Earnings Call Transcript - ALL Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Allstate Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mark Nogal. Please go ahead, sir.

Mark Nogal, Host

Thank you, Jonathan. Good morning, everyone, and welcome to Allstate's fourth quarter 2020 earnings conference call. After prepared remarks, we'll have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement and posted today's presentation on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. 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 the 10-K for 2019 and other public documents for information on potential risks. And now, I'll turn it over to Tom.

Tom Wilson, CEO

Good morning, and thank you for joining us. Amidst the pandemic, Allstate delivered really attractive returns while building higher growth business models in 2020. Exceptional progress has been made in building higher growth business models to execute our strategy of increasing market share in personal property liability and expanding protections offered to our customers. One of our key focuses this year was transitioning the personal property liability business to a higher growth model. We took decisive actions and, despite the operational complexity of these actions, maintained Allstate brand property liability policies in force. We'll take you through a reconciliation of the various components of this, and you'll see the path to growth. We've made excellent progress in expanding protection offered to customers, with total policies in force increasing by 20.5% to nearly 176 million. We took advantage of the decline in auto accident frequency and our cost reductions to improve our competitive price position in auto insurance while maintaining attractive returns. The acquisition of National General is expected to increase auto insurers' market share by 1 percentage point in 2021 and provides another platform for growth as we expand its product breadth. These changes position Allstate for sustainable long-term growth. At the same time, Allstate generated strong profitability and returns in 2020. Net income was $2.6 billion in the fourth quarter and adjusted net income was $1.8 billion or $5.87 per diluted share. This was driven by lower frequency of auto accidents, continued strong profitability of homeowners insurance, and higher performance-based investment income. Net income was $5.5 billion and adjusted net income was $4.6 billion for the year. This represents a 19.8% return on equity, far in excess of most insurance companies. Our strategy to increase market share in personal property liability while expanding protection services to customers will increase shareholder value. Higher property liability growth with attractive returns and rapidly growing protection services expand our total addressable market. This growth, combined with our proactive capital deployment strategy, supports returns on equity above the insurance industry and are comparable to the S&P 500. Slide 3 is there to touch base on the strategy, and so we're not going to spend time on that. So let's move to Slide 4 and discuss this strategy as it relates to the property liability business. Transformative growth has become more than a plan; it's about creating a business model, capabilities, and culture that continually transform to deliver market share growth. This is done by focusing on the customer, expanding access, and improving value. Expanding access includes all the ways customers choose to interact: exclusive agents, directly through call centers, on the web, and through independent agents. The largest part of this change was transitioning our exclusive agent and direct businesses that operate under the Allstate brand. This gave us the ability to lower costs, leverage scale, and increase advertising. This transaction is successfully being implemented, and we achieved key milestones in 2020. We were pleased with new business growth from existing Allstate agents who remain key to serving our customers and growing. The property liability business from existing agents met our goals, except for the pandemic slowdown in March and April when, of course, nobody was buying anything, as we shifted commission to new sales from retention. We're testing new agent models with less real estate and more efficient service enabled by technology, with the goal of having strong local personal relationships with customers. These models will also create learnings to enable existing agents to achieve higher growth. As a result of that, we did stop appointing new Allstate agents in early 2020 while higher growth and lower-cost models were being developed. This had a negative impact on points of presence and new business sales. At the same time, we increased direct sales. The net result was that overall policies in force remained the same through the transition despite a drop in retention, which was concurrent with the ending of the special payment plans related to the pandemic. Glenn will take you through that reconciliation in a couple of minutes. The acquisition of National General in January also improves growth prospects. This is essentially a reverse merger. The National General team is joining Allstate, and they're consolidating our independent agent businesses, encompassing AIA into their operational and technology platform. Then we're going to be able to broaden National General's product portfolio using Allstate's standard auto and homeowners insurance capabilities, which will create growth through independent agents. We also made great progress at improving customer value last year. From a customer value standpoint, we've maintained attractive margins through cost reductions while investing in growth. This includes improving the competitive price position of auto insurance through targeted rate reductions and a direct pricing discount. While most of these changes are due to the lower frequency of auto accidents, we are also reducing costs to ensure we continue to generate attractive margins. We're also expanding our industry-leading telematics offerings, Drivewise and Milewise, to further improve our value proposition and improve pricing expectations. We are the only major company selling Milewise, which is very attractive to customers today because they're not driving as much. Our goal is not just to execute this plan but to continually generate transformational growth. We have the brand, market position, resources, capabilities, and strategy to deliver this for shareholders. An extensive Allstate agent platform delivers more value per dollar to customers and competitors; a direct business utilizing the Allstate brand with competitive prices, broad product offerings, and our insurance expertise; an independent agent business with national distribution and a strong position in both auto and homeowners insurance; and protection services with innovative business models and expanding total addressable markets. We're well on our way to achieving this goal after putting the foundational elements into place last year. Let's move to Slide 4 to discuss Allstate's excellent financial performance in 2020. Revenues of $12 billion in the fourth quarter increased 4.8% to the prior year quarter, with total revenues for the year reaching $44.8 billion, which is primarily driven by higher premiums earned, partially offset by lower net investment income. Net income was $2.6 billion for the fourth quarter and $5.5 billion for the full year 2020. Adjusted net income was $1.8 billion or $5.87 per diluted share in the fourth quarter. For the full year, adjusted net income increased to $4.6 billion or $14.73 per diluted share. We had strong profitability in both auto and homeowners insurance. Adjusted net income return on equity is 19.8% over the last 12 months, exceeding our range of 14% to 17%, which is near the top of the insurance industry. Now I'll turn it over to Glenn to discuss the transition of the property liability businesses to higher growth.

Glenn Shapiro, CFO

Thanks, Tom. Let's go to Slide 6. We'll discuss how Allstate is increasing property liability market share while maintaining attractive returns. With the foundational work completed in 2020, Allstate is positioned to grow market share in 2021 while developing a leading position in all three primary distribution channels in property liability. Some of the actions taken in 2020 have impacted growth in the near term but were critical to advancing transformative growth in the longer term. Starting with Allstate exclusive agents who serve customers that value local advice and relationships, we're focused on accelerating growth and improving efficiency. Allstate agents continue to be a core strength of our organization. We're further strengthening that model by focusing on new business growth and lowering costs by improving marketing effectiveness, centralizing customer services, and enhancing customer connectivity. Leveraging Esurance's direct capabilities under the Allstate brand, we've created an omnichannel experience that meets the customer where, how, and when they want to interact with us. We completed the integration of direct processes and systems in 2020 and expect direct sold business to continue to accelerate. As Tom mentioned, National General is another exciting growth platform for us. National General's independent agent-facing technology is among the best in the industry, and our combined agency footprint covers the vast majority of the U.S. market. So as we expand products on the National General platform, we'll be in a position to grow share in the independent agent channel. The totality of this go-to-market model with strong capabilities in each distribution channel is designed to generate higher growth. Allstate's leading pricing and claims capabilities, including our strength in telematics, put us in a strong competitive position. We're also enhancing our price competitiveness while maintaining attractive returns. The impact of the pandemic on miles driven and lower costs for auto losses gave us an opportunity to improve auto affordability through targeted rate reductions. We've also lowered underwriting expenses, as Tom mentioned, down 1.9 points over the last two years when excluding restructuring and coronavirus-related expenses. These efficiencies and continued cost structure reductions allow us to improve pricing relative to competitors while generating excellent returns. Allstate has a strong record of profitability across lines of business and in different market conditions. The average combined ratio in auto insurance over the last five years was 94.4, excluding 2020 results, which were influenced by the pandemic. We're equally strong in homeowners, where we averaged a combined ratio of 89.5 over the last five years, reflecting the higher capital requirements in homeowners compared to auto. The point is we expect to grow, and we expect to earn really attractive returns. So let's go to Slide 7 and discuss National General in a little more detail. On January 4th, Allstate closed the $4 billion acquisition of National General. We are incredibly excited about the opportunity ahead with National General and how this advances our strategy to grow personal lines. It gives us an estimated increase of over 1 percentage point of total personal property liability market share. Allstate is now a top five personal lines carrier in the independent agent channel with a significantly better competitive position. We utilize National General as our independent agent platform by consolidating our Encompass and Allstate independent agency operations into the new entity, which will be branded National General and Allstate company. We expect to grow by rolling out new standard auto and homeowners insurance offerings starting later this year and completing countrywide deployment in less than two years. Consistent with past acquisitions, we've developed measures of success and we're showing those at the bottom of this slide. First, we expect the acquisition to be accretive, with growing earnings adding to returns and total profit. Second, we expect to achieve synergies by consolidating the three independent agent channel businesses into one, improving our competitive position. Third, we'll grow independent agent channel policies in force by broadening the product offering to fully meet customer needs for auto, home, other personal lines, and from nonstandard to middle market to mass affluent. We'll continue to provide updates on our success in this channel as we report our National General brand results in the first quarter. Moving to Slide 8, let's go deeper into how we've strengthened Allstate branded property liability distribution. As we said before, some of the actions we took in 2020 negatively impacted near-term growth while accelerating it in other areas. We supported Allstate agents to increase new business growth in 2020 with the exception of March and April at the beginning of the pandemic when things slowed down. At the same time, we stopped appointing new Allstate agents while higher growth and lower-cost models were being developed, and that had a negative impact on new business. As Tom mentioned earlier, we expect the new models to create learnings that enable our existing agents to achieve higher growth too. The chart on the lower left breaks down Allstate's personal auto new business applications compared to the prior year. If you exclude the declines in March and April due to the pandemic, Allstate brand new business increased with an improving trajectory throughout the year. The red bar on the far left of the chart shows the estimated unfavorable impact of the pandemic on new business in March and April. Moving to the right, you can see the negative impact of stopping new agent appointments during 2020, but that was partially offset by an increase in existing agent production. This shows the viability of growth with those existing agents when we made a slight compensation change towards new business from renewal. They had a great opportunity to grow. The total direct channel increased compared to the prior year, and this is the combined Allstate and Esurance view. Allstate brand direct applications more than offset the decline in Esurance brand, reflecting the redirection of branding investments and resources from Esurance to the Allstate brand. We expect continued growth in the direct channel as we optimize web and call center sales capabilities. A relatively small number of independent agents operate under the Allstate brand, and they had a small positive impact on overall growth, but a really nice percentage increase among that group. This highlights the growth opportunity we have going forward in the independent agent channel as we transition those appointments to National General over time, expand National General's product offerings upmarket and endorse the brand as an Allstate company. The overall Allstate and Esurance policies in force maintained prior year levels as we managed through significant change in our operating model and had a small decrease in retention levels, which you can see all of that in the lower right. Total property liability policies in force declined slightly, driven by the Encompass brand, which will be integrated into the National General's platform in 2021. Now I'll turn it over to Mario to discuss the rest of our quarterly results.

Mario Rizzo, CFO

Thanks, Glenn. Let's turn to Slide 9 to discuss the performance of our property liability business. Property liability results remained strong, with excellent recorded and underlying profitability. Net written premium declined in the fourth quarter by 1.5%. While homeowners premium grew 3.2% from the prior year quarter due to average premium and policy growth, this was more than offset by a modest decline in auto insurance premiums driven by premium refunds. Underwriting income of $1.4 billion in the fourth quarter and $4.4 billion for the full year increased relative to the prior year by $420 million and $1.6 billion respectively. As shown in the chart on the lower left, the recorded combined ratio was 84 in the fourth quarter, improving 4.7 points compared to the prior year. This improvement was primarily attributable to a lower underlying loss ratio in auto insurance, driven by fewer auto accidents, partially offset by higher auto insurance claim severity and a slightly adverse underlying loss ratio in homeowners insurance compared to the prior year. Homeowners continues to generate attractive returns, with a recorded combined ratio of 78.5 in the fourth quarter and 90 for the full year 2020. Additionally, the underlying combined ratio performance has consistently achieved our low 60s target, which speaks to our expertise in managing this business. Favorable underlying loss ratios were partially offset by higher catastrophe losses along with restructuring charges related to transformative growth. The underwriting expense ratio improved by 0.2 points compared to the prior year quarter, which reflects a 0.6 point improvement in the expense ratio, excluding restructuring costs, partially offset by 0.4 points of restructuring. When excluding restructuring charges and impacts from actions taken as a result of coronavirus, the expense ratio improved by 1 point in 2020 and 1.9 points over the past two years, demonstrating continued progress toward the goal of reducing our cost structure to maintain returns while improving the competitive price position of auto insurance. Shifting to Slide 10, let's discuss protection services, formerly known as our service businesses. Protection Services revenues, excluding the impact of realized gains and losses, increased 17.5% to $497 million in the fourth quarter, reaching $1.9 billion for the full year. Allstate Protection plans continued to deliver significant growth, ending the year with nearly $1 billion in revenue. Policies in force increased 28.6% to $136 million, driven by Allstate Protection plans. As shown in the table on the bottom right, adjusted net income was $38 million in the fourth quarter and $153 million for the full year, representing increases compared to the prior year of $35 million and $115 million respectively. The increase in both periods was driven by the growth of Allstate Protection plans and improved profitability at Allstate Roadside Services. Now let's turn to Slide 11, which highlights investment performance for the fourth quarter. The chart on the left shows net investment income totaled nearly $1.2 billion in the quarter, which was $502 million above the prior year quarter, driven by higher performance-based income. Performance-based income totaled $557 million in the fourth quarter, primarily from higher private equity valuations and gains from sales of underlying investments. Market-based income was $63 million below the prior year quarter. With lower interest rates, our reinvestment rates remain below the average interest-bearing portfolio yield, reducing income. GAAP total returns are shown in the table on the right. Our 2020 portfolio return totaled 7.1%, reflecting income generation and increased fixed-income and public equity valuations. Our performance-based investment return was 7% for the quarter and 4.9% for the full year. Our performance-based strategy has a longer-term investment horizon and higher but more volatile return expectations compared to the market-based portfolio. The compound annual rate of return on the performance-based portfolio is 8.8% over the past five years, exceeding the market-based portfolio return by 330 basis points. Now let’s move to Slide 12 and review results for Allstate Life, Benefits, and Annuities. Allstate Life recorded adjusted net income of $56 million in the fourth quarter, $20 million below the prior year, primarily driven by higher contract benefits as coronavirus death claims totaled approximately $30 million in the quarter. Allstate Benefits adjusted net income of $34 million in the fourth quarter was $18 million higher than the prior year quarter, reflecting lower benefit utilization likely due to the coronavirus and the non-renewal of a large underperforming account in 2019. Allstate Annuities had adjusted net income of $160 million in the fourth quarter, attributable to strong investment income generated from the performance-based portfolio. Starting in the first quarter of this year, the majority of the Allstate Life and Annuities business will be classified as held for sale on our balance sheet, and results will be presented as discontinued operations following our recently announced agreement to sell Allstate Life Insurance company. Now let's move to Slide 13, which highlights Allstate's attractive returns and strong capital position. Allstate continued to generate returns that are among the highest in the insurance industry with an adjusted net income return on equity of 19.8%. Excellent capital management and strong cash flows have enabled Allstate to return cash to shareholders while simultaneously investing in growth, a capital deployment strategy that leads to increased shareholder value. Investing in growth opportunities remains a priority, as evidenced by our investments in building higher growth models and completing the $4 billion acquisition of National General. We also continue to provide cash returns to shareholders. In September, Allstate executed a $750 million accelerated share repurchase agreement. Upon completion on January 12, $1.45 billion remains on the $3 billion common share repurchase authorization, which we expect to complete by the end of 2021. We returned $2.4 billion to common shareholders in 2020 through a combination of $1.7 billion in share repurchases and $668 million in common stock dividends. Last week, we announced the pending sale of Allstate Life Insurance company, which will enable us to redeploy up to $2.2 billion of capital out of lower growth and return businesses with minimal impact to our two-part strategy. With that context, let's open up the line for questions.

Operator, Operator

Our first question comes from Josh Shanker from Bank of America.

Josh Shanker, Analyst

One thing that really didn't get expressed, maybe you can talk about is the extent to which we're seeing buydowns to like pay-per-mile products and whatnot, or unbundling is going on that you're keeping the homeowners and not the auto. To what extent is customers shrinking their wallet with Allstate taking place in this transition?

Tom Wilson, CEO

Josh, this is Tom. I'll start and then get Glenn to talk a little bit about Milewise and our success there. First, we don't really see an unbundling. I know you mentioned that in your report. Our bundling percentage actually went up. That doesn't mean that it's not happening, and we just don't see it, but we're seeing our bundling actually go up as it relates to the buying down and sort of getting lower average premium. I think what you're seeing is through telematics is more accurate prices, the way I would describe it. If you look at the total revenues we take in and then what we pay out, we've consistently made money in auto insurance for a long period. That will change by customer. If somebody gets Milewise and they only drive 2,000 miles a year and pay less, then someone else will have to pay more. So we maintain that overall profitability. So we see it as a good thing that people get the most accurate price, particularly since we're more sophisticated than most of the industry, and we have some of the tools like telematics. Glenn, what would you add to either bundling or telematics?

Glenn Shapiro, CFO

I think on the bundling side, I would flip it the way Tom did there, we're actually seeing some increase in bundling, and I think that's helping our homeowners. Part of the story in the homeowners growth is bundling. In terms of Milewise and Drivewise, I'll talk about both of them; we definitely see increased demand. Right now, we have Milewise available to 45% of the market, and we're continuing this year to roll out to more states. We have Drivewise just about everywhere; only one state doesn't allow it. But the demand for telematics has gone significantly up. For Milewise, for example, admittedly a relatively small base, it was up 35% in terms of sales. So people are looking at the pandemic; they're not driving as much. We're advertising it a little bit, and we're getting a lot of people interested in the notion of pay-as-you-mile. From a Drivewise standpoint, most people really want to include the telematics as part of their offering from us. So we're seeing a nice upswing in demand post-pandemic.

Josh Shanker, Analyst

I'm going to try and digest all that and figure out how it works. If we can go to the slides you prepared on Page 8, you have this very interesting slide about new issued applications. I'm trying to understand it a little bit better. First of all, when it says Allstate brand direct submissions were up but Esurance was down. Is that four months of Allstate brand direct and eight months of Esurance? When should we think about that, that not only is the Allstate brand bringing in more customers than Esurance but it's a smaller timeline? Is this the right way to think about that?

Tom Wilson, CEO

No, those numbers are for the entire year. What we're trying to show there is that we've successfully made the transition to the Allstate brand selling direct, both operationally, which wasn't simple, by the way, in terms of changing web flows and all kinds of other stuff. They're getting the branding changed and putting the price discount in if you buy direct under the Allstate brand because it doesn't come with an agent. We've made that change. What that shows is that overall, we grew. We did keep selling some under the Esurance brand because they're open; people can call and get on our website and track their way down to it. It's low-cost business, so we didn't completely shut it off. Over time, it will go away as we cut advertising and quit tracking people towards that site. So it’s really showing that we've made the turn indirect, and we feel good about our ability to operate under one brand when many people didn't think that was possible, whether that was perceived channel conflict or operational capabilities.

Josh Shanker, Analyst

And then on the EA channel part, a significant portion of annual new policies coming through the EA channel is coming from new appointments? If we don't do a lot of new appointments going forward, should we expect that's a multiyear issue in terms of growth in the EA channel?

Tom Wilson, CEO

I don't think you should think it's a multiyear issue. Obviously, Glenn mentioned we're working on creating some new higher growth models, and he can talk you through that in a second here. The part that may not be as obvious is putting Allstate agents onboarding with the old model; the commissions were substantially higher than you pay to an existing agent. The idea was if you opened an office and had nobody coming in, you needed to sell the first policy to make some money, so the commissions were quite high there. What Glenn is working on is coming up with a model where an agent can build the business and be successful without us having to incur the additional cost upfront to build it, which rolled out over three to five years. It was expensive. What we made was the economic choice, which was to save shareholder money and ensure the existing agents continue to grow. Glenn, do you want to talk about the new agents and what you've done with the existing agents as well?

Glenn Shapiro, CFO

I always want to emphasize this: our exclusive agents are a huge strategic advantage for us and a core capability for Allstate. As much as we talk about and I'm excited about the direct growth and what we can do in the independent agent channel, a large portion of customers really like to go to a local agent and a branded agent like an Allstate agent. It's a great model for us, and we want those agents to keep winning. With existing agents, we've shifted compensation a little bit, motivating them more on the new business side than just on the renewal side. We're also working with them on how we market. We're putting more money into marketing. We really want them to be successful. From a new agent standpoint, we've got a few models in the market right now. The general theme would be that in this virtual world we're operating in, can you have a local agent that doesn't require brick and mortar? We think the answer is yes. There’s an opportunity for agents to be a local point of sale for active community members who build relationships locally and sell through those relationships but don't necessarily have a staff and brick-and-mortar office where we perform the backend service in a more centralized way. It’s a significantly lower-cost model to get started, as Tom mentioned, and one that we're pretty bullish on our ability to scale.

Operator, Operator

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

Greg Peters, Analyst

My first question is around price and competitive positioning. Obviously, we're listening to the new products that you're rolling out, the product enhancements, and the focus on profitable growth. Your underlying combined ratio for the year is 79.3%, which is obviously an excellent result. But do you think that your price for your Allstate brand auto is competitive in the marketplace considering how profitable the business is at the moment?

Tom Wilson, CEO

The answer is yes. We think we can be even more competitive. It's a complicated question, of course, because with billions of price points, in some segments you're not competitive at all because you don't want to be competitive; you think someone else is undercharging. In other places, you want to be competitive. The trick is where you want to be competitive—enough to win the business, but not so competitive that you're giving away margin. We have a sophisticated approach to that. We do think we can change our pricing to be more competitive overall. However, we look at our close rates, and we're right in the market. That depends on how we carry ourselves too. So if you look at us versus other exclusive agents, we're very competitive. Compared to direct, I'd say we're less competitive, which is why we made the change to include a direct discount on that business. So we are more competitive because people are not getting an agent and don't want to pay for one. I'd say we're highly competitive, though I think we can always be better. Price is a significant driver of customer purchase decisions, but we also have to ensure we're making enough money.

Glenn Shapiro, CFO

Just a couple of things I'll hit on. One would be, you mentioned close rates; we keep a close eye on our close rates, and they have improved. Our new business is up. You mentioned auto, but I'll say auto and home were up 2% and 8% respectively in terms of new business. So folks are buying the product, and you really can't sell the product if you're out of the market from a competitive standpoint. Those are good signs. Lastly, I always go back to this: we manage state by state. We have a talented group of state managers who have their hands on the lever in each state, looking at the competitive position specifically in that market. As Tom said, the various types of business we offer depend on many factors. Our state managers are pulling those levers to ensure we're as competitive as we can be while earning attractive returns.

Greg Peters, Analyst

I'd like to pivot to the expense ratio. I think the chart you put on Slide 9 of your presentation showed very strong improvement from 2018 to 2019 to 2020. So, two-part questions: how much of the 23.2 is benefited from reduced T&E because of lockdown? Or looking at it another way, is there an expectation that you can drive further improvement in '21 regarding the expense ratio?

Tom Wilson, CEO

Mario has been our lead on cost reduction. Mario, do you want to take that?

Mario Rizzo, CFO

When you look at the expense ratio for the year and the improvements we made, we came into the year really focused on taking costs out of two principal areas: acquisition-related costs and operating costs, which your T&E component is a part of those people-related costs and operations. That's what's driven the improvement, once you factor out the noise of restructuring and pandemic-related costs. The improvement we've seen this year has really come from those two principal areas. We've spent a little more on marketing, as we said we would, but our reductions in those two areas have really created the space for us to increase our growth-related investments. As we go forward, our focus is on continuing to drive our cost structure down because it is a core part of our growth strategy. It's how we're going to improve our competitive positioning in terms of auto insurance pricing while continuing to deliver exceptionally attractive returns. So that's a key part of our strategy and focus: to continue to drive that ratio down.

Operator, Operator

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

David Motemaden, Analyst

Just a question, and I believe on one of the slides you had talked about how you had a 94.4 average combined ratio in the auto business over the last five years excluding 2020. Obviously, 2020 is an abnormal year, but is that a level you’re comfortable getting back to in order to return to growth? What sort of level are you willing to let that go to in order to accelerate growth?

Tom Wilson, CEO

I would say that what we've said is we can grow the market share on personal property liability and as a company will deliver 14% to 17% return on equity. We believe that will drive lots of shareholder value, both in terms of economic value creation and valuation multiples. When you look specifically at the components of that, we have a headwind in investment income with low interest rates. We do have and have had for a long time great profitability in auto insurance, and we expect to continue. At a 94, you still earn a highly attractive return on equity because you don't have to put up as much capital on auto as on some other lines. So we like to make as much money as we can and grow as fast as we can. It's really about how to drive net present value to the whole company. We don't have a specific combined ratio target, but we are comfortable with the idea of being around 94, 93, or 95. It’s all really great returns. The other part to focus on is homeowners insurance, which is a higher capital return business, so we have a lower combined ratio there. We're 10 to 15 points better than another large public competitor, amounting to somewhere between $700 million and $1 billion a year of profit. So we think all those add up to a 14% to 17% return, and we are confident we can grow the business while earning good returns. It won't always be the same every year, as the world changes, but we know how to make money.

David Motemaden, Analyst

Switching gears a little bit to the new appointed agents, that was a very helpful slide on Slide 8. Some encouraging trends there. I just wanted to ask about the new agents and appointments. Do you expect that to still be a drag in '21 or will that turn from a drag to a positive addition to new apps and growth? Or should we expect that to still be a little bit of a drag as these new models ramp up?

Tom Wilson, CEO

I'll make some overall comments, and then Glenn, you may want to add. First, I would say that when you do these year-over-year comparisons sometimes I feel like the external view of the company looks only at one year. Next year, obviously, we won't have the effect from this year. So I would actually expect a negative comparison to the prior year. That said, I think the transition of Allstate agents to higher growth and lower-cost models will have some bumps in it. As you see, those we focus on, the existing agents doing well—they know how to grow. They know their local market, and they have aggressive salespeople working for them. So it’s not as simple as like that's now gone and we get the new one. The new model should assure additional volume from us, and Glenn can talk about that transition. The beauty of our strategy is that as direct growth we keep our advertising spend highly effective because if we're not closing enough because of some agent changes, we can close more in direct. We don’t think we need it but have plenty of opportunities to balance between those. Glenn, do you want to elaborate?

Glenn Shapiro, CFO

I think you should see it across all three channels. With exclusive agents, we will ramp up some new models later this year and next year. We are excited about existing agents excelling. So you’re looking at a bittersweet story. We achieved growth on the Allstate guest side, and although we lost some on the Esurance side, it all unfolded ideally amid the change. We are making that kind of transition within the exclusive agent system. We have a lot of agents that are phenomenal at what they do, and we're probably investing enough in marketing to ensure their success. With the direct model, we've been shifting a lot of effort to direct, and with nice returns after heavy lifting, we should continue to grow effectively. We already have builds into the independent agent channel by entering the top 5 and will begin rolling out in various states this year, which will continue across all 50 states through 2022.

Operator, Operator

Our next question comes from the line of Michael Phillips from Morgan Stanley.

Michael Phillips, Analyst

You mentioned the impact on the end of the payment plans and the pandemic on retention and growth in the quarter. I guess, part A of this is, is there any way to quantify that? Given that the EA is still the bulk of your business, how much of a drag on retention can be attributed to commission changes and the transition to direct channels? Can we quantify that impact?

Tom Wilson, CEO

Well, Glenn can give you specific details on that year. Retention is always hard to figure out because you have many things going on: people changing lifestyles, not driving as much, and others shopping more. You have competitive moves, and we also did things like shelter in place, payback, and payment plan deferrals. It's hard to attribute these changes. That said, it was down this year, which we're focused on. Our Net Promoter Score peaked during the year, peaking around July when we were doing all the shelter in place paybacks. It came down a little towards the end of the year, but not significantly. Glenn, do you want to offer specifics on retention numbers?

Glenn Shapiro, CFO

Yes, I don’t think I can add too much to what you said, Tom. The retention level is in a decent range right now. It's off the highs we hit, but we're contained within a long-term window on retention of where we've operated. All the things that Tom mentioned had a drag on it. We know that coming due of special payment plans impacted it, along with the competitive environment. Some competitors took rate down, and we know facing financial hardship can cause customers to shop around or even give up a car. All of those factors play a role, making attribution difficult. We're focusing on it and want to retain every customer we work hard to gain in the first place.

Tom Wilson, CEO

The underlying question was whether existing agents performed sufficiently to maintain retention. Our answer is no; we don’t see anything indicating agents are not doing their usual excellent work helping customers during the pandemic. Our agents made a significant effort reaching out with many calls on shelter in place, payment plans, etc. They did a great job, and there's nothing structural indicating performance issues or that the transition weakens retention. It’s critical to note that agent compensation is tied heavily to retention, so you can be certain their interests are aligned with ours.

Michael Phillips, Analyst

Second question, still on channel mix, near term and longer term question. In the near term, you talked about a 1-point change in market share. Should we expect that to be even throughout the year or more back half weighted in terms of that market share shift?

Tom Wilson, CEO

We closed National General on January 4th, which means we'll realize that revenue for the entire year. You should expect to see total auto premiums go up throughout the year. We would anticipate growth as we continue to extend things in the Allstate brand, but we don't typically detail that by quarter. In terms of long-term, we want to take anyone we can get. We have one out of ten and still nine out of ten to go. I'd be happy if all of them got a lot bigger, and that's our goal. Customer preferences indicate 25% of customers prefer self-serve, with about a 65% preference for agents. Hence, there's plenty of growth opportunity. The shifts in channels reflect changing customer needs. While direct companies advertise more, we try to give customers what they want and provide flexibility, which works well for us.

Operator, Operator

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

Paul Newsome, Analyst

I was hoping you could help us understand a little bit more about how the investment portfolio will look after the life sale. Will the P&C business have a slightly different mix of assets, and will that impact the yield as well?

Tom Wilson, CEO

Paul, let me give you a slight overview from a corporate standpoint, and John can talk about the specifics. The sale of Allstate Life Insurance company substantially reduces our investment portfolio as we exit a spread-based business. The new entity will take most of the assets used to asset liability match that business. They are not taking all of the performance-based assets. This increases the percentage relative to the overall portfolio, made smaller in size. We looked at it prior to the sale, and we're comfortable with the risk and return of it. You may remember we reduced equity holdings significantly this February due to our views and evaluations of risk versus return. We have the flexibility to manage overall risk in the portfolio and are quite confident where we will end up. John, do you want to address performance-based specifics?

John Dugenske, Investment Manager

When you look at performance space, it's a part of a broader overall portfolio context. So while that percentage will go up, we're looking across risk and return factors across every security and investment we hold as a whole. We've gradually grown this area over the years. This accelerates our speed in a way that we're very comfortable with. The return on this has stood up well even in this volatile year, and our returns over the last five and ten years have been very good in the performance sector. We see this continuing to be integral to the portfolio.

Operator, Operator

Let's take one last question and then we'll wrap up to keep people on time.

Gary Ransom, Analyst

I wanted to loop back to telematics. You mentioned increased demand for the product. Could you discuss if that made any material difference to the new business growth resulting from the vision on Slide 8? Secondly, could you outline the difference between your 'pay by the mile' product and the standard product? Is pay by the mile a viable way of the future?

Tom Wilson, CEO

Gary, let me make a couple of comments. First, I don't believe it's driven new customers to us directly. Our advertising engages customers, leading them to contact us for our offerings. It helps ensure we provide them with a more accurate price, protecting our competitive edge. If someone were to leave us because they feel they can find a better deal elsewhere, it keeps our overall margins in check. We see that as a sustainable growth strategy rather than a short-term customer acquirement method. Looking long-term, pricing will continue to use telematics. Insurers have long sought to create more accurate pricing based on individual risk, especially in auto and home insurance. Telematics are essential for that; it’s powerful for real customers on either extreme end of the risk spectrum.

Glenn Shapiro, CFO

We've got capabilities developing around accident notification too. This is about early notification, emergency notifications, and first notice of loss. Those are areas being developed and will gain significance.

Tom Wilson, CEO

If you go to digital claims settlement, we believe we've been leading the industry, including through quick photo claims, and utilizing algorithms to evaluate claims. We've worked extensively to optimize our platform and technology to enhance data usage for claim settlements. So while it’s not directly related to telematics, it is tied to the overall digitization of the business, which plays into our long-term growth strategy. Thank you for participating. We are trying to generate transformational growth business models. It’s more than a plan; it’s a way of life. Expect to deliver increased growth alongside good returns, creating economic value and driving higher valuation multiples.

Operator, Operator

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