The Allstate Corporation (ALL) Earnings Call Transcript & Summary

Moving on to the next presenter, we are very pleased to have Tom Wilson, Chairman and CEO of Allstate, with us today. Tom has been with Allstate for over 20 years. I actually remember when you joined the company from Sears, right? That's how old I am. I remember that. He's been CEO since 2007. Under Tom's leadership, Allstate has emerged as a leading innovator in the personal lines industry, and the company continues to evolve in reaction to changing consumer appetites. The company recently announced a transformative growth plan, which hopefully we can hear more about, to drive continued growth and improvements. Tom has been a regular presenter here. We always look forward to his comments and we always learn something. So Tom?

Thank you. Thank you, Jay, and good morning, everybody. Thanks for investing time to learn more about Allstate. Before we begin, let me give you our surgeon general warning, which just says that I'll be making some forward-looking statements. Some of them are GAAP, some are non-GAAP, and you just need to consider in the context of all the information we give you. And then, of course, if you want to go on our website, there's plenty of additional information there. As you know, Allstate's strategy -- we have 2 components of our strategy: increase personal Property-Liability market share and expand into other protection businesses. If you start with the upper oval, we've been a leader in creating differentiated personal insurance products with features like declining deductibles and new car replacement. We use sophisticated pricing, have strong claims expertise and are building an integrated digital enterprise to lower our costs. If you -- we're also diversifying our -- these businesses by going into other protection products, which are in the bottom oval. And there, we leverage the Allstate brand, our customer base, our capabilities to drive growth in those businesses. We offer customers a circle of protection. That's a wide range of things in Allstate Life. We do workplace benefits. We have over 4.5 million people we do voluntary benefits with. We have commercial insurance, we have Roadside, car warranties, Protection Plans and Identity Protection. The strategy is designed to create shareholder value through customer satisfaction, unit growth and attractive returns on capital. It also ensures we have a sustainable, profitable business and a diversified business platform. Let's discuss the top oval first, on increasing market share in personal Property-Liability and the components that will accelerate growth in that business. Our strategy starts with the customer and then uses people and technology to deliver a differentiated customer experience. We'll execute this plan through our transformative growth plan, which Jay just mentioned, which has 3 components to it: expand customer access, enhance the customer value proposition and investing in technology and marketing. This is a multiyear effort, but it builds on our strengths and reflects our current market conditions. So we obviously have a number of significant strengths in the Property-Liability business. We have a broad distribution platform from the Allstate agents, the Esurance, direct capabilities to Encompass in the independent agent space. We're quite good at claims. We're excellent at pricing. And as a result of those, we're growing, but GEICO and Progressive are growing faster than us because they have massive advertising spending and lower cost structures. So our plan also recognizes that the customer needs are changing due to increased connectivity and advanced analytics. So our leading position in telematics in using digital auto collision estimating, we call it QuickFoto Claim, are 2 examples of how we're embracing those changes. At the same time, a majority of customers prefer an insurance agent when purchasing a policy but are comfortable with self-service for routine transactions. So we're increasing our mobile application capabilities and building lower-cost centralized integrated service capabilities. Let's spend a few minutes on each of these 3 components. Expanded customer access, we provide it by utilizing Esurance's direct capabilities to sell Allstate-branded products. Esurance has really strong direct capabilities. It's more than doubled in size since we acquired it a little over 8 years ago. As a result, we can further leverage those capabilities by selling Allstate-branded products directly to customers. As part of this effort, consumers will be able to choose their service level either with an agent or self-serve. And their price will reflect the cost of that method they choose. Consequently, we'll be able to phase out the Esurance brand later this year. We're also going to transform the Allstate Agency distribution to increase effectiveness and efficiency. And while many customers want an agent and they want their help, they want increased connectivity and they want to do it more efficiently. We're going to enhance the customer value proposition by improving insurance affordability by reducing costs. That will enable us to be more competitive on price without intentionally giving up margins. We also -- at the same time, we need to launch new products and leverage our innovation capabilities, so we need products with simpler features. We are strong in rewards, so we want to be more rewarding and more connected. The third component is to invest in technology and marketing. The technology stack will be redesigned with a focus on adaptability and speed. And so what we'll do is you create micro services that enables -- put those together so we can leverage them across the enterprise and have basically one operating system. And the -- as we reposition the Allstate brand to count for both agents and going direct, we're going to leverage things like the high trust levels we have in our reward engagement, but we also need to deploy more advertising to compete with GEICO and Progressive. So we'll take the money we spent on Esurance and we'll shift it to the Allstate brands, which will help drive more growth. So it's a comprehensive plan, and it's going to make us a stronger competitor in the personal property-liability business. Let's focus on the bottom oval of this thing. And we're continuing to expand into other protection products by leveraging our enterprise capabilities and the Allstate brand through a wide variety of distribution channels. These businesses are comprised of a number of innovative growth platforms, includes product Protection Plans, voluntary workplace benefits, auto warranties, life insurance, Identity Protection, Roadside Services. We have agreements with shared economy companies. We have Arity, our telematics company, and we started to build a car-sharing platform. We distribute those products, of course, to the Allstate agents, but we sell them directly. We sell them through workplace brokers. We sell them through major retailers like Walmart, Costco and Target. We sell them through car dealers and we sell through telecom providers. These businesses have substantially expanded our customer relationships with over 112 million policies in force through the end of the year 2019, which is 38% growth over the prior year. They generated $4.9 billion of premium, and adjusted net income was $428 million last year. The size and importance of these -- of our Property-Liability business results in some investors overlooking the value created by these protection businesses. These businesses have highly attractive economic prospects and are worth billions of dollars and should be considered when making an investment decision. Allstate Benefits is an industry leader in the growing voluntary benefits workspace. Premiums and contract charges have grown for 20 consecutive years and exceeded $1.1 billion in 2019. SquareTrade, which we bought in 2017, we rebranded it Allstate Protection Plans. We acquired it for $1.4 billion for its high growth and return prospects. Those plans have grown from under $30 million when we bought it to nearly $100 million by the end of 2019. We entered into a new line of business for Allstate Business Insurance in 2018 when we competed for and won a significant insurance contract with a large transportation network company as one way to take advantage of the changes in personal transportation. It is really our operational excellence in claims that was a factor in our success. We've expanded that relationship and entered into contracts with multiple other shared economy companies across the United States. And this space is going to continue to grow since sharing assets requires a different risk-sharing metrics. Business Insurance premiums in 2019 exceeded $900 million with compound annual growth of 36% since we began expanding into the shared economy in 2018. In 2018, we also purchased InfoArmor, now rebranded Allstate Identity Protection, for $525 million to expand our presence in personal identity protection products and services with a proprietary product offering. As you know, when you think about what you're trying to protect, people are very concerned about their identity today, and we think that's a growing area where Allstate's brand will do well. Arity was created by Allstate outside of our insurance operations to be the telematics provider for auto insurance. Now telematics in the auto space enables us to give customers a highly individualized price, which reduces subsidies between risks and improves their driving experience. We now have 2 million active affiliate connections on our drive -- on the telematics-based pricing. But Arity is further expanding that. We have relationships with a number of third-party companies. So we now have over 20 million active connections where we're collecting information. We collect over 15 billion miles of data -- driving data per month. We compete with companies like Cambridge Mobile Telematics, [ nRoute ] which have valuations of over $1 billion. And so $1 billion is worth $3 a share for us. To further take advantage of the changes in personal transportation network, we initiated operations at Avail, which is a car sharing platform we're creating. It currently operates in 7 major airports across the United States. So these highly attractive businesses and track record of innovation should not be overlooked when valuing Allstate. This 2-part strategy of growing personal Property-Liability market share and expanding protection business is working as Allstate delivered excellent results and achieved all 5 operating priorities in 2019. Our revenues were $44.7 billion, and net income was $4.7 billion. Adjusted net income, which excludes capital gains, was $3.5 billion and it was 11% higher than the prior year, reflecting excellent underlying profitability and lower catastrophe losses. Returns were also excellent with an adjusted net income return on equity of 16.9%. In measuring our performance, we believe ROE is the best measure for a number of reasons. First, it's a broad long-term measure of performance that has -- includes our underlying combined ratio, how we're doing in auto and home insurance. It excludes, but it also includes things like investment income catastrophes and our other protection businesses. It factors in capital management. It's more correlated with the stock price and it's a better comparison with our peers. On a long-term basis, our adjusted net income return on equity goal is 14% to 17%. That range also aligns with our executive compensation, which you could see if you look at our proxy. While we're investing in growth and expanding protection businesses, Allstate continues to provide excellent cash returns to shareholders. In 2019, we returned $2.5 billion to common shareholders through a combination of $1.8 billion in share repurchases and $653 million in common stock dividends. We repurchased 16.4 million shares. It's 4.9% at a common outstanding over the last 12 months. Over the last 5 years, we've repurchased $9.6 billion or 28.7% of common shares outstanding. We -- the $3 billion repurchase program we announced in 2018, we finished in January of this year, and the Board approved a new $3 billion share repurchase program, which we expect to be completed by the end of 2021. We also reduced the cost of capital by redeeming multiple series of preferred stock and issued them at new rates, which helps us save money. The bottom line is Allstate represents an attractive investment opportunity. Our strategy is working and resonating with customers. Long-term growth prospects exist in the personal Property-Liability business and our other businesses that leverage our capabilities and brand. And we're proactively managing our capital and returning significant amounts of cash to customers. With that, Jay, should we just ask questions?

Yes, sure. Are any questions back there? We have one over here.

What would you say would be the biggest challenges in increasing the direct channel and your personal auto business?

The biggest challenge is in increasing the -- well, it's really making the -- its transform of growth is designed around that. So there's the -- we have to obviously put the operations together. So we sell direct into the Allstate brand today. We just have a number of rules that don't like people go all the way through the system. So if you call during business hours, we'll route you to an agent. We won't do that in the future. So we will have to find -- we're combining the Esurance operations and the Allstate operations together. So there's an operational work. I don't know if it's a huge challenge, but it's work to do, and we need to do it well. The Allstate brand has higher trust levels in Esurance. So Esurance -- when you look at Esurance quote-to-close ratio, if we look at the Allstate quote-to-close ratio, it's better. And so by putting the Allstate brand on that, we think we'll increase the number of direct sales we get, even the ones that would come into Esurance. So we'll reshift that advertising, so that will work. I think the biggest challenge is -- just in general, it's just in property-liability is we have to get our cost structure down. And so we need to continue to reduce our cost. We have the available technology, but we need to make sure we embed that in our business processes at the same time. So our QuickFoto Claim is an example of that, where we used to have 937 drive-ins. We had people who are driving around from body shop to body shop doing an adjustment of a car. And today, you take 6 pictures. You send it to us. We don't have 937 drive-ins. We don't have as many people spending time behind the windshield. They sit behind a computer. They do 4 to 5x as many claims per day, and that's faster for the customers. We pay them in 7 to 15 hours instead of 7 days. It's cheaper for us. And the accuracy is good. But making that change is not easy, right? Like suddenly, when you got someone who's driving some place and they can actually look at the current touch and feel it, that's a little different than doing it on a computer. So you have to control your severity. So building an integrated digital enterprise is something we've long been at, but that's the way we'll lower our cost and become more competitive to compete in that channel.

A number of years back, Allstate was ahead of the curve and seeing a higher frequency and I kind of reserved for that before the industry. Is the company seeing anything in terms of bodily injury severity? There were a couple of regional players that had a blip this quarter. Is Allstate on a national scale seeing any changes in that specific loss cost?

So our -- so first, when you just set the stage for everybody. So in auto insurance, you have the number of accidents and then how much does it cost per accident. And when you look at the number of how much it costs per accident, the biggest driver there is how much it costs to fix the car. That's about 45% of the cost. But then there's -- about 25% of that cost is bodily injury claim. So what you do to other people, what your customers do to other people. We have seen an increased inflation in both of those. The first one is -- my view is that what the auto manufacturers are doing is having us collect revenue for them because they're selling the car at a low price and charge them a lot for the parts. And so as a result of that, when a car gets in an accident, you have more throwaway cars. And I'll come to bodily injury in a second, but here's the way the cars work. If you took 2013 particular model, we looked at 2018, the difference in price between '13 and '18, over a 5-year period, that sticker price of the car is up 2% per year. And if you -- and so it went from 23 -- $22,000 to $25,000. If you looked at the cost to fix that car, same accident, $8,000 to $14,000. So what I believe the auto companies are doing is holding down the price of cars to sell those units, and then what happens is they make a lot more money where there's not as much competition on fixing them. As a result of that, what happens is our cost to fix the cars goes up, and so we have to charge consumers more for that. That's okay. We have them baked into our prices, but you're seeing increased cost of fixing cars, in part because -- it's also because there's a little more technology in cars. But if there's more technology in cars, a car should cost more, too. So it's -- there's -- it's both more sophisticated cars and more throwaway cars. I don't see that trend changing. I think they like the model they have, so I think we should expect to continue to see the property damage costs continue to go up. And we factored that into our pricing. On bodily injury, that's where you hurt other people, your customers hurt other people and you have to resolve that. We have seen the cost of that go up throughout 2019. It's above inflation at this point. We have it factored into both our reserves, obviously, and our pricing. Some of that, I believe, is social inflation. Some of it is some things we can do differently in managing our operations. So it's a little of both. I can't speak to what happen to everybody else, but it is pretty broad-based at Allstate.

What about frequency, Tom?

Frequency has been -- you got to look -- it depends whether you're looking friction on a annual basis or on a daily basis or a decade over decades. Frequency, of course, was coming down for many, many years, about 20 years, in part because of third tail lights, anti drunk-driving laws, anti-lock brakes. And so frequency came down. And then it leveled off in the beginning of this -- the 2010 decade, kind of leveled off in '15 and '16. As you point out, it went way up. I don't think anybody still really knows why it went up. It then started back down again and has been down since then. I think if you look at the cars and what would drive frequency, of course, safer cars reduce frequency, and that's a good thing. And we think that will have a benefit to frequency going forward. There's other things like economic activity, which has the opposite impact on it. So the more people driving, the more people going to work, then more accidents there are. So I think, though, we try not to predict frequency because you also have weather in there. And if it snows at 4 p.m. and it's 28 degrees, the traffic conditions are worse than if it snows at 2 a.m. So it really depends -- a lot of it's also weather-related. But we just price in frequency as it goes.

I wanted to ask about the agent reaction to 2 things. One is rebranding Esurance into Allstate. So that's one. And secondly, and you could maybe describe it, but the change in your compensation structure to the agents, where you're focusing more on your new business. What are the reactions to both those changes?

Look, let me just throw a little context, and I'll go back to the agent reaction. So we have slightly less than 11,000 agents who have about 28,000 people working for them in their offices that only work on Allstate stuff every day. So that's 39,000 people, and that's too many people. And so we have to figure out how we get more effective. So we started on a program to take low value-added work away from agents and have them focus on high value-added work, the things that you would pay them for in terms of their advice, their counsel as opposed to changing an address or copying their information down onto a computer file. So we started something called integrated service where we're working those 28,000 people that work in those offices, do work that is sometimes clerical, sometimes service work. Some of it's sales work and some of it's support work. But we're centralizing that work. And then what we'll do is once we centralize it, we'll get rid of it. So we'll make it not necessary. So that will help us reduce our overall cost, Jay. It will also help reduce our agents' costs. That said, they're a little nervous about it because they think, well, if you come for them, when will you come from me. And the answer is we're not going to come for you as long as you're doing a great job for your customers and your customers want to pay you for the value you're giving them. So we've also been working on increasing their value added, so we make them trusted advisers, is the term we were using for a long time, which is to help them do more high value-added work. At the same time, we looked at how many of them were growing and how many of them were not growing, and we decided to change our compensation for 2020. And we increased the amount of compensation you get for growing, and we decreased the amount of compensation you get for just staying the same size. Out of 11,000 people, the ones that are growing, really like that. The ones that are not growing don't like it. And so their challenge is they have to change your business model because what our customers are saying is, "I'll pay, if you're selling me something, but I'm not going to pay you a lot of money just for cashing my checks." And so if you look at commissions, our commissions are 9% to 9% with some bonus on top of that. Customers really don't want to pay 9% to just have you be there. If you call them, you do an insurance review and you talk to them, they're happy to pay you. But you have to step up and do this. So what we're trying to do is get them moving along that path, starting with their compensation. On the Esurance brand and the Allstate brand, the reaction has been okay. It could have been uglier. Again, there's shades of gray in all of those. There are -- some people think it's a great idea because we're now going to spend hundreds of millions of dollars more advertising the Allstate brand. And at the same time, they have higher new business commissions, so that's a really good win for them. Like more people are going to call me, you're going to get your price more competitive, and that's good. To the extent we are offering customers the choice of what -- you get what you pay for at Allstate. So if you want an agent, you pay for an agent. You don't want an agent, you don't pay for an agent. That's pretty simple. That makes some people nervous and they would rather not to confuse customers their view, or my view given that choice, but we're going to do what the customers want. So that's -- I would say, Jay, it's manageable. But there will be some of those agencies or those agents who don't choose to move into the future with us. But our goal is if customers want it, we just need to do at the price that they wanted to pay.

And then on the advertising, you talked about shifting more to the Allstate brand. You're dropping the Esurance brand. But in addition, will you be raising your overall ad spend as well to drive growth?

Yes. So we previously spent many hundreds of millions of dollars, not quite $1 billion, but a lot on the Allstate brand. We spent hundreds of millions of dollars on Esurance. We're going to combine those. But at the same time, we're going to reposition the Allstate brand. So the Allstate brand is known as trusted, known for agents, Esurance, modern world, fast, efficient, relatively cheap. So what we need to do is take the best of both of those. So we're working right now on relaunching the Allstate brand. The timing of the Esurance brand and moving away from it is related to 2 things. One, do we get the direct capabilities all together? And secondly, when do we have the brand repositioned at a place where we feel it will drive as many quotes in on the direct space as Esurance does now? And so -- but we expect to do more advertising, and we'll do it at all points in the funnel, right? Everything from repositioning the brand, some nice TV ads, to what you do with social media in driving actual quotes.

You're not going to find some mascot animal, are you? Like an emu, or...

Well, right now, I'd like to say we have 3, maybe 4 spokespeople. So we have Dennis Haysbert. We have Dean Winters as Mayhem. We have Dennis Quaid as -- for Esurance; and Tina Fey has recently joined Mayhem, if you've seen her.