The Allstate Corporation (ALL) Earnings Call Transcript & Summary

So I think we're right about on time, so might as well get started. Thanks, Tom, for being here. It's Tom Wilson, Chairman and CEO of Allstate. So just I think maybe to kick it off, I think we could just go right into some background on where the business stands today and kind of key pieces of the Allstate strategy going forward.

Okay. I'm going to show you some slides and then we'll jump into it. Is that all right?

Yes.

First, thanks for taking time to figure out why Allstate is a good investment and why you should lean into us. Know that I'm going to use some -- this is our surgeon's general warning up there to know that we're going to use a bunch of non-GAAP-related stuff, so use everything we have. Look at our 10-K, look at all our disclosures, so it'll help you figure out what we're doing. Let me start by discussing Allstate's strategy. And the 2 ovals on the left are the components of our strategy, which is a customer-focused strategy, which is to increase personal Property-Liability market share and then expand our Embedded Protection offerings. So -- and I'll talk about both of those. The bullets on the right show our approach to creating shareholder value. So first, we deliver attractive risk-adjusted returns, and then we have an integrated approach to managing both our capital and our returns. The Property-Liability business and the Embedded Insurance businesses, both delivered strong bottom line results. Our investment portfolio is proactively managed. And we manage that on a economic basis, market basis and looking at enterprise risk and return. Investment income is up over 20% for the first 3 quarters. So we do deliver good returns. Second thing is once you've done that increasing auto and homeowners insurance policy growth will both expand income and should expand valuation multiples. And then embedded insurance expansion is another growth opportunity to create value. This slide shows our 2024 financials and you can see, we are generating attractive returns on capital. And the chart on the left, you can see the success of the comprehensive profit improvement plan that we instituted as a result of the inflation in auto insurance loss cost, primarily int he used car prices that happened through the pandemic. You can see the combined ratio is 96.9 for the first 9 months of the year. And so we've gotten through the profit improvement plan. Now we're into growth. That's the next phase here. The table on the road shows our success, right? Total revenues, $47.6 billion, which are up 12.6% compared to the prior year. Property-Liability earned premiums were up at 11.5%. Net investment income was $2.3 billion, 20.5% higher than the prior year. Net income was almost $2.7 billion. Adjusted net income, $10.64 a share, and that represents a return on equity of 26.1%. So pursuing growth of the Property-Liability business at these returns will generate higher income and higher valuations. So as a result of that, our focus is now on growth. So let's talk about growth. This slide shows 2 components of policy growth. And of course, it's not really that complicated now, how many policies you have, how many new policies did you get and how many did you keep. And the chart here, you can see that on the left is the composition of the property liability book. So we have 205 million policies in total. This is just the property liability piece. You can see auto policies in the dark blue account for approximately 2/3 of the Property-Liability policies in-force and homeowners in the medium blue is about 20%. We're going to focus in really on auto insurance today, but the same thing applies to homeowners. So if you look on the right-hand side, you can see auto insurance policies in-force decreased by 378,000 or 1.5% in the third quarter versus the third quarter of the prior year. Homeowner policies on the other hand increased by 186,000 or 2.5%. If you go down the columns, it breaks it into the 2 pieces. So new business applications for auto insurance were 387,000 up, which represents a 25.7% increase versus the prior year quarter. The renewal ratio, however, was down 0.2 point, which led to an overall decrease in policies in-force. And we're going to talk about both of these in a couple of minutes. For homeowners insurance, new business and retention both increased, which led to the increase in policies in-force. So let's -- I want to dip down into auto insurance, focusing on these 2 components, looking really on a longer-term basis. So prior to 2001, our new business was heavily concentrated in the Allstate agent channel, as you can see in the second and third column to this table. We -- and then we put in Transformative Growth. One of the parts of Transformative Growth was expand customer access. And so we did a bunch of things for the various channels to do that. So we restructured the Allstate agent rewards to improve growth and to lower costs. In 2001, we acquired National General, expanding independent Asia relationships and gave us a stronger position in nonstandard auto insurance. Transformative Growth also improved our direct sales capabilities which leverages the Allstate brand, but we also use a lower-priced standard auto product sold through that channel because distribution costs are lower. And so the successful repositioning of the distribution has increased new business and balanced growth between the 3 channels, as you can see from the 2 columns on the right. New issued applications for the first 9 months of 2024 increased 800,000 policies versus the prior year or 17%. In the Allstate Agent channel, new business was up 9% on a year-to-date basis with bundling rates that being auto and home insurance at all-time highs. Independent agent channel production increased by 15%. In the direct channel, new business is up 31% on a year-to-date basis. It's a little unfair comparison because we dialed -- when we decided to reduce growth because of the profit challenges in auto insurance in 2022 and 2023, the first place we dialed it down was direct. So it's not quite the 31% is on a year that we took it down. But it's way up now. It reflects fewer underwriting restrictions, increased advertising and launch of a new product, which is affordable, simple and connected, which is currently available in 31 states. So to help you forecast what new growth might look like, we show a sensitivity on the bottom. So the -- in the 5% increase in new business from where we are today is 250,000 policies on an annual basis. There's a number of initiatives we're doing to increase that new business further from where it is today. So the rollout of the new affordable, simple, connected product both auto and homeowners will be largely completed next year. At the same time, we're improving the customer experience, rolling out more sophisticated pricing plans and beginning to leverage the Allstate brand with nonstandard customers. In the independent agent channel, we have a product called Custom 360. So National General was primarily a nonstandard carrier sold through independent agents. After we bought it, we expanded both our geographic footprint, but we've also now taken Allstate's standard auto and homeowners expertise and we created a series of products called Custom 360. So we're expanding that throughout the independent agent channel. And we should be in all of the country by the end of 2025. At the same time, we've increased our marketing costs and sophistication, and we're personalizing experience. So a lot of things going to drive new business growth. Let's jump into retention because that's the other key driver of growth. And you can see, it's decreased significantly for auto insurance over the past couple of years, in part reflecting a 40% cumulative increase in auto insurance, right? So pandemic happens, used car prices go way up, we have to raise prices, we raise prices, people shop, people shop, we lose customers and it goes down. So this chart shows Allstate brand auto insurance retention in black and rate increases are in the orange dotted line. The chart shows that they're negatively correlated, right? So you can see the orange line rate increases go up, retention goes down. In the box in the upper right, you can see that the retention -- current retention is 85.5, which is 2.1 points lower than the average from 2018 and 2021. Now this is just for the Allstate brand. As Rob knows, we're going to start giving you an overall enterprise retention level starting in the fourth quarter of this year. Again, sensitivity, a 1 point increase in retention is worth 350,000 policies or 1.4% increase in growth. So it's not like we're just waiting for this to happen, we do have a comprehensive plan on it. And you can see the first thing is just smaller rate increases. So given our current return levels and moderating physical damage repair costs, we expect smaller rate increases than it's been the case over the last 2 years, that should have retention if it's inversely correlated, right, that means retention should go up. We're also doing proactive coverage reviews for existing customers to identify potential savings when we did the rate increases because we -- the costs were going up so quickly, we said, let's just move it through very aggressively. Let's not get as sophisticated as we could because it will take longer. Now we're going back in and going to customers and helping improve their position. And that's a whole variety of things, could be increasing deductibles, changing coverage, getting them to telematics. At the same time, we're working on improving the value for customers with millions of customer interactions, improved our customer communications and personalizing experience. So we are now positioned to drive auto growth. Let's go to embedded protection, which is also driving growth. So -- but the thing embedded protection is where you're selling protection, it's in the flow of commerce. So as opposed to I bought a car, go home, got to call my insurance agent, separate transaction. Embedded protection is when I'm buying a TV at Walmart, I'm at the cash register, and they say, "Hey, do you want protection with that?" And you're like, "Yes, hit the button." Think about it, it's faster, cheaper, easier for the customer. So we're focusing on building out more embedded protection. And so SquareTrade, a company we bought in 2017, does that. If you think about beyond SquareTrade, we do it not just with retailers, we do it through car dealers, benefit brokers, mobile phone carriers, financial institutions. We're trying to embed our protection in the flow of commerce for a whole bunch of other entities. And that includes the warranties that you see through protection plans, but identity protection, roadside services. But protection plans, we bought for $1.4 billion, and it provides breakage basically, if something breaks that you buy. In the bottom left, you can see we distributed that to a lot of great retail partners, great brand names along with Allstate, sold under the Allstate brand name. The premiums per policy are much smaller in this one, but we have 157 million policies in-force. Revenues have grown by 20% compared to the same 12 months in 2023, and returns have been really strong. So we're very excited about this business. I would say, since once we bought this business, we paid $1.4 billion. We've gotten back over $700 million in income since we bought it, and you can see it's got great growth rate. Before we move to questions, let me just talk about investments in capital management. So we -- as I mentioned, we proactively manage the investment portfolio on an enterprise basis. So in late 2021, we looked at rates and we decided to reduce our duration to roughly 3 years and wait till rates increased. Duration went down. Rates did increase. We took duration up, and that's worked out quite well for us. The performance-based investments, which were largely private equity, enable us to capture additional value. If you go to capital allocation. First, the Property-Liability businesses earn great returns. So if we can deploy as much capital as we can deploy in expanding those businesses, we're going to do that. Organic growth then enables us to both leverage our capabilities and drive valuation changes. We decided to divest our life and health benefits business. And so businesses can create additional value for other -- if there's somebody else who's a better owner and that process is well underway. We've also had several successful acquisitions. We talked about SquareTrade. National General has more than doubled in the 4 years since we bought it, and it's getting strong returns. And if there aren't sufficient opportunities to deploy capital, leveraging our capabilities and our growing business and we return to shareholders, and we have a good track record there. So let me stop there, and we'll go wherever you want to go, Rob.

Awesome. All right. Appreciate the comprehensive overview there, Tom, and thanks for being here with us. So I'll start where you started on auto insurance. So the margins have improved meaningfully towards target levels. Can you give us a sense of what that means for the pricing strategy going forward? And just how much can margins improve back towards -- underwriting margins improve back towards prepandemic levels in sort of a steady state?

When you -- well, first, right now, we're at where we want to be, actually. So it bounces around sometimes. But we can be in the mid-90s, that's a really good return on capital. And that's where if you adjust the current results for this year for a variety of changes, we're basically where we not be. And that's not every state, not every market, but in general, we're all good to go on growing the auto insurance business. Looking forward, we think that's going to be -- we're able to maintain that. So I'm not concerned about what's going to happen. If you look at the competitive environment, Progressive has taking a couple of increases or decreases, but State Farm has still got to raise rates. So they're still behind. They're still losing money. So I'm feeling good about the competitive environment. If you look at the cost structure underneath that, the thing that drove the 40% increase in prices was twofold. One was just it cost a lot more to replace and fix cars. So think about this, if you insure a car and you're getting $1,500 a year, and it was worth $20,000 and it got totaled, you gave them $20,000. When it goes up to $32,000, you got to give them $32,000. Not a lot of margin to play with there. And so that has moderated in effect, come down. And as we look forward, the physical damage coverages, which are a little more than half of total loss costs are sort of around where in general inflation is. So I'm feeling okay about that in terms of both us being able to get those rate increases from our customers and be able to help us improve retention. The other part that's a little higher, I don't really like the term social inflation because I don't really know what it means. I think fender bender lawsuits is a better way to describe it. There's just too many fender bender lawsuits. Somebody is going 10 miles an hour, they get bashed by somebody, suddenly there's a lawyer in there, and so you have more lawyer cost. So we have to figure out how do we address fender bender lawsuits and not have our customers having to pay for fender bender lawsuits, which primarily benefit plaintiff attorneys. And yes, obviously, if you have a big accident, you should have a plaintiff attorney, like I'm not against attorneys representing people, it just -- you shouldn't have to represent somebody if they get in a 5-mile an hour accident. And so that cost is still going up higher because they've gotten much more sophisticated on using data and analytics. So we have to figure out how to do that. That said, that's only about 1/3 of cost, depending on how you want to slice and dice it. So I feel good about our ability to maintain margins and grow.

Okay. Got it. And then you just talked about a lot of the different pieces here, but maybe slightly more quantitatively, like what are you thinking about in terms of frequency and severity as we head into 2025?

Well, frequency bounces around, right? So it depends -- when does it snow? When does the ice get on the road? Is it at 2:00 p.m. or is it 2 a.m.? 2 a.m., not so many accidents. 2 p.m., like everybody gets bashed up. So frequency always bounces around, about 1 point a year, like it's really hard to figure out. So you don't actually price as if you know frequency, you price frequency on what it's been. It's been on a long-term trend down, more expensive cars, more sophisticated -- with more sophisticated safety material has brought frequency down. Severity, though, has gone up in part because the cars are more expensive because a side mirror now costs $1,000 when it used to cost like $50 because it's got you a low blinker on and stuff like that. So that's -- they're more expensive cars. And people are driving faster. So in the pandemic, everybody got used to open roads. They love driving fast. Drive fast, get into severe accident. So we do have severity going up in the future. Frequency, we think, will moderate, but it bounces around a little bit. So if you want to look at it on an annual basis, we don't really think about -- we obviously have a projection for next year, but it's up in the air. But we think, in general, frequency is going to be our friend not our enemy.

Okay. Sticking with the margin, as part of Transformative Growth, you've decreased the underlying expense ratio meaningfully. Where does this expense efficiency come from? And can you give us a sense if that's all being used towards increasing advertising or if some of that -- some of those savings are being passed along to the customer?

Okay. Let me go way up for a minute. I'll come down. So Transformative Growth, the -- we have been -- was all about -- it's all about the price, like it just got to be lowest price in auto insurance, like that's just what you got to do. So you got to cut your expenses to do that. And when we decided to do that, we said, well, you can't just cut expenses in 1 area. So basically, Transformative Growth is about changing our entire business model all at the same time. So we changed our technology platform, we changed where we do call center work, we moved stuff offshore. We cut agent comp. We've cut expenses across the board everywhere because we're in the hunt to be lowest cost in auto insurance. And essentially, what we did is we took increased operating risk for lower strategic risk by positioning ourselves with lower cost, no matter what you think happens to autonomous vehicles or anything else, we're still going to be right there in the hunt. So we cut expenses everywhere. We have more to do. We have to reduce distribution costs more. We have to reduce our processing costs. We got to use more technology and take people out of the work. So there's a lot more we have to do. We've basically got to the goal we set out when we first started with you all on Transformative Growth. We haven't put a new goal out, but our goal is to keep reducing expenses.

Okay. And then switching to growth. So Allstate is growing new apps in each channel. How should we think about the contribution from the different distribution channels to PIF growth? And can you give us a sense of where you feel you might have an edge or where Allstate is placing greater value on growth?

We'll take everybody we can get. So let me just -- so -- but I think that for the first time since we've started pursuing this, I feel good about the capabilities and capacity in all 3 of our channels. So the Allstate agents, they basically serve people who like insurance companies, believe in branded products, but want some help, so they call an Allstate agent. Then there are people who don't really like insurance companies so much, don't really trust them, but they want help. They go to an independent agent because they represent multiple companies and they feel like they have persons, they have advocate in between the companies. And then there's people who are very comfortable with insurance, very comfortable making their [Technical Difficulty] capabilities in all 3 of those. And I will just hunt that one down in the market. If you look at our existing book of business, that's the existing customers, we have a lot more in the first category than the other 2 categories. The second category, independent agents, is growing quite rapidly, and that's the National General acquisition. And with Custom 360, I think there's got great growth potential there. In the direct channel, we're about -- if you look at our new business today, it's about where the market is. So it's not quite 1/3 of our new business. But it's a much smaller portion of our existing book. So when you look forward, I think you could expect to see growth in all 3 channels. It seems reasonably balanced between all those 3. That will, over time, shift the book of business, but right now, we're still predominantly with the Allstate agents.

Okay. And you talked about one large competitor, State Farm before. When you think about large competitors like GEICO, Progressive, State Farm, does Allstate need to take share from those large competitors in order to achieve these growth objectives or can you take share solely from smaller players in the market?

Well, it should be both, right? Let me go through those first. State Farm, I mentioned, is going to start raising prices. They just got a 20% increase in California. We took a 30% earlier this year, I think it was like February or something like that. And they took like 15, now they took it. So they're going to come our way, not just in California, but as they seek to raise their prices. And in that customer segment, we compete very heavily with State Farm. So I feel good about our ability. They've picked up a couple of points of share. This is a story not many people focus on. They picked up 2 points of market share over the last 3, 4 years at State Farm. And so I think there's opportunity to grow there. GEICO, on the other hand, lost 1.5 a share. They're really for that direct customer. I think they just ended up writing a bunch of bad business and just decided we got to make money so they shed their business and they won't weigh down. They're not really hitting the hammer on growth yet. There's publicly stated, I only know what you know, which is, is that their technology platform isn't good enough for them to really hit the hammer. So we -- our technology platform is good. We are feeling really good about it. We like our direct capabilities. We're finally getting much better at it. And so I like us being able to attack GEICO in that direct channel. In the independent agent channel, right, like that's where Progressive has -- it just kills it in nonstandard. We've done very well in nonstandard with National General. We're going to now start using more of the Allstate brand, not through independent agents, but in the nonstandard channel. So on a product standpoint, we'll take on them. In homeowners, we're just much better than that. I mean we're really good at homeowners, we make really good money on it. They're in a learning mode still. So as a result of that, they've backed off on homeowners or starting to nonrenew people and take less new business. So that gives us an opportunity in the independent agent channel with Customer 360 to go out and take share from Progressive. And Progressive is a really good company. They're particularly good on frequent shoppers. But like I wouldn't mind their valuation, which is why I look at their multiples and look at our multiples and you'll see why we're chasing growth.

Got it. And I just wanted to double-click on something you just said related to homeowners. It seems like one of the key differentiators of Allstate's competitiveness right now in the market is that you might be willing to grow in homeowners in areas where others are pulling back, how meaningful can that be for auto policy growth? And why are you comfortable growing in those areas?

I think the homeowners business is misunderstood by investors. They think that it's a highly volatile, low return business, and it is for the industry, not for us. If you look at the industry profits -- first, over the last 11 years, we've made profit in 10 -- underwriting income in 10 of those and our returns on capital on almost any measure of business you want to do is got a 2 on it. So if you look at the industry, we've made about 3/4 of the profit that the industry has made. So we've built a really good homeowners model, and it generates good returns. I think it still freaks people out a little bit, they're like, "Oh, you got all these catastrophes," but we price for it. So as long as you price for it, it seems to be fine. I actually think it's a growth business that's not been a big sale with investors. They're like, "Ah!" But you think about climate change, increase severe weather, it'd be like there's growth there. So if you look at our top line, we're growing both -- the average premiums are up double digits. Our policies in-force are up 2.5% and -- in a period of time when we weren't really growing the auto insurance, so I think it has good growth potential. You could be concerned, Rob, you're kind of alluding to this, which is, what about climate change? And like are you going to be the -- on the wrong end of history on this one? Yes, nobody really knows what's going to happen to climate change. There's been a lot of severe stuff. What you do know is we've got more severe weather. And as a result of more severe weather, there's been more catastrophe losses. But there are 3 parts to catastrophe losses, which have gone up, one of which is not predictable, 2 of which are predictable. The one that's not predictable is increased severity of storms. Tornadoes are bigger and stronger, more straight-line winds, hurricanes last longer, have higher wind speeds. That's not -- like it's hard, nobody can predict that. And -- but then there are 2 other pieces. One is houses are more expensive and bigger. And second -- or third, they're in all wrong places, like we keep building them where there's going to be catastrophes. Those last 2 are very knowable. All is you going to do is you can price it. So we have roof scores on every house in America. We can tell whether there's branches hanging over 30% of your roof, and we can put that into our underwriting and our pricing. So those last 2 -- so while climate change does create some uncertainty, the 2 biggest things driving increased catastrophe losses -- or no, I think it's kind of really hard to do attribution. I think Swiss Re or somebody said it was less than a 1/4 was due to that first category, which is just more severe storms. When you read the newspaper, it's all about climate change driving all these catastrophe losses. Yes, that is true. But if you didn't put the house where the hurricane was going to be, you wouldn't have a loss either. So we're happy to sell you insurance if it fits our standards so we can get a return. Obviously, we can't, in certain places like Florida and California, but that's okay with us because there's the rest of the country to grow.

Okay. And you just touched on some of the bigger states there. I think you've talked about 75 to 85 or 75% to 80% of the premium volume in auto insurance now open for business. Can you talk about the rate impacts and your expectations for the market conditions in some of those bigger states that have been a little bit more difficult to kind of reach that pricing threshold?

Well, California for auto insurance, we're open for business, homeowners now, and we won't be until there's such a time when we think we can get a fair return for our shareholders. In New York, which was one of the states we had a problem with, we're kind of open for business. We got somewhat of an increase, but we're not wildly open. New Jersey, which is the other place we're still not open for business. We've got like an 18% increase earlier this year. We're up for another smaller increase in December, but it's not open for business. Other than that, most of the rest of the country is pretty wide open. I mean there are certain counties and stuff like that where you don't want to take the business. But in general, we're ready to go.

Okay. And then a broad characterization on the competition right now. Do you feel like the competition in today's market is tougher than it was, say, prepandemic with more carriers reaching pricing adequacy or is this sort of normal course and it's always pretty competitive market to operate in?

Well, it's -- I mean, it's not a high-growth market itself as an industry. And we have really smart good competitors. So I expect competition to be what it has been given the people we just talked about. So I'm comfortable we have -- I'm comfortable we can grow. Like I think we've got enough things going. Not everything I talk about everything we're doing is going to win. But there's enough in that portfolio where some of those arrows are going to hit the mark.

Okay. And retention, a material driver of the growth formula obviously, and I was hoping you could talk a little bit about some of the things Allstate is doing to proactively improve the retention profile and just your expectations on the retention improvement over time?

Yes. So the first thing proactively is not jacking prices up because we're making good returns, that's a good thing. And that should lead to higher retention, that should just go back. If you look over at that, that time series we showed, it does track it. But we're also -- the thing I'm most excited about us doing for our customers at this point is going back and saying, "Okay, we had to raise your prices by 40%, how can we help you better manage you?" So we did that reasonably well with our agents as we went through the pandemic, which is why if you were to do price sensitivities and you looked at the price sensitivity taking a 40% increase, if you were to ask me 3 years ago, what would that do to retention? I'm like it would have killed it. It would have just killed it. We did a much better job of hanging on to those customers, even though we raised prices because our agents called people. And I said, "Hey, what's your deductible? What should we do with the coverage?" We're now going to -- now that we're through that, we're not done, though. We can go back and do that again with customers. And I think that will drive increased retention rather -- and that's in addition to just as opposed to bothering them with the price increase.

Got it. Yes, I want to ask on capital deployment. Also, PIF growth is going to require some more capital to be set aside, maybe more so than Allstate has needed in the past. How do you anticipate that dynamic impacting the pace of share repurchases and other avenues?

Well, we kind of -- we have a pecking order that we used in terms of the -- and the order is what creates the most shareholder value? That's how we decide. So first, if you can get a 20-plus percent return on your organic business, incremental cost, low risk, you should do that, you get a higher return and higher valuation. So that's the first and foremost. That's both in Property-Liability and embedded insurance, which has even got higher returns because there's very little capital needed there. Then we look and say, "Okay, well, is there any other way we can leverage our capabilities on behalf of shareholders and generate more return?" So are we a better owner of a business than somebody else? So in terms of SquareTrade, we said with our brand name and our financial wherewithal, we'll win Home Depot and Walmart. They didn't have Home Depot and Walmart before we got them. That's driven a huge amounts of growth. And so we leverage our capability, it turned out be a great deal. Similar story with National General. So if we have something where we think that we can be a better owner, we do it. In the Property-Liability business, there's not a lot we need, right? Like -- so sometimes small books of businesses come up, particularly in independent agent channel, we tend not to be the most aggressive bidder for those because we're like, we're happy to pay for the customers you have, but we're not so happy to pay for anything you think about the future, called goodwill. And so we don't -- in the embedded insurance business, I think there are other ways we could grow. But we're not out hunting anything. Now we've also looked at some of the fintech companies who got into our space, didn't really make any money because they didn't know how to underwrite and now they're trying to like sell their technology and get you do stuff. We've looked at them and thought -- like our technology actually is more contemporary than theirs because we've built it sooner. So we don't need their technology, and there's no reason to take a book of business, which is losers. And so we don't have anything there. So then you go to share repurchases. We have a good track record there. If we don't have the use of the money, we give it back to shareholders, and we've done well on that.

Awesome. Well, I think we'll leave it at that. We're out of time. So thank you very much, Tom.

Thank you, Rob. Thanks.