The Allstate Corporation (ALL) Earnings Call Transcript & Summary

All right. We'll go ahead and get started. First, I wanted to say thank you to Tom Wilson, CEO of Allstate for being with us. And we're going to start out with some opening remarks, and then we'll dive into a little Q&A.

Great. Good morning. We'll set some context before Alex and I jump in. So first, we appreciate you taking the time to come see why Allstate is such a good investment. Let me start on Slide 1, which is our Surgeon General warning. Remember, we're using all kinds of forward-looking statements, non-GAAP. Take our remarks in context, everything else we do, whether it's a 10-K or 10-Q or earnings stuff. So make sure you look at everything out there. Let me start with our strategy, which the two ovals on the left show the components of our customer-focused strategy: one, increase personal property/liability market share; and second, expand the protection we provide to customers. The bullets on the right show what our current strategic priorities are. Obviously, improving auto insurance profitability is our top priority, and we have a comprehensive set of actions that are underway that's showing progress. Increasing property and liability market share through transformative growth when margins are improved, will generate increased shareholder value after that. And then at the same time, we are pursuing the sale of our Health and Benefits businesses, which is an exceptional benefits platform. That follows the successful integration of what was Allstate's workplace business with two businesses we got from -- when we bought National General. We think a transaction will be completed in -- sometime in 2024. Let's go to Slide 3 to focus on profitability. This is property-liability. So it's auto, home, everything else and talk about our actions to get a mid-90s combined ratio. So in the chart on the left, you can see that Allstate has a strong track record of achieving strong returns on all property-liability lines, and that's averaged about mid-90s before the pandemic. The pandemic then, of course, created a sharp increase in auto claim severities and eroded profits, not just for us but for the entire industry. In addition, this year, severe weather has driven elevated catastrophe losses which you can see in the light blue on this chart, which contributed to then underwriting losses. On the right, we show the progress on our comprehensive auto profit improvement plan. First is increasing rates. The Allstate brand has implemented over 27% of rate increases since 2022, including 10.4% through October of this year. National General at the same time increased rates about 10% in 2022 and an additional 9.9% through October of this year. We'll continue to pursue rate increases to restore auto insurance margins back to target levels. And I'm sure Alex will have a few questions about that. Second, reducing operating expenses not only supports profit improvement, but we really started it 3 or 4 years ago as part of transformative growth, which I'll talk about in a minute. So it was good idea that we moved it early. We did it to become lowest cost. It's clearly helping us improve our profitability at this point. Third, reducing exposure in states and segments where we're not making money. Fourth, making sure we enhance our claim practices in a high inflation and an increasingly litigious environment. So we go to Slide 4, [ I'll ] show the progress on just the auto insurance piece of it. So the chart on the left shows progress in the underlying combined ratio, with higher average premiums and expense reduction sequentially improving the third quarter results to 100.5. There's a bunch of adjustments in here for inter-quarter and intra-year reserve adjustments. We put this out here to give you a sense where, here's when -- if you do apples-to-apples, what it looks like over time. And the chart on the right shows how our comprehensive actions have resulted in a higher proportion of the portfolio progressing towards achieving our target profitability. If you exclude 3 large states, California, New York and New Jersey, which generated 45% of the Allstate underwriting loss in 2022, you can see that the underlying combined ratio for auto insurance is 97.2. So our processes work, we've just got to get them to work in those 3 states. Premiums from states with an underlying combined ratio below 100 improved to about 59% of the total portfolio in the third quarter, and you can see that in the bottom two bars on the chart on the right. If we go to Slide 8, you can talk about our industry-leading homeowners business. So we have a fully integrated business model we've built over a long time, and that gives us a competitive advantage in homeowners. The left chart shows how our approach has consistently generated industry-leading underwriting margins, outperforming the industry by 12 points from 2013 to 2022. During that same period, we generated average annual underwriting income of about $900 billion, and you can see that on the bottom of that chart. The table on the right highlights the impact of elevated catastrophe losses in 2023, which resulted in a 29-point increase in the combined ratio versus the prior year. We continue to implement actions to earn attractive returns on this risk over time. Our net written premiums increasing 11.9% from the prior year, primarily driven by higher average premium per policy. We remain highly confident in our ability to generate attractive risk-adjusted returns in the homeowners business. Moving to Slide 6, let's discuss Transformative Growth. This is a multiyear initiative which is about becoming the lowest cost insurer. So despite lower profits, we continue to invest in this opportunity, so that we're positioned to grow when margins are restored. So we have new affordable, simple protection solutions, which will have a differentiated customer experience. Customers will have access to that high-quality, low-cost protection through a broad distribution system. That includes Allstate agents, independent agents and directly from company call centers and over the web. We're now live in a few markets with auto insurance and renters insurance on this new tech platform, and we like what we see. With each of the 5 -- there's 5 components of transformative growth. Each are in a kind of a different place, but basically, we're moving from Phase 3 to Phase 4. Slide 7 shows Allstate's progress on expanding customer access as part of that effort. So we're the only carrier that has really significant presence in the 3 primary ways in which you distribute personal lines. So that's exclusive agents, independent agents and directly through the company. The exclusive agent channel, of course, represents the majority of Allstate's U.S. personal lines premium at about $32 billion. And that's roughly a 22% share of that specific piece of the market. Our exclusive agents continue to be a strategic asset, and they're offering personalized local advice to customers in what is a $145 billion opportunity. And while -- when you look at the Allstate exclusive agent Auto New business, it's down by 5% in total, and that's applications per agency. When you exclude the 3 profit-challenged states: California, New York and New Jersey, where we've severely restricted new business, we're down over 75% in new business in those states. That's increased the volume -- productivity has increased 13.4%. So the strategy is working to improve customer value. Bundling at the point of sale is over 75% -- that's bundling home and auto. And agent productivity for top-performing agencies also improved. The acquisition of National General in 2021 created growth prospects through independent agents. What we're doing is leveraging Allstate's expertise in standard auto and homeowners, and we call that Custom 360. And we're now live in 15 states. So National General is primarily a nonstandard carrier. We're adding standard products to it, and we'll be in every state by the end of next year. We've improved our capabilities in the direct channel to provide another source of organic growth under the Allstate brand with differentiated pricing. It's cheaper to buy an Allstate product through direct than it is through agents. Volumes are down significantly since last year, since that was the fastest and easiest way for us to reduce new business. Let's transition to Slide 8 to discuss our Protection Services businesses. This is the bottom oval which offers customers a circle of protection through a wide range of protection products, whether that's protection plans, identity protection, roadside, car warranties, telematics. Our revenues in those businesses are over $2 billion through 9 months, so obviously that's not the full year number. That's up 8.3% compared to the prior year. It's mainly driven by protection plans, which is up 18%. And that reflects both expanding the product offering and international growth. By leveraging the Allstate brand and expanded products, protection services revenue has grown at a compound rate of over 22% since 2016. And adjusted net income was roughly $0.5 billion over that same time frame. So we're going to continue to invest in these high-growth businesses. Let's shift to investments. We proactively repositioned our investment portfolio based on changes in the economic environment and our enterprise risk and return considerations. We're not necessarily a buy-and-hold insurer. The chart on the left shows changes we made in the duration of our bond portfolio in comparison to interest rates. So in late 2021, we reduced duration to roughly 3 years by early '22, and that was before interest rates increased. So we avoided those losses. Duration was an increase last year and throughout this year with higher yields, enabling us to capture increased investment income. As you can see on the right, you can see that come through on the right, particularly when you look at the market-based income line there, which is $567 million, which is $165 million over the prior year quarter. And that's reflecting longer duration, high yields. We reduced our public equity holdings as well. So let me end where we started, which is Allstate. We're -- get auto profitability back to target levels, position ourselves for growth after that, make sure we're proactive in thinking about our investments from a risk and return standpoint, and then sell our Health and Benefits business. So with that, Alex, I'm all yours.

So [ I guess ] I want to jump right on into auto and in particular, severity. So maybe just give us the update on what are the latest trends you're seeing there, particularly as we think about some of the biggest pressure points around things like auto repair costs and some of the BI. What's the latest view? And are you seeing any signs of stabilization in the trend down?

I'm -- so just to reset history. So I don't know if everybody follows this as much as we do. You know, we all think everybody pays as much attention to us as we do. The -- of course, claim costs went way up after the pandemic, used car prices were up 60%. Cost to repair cars went way up because you couldn't get anybody to fix them. The parts went up because the OEs took advantage of their pricing power to raise prices. And so as a result of that we -- claim costs went way up. They started to come down, as you saw in the third quarter. We make an estimate of what we think the increase is going to be for a full year. And so for the first two quarters, we thought it was going to be 11% for this year, for 2023. At the end of the third quarter, we said eh, we think it's going to be 9%. And that's really due to the fact that the cost to replace cars has come way down. So used car prices have come down. Somebody gets in an accident, we total their car, we have to pay them whatever the market value is. So as the market value comes down, those loss costs actually come down. You're not seeing as much decline in the other. So bodily injury continues to be above general inflation. The costs to repair are still above general inflation. Litigation costs are still relatively high. So the -- we factored that all in, which is why we think we're going to continue to increase prices next year.

And when I look at the progression of pricing, we did see it come down a little bit this year compared to 2022, I think just the amount of rate that you're taking. How much of that really is some of these bigger states that you've got a tougher regulatory process that you're working through, as opposed to strategically slowing down more recently, the amount of rate?

So of course, we have to go to regulators and every state is different, of course, but some states are easier than others. Some, you just file it and off you go. Other ones, you have a long drawn-out process to increase your prices. So as you look over -- so the 27% we got, basically, regulators understand it. They know we need to raise prices because they can look at our costs and see we're paying out more than we're taking in. And so we've been able to get pretty good price increases through just about every state except California, New York and New Jersey. And so we feel good about where we've gotten there. So when you see the price come down a little bit, the average increase. It's because in many of those places, we've achieved what we think we need to. Now we're not all the way there, and you have to earn more of the premium in. It will take a while, but you can see it, right? Like you can see it coming. In California, New York and New Jersey; California, we need 30% plus increase in pricing. When you look at the amount of money we have -- we write in that [ say ] it's a big number. Same thing is -- New Jersey is about the same, New York's maybe 60% of that, so probably in the 18% range. And so those are high priority stuff for it. You'll note on our last call, we said if we don't get price increases this year or approved this year in those states, we're going to move from just not taking on new business to having to say goodbye to some existing customers. We don't want to do that. I think the regulators would prefer we not do that. We're not threatening anybody. We're just saying, like, we can't afford to lose that much money in those 3 states. And so that's -- so when you look forward next year, either we'll be successful, and we'll get the kind of rate increases we need to get us back to the margins we want, or we're going to get smaller in those states. Either way it should improve auto insurance profitability.

Understood. Can you talk a bit about how that process is going, with California in particular. I mean it's -- we're reasonably close to the end of the year. You kind of mentioned that you set that line in the sand. I mean, is it progressing in a comfortable way?

Yes. I mean -- so California, if -- you have to put yourself in the mindset of a regulator, is not an easy thing. Because if you have companies you have to allow -- by law, you're required to let them make money and let them increase their prices. On the other hand, if you're a politician, it's not the most favorable thing you can do for your career to increase prices. So they're trying to walk through that. We have good conversations with them. We're in active conversations with California. Our teams, they were talking to them last week. I mean we're -- from our standpoint, it's one of the highest priority things we've got going before the end of the year. So we're all over it, and we'll see how we do.

All right. I guess taking this all together, as we think through the pricing, still a strong amount of price coming through and potentially more, I guess, with either outcome with some of these states that you haven't [ added ] in yet. Is the spread potentially widening more significantly between that price and the severity, which has been naggingly high. I think this last year, you sort of said they were more at [ parity ]. And so there is, I think, some expense ratio benefit but not quite as much on the loss ratio. Is that going to be at a point where in 2024, it is more of a conversation about how big that spread is, as opposed to if it's still more in lockstep?

How big this -- I want to make sure I get...

Spread between pricing and the loss cost trend? This last year, they were closer to even, right? How do you...

Okay, I get it. So if your costs are going up faster than your premiums, you're going to lose more money in the future. That's the situation we had after the pandemic kind of started unwinding. Claim costs going way up, premiums lagging behind. Oops! There goes your underwriting profit. Then what we've done is drive that premium increase up. And I think I said earlier this year, we're kind of holding serve. Like it was -- if you like, let's just -- let's say you had a -- if you got -- make it up 10% increase in premiums and 10% increase in cost, then your margins are going to stay the same. Your combined ratio will -- if you can get 15% in premiums and only 10% in loss costs, then you [ pick ] that back. You see that happening in a bunch of these other states. So that one slide where I showed -- so like 56% of the premiums now come to in places where that line is crossed. It hasn't crossed in the big states. It's hard to tell what the -- and I know everyone wants to know like, what are loss costs going to be next year? You can't really predict, right? Like I don't know what people are going to charge to fix cars, and I don't know [ who's scalping those ] car prices. But what I do know is that the way we price is if those costs keep going up, we're going to keep raising prices. We've proven ourselves to be able to do so. So I think we feel confident that auto insurance profitability will improve next year. How much will be dependent on what happens to those lines.

Understood. Okay, maybe shifting over to homeowners for a minute. I think the story of this year was all of these smaller catastrophe events that really added up to large amounts in aggregate. How are you managing those risks and trying to navigate the higher-cost reinsurance markets?

So yes, so the first three quarters of this year, crazy high in terms of catastrophes. Now you could say, well, is that permanent? Like, are we now in this -- global warming's here, this is the reality. We don't think that's the case. We think it's -- when you look at the statistical anomalies and the math, the weather and all kind of stuff, certainly, there are more severe storms for sure. That's been going on for a while. We think that's going to continue to go on. But we think, therefore, we can -- given our -- the way we've got our business set up, it's a great place we can make money. And so we do try to mitigate those catastrophe losses by using reinsurance. So we're probably the biggest buyer of personal lines [ insurers ] in the world. So we know the markets well. The market has tightened up a little bit, in part because of losses last year, in part because of the U.S. dollar really whacked some of the reinsurers on their premiums. And that said, we don't see any -- there's plenty of capacity for us to do what we want to do. So we're growing that business, you saw we grew that business. Not much, like maybe 8, 9, tenths of a point last year, but that's because we got everything else restricted. We do think with National General, we'll be able to expand, particularly in the lower cat markets, through independent agents and give ourselves a better profile of risk, which will make it an even more attractive business. So we're all in on homeowners. We think it's a great business. We're one of the only people making money on it, so we intend to keep pushing there.

Maybe one specifically on Florida and related to homeowners. Can you talk about some of the legislative changes that were made? And are you seeing any signs that some of that is helping with the loss cost trends in that state specifically?

So the legislative changes were primarily around some litigation stuff, which is a good idea. They had way too many [ lives ]. Then math, it's like there's 10% of the homes and 80% of the lawsuits or something like that in Florida. So it was a good thing to fix it. That said, it's not going to fix Florida. And we never thought it would. We thought it was a good thing to do. We're going to keep getting smaller in Florida until such time as you can get an adequate return, and so we're a fraction of what we used to be. Our market share used to be, I don't know, 12% maybe. We're less than 3% today, and we'll get smaller.

Understood. Next, I want to move on to the Group Benefits business. The potential for a sale there. I'm sure you only want to say so much about that, but maybe you could talk about, if you're successful, what are the potential uses of proceeds and priorities there?

Well, let me go up a little bit because some people were like, well, why are you selling it? And so I think it's helpful to tell you the story there. So we were in the voluntary benefits business since 1999, when obviously it's Allstate Financial, we bought American Heritage Life. Good business, 4 million people, sells at the work site when you're enrolling for your benefits, disability insurance, life insurance, and we liked it. We buy National General. We buy National General really to get the independent agent business, like we were not successful there. But with it came these two other businesses. They happen to be a group health business and an individual health business. And so when we bought it, we said, well, we could -- like you're doing the acquisition math and you say "Well, we could just sell them and that will offset the cost." And we said, "Well, you know what, before we do that, let's see if we can put them together with our voluntary benefits business and see if we can create a really strong platform." We did it, we were successful, we really like what we got. The business makes $0.25 billion a year. It's got good growth potential, the group health business is a good business focused on small businesses. And then we said, okay, well, how do we now -- where do we take it from here. And we said, well, to take it from here, we need a bigger presence in group health and we go to small companies. We need to go to big companies, because we're selling benefits businesses to Walmart and other big companies. So we need a better group business. We also need a better medical management system because we're renting other people's -- and we could probably broaden our distribution. We said, well, we could make that. I mean, we're making $0.25 billion a year, we can invest in it. Now, we said we know these capabilities exist in the world, and we could rent them from somebody, but we're like, "Ah, we looked at that, we don't really think we get." So we said, "You know what, we should sell this business, capture the benefit we got, let somebody else harvest the great growth potential here, and it will be better for our shareholders." It was hard -- I mean this is a low-capital, high-growth business. Like I'm looking for return on capital these days. But that said, it was the right thing to do for shareholders. So we sold it or we're going to sell it. There's a lot of appetite for it. So I'm confident. And the reason we announced it now was we were confident we would have -- that it would be -- it's salable. So it's not like you're going to have a failed sale. And secondly, when you look at the cycle of getting new customers, we wanted to get that off the table. Because right now is enrollment time and then you get into sort of like spring, summer, companies are deciding who do I want to do my group benefits with. So we wanted to get that off table. When we look at the amount of money we'll get out of it, the -- we think we have plenty of growth opportunities. So transformative growth, which doesn't get much focus right now because everyone's focused on auto profitability, will drive real organic growth. And the returns in that business are every bit as good as returns in the workplace business. So we feel good that we've got great growth opportunities. If we have extra money, then we'll do what we always do, which is give people back. When you look at our math, I don't know if this -- I don't think this is through 2023. But if you look at us in terms of cash return, cash return being dividends, share buybacks. Relative to everybody, not just financials, we're in the top 10%. So we've proven and have a philosophy that if we don't have a good use for the money, we give it back to shareholders. If we do, we keep it and deploy it on their behalf.

Yes, understood. So while we're on capital, I did want to ask you about, just how you all are currently thinking through the capital in your business today. How much you really feel like you need just steady-state, and then the capacity you have to execute on the transformative growth. I mean what are the right metrics for us to think about where do they need to be?

Yes. I think that -- and people got -- there was a little bit of -- because we use a very -- so first, we have enough capital. We've got plenty of money, like I'm not worried about it. We use a really sophisticated way in which we do it and which has served us pretty well. And to the point of where when we're looking at our investment portfolio, we're like how much capital are we allocating into our investment portfolio. And so we dialed our capital down in the investment portfolio last year when we took our equity ownership down. In part, we didn't really like -- we didn't think it was a good risk return in the equity market. We don't think it was terrible, but we're like -- like if you look at the upside, downside, we'd rather be in bonds. That reduced our capital in total. So that model is really interactive and looks on an enterprise-wide basis. So when people take metrics like premium to surplus ratio and say, "Oh, that's the way you should measure capital." We're more sophisticated than that. I think we got caught in this thing of where people were feeling like premium to surplus and we didn't maybe do as good enough job explaining how we get there and people thought, "Oh, well, that's not the right number." The premium to surplus doesn't include a whole bunch of stuff like including the surplus we don't have in AIC. So it's like, it just wasn't even a complete number. So we have plenty of money, we use those models in a very sophisticated way, to look at things like reinsurance and decide. So we were talking earlier this year about maybe we're going to do some more reinsurance. We've been -- I think in the -- amongst the leaders, I won't say cutting edge, in trying to use reinsurance. And so we were talking about some other reinsurance stuff because we're always looking for more capital. Because if we can source reinsurance capital cheaper than our shareholders, we want to return that. It's good for our shareholders. And that got convoluted with the premium to surplus thing and people thought, "Oh, you need to do the reinsurance, will you have enough money?" That had nothing to do with it. Really, it was -- I mean, maybe you're always thinking about capital, so nothing to do with it is too strong a word. But we were sort of like, if it's a good trade, we'll do it. If it's not a good trade we won't do it. As it turns out, it's more complicated than the people who were pitching it so that we can do it at this rate, than they thought. And so we might not end up doing it. But it's just another -- it's just one of those things we were looking at, and I think it got blown out of proportion as a result of that focus on capital.

Understood. I want to circle back on transformative growth. And I guess I'd be interested in if you have an update there. And in particular if, is there anything incremental you're considering to advance the strategy?

So transformative growth was a shift in strategy in the Property-Liability business from differentiated premium product, not quite premium price but above average price, which worked really well for us. And so we earned really high returns in that business and -- but we weren't growing. And so we said, like, -- and we thought differentiation would help us grow. We created new car replacement, declining deductible, all these things, people have got [ be ]. That said, we weren't growing. So we said, you know what, we want to grow, we've got to be lower priced. And we've just got to drive costs down. So the biggest part of transformative growth was cut a bunch of costs, cut out $4.5 billion of costs, so you can bring your price down. Lower price going to lead to higher growth. Now you can't take out that much cost just -- it's not like we're sitting around and had $4.5 billion that was like wasted money. You've got to really reengineer your entire business process. So we had to change the way we pay our agents. We had to change where we process our work around the world. We had to get rid of a bunch of technology. We had to clean up a whole bunch of stuff. So at the same time, so we decided to redo the entire business model. And we've made really great progress on it. And I would say at this point, what we've done is we've validated the underlying assumptions. We've yet to validate those underlying assumptions in the markets with market growth, but we're going to start that next year. So let me tell you the underlying assumptions. One, will lower price selling, will it be economic? Yes, we did it. We did it right before auto costs went way up. So if you look at our profitability, we cut prices about 2% right before claim costs zipped up. That was intentional on our part because we were taking costs down, and so we saw that. We saw that we could get agents to sell at -- more business and at a lower cost. We saw we could expand in the independent agent business. We saw we could sell direct at a cheaper price. We knew we could build the technology. Like we didn't know if we could build this new tech platform, right? We set off to do it, but like it's one thing to talk about it and another thing to have that -- push the button for it to work. So all the underlying assumptions, we think we've proven out. What we haven't done is then take those into the market and say, okay, let's go to this state. Let's put the whole ball of wax in there. Let's drive increased marketing in there, let's -- because the lower cost should help us drive increased marketing. And how much growth will that [ drew ]? The reason we haven't done that is because the markets are in complete turmoil and we weren't making enough money. So if we were making enough money, maybe we would have gone in. But still, you've get a bunch of people changing prices, GEICO is raising prices, Progressive is raising prices, State Farm is not raising prices. So to know whether you're really lowest cost is difficult when the prices are moving around. So we believe in a bunch of states now, given where we are in profitability, given where everybody else in profitability, we're going to be able to go into some states next year and say, okay, how do we really make this work so we increase market share? When we do that, that will lead to not just more profit, that should lead to a revaluation of the multiple, which is a second kick on the value.

I'm jumping around a little bit. I wanted to come back to reserves for a moment. We saw a little volatility, as we did for a lot of industry participants, going back about a year or so. But that seems to have found some stabilization. And I think when we look at the '22 and '23 accident years, it does appear maybe there was some reserving philosophy shift that maybe occurred. And I'd just be interested in your views on the confidence of the reserves at this point. And really how what you're seeing in loss cost trend is also maybe making its way into helping the balance sheet strengthen?

And so a couple of key messages. One, we think our reserves are appropriately established in total, which is what you would expect. And while I sign on the document on every quarter. The -- of course, 2022 wasn't our finest year in reserves. And that's because we had a dramatic increase in inflation that hadn't gone through. So we haven't really changed our philosophy, even haven't changed the metrics. We're using some more -- some different ways to look at it in a high inflationary environment. But the basic premises on which you do reserves is still the same. Our -- the way we do it apparently is a little more responsive than the way other people did it. Because we made changes in 2022 and everyone said, you guys are stupid and you don't know what you're doing, and we've lost confidence in you. Now everybody has done it this year and they're like, "Oh, well, that just comes with the territory." I would like to have their reaction rather than ours, but whatever. We didn't get it right and so we had to fix it. We're feeling good about where we're at in reserves. Now they move around a lot, like so you took -- you do it in total. So sometimes it's by coverage, sometimes it's by state, sometimes it's by year. So when you look at -- you do get it by year when we do the disclosures. So you can see in the 10-K and stuff like that which year it's spread out to, so that you can understand exactly how much money did you really make in that year. When -- we've started to move it around a little bit between the quarters, and that's where we had that one chart we tried to show you, "Okay, like we'll show you how we're moving it around in between the years so that you're not -- so that you can have some clarity on it." So we -- it's complicated, we do it right. We try to give you what we can to help you see what we believe to be true, so you can make a more informed adjustment. But I'm comfortable with our reserves.

Got it. All right. Well, we're at time. So thank you very much.

Thank you.