Earnings Call Transcript
ALLSTATE CORP (ALL)
Earnings Call Transcript - ALL Q1 2020
Mark Nogal, Head of Investor Relations
Thank you, Jonathan. Good morning, and welcome, everyone, to Allstate's First Quarter 2020 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 further context on our response to the coronavirus pandemic. 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 throughout Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2019 and other public documents for information on potential risks. And now I'll turn it over to Tom.
Thomas Wilson, CEO
Good morning. Thank you for joining us from wherever you are sheltered in place. Let's jump right in with Allstate's response to the coronavirus pandemic on Slide 2. Allstate has been helping customers overcome catastrophes for 89 years, and we've learned to act decisively, quickly and put customers first. As a result, we've led the industry in helping customers. We created a Shelter-in-Place Payback program of more than $600 million. Special payment plans are being used for customers experiencing financial challenges. Auto insurance coverage was expanded to cover the use of personal vehicles to deliver food, medicine and other goods for commercial purposes. Allstate Identity Protection is being offered for free for the rest of the year to all U.S. residents, given the increased exposure to cybercrime. Business continuity plans were executed. Virtual sales and support capabilities were expanded. We leveraged our digital innovations, such as QuickFoto Claim and Virtual Assist, to better protect our customers, employees and agents. Employees and Allstate agents moved to more than 95% working remotely, and we altered a number of business practices to support our agents and employees. At the same time, Allstate is financially strong with significant capital and liquidity. In February, we reduced our public equity holdings by $4 billion to reduce the amount of economic capital back in the investment portfolio. But this turned out to be good timing because it enabled us to reduce the impact of the market downturn in March. And as Mario will cover later, we will maintain our share repurchase program given the strong capital position. For our communities, the Allstate Foundation announced an additional $5 million. That's on top of the money we normally grant every year, which is substantial to help deal with the pandemic and double demand for Allstate employees' support. Move to Slide 3. Let's touch base with Allstate's strategy. As you know, our strategy has two components: increase personal Property-Liability market share and expand into other protection businesses. This 2-part strategy leads to our 5 annual operating priorities, which is shown on the right side of this page, and we made good progress around all five. If you move to Slide 4, Allstate had strong operating and financial results in the first quarter. Total revenues of $10.1 billion declined 8.3% for the prior year quarter due to capital losses instead of capital gains in the prior year. If you exclude the impact of the realized capital losses, revenues increased 2%, driven by a 4.4% increase in Property-Liability insurance premiums, which you can see from the table. Net income of $513 million declined to the prior year quarter's increased underwriting income, which was more than offset by capital losses and charges for pension and postretirement benefits. Adjusted net income, shown in the middle of the table, was $1.1 billion in the quarter or $3.54 per diluted share, which was significantly above the prior year, reflecting lower catastrophe losses. Returns were excellent with adjusted net income return on equity improving to 18.2%. Mario will now discuss the first quarter results in more detail.
Mario Rizzo, CFO
Thanks, Tom, and good morning, everybody. Let's go to Slide 5 to discuss the strong performance of our Property-Liability segment. Starting with the chart on the left, policy and premium growth continued, with excellent recorded and underlying profitability. Underwriting income of $1.35 billion in the first quarter was $645 million higher than the prior year quarter with a combined ratio of 84.9. The improvement to the prior year was driven by several factors, including lower catastrophe losses, increased premiums earned, and lower auto accident frequency from the decline in miles driven. Auto accident frequency was significantly lower in the quarter, with property damage gross frequency down 12% compared to the prior year quarter. For the month of March, property damage gross frequency declined 27% compared to the prior year, as miles driven dropped significantly, as states began implementing social distancing measures. These benefits were partially offset by increased severity and the Shelter-in-Place Payback expense. The chart on the right shows our Property-Liability expense ratio over time and specifically highlights the $210 million Shelter-in-Place Payback expense we recorded in the first quarter, which increased the expense ratio by 2.4 points. Excluding this impact, the expense ratio improved by 1 point compared to the prior year quarter, reflecting continued progress on enhancing the customer value proposition, which is one of the key components of our Transformative Growth Plan. Let's go to Slide 6, which highlights investment performance for the first quarter. As you'd expect, our first quarter investment portfolio results reflect the impact of the market volatility caused by the coronavirus. As shown in the table in the middle of the page, total return for the first quarter was a negative 2.4%, largely reflecting lower portfolio valuation. While the decline in treasury rates supported fixed income prices, the significant widening of credit spreads more than offset that benefit, and interest-bearing valuation decline reduced return by 1.9%. Lower equity valuations further decreased returns by another 1%. The chart shows net investment income of $421 million in the quarter, which was $227 million lower than the prior year. We recorded a loss of $208 million for performance-based results in the first quarter, as shown in gray. As you may recall, the income on our limited partnership is typically booked on a 1-quarter lag. Performance-based income related to fourth quarter 2019 sponsored financial statements was $176 million. We also recorded write-downs of $137 million on 4 underperforming private equity investments. In a typical quarter, this is where our process would have ended. However, given market volatility and economic disruption, we also recognized declines in the value of limited partnership interests, where we had enough information to make informed estimates rather than solely relying on sponsored financial statements as of December 31. This included updating publicly traded investments held within limited partnerships to their March 31 market pricing, which reduced investment income by $52 million. We also did not recognize $195 million of unrealized valuation increases reported in sponsors' fourth quarter financial statements. The sum total of these 4 items generated the $208 million performance-based loss in Q1. Because these investments exhibit idiosyncratic risk and return, future gains and losses are uncertain. But we believe utilizing this approach in the quarter is a better indication of current value. Income from the market-based portfolio, shown in blue, was lower than the prior year quarter by $19 million, reflecting the impact of lower reinvestment rates. We expect this trend to continue to the extent reinvestment rates remain below average interest-bearing portfolio yield. Let's turn to Slide 7 to discuss our portfolio positioning. We take a disciplined and proactive approach to managing the investment portfolio risk and return profile, and our positioning has mitigated the impact of the current crisis. As you can see in the chart on the left of the page, the portfolio is largely made up of high-quality fixed-income securities with substantial liquidity. We extended the duration of our Property-Liability portfolio last year, which has supported both income and returns in the lower rate environment. We are conservatively positioned in sectors more susceptible to the pandemic and continue to monitor those exposures closely. To provide transparency into these exposures, we have enhanced our Form 10-Q disclosures. We also have a 13% allocation to performance-based investments and public equity securities, down from 18% at year-end 2019, which backed long-dated liabilities and capital. As you can see in the chart at the bottom right, in February, we reduced our equity exposure by $4 billion, primarily through the sale of public equity securities with proceeds invested in high-quality fixed income. These trades were executed at an average price equivalent of 3,281 on the S&P 500 compared to the March month-end level of 2,585. We continue to proactively employ a disciplined risk and return framework to the portfolio as economic conditions evolve. Now let's turn to Slide 8 to review results for the Life, Benefits and Annuities segment. Allstate Life, shown on the left, generated adjusted net income of $80 million in the first quarter, an increase of $7 million compared to the prior year quarter, driven by lower operating costs and expenses. Allstate Benefits' adjusted net income of $24 million in the first quarter was $7 million below the prior year quarter. The decline was due to higher operating costs and expenses, driven by increased investments in technology and higher DAC amortization. Allstate Annuities, shown on the bottom right, had an adjusted net loss of $139 million in the first quarter, primarily due to the performance-based investment results we discussed earlier. Coronavirus claims did not appear to materially impact any of these businesses in the first quarter, though we continue to monitor developments closely. Now let's turn to Slide 9 to talk about our Service Businesses. The Service Businesses continued to increase the number of customers protected with policy in-force growth of 35.4% to $113.7 million. This is largely due to the increase in Allstate Protection Plans. Revenues, excluding the impact of realized gains and losses, grew 18.2% to $454 million in the first quarter. Adjusted net income improved to $37 million in the first quarter, reflecting an increase of $26 million compared to the first quarter of 2019, driven by growth of Allstate Protection Plans and improved profitability at Allstate Roadside Services. Slide 10 highlights Allstate's attractive returns and strong capital position. While the impact of the coronavirus drove financial market instability and led to a decline in shareholders' equity, Allstate's diversified business model, substantial earnings capacity, and strong capital and liquidity enable us to manage effectively through this pandemic. We have $3.4 billion in parent company holding deployable assets and $8.8 billion of highly liquid securities saleable within 1 week. We continued to generate strong returns on capital with an adjusted net income return on equity of 18.2% as of the end of the first quarter while returning $670 million to common shareholders in the quarter through a combination of $511 million in share repurchases and $159 million in common stock dividends. We plan to continue share repurchases under our current $3 billion program, which is expected to be completed by the end of 2021. And now I'll turn it over to Glenn to discuss the coronavirus impact on auto insurance and how we're leveraging data and insights to make decisions.
Glenn Shapiro, CRO
Thanks, Mario, and good morning, everyone. Let's go to Slide 11, which looks at the potential impacts of coronavirus on auto insurance. Profit has been, and will be, impacted by a reduction in miles driven, which will lower overall loss costs. While this has been significant, it will decline over time as the economy begins to reopen, and there are several offsets. First, the reduction of drivers on the road has increased driving speeds, which can lead to increased severity per claim. We'll also likely incur additional bad debt from some customers who have chosen to take extended payment terms. On a longer-term basis, if the global auto parts supply chain is disrupted or parts prices are raised by auto manufacturers, this could increase repair costs. The pandemic and economic slowdown will also impact growth. If loss costs continue to be below prior year, the lower required rate increases will limit average premium growth. On the positive side, the Shelter-in-Place payment could have a favorable impact on retention. The impact on new business is unclear since reduced vehicle sales can lower new business, but economic conditions may increase shopping levels. And we've seen an increased customer interest in telematics, and we're well positioned with both Drivewise and Milewise, the latter of which charges customers' insurance by mile. Getting ahead of these trends will be important to grow profitably as we continue to manage profitability and competitive position on a market-by-market basis and will enable us to be precise in our responses. Let's now move to Slide 12. As a customer of Arity, we have access not only to our data, but insights from a much broader data set, some of which is shown on this slide. Telematics-based pricing allows you to factor in things like how much someone drives, where they drive, and how they drive. Our telematics products enable us to do that for individual customers, which when combined with a broader set of data, enables us to make better judgments market by market. For example, based on 3.5 billion trips from February through April, the upper-left graph shows that miles driven declined sharply in mid-March and then began a slow increase since then. You can also see that those states that had stay-at-home orders had a bigger decline in driving. In the upper right, you can see there's also a difference between rural areas at the top of the chart, which declined by about 20%, and urban areas at the bottom, which declined by about 50%. The bottom-left graph shows that while some drivers are not driving at all, those are the bars to the left, about 20% of drivers are actually driving more than they did before mid-March. Arity also provides a Drivesight score, which is a measure of driving risk. The lower the score, the higher the risk. As you can see on the bottom right, the mean risk has increased despite fewer cars on the road, which correlates to the data that shows some drivers are driving faster. The net of all of this is that Allstate has the data and business processes to proactively adjust to a changing operating environment. I'll now pass it back to Tom.
Thomas Wilson, CEO
Thank you, Glenn. To move to Slide 13, we want to discuss how we've moved past the emergency of moving people to work from home to the immediate of creating a Shelter-in-Place Payback to implementing intermediate-term actions. In this type of environment, you obviously have to look where you step, but you also have to decide where you want to walk. And as we look into the future, there's not that much clarity, right? Who will move back into offices? Will as many people still need to commute to work? What happens to the investment market? And of course, the answer is nobody knows. There are so many possibilities you can get frozen into inaction. So we used scenario planning to see what the future path looks like under alternative assumptions. This came out of Royal Dutch Shell in the '70s, and it works kind of like this. You find 2 things that will be the primary drivers of change. In this case, we selected the length and depth of the health crisis, which is shown at the top of the box on the bottom of that page, and the severity of the economic downturn from disruptive to severe, which is shown on the vertical axis. You then create 4 scenarios to represent a range of possible outcomes. As you can see from the slide, the best case in the upper right, we've labeled sigh of relief. The healthcare crisis is over relatively quickly and the economy is disrupted, but government support enables us to bounce back with them. In the worst case, in the lower right, is distracted by the virus. It reflects a significant health impact with repeated lockdowns over the next couple of years. The decline in GDP is greater than the Great Depression, but it doesn't last as long because of the government fiscal monetary action. For each scenario then, we look at a range of outcomes, including consumer behavior, auto insurance accidents, and investment returns. This helps us decide what actions we should do, even though we do not know what the ultimate outcome will be. It also helps inform what not to do. And it enables us to establish road signs for each scenario, which improves our ability to forecast the direction we're headed. There are, of course, similar consequences in the scenarios, which help determine what actions to take, which is shown on Slide 14. In many of the outcomes, revenue growth is constrained because of fewer auto accidents, deteriorating incomes, increased unemployment, or lower interest rates. As a result, we are accelerating our Transformative Growth Plan, which will improve customer value with increased utilization of new technologies, lower costs in new auto insurance products. And as you know well, the investment markets will be more volatile in many of these scenarios. As a result, we're evaluating our strategic asset allocation. Many of us have found that we can adopt new technologies pretty quickly. Like who knew you can have so many Zoom or Teams or Skype meetings in one day? As a result, we're going to maintain a strong commitment to telematics and expanding the Integrated Digital Enterprise. Consumer behavior is also likely to change to focus on the quality and breadth of their protection. And this is where Allstate is headed, with the second part of our strategy, is to provide a broader array of protection offerings from auto insurance to include things like your phone and your identity. Now we'll open the line for questions.
Operator, Operator
Our first question comes from Elyse Greenspan from Wells Fargo.
Elyse Greenspan, Analyst
My first question is regarding frequency. You provided substantial information on the decline in miles driven, and I believe you mentioned that there has been a recovery from the impacts of COVID. As we consider Q2, particularly for April and May so far, how do you view the frequency benefits we might experience during that time compared to what you observed in the later part of March?
Thomas Wilson, CEO
Elyse, let me start, and then I'll hand it over to Glenn. As more people begin to drive again, we anticipate an increase in accidents. The exact level this will reach is uncertain, particularly as we don't know when people will return to the office or how many will actually go back. From my discussions with other companies, it's evident that we've established the infrastructure for a remote workforce. At Allstate, around 15% of our employees were already working remotely before this situation. We believe we could increase that number. This, of course, may result in fewer people commuting to work, but it's difficult to predict the exact outcomes. Glenn, do you have anything to add?
Glenn Shapiro, CRO
Not much to add. As Tom mentioned, there are some uncertainties, which include possible pent-up demand. Consider individuals who have delayed trips or visits to family and now wish to reconnect. This could result in some fluctuations due to ongoing downward pressure on driving and frequency, but there may also be short-term spikes as people feel the need to get out after being cooped up.
Elyse Greenspan, Analyst
Okay. That's helpful. And then my second question is on buybacks. I know you guys have said you expect to maintain your buyback program. So as we think about the completion of that program, I believe it runs through the end of 2021, should we think about kind of an even pace of buybacks from here? Would there be some slowdown over the next couple of quarters? Or just given the capital position, you kind of expect that to be evenly maintained as we work our way through 2021?
Mario Rizzo, CFO
Sure. Elyse, thanks for the questions. So I think the place I'd start, Elyse, is we feel really good about our capital and liquidity position, $3.4 billion of holding company assets, $8.8 billion of readily available liquidity, $3.7 billion of dividend capacity out of our insurance companies into the holding company for the year. And our businesses are performing really well. So I think I'd say we expect to complete the program by the end of next year just like our Board authorized. And we've got a lot of flexibility in terms of how we execute it, but we would expect to just continue to buy back shares over that time period.
Operator, Operator
Our next question comes from the line of Greg Peters from Raymond James.
Charles Peters, Analyst
Can you provide more details on the improvement in the underlying expense ratio? You mentioned it briefly in your prepared remarks. How does this relate to the sequential decline in Allstate Agency's LSPs, and is this connected to the rollout of your integrated services platform?
Thomas Wilson, CEO
Mario, why don't you take expenses? And Glenn, will you take the agent?
Mario Rizzo, CFO
Yes, sure. So when you look at the expense ratio in the quarter, you saw a 1-point sequential decline year-over-year in the expense ratio. And first thing I'd say is, reducing our cost continues to be a core part of our transformative growth strategy. And when you deconstruct where the improvement came from, it's about 50-50, not quite between acquisition costs and operating costs. And obviously, those are two core parts of our cost structure, and we saw improvement in both. And we're going to continue to be focused on reducing those costs going forward to enhance our competitive position to still take growth and be a core part of transformative growth for us. We're also going to continue to invest in the things we need to invest in for transformative growth, things like technology and marketing. But we're focused going forward on continuing to reduce costs over time. I'll turn it over to Glenn to talk a little bit about the agency part of it.
Glenn Shapiro, CRO
Yes. Greg, thanks for the question. In terms of the LSP count and agent count, you hit on part of it in your question with integrated service. When you look at licensed sales professionals, and in spite of the word sales being the operative word there, they spend only about 40% of their time on sales, about 60% on service. That's been a historic number. And one of the things we're committed to is taking a lot of the transactional work out, both through self-service capabilities as well as integrated service, over time, so that they're increasing that percentage of time they spend selling and not having to do as much of that transactional work. So we'll probably see that change over time. And that's really part of our overall transformative growth work that we're doing. And in terms of the agency count, we're really focused on growth and growing with quality in terms of the agency force. So coming into this year, I think everybody knew we changed compensation a little bit, where we moved variable compensation from renewal to new, part of it. And we also increased expectations for production on our agency force because we really want to grow with those agents that are looking to invest and grow in their business.
Charles Peters, Analyst
My follow-up question is about the investment portfolio. First, I want to commend the decision to sell public equities in February; it's impressive. Regarding the adjustments made to the limited partnerships, do you see this as a permanent shift in your valuation approach on a quarterly basis? Additionally, did your adjustments to the first quarter results on limited partnerships include an assessment of all of them or just a portion? What percentage of the portfolio was not included in your valuation reassessments?
Thomas Wilson, CEO
Greg, thank you for your comment on equity. I want to clarify that our decision was based on risk and return considerations. We evaluated the capital involved and the future outlook, and ultimately we determined that the return was not adequate given the capital required for equity. While it was good timing, we did not foresee the market crash. This situation also highlights the advantages of adhering to metric-driven business processes, whether in our investment strategy or in the way Glenn discussed regarding the changes in frequency and pricing by state. Mario, could you address the question on accounting related to this performance-based investment?
Mario Rizzo, CFO
Sure. So Greg, I guess where I'd start is, as we've said in the past, generally, we record performance-based income on a 1-quarter lag based on the partner financial statements as of the prior quarter end. So for example, in the first quarter, we would have relied on year-end partner financial statements. And that's typically how we would approach the accounting. However, our accounting policy does require that when a material market event occurs, and we have information available to make informed estimates, that we need to take that information into account. And that's what we did this quarter. So we made the two adjustments, marking the public equity holdings in some of the partnership holdings to March 31 levels, and then suppressing the increases in unrealized valuations on securities that were reflected in the year-end financial statement. We did that because that's part of the accounting policy because there was a material market event in the quarter. The other piece was just our normal watchlist process where we go through every holding. And to the extent we believe we need to impair a holding, we do that. And that was worth $137 million in the quarter on four specific holdings. So absent another market disruption event, let's say, hopefully, we avoid one this quarter, we'll go back to what our typical process would be. But because there was this disruption event in the first quarter, our policy required that if we had additional information that we could make good estimates based on, we should do that. And that's exactly what we did.
Operator, Operator
Our next question comes from the line of Paul Newsome from Piper Sandler.
Jon Newsome, Analyst
I was hoping you could talk a little bit about or give us some color on where the acceleration will come in the Transformative Growth Plan. What will change? You mentioned you're thinking of accelerating it.
Thomas Wilson, CEO
Thanks, Paul. It's a complex program aimed at enhancing customer access. This involves leveraging Esurance's capabilities under the Allstate brand to expand our reach. The goal is to lower our cost structure and utilize technology to introduce new products. Glenn can share updates on the progress of Esurance and the Allstate brand, which have been positive. We are on track to operate under the Allstate brand directly this year. The cost reduction efforts will be accelerated, and we will also speed up the development of new technologies, especially with initiatives like Milewise and Drivewise. Previously, selling insurance by the mile was uncommon among large companies, but recent actions by us and our competitors have raised awareness, leading people to consider pay-by-the-mile options. We will intensify our efforts on new product development as well. Glenn, would you like to discuss the Esurance and Allstate brand further, as well as Esurance's growth in the first quarter, which might be relevant for those interested in transformative growth?
Glenn Shapiro, CRO
I will begin by discussing Esurance's growth before addressing our transformation efforts. The growth in the first quarter was not directly related to our brand changes or transformative growth. It can be divided into three parts. Esurance faced rising loss trends towards the end of last year, which necessitated adjustments in pricing and underwriting. We implemented these changes successfully, leading to improved profitability. However, this often results in a temporary decline in retention and new business, which we experienced late last year into January. Once the new pricing settled, we reinvested in marketing and performed well in February and early March, but quoting dropped significantly in mid-March. This resulted in a slow start in January, solid momentum in February and early March, followed by a steep decline. Thankfully, recent data indicates shopping has returned and is expected to increase going forward, which is promising for Esurance's growth. Regarding our transformative growth strategy, Jonathan Adkisson, Esurance's President and now head of our direct business, has been aligning both teams to enhance our sales process under the Allstate brand and improve our online quote flow. This continuous improvement is already underway. Looking ahead, we will focus on our branding strategy and marketing investments for the Allstate brand, targeting both direct and agency-driven markets, as well as our initiatives with online leads.
Jon Newsome, Analyst
Somewhat relatedly, could you talk a little bit about what happened with retention? Did it also have a kind of similar 3 different periods like the sales did during the quarter?
Thomas Wilson, CEO
Glenn, will you take that?
Glenn Shapiro, CRO
Sure. I would say there has been no impact on retention from coronavirus yet, as it's a lagging metric. It reflects midterm cancellations measured at the time of renewal. Any effects from coronavirus, whether positive or negative, will likely be seen moving forward regarding retention. Currently, we are in a good position, although we are down year-over-year from a high point, we still have an 88% retention in auto, which we feel good about. We are continuing to make efforts to support our customers. Our quick response to coronavirus in multiple areas should assist in maintaining retention, and it's something we are actively working on.
Operator, Operator
Our next question comes from the line of David Motemaden from Evercore.
David Motemaden, Analyst
I have a question for Tom regarding investments. You mentioned that you reduced the equity allocation during the quarter by evaluating the return and the necessary capital. How are you planning to allocate to equities and LPs with them making up 13% of the portfolio going forward? Do you anticipate making more adjustments in this area? Additionally, could you clarify how much capital was made available by decreasing the $4 billion worth of equities?
Thomas Wilson, CEO
Thank you for the question, David. I'll explain our approach to equity investments. John can elaborate on our forward-looking process, which is related to your question about where to invest in the current environment. The truth is, we are still assessing the best options available. Regarding equities, a significant part of our equity portfolio is tied to payout annuities, which are long-term obligations similar to pension plans. Therefore, investing in fixed income for annuities that mature in 10, 20, or 30 years is not ideal. It is important to maintain this liability matching as deviating from it would have negative long-term economic consequences, and we prefer not to time our trades. However, some equities represent capital we utilize to support the business, allowing more flexibility with those investments. We concluded that the return was not sufficient, which led us to lower our overall equity portfolio rather than focusing on specific asset-liability matching. In response to your question about freed-up capital, from a statutory capital perspective, there is a slight reduction, but overall we are well-capitalized. We do not view it as needing to free up capital for share buybacks; instead, we consider the best long-term decisions for our shareholders. While it did release some economic and statutory capital, it does not significantly affect our available capital for share repurchases or similar activities. John, would you like to discuss our strategic asset allocation?
John Dugenske, Chief Investment Officer
Thank you, Tom, and David, I appreciate your question. We take a careful approach to investing, focusing on managing both risk and return trade-offs. This is done directly in our investment department and is closely integrated with our overall perspectives on risk and return opportunities throughout the firm, as Tom mentioned. We have a strong team of approximately 400 experienced investment professionals who analyze various markets, including price actions, fundamental factors, economic drivers, and technical observations. We regularly seek insights from external sources such as our dealer relationships and consultants, which help us determine the optimal risk-return trade-off for the portfolio, particularly in relation to our business lines. Last year, we noticed a flattening return per unit of risk in the marketplace, leading us to reconsider investment opportunities. The active stance taken by the Fed has allowed us to add duration to the portfolio, which is currently benefiting us. As we approached the end of the year, we identified limitations to what central banks could achieve in terms of returns from growth or risky assets. We observed minimal earnings growth and some multiple growth in 2019, suggesting a potential end to those trends. While we didn't anticipate a specific event, we recognized that we weren't receiving adequate compensation for risk. Consequently, we executed an equity trade in February at favorable levels. We follow a capital allocation process on a regular and quarterly basis, dedicating several days to in-depth market analysis and sharing our findings with the broader enterprise.
David Motemaden, Analyst
Got it. And if I could, just one follow-up. Just on the expense ratio, the 23.4 in the quarter. How should I think about that for the rest of the year, just given potential top-line pressure, offset by what sounds like ramp-up of the transformative growth as the year progresses?
Mario Rizzo, CFO
Sure. Again, what I'd say is I'd reiterate. Look, a core part of our strategy is to continue to look to take costs out of the system and the general downward view of our expense ratio to improve competitive position. Having said that, you did say, you articulated a couple of the items that are going to cause some choppiness in that. Number one is the outlook on revenue, which there's uncertainty around that, but also, we're going to continue to make investments in things, like I said, technology and marketing. So I guess what I'd say is, look, our focus is still on reducing costs and driving the expense ratio down over time. I'm not going to sit here today and give you an exact trajectory of what that's going to look like. But strategically, that continues to be a core part of what we're trying to do.
Thomas Wilson, CEO
So what we try to do is manage it down, but not do it stupidly, right? So like, as Glenn mentioned, we have to reposition the Allstate brand to go even more aggressive into driving the direct growth. And that is going to cost some money. So we'll do what we think is economic for shareholders. And then we think if we do it on an upfront, it works out so we achieve our overall objective.
Operator, Operator
Our next question comes from the line of Jimmy Bhullar from JPMorgan.
Jamminder Bhullar, Analyst
So I had a couple of questions. First, maybe just on the auto business, if you could talk about competition as you're looking at the business through the rest of the year. Everyone's margins are actually obviously pretty strong. Do you see, at some point, companies start to adjust pricing based on sort of whatever the new normal is in terms of driving behavior? And have you seen any indication of companies getting a little bit looser on renewal terms recently?
Thomas Wilson, CEO
Let me begin by discussing the process, and Jimmy and Glenn can provide more specific insights. We implemented the Shelter-in-Place Payback, and most followed suit fairly quickly. This indicates that we collectively believed it was fair to return value to customers given our margin situation. However, it's uncertain whether this approach will be maintained moving forward. What I can confirm is that our business model operates based on market conditions, product lines, and coverage, utilizing a wealth of data, including telematics, historical data, claims information, and insights from Arity. This enables us to respond effectively and precisely. I can't comment on the actions of others. Glenn, is there anything about the competitive landscape that has become clearer than before?
Glenn Shapiro, CRO
Yes. I would say we are clearly going to be in a very favorable rate environment, and that might be an understatement, for some time. What I haven't observed in the competitive landscape is anyone making a lasting or permanent adjustment to their premiums, meaning a rate reduction that is a permanent change. I think, like us, others also noticed that this situation emerged quickly. It’s unlikely anyone anticipated that we would experience an event this year that would lead to a significant drop in mileage. This situation can change rapidly as well. Therefore, I believe everyone, including us, is considering how to respond in real time, making informed decisions that benefit the market with precision, as Tom mentioned, always keeping our customers in mind, but without taking actions that we would later need to correct. It wouldn't be beneficial for anyone to overextend and then have to implement rate increases afterward. Thus, I think what we can expect is a very stable, flat rate environment rather than a negative one.
Jamminder Bhullar, Analyst
And then on the sales or top-line growth environment in sort of the Services, Benefits, or Life businesses, should we assume that because of COVID and sort of Shelter-in-Place, that you'll see a drop-off in sales in some of these businesses in the near term?
Thomas Wilson, CEO
Let me have Don discuss the Services Business, especially Allstate Protection plans, which, as you observed, are continuing to grow at an impressive rate. I hope this story doesn’t get overshadowed by the coronavirus situation. I would summarize that in Life, there hasn't been much growth over the past couple of years, and we are actively working on revamping our growth strategy. Don, would you like to...
Dogan Civgin, President of Services
Sure. Each business will face different trends. Some will be influenced by frequency, like our roadside business, while others will be affected by auto sales and general economic conditions, such as dealer services. Therefore, each business will be impacted by various factors. Allstate Protection Plans has experienced strong growth over several quarters, not just in the first quarter of 2020, and we are pleased with the overall growth and profitability improvements they have shown. While it might seem that most of their sales are through retail, and retail is struggling, it's important to consider the specific types of customers and retailers involved, as well as what is being purchased. SquareTrade's largest B2B customers are generally larger one-stop shops, which have seen increased foot traffic since the onset of the coronavirus because customers prefer to complete their purchases in one trip. Additionally, many purchases have been focused on setting up home offices and entertainment setups, leading to opportunities for extended warranties, especially with stimulus checks providing extra funds for spending. In the first quarter following the coronavirus, there was a noticeable increase in what their customers sought. It is uncertain how long this trend will continue, and retail's overall downturn may pose challenges for Allstate Protection Plans in the future. However, in the short term, it has benefitted their growth. The business has also recently acquired several large accounts both domestically and internationally, but the rollout of these programs has slowed as stores plan their reopenings. Furthermore, there was a temporary benefit in the first quarter as claims decreased due to fewer submissions after the virus emerged. Overall, trends remain strong, but it is difficult to predict the long-term impact of the virus on Allstate Protection Plans. In the immediate term, it has positively affected their revenue.
Jamminder Bhullar, Analyst
Okay. And just lastly, any comments you have on long-term strategy for the annuity block and the likelihood of a sale or reinsurance of that business?
Thomas Wilson, CEO
Sure. Let me address that, Jimmy. First, I should also mention that from a broader perspective, Allstate Protection Plans now has over 100 million policies in force. Don, I believe it was around 30 million when we acquired it, right? 30 million plus.
Dogan Civgin, President of Services
Yes.
Thomas Wilson, CEO
It's had a tremendous run and deserves recognition. The team is doing a great job. Regarding annuities, they significantly impact our return on equity because we have a substantial amount of equities backing that portfolio, which we believe is the right strategy. Our 18.2% return includes a considerable drag from annuities. If we could remove that drag, we would, but we want to ensure that our customers are well cared for since this is largely under our responsibility. We don’t want to give someone a lot of investments and leave them to handle it on their own without guidance. We're managing it effectively as it stands. We're exploring solutions, which could involve reinsurance, a sale, or simply managing it differently. Ultimately, the drag on our return on equity will diminish when the new long-dated annuity accounting practices take effect, requiring us to mark it to market. We find that accounting a bit challenging, but it will remove the drag on our overall return on equity.
Operator, Operator
Our next question comes from the line of Mike Zaremski from Crédit Suisse.
Charles Lederer, Analyst
This is actually Charlie on for Mike. Can you talk about your commercial lines exposures outside of commercial auto? And specifically, can you talk about business interruption exposure in general, whether you've seen claims and if your policies have virus exclusions?
Thomas Wilson, CEO
Don, in your report?
Dogan Civgin, President of Services
In our business insurance, we do have exclusions for disruptions caused by the pandemic, similar to many others. There is considerable discussion regarding requirements for insurance companies to retroactively provide coverages that were explicitly excluded and not priced for, and we would oppose that. However, our exposure is relatively minor, affecting about 60,000 policies that contain this exclusion, which is a small number for a company like Allstate.
Charles Lederer, Analyst
Got it. And then on the Shelter-in-Place Payback included in the expense ratio in the first quarter, does that imply the charge for the second quarter will be the balance to get to the $600 million you guys have talked about? And is there a potential for further premium reductions, either larger discounts per month or an extension of the duration of the discounts?
Thomas Wilson, CEO
Mario, please address the first part and ensure we cover all related topics, including bad debts and any other upcoming issues this quarter. Concerning another Shelter-in-Place program, we have always aimed to treat our customers fairly. This situation arose quickly, and we acted within 10 days to implement a solution that was easily accessible nationwide for all customers. Everyone received a 15% discount in April and May because we recognized they were facing challenges, especially since government assistance had not yet reached them. We even offered them cash opportunities, despite the deferred payment plan options. This initiative was imperative because we understood our customers needed support urgently. If driving frequency remains low for any reason, like a prolonged Shelter-in-Place situation, we might consider additional measures for customers who are not driving as much. This time, however, we plan to be much more precise, utilizing all available data. As Glenn mentioned, some customers are driving more, and it wouldn’t be fair to provide a Shelter-in-Place Payback to them, especially compared to those who aren’t driving at all. We’ll also take into account the area you live in, whether urban or rural, and the nature of your driving habits. While not all customers are on telematics, we are developing a more comprehensive strategy in case driving frequencies remain low, ensuring we act fairly for our customers. Mario, would you like to discuss the second-quarter impact based on what we’ve already done?
Mario Rizzo, CFO
Sure. We recorded a portion of the SIPP payment in the first quarter, and the remaining balance will be accounted for in the second quarter. When we planned for the SIPP payment, we took into consideration the potential bad debt expense related to the special payment plan offered to our customers. As of the end of March, the number of customers who opted into that plan and our historical bad debt experience indicated that the bad debt impact in the first quarter was quite small. Moving forward, we will assess the number of customers enrolled and the potential exposure, and we will factor that into our bad debt estimates for the second quarter. The first quarter's effect was minor, but we will conduct a thorough analysis for the second quarter and make any necessary adjustments.
Operator, Operator
Our final question then for today comes from the line of Yaron Kinar from Goldman Sachs.
Yaron Kinar, Analyst
I would like to revisit the topic of distribution. Could you discuss how the agency channel is affected by the Shelter-in-Place environment and the potential for customers seeking lower-priced options? Additionally, could you address the timing of shifting the agent variable compensation more towards new business generation and how that has impacted the sales force?
Thomas Wilson, CEO
Glenn will be the best person to answer that question.
Glenn Shapiro, CRO
Alright. Thanks, Yaron. First of all, when you think about the impacts of coronavirus, I think it's important, there's all different types of businesses that have to close down all the way up through businesses that actually benefit because they're in the type of business that wins in this type of new environment. The agents kind of fall in the middle of that because if you think about their revenue stream, it is still significantly renewal compensation. Our total compensation to the agency force, and if you break down to any individual agent, will range somewhere between 90% and 100% or, in some cases, even above 100%. Some are growing more post middle of March versus before. So the core of their income remains. So you've got that piece. In terms of how it impacts their business, I think that, that will be something to watch and something to see. I agree that people will be looking for value as they go forward. But I also think our agents have really been able to show their value in this process. I don't think there's another time in our company history where I could make the following statement. Over the course of the last 6 weeks, almost all of our agents have called almost all of their customers. So you've got this really unique period of time where, a, people are more available to be reached; b, they have more questions, and they really want to hear from their trusted adviser; and c, our folks are just committed to that because of a national crisis. And so I think that there's this moment in time where at least some portion of our customer base will really see the value of what they've gotten out of their agency relationship and having a trusted adviser. That said, everything Mario and Tom and others have talked about on this call about transformative growth is, we've got to keep taking costs out of our system and be a more affordable and more competitive value for consumers going forward, which is why we're accelerating the Transformative Growth Plan.
Yaron Kinar, Analyst
Got it and understood. And then maybe one quick follow-up. Milewise, you talked about potentially accelerating it. I think as of year-end, you were in 14 states. Any thoughts as to how quickly you can really expand the program to all 50 states?
Thomas Wilson, CEO
Glenn, do you want to give an update on that?
Glenn Shapiro, CRO
Yes. So we're in 16 states and moving as quickly as we can on it. Certainly, the pandemic has shown a light on the value of a pay-per-mile product, and we're seeing a nice uptick in the demand for it. You see kind of 2 effects in the public right now. One is just the acceptance of the notion that telematics is going up as a result of all of this, and two is actually the over-demand for something like Milewise is going up. We have some states up 30% in terms of their sales since the middle of March and seeing double-digit percentages regularly on a week-by-week basis of the new business being sold in Milewise versus other products. So we think it's a great opportunity. It will absolutely be part of our filings that we're doing broadly across the country to try to expand and do more for consumers as a result of the pandemic.
Thomas Wilson, CEO
Okay. Thank you all. Allstate is in a strong position. We know how to protect our customers from life's uncertainties, and we'll continue to do that as we navigate through this crisis. So thank you for participating, and we'll talk to you next quarter.
Operator, Operator
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.