The Allstate Corporation (ALL) Earnings Call Transcript & Summary

Okay. Welcome back to the Bank of America Financial Service Conference, you're in the insurance sleeve and it's a crowded room. Allstate is very popular. I can say we're really pleased. We have Tom Wilson, Chairman and CEO of Allstate here. This is your 27th year, Tom?

At Allstate, that sounds about right, yes. Been around the hoop a long time.

And he's been CEO since 2007. A couple of things I just want to mention about Tom. He's been a very big public advocate for a broad [ room ] of society for people getting living wages and diversity in equity in this business. And Allstate has been pioneer of that movement. He chairs the Board of Trustees, the U.S. Chamber of Commerce Foundation. Under Tom's leadership, Allstate has significantly reduced its catastrophe exposure over the years, becoming improving ESG contributor, and it's very successful. He's made a number of acquisitions under his tenure ship. Esurance, SquareTrade, InfoArmor, National General. He's currently focused on many things, but the transformer of growth strategy at Allstate is a key part of the story. And I think that Tom is going to tell us a little bit about that with personal prepared remarks. And then we'll get into Q&A and you can participate in the Q&A if you want, but really pleased to have Tom Wilson.

It's good to be here. Well, so we do have some slides we'll walk you through. The first slide is, I think -- do I have the clicker -- all right. So if we go to the first slide there Mark. So this just says listen to what we say, but read what we give you. So please make sure you look at everything we got. Jesse Merten, our CFO, is with me as is Mark Nogal. So just make sure you look at everything so I keep the lawyers happy. Let's go to the first slide. I want to start with our strategy to increase shareholder value. Many of you have seen this slide -- the 2 what was on the left are our strategy. First, increase personal property-liability market share through transformer growth. I'll talk a little bit about that in a minute. At the same time, we're expanding the many other protection offerings we have and which are listed in the bottom. And those -- the bullets on the right show what we're doing right now to increase shareholder value. So first, we're focused on increasing auto insurance profitability. It won't be a surprise to most of you. Increasing our property liability market share through transformative growth is the next wave of that -- what that does is that should increase the multiple with higher growth. First, we get ROE up, first line, second one, get the growth up from where it has been by increasing market share that should increase the valuation multiples. At the same time, we're expanding our customer base through the broad distribution and the innovative product offerings that leverage the stuff in the middle our Allstar brand. And I'll give you an example. We'll talk about protection plans in a minute. We're also highly focused on enterprise exceptional capital management, utilizing our capital, whether that's through organic growth, through acquisitions or in the absence of those, we have a track record of returning capital to shareholders and we've repurchased about 30% of our outstanding shares in the last 5 years. And then that should all go into our target of 14% to 17% return on equity. So if we go to Slide 22 -- or Slide 3, talk about 2022. If you start at the top, revenues, $51.4 billion were 1.6% higher than the prior year. But underneath that, the property liability revenues were up 8.5%, we'll talk about price increases in auto and home insurance in a minute. And that was offset though by lower investment income because we had a great 2021 in the performance-based space. If you go down the table, we had a net loss of $1.4 billion that reflects an underwriting loss as well as a decline in the value of the equity portfolio. The adjusted net loss, which excludes that decline in the equity portfolio and some amortization of intangibles, was $262 million. That was a property liability combined ratio of 106.6. And that was primarily due to auto insurance, hence, that first point on that slide. The homeowners insurance business, the investment income and protection services businesses all did well last year. Slide 4 provides an overview of our auto insurance results, and Josh knows these well. In the chart on this page, you can see we have a history of having a mid-90s combined ratio from 2017 through 2021. And that gives you, of course, a 4- to 5-point margin, which generates a really attractive return on capital in that business. The lowest combined ratio, which was in 2020 was a result of the pandemic. What happened people could drive in, people could get in accidents, profitability went way up and that number there is net of the $1 billion of shelter-in-place payments that we gave back to customers voluntarily in that year. Then in 2021, in 2022, the combined ratio starts to go up as people started going back to work, started driving more, higher accidents. In addition, the loss costs started to really escalate in 2021. That was because of increased severity. Some of that was more severe accidents. And some of that was just the cost of replacing or repairing cars. And so you've seen the used car prices were up like 60% due to pandemic. The combined ratio then went up to 95 in 2021 to 110 last year. Now part of the increase in 2022 was due to the increase in reserves from prior years. So that 95, when you look back on the reserve changes we made this year in 2022, was really more like a 97 because we had underestimated how expensive it was to fix cars and bodies at that point. That was about 6.5 points on the combined ratio. Slide 5 talks about, okay, what are we going to do to fix this situation? And there's 4 areas of focus, raising rates, reducing expenses, implementing stricter underwriting requirements and modifying our claim practices to manage loss costs. Starting with rates, we implemented rate increases of 16.9% in the Allstate brand in 2022 and additional rate increases are being hunted down this year. Reducing operating expenses is a core part of transformative growth. And we're about halfway to the goal. We set up a goal in 2018 that we said by 2024, we're going to be down 6% of premium to 23%. We're about half of the way there right now. And that's helped us during this period where the loss cost went up. In fact, we got started on it early. I'm really happy about. Restricting underwriting actions on new business is in place in 37 different states where we're not making enough money. And then claim practices have also been modified. So we have strategic partnerships with repair facilities. So we have 3,000 good hands repair networks where we get our cars in, we get a better deal. We buy parts in bulk, which is helping us keep our costs down versus our competitors. Obviously, not keeping our cost down enough in total, but better than our competitors. And then we use predictive modeling on all kinds of stuff in the company, as you would expect, whether that's repair versus total loss that saves you money when you make that decision or the likelihood of attorney representation in an injury. Slide 6 that shows the -- how these impact the timing. Everybody is like, okay, we got it used to be there. You know how to get back there. You got a plan. You've been working on that plan since 2021. Show me the money sort of [ Tom Hanks ] thing. And so this slide gets you there, you start on the left, that's the blue bar. That's the combined ratio in 2022, 110.1 million, right? That's a number we just talked about. So they got us normalized a little bit. So the -- there was 4.5 points so that was due to either the prior year reserve increases that we just talked about or Cats that were above normal in auto insurance, not -- and our overall catastrophes were lower last year than we expected. But in auto insurance, they were high in part because of the Floridian stuff. The second green bar reflects the estimated impact of auto insurance rates already implemented. So these are done, approved in the computer waiting to spit out policies. Now the challenge, of course, then is we saw 6-month policies. So all the policies we sold yesterday, the day before we got a rate increase, we're not getting -- we get the old price on. So we sell the new one. So it takes about a year to get through that incremental to go from what we call written into earned premium. And so you can see that's about a little over 10 points reduction of what's been done but still to come. And we assume there's some degradation in the rates we got. We assume people raise deductibles and people now having doing. So it's -- we think it's a good net estimate. And so then that most of that will be earned by the end of 2023 because it was taken in either 2021 or 2022. Of course, at the same time, we don't think loss costs are going to moderate or going to go away that could be flat. And so whether that's increased in severity or frequency that impacts the combined ratio going up. And then prospective rate increases in 2023 and other margin improvement actions that we just talked about have to meet or exceed those loss cost changes to get us down into our target level of mid-90s. We feel highly confident we'll get there. It's just going to take us some time to do it. Let's go to Slide 7 and jump to the homeowners business. The graph on the left shows our homeowners insurance combined ratio shows that by company from 2017 along with the industry in green. As you can see, Allstate leads the industry. It's got an average combined ratio. It's about 12 points better than the industry for that 5-year period and we had a combined ratio of 93.8 over that period in 2022. And that's got a lot of sophisticated competitors in there, whether that's Progressive, State Farm, Travelers. This is not -- these are highly competent sophisticated companies. As a result of our results, our underwriting income averaged about $650 million for the first part of that, and then it was $681 million last year. In comparison to the industry average, for that 5-year period, this is kind of a stunning number. If we had the industry average because we did better than industry, we made another $4.9 billion in underwriting income. That's how strong that advantage is. And that's an annual average of about $975 million. Bottom line, the integrated business model we have in homeowners is really unique. It's quite a competitive advantage. And now homeowners, it's not immune to the increase in loss cost either, your houses have all gone up in price, you've seen lumber prices go up. We have a different model in the homeowners business where the prices go up as house values go up. So you don't have to file for rates, it just automatically goes up. And so gross premiums in the Allstate homeowners business were up 13% last year. Some people have asked me, why don't you do that in home and auto? And it's because auto car prices used to always go down. So you didn't need it when they went down. When they go up 60%, you sort of wish you had it. The risk selection, we're quite good at. We do required capital by geography. So we have targeted combined ratio. So in a CAT-prone area, we expect to have a much lower combined ratio than we do in a less CAT-prone area. Our claims capabilities are good. We use everything from satellites to drones to look at houses and take care of them. And then we have a system that uses a third-party brokerage business as well if we have a customer who buys auto insurance from us, but we don't feel like selling them homeowners insurance like California and Florida, than we sell them somebody else's... If you go to Slide 8, I want to talk about transformative growth. So this is a multiyear five-part initiative that's got 5 phases in it. It's 5-part. I mean it's not really 5 years. It's 5 phases. We've been at it for 3, and we're not -- I don't -- we're not done yet, but we made a lot of progress. So it's got a couple of things: improve customer value, expand customer access, increasing the sophistication and investment in customer acquisition, modernizing our tech stack in driving organizations. We're basically rebuilding the whole business model as we fly it. The bottom half shows what we getting out of it. So providing the lowest cost auto insurance by channel for the customers we're targeting. And we're going to maintain margins by reducing our expenses and using telematics pricing, providing a differentiated product and customer experience. So we've embedded features like new car replacement, declining deductibles, pay-by-mile and we expect to continue to innovate on that kind of product stuff while giving the lowest price. The new technology we launched last year uses analytics and machine-based learning to offer a personalized shopping experience. At the same time, we're leveraging a really broad and efficient distribution system. So we have strong capabilities in all 3 of the primary ways you buy personal lines insurance of auto and home against a broader distribution in a minute. But branded agents, we have over 8,000 Allstate agents direct under the Allstate brand, and we sell cheaper under the Allstate brand than we do through the Allstate agents when we sell it direct. And that's because it doesn't come with an agent like our theory is you should pay for what you get. If you don't get an agent, you should not pay for it. If you do, you should pay for it. And they just have to make sure they add the value necessary. And then we have -- we bought National General. So we have a broad-based independent agent. We're building on their nonstandard auto business with adding our standard auto and our homeowners business to really expand that. And that gives us the ability to really challenge Travelers and Progressive in that channel. And then the new technology stack getting rid of old technology obviously makes it more agile and lowers your cost. So we made a lot of progress in all these components. We're not done. We still have a lot of work to do, but the recent increase in auto loss cost may slow the benefits of increasing market share. It really depends what our competitors do. So as we keep our prices lower than we would have historically because we're lowering expenses, we just have to see what everybody else does. But we're highly confident the underlying assumptions in this thing work. Now, let's go to Slide 9 and talk about the nonproperty liability businesses, also protection businesses. So we offer a wide range of stuff, right? We sell workplace businesses, roadside services, car warranties, protection plans, identity protection, we sell to just about everybody you can think of selling to, whether it's independent agent, worksite brokers, Walmart, Target, Costco, Home Depot, we sell to just about everybody. And they have good growth prospects, and they each have their own independent value. So I thought I would just show the Allstate Protection Plans, which is just 1 of those, which we bought in 2017 for $1.4 billion. By leveraging the Allstate brand back to the middle of that circle, right, leveraging the Allstate brand, they have excellent customer service, and they've expanded the products with leading retailers. This has had tremendous growth. So revenues finished 2022 at $1.4 billion. It's a compound annual growth rate of 36%. Policies in force increased nearly fivefold. And so -- and then to continue that growth, we've been investing in expanding both with appliances and furniture and internationally. And that slowed income growth. So you see income growth kind of capped out there around 149, it was up a little bit last year because of some onetime tax benefits. I'm okay with it slowing because it's growing so fast. And if you think about buying that kind of growth business at a 10 multiple is a pretty good deal. So we have lots of other innovative stories in the protection services, and you should be thinking about those when you think about Allstate. I want to shift to investments, and then we'll wrap up. So -- but I want to talk about investments, not as to what we own, but how we think about it from an enterprise risk and return management perspective because this is fully integrated, and we do this differently now than we did 6 or 7 years ago. So in 2021, we decided to lower our overall enterprise risk because of the declines in auto insurance profitability. So okay, inflation is kicking us in the butt in auto insurance like I don't want it to kick us in the butt in the investment portfolio. So what are we going to do about that? And so -- we also looked at sustained -- we did not think that inflation was going to be transitory. So we said our yields are likely to go up. But we don't want to -- but we don't think they're going to stop like it's just going to go up now. So we want to avoid losses in the bond portfolio at the same time as we're dealing with an underwriting loss in the auto line. So a result that we decided to reduce the economic capital that we put in investments. And that was the first decision, just put less capital to it. And that led to a shortening of the bond portfolio. As a result of that, we saved about -- we still lost money in the bond portfolio last year, but it helped us mitigate about $2 billion of losses in bond portfolio by doing that. In 2022 then, so last year, we were looking at the risk of an economic recession coming and higher interest rates, we thought interest rates are starting to get to a place where we're interested in going longer. And so we adjusted the investment portfolio again. So growth risk was reduced. Interest rate risk was increased. We sold down our holdings of investment grade below investment-grade bonds. We cut it about in half. We sold about 40% of the public equities. And then we started to increase interest rate risk by extending duration. So we took off some derivatives that we had in the portfolio. And duration will probably be further extended this year. We're not convinced rates have peaked at this point. But so we're kind of taking our time and doing it over time, kind of dollar weighting in. And the net of that will be to increase investment income. It does, by the way, also lower the amount of capital we have to put against the investment portfolio, which positions us well should we decide we want to go risk out again relatively quickly. So net investment income last year, $2.4 billion. You can see from the portfolio, we lost money, not a good year when you lose 4%. The only good news is other people lost more. And so if you look at the intermediate bond portfolios they were down 9%, S&P, of course, we know well is down 18%. So let me just close and go to your questions, wherever you want to go, where we started. So we are trying to be a purpose-driven company that empowers people with protection. Combined ratio, we get the combined ratio down to the mid-90s. We get good growth in homeowners market share growth, but transformative growth, continue to manage our capital well and expand our other businesses, we think that will add a lot of value for you.

Well, thanks for those prepared remarks. I've often said I'm a storyteller that's what I do. And I always called Allstate a Michelangelo sculpture. And there's a mix -- and the idea would be that Michelangelo would cut away everything that wasn't the sculpture, would unlock within. Back in 1990, Allstate was a very different company than is today. Hurricane Andrew helped make the decision to go public to cordon off Florida and turn into Castle Key, Hurricane Katrina move away from the coast, '09, '10, '11, tornadoes and hail storms all say, radically reduced its catastrophe exposure to the company it is today. In the process of not renewing these homeowners, a lot of auto policies were loss as well. And then we get into the '14 to '16 [ stretch ] driving spike and now we're in this time here. Allstate has never really had the opportunity to show that it can grow, certainly in auto. With transformative growth, as you sort of viewed it. When is -- is there a multiyear period of growth that comes into play following this repricing initiative? Or we always in a competitive industry where the next thing is going to happen that's going to make it difficult for Allstate to really stretch out its wings and become bigger. Instead of being like what is a company with the best, most reliable, lowest ticket customers and yet so profitable typically that it's very hard to add those customers. Yes.

First, I love the analogy, like I'm thinking of all the c*** I went through and it's taking a chip off the marble make me feel like that was good. Right. The story is, I think, accurate, but I want to add something to it, which is -- it is true that as we had to reshape the company, we had to give up some policies. And I was good doing that. You should make money in every line, every year, every state, you shouldn't be like trying to subsidize stuff. But I think there's another part of the story, which was a learning for us and me personally, which was one, we had been pursuing through the time it wasn't like we weren't trying to grow, but I would describe our strategy in the early part of the 2010, '11 period of time after we came out of the financial crisis, as a premium price, high-quality business that we thought we had good margin and we made high returns. And that basically enabled us to hold share. And so we kind of -- then we -- and so we -- what I -- this new strategy is basically, it's about the price. So you got to cut out $4.5 billion out of your cost, you got to lower your auto insurance price, you got to get out there and you still got to have differentiated products, you still got to do all the stuff we've done worked to maintain share, but it didn't really work to grow share. So when we looked at where our competitors were, we said, we just need to be. So this is a lower price, low price by channel. So that, I think, is one of the fundamental differences between the old Allstate in this -- there's 2 other pieces. One was indirect. So indirect, we had Esurance. We sold it under a different brand name, obviously, and a different price. And we realized that what everyone is like channel conflict and all kind of stuff. We're like that's just something you manage. We're going to sell under the Allstate name best brand name out there, take $200 million of advertising from Esurance so at the Allstate brand and sell it 7% cheaper because it doesn't come with an agent. And we're just going to have to get used to it because customers are going to buy it. So I think we've now built a direct model that can grow faster. We still have some work to do trying to go like we still need to do some work to make that more effective. But the -- and then the third is in the independent agent channel, we bought Encompass' business 1989. So I've been here a long time when we bought it. We didn't pay much for it. That was a good news. Even better news, we made a bunch of money upfront to really pay down so we had no cash into it, but then we didn't really make any money. And so I went to Barry Karfunkel, and I had 3 different runs at it, like 3 different management teams and they couldn't get it to grow and everybody as well, it's because you're Allstate, you have branded agents. And I was like, I don't think that makes any difference at all, we just don't know how to do this. So I went to Barry Karfunkel and said, "Look, I have a problem". I should be making a bunch of money in the independent agent channel so in auto and home insurance because we know how to do that. We know how to price it. We know how to resolve the claims. We like this is not that hard to do for us. And the problem is I've never been successful. So I either have to sell the business or go at it with another management team. And I said I decided to sell the business. I'm going to -- but they -- I don't want to sell it to you because National General has been really good in the independent agent channel. You've consolidated like 20 companies in 10 years. You've got some good technology. The only difference is I want to buy you first. So I'm going to buy you. I'm going to give you our business, go to town, do whatever you want with it and get us an independent agent channel. And we'll bring to you auto and homeowners that you cannot sell right now because you don't have a data on it. So I think it's slightly different. Those things certainly are there. But I think had we done some of those earlier maybe we would have grown soon. I don't know.

So as part of this analogy, just to stroll a little further, I mean, the -- I remember when Hurricane Sandy hit and maybe were selling Allstate stock." And I said, I swear to you, I've read it 6 ways it's the most amount of money they can lose the $1 billion and like -- I mean because the year's previous people were so fearful. And then, of course, it's really a testament to the success of the story that you got the exposures right and you bought the reinsurance correctly. To what extent does the Allstate is capable of growing in homeowners. To the extent that the best customers are the bundlers and Allstate customers tend to be very sticky customers over the long term. Can Allstate really grow its geographical footprint in a way that doesn't increase the catastrophe profile that you spent 30 years trying to reduce?

Short answer would be, yes, I think homeowners is a growth business. Everyone looks at it and like, they get scared by the catastrophe stuff. We do have a lot of reinsurance in place. Yes, we might take a big hit some day, but we've got -- like we know the size and the probability of our risks. I think you can know those. But I think it's a growth business, one, homes are getting more expensive. And two, the weather has changed. So with more severe weather, there's more catastrophes, more catastrophes, more insurance needed and so you can charge more. So I think there -- and we grew the homeowners business 1.4% in units last year. I think, though -- so I think we can grow in the Allstate agent channel. I think we should be able to -- then be able to grow the next place that would be the easiest will be the independent agent channel. And you don't have to -- like there's plenty of places we can grow in independent agents in the middle part of the country that aren't Florida or California. So I think we can grow in that space.

Also, I would say that I mentioned Peoria, Illinois that Allstate already has a lot of customers would be my guess.

Yes. But there's a bunch of independent agents, we know. So like independent agents sell half the business, in homeowners, and we should be able to capture some of that. And there's nobody really that good in that space. I mean Travelers is good at homeowners. If you look at Progressive, like they still got some work to do. And so I think there is space to grow there. And then I also think in the direct space, in the direct space, very few people sell homeowners. And I'm like, it doesn't make any sense to me. Like people buy houses on the Internet, right? They buy cars on the Internet. There's really no reason why they shouldn't buy homeowners insurance on Internet. Right now, very few people buy homeowners insurance on the Internet. We should be able to -- and that gives you the ability to really target. You're talking about getting your aggregates right and your individual stuff with direct or you can Zoom right into ZIP code.

I want to leave the opportunity if someone wants to ask a question. We have plenty of questions, but if they raise a hand that we got some definitely wants to ask a question there.