonomous Research -- Analyst

Rob Cox -- Golden Kinar -- Analyst

Michael Phillips -- Morgan Stanley -- Analyst

Paul Newsome -- Sandler O'Neill -- Analyst

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