The Allstate Corporation (ALL) Earnings Call Transcript & Summary

All right. So get the next session started. First, I'd like to welcome Tom Wilson, Chairman, President and CEO of Allstate. Thank you very much for being with us. We're going to start with some opening remarks from Tom, and then we'll jump into Q&A.

Well, good morning. Thank you for taking, investing some of your time to help us tell our story. Jesse Merten, our CFO, is with me, as is Mark Nogal. If we start on Slide 1, this is our surgeon's general warning. We're going to make some comments today, but we'll give you a lot of other information, whether it's on our website or a 10-K. So please look at all that stuff, so that you can be fully informed. Slide 2 talks about our strategy to increase shareholder value. The 2 ovals on the left are the 2 components of our strategy. The first is to increase Property-Liability market share through our Transformative Growth Program. I'll talk about that in a minute. At the same time, we're expanding our protection solutions. So whether it's identity protection, cell phone protection, your computer, your TV. The bullet on the right highlights our strategic priorities. First, and most importantly, is to increase our auto insurance profitability. We'll talk some about that. Second is then continue to advance Transformative Growth, which should lead to a re-rating of the earnings multiple. The Protection Services businesses are generating very profitable growth, and we're continuing to invest in expanding those both geographically and by product line. And then the other thing to note is, about a year ago, we implemented a strategy to reduce the risk in our investment portfolio. We had -- see, it was back last September, we saw inflation ripping through the auto insurance business turning its profitability down. It had not yet hit rates in the investment portfolio. So we derisked the investment portfolio, cut the duration in half, sold down some equities and has reduced the impact of the market downturn on our investment portfolio by about $2 billion this year. So we -- the concept there is we approach risk and return from an enterprise standpoint. If you go to Slide 3, let's really start with auto insurance profitability, which will be the story I want to focus a lot on, which is how do we get to a mid-90s target combined ratio. So the chart on the left, you can see we have a long history of achieving a target combined ratio averaging about 92 for the 5-year period from 2017 to 2021. Now our performance is amongst the best in the industry where if you look at the industry average, we're about 6.5 points better than the industry. So we know how to make money in auto insurance as a point there. The pandemic, obviously, has created a very volatile environment and required us to adapt pretty quickly. So you could see 2020 is an outlier with a much better than target. And that's because people quit driving, quit driving, there weren't that many accidents. And so that obviously lowered our loss costs. In 2021 and again, this year, we -- both had higher frequency started to pick up because people started driving to work and around to go visit people. And then you also have the impacts of inflation, both on used car prices, parts prices and increased severity in bodily injury. So the cost of settling bodily injury claims is escalated. That's in part due to just more severe accidents. So during the pandemic, people got used to driving really fast. And when people got back on the road, they still like to drive really fast. And so you end up with more severe accidents. And we track all that with our telematics servicing. As a result of that, both the increased frequency, increased severity and prior year reserve increases, we also had high cat losses in the third quarter. You can see our profitability is not where we want it to be. So outlined on the right is our comprehensive approach to dealing with that. First, increasing rate to reducing growth through stricter underwriting restrictions, continuing to focus on reducing expenses, and then modifying our claim practices to adapt to an increasingly high inflationary environment. So starting with rates. Since the beginning of the year, we've implemented rate increases of about 12% in the Allstate brand, that's through 10 months. And we anticipate to continue to take increases this year and then into 2023. We are reducing operating expenses as part of Transformative Growth, including advertising. And then our claim practices have been modified, particularly doing things like getting to customers in severe accidents earlier in the process rather than later in the process. And we also have a number of strategic relationships with part suppliers, rental car companies, all of which help us lower our costs and use predictive modeling to get people to the right place at the right price. If you go to Slide 4, this talks about auto insurance prices. So growth in our average premium per policy is accelerating. You can see that in our numbers. And that's because of the rate increases we just talked about that we've done over the last 12 months. The difference is, though, when you write it, you get the higher premium. And so our written premiums are up, but then it takes a while to earn into the P&L, because these are 6-month policies. So you don't get -- the first day you get it, you don't get all the increase, it takes about a year before you get it all in. So over the last 12 months, we've implemented the Allstate brand increases of 13.7% or nearly $3.3 billion, which included 4.7% in the third quarter. So you can see it's been accelerating through the year. The chart on this page is an estimation of when those rates that we implemented come through to the P&L. And you can see in the third quarter, the estimated impact is $3.3 billion, of which only $660 million has come through into the P&L. So we expect that to grow through the end of next year. As I mentioned, we also expect to continue to take rate increases. We're down to various states and negotiating with them. Most of the states are very open to it. There are a few that are laggards in recognizing that the costs are higher for customers. Slide 5 talks about the timing of that. So you're like, okay, that's great, you're going to raise prices, reduce growth, make more money when, which is, of course, a key question for most shareholders. So if you start on the left, this chart walks you through the when. So for the first 9 months of the year, the combined ratio was 109. That's the first blue bar. And then you got to normalize that. So we take out the prior reserve increases that I just mentioned and normalize our catastrophes to a 5-year average, and that improves the combined ratio by about 6 points. The second green bar reflects the impact of the rate actions that we just talked about on the prior slide. And as they are earned into premium, and that's -- you can see that, that would reduce the combined ratio by about 8 points. And there's an estimate as to how much goes through and what people do with deductible. So it's not exactly one for one, but we've tried to give you a sense for how big that number can be. And then, of course, we don't expect loss costs to stop here. We don't see an end to inflation at this point. You still -- used car prices have leveled out going down a little bit this year, parts and labor though continue to go up and severe injuries continue to stay at pretty high levels. So we don't see that coming down, so that will put pressure up. And then, of course, we have to take future rate increases and the other reduced expenses and everything else to get it down to mid-90s. We're highly confident we can get to that level. I'll go to Slide 6. This is our homeowners business. Bottom line is we're really good at it, much better than our competitors. So we've generated $1.2 billion of adjusted net income on average over the last 10 years. The graph on the left shows us relative to our competitors, so you can see our position. And we've averaged 12 points better than the competition on the combined ratio there. We have a really integrated business model, which goes from top to bottom, and I won't go through it right now. But it's not just price, it's not just policy terms, it's not just where you're right at, not just your reinsurance programs, not just your -- how sophisticated your pricing or hardly good claims are. It's all those things have to tie together, and they are all linked as well. So you have to adjust it all together. And you can see the bottom line is we do quite well on that business. And we've -- one of the things, inflation has been coming after the homeowners business as well. But we have an automatic adjustment in that policy called PIA, it goes up as the value of the house goes up. And so you can see our written premium is up almost 13% this year. If you go to Slide 7, this is Transformative Growth. It's our -- remember, it's our second priority on that first slide. And this is a multiyear initiative with 5 facets in 5 phases, which is about increasing market share in the Personal Property-Liability business. For a long time, we've had a premium priced approach to the market. This is lowest cost approach. And so -- but it required us to do everything. So we wanted to improve customer value in part by lowering expenses, so that we didn't have to give up shareholder money to do that. And we're pretty far along in that process. Secondly, we wanted to make sure we expanded our access to customers. So that's selling direct under the Allstate brand, it's 7% cheaper than you can buy through an Allstate agent. So you don't have to pay for it if you don't want an agent, and so that's helped us drive growth. We needed a new tech ecosystem to do that and as well, we need new organizational capabilities. So we're pretty far along in this. If Alex want us to get there, we'll talk about what we've learned along the way. But this is, we feel good about where we're at. We slowed down a little bit because of auto insurance profitability but not a lot. Let's go to Slide 8. So this is investments. As you may recall, as I just mentioned, we reduced our risk in the investment portfolio last October. That reduced the fixed income duration from 4.5 years to 3 years, with some of it we [ sold by ] and some of it we sold some derivatives because it was cheaper and easier. And that's worked really well for us. We also took some high yield off the books and some equity. The result of all that is we've reduced our losses in the investment portfolio by about $2 billion, despite the fact that, as you know, the corporate bond index is down like 12% and S&P is down in the 20s, depending on which day you look at it. Our net investment income is shown on the left, and we had good results to date, and we get good momentum on the shorter duration. So as you'll see in the blue bar is the market base, that's basically stuff that comes off the corporate bond portfolio and some equities, and that's performing well. But even with the shorter duration as rates go up as they already have, so you can see on the blue line and the red line on the right hand side, the yield on the portfolio versus the current yield of intermediate bond index there, there's -- that when we decide to go risk on, that money will come straight through to the P&L. Let's go to Slide 9. And this is a bunch of businesses don't get much focus, but we think they have a lot of potential. So we offer this wide range of protection. That's the bottom oval in that strategy. So whether that's at the workplace, our roadside services, car warranties, protection plans, so through Walmart, Costco, Target, Home Depot, our Identity Protection, those are all good strong businesses. They're all growing quite rapidly and not all of them, but most of them are growing quite rapidly. And you can see they had revenues of $4.5 billion and over $0.5 billion of EBITDA oftentimes get overlooked in our valuation. Let's go to end where we started. But I'm going to really focus on the right hand side of this chart, which is, as investors, how are we thinking about you and creating more value for you. So first, we have to make more money in auto insurance. We talked about that, highly confident we can get there. Second, we have to continue to maintain really strong returns in the homeowners business, which we're capable of and done for a while. Third, we need to advance Transformative Growth that should lead to a re-rating of the earnings multiple because if you look at our earnings multiple relative to other people, it's low. Fourth, we talked about growing Protection Services in our Health and Benefits business. And then lastly, it's as rates rise, so does our investment income as we go forward. So that's our plan. All of that means we think we can get to a 14% to 17% return on equity in the future. Thanks.

All right. So we'll jump into some Q&A. I thought I would say there was a lot of helpful information there, by the way. I -- the piece that I thought was interesting was how much revenue you expected to get out of the rate increases that you've been implementing? And the other piece of it is obviously what's happening in the severity as you're taking an extra rate. Are we getting close to a point where severity year-over-year comps begin to become much less extreme and that rate really begins to earn in more to margin improvement, are we sort of near that inflection?

We've made a lot of progress. So over the last 18 months, we've really put through a lot of increase in prices. I can't say that we're done yet. And because we're not willing to say that inflation is going to level out or even that used car prices are down, and so we shouldn't take increased price. We're going to keep increasing price until we get to our target combined ratio. We may end up overshooting a little bit, don't know. And it's not our goal to overshoot it. But we're not backing off at this point only because, Alex, it keeps showing up like first, it's used car prices, now it's parts and labor, severe accidents. And so all is we can do is price well. And what we've done is weight the -- and when you're doing our pricing, we've weighted the near-term results more than the long-term results. So that should continue to increase prices.

So recently, you did an Investor Day on some of the claims practices, reserving practices. And it struck me that a fair amount of it, I think was around courts being closed, and there were a lot of blind spots to the industry. I mean, to what degree was that impactful to some of the PYD you've taken? And what are you seeing in terms of normalized levels in terms of like court backlogs and things like that? Are we at a point where actually that's not as much of a blind spot as it used to be?

Well, first, nobody likes to put up $875 million of prior year reserve increases, including us. We put it up because we thought we needed that to make sure that we had the right liability on the balance sheet. And it's really not from last year or this year. It's really from the early pandemic years and a little bit before the pandemic. It really relates to more severe accidents. I don't know that I could really attribute. I mean, doing attribution and claims is really hard, is like trying to play. And we slice and dice it like every which way known to man. And I would say it's not really clear that it's court backlogs for us. It's just the accidents are a lot more severe. When they're more severe, they take longer to play out. Somebody breaks a finger, it doesn't take so long. If they end up being -- having mobility problems or something else, it takes a long time for that to play out. And so the medical treatment is longer. So it costs more. The more severe it is, the longer it takes, more likely you are to have an attorney come into the case, and we will settle those cases if we believe it's the appropriate amount. So our court back -- our backlog of pending cases being litigated is actually lower now than it was pre-pandemic. Because during the pandemic, we could see the courts were closed, we could see these severe cases and we're like we need to close these things off and move on and not have them be an unknown on the balance sheet. So it's -- for us, it's not really related to court backlog, it's really related to severity of accidents.

Yes. Got it. And last week, you all walked through, you've obviously got much more sophisticated ways of estimating reserves than somebody looking from the outside and our seats are able to assess it. And one of the things I think everybody is trying to get their arms around is how the inflation expectations and assumptions around what's going on, whether it's social inflation or the severity of accidents. How would you reflect that in things like loss development factors, like is there anything you can share about that process that can give some comfort to at this point after some of the work you've done? We've gotten to a point where you've got a healthy degree of conservatism layered in for some pressure that's still in the system?

First, so every time we put it up, we think it's the right number. So when we put it up at the end of last year, we thought we had the right number. But then, as I said, is the case is developed, you like to learn new stuff. And sometimes, I think from the outside, it's hard to see when you're looking at the math, and so on a physical damage claim, those things are done in like 90 days for the most part if they're our customers. If there's somebody else's customers, it takes a little bit longer. And so the first reserve increases we put this year was those claims that were solved, settled by other insurance companies, we got a lot of requests from them later than we normally would have, even though we thought it was going to be 40% higher. We thought it would be 40% higher and it was actually more than that. So that was the first part of the reserve. The bigger piece that you're talking about really is bodily injury, and these are the severe cases. And we haven't changed our processes. We haven't changed the inflation numbers. You just use about -- there's at least 5 different methods. We've got all these different inputs you put into it, and then you pick a number out of that. When you look at just 9 months' worth of development this year, that's really, in some cases, that's 25% to 30% of the whole life of the settlement. So when those numbers are climbing this year as they have, then we said, we got to put more money. So there's nothing really, it's not like we said our inflation was 7% and we went to 9%, and that led to it. It's much more complicated. The thing though that should give you -- I don't know if it's comfort or not, but I'll give you an insight into how we think about it, which is when just saw those numbers developing in the beginning of the third quarter with some additional -- with the work we're doing, we reached out to our external partners and said, hey, are you seeing what we're seeing? And they were like, look, we saw exactly what you saw at the end of last year, we saw exactly what you saw at the end of the second quarter, we were done exactly what you did, and we see the exact same thing in the third quarter. So it isn't like we missed some numbers or we couldn't find anything, it was just the numbers just kept running. And then we said, let's put up what we think is right, and that will fully recognize that these liabilities are covered.

Got it. That's very helpful.

That makes sense, you, Jess. I'm not trying to...

So next, I thought I'd ask you a broad question about profitability versus growth. We're at a point in which, obviously, you're very much so focused on restoring the profitability that you've had over time. You've also got this Transformative Growth. There's always that struggle in this business in terms of balancing the 2 things. Where are we at with that? How do you see that moving forward over the next year or 2 years?

Okay, I'll go way up for a second, like why do we do it? So we're good at making money. I remember [indiscernible] some shareholders, so what's your strongest muscle, and I was like, I don't really know what to say about that. And then they were really talking about what are you really good as a business. Allstate has been really good in making money in auto and home insurance. You can look at those numbers. We know how to make money, we know how to price, we know how to settle claims, like we know how to make money. Then you say, well, geez, why is your multiple half of somebody who looks a lot like us, and it's because they have more growth than we did. So we came up with Transformative Growth, which was a way to re-rate the stock, get growth and market share. And so how are we going to do that? And I would say our prior strategy was really based on a premium product, good service, use that to growth. We managed to maintain share, but we really didn't pick up share with that. So we said you know what, big driver in auto insurance and home insurance at this point is get the right price. How do we get the right price? We got to cut costs like crazy. And so we set a goal of $4.5 billion of costs. I think we're about 60% of the way done at this point. And then with a better price, we also decided we could simplify our product because our product is just a little complicated right now as is everybody's, by the way. So it would competitively differentiate us and make it available through more people, do a better job, lower your acquisition costs, put more money into it, all which requires new tech system, and you need people to implement that. We've -- that's working. What I would say at this point is we're -- there's 5 phases. We're kind of in Phase 3 and 4 right now, which is build a new and start to roll out the new. What we've shown proven to ourselves is that the underlying assumptions are right. Underlying assumption one, we could cut costs dramatically and not ruin the business. We're well underway. Are we done? No. We've got more work to do, of course, but we've proven that. Two, did we prove that? When we cut that, those costs and cut our price, could we end up with higher growth and still got good margins? Yes. So before the pandemic set in, we have been reducing prices, I think like by 2% or 2.5% right before the pandemic started to set in. And we -- our close rates went up. Could we sell through on the direct channel under the Allstate brand, get rid of the insurance brand, cut $200 million out of advertising. And it's 7% less than the agents and not have all the agents quit and walk away. Yes, we proved that. So could we build a tech system? Tech system is up and running. It's using AI in Illinois, and we just rolled it out to Tennessee. So building that is not a piece of cake. I mean just it's like -- it wasn't like it was completely made up, but it's like it was an underlying assumption, we could build a system that would give a differentiated sales experience. And so we've proven it. So when you step back and look at it, we feel like we've proved out the underlying assumptions. We did back off a little on growth because auto insurance profitability is sort of no sense doing a bunch of advertising if you're going to raise somebody's price by 15% the next time they call you. So I think it's delayed, when you'll see the realization of those market share gains, I don't like to have a specific month. Is it a year? Is it 2 years? It's not forever, though.

Sure. And when I think about some of those comments you made in the end there around price adequacy. There's always a dynamic between what some of the mutuals are doing that are also very big players in the market obviously. How do you view that your competitive positioning as you get a little more price adequacy in your book? I think you've been a little more aggressive with getting out ahead of some of the pricing actions that needs to be taken relative to some of the mutuals? Do you feel like that's the case? Do you feel like you can take advantage of that in terms of the growth strategy?

I think what gives us the most competitive advantage is reducing our expenses and having that flow through prices as opposed to them not raising prices because they're losing money. I mean, State Farm, it's a great company. We've competed with them forever. They're really smart people. They're not going to lose money forever, okay? So do they need to move as quickly as we do, I don't know, like I think we're moving as fast as we can. I suspect they probably think they're moving as fast as they need to, given their capital position and given their returns on capital they need. That said, they had a big downdraft in their capital this year. So that the 20-plus percent, a lot of their equity or capital is in equities. And the last time that happened, last time, they had a loss in underwriting and they had a loss in the capital markets and took their overall surplus down, that does drive me, they moved, like I'm highly confident they will move their prices even though I don't, just based on their history. So I think from our standpoint, we're not seeing any one competitor be so much better priced than we are that it's not enabling us to grow. National General is growing like crazy, and we could grow it faster if we wanted to, and we're choosing that too.

Got it. So I thought maybe I'd shift gears a little bit to capital. And so I thought maybe you could just opine on just how you view the capital position today? If we think through the possibility of a downgrade, how much does that affect your business if that what happens?

First, we've got plenty of capital, not worried about capital at all, whether that's what our customers ask of us, given our brand name or what the regulators want us to have. So I have no concerns about capital. The rating agencies just won't let me talk to them anymore because they thinks that mean to them. Whatever they decide to do won't have any impact on us.

Okay. Any shifting in terms of your approach to buybacks during this period where you're still sort of working through getting the profitability back to where you want it?

Well, so yes, the answer is yes, that -- but in a minor way. So remember, we're -- right now, we're in the middle of a $5 billion share buyback. About $3 billion of that is because we sold the Life Company, and we didn't need that capital. And so if we don't need the capital, we give it back to shareholders. The rest was just money we earn or had earned. And so that $5 billion program just slowed down by a couple of quarters really, not a lot. But we thought you know what, like we've always been good at capital. We've got a lot of capital. We've always been conservative in the way we run our business with capital. So we stretch it out by a couple. When we get to the end of that program, which will be sometime end of sort of third quarter of next year, then the Board will decide what do we want to do, part of that will depend how much we're making in homeowners, how much we're making in auto insurance, how do we feel about the investment portfolio at that point. So that's a decision. But I think if you just look at our track record, and it's not often show up in the stock price, it's interesting. Our shares outstanding today are 8% lower than they were a year ago. So in theory, 1 share of stock owns 8% more of the company today than it did a year ago. And it just doesn't kind of roll through the stock prices, but we do it because we think it's right for shareholders.

Got it. Maybe on the regulatory front, you're going through a lot of rate increases, there is a little more opposition at first. It seems like some of it's easing. What's the latest update with those discussions and a willingness to allow you to take the rate you exactly need?

Well, there's not 50 stories, but there's a lot of different stories. So in places like Texas and Illinois, where Texas, I think we're up over 50% this year. They understand it. They can see the numbers. They know we're not making it up. We're paying the money out. And so they know that we have to -- they have to have a fully functioning market. If you get to places like California, less so, we got a rate increase recently in California, 6.9%. By using Prop 103 methods, our numbers multiples that. So the only reason you take 6.9% is because they can approve 6.9%, and you don't have to go through a bunch of hearings and consumers and which we would get because we're doing it according to the format, it just stretches all process out. So we're going to implement 6.9% in California, and then we'll immediately file for more because we need more. How cooperative they are, how helpful they are, I don't know. We have same issue with New York. New York has approved a bunch of other of our competitors right now. And we're still in negotiations with about what our rate increase should be. But this is where it gets a little bit on growth. If other people get rate increases and we don't at the same timing, I talked about one of the things in the auto profitability plan was underwriting restrictions, we just won't sell much business in Europe, like it's really doesn't make sense to have our competitors get price increases, suddenly, they're more expensive than us. And yes, we can sell it, but it's at a price we don't really want to sell at that. So we do it by state.

Yes. Got it. The next one I wanted to ask is just on reinsurance costs. Everybody is very hyper-focused on what's going on with reinsurance pricing right now. So we're frequently getting the question of how impactful is this to Allstate. Anything you can share with us around just the renewal process as you get to your renewals? What that could look like? And what options do you have to potentially offset some of it?

First, I think you're right to be concerned about the reinsurance markets. I think there's less capacity going to be available. One is, over the last 5 years, they haven't made much money, and if any, at all. Second, the U.S. dollar, which is not often looked at has really kicked the number of them in the [ rear ], particularly the European people. So they've lost a lot of money on that currency trade. So there will be an issue. I don't really think it's an issue for Allstate, but I'll tell you that's my view. You can have your own view. First, we are one of the biggest buyers of catastrophe reinsurance probably in the world, certainly in the United States. And we have a good spread of business, which is what they want, like we've got business everywhere. So when they're trying to figure out their aggregates and how they drive it, they want a good -- so we are an attractive customer from that standpoint. Second, we have a program that basically is 1/3, 1/3, 1/3. So only 1/3 of our overall program comes up for renewal every year. That's because when we built our homeowners business, when we talked about building a sustainable profitability, we said, look, we don't want to be subject to some reinsurer decide they want to raise our prices by 100% from what -- and they're not [indiscernible], but let's call it 10% from 1 year now. So we have a stage program, not all that expires. So we still have 2 years left on the old prices as it goes to next year. Third, we recover most of that money from our -- in our homeowners premiums. So over the last 10 years really, we've built out a system where when we write a check to Swiss Re or somebody else, we then go to the regulators and say, hey, guess what, our costs are up, we need to raise the price for our homeowners. So if you look at the overall long-term economics of our homeowner business, we feel like it's built to weather any changes, no pun intended really, but to weather changes in the reinsurance market. It doesn't mean that you don't lose a point a combined ratio here or there on any given year. But from a long-term economic value, we feel very good about the way that business is built.

Got it. All right. Well, I think we are at time. So I will stop it there.

Thank you.

Thank you very much for being with us today.

Okay, thanks.

Thanks.