The Allstate Corporation (ALL) Earnings Call Transcript & Summary

And we're live. And thank you for joining me today. If you've not been in one of these sessions before, this is the Bank of America U.S. Insurance Conference. It's my first one. And we've had now 4 different meetings. And we have our fifth here is Allstate. We are honored to have CEO Tom Wilson presenting. I think I'm estimating that Tom has been in Allstate leadership probably as long as I've been in this business, about 25 years. I think you've been CEO for about 15 years now roughly. I'm guessing that's about right. And so Tom is going to do a presentation, and then we'll come back for Q&A afterwards. [Operator Instructions] Tom, please start, and we're really happy to have you.

Thank you, Josh. It goes by quickly. That's for sure. Well, good morning, everybody. Thanks for taking the time to figure out why Allstate is such a good investment. Let me begin on Slide 1 with a reminder that I'll be using some forward-looking statements and will reference some non-GAAP measures. And you just have to consider those in the context of all the information we give you, which is pretty extensive if you go to our website at allstateinvestors.com. So Allstate is a really unique investment opportunity. When you buy shares of Allstate, you get an exceptionally strong business that provides a really secure source of earnings and a cash return on your investment, but you also get the capabilities and capital to drive transformative growth. And today we have a low price/earnings ratio, which we believe indicates that the growth potential is not being fully valued in the market. So today, I'm going to focus mostly on the opportunities for growth. So let's begin. I want to begin with the, just talk a little bit about Allstate's business model, our strategy, our 2020 performance, then we'll lean into growth. So if you go to Slide 2, what Allstate does is we empower customers by providing affordable, simple and connected protection solutions. And we do that with a diversified portfolio of businesses. We're, of course, well-known for auto and home insurance. And we have about almost 34 million policies in force in that line of business. And that's the bulk of our revenue. But we also provide roadside assistance; car warranties; accident and health products; consumer protection plans for phones, computers, appliances and furniture. That was added to the portfolio with the acquisition of SquareTrade in 2017. We recently entered the growing identity protection business with the acquisition of InfoArmor. We've built a leading telematics business, Arity, which is enabling us to outrun the insurtech start-ups by leveraging our capabilities and our market presence. The total number of policies in force then are 176 million, which it just shows how ubiquitous the Allstate brand is becoming to protection. And then the breadth of our distribution really supports this expansive market reach. And we're obviously in almost every local market in America and a pretty big presence in Canada with over 10,000 Allstate agents. We then also have about 24,000 people working for them on our stuff each and every day. And that's what we're mostly known for. But if you look at the breadth, we're also a top 5 company in the independent agent distribution channel with the acquisition of National General, which we just closed. And we have over 42,000 agents deployed. We have a large direct operation using our call centers and the web. We really built it on our Esurance platform. We sell protection plans to retailers all over the world really, including some of the largest, which you can see on the slide here. And we reach customers through over 50,000 worksites. So what we have is this comprehensive portfolio of protection solutions that are broadly available, enabling us to leverage the Allstate brand, customer base and business capabilities. So if you go to Slide 3, our strategy has 2 components: increase personal property-liability market share and expand the protection services we provide. Now we're going to increase market share in personal property-liability by expanding the customer access, improving customer value, increasing our sophistication of marketing and deploying a new technology ecosystem. So I'm going to provide an update on some of those, and I'm sure Josh will dig in. He's well aware of what we're doing here because the growth of the property-liability business and our market share there is really important to our overall results obviously, but also our valuation. We're also expanding the protection services and increasing our total addressable market through the businesses in the bottom oval. So let's go to the next slide, Slide 4. And when we think about 2020, amidst the pandemic, we delivered attractive returns, we built higher-growth business models and made a lot of portfolio changes in our businesses as you can see from the highlights on this slide. So net income was $5.5 billion. Adjusted net income was $4.6 billion for the full year. That represents a 19.8% return on equity, far in excess of most insurance companies and slightly above the S&P 500. We also made exceptional progress in expanding customer access by merging the Esurance and Allstate direct businesses and beginning to transform the Allstate agents to higher growth. Customer value was increased by improving the competitive position of auto insurance prices, and we did that by combining pricing sophistication. There's obviously a decline in auto accident frequency last year, which gave us some room to make some significant changes. And then we've made a big reduction in our costs last year and are continuing to reduce our costs. Personal property-liability market share will increase by 1 percentage point in 2021 to 10% with the acquisition of National General, which we just closed. And that's an acquisition that you see is very attractive financially as well. So it's not a bad way to get customers. It also gives us a platform for growth in the independent agent channel as we expand the product breadth of that offering. We recently announced the sale of Allstate Life Insurance Company, which redeploys capital out of lower growth and returning businesses. And at the same time as we were running the business through the pandemic, acquiring growth opportunities, repositioning the portfolio of businesses, figuring out how to drive more growth through the Allstate channel, we returned $2.4 billion to shareholders, in part by repurchasing about 5% of our outstanding shares. So if you could move to Slide 5, let me discuss how we strengthened the Allstate brand property-liability distribution in 2020. And some of the actions we took had an impact on near-term growth, a negative impact, but they are really critical to create sustainable market share gains. So the Allstate agent distribution channel was improved by focusing agents on growth by increasing new business incentives and lowering renewal commissions. So if you exclude the declines that happened in March and April when basically the world shut down due to the pandemic, the Allstate brand new business through existing agents increased. We also stopped appointing new agents under the existing Allstate agent contract while we developed lower-cost and higher-growth alternatives, have local agents with less real estate and more efficient service. The direct businesses was all transitioned under the Allstate brand. So the Esurance brand advertising was discontinued. And those resources were shifted to the Allstate brand to compete more aggressively with GEICO and Progressive. And we also lowered the price for directly sold business. So the Allstate brand business sold through our call centers and on the web has a lower price than that sold through the agents because customers don't get the benefit of local agents. So we believe you should pay for what you get. In total, that transition worked as the overall Allstate and Esurance policies in force have remained at prior year levels despite the pandemic and a transition in the business model. As you can see, let me walk you through some attribution on the bottom of the slide there. On the lower left is new business for the year. So it's just new business, doesn't include renewals. The red bar at the far left of the chart shows the estimated unfavorable impact of the pandemic on new business in March and April. You move to the right, you can see the impact of stopping new Allstate agent appointments. That was partially offset by an increase in existing EA production. And that shows the viability of growing in the existing agent platform as the compensation was shifted to drive new growth. If you move to the center of the chart, the total direct channel increased compared to the prior year as the increase in the Allstate brand direct applications more than offset the decline in the Esurance brand. So we anticipate continued growth in the direct channel as we optimize the web and the call center capabilities. We have a relatively small number of independent agents that operate under the Allstate branding. And they had a small positive impact in overall growth. You go to the lower right then, you can see that the total Allstate, Esurance policies in force remained at the same level in 2020 as we managed through the significant change of the operating model. And we did have a small decrease in retention levels at the end of the year. So it didn't increase, but we feel good managing through that transition. And when you look at the attribution, you can see the green sprouts for growth, so to speak. You go to Slide 6, I want to discuss the National General acquisition, which increases market share, as I said, by 1 percentage point in 2021 and improves our growth prospects. So we closed this $4 billion acquisition. We closed in January. It's essentially a reverse merger. So the National General team is joining Allstate, and they're consolidating our independent agent business into their platform. They have a better platform. They have better operations. They're just better in that channel than we were. So the Encompass and Allstate independent agents are going to be consolidated into National General and will operate under National General, an Allstate company. What this makes us is now we're a top 5 personal lines carrier in the IA channel, and we got much better capabilities. And that channel, that serves, of course, about 1/3 of the personal property-liability business, which is a $125 billion addressable market. We expect additional growth in this channel, not just putting it together, lowering our costs, making some money that way, but by rolling out new standard auto and homeowners insurance offerings starting later this year. So consistent with our past acquisitions, we always like to give you measures of success, and those are shown on the bottom of the slide. First, we expect the acquisition to be accretive with growing earnings, adding to both returns and profitability. Second, we expect to achieve the cost synergies by consolidating those 3 IA businesses into one, which will further improve our competitive position. Then thirdly, we're going to grow the IA channel policies in force by broadening the product offering. Let's go to Slide 7 and discuss protection services. That's the bottom oval. These businesses are significant in size and are becoming meaningful to our total corporate results. Protection Services revenues, when you exclude the impact of realized gains and losses, increased 17% to $1.9 billion. Adjusted net income was $153 million in 2020 despite the fact we're investing heavily in growth. And it represents a $115 million increase compared to 2019. So the increase in revenue and profit is really being driven by continued success of Allstate Protection Plans. So you can see in the bottom left, bottom left or bottom right, sorry, the Allstate Protection Plans. Revenues are growing 48% since it was acquired on a compound annual growth rate. The business also generated $137 million of adjusted net income. And at the same time, they're expanding their total addressable market. We've expanded into furniture. We just launched Home Depot in appliances with some new offerings there. We're obviously big in consumer electronics, tablets and cell phones. We're expanding internationally there. So we have good potential growth in the future coming out of that business as well. If you go to Slide 8, let's discuss how you do all this. You have to innovate on both customer value and to get growth. And so Allstate has an industry-leading telematics solutions, and it's really been a great 10-year run for us. We created this business outside the insurance company, so it could be the telematics provider for Allstate, but also for third parties. So we could leverage those capabilities and make more money off other people. And Arity's access to third-party information along with the Allstate-specific data is really a competitive advantage. So we now have over 410 billion miles of data collected with over 27 million active connections. And we're scoring over 1.3 billion trips per month. That's far in excess of anybody else that I know at least at this point. We have advanced analytics. We use insurance claims data. And we're creating proprietary driving scores that accurately price each individual risk. And those industry-leading telematics capabilities improve the customer value proposition for Allstate's customer base, for Arity's partnerships. You might have seen something right now. We've just put out today that we're starting to show miles driven on a much more frequent basis than the Department of Transportation and ridesharing companies. So innovation has also expanded telematics products for Allstate customers. With Drivewise and Milewise, we are the only company, only big insurer really, offering a pay per mile auto insurance product, which is really attractive to customers today because they're not driving much. They're like, why should I pay X amount for 6 months? I can just pay you by the mile. So we're having good success selling that. At the same time, we're digitizing processes throughout the organization. We believe we're one of the leaders in using digital processes to resolve claims, which includes QuickFoto Claim, virtual assist, aerial imagery for property inspections. And that does a couple of things. It lowers cost, but it also improves your effectiveness. You can be back to your customers much more effectively and we're starting to be able to use digital data to really resolve the claim in a more precise way. We also have a strong track record of innovative solutions in just property casualty, features like accident forgiveness, new car replacement. Those have all been copied by our competitors. We were in the market well before them. We recently launched the digital footprint that shows you how many people have your data and collecting your data, so it helps expand our identity protection offering. Allstate Protection Plans just introduced a 2-day appliance guarantee with Home Depot. The point of this is that our innovation extends through all parts of our business, including data and analytics. And the message is, we're always investing to get better. Let's move to Slide 8. So before we move to the dialogue and send your questions on to Josh, let me just summarize the story here. The transition to higher growth business models is being successfully implemented. We have the brand, the market position. We have great resources, unbelievable capabilities and a strategy which should deliver results for shareholders. We have the extensive Allstate agent platform that really will deliver more value per dollar for customers that want to buy from a local person than our competitors, better direct insurance business that's utilizing the Allstate brand starting late last year, got good competitive prices, broad product offerings. We have an independent agent business that's got national distribution and a strong position in nonstandard auto today, but we expect to expand that into standard auto and homeowners. And our protection services businesses have a lot of growth opportunities. And when you look at our valuation, we believe it's attractive relative to peers and doesn't appear to fully reflect our growth potential. With that, Josh, let's go wherever you'd like to go.

All right, very good. Thank you, Tom. So a couple of years ago or maybe it was 18 months ago or so or 2 years ago, I can't remember, you changed guidance for the company. You used to give general guidance around a range of underlying combined ratio. Then you switched to giving ROE guidance. And the guidance was 14% to 17% ROE for the business. First of all, why the switch in terms of how you present ROE? And two, with the National General acquisition and the closing of the life block sale, you said that your ROE is going to go up by about 100 basis points. Yet the guidance is still 14% to 17%. When I asked on the conference call, you said 14% to 17% isn't a ceiling. Can you sort of talk a little about all those things? How much we should expect Allstate to earn? Why change how we think about Allstate's guidance? And you can sort of give your thoughts on all those sort of items.

Sure. Well, we moved off of -- I'll start with the beginning. We moved off underlying combined ratio because it was just too small a part of the story. So if you think about our results, underlying combined ratio, of course, our combined ratio on property-liability, but it excludes catastrophes, and it also doesn't include investment income. It did include what we were making off the life business, doesn't include what we're making in protection services. And we said, we're really giving you one little piece of information. People like that because they could hold us accountable to it, which is fine. Like we don't mind being held accountable to it, but it wasn't really telling the whole story. So what it was doing, driving all of our conversations to what are you making in property-liability, not how is your investments doing, how are you doing on overall results. So ROE, of course, is the broadest measure you can get, and we thought that was a better measure of what we could deliver to shareholders. And we do think it's good governance to tell you like, here's what we think we're going to do, so you can come back into it. That said, it's not really used as an annual earnings guidance. So we said it's going to vary from year to year. And we said in the 14% to 17% range, we'll be far above almost all insurance companies, well above the commercial carriers, well above the mutual companies. The only person it's below would be Progressive. They have a little more leverage and they weren't carrying the life business that we were carrying. And so we thought, this is a good return. If we can grow and generate 14% to 17% returns on equity, the stock should have good value and it should actually be revalued when we go there. There is a lot of -- some people have asked, including you, okay, well, when you said you were buying National General, would increase return on equity by 100 basis points. We believe that's still true. When you sell the life businesses and it does go away later this year, that should increase returns by another 100 basis points. So why wouldn't you raise it? We don't really see it as an annual guidance kind of thing so you can then say, well, and I said, that's why I said on the call, like it might be higher than 17%. It's not like it's a bad thing for us. But when we say, what can we really think we can deliver in this industry, grow rapidly. And so you get not only high ROEs, but high growth potential on a sustainable basis that we thought we could get there. So it isn't really about the annual target, and it may be above or below 17%. It's almost like if you thought about Progressive, they are going to say, they're going to grow as fast as they can below 96. So they're below 96, at least on auto. They're obviously losing money on homeowners. And so they say, as long as we can keep growing below 96, we'll keep doing that. If they actually went to 96, I don't think people would be very happy. But their point is, you can't manage it every year in this business. It goes up and down. And this is us saying, we can earn really good returns on equity and we can grow the business.

So if I think out longer term, it's hard to know what policy count is for this, but we know premiums. I estimate that the top 4 carriers, you among them, in auto control about 63% of the auto market share in the United States. And the share, certainly GEICO and Progressive have been growing fairly quickly over the last few years. And I expect that the top 4 carrier share is going to continue to grow over time, including yourself. When I look at the homeowners market, the top 4 carriers probably combine for maybe 39%, 40% of the market. So there's 2 questions in here. One is, should we expect the market share for the auto insurance marketplace to continue to consolidate with Allstate being one of the winners in that consolidation? Two, is there something different going on in homeowners because of catastrophe risk that the homeowners market might be fragmented in perpetuity while the auto market consolidates?

Let me go way up, and I'll swoop down to both auto and home insurance. So as I mentioned in our strategy, I'd like to protect everything you've got. Like I want to protect your cell phone, your car, your house, your identity. Like whatever you got, we'd like to protect it. So we think about market share as really doing in all those different ways. You're right in the auto business that it's -- I won't say it's not. It's concentrated. It may not be consolidated yet. And certainly market share really helps you for a variety reasons. It's not a panacea, but it certainly helps you. So higher market share, more volume allows you to spread the cost of technology, lets you spread advertising base. I mean advertising has gotten to be a big game, right? Like if you're not spending $1 billion here in advertising, you're going to have a hard time competing these days to really drive customers to you. And obviously, the increased amounts of data, as you know well, really help you be more precise both in pricing and in settling claims. So that said, I don't think that we should ignore the smaller, more innovative companies. Some of them have new good things they're trying to do. I don't know that I think they're going to knock us off our pedestal because what we do is say, if it's a good thing, we'll do it, too. And in fact, we got some better ways to do it. And so you have to have, a good strategy is both think about your size and scale, but also paying attention to those people who are finding the holes in the market and how to advance. I think the people in the middle, Josh, are going to have trouble. So some of these are public companies. Some of these are mutuals. The public companies will probably bail sooner than the mutuals will because the mutuals don't have the kind of oversight that you get from being a public company. And so they can just kind of continue on their way. But if you're not leaning into telematics, you're not going to be in the business for very long, at least on a profitable basis, if you're not leaning into advertising, you're not innovating and figuring out how to use digital technology to do your business more effectively. And the medium-sized companies are going to have a harder time doing that than the big companies. That said, there'll be people that develop services that help them do well. And that's why we turned Arity loose on third parties too. So we have some foreign bureaus and other companies that are using Arity's help to get into the telematics business. And we're okay with that because we think we can win in our space. And we only got, we still have 9 out of 10 customers we could get in the auto space. And so we're not opposed to making some money off people who are serving some of the other 9 out of 10. Homeowners is a different animal. It started -- it was consolidated because it was so volatile. There are big catastrophe losses. It's hard to resolve those claims than it is auto in terms of they're more complex. And so you're right that there's only a few big players there, State Farm, us, Farmers who got a decent size. Travelers is small, but I think had a decent business. Progressive, of course, has gotten into the market. We took that business and we repositioned it. It could be 8 or 9 years, maybe even 10 years ago now to where -- the business used to be in a catastrophe year, you lost money. And in a good year, you made money. But on average, you didn't really make much. We repositioned our business so in a catastrophe year we still make money. So our underlying combined ratio has to be in the low 60s to do that. And in a low catastrophe year, we make a lot of money. Not all of our competitors are doing that. Progressive has been losing money for 3 years in a row. And it's a capital hog, right? This business, because of the volatility, needs more capital than auto insurance. So I think we'll see more competition there as Progressive and GEICO does some brokering. That said, we're really well positioned in it. We've made $4 billion off that business underwriting income in the last 5 years. So we feel really good about our position there. We think with what we're doing with direct, we can continue to grow. And that is a business that we grew last year in units under the Allstate brand.

I'm going to go a little out of order because we do have a couple of questions from the 90 people who are listening to the call. So I'll jump around a little bit, Tom. But...

Yes, go ahead.

How much was the retention drop due to the payment deferral program? And how much should that impact the retention ratio going forward?

So it's a good question. And the answer is, depending how you do attribution, it was either most of it or some of it. I tend to lean into that it was some of it because I don't you want to get confused in that we always have to do a good job for our customers. And if your retention goes down a little bit, you got to take it seriously. So I'm not freaked out about it. I'm not concerned about it. I'm just paying attention. The genesis to that question is around is last year when frequency went down so much and we ended up in the pandemic, we led in doing a shelter-in-place payback, giving our customers almost $950 million back. But we also did things like extend payment terms, and you didn't to pay us if you -- and people took advantage of that. And then we ended those in the fourth quarter. We said, okay, hey, you owe us our money back. And some people said, well, we don't have any money so we're leaving or don't need insurance, whatever. And so that did cause a drop in retention. When you do the attribution, it was pretty significant, which is why we called it out in earnings. That said, the market is pretty competitive, and I think you always need to pay attention to your retention levels. And that, I don't think there's some secular thing that we're doing wrong. And it's going to drive our retention down, but you always need to be doing a better job for your customers.

All right. Question #2 here is, how is Allstate thinking about ESG, especially as it relates to insuring areas that you're increasingly exposed to shifting weather patterns?

So well, ESG, of course, is just wide, almost amorphous kind of description of what it is. I'm going to take the question really as climate change. If you want to go somewhere else with it, just send Josh a follow-up on it. But on climate change, we've been active in climate 2 decades and because it has a huge impact on our business. Obviously, the homeowners business as you mentioned and as well as the auto business to a certain extent because precipitation leads to more car accidents. Flooding obviously washes out cars. So we've been active in it for a long period of time. The first thing we did was take care of our own business. And so we used to have a homeowners business that had over 8 million policies in force. We reduced that by about 2 million. That cost us some auto growth. And that was, when you look at our growth over a period of time, you can see that, that really hurt us in auto growth. That said, it was the right thing to do because we had too big a share in Florida, which of course sticks out into the ocean like a thumb. We had too big a share in California. We had to reduce ourselves in New York, particularly east of Sunrise Highway. And so we went about reducing our profile. Second thing we did is we basically divested ourselves of some catastrophe risk. We have a giant reinsurance program. We got to be one of the biggest buyers of catastrophe reinsurance for residential properties in the world really. And we have a very extensive property reinsurance. Because we said, we like the slip and fall, the drive through your garage door, the kitchen fire business. It's very predictable in terms of the overall frequency and severity. We don't really like having big exposure to force 4 hurricanes or large tornado. So we bought a bunch of reinsurance. The third thing we did was really change our underwriting practices, our inspection practices and then our policies. And so we now age rate roofs and things like that because that's the thing that gets mostly exposed to the impacts of climate change, which is more severe weather. And at the same time, we raised our pricing over a relatively short period of time. I don't remember the exact number of years now, but we raised our prices by about 30%. So we took that business that have a combined ratio, underlying combined ratio, that's combined ratio minus catastrophes, in the low 60s, really good business today. So the first thing we said is, okay, climate change, more severe weather, it's here to change, we're going to fix. And we started that really in about 2005. So we're in a really good position up in the business. Second thing we said is, okay, we got to take care of our customers. And so how do we help them? So we try to get building laws changed in terms of kind of nails and things people use. We've helped put up state-based programs. The California Earthquake Authority, we helped fund and started. It was one of the first things I did when I got here. We did Florida windstorm, a pool we help fund. And so we used those so that people who are not insurable, we can get them into the pools or we broker well over $1 billion of homeowners insurance business to other people who want the risks that we don't want so we can still take care of our customers. We were unsuccessful in getting the federal government to do anything really different about flood or for large hurricanes or catastrophes, trying to get some sort of federal program. So we've been active in climate change. We're going to stay active in sort of the remediation of climate change as opposed to fighting on the, what the genesis of the climate change. We're like it's real. It's here. Let's just figure out how we deal with what's here.