Operator:

Good day, and thank you for standing by. Welcome to Allstate's Second Quarter Earnings Investor Call. [Operator Instructions] As a reminder, please be aware that this call is being recorded. And now, I'd like to introduce your host for today's program, Brent Vandermause, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Well, good morning. Thank you for investing your time at Allstate. I'll provide an overview of results. Mario and Jess will go through operating performance, and then we'll address questions. Let's start on Slide 2. Allstate strategy has two components

Jess Merten:

All right. Thank you, Mario. Slide 11 details profitable growth in Protection Services. In the second quarter, revenues in these businesses increased to $773 million, which was 12.7% higher than the prior year quarter. This result was primarily driven by growth in Allstate Protection Plans. Revenues in our Roadside business decreased 22.7% compared to the prior year quarter, reflecting the impact of exiting a large unprofitable wholesale account. In the table on the right, you will see adjusted net income of $55 million in the second quarter increased $14 million compared to the prior year quarter, with most businesses showing improvements. Profitable growth in Allstate Protection plans resulted in adjusted net income of $41 million, a $10 million increase compared to the prior year quarter as revenue growth and improved claims trends continue to benefit the bottom-line. Slide 12 provides additional insight into the shareholder value created by protection plans. Since acquiring SquareTrade in 2017 for $1.4 billion, this has become a significant growth platform with scale and attractive profitability. Protection Plans provides warranties for a wide range of products, including consumer electronics, computers and tablets, TVs, mobile phones, major appliances and furniture. The power of the Allstate brand has helped to secure partnerships with large retailers in North America. We sell Allstate Protection Plans at point of sale through successful retailers such as Costco, Home Depot, Sam's Club, Target and Walmart, all under the Allstate brand. We're also expanding internationally into Europe and Asia. As you can see from the charts to the right, broad distribution and customer-focused operational execution has resulted in rapid growth in this business. Revenue grown 20% compared to the same 12-month period in 2023, while returns have been strong. Adjusted net income over the last 12 months totaled $139 million and almost $700 million cumulatively since 2017. Now let's shift to Slide 13 to discuss investment results. Result again benefited from active portfolio management that seeks to optimize return per unit of risk across the enterprise. Net investment income, shown in the chart on the left, totaled $712 million in the quarter, which is $102 million above the second quarter of last year. Market-based income of $667 million, which is shown in blue, was $131 million above the prior year quarter as the fixed income portfolio continues to benefit from repositioning into longer duration and higher yielding assets. Performance-based income of $107 million, shown in black, was $20 million below the prior year quarter due to lower real estate investment results. The performance-based portfolio is constructed to enhance long-term returns and volatility on these assets from quarter-to-quarter is expected. On the right, you can see our annualized portfolio return in total and by strategy over a short-term and long-term horizon. The market-based portfolio delivers predictable earnings while the performance-based portfolio enhances risk and return and diversifies the $71 billion investment portfolio. Moving to Slide 14. The Health and Benefits business continues to perform well. Revenues of $620 million increased by $45 million compared to the prior year quarter, driven by premium growth in group and individual health. Adjusted net income of $58 million in the second quarter was slightly higher than the prior year quarter, reflecting increased group health and employee benefits adjusted net income that was partially offset by a decrease in individual health. As a reminder, the decision to pursue a divestiture of these businesses was based on a belief that potential buyers with complementary products and capabilities will unlock value beyond what is achievable by Allstate. The process is progressing well and has confirmed our strategic logic. Slide 15 recaps Allstate strategy in this quarter's results. Auto and Homeowners insurance profitability has improved. National General is profitably growing policies in force. We're accelerating transformative growth to increase auto and homeowners' policies in force. Proactive risk and return management of the investment portfolio continues to generate value. And Protection Plans is expanding with broadened product offerings and distribution. We're confident that this strategy will continue to create value for our shareholders. And with that context, let's open the line for your questions.

Gregory Peters:

Good morning, everyone. So for my first question, I'll focus on growth. And Tom, I know you've been talking about transformational growth now for several years. And we're seeing this strong increase in new issued applications. So I'm wondering if you might help us understand how you think that new issued application result is going to drive increased policies in force in the auto stats that we see in some of your supplements.

Mario Rizzo:

Sure. Thanks for the question, Greg. So maybe the place I'd start like Tom said, retention is obviously critically important to growth, and we're pleased with the fact that retention is stabilizing. But we also recognize there's a handful of states that we have taken some pretty significant rate increases more recently, California, New York, New Jersey. Those are going to continue to have an impact on retention going forward. But absent those three states, we kind of like the trends that are emerging. But I want to talk a little bit about new business production and get at your question. So Greg, where I would start would be kind of how did we get here? And the reality is, as we've been implementing the auto profit improvement plan over the past couple of years, that's obviously being executed on a state-by-state, market-by-market basis. But as states have gotten to a rate adequate level, we've begun to lean in and invest more in growth to drive production in those states. And that would include things like unwinding underwriting guidelines to restrict business, increasing advertising spend, both nationally and locally. And as where we sit right now, as I'd say, about two-thirds of our states, the premium volume represented like two-thirds of our states, are what we would consider at profit target levels. And then there's about another 10% or so that are kind of on the path to getting there. So overall, we feel really good about the vast majority of country in terms of geographically where we're comfortable investing. And you see the momentum that's really been building over the course of the year. Last quarter, production was up about 9% in total. This quarter, it was up 17% as we further ramped up growth investments. And we're going to continue to do that. At the same time, you've seen us take less rate, which, as Tom mentioned, helps retention. But we're going to continue to be diligent about staying on top of loss cost trends really broadly across states. And as I mentioned, there are some states that aren't in that growth category right now that we've got to get to target levels of profitability. We're going to continue to focus on taking rates that are necessary there. And when we're successful, those will become additive to the parts of the country where we can invest. So that kind of got us to where we're at in terms of geography and new business and the good news is we're seeing the growth across brands and across channels.

Tom Wilson:

Let me answer that both by first by going up and then coming down a little bit. So Transform Growth had 5 components that Mario walked through. We've -- on each of those, the underlying assumptions between whether that was a good thing to do or not, we've proven out. We haven't -- they all are not working all at the same time right now so that you're seeing the growth we think we can get, which is to increase market share. So we're confident we're going to increase market share in personal property liability. When you get into what's retention next quarter, what happens in new business exporter, we're confident that all of those things will work in the same direction. As it relates to expenses, we think we need to continue. I mean we wanted to affordable simple, connected protection. Affordable means low price. That means we're going to continue to reduce costs. And so we've got a whole bunch of things we're working on now that are -- we've been working on for a couple of years as you point out, that are starting to generate benefits. But we have more to go. Like we don't -- we think there's with the age of digitization and the things we can do in our business, we can still drive cost on. As it relates to advertising, the reason we broke that out separately is that, that does relate to the fact of we don't want people to be to miscommunicate to people that we think taking advertising down and making that lower is a good idea, because we think growth creates value for shareholders as long we're operating at attractive returns. We've got a good set of capabilities there. And I'd be happy to talk about that. If anybody wants to get there, but we're comfortable that we can continue to invest in growth, get good returns, lower expenses at the same time, increased market share, which then will lead to a re-rating of the earnings multiple.

Operator:

Thank you. And our next question comes from the line of Jimmy Bhullar from JPMorgan. Your question please.

Tom Wilson:

Let me talk about advertising and Mario, can jump in on pricing. And of course, there's a lot of competitors, but let's focus on the biggest competitors for time being a business is the ones that are mostly in play here. So from a -- as we were just talking about, growth is good for shareholders. It's good, because we're earning good returns. Secondly, we're leveraging capabilities over a broader capital base, which drives more shareholder value creation, and then that should lead to a re-rating other multiple. And then you say, what needs to be true for you to do good advertising and to head into a fight on that one. And first, you got to have a product that's differentiated and appeals to customers. So we have that with our new ASC Auto product. We know it from the close to quote ratios higher with product you've got to have -- you got to be getting attractive returns when we talked about that at length. You got to have a great brand because that increases consideration like if people view the first time people have heard of you your dollar advertisings done is effective, obviously, we a great brand and great consideration. You have to have broad access, and this, ties together with transforming growth. We advertise, you can go to exclusive agent, you can go on our website, you can go to a direct. So you want to make sure that however they want to come to, they had advertising dollars effectively used. Now I would say advertising today, though, is a game of precision, much as Auto Insurance pricing went through this great push on sophistication, those who are good at sophistication win. And you can see that when you look at the combined ratios of people like Allstate Progressive, Geico, we all have really good combined ratios, because we're sophisticated in how we price product. Same thing is true in advertising today. So you have to be good at search. And we don't just listen to ourselves. We had external reviews, and we're really good at search. You have to be good at a bidding strategy. How much you're bidding for Elite? We're good at bidding for Elite. It's not like we're perfect. We got other stuff we need to do. You got figure out how you're using different kind of messaging for different groups. And you can imagine with the refrain of number of media channels, number of messages you can do now, particularly with AI, the number of segments you have, your pricing sophistication, it gets complicated really fast. And we're really good at it. So when we go into this, and we're thinking about us increasing the advertising versus other people, you're like, well, how good are you? And we think we're good at it. If you look at where we are with Arity and our Telematics work, that's to really end run around having more information on who you bid on because we track 15% of the U.S. population they're driving. So we can decide how good a driver you are without even sticking a device on you or an app on your phone or a device in your car. So will competition increase in advertising, probably. Do I -- it will be from those carriers who have the same kind of capabilities we do. So we're fully up to winning that game. I think there will be some other people who hold back or even drop out because they can't -- they don't have the capabilities and expertise to do it. So that's where we are in the advertising, good for shareholders because it's good for growth. And we use the money effectively. Mario, do you want talk about pricing environment?

Jimmy Bhullar:

And then just on the benefit sale, we're late in the year, and there hasn't been an announcement, but maybe talk a little bit about how the process is going. And I'm assuming it's probably not going to close this year, but are you still assuming the close within the next few months, even if it drags on to next year?

Jimmy Bhullar:

And do you intend to sell a disposal of the entire unit eventually, even if it goes into pieces? Or are there some pieces you might decide to retain?

Jimmy Bhullar:

Thank you.

Bob Huang:

Hi. Good morning. Maybe one on homeowner. I think last year, when it comes to cat losses, severe convective storm was a one in 2018 event, if I remember correctly, which obviously was a headwind to your cat numbers. Just given how things are developing so far, curious how is it tracking this year? Is it going to be more of a worse than one in 2018 event? Just pace on what we have in the first half, curious in terms of like how are the weathers are developing for the Homeowner side.

Bob Huang:

Okay. Thanks. My second question, a little bit of a shot in the dark here. For the DOJ lawsuit for National General, there has been precedent where under FIRREA Civil Enforcement Actions, where SEC can potentially get involved under the current litigation environment, do you expect that the National General case should get SEC involved at some point down the road? I'm not sure if that's the question you can answer at this point.

Bob Huang:

Okay. Thank you.

Jack Matten:

Hi. Good morning. This is Jack on for Mike. Just a follow-up on the advertising spend strategy. I'm curious how your strategy and focus today compares to the last cycle? And more specifically, how much of your ad spend has historically been geared toward direct-to-consumer targeted sales versus supporting your agents? And then how is that evolving today given the success of your transformative growth strategy in your lower expense base?

Jack Matten:

That's helpful. Thank you. And then maybe switching gears to auto loss cost trends. If you look at the average underlying loss you disclosed, it's now running slightly lower compared to 2023. I guess does that mean you're now seeing frequency benefits more than offsetting higher severity. And I'm curious how you view the sustainability of current favorable frequency trends. I know last quarter, you mentioned favorable weather. Just curious how those pieces are moving.

Mario Rizzo:

Sure. Thanks, Jack. I guess the place I'd start is as much as we dig into the components of profitability. They're all important, but we should lose sight of the fact that the way we manage the auto business is to generate mid-90s combined ratios across the entirety of the system. And we use levers like rates and we look at pure premium, whether that's frequency and severity and expenses, they all matter. And certainly, the loss trend helps inform what we need to do with some of the other levers. What I would say, as I mentioned, the negative trend, the negative 0.8% that you see in the supplement as I mentioned in my prepared remarks, there's a little bit of noise in in there terms of year-over-year comparisons because we were moving severity targets around intra-quarter last year. So the adjusted numbers, it's slightly positive, it's about 1%. So not all that different. But I would say it's -- favorable frequency has continued through the first half of the year has been offset by higher severity predominantly in bodily injury, which continues to run above inflation and on the physical damage side, we continue see some good tailwinds with things like used car prices and stabilizing repair costs and so on. But that's kind of the overall loss trend that we're reacting to. In terms of the sustainability of frequency, it's a really difficult question to answer. Things like weather and geography risk segments all come into play. Frequency has been better than it was a year ago. When we look at our telematics data, which gives us a lot of rich information, miles driven per operators up a little bit but trips are shorter. So that could be having an impact on frequency. Weather favorably impacted frequency in the first quarter. And the other thing I'd say is as we've been looking to improve profitability over the last couple of years and not growing, the risk segmentation and the mix of our auto book has shifted around a bit to higher lifetime value, let lower frequency type business, that's having an impact as well. So there's a lot of moving parts in there. One thing I will say is as we go forward and write more new business, that will impact prospective frequency trends, but I'll go back to where I started. We manage the system in its entirety to generate mid-90s combined ratio profitability, and we're going to continue to do that despite however frequency bounces around.

Operator:

Thank you. And our next question comes from the line of Yaron Kinar from Jefferies. Your question please.

Tom Wilson:

So we haven't given out a target for PIF growth, but it's the right way to think about it. Because when you're looking at market share, a lot of times, market share is done in the industry by premiums. Also charge, more have fewer customers and presumably could increase your market share on that basis, that's not our goal. Our goal is PIF growth. If you want to assume that, if you said okay, the U.S. economy in terms of number of cars, house and stuff like that, it's going to be a low single-digit increase, I don't know. So 1% there's not going to be a whole bunch of more new cars in houses in the United States. And so obviously, PIF growth has got to be higher than that. And it is higher than that you can see right now in Homeowners because we're winning in that business. When you look at how far up is up, we don't have a limit on that, if you look at National General, which is one of the reasons we called it out, it's got every bit as good a growth as some of those our competitors who get much higher valuations than we do. And it's got really good profitability. So we know how to do it. And the question is how do you translate it into? And what is the timing? We think there's great growth potential here. And that when you put on, just call it, -- if you take 1% for the overall growth in assets in the United States. You put on top of that what would be modest increases in premiums then you should get revenue growth which is above 5%. And so what does that turn into? You can do the math as well as we can. But we think there's great potential here. When you look at other people, we don't think they figured out how to turn lead into gold. They're just really good at what they do. We think we can be every bit, as good in the Allstate brand and growing that business. Particularly now that we've gotten direct, what I would say is improved and unleashed that. And you can see that from Mario's charts on how much new business we're writing there. So we think there's lots of potential, like we're very optimistic, but we don't have -- here's our magic number that we're going to get to. But whatever the number is, it would lead a higher valuation of earnings than we currently have.

Tom Wilson:

If you're relating to the DOJ lawsuit, I don't think that will impact what eventually happens. But let me just reiterate, we're really confident in where we are with that claim, we put it that way.

Operator:

Thank you. And our next question comes from the line of David Motemaden from Evercore ISI. Your question please.

Tom Wilson:

No. Let me give you a little -- I'll give you the summary and then go through Mario you can jump in here front. I don't know how you determine what's sustainable or not sustainable in frequency. Examples, if it -- in the winter, if it snows at 3 p.m., and it's kind of wet and then the temperature drops quickly and it turns the ice by time you get to 5:30 rush hour, a bunch of cars getting accidents. If it snows at 2 a.m., it doesn't matter so much. So I'm not really sure how you -- and that's just one example of the myriad of things that Mario talked about how far are you driving? How often do you drive? How fast you drive? What city driving? Who else drives? Like I don't know how you -- I don't know if they -- I don't know who it was on that remember said that, but I'm not sure how we would be able to with our math and the precision that we were being able to determine what's sustainable or unsustainable. What I would come back to is what Mario said, we price on what it is. So what it is, is what we factor in. Just the frequency goes down in a quarter, we don't suddenly decrease rates. Just like if it goes up in a quarter, we don't suddenly increase rates. We price to get a mid-90s combined ratio in auto insurance, and that's what we'll keep doing.

Tom Wilson:

I'll let Mario answer the percentage question. I would say in hold back -- I was trying -- think of it as a lever that dialed you turned. Some states were wide open and testing really high levels. Other states were at what we think is appropriate there. So we're constantly managing and testing learning in a live market on how much we bid on stuff. I mean there's just -- it's very sophisticated. So it's not like there's a go or no go level. But there is, to your point, important from a macro standpoint, like how many states you're making money.

Tom Wilson:

I would just add a couple of things. First, I don't think we'll ever be at 100%. But I also that that the high-growth competitors that your competitor, I guess, you're comparing us to, it probably has the same situation. Like not everything goes well in every state in this business. So I can see what people are trying to do. You're trying to triangulate between the gap of a small decrease in auto insurance to what's the increase is going to be and how does that translate into the increase in valuation multiple. Appropriate thing, we're focused on it as well. I would just say that the gap between the current growth and what potential is probably narrower than the gap that between the valuation, like our valuation multiple could be substantially higher even with small moves in the growth rate. You have to decide what you think that's worth and whether you want to pay for it or not. But I think that focusing -- it's not going to be a one-to-one thing, and it's not all going to happen at the same time. But we're confident we can grow like we know how to run this business.

Operator:

Thank you. And our next question comes from the line of Vikram Gandhi from HSBC. Your question, please. Vikram, you might have your phone on mute. We're still not hearing you. Would you like me to…

Operator:

All right. Our question then comes from the line of Charles Lederer from Citi. Your question please.

Tom Wilson:

First, I would say we want all customers all locations or most locations, but all risk levels. Mario, do you want to talk about maybe specialist, not general or non-standard.

Tom Wilson:

Okay. Thank you all for spending your time with us as we move forward, we'll keep doing what do well, which is to serve our customers. We're going work on accelerating our growth in the profit liability business, making sure we're proactively investing and we didn't have spent a lot of time on that today, but we've had really great results in our investment portfolio. And then expanding protection offerings through great platforms like Protection Plans. Thank you all. We'll see you next quarter.

Operator:

Good day, and thank you for standing by. Welcome to Allstate's First Quarter Earnings Investor Call. [Operator Instructions] As a reminder, please be aware that this call is being recorded.

Brent Vandermause:

Thank you, Jonathan. Good morning, and welcome to Allstate's First Quarter 2021 Earnings Conference Call. Yesterday, following the close of market, we issued our news release and investor supplement, filed our 10-Q and posted today's presentation, along with our reinsurance update on to our website at allstateinvestors.com. Our management team is here to provide perspective on these results and our strategy. After prepared remarks, we will have a question-and-answer session.

Thomas Wilson:

Good morning. Thank you for investing your time and have interest in explaining why Allstate's such an attractive [indiscernible]. And then Mario and Jesse are going to walk through the operating performance. And then as Brent mentioned, as there we'll have time for Q&A.

Mario Rizzo:

Thanks, Tom. Let's start on Slide 4. Property-Liability earned premium increased 10.9% in the first quarter, driven by higher average premiums. Underwriting income was $89 million, the combined ratio of 93%, which improved by 15.6 points compared to prior year was driven by higher premiums earned, improved underlying loss cost trends, lower catastrophe losses and operating efficiencies. The chart on the right depicts the components of the 93 combined ratio. Lower catastrophe losses of $731 million were 8.8 points favorable to the prior year quarter, reflecting milder winter weather.

Jesse Merten:

Thank you, Mario. I'm moving to Slide 10, let's discuss the increase in investment income. Before we dig into specifics, let me reiterate that our active portfolio management includes comprehensive monitoring of economic conditions, market opportunities, interest rates and credit spreads by rating, sector and individual names. We seek to optimize return per unit of risk across the enterprise. This approach to portfolio management continued to benefit results in the quarter. Net investment income shown in the chart on the left totaled $764 million in the quarter, which is $189 million above the first quarter of last year.

Jamminder Bhullar:

So my first question was just on your views on PIF growth. And I realize it's going to be challenging in the near term, just given price increases. But with the expense cuts and coming through and once you're done with repricing, do you think that it's reasonable to assume that you'll have positive growth beginning sometime later this year or early next year in the auto business?

Jamminder Bhullar:

And can you talk about progress on the benefit sale? Obviously, from the outside, we haven't seen any movement. But -- and then just how you think about the deployment of the proceeds that come out of that sale?

Thomas Wilson:

Jim, let me make a comment about the capital since it came up -- you mentioned that it came up at a number of the analyst write-ups last night. So first, we're very well capitalized. We've made that point consistently over the last couple of years. Obviously, the divestiture of health and benefits would free up additional capital. We're doing it because we believe it's the right way to harvest value, as Jesse pointed out. We think this is a great business that's shown up in the people who have been interested in buying it, but we also think that somebody else could do more with it than we can do with.it.

Operator:

And our next question comes from the line of Andrew Kligerman from TD Cowen.

Thomas Wilson:

I'll let Mario talk about how he's reorganizing the business and really going to market in an integrated fashion to drive growth. As it relates to advertising, we don't like to give those numbers out just because we've got other people out there doing their advertising as well. What I will point out is one of the key components of transformative growth was improving our sophistication of customer acquisition. So no matter what percentage it is we want it to be more effective. But Mario, maybe you should talk about how you're changing your go-to-market.

Thomas Wilson:

And we know that it works because we've used it for a long time. So -- and we dismantled some of it about 2 or 3 years ago when we were cutting expenses that didn't want to grow. And now that we're back into growth mode, we're just expanding what we know works.

Thomas Wilson:

Well, we wouldn't give out that percentage in each, but you're correct. And then it's -- when we bought National General, it was mostly a nonstandard company. And we bought it for the strategic opportunity to leverage our capabilities in, which is called preferred auto and home insurance, and that's turning out to be true. Mario, maybe you want to talk about the success you're having with Custom360.

Operator:

And our next question comes from the line of Gregory Peters from Raymond James.

Mario Rizzo:

Thanks, Greg. This is Mario. I'm going to make some comments off the slide -- off of Slide 5 that we showed you in the presentation, which really shows the -- starts with the average underlying loss and expense trend that we saw in the quarter. That number is about 6.7%. If you take out the expense component, it drops by over 1 point. So I'd say the loss trend we're seeing in the protection business in the mid-5s, and that's made up of both frequency and severity. As we indicated, frequency relative to last year, just given the milder weather was favorable. And then the other component of it is severity. So it's, I'd say, favorable frequency more than offset by higher severity. But severity is continuing to moderate in terms of the rate of increase that we're seeing.

Thomas Wilson:

I'll let Mario go into the 3 states, but I just want to clarify. We decided not to give it to you every month because -- we don't -- we think you get to drill, you know what we're doing, and we don't need to do it. We didn't say we're very adequate so don't worry about it. We're always focused on it. We just didn't think we needed to like burden people sending out every month.

Jian Huang:

Maybe just going back to the PIF growth and rates -- for Slide 6, if we look at the states that are above 96% combined ratio, I know that you talked about New York, New Jersey, California, but are there any other reasonably large states where you continue to need rates? And in those states, are you -- like comparing to your peers, is your loss ratio significantly above everyone else? Or in other words, if you were to raise rates in those states, do the customers have anywhere else to go?

Jian Huang:

Okay. That's very helpful. But just curious, are there any other relatively large states outside of New York, New Jersey, California, where you still need rate at this point in time?

Elyse Greenspan:

My first question is on the auto. I guess it's more on the underlying loss ratio. I thought in the past, right, the first quarter would seasonally be a better quarter for just an auto book in general, but understanding rate increases that can earn in can kind of mask that as we go through the year. And then I'm also not sure if there was maybe some favorable non-cat weather in the Q1 numbers. So just can you give us a sense of the cadence would you expect on the underlying loss ratio within auto to improve as we go through the year given the rate to earn in? Or is there some seasonality or other factors that we need to consider?

Jesse Merten:

It's a normal process, Elyse. We're not going to go through [indiscernible] it. We still think we'll sell it this year. A lot of people are interested in the business, and we're confident we made the right choice.

Yaron Kinar:

Most of my questions have been asked, but I did want to dig a little deeper into NatGen, if I could, in the PIF growth there. So I understand you have the Custom360 that should drive further growth. At the same time, we also see maybe some competitive pressures rising in nonstandard auto, which may actually result in a little bit of a decrease in that segment's growth? Maybe you can help us think through the two combined.

David Motemaden:

I had a question just on the brand auto PIF. So the brand auto PIF was down about 1.5% compared to the fourth quarter. And I guess I'm wondering how. And now is for the entire book, the entire brand auto book. I guess I'm wondering how that PIF growth trended versus the fourth quarter in the 64% of the book that is at target margins that you showed on Slide 6, are you guys growing PIF in that part of the book?

David Motemaden:

No, understood. It was worth a shot anyway. Just another question, just on the agent productivity. You gave some interesting stats last quarter that agent productivity was up 6% excluding California, New York, New Jersey. I'm just wondering how the productivity looked this quarter. Did that improve significantly? Or just how to think about that as a potential growth driver?

Brent Vandermause:

We'll take one more question.

Michael Zaremski:

I guess just I know there's been a lot of talk about growth. And the strategy has been clear you guys have successfully kind of transformed your expense ratio lower, which should help grow direct-to-consumer channel specifically. And I know Allstate has a ton of marketing expertise. But I'm just kind of curious, the direct-to-consumer -- customer, my understanding is a bit different than the average current Allstate customer. So is there -- are there any different strategies or maybe you kind of -- or just go slow to learn as you kind of grow into DC? Or anything you'd like to -- you think we should be thinking about there?

Operator:

This concludes the investor call. You can now disconnect. Good day.

Operator:

Good day and thank you for standing by. Welcome to Allstate’s Fourth Quarter Earnings Conference Call. Currently, all participants are in a listen-only mode. After prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, please be aware this call is being recorded. And now, I’d like to introduce your host for today’s program, Brent Vandermause, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Good morning. And we appreciate you taking the time and spending your efforts to explore why Allstate is an attractive investment. So I will begin with an overview of our strategy and results, and Mario and Jess, can go through the operating performance. Then we will have time for your questions at the end. Let’s begin on slide two, which depicts Allstate’s strategy to increase shareholder value. So we have two components to this strategy, increase personal Property-Liability market share and expand protection provided to customers, which are shown in the two ovals on the left. On the right-hand side, you can see the highlights for the fourth quarter. We generated net income of $1.5 billion. The strong results reflect our actions to improve auto insurance profitability and mild weather conditions, which was a welcome reprieve from the elevated level of weather related losses in the first three quarters of the year. The proactive approach to increasing bond duration also contributed to strong results with higher income from the market based portfolio. To further increase shareholder value this year, we remain focused on improving auto insurance profitability. There is more work to be done, but we are well on our way. Additional shareholder value will then be increased by increasing policies in-force across all of our businesses. The transformative growth initiatives to drive Property-Liability market share growth can be implemented in more states this year now as auto margins have been improved. We are also focusing on expanding protection offerings to Protection Services businesses, which is shown in the lower oval as Protection Plans, Identity Protection, Roadside and Arity, all have good growth prospects. As you know, we started the process to sell the Health and Benefits business and that process is proceeding on schedule. Let’s review the financial results on slide three. Revenues of $14.8 billion in the fourth quarter increased by 8.7%. That reflects a 10.7% increase in Property-Liability earned premium and that was due to rate increases in 2022 and -- mostly in 2022, and in 2023 in both the auto and homeowners’ insurances. Net investment income in the quarter was $604 million, an 8.4% increase, reflecting higher fixed-income yields and duration extension, which is partially offset by lower performance based income. The strong profitability in the quarter generated adjusted net income of $1.5 billion or $5.82 per diluted share. Annual revenues of $57 billion were up $5.7 billion or 11.1% over the prior year. Strong fourth quarter earnings resulted in positive adjusted net income for the year. Slide four summarizes the status of the four-part auto insurance profit improvement plan. Strong execution resulted in 6.7% point improvement in the combined ratio in 2023. Starting with rates. Since 2022, the Allstate brand implemented rate increases 33.3%, which included 16.4% in 2023 and 6.9% in the fourth quarter, driven by the recent approvals in California, New York and New Jersey. National General implemented rate increases of 10% in 2022 and an additional 12.8% in 2023. Looking forward, we will pursue rate increases in 10 states to improve margins and in other states to keep pace with increases in loss costs. Expense reductions were initiated in 2019 as part of the transformative growth plan to become a low cost provider of protections, being early in this effort helped offset the rapid inflation in loss costs. The underwriting expense ratio decreased 1.1 points in 2023 compared to the prior year when you exclude the large decline in advertising that was directly linked to lower profitability. Looking forward, further cost reductions will improve efficiencies and our competitive price position. Given the significant improvement in perspective, auto margins will increase advertising investment this year. In addition, we implemented underwriting actions to restrict new business, where we were not achieving target returns. We are moving some underwriting restrictions as rate adequacy is achieved. Finally, enhancing claim practices in a high inflation and increasingly litigious environment are required to deliver good customer value. This includes accelerating the settlement of injury claims and increasing in-person inspections. This program has positioned us to increase new business levels and begin to grow policies in-force in sales where acceptable margins have been restored. Now I will turn it over to Mario to discuss Property-Liability.

Jesse Merten:

All right. Thank you, Mario. On slide 11 we delve deeper into how we are improving customer value through expense reductions. As shown in the chart on the left, the Property-Liability underwriting expense ratio decreased two points from 2022 to 2023 as we continue to focus on lowering costs to provide more value to customers and some of the benefits of higher earned premium growth relative to fixed costs. The right half of the chart provides additional context on the drivers of the 1.3-point improvement in the fourth quarter compared to the prior year quarter. The first red bar shows the two-tenth of a point impact from increased advertising spend, reflecting the slight increase was driven by seasonal investment changes and growth investments in rate adequacy states. The second green bar shows the 1.4 -- 1.4-point decline in operating costs, which was mainly driven by lower employee-related costs and the impact of higher premiums relative to fixed costs in the quarter. Shifting to the longer term trend in the chart on the right, we remain committed to reducing the adjusted expense ratio as part of transformative growth. As a reminder, the adjusted expense ratio starts with our underwriting expense ratio, which I just covered and excludes restructuring COVID-related expenses, amortization and impairment of purchased intangibles and advertising expense. It then adds our claims expense ratio, excluding costs associated with settling catastrophe claims. Those expenses are excluded because catastrophe-related costs tend to fluctuate. Through innovation, process improvement and strong execution, we have driven significant improvement in expenses for the fourth quarter and year-end 2023 adjusted expense ratio of 24.7. This reflects decreases in both the underwriting expense and non-cat claims expense ratio compared to the prior year quarter. Now moving to slide 12, I will cover investment results. This quarter showed how our proactive approach to duration management benefits results. The chart on the left shows changes we made in the duration of the bond portfolio in comparison to bond market yields, from the fourth quarter of 2021 through the third quarter of 2022, lowering fixed-income duration, mitigated losses as rates rose. Beginning in Q4 of 2022, we began to extend duration which when combined with higher yields has increased market-based income. Our fixed income yield, shown in the table below the chart, remains below the current intermediate corporate bond yield, reflecting an additional opportunity to increase yields as we continue to reinvest portfolio cash flows into higher interest rates. The bar chart on the right shows the income and total return benefits of these decisions. As you can see in the table on the chart, the total return of our portfolio was 4.6% in the fourth quarter and 6.7% for the year. Portfolio returns in both periods reflect income earned, as well as higher fixed income valuations due to the decline in market yields in the fourth quarter. Net investment income totaled $604 million in the quarter, which was $47 million above the fourth quarter of last year. Market based income of $604 million shown in blue, was $140 million above the prior year quarter, reflecting the repositioning of the fixed income portfolio into longer duration and the benefit from higher yielding assets that sustainably increase income. Market based income also benefit -- benefited from higher fixed-income balances. Performance based income of $60 million shown in black, was 87 million below the prior year quarter due to lower valuation increases and fewer sales of underlying assets. As we have stated previously, the performance based portfolio is expected to enhance long-term returns as demonstrated through our five-year and 10-year internal rates of return of 12% and volatility in these assets from quarter-to-quarter is expected. Slide 13 covers results for our Protection Services businesses. Revenue in these businesses increased 11.8% to $719 million in the fourth quarter compared to the prior year quarter. This result is mainly driven by growth in Allstate Protection Plans, which increased 19.6% compared to the prior year quarter, reflecting expanded product breadth and international growth. In the table on the right, you will see adjusted net income of $4 million in the fourth quarter decreased $34 million as compared to the prior year quarter. This decrease is attributable to the results of a state income tax examination that increased the effective state tax rate that we apply, which increased deferred income taxes by $43 million in the quarter for future tax payments and Protection Services, largely related to dealer services. The impact of the tax change on the enterprise was a net benefit of $6 million. We do not anticipate that these tax adjustments will have a significant impact on our ongoing operations. Shifting now to slide 14, our Health and Benefits businesses continue to generate profitable growth. From the fourth quarter of 2023, revenue of $630 million increased by $50 million compared to the prior-year quarter, driven by growth in individual health, group health, as well as fees and other revenue. Adjusted net income of $60 million in the fourth quarter of 2023, increased $2 million compared to the prior year quarter as individual health revenue growth partially offset higher benefit ratios in group health. As you know, late last year, we announced a decision to pursue the divestiture of our Health and Benefits business following the successful integration of Allstate’s voluntary benefits business in National General’s Group and individual health businesses. We continue to anticipate a transaction will be completed in 2024. We will close on slide 15 by reviewing Allstate’s financial condition and capital position. Allstate’s proactive capital management approach provides the financial flexibility, liquidity and capital resources necessary to navigate a challenging operating environment, while providing support for long-term value creation. Fourth quarter results demonstrated the company’s capital generation capabilities with a statutory surplus in holding company assets of $18 billion, increasing by $1.6 billion compared to the prior quarter. Assets held at the holding company also increased to $3.4 billion. The increase to the prior quarter primarily reflects a return of capital from National General statutory entities, partially offset by common shareholder dividends. Additionally, GAAP shareholders’ equity of $17.8 billion increased $3.2 billion compared to the prior quarter, reflecting $1.5 billion of GAAP net income and the improved unrealized position on fixed income securities of $1.9 billion. We continue to proactively manage capital, make progress on the comprehensive profit improvement plan and invest in transformative growth. We remain confident that these strategic actions will generate attractive shareholder returns. With that as context, let’s open it up for your questions.

Jimmy Bhullar:

Hey. Good morning. So I had a couple of questions. First, can you talk about rate adequacy in California, New York, New Jersey, the new business that you are issuing there now is that adequate price for normal profitability or are you assuming that you are going to need another sort of stab at it in 2024 to get the normal profits?

Mario Rizzo:

Yeah. So, Jimmy, first thing I’d say is, we have talked a lot last quarter about the actions we needed to take in the three states, California, New York and New Jersey. I will start with a view that says, look our objective is to meet the protection needs of as many customers in as many states as possible. When that can happen, we think customers are served well, markets operate effectively and we can operate our business to achieve the appropriate levels of returns. We had rate pending in all three of those states and I will just spend a minute kind of giving you the story in each one of those, because I think it’s slightly different. In California, you will remember we filed a 35% rate. We got approval for 30 %. But we got approval earlier than our expected effective date. So, effectively, we filed our full rate need and got approval for our full rate need. As of yesterday, we are writing business in California, again across all channels and we feel comfortable writing business in California given the rate level that we are operating. Now, of course, having said that, we have got to stay on top of loss trends going forward and we will do that, but we are comfortable with the rate level, we have gotten California that have opened up that market. In New Jersey, it’s kind of the opposite story we filed for 29 points of rate, we got approval for just under 17%. And as a result of that, we are going to continue to take the more restrictive underwriting actions that we have been taking in New Jersey, which means we will continue to get smaller in New Jersey, while we plan on filing additional rate as a matter of fact, we have two rates pending with the New Jersey Department and depending on how those things shake out that that will inform future actions we take in New Jersey. But as of right now, we will continue to get smaller in New Jersey, just given the lack of rate adequacy. And New York is kind of somewhere in between, we got approval for a 14.6% rate in December. We have implemented that, that helps. But we still need more rate. We are actively engaged with the department and intend to file our full rate need going forward and do that in reasonably short order. And again, depending on how that plays out, that will inform the next set of actions we have taken in New York.

Tom Wilson:

Jimmy, this is Tom. I will start and then Mario can give -- can add on to that. I would say that the current competitive environment is still in flux. So, we raise our rates 30 points in California. State Farm gets another increase somewhere after that. So it’s too early to tell what impact that will have on volume in 2024. We do -- our goal, though, is obviously to, one, make good money for our shareholders as first part, and as Jess said, the other part is, we need to grow. So we are -- we think we have got transformative growth in place, which is differentiated in a long-term growth plan, as well as some of the short-term things you are talking about here. Mario, what would you add to that?

Jimmy Bhullar:

Thank you.

Gregory Peters:

Okay. Good morning, everyone. I -- for my first question, I’d like to focus on transformative growth and it’s kind of counter intuitive, right, because you are talking about lowering expenses at the same time growing your policy count. So when I think of some of the headwinds going forward on expenses, I think, of increased agent commission because profitability is going up. I see maybe the potential for increased advertising expense. So maybe you can help us pull together on how you see growth emerging at a lower expense base?

Mario Rizzo:

Yeah. So, Greg, I think, when you combine the pieces that Tom talked about, I think, you can get comfortable that we can continue to improve our expense ratio and our cost structure to get more competitively priced and invest in marketing at the same time. So when I think about the broad areas where we are looking to get more efficient and where we have gotten more efficient over the last several years, first, distribution costs. So when you look at the progress we have made on creating a lower cost but more productive Allstate agency distribution system. We are really happy with the progress we have made there. And I have talked a little bit earlier about the increases in overall production. But underneath that, the even more significant increases in average productivity as we have fewer agents producing more volume today than was the case a couple of years ago. And within our expense ratio, the distribution cost component of our expense ratio has continued to come down while we have been able to do that. So I am really optimistic that as we move forward and look to grow in more states that our Allstate agency force is going to be a core part of that and we will continue to be able to do that, but do that at a lower distribution cost overall. On the operating cost side through the combination of becoming more digital, outsourcing, offshoring, just improving processes, we have seen pretty significant reduction in operating costs going forward and we are going to continue to hammer on that one. We have also seen similar improvements on the claim side. Although I will say we are going to continue to invest in claims as part of profit improvement plan to get more effective on a number of processes. And I think the combination of the efficiencies we will get in those three areas will help fund the marketing investments that we want to make and will make as we look to accelerate growth.

Tom Wilson:

But if we need to spend money to grow on advertising and we like the profitability, we are going to spend more money on advertising.

Mario Rizzo:

No. National General is a core part of transformative growth. The reason we acquired National General was to, first and foremost improve our competitive positioning in the independent agent channel and we have done that. With the business, we got a very well run non-standard auto business that we have continued to grow and grow profitably over the last several years. We are in the, I will say, early stages of rolling out what we call Custom 360. As I mentioned, that’s the standard and preferred auto and homeowners offering. So we think there’s significant opportunity in the independent agent space. When you look at the size of the National General business when we bought it compared to what it is now, our total IA presence, say, at the beginning of 2021 was a little over $5 billion, which included National General plus the Allstate independent agent business, as well as the encompass business. It’s over $9 billion currently. So we have had a lot of success in that channel and we think there’s just a ton of opportunity both in non-standard auto, but in standard preferred homeowners in the IA channel, and we expect to continue to capture that opportunity and that’s a core part of how we are going to grow and a core part of the transformative growth strategy.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Yaron Kinar from Jefferies. Your question please.

Tom Wilson:

Well, how quickly will depend what happens in the marketplace, Yaron. So, I fully expect that Progressive and GEICO are going to spend more money in advertising and seeking to grow this year based on where their profitability is. State Farm has also been aggressive in trying to grow. Although they still have to improve their price position so that they are earning profit. But I expect it to continue to be a competitive environment. But you are right about the -- and then, it will just be how effective are we versus them. We feel -- Mario showed you the numbers, where two-thirds of the country were like all systems go. When you add in California, that’s another big chunk. So we think we have got plenty of open fields, so to speak, to run in and to compete with transformative growth. We have validated a lot of the underlying assumptions, but we have yet to bring it to market in a consolidated way in particular states with all of our channels, that’s on Mario’s list to do this year. So we feel good about those opportunities. So we will grow as fast as we can and still make sure we have a good combined ratio. Mario, what would you add to that?

Yaron Kinar:

Thanks. And then maybe as my follow-up, tying the appetite to grow as much as you can profitably to the question of capital. You talked in the past and even on this call, about the -- about maybe selling the Health and Benefits business, you talked about the stop loss that you were looking to maybe purchase last year. Do you need to take any of these actions or other strategic actions in order to satisfy the growth appetite or do you have all the capital you need to grow as much as you want today?

Yaron Kinar:

Thank you.

Elyse Greenspan:

Hi. Thanks. Good morning. My first question is on the holdco cash. It did go up in the quarter. Did you guys take a dividend out of AIC or another entity in the third quarter.

Elyse Greenspan:

Thanks. And then my second question is on policy growth, but on the Nat Gen side, right? You guys have been showing on as growth slow within Allstate brand. You have been showing pretty strong growth within Nat Gen policies in-force. Just hoping to get some color there as you have kind of put way through books like what’s been driving the growth within NAT Gen and how should we think about that continuing from here?

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Bob Huang from Morgan Stanley. Your question please.

Tom Wilson:

So -- hi. This is Tom. I am going to start. Our capital is always been sufficient. So it should like reiterate what the position we have had. As it relates to buybacks when we are looking at capital regenerate. We start with, first, making sure we have enough capital to run the business and to grow the business and we have -- had put aside more capital for growth, given the dramatic increase in premiums and the risk and we think by transformative growth. We will continue to have opportunities to deploying capital and high ROEs in fact growth. So that’s the first thing we do is like how do you drive shareholder value. And so, I think, looking forward with those opportunities, we will have less capital than it’s for share buybacks that we had historically. That said, we have a strong track record of buying shares back. I think, I don’t know, since I have been CEO, maybe it’s $30 billion worth of shares we bought back. Like, if we don’t have a good use for the capital. Then we will give it back to shareholders, because there’s no sense holding onto extra capital. But between growth in the Property-Liability business, growth in some of our Protection Services, they tend to be a little lighter in terms of capital needs. And then our investment portfolio we derisked our investment portfolio last year, because of what we didn’t see as great market opportunities and if we saw there was opportunities to put more risk into that portfolio that would be another use of capital. So I think -- the think about capital we are always trying to manage and maximize shareholder value and we will do that -- do whatever form that is best.

Tom Wilson:

Okay. That’s fine. So my second question really is on the expense. So one thing we hear typically from litigation lawyers is that, well, social inflation is an issue because insurance companies, carriers tend to under underfunded claims departments and often have inexperienced claim staffing. As you think about expense save going forward and as we think about re-pivoting back to growth, can you maybe help us think about what areas within expenses are you cutting and what are the areas where it is very critical and then things that are you are not going to cut on the expense side, is it possible to provide some colors?

Mario Rizzo:

Yeah. I guess where I start is, as we talked over the last really couple of years about our profit improvement plan, it’s multidimensional, and one dimension that we have continued to focus on is just improving claim operational execution. The fact is, as much as continuing to reduce our cost structure improves our competitive position, really operational excellence and claims is another way to make sure that, we pay what we owe, but that also will translate into better competitive position over time. So we are focused on really, I would say, all elements of the claim process. It’s people, it’s process, it’s technology, analytics. And we are going to invest in the claims process moving forward across all those dimensions to just continue to invest in terms of people, making sure we have the right adjuster capacity. We went through a pretty significant turnover. It was really in 2022. That has largely subsided. So we have much more stability in terms of claim staffing, but we are focused on training claim staff and providing them the tools, both in bodily injury and in physical damage to operate in a way that, again, we pay what we owe, but we ensure that we eliminate any leakage in the system and again, that’s been a core part of the profit improvement plan going forward. We are investing in people to provide more oversight, get more eyes on cars in the physical damage side, do a much more effective job in terms of total loss evaluation on the injury side. Tom mentioned we are paying claims faster. We have reduced our pending inventory on the casualty side to the lowest level it’s been since well before the pandemic. We think that continues to reduce reserve risk going forward. So I would say, really, the answer is, we are going to continue to invest in claims broadly, because we just do believe it’s a core part of enabling us to be more competitive and ultimately translate into growth.

Bob Huang:

Got it. Thank you very much.

Josh Shanker:

Yeah. Thank you for taking my question. Once upon a time you think about combined ratio guidance and now you talk more about ROE guidance, which is sensible. But I look at the results in homeowners and they are quite volatile and good this quarter. I want to know where we stand in terms of pricing adequacy broadly for the homeowners’ line. But more importantly, I want to see pricing adequacy for bundlers, I assume that you have a pricing adequacy for monoline drivers and it’s different for the bundlers. Are we at a point where you are very happy to take unbundles at a nice level of profitability today?

Mario Rizzo:

Yes. So, Josh. On -- in terms of overall rate adequacy. Obviously, through the combination of the rates we have taken over the last couple of years, plus the inflation and replacement values in homes, that’s really fueling a pretty consistent and significant low-teens increase in average premiums. So this quarter that was about 12.5%, so we are seeing price flow through the system. And that doesn’t include, because as you know, with a 12-month policy, it takes 24 months to earn it all that rate. So a lot of the rate we took in 2023 we have yet to earn and we are going to we are going to keep at it in terms of staying on top of loss cost. The underlying combined ratio for the year was 67 improved by about 3 points, mid 60s is where we would like that number to be. So we are getting closer to that, we have more rate that’s going to earn in, and as Tom mentioned, we feel really good about our capabilities in homeowners and we are going to continue to lean-in and look to grow that business. From a bundling perspective, just 80% of our homeowners’ customers have a supporting line are bundled. That’s a pretty meaningful number and it happens at discount, it’s upwards of 15%. And again, what we think with that pricing the lifetime value of that bundled segment is substantial and we will write bundled customers all day long. Our agents are writing bundled business at an all-time high level north of 70% of new business we are incenting agents to write that, we are seeing more bundled business come through our call centers and our direct business. And as I talked earlier Custom 360 going up market is both in auto and home offering. So we think we are well-positioned across all three channels to continue to attract bundled business that we can be even more competitively priced and because of the discounting element, but also it’s a segment that we think generates substantial lifetime value and we are good at it, so we are going to keep that.

Josh Shanker:

And if I just close upon that, even though we are going to see some modest decline in auto policy count due to price increases and turning the book a little bit, are you net growing bundlers every day?

Brent Vandermause:

I think we have time for one more question, is that.

Andrew Kligerman:

Hey. Thanks for sweeping me in at the end. Quick -- maybe some quick questions here. With regard to the impacts of unwinding the restrictions and increasing advertising, could you give us a sense of the impacts of each on the combined ratio?

Andrew Kligerman:

Got it. And then with regard to severity, just to make sure I am clear on it, you talked about 8% to 9% in 2023. Is that what you are anticipating for 2024 and how are you thinking about frequency as well going into the year?

Andrew Kligerman:

Okay. Thank you.

Operator:

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Thank you for standing by and welcome to Allstate's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Brent Vandermause, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Good morning. We appreciate your investment in time in Allstate. Let's start with an overview of results and then Mario and Jess will walk through our operating performance. Let's begin on Slide 2. So our strategy's 2 components

Jesse Merten:

All right. Thank you, Mario. I'll start on Slide 14 to discuss investment results. We proactively repositioned our investment portfolio based on continuous monitoring of changes in the economic environment, current market conditions and enterprise risk and return considerations. As shown in the chart on the left, net investment income totaled $689 million in the quarter, relatively flat to the third quarter of last year but with a higher contribution from the market-based portfolio. Market-based income of $567 million shown in blue, was $165 million above the prior year quarter, reflecting repositioning of the fixed income portfolio into longer duration bonds, a reduction of public equity holdings and higher interest rates. The chart on the right shows changes we made to the duration of the bond portfolio in comparison to interest rates. In 2021, we began reducing duration to reflect the belief that interest rates would rise. This not only reduced some losses as rates increased but it provided flexibility to reposition as yields increased. Starting in the middle of last year, we began increasing duration as rates increased which has increased market-based income. On Slide 15, let's take a closer look at our performance-based portfolio which offers diversification and enhances longer-term returns. The portfolio is anchored in private equity and real estate is diversified across infrastructure, energy, agriculture and timber investments. We hold more than 400 names, including funds with multiple underlying positions across diversified vintage years. These investments are focused on long-term value creation and we expect quarter-to-quarter income volatility as seen in the bars on the chart to the left, where quarterly returns have ranged from a negative 2.3% and to positive 8.6% over the last 5 years. The benefit from accepting this volatility is shown on the right with 3- and 5-year annualized returns of 19% and 12%. The private equity portion of the portfolio has outperformed public equity benchmarks over 3, 5 and 10 years. Slide 16 covers the results of our Protection Services businesses. Revenues in these businesses increased 8.9% to $697 million in the third quarter compared to prior year quarter. Increase is mainly driven by growth in Allstate Protection Plans which increased 19.2% compared to the prior year quarter, reflecting expanded products and international growth. In the table on the right, you will see that adjusted net income of $27 million in the third quarter decreased $8 million compared to the prior year quarter, primarily due to the higher appliance and furniture claims severity and a higher mix of lower-margin business as we invest in growth at Allstate Protection Plans. These were partially offset by improved margins at Allstate Roadside and lower expenses at Allstate Identity Protection. Shifting to Slide 17. Our Health and Benefits business also had good results. Both revenues and income increased significantly with the National General acquisition in 2021 as we added scale and capabilities. For the third quarter of 2023, revenues of $587 million increased by $17 million compared to the prior year quarter, driven by an increase in premiums, contract charges and other revenue in group health which was partially offset by a reduction in individual health and employer voluntary benefits. Adjusted net income of $69 million in the third quarter of 2023 increased $6 million compared to the prior year quarter primarily due to increases in group and individual health revenue and lower operating expenses. Now let's move to Slide 18 and discuss Allstate's approach to capital management to clarify how this differs from traditional methods used to evaluate capital such as the ratio of premiums to statutory surplus. On the left hand of the slide, we summarized 3 discrete components we evaluate to establish target capital which is the basis of our capital management framework. Base capital at the bottom is the capital required to meet ongoing operating requirements. Stress Capital is an additional layer of capital needed to cover tail events for the occurrence of multiple negative impacts, such as lower auto profitability and high catastrophe losses. The contingent reserve is for extremely low frequency and high severity events, a severe breakdown in diversification benefits and also provide strategic flexibility. We use a highly sophisticated model that breaks out individual risk types incorporates regulatory and rating agency considerations and uses extensive simulations to determine the right amount of capital for each component. This is more sophisticated and comprehensive than the ratio of premiums to surplus to determine the right amount of capital. For example, when calculating the premium to surplus ratio for the Allstate Insurance Company, the premiums for many of our subsidiary companies are included but over $1.6 billion of statutory capital is not included in the denominator. This framework also better assesses the use of catastrophe reinsurance particularly for large tail events then a simple ratio. Our sophisticated model and proactive actions provide flexibility to manage capital to maximize shareholder value creation. To close, let's turn to Slide 19 and recap all state strategic priorities. We continue making progress on our plan to return auto insurance profitability to targeted levels. We will pursue the divestiture of our Health and Benefits business, we're continuing to advance on our transformative growth initiatives. Proactive investment management has increased income. Allstate Protection Plans is expanding and these strategic priorities support value creation for Allstate shareholders. With that context, let's open the line to your questions.

Gregory Peters:

I guess for the first question and there was a lot to unpack in your release and slide deck. I'm going to focus on Slide 7 which is the transformative growth strategy. I was looking at your slide and it talks about building the new model and scaling the new model. And I'm just curious if you're running elevated expenses at this point because you're running 2 separate models. And as you roll out the model, I'm curious about how it's accounting for the nuances of different customers. And I'm thinking about the needs of preferred customers versus standard versus nonstandard?

Gregory Peters:

Well, that makes sense. I guess for my follow-up, I'm going to pivot to the pricing slides. I'm thinking Slides 9 and 10. And was wondering if you could -- I know you provided detail in your comments but if you could give us an update on the problematic states. I think in Slide 9, you said 41% of the -- of your business in auto is running above 100. If we look forward to 2024, how do you think this chart might look?

Gregory Peters:

[Indiscernible].

Mario Rizzo:

Just to give you a little additional color across the 3 states. And Tom is right, we've been talking about this all year and we've taken pretty significant actions to restrict new business volumes and it's down like we talked about earlier, about 75%. We've got 3 significant rates pending rate pending across all 3 states. We have an auto rate in California that we filed back in May, I believe, 35% we've got a 29% filing pending in New Jersey. We implemented rates in New York ranging from high single digits to low double digits or low teens across our opening closed books middle of the year. We just filed for another 18.3% in New York auto. So we've got significant rates pending with the department. As Tom mentioned, where we're at now is we need action those filings in the fourth quarter. And if we can't, then we believe the right thing to do for the customers in the other 47 states as well as for our shareholders is to take additional action to get smaller across all 3 of those states and that's what we would do beginning next year if we can't get resolution on the rate filings that are currently pending.

Unidentified Analyst:

It's Marley [ph] on for Alex. So you mentioned in the prepared remarks that you were increasing in-person inspections to reduce overall claim costs. Could you touch on this a little bit more? How impactful is this? And then maybe how many of the current accidents are assessed now in person versus remote? And then how should we think about this for near-term changes to loss LAE?

Unidentified Analyst:

Got it. And then I just wanted to get your thoughts on longer-term severity drivers that you're seeing in terms of medical inflation and any impacts from the UAW strike?

Operator:

[Operator Instructions] And our next question comes from the line of Elyse Greenspan from Wells Fargo.

Jesse Merten:

Yes, Elyse. Thanks. This is Jess. We have talked a lot about our reinsurance program in general. As you know, we have a robust reinsurance program that reduces our overall capital levels. We've talked more recently about the aggregate cover. At this point, we don't have specific updates about the potential transaction. As I've talked about a number of times, we're looking at whether or not we can economically reduce overall risk and target capital. And to the extent we find a structure where we can get that done, we'll do it. And to the extent we can't get it done economically we'll move on and look at other options. So I would say, as it relates to this quarter, no updates. We continue to be interested in understanding what might be available to attract some new capital. sources into the industry and make them available. But we don't have anything firm to talk about at this point on that.

Tom Wilson:

Of course, yes. So they're there but we factor that into our overall position here.

Unidentified Analyst:

This is Jack [ph] on for Mike. Just one question on changes to Allstate's captive distribution commission and fee structure. I think you mentioned earlier, how it has driven greater bundling rates. I'm just wondering does also expect this change to impact overall organic growth levels? And do you expect a meaningful benefit to the company's expense ratio?

Mario Rizzo:

Yes. So again, I would characterize the most recent set of changes as a continuation of what we started really several years ago which was intended to drive higher levels of productivity in the exclusive agent distribution system but also reduced distribution costs over time. And I think what we're seeing if you -- particularly if you take out the impacts of the 3 large states where we're purposely driving reduced volume is exactly what we had hoped would happen. So from an expense standpoint, you see in the quarter, we benefited by 2 or 3 from [ph] the distribution cost perspective. So we're continuing to see the impacts and benefits of lower distribution costs. but more importantly, the productivity of the exclusive agency system continues to improve. So I can take out those 3 states, overall production was up 7.6%. Average productivity was up over 13%. And when you look at our top tier of agents, we segment agents into 3 categories, emerging Pro and Elite, that elite group, their level of production was up 15%. So that shows that agents continue to invest in their businesses and take advantage of increased shopping levels in the marketplace but they're focused on driving the kind of growth that will certainly become a real asset for us as we begin to lean back into growth as different states hit target levels of profitability. So we're really encouraged, both in terms of the performance of our agency channel, how they've adapted and the fact that we've been able to take cost out of the distribution system at the same time.

Joshua Shanker:

I have a model that goes pretty far back. And historically, if you look at reserves and try and analyze that -- it's hard in short-tail lines. Historically, Allstate run at about a 95% paid to incurred loss ratio. For every dollar of loss you put 5 in the reserves for future losses. And that's true in 3Q '23. But for the previous 5 quarters, it ran at an astonishingly low 83%. I know that you try and get the reserves right. But it does feel over this period of elevated loss ratio that the company put a lot more of its reserves of losses into reserve than any time in my model. Is there something different that had gone on over the past 5 quarters now that you're resuming a normal sort of pay to incur trend? Or is it just -- that was unusual period in you needed to put more reserve?

Jesse Merten:

No, I would agree with that. I also think you should keep in mind that, that same period was a period of extreme acceleration in the loss cost trend which you wouldn't see over the historical periods, right? So you're going to get a different pay-to-incurred ratio when you have acceleration, the way that we've seen and you saw what our severity trend was last year, you've seen what it is this year. So I think a component of that clearly is just the time period that you're looking at and the acceleration of the underlying trend.

Tom Wilson:

Let me start and then Mario just if you guys want to jump in. First, I would start with saying we've built a really great business model in homeowners just like we make more money than the industry on auto insurance were even better in homeowners. And you see those results over 10 years. You do see this year a lot of catastrophes which is like to have an underwriting loss which we prefer not to have that said, catastrophes happen and that's why people buy insurance. So we're comfortable that, that worked. When you look underneath that and say, okay, what's driving those cat losses storms are more severe now. So just the fact you have a more severe storm will increase the severity of the losses that you have one on a strong, whether that's hail storm or a tornado or a hurricane, it just causes more damage. Underneath both that and a traditional loss are just the normal inflationary pressures. And so the cost of lumber goes up, whether you burn your house down or get knocked down by a hurricane, it's that underlying it. So you have kind of a compounding impact on catastrophes. That said, we're good at it. We manage it by state. So you're correct, Illinois would have less pressure because it would have less catastrophe losses than perhaps a state along the East Coast or in the Southwest on the coast. So -- we factored that all in and both of those things there. We do think though that we -- you've seen the raise in prices that spend both of those factors have increased it. So the dramatic increase in homeowners insurance prices has been driven by both those factors. Anything to add, Mario [ph]?

Operator:

[Operator Instructions] And our next question comes from the line of Tracy Benguigui from Barclays.

Tom Wilson:

Neither. And nor was it in relationship to any shareholder asking us to pursue a sale. I know a few of you wrote about. Let me just tell you what it is. So -- we're selling the businesses because it's the best way to capture the value credit. They're terrific businesses. I mean we make almost $0.25 billion a year. And we get a good platform, they have low capital requirements. We like the businesses. When we look forward to the future, though, we said we think we can harvest more growth from it if we had more complementary distribution, a broader set of products, capabilities such as network management of a health network like manage that. Those are things that we don't have today. We said we can build those it would take us time and money. On the other hand, we could access those that already exist. But that requires us to let go the success we've created. So we decided to choose the latter path. It had nothing to do with a shareholder coming to us and saying, you should sell this had nothing to do with needing the money, it has everything to do with this is the right way to manage your company to optimize shareholder value which is sometimes you have to let go of the success you've created.

Tom Wilson:

These are low capital businesses. So this First, I would say, on the price high would be the appropriate message I'd like you to carry out there because we do like the businesses a lot. Secondly, they're pretty low capital businesses. So whatever the sale price is, will generate additional capital. And then we'll decide what we want to do when we get there. We've got plenty of other growth opportunities. We're doing a lot with to grow market share and profit liability. We don't need to make that decision right now, so we're not going to.

Tom Wilson:

There's -- we have all the options that you would have to use capital. Organic growth to buying shares back. All those options are out there. We have no set plans for the capital. Right now, we're focused on -- this is a great business. We can help it be an even greater business by letting go of it. So that's what we're going to do.

Tracy Benguigui:

Got it. And just quickly on your commentary of extending your asset duration now at 4.6 years. I mean you don't have a life business anymore. You plan to divest the Health and Benefits business. How you think about the optimal asset duration relative to your pro forma duration of your remaining liabilities?

Mario Rizzo:

Yes. I'd just add that -- another thing to consider when one lengthens out duration is just that you keep the appropriate amount of liquidity and flexibility in the portfolio. And I can assure you that we are doing that between the cash that we hold short-term position to other things that we can turn into cash in short order and just maturities by year-end, we're close to $10 billion. So we believe that we're both capturing the additional income that the market is giving us. lengthening out to preserve the capture of that income for a longer period of time, building some resilience into the portfolio in case the economic environment would change, while also providing adequate liquidity.

Tom Wilson:

Well, the Property-Liability business is a little different than the life business in terms of matching to liabilities. In the life business scores, we have a set maturity date and you can factor in some stuff and you figure out let's match that off. In the Property-Liability business, of course, the liabilities are much shorter but then they're naturally recurring. So you pay off 1 claim and you get another one. Is that a separate claim or -- and so if you match it to that, you'd be having here for 90 days for a physical damage claims. So it's really more about liquidity and overall risk management. And I would also point out a large part of our set capital is there in case we mess up on underwriting income. And so that has a really long duration on it.

Operator:

Our next question comes from the line of David Motemaden from Evercore ISI.

Mario Rizzo:

David, it's Mario. Thanks for the question. I'll talk a little more qualitatively about frequency since we now are disclosing more pure premium trends which combine the overall loss trend. We just think it's a better way for you all to look at and think about auto profitability. But in terms of auto frequency, the headline is it continues to revert back to pre-pandemic levels but remains below where it was in 2019. There continues to be a tailwind when you think about the safety features embedded in vehicles that will continue to help improve frequency, we think, from a long-term trend going forward. And then when you look at the other driver which is driving activity. When we look at our telematics data, we look at the number of miles that a person is driving each day. It's up mid-single digits compared to last year, still skewing less to rush hour times which benefit frequency and more to nonpeak hours. But that trend has been pretty stable over the last several quarters and we feel like we're in a period of stability in terms of driving behavior. So net-net frequency is up modestly. It's a small component of pure premium. So just to give you a couple of numbers. When you adjust out the intra-year impact in pure premium, it's up about 9.7% year-over-year in the quarter and we said severity was up 9% [ph]. So you can see the modest impact that frequency is having, again, as people drive a bit more than they were a year ago.

Mario Rizzo:

Yes, David, the trend has been pretty stable over the last several quarters in terms of when we look at miles driven for our book.

Tom Wilson:

Let me David maybe a couple of thoughts. First, there's a lot of analysis on it. People want to tend to like assume that it's a straight line. And actually, there's competition for the customer amongst all of those. So our effort to reduce the cost that Mario talked about in providing an agent is to give customers better value which should take share away from some of the other 2. The independent agents also are a good place people want to come where they don't want to just buy from an insurance company. They want somebody to shop around for them and want them to do the work for it. On the direct channel, obviously, with increased connectivity, the direct channel has certainly grown. But it's also growing a lot because billions of dollars of advertising going to it. So it's an overall ecosystem, I guess, I would say. And so we look at it and like, we want to be there. People want to have buy from a company like Allstate. Allstate brand name, want to go to that agent. We want to be there for that person with everything they have. The same thing if they want someone to shop or on them, don't want to do the work. We want to be in that independent agent channel. And then in a direct channel, if they want to buy directly then. And what we are doing is using the technology between those various things make it an even better value proposition. So we showed you that cell phone which had the 3 offers in it. Imagine an agent now being able to not have to ask you a whole bunch of stuff; what's your deductible, what kind of stuff. But we pre-populate it with, here's what we think David's deductible should be, offer David this package you put them in a different position. So we look at it really as sort of organic and it moves between there. And we want to be there for all of our customers. So it's not like we think 1 is going to win and the other is going to lose. It's just a constant competition to just do a better job for the customers that want to buy it that way. Jonathan, we'll take one more question.

Unidentified Analyst:

It's Jen [ph] on for me. Most of my questions are answered just 1 on the growth in 2024. So what is your expectation and plan for next year? Is the nonstandard auto still be the key growth driver -- any color on that would be great?

Mario Rizzo:

Yes. The only thing I'd add as we look ahead is -- I think it's important to recognize that we manage the business on a local level. That means state by state, market by market, risk segment by risk segment; that's been the approach we've taken to improve profitability and we're taking that same approach as we look forward in terms of growth. And I think it's -- where we're at is really 2 groupings of states emerging. Tom talked about the 3 that we've just got to get more rate and get more profitable. And before we can even begin to think about growing and investing in growth because it just economically doesn't make sense for us and that's California, New York, New Jersey. The rest of the states that if you divide them, there's a number of states that are already at target levels of profitability and we're beginning to do things like make local marketing investments, leverage a lot of the capabilities we've been building with transformative growth, the momentum we've got in the exclusive agent channel, the improvements we've made in direct and the capabilities we've built there and what we're building in the independent agent channels with things like Custom 360 and nonstandard auto. So we feel like as a system we are much more effectively positioned to grow when the time is right for us to grow. And as we look out into 2024, we think more states will fall into that ready-to-grow category in terms of target levels of profitability. And we look forward to continuing to invest in growth in those states and leverage the capabilities we've been building with transformative growth.

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Good day, and thank you for standing by. Welcome to Allstate’s Second Quarter Investor Call. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please limit your enquiry to one question and one follow-up. As a reminder, please be aware that today’s call is being recorded. And now, I’d like to introduce your host for today’s program, Brent Vandermause, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Good morning. We appreciate you investing your time in Allstate. Let's start with an overview of results and then Mario and Jesse will walk through operating results and the actions being taken to increase shareholder value. Let's begin on Slide 2. Allstate's strategy has two components; increase personal profit liability market share, and expand protection services, which are shown in the two with on the left. On the right-hand side, you can see a summary of results for the second quarter. Progress is being made on the comprehensive plan to improve auto insurance profitability, which includes raising rates, reducing expenses, limiting growth and enhancing claim processes. While auto insurance margins are not at target levels, the proportion of premium associated with states operating and that underlying -- underwriting profit has gone from just under 30% in 2022 to 50% for the first half of this year. Mario will discuss the actions being taken to continue this trend and importantly, improved results in New York, New Jersey and California. Severe weather in the quarter contributed to a net loss of $1.4 billion, 42 catastrophe events impacted 160,000 customers and resulted in $2.7 billion of catastrophe losses and a property liability underwriting loss of $2.1 billion. Strong fixed income results from higher bond yields generated $610 million of investment income and Protection Services and Health and Benefits generated $98 million of profits in the quarter. The transformative growth plan to become the lowest cost protection provider is making continued progress. This both helps current results with lower costs and positions Allstate for sustainable growth when auto margins return to acceptable levels. Affordable, simple and connected property liability products with sophisticated telematics pricing and differentiated direct-to-consumer capabilities are being introduced under the Allstate brand through a new technology platform. National General was growing, which will also increase market share. Specialty auto expertise, along with leveraging auto’s Allstate strength in preferred auto and homeowners insurance products are expected to drive sustainable growth. Allstate Protection Plans is expanding its embedded protection through new products and retail relationships and in international markets. Allstate has a strong capital position with $16.9 billion of statutory surplus and holding company assets, as Jesse will discuss later. And as you know, we have a long history of providing cash returns to shareholders through dividends and share repurchases. Over the last 12 months, we've repurchased 3.9% of outstanding shares for $1.3 billion. We suspended this is repurchase program in July, as we had a net loss for the six months of the year. Improving profitability, increasing property liability, organic growth and broadening protection offered to customers through an extensive distribution platform will increase shareholder value. Let's review financial results on Slide 3. Revenues of $14 billion in the second quarter increased 14.4% above the prior year quarter of $1.8 billion. The increase was driven by higher average premiums in auto and homeowners insurance from rates taken in 2022 and 2023, resulting in property-liability earned premium growth of 9.6%. Net investment income of $610 million reflects the impact of higher fixed income yields and extended duration, which will substantially increase income. This growth more than offset a decline from performance-based investments in the quarter. The net loss of $1.4 billion and an adjusted net loss of $1.2 billion reflects a profit liability underwriting loss of $2.1 billion due to the $2.7 billion in catastrophe losses and increased auto insurance loss costs. In auto insurance, higher insurance pros and lower expenses were largely offset by higher catastrophe losses and increased claim frequency and severity. The underlying auto insurance combined ratio did improve slightly for the first six months of 2023 compared to the year-end 2022. Auto insurance had an underwriting loss of $678 million. In homeowners insurance, catastrophe losses were substantially over the 15-year average, resulting in a combined ratio of 145, generating an underwriting loss of $1.3 billion. The underlying combined ratio on homeowners improved 1.9 points to 67.6% as higher average premiums more than offset increased severity. Adjusted net income of $98 million from protection services and health and benefits when combined with the $610 million of investment income offset a portion of the underwriting loss. The target for enterprise adjusted net income return on equity remains at 14% to 17%. I'll now turn it over to Mario to discuss profit liability results.

Jesse Merten:

Thank you, Mario. I'd like to start on Slide 10, which covers results for our Protection Services and Health and Benefits businesses. The chart on the left shows Protection Services where we continue to broaden the protection provided to an increasing number of customers largely through embedded distribution programs. Revenues in these businesses, excluding the impact of net gains and losses on investments and derivatives increased 9.1% to $686 million in the second quarter compared to the prior year quarter. Increase reflects growth in Allstate Protection Plans and Allstate Dealer Services, partially offset by a decline in parity. By leveraging the Allstate brand, excellent customer service and expanded products and partnerships with leading retailers, Allstate Protection Plans continues to generate profitable growth, resulting in an 18% increase in the second quarter compared to the prior year quarter. In the table below the chart, you will see that adjusted net income of $41 million in the second quarter decreased $2 million compared to the prior year quarter, primarily due to higher appliance and furniture claims severity and a higher mix of lower-margin business as we invest in growth at Allstate Protection Plans. We'll continue to invest in these businesses, which provide an attractive opportunity to broaden distribution protection offerings that meet customers' needs and create value for shareholders. Shifting to the chart on the right, Health and Benefits continues to provide stable revenues while protecting more than four million policyholders. Revenues of $575 million in the second quarter of 2023 increased by $2 million compared to the prior year quarter, driven by an increase in premiums, contract charges and other revenues in group health, which was partially offset by a reduction in individual health and employer voluntary benefits. Health and Benefits continues to make progress on rebuilding core operating systems to drive down costs, improve the customer experience and support growth that generates shareholder value. Adjusted net income of $57 million in the second quarter of 2023 decreased $10 million, compared to the prior year quarter, primarily due to the decline in employer voluntary benefits, individual health and higher expenses related to system investments. Now let's move to Slide 11 to discuss investment results and portfolio positioning. Active portfolio management includes comprehensive monitoring of economic conditions, market opportunities, enterprise risk and return and capital, as well as interest rates and credit spreads by rating, sector and individual name. As you'll recall, last year, exposure to below investment grade bonds in public equity was reduced. We maintained this portfolio allocation in the second quarter, which enabled us to extend duration of the fixed income portfolio and increased market-based income levels. As shown in the chart on the left, net investment income totaled $610 million in the quarter, which was $48 million above the second quarter of last year. Market-based income of $536 million, shown in blue was $168 million above the prior year quarter, reflecting repositioning of the fixed income portfolio into longer duration and higher yielding assets that sustainably increased income. Market-based income has also benefited from higher yields for short-term investments in floating rate assets, such as bank loans. Performance-based income of $127 million shown in black, was $109 million below the prior year quarter due to lower valuation increases and fewer sales of underlying assets. Our performance-based portfolio is expected to enhance long-term returns and volatility on these assets from quarter-to-quarter as expected. The chart on the right shows the fixed income earned yield continues to rise and was 3.6% at quarter end compared to 2.8% for the prior year quarter and 3.4% in the first quarter of 2023. This chart also shows that from the fourth quarter of 2021 through the third quarter of 2022, lowering fixed income duration mitigated losses as rates rose. Beginning in Q4 of 2022, we began to extend duration, which locks in higher yields for longer. In the second quarter, we further extended duration to 4.4 years, increasing from 4 years in the first quarter. Our fixed income portfolio yield is still below the current intermediate corporate bond yield of approximately 5.5%, reflecting an additional opportunity to increase yields. To close, I'd like to turn to Slide 12 to discuss how Allstate proactively manages capital to provide the financial flexibility, liquidity and capital resources necessary to navigate the challenging operating environment. Capital management is based on a sophisticated framework that quantifies capital targets by business, product, geography, investment type and for the overall enterprise. Targets include a base level of capital for expected volatility and earnings as well as additional capital for stress events, situations where correlations between risks are higher than modeled and other contingencies. This model enables us to proactively manage capital in a dynamic and uncertain environment. Utilization of reinsurance, both by event and in aggregate is assessed relative to overall enterprise risk levels. A robust reinsurance program is in place with multiyear contracts to mitigate losses from large catastrophes. Homeowners insurance geographic exposures are managed to generate appropriate risk-adjusted returns, including lowering exposure to California and Florida property markets. This framework was used to decide to purchase additional aggregate program coverage this year. Reducing high-yield bonds and public equities in the investment portfolio significantly reduced the amount of enterprise capital required for investments. This decision was based on market conditions and the decline in auto profitability as well as the desire to reduce volatility and statutory results. It also provides a sustainable source of increased income in capital generation. The decline in auto insurance profitability is also captured by our framework, which increased capital requirements for auto insurance from pre-pandemic levels to reflect recent results. The capital management framework ensures Allstate has the financial flexibility, liquidity and capital resources necessary to operate in challenging environments and be positioned for growth. Allstate's capital position is sound with estimated statutory surplus and holding company assets totaling $16.9 billion at the end of the second quarter, as shown on the table to the left. Holding company assets of $3.3 billion represent approximately 2.5x our annual fixed charges with no debt maturities for the remainder of 2023 and a modest amount maturing in 2024. Senior debt and preferred stock refinancing in the first and second quarters of this year demonstrate our ability to readily access capital markets to address maturities as they arise. In response to the loss this quarter, we have suspended share repurchases under the $5 billion authorization, which is 90% complete. This authorization expires in March of 2024. In addition to having a strong capital base, Allstate has a history of generating capital and statutory net income in our largest underwriting company, Allstate Insurance Company, as you can see on the chart on the right. Statutory net income averaged $1.9 billion annually in the 10 years prior to the onset of COVID. You can also see the impact of the rapid increase in auto insurance claim severity and recent catastrophe loss experience on 2022 and 2023 statutory net income. We're confident that the auto insurance profit improvement plan will restore profitability. The homeowner's insurance business is designed to generate underwriting profits, and proactive investment management will create additional capital to grow market share, expand protection offerings and provide cash return to shareholders. Allstate will continue to proactively manage capital to navigate the current operating environment and be well positioned for growth to increase its shareholder value. With that as context, let's open up the line for your questions.

Gregory Peters:

Well, good morning, everyone. I guess, I'm going to focus on auto insurance profitability for my first question. And obviously, there's a bunch of slides in your presentation, the one where you identified the three states. I guess from a bigger picture perspective, though, -- do you have updated views on frequency and severity for the second half of this year or for next year versus what you were thinking at the beginning of the year I guess what I'm ultimately getting is how much more rate do we need to get that underlying combined ratio number that you use on the slide 6 -- excuse me, slide 5 to get it down to the low to mid-90s.

Mario Rizzo:

I think, Greg, the thing I'd add is less about to Tom's point, what we expect going forward and more about what we're seeing and maybe just give you a little more color underneath the loss cost trend. So as you remember, last quarter, we started giving you pure premium trends as opposed to coverage specific frequency and severity because we just think it's a better way for you to evaluate where overall profitability is going. And the point I'd make is if you look on Slide 5, as Tom pointed out, for the first couple of quarters this year, we've seen the average earned premium trend begin to outpace the increases in loss and expense. It's hard to predict what the future will hold, but that's an encouraging development. Underneath that loss trend, if you look at where we're at in the second quarter compared to where we were for the full year last year, the increase in pure premium is about 12.5%, and we told you that severity is up on average across all coverages by about 11%. So what we're seeing still is persistently high severity across coverages with a lesser impact from overall frequency increases. The point being we're going to continue to aggressively implement our profit improvement plan, you've seen what we've done with rates. We've done 7.5 points through the first half of this year in the Allstate brand, 5.5 points on National General. We're going to continue to do that. You see the benefit that the cost reductions is having on the combined ratio while that rate earns in. And we've talked a lot about those three states, which make up about one-quarter of our book, California, New York and New Jersey. We want to keep pushing on continuing to drive rate increases into the book. We've gotten some approvals so far this year, but there's rates pending, pretty significant rates pending in California and New Jersey, and we're prepared to file another rate in New York. So we're going to keep pushing really hard on that. And in the meantime, we've scaled way back on new business production in those states. And while it's having a reasonably small impact on the loss ratio so far this year, because new business just tends to be a smaller proportion of our overall book, it will continue to have a favorable impact on our loss ratio going forward. And until we get to adequate rates in those three states, we're going to keep restricting the volume of business we're willing to write.

Tom Wilson:

Mario can answer how we feel about the growth and the profitability of the growth in National General, Greg, let me just settle up context. So first, the acquisition of National General is exceeding our expectations. As, you know, we bought the company so that we could consolidate our Encompass business into it that would reduce the cost and create a stronger business that we're serving independent agents. We like what we got there. The consolidation and the cost reductions are exceeding our expectations. And that was the basis under which we agreed to where the economics of the acquisition made at. The upside from there was growing in the IA channel, both through the specialty vehicle product and by building new products for preferred auto and homeowners insurance using Allstate's expertise, both of which are also becoming reality. Mario, do you want to talk about, I guess, both reserves. But I think Greg's underlying question there was like you're growing, is that a good thing?

Gregory Peters:

Got it. Thank you for the detail and your answers.

Josh Shanker:

Thank you very much for taking my question. Yes. Tom, there's the amount of rate that you need and the amount that you can get over a certain period of time, but when you look back to the beginning of the year and you had your plan for taking rates and you've learned about some changes in frequency and severity over the past six, seven months. Has that changed the perspective on how much rate you need and want to ask for? And does that change the 2023 plan, or does that mean that the regulators will give you only so much and you have get that rate in 2024 and beyond?

A – Mario Rizzo:

Yes. Just a couple of additional data points, Josh. As Tom mentioned, our data is immediately -- our indications are immediately responsive to the data we're seeing. So we're constantly updating rate indications and filing for what we need based on what we're actually experiencing versus what we thought we would have needed going into the year. And the other point I'd make is, and this is on a couple of the states that we've spiked out for you. We're evaluating trade-offs and leaning in where we think it just makes sense. So for example, in California, got the 2 6.9% rate and we turned around and filed for essentially our full indication at 35, knowing that, that was likely to require a longer review period. There was a little more risk there, but we thought it was the right thing to do. In New Jersey, we did the same thing. We got the 6.9% rate approved, which is essentially the cap that the state hold you to, but then we opted to utilize an administrative provision and file for a 29% rate. So again, we're aggressively pushing on the amount of rate we need based on the loss experience where we've got in real time. And we're going to keep doing that. and keep pushing rate through and working with all the departments and each of the regulators to get those rates approved as quickly as we can to continue to bend the line on that loss trend.

A – Mario Rizzo:

Yes. I mean for filing used state, certainly, we're filing based on current data as opposed to relying on prior year-end or any of that information. So what we're doing is, Josh, is reacting to the loss trends we're seeing incorporating that into the filing, and that's what kept submitted.

Operator:

One moment for our next question. And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question, please.

Tom Wilson :

Elyse, let me start macro and then ask Jesse to maybe dig in even a little more. I know you spend a lot of time on capital, so we can help you show you what we believe to be true. First, we have a long history of proactive managing capital, whether that's how we deploy it at the individual risk level or what we do with different investments, as Jesse talked about, whether it's selling businesses like life and annuities or using alternative capital like reinsurance or cat bonds or providing cash to shareholders through dividends and share repurchases. As you point out, I think if you look at the Q, we bought back about $37 billion of stock since we went public. And so that's because we're -- we got good math, which Jesse will talk about, and we do a proactively. I think the suspending the share repurchase we just sound judgment. If you're not making money, don't buy shares back. It's really not a lot more complicated than that. I mean, it obviously helps you preserve capital, but just sort of good logic always serves the right kind of capital plan, which is you got to make money to be buying shares back. Jesse, do you want to talk about maybe give at least some more specifics on this whole capital?

eyes:

Now that capital is all available to us and our comprehensive and more precise capital management framework considers those facets. So -- and I think it's important to go back to really how we're managing capital through what we consider to be a very detailed and sophisticated economic capital framework that quantifies enterprise risk and establishes our targets. As we've talked, that includes inputs from regulatory capital models, rating agencies and then our own risk models to help to quantify stress events, and we built those models really off of their risk models that are used to regulate banks. We feel very good about the output of our overall economic capital model. So we use that then as we've discussed, to determine a level of base capital that we need to operate our business while continuing to meet customer needs and amounts that are well above triggering any regulatory involvement. So you've got base capital. On top of that, we hold stress capital for unexpected on frequent outcomes. And then we have a contingent reserve that we use and included in our target capital range, that's really meant to incorporate extreme stress events, extreme low frequency events and just basically things that are beyond the standard probabilities that we apply to our stressed capital calculations. So high catastrophes this quarter used some of the contingent capital reserve, but we continue to hold stress capital that's above our base capital level, and we remain confident in our capital position and our ability to execute on strategy, we look ahead. I think your question gets to the future, right? So I wanted to build a base for reminding everyone how we think about it. But as we look to the future, it's more than just a question of the buybacks, it's what is their capital perspective look like. And we continue to believe we're well capitalized even if it takes longer than we expect to get auto profitability back to targeted levels and even if catastrophes come in at more expected levels, for the rest of the year in 2023. Even at more normal levels of catastrophes for the rest of the year, 2023 will be the highest year for catastrophe losses on a pure dollar basis in about 25 years. So it's a high cap quarter. We continue to feel good about capital, liquidity is not an issue, as we've talked about. We have a strong source of cash through interest payments and maturities that come over the next 12 months, and we have about $5 billion that comes off the portfolio that selling everything in the next 12 months, and we have a highly liquid investment portfolio. We also have a number of capital options that we're continuously evaluating given our proactive approach to capital management, as Tom mentioned. So that includes additional reinsurance options that could allow us to lower the volatility of our earnings at an attractive cost of capital, and we continue to look at those things. I think we've also proven in the last couple of quarters, we have open access to financial markets where we showed that through our -- some of our refinancing activity. So we have a lot of options. I want to kind of close out with -- as it relates to capital options and capital strength, issuing common stock at this point is not something that we're considering. It's not an option that's on the table given how we feel about our overall capital position. So maybe that -- I know it's more than just when you're going to turn back on buybacks. But I want to -- I think the context around how we think about capital management is more important to how we might answer that question in the future. So hopefully, that was helpful.

Tom Wilson:

Elyse, so on the investment side, that decision was primarily made from a risk and return standpoint, first starting at the markets. And we thought -- when we made the decision, we thought there is greater opportunity to make money by lengthening duration than by staying in equities. It had the benefit of reducing the volatility of equities. And in our models, the capital charges for equities is a lot higher the bot. So it has that capital benefit. If we felt like the time was right to go back long in public equities, then we would look at it at the time and then we'd say, okay, how much capital do we have and how do we feel about it? But we don't have a date in mind for that. I think when you just look at the economic environment, it's somewhat balanced.

Tom Wilson:

We have the capital to make our strategy is, of course, the way we're going to increase shareholder value. One, get profit up. Two, get growth up. And three, broaden the portfolio, which those lands to will lead to a higher multiple, and that's what we're trying to drive to.

Operator:

Thank you, one moment for our next question. And our next question comes from the line of Michael Zaremski from BMO. Your question, please.

Tom Wilson:

So first, the 14% to 17% confirmation was just really our way saying we don't see anything that diminishes the ultimate earning power of the company. What the equity base is and what the earnings are, of course, but we -- so we're really just trying to say we don't see anything that diminishes the earning power of the building company. We never said it was a cap. And as I just mentioned, our strategy is really get returns up to where they've been historically, which will increase shareholder value. And then the big differential we have versus progressive and others is we need higher growth to drive the multiple of and we're going to get that two ways to increase market share, personal profit liability to transformative growth. And then secondly, by expanding our protection offerings, which will drive the multiple up. So it's like step 1, step 2. We think they can both hit at the same time, to be honest, but that's what we're driving to.

Tom Wilscon:

Capital models are really driven on risk, which are tied to premium. So PIF doesn't really impact it. So -- which is the right economically, we believe the right way to do it. In terms of growth, we think we can -- Mario talked about growth in National General. We talked about growth in 50% of the markets were working there. When those 3 states that we need higher prices on get to the right level, we can grow there as we continue to roll out transformative growth and we'll be in -- we expect to be in 10 states with our new product this year, which will just be in the states and that we drive a lot of growth. but we're using machine-based learning some really cool direct stuff. So we think there's plenty of opportunity to grow. And so we're not concerned about it. The reason we're reducing the growth in those states like if you're not making any money, it doesn't make sense to sell it. Like I don't really understand the logic of we're losing money. Let's go out and spend a bunch of money to get business, and we'll continue to lose money until we can raise the prices later. That just raises your -- if you include those losses in your acquisition cost, it's hard to make the lifetime value work. So we chose not to write the business it's not quite really, as Mario said, it's not really a combined ratio impact. It's just like why do something that's uneconomic.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Alex Scott from Goldman Sachs. Your questions please.

A – Jesse Merten:

And I'll take that quickly. I think the first thing I would highlight is that the development this quarter was related to National General, so a little bit different than what we went through last year. And we don't separately disclose which prior years, it's attributable to. But it's safe to say -- given the nature of that business, some of the near and years, we continually, Alex, move reserves between years and coverages and prior year reserves and coming up with these estimates. And so it's safe to say that we're really focused on settling -- getting some of those older claims settled, getting the reserves right. And, sort of, again, I'm a broken record on this, but getting the aggregate reserve recorded properly. So this was really -- again, this was -- this quarter is certainly a story of the National General reserve levels. And the movement between prior years and coverage is just normal course this quarter.

Tom Wilson:

I think I'm probably the one that said 18 months that was not to imply that we think it's right to wait 18 months or it should take 18 months. We just said sometimes it takes a long time, the California department stayed on all rate increases for a couple of years. They're not in that mode anymore, and we're working actively with them because they know that's not a good place to be and it doesn't create a good market. So I think what you can do is just look at the monthly numbers we've put out on rate increases. You can factor that in. You can -- we've given some math on how it rolls into the P&L. And that will give you a good look 12 months forward at what that blue line is that Mario talked about and at what rate is going up. They will tell you what's going to come in. And then you can make your own judgment on what you think severity and frequency will be.

Brent Vandermause:

Hey, Jonathan, we’ll take one more question.

Yaron Kinar:

Thank you. Good morning. Thanks for first allowing me in here. I want to go back to the capital question and the decision to stop the buybacks, if I may. And Tom, I'm certainly -- I appreciate the thought of it doesn't really make sense to buy back stock when we're generating a loss. That said, I think we have seen about $2 billion of buybacks since I think, the second quarter of last year in a loss environment. I think everything you're showing on -- and presenting in the slides would suggest that we are hopefully inflecting in the auto margins. I think even a quarter ago, you were still talking about over $4 billion of holdco liquidity. So I'd just love to better understand what changed or shifted in the thinking here to make you decide to stop here, especially when stock seems to be attractively valued relative to previous buybacks?

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to Allstate's First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Good morning. We're excited for Mark, and we're completely confident that Brent is going to give you everything you need to help you decide how and why you want to invest in Allstate. So good morning. We appreciate the investment of your time in Allstate today. Let's start with an overview results, and then Mario and Jess are going to walk through the operating results and the actions that we're taking to increase shareholder value. So let's start on Slide 2. Allstate's strategy, as you know, has two components, increased personal property-liability market share and expand protection services. Those are shown in the two ovals on the left. If you go to the right-hand side of the slide, you can see a summary of the results for the first quarter. We had a net loss of $346 million in the first quarter, which reflects a property liability underwriting loss which was only partially offset by strong investment income and profits from protection services and health and benefits. We're making good progress on executing the comprehensive plans to improve auto insurance profitability, and of course, we'll have a substantive discussion on that today. Not to be overlooked, we also continue to advance Transformative Growth plan, which is to execute the top oval there, which is to increase Property-Liability market share. At the same time, Allstate Protection Plans in the lower oval continues to expand its product offering and geographic footprint. Let's review the financial results on Slide 3. Revenues of $13.8 billion in the first quarter increased 11.8% or nearly $1.5 billion as compared to the prior year quarter. The increase was driven by higher average premiums in auto and homeowners insurance, resulting in Property-Liability earned premium growth of 10.8%. In the auto insurance line, higher insurance premiums and lower expenses were essentially offset by increased loss costs, so the profit improvement plan has not yet returned margins to historical levels. The auto insurance line had an underwriting loss of $346 million in the quarter. In homeowners, the story is really about $1.7 billion of catastrophes, which led to an underwriting loss of $534 million. The total underwriting loss was just under $1 billion. Net investment income of $575 million benefited from higher yields, which mostly offset an income decline from performance-based investments. Protection Services and Health and Benefits generated adjusted net income of $90 million in the quarter. As a result, the adjusted net loss was $342 million or $1.30 a share. Now let me turn it over to Mario to discuss Property-Liability results.

Jess Merten:

All right. Thank you, Mario. Let's start with Slide 11, which covers results for our Protection Services and Health and Benefits businesses. Chart on the left shows Protection Services revenues excluding the impact of net gains and losses on investments and derivatives, which increased 7% to $671 million in the first quarter compared to the prior year quarter. Increase reflects growth in Allstate Protection Plans and Allstate Dealer Services, partially offset by a decline in Arity. By leveraging the Allstate brand, excellent customer service, expanded product offerings and partnerships with leading retailers, Protection Plans continues to generate profitable growth, resulting in a 17% increase in the first quarter compared to the prior year quarter. In the table below the chart, you will see that adjusted net income of $34 million in the first quarter decreased $19 million compared to the prior year, primarily due to higher appliance and furniture claim severity and a higher mix of lower-margin business as we invest in growth at Allstate Protection Plans. We will continue to invest in these businesses which provide an attractive opportunity to meet our customers' needs and create value for shareholders. Shifting to the chart on the right, Health and Benefits provide stable revenues and is consistently profitable while protecting more than 4 million customers. Revenues of $583 million in the first quarter of 2023 increased by $3 million compared to the prior year quarter as an increase in group health and other revenue was partially offset by a reduction in individual health and employee benefits. Health and Benefits operating systems are being rebuilt to lower costs and support growth, which will leverage the Allstate brand and customer base to generate shareholder value. Adjusted net income of $56 million was in line with the prior year quarter. Effective January 1, 2023, we adopted the FASB guidance, revising the accounting for certain long-duration insurance contracts in the Allstate Health and Benefits segment using the modified retrospective approach to the transition date of January 1, 2021. This had an immaterial impact on our results. Now let's move to Slide 12, which depicts trends in our investment portfolio allocation. Our active portfolio management includes comprehensive monitoring of markets, sectors and individual names, and we proactively reposition based on our views of economic conditions, market opportunities and the risk return trade-off. Asset class holdings are shown on the left. Our $63.5 billion investment portfolio includes a large allocation to high quality interest bearing assets, which has increased in recent years. In response to increasing recession risks, we defensively position the portfolio in 2022 by reducing our exposure to below investment grade bonds and public equity. We maintain this defensive position in the first quarter with additional reductions in our public equity exposure. Our performance based portfolio shown in green and gray enhances long-term returns and is broadly diversified with more than 400 assets. The portfolio is largely U.S. exposure that span vintage years, sponsors and sectors. Exposure to real estate and commercial mortgage loans is modest at $2.8 billion or 4% of the portfolio and is focused on more resilient sectors such as industrial and multifamily. We hold only $230 million in office properties for mortgages. In addition to real estate, we have selective exposure to the banking sector totaling about $4.5 billion and consists primarily of investment-grade, fixed income securities issued by large financial institutions. We hold $240 million of exposure to regional banks, primarily larger regional banks, and we did not realize significant losses related to recent bank failures. Our high-quality portfolio provides flexibility to take advantage of investment opportunities as economic conditions evolve while providing substantial liquidity to protect our customers. Let's shift from investment allocation to performance on Slide 13. As shown in the table at the bottom of the chart on the left, total return on our portfolio was 2.4% in the first quarter and 1.2% over the last 12 months. Net investment income, shown in the chart on the left, totaled $575 million in the quarter, which is $19 million below the first quarter of last year. Market-based income of $507 million, shown in blue, was $184 million above the prior year quarter following the proactive decision to reposition the market-based portfolio into higher market yields and an increase in fixed income funded by our reduction in public equity. Performance-based income of $126 million, shown in black, was $180 million below a strong prior year quarter. Volatility from quarter-to-quarter on these assets is expected. Our portfolio management and the allocation of risk capital to investments is highly integrated with the assessment of risk-adjusted return opportunities across the enterprise. As you'll recall, in response to declines in auto insurance profitability, last year, we defensively positioned the portfolio against rising rates and reduced our exposure to recession sensitive assets. As market rate grows, we began to increase the duration in the fourth quarter and ended the first quarter at four years. This duration extension locks in higher yields and income for longer while positioning the portfolio to benefit from potential future reductions in interest rates. The chart on the right shows the fixed income earned yield continues to rise and was 3.4% at quarter end. Our portfolio yield is still below the current intermediate corporate bond yield of approximately 5.1%, reflecting an additional opportunity to increase yields if rates stay at these levels. To close, let's turn to Slide 14 to discuss Allstate's strong financial position and prudent approach to capital management. In light of recent financial events impacting the banking industry, let's start with an overview of Allstate's liabilities. As you can see in the chart on the left, our liabilities primarily consist of property casualty claim reserves and unearned premiums that are not subject to unpredictable or immediate demand for repayment. Our sophisticated economic capital framework quantifies enterprise risk to establish capital targets by business, product, geography and investment while also providing additional capital for stress events or contingencies. The framework incorporates regulatory capital standards, proprietary econometric modeling, I struggled with that, rating agency criteria and other external assessments. It's used through the company from individual product and state-based decisions to establishing the appropriate amount of capital for each company and the overall corporation. Allstate's capital of $19.2 billion exceeds our target capital based on this framework. Our ratings remain strong, with S&P and Moody's assigning an issuer credit rating of A minus and A3, respectively, to our recent senior debt offering. Holding company assets of $4.2 billion as of the end of the first quarter represent approximately 2.5x our annual fixed charges. We returned $377 million to shareholders in the quarter through dividends and share repurchases. As a sign of our financial strength and commitment to shareholder returns, the common dividend was increased by 4.7% in the first quarter and paid in early April. With that as context, let's open up the line for questions.

Gregory Peters:

Well, good morning, everyone. A lot to unpack in your comments. I think what I'd like to do for my question and follow-up would be to focus on, first, Slide 5. And I was interested in your comments about the average underlying loss ratio, I think, up 6.5% in first quarter versus the average earned premium being a good guide for 5.7%. I guess the question would be, is the expectation that 6.5% is going to continue? And when will the average earned premium go beyond where the underlying loss ratio deterioration is?

Mario Rizzo:

Yes. Good morning, Greg. So in terms of claims severity, what we disclosed this quarter was across major coverages. We're running in the 9% to 11% range in both physical damage and in injury coverages. Really, the drivers of those costs, if you start with physical damage, we continue to see pretty persistent inflation particularly in parts and labor costs to repair cars. Actually, used car prices or total values for used cars actually came down a little bit in the first quarter in our numbers, but we had a higher percentage of total loss frequency which impacted the mix, so those are really the drivers. And on bodily injury, it's the same things we've been talking about. Medical inflation, medical consumption and attorney representation. So I think the drivers of severity continue to persist. In terms of where they're going forward, it's really anybody's guess, but I think our perspective is, and we've been pretty consistent on this point, we're going to continue to take prices up. We've been doing that really since the fourth quarter of 2021 throughout last year. That continued into the first quarter. We're going to continue to, on a forward-looking basis, implement rate increases to first catch up and then outpace loss cost trends. But our perspective on rates as we continue to need to push more price through the system, and we intend to do that throughout the balance of 2023.

Mario Rizzo:

Sure. So first I'll start with -- as we talked about, we just got approval for a second 6.9% auto rate increase in California, so we're -- going back to the fourth quarter of last year, we've got approval for 2 6.9% rates, and we've done that by working closely with the department to lay out our data and our loss costs. In those conversations, and I think you've seen some of this across the industry, the department is really encouraging carriers to file for the rate need that they have in their book as opposed to going forward with 6.9% rate increase filings, and it's really based on just the volume of rate filings they're getting. So as we talk to the commissioner and the department, we got -- we're able to secure approval for the two 6.9% rate increases, and we intend on filing the balance of our rate need going forward. Does that create risk in intervention? It does. But I think we need to get California auto prices back to where they need to be so that we can create the kind of availability for consumers, really, that they deserve in California. So we're going to work with the department closely, we're going to make that filing, and then we'll see where that takes us going forward.

Gregory Peters:

Got it. In New York, New Jersey?

Gregory Peters:

Got it. Thank you for the answers.

Paul Newsome:

Good morning. I was hoping you could give us a little bit more additional color on the risk inflation rate. Is it fair to say that what we saw in the first quarter was an acceleration of frequency or severity trends that was unexpected? And if so, maybe you could talk about a little bit more of the pieces that were that much worse that may have seemed to have caught some people in the industry off guard.

Mario Rizzo:

Yes. I guess what I would say about severity, again, in that 9% to 11% range is it just remains persistently high, I think, is how I would describe it, and that's true across coverages. It's certainly lower than what our expectations were for severity last year, what our ultimate forecast is for 2022. But it still remains at elevated levels, which is why I go back to we're going to need to continue to push rate through the system through the balance of this year to combat that inflation.

Tom Wilson:

Yes. Paul, I think there's a little bit of -- I mean, when you're looking at the percentages, it gets a little confusing when you're in a high increase environment. So if you looked at the numbers that Mario was talking about, are the percentages up versus the full year of 2022, not versus the first quarter of last year. As you know, the percentages kept going up as we move throughout the year and we adjusted our results, so what we've decided to do is to talk about the percentages up versus the full year. And I think, Mario, it is -- said it well, which is it continues to be high. And so we're trying to -- if you look at the percentage up versus what we thought it was in the first quarter, it would be higher than 10% to 11%, but it's not higher than what we thought the first quarter was at the end of last year. So as it relates to pricing, we're looking at just total loss cost frequency and severity, and we have to -- we believe we have to continue to increase prices this year. As Mario talked about, we were up almost 17% in the Allstate brand last year. I don't know. We don't have a target for what it will be this year. As Mario said, it's going to be what it needs to be.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please.

Tom Wilson:

Elyse thanks for the question. Let me provide a little overview and then Jess will jump into the specifics. The headline would be, we don't just look at RBC. And so as Jess said, so -- I mean, if you step back and say, what are the learnings from the recent bank failures? Having a capital problem is not something that just happens to you like an auto accident [ph], right? It's a result of a series of choices made over time. So in terms of our series of choices, we had this really comprehensive set of processes around those choices that are highly analytical. We look at all kinds of scenarios. We look at it frequently, and as a result of that, we come up with what we think the right amount of capital. It includes things like RBC it includes things, like the rating agencies it includes. In some cases, we are more restrictive in terms of the amount of capital we think we need than other people. So we don't play the game of RBC arbitrage, so to speak, and fool ourselves. With that, Jess, do you want to talk about how you think about capital and where we're at?

Tom Wilson:

But you shouldn't take the fact that we have less equity as a statement that we thought we needed to save capital. We have less public equity holdings, because we didn't think it was a good risk return trade-off, which John [ph] will be happy to talk about it if somebody wants to go through. But we think we have plenty of capital on this business.

Tom Wilson:

Well, first, we think the profit improvement plan is working. I would say, Elyse, that if you just summarize the first quarter, I would say we held serve, we held serve in the face of, if you're a tennis fan, 120-mile an hour serve, which was called continued high increase in severity. How will - we'll return the ball, and as you point out, it's about where it was last year. It is improved sequentially in the fourth quarter, but you're absolutely right. Yes, there were some other things going around in the fourth quarter related to the first, second and third quarter of last year. So it's not quite fair to say that it improved. I would just say we held serve. We feel good about where we're going. In our mind, it's a question of when, not if we will get back to how we make profitability. And that's, of course, dependent on what happens with inflation and costs.

Operator:

Thank you. One moment for our next question and our next question comes from the line of Yaron Kinar from Jefferies. Your question please.

Tom Wilson:

Yaron, I'm not exactly sure. Maybe you can give me another layer down in the question so we can get specific for you?

Tom Wilson:

Yes. No, it's a good point. Let me get John to answer that. I'll give you a little overview [ph]. First, I would just say analytics everywhere. It counts for everyone despite. So whether that's using sophisticated models is that where they toll the car or extending duration or what we're doing with capital. And so, when we look at the extension of duration, I think John ran like nine different scenarios, how to do it, what to do it, what and - so we're all over that. When it comes to stress events in the capital markets, we look at all kinds of alternatives there. Everything from -- and what do we do with the government defaults to what do we do if there's more bank failures. And so we have - and John can tell you sort, of how he's thinking about how we allocate assets in the portfolio relative to stress events in today's market. I would say from an overall capital standpoint, which is we got plenty of money. Like you saw our liabilities, they're very predictable, and so nobody is going to run in and say give us back our $10 billion and we don't have it. At the same time, we have a really highly liquid portfolio, because so much of it's in investment-grade fixed income. If it's fixed - investment-grade fixed income market is completely shut down, we would still probably be fine. Right now probably we would be fine, because we're having cash come in terms of unearned premiums every day, so we don't really have any overall liquidity issues. But in terms of capital market stress and how you think about that from an investment decisions and where we're invested today, John can give you some perspective.

Yaron Kinar:

Thanks. And then maybe shifting back to the auto book, is the piece or the cadence of rate increases that you expect to file in auto kind of similar to where it was when we ended in 2022 or do you see maybe additional rate increases are necessary today relative to the plan at the beginning of the year?

Mario Rizzo:

Yes. What I would add Yaron, I'm going to go back to a comment I made earlier, which is we've been pretty consistent on this point of the need to take prices up going back to last year, and that hasn't changed. Now obviously, we react to new data, new information in real-time and the absolute amount of rate we take is going to be dependent on that updated data. As Tom mentioned earlier, we rely on heavy-duty analytics to manage the business and we respond to what's happening in real time, so the amount of rate we need will be dependent on how loss costs play out over time for us. But we're going to continue to push rate through the system. We've been successful at that. I wouldn't get too hung up on quarter-to-quarter fluctuations because that quarterly number is going to bounce around in terms of the rates that were approved in a particular state, and the size of those rates. But I think thematically, I'm going to go back to what we've been saying now for -- over the last year, which is we're going to continue to take the rate that we need to get auto margins back to where they need to be, which is in the mid-90s targets that we have.

Mario Rizzo:

Thank you.

Andrew Kligerman:

Thank you and good morning. I'm trying to unpack the earlier comment about used car prices coming down a bit, because the Manheim Index was up about 8.6%, and that's kind of a forward-looking indicator. So maybe you could kind of give a little color on what your expectation there is for used car prices? Does that kind of fit in your 9% to 11% or could - of projected severity increase or could it be materially higher as we look out in the year?

Andrew Kligerman:

Got it, all right. Thank you on that. And then it was interesting following National General with auto policies in force now of about $4.6 million off pretty significantly from $4.1 million last year. It looks like you're getting good rate increases. Your combined underlying was 94%, so which is pretty decent. So looking forward, it sounds like you haven't fully rolled it out. Is this something that could really catapult your policy in force at a very responsible return? I mean, maybe a little color on how that - what your expectations over the next year to -- for policy growth and doing so profitably?

Andrew Kligerman:

Awesome, thank you.

Josh Shanker:

Yes, thank you. I want to talk about segmentation and policy count. Obviously, the net decline in the auto policy count was quite high this quarter. Do you have some sort of advice or thoughts to think about how much policy count will decline over this repricing period? But two, I also note that homeowners policy count was flat which suggests in the segmentation, there's different policyholders you're keeping versus different policyholders you're losing. So I thought you might be able to touch on both things?

Mario Rizzo:

Yes. Thanks for the question, Josh. And homeowners, again, as I talked about in the prepared remarks, is a business that we continue to feel really good about in terms of where it's positioned from a profitable growth perspective. And what you saw in the quarter is that we actually increased policy count by about 1.4%. Retention actually picked up by a temp. And I think there's a couple of things when you kind of unpack what's happening with retention in homeowners because much -- as Tom talked about, we're having to take prices up in auto. The way we're taking price increases is in a highly segmented and targeted way, and that's helping from a retention perspective on homeowners because those bundled customers tend to be our longest-tenured, most profitable customers. We also bundle about 80% of homeowners' policies have on supporting auto line and the retention on a bundled customer where a homeowner that has an auto policy is meaningfully higher than a monoline homeowners, and we're continuing to see the benefit of that. And we've put processes in place both in terms of economic incentives for our agents and sales processes in the call centers on the direct side to incent additional bundling. And we're seeing some nice trends in terms of bundling rates, which is certainly helping homeowner growth through homeowner retention. We're going to continue to look for ways to grow the homeowner business. We think it provides a really compelling risk and return opportunity for us. The results are going to bounce around because there's volatility. This quarter is an example of that with catastrophe losses, but we continue to see our underlying combined ratio and loss ratio improve, and both through leveraging the tactics I talked about for retention production, particularly with bundled customers, we think we can continue to grow that line.

Mario Rizzo:

Yes, we're obviously quoting bundled customers right now. And when you look at the business we are writing, we're seeing really nice improvements in terms of quality and lifetime value, which is indicative of that bundling rate. And so yes, we're quoting it. And the other thing you got to remember, and this is true both from a retention and a new business perspective. Bundling, it's an easier experience and a more streamlined experience for customers. There's discounts associated with bundling as well that can help offset higher auto rates and incent customers to stay with us.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Brian Meredith from UBS. Your question please.

Mario Rizzo:

Yes, Brian, this is Mario. Thanks for the question. Again, expenses as much as Tom talked earlier about, earned premium and loss ratio, we kind of held serve there. We did see the benefit of a lower expense ratio both in terms of the underwriting expense ratio and the adjusted expense ratio. Where we're at in the kind of continuum on the adjusted expense ratio, we set a goal to get that adjusted ratio down to about 23 by the end of 2024. And we're making really good progress on that, you saw continued progress on that this quarter. We certainly are being helped by higher earned premium which leveraged our cost. But we're continuing to see reductions in both operating costs and distribution-related costs, which are helping the expense ratio. And I talked a little bit earlier about the areas we're focused on, whether it's automation, digitization, sourcing and continuing to drive both operating and distribution costs down. We're going to -- those are really going to be the levers we pull to push the expense ratio ultimately to that goal that we set with Transformative Growth. So we're making good progress, feel really good about that. In terms of the level of marketing spend, certainly, we spent less this quarter on marketing than we did a year ago, and we've pulled that back. I think as Tom said earlier, really from an economic risk and return perspective, it doesn't make a lot of sense for us to invest aggressively in marketing at a time when our prices aren't adequate. But what we will do over time has more rates and -- or, I'm sorry, more states and more markets get to a rate level that we're comfortable with, we're going to surgically lean in. And as one of the components of Transformative Growth, we're going to look to both increase the level and the sophistication of the marketing investment that we make. And that will be commensurate with what we think the opportunity is to grow, so I can't sit here today and give you a specific dollar amount or our target that we're focused on. That's why we gave you the adjusted expense ratio, which excludes marketing costs because we're going to continue to invest in marketing when it makes economic sense and where it makes economic sense for us to lean in.

Brian Meredith:

Can I just -- one quick follow-up here. If I think of kind of going forward here, when you're looking at putting rate increases through for the remainder of the year, what's your kind of base case with respect to how you're thinking about inflation here? Are you assuming that the current inflationary environment in persisting through the remainder of 2023 as you're filing for rates?

Tom Wilson:

Thank you all for participating today. Thank you for being generous with your time. We're going a few minutes over. Our priorities, make sure we're going to make money in auto insurance and continue to leverage our superior position in homeowners as start to grow and execute Transformative Growth, whether that's by getting our costs down, rolling out new products, expanding our National General platform. And then we didn't spend any time today on the great stories we have in the lower oval, which is expanding Protection Services. So a lot of things we're working on hard to create more value for you. Thank you, and we'll see you next quarter.

Operator:

Good day and thank you for standing by. Welcome to Allstate’s Fourth Quarter Investor Call. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. [Operator instructions] As a reminder, please be aware that this call is being recorded. And now I’d like to introduce your host for today’s program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Well, good morning. Thank you for investing your time in Allstate today. I’ll start by setting context and then Mario and Jess would provide additional perspective on operating results and the actions being taken to improve auto profitability and increase shareholder value. So let’s begin on Slide 2. So as you know, Allstate strategy has two components

Jess Merten:

All right. Thank you, Mario. Well, property liability is a core business for us. There are other important drivers of financial performance to discuss, starting with investment income on Slide 13. As shown in the table at the bottom left, the total return of our portfolio is 2.5% in the fourth quarter and negative 4% for the year. These returns for our broadly diversified portfolio compare favorably to the full year performance for the S&P 500 of negative 18%, and to the Bloomberg Intermediate Bond Index return of negative 9%. Net investment income shown in the chart on the left totaled $557 million in the quarter, which is $290 million below fourth quarter last year. Market-based income of $464 million, which is shown in blue, was $101 million above the prior year quarter. This is the third consecutive quarter of increase as we benefit from reinvestment at higher market yields. Performance-based income of $147 million shown in black was $369 million below a strong prior year quarter. Income this quarter included in negative contribution from valuation of private equity fund investments that was more than offset by positive contributions from direct investments along with positive returns for infrastructure in real estate. The chart on the right shows the fixed income yield is rising and was 3.2% at quarter end, but is still below the current intermediate corporate bond yield at 5.3%. Also shown is that duration increased modestly to 3.4 in the fourth quarter, primarily by removing approximately half of our duration shortening interest rate derivatives. The migration of the portfolio to higher yield and the corresponding increase in income will happen over time as we reinvest portfolio cash flows into higher interest rates. With the portfolio in unrealized loss positions accelerating this shift by selling bonds to generate capital losses but will be pursued if it optimizes enterprise risk and return. Now let’s turn to Slide 14 and talk more about how enterprise risk and return management impacts investment allocations and results. Proactive investment management is highly integrated with risk adjusted return opportunities across the enterprise. We discussed this in detail on our September 1 Special Topic call on investments. In 2021, we decided to lower overall risk levels given the declines in auto insurance profitability. We also expected that sustained inflation would lead to higher interest rates. As a result, the economic capital deployed to investments was reduced. This led to a shortening of the bond portfolio through the sale of long corporate and municipal bonds and the use of derivatives. While adverse market conditions negatively impacted our portfolio, these actions mitigated losses by approximately $2 billion. In 2022, giving continued auto insurance losses, we decided to lower the potential for investment losses as the U.S. economy went into recession. At the same time, interest rates were increasing, offering a better risk adjusted return from fixed income. Consequently, holdings and below investment grade bonds were cut almost in half, and public equity holdings were lowered by 40%. Late in the year, interest rates had increased in the duration of the bond portfolio was extended as shown on the previous slide. About half the duration shortening derivative position was removed in the fourth quarter, at the same time, this lowered the amount of economic capital deployed to investments. These actions optimize enterprise risk and return and provide flexibility to take advantage of investment opportunities as economic conditions evolve. The Protection Services businesses also create shareholder value, as shown on Slide 15. Revenues, excluding the impact of net gains and losses on investments and derivatives, increased 6.1% to $643 million in the quarter and 8.7% to $2.5 billion for the full year 2022. The increase in revenue for the fourth quarter and full year was primarily driven by Allstate Protection Plans growth of 16.9% and 15.7% respectively. As you can see from the table on the right, Allstate Protection Plans continues to rapidly expand with written premium of $1.9 billion for the year. Allstate Protection Plans expansion in 2022 is primarily driven by our investment in appliance and furniture product coverages. We continue to believe there’s a significant growth opportunity in these areas and in our continued expansion of European consumer electronics and other international growth. Given, the longer policy term compared to auto and homeowner’s insurance products, the unearned premium balance continues to significantly grow as well, reaching $2.6 billion at the end of the year. For the segment, adjusted net income of $38 million in the quarter, increased $9 million compared to the prior year due to a one-time net tax benefit in Allstate Protection Plans. Full year adjusted net income of $169 million, decreased $10 million compared to the prior year, primarily due to the lower revenue in Arity as a result of decreased insurer client advertising. We’ll continue to invest in growing these businesses as they provide an attractive opportunity to meet customers’ needs and create economic value for our shareholders. Moving on to Slide 16, Allstate Health and Benefits is growing an attractive set of businesses that protects more than 4 million policy holders. The acquisition of National General in 2021 added both group and individual products to our portfolio as you can see on the left. Revenues of $579 million in the fourth quarter of 2022, excluding the impact of net gains and losses on investments and derivatives, decreased 1.5% to the prior year quarter as a reduction in individual health was partially offset by an increase in group health and other revenue. Adjusted net income of $50 million, increased $2 million compared to the prior year quarter, resulting in a full year 2022 income of $222 million. The full year 2022 result was $14 million above prior year and reflects increases in group health revenues partially offset by higher operating costs and expenses on group health contract benefits. Let’s close by highlighting Allstate’s strong financial condition and proactive approach to capital management, which you can see on Slide 17. We ended the year with $4 billion in holding company assets, which represents an increase of $700 million compared to year end 2021. We believe holding company assets and capital resources available from statutory operating companies provide financial flexibility as we continue to implement profit proven actions, invest in Transformative Growth and return capital to shareholders. As you can see, our adjusted net loss in 2022 resulted in a negative adjusted net income return on equity. Executing our comprehensive plan in achieving target combined ratios for auto and homeowners insurance will bring adjusted net income returns and equity back to our long-term target range of 14% to 17%. In 2022, we returned $3.4 billion to shareholders through $2.5 billion in share repurchases and $926 million in common shareholder dividends. This resulted in common shares outstanding being reduced by 6.1%, reflecting the repurchase of 19.7 million shares in 2022. With that as context, let’s open the line for your questions.

Paul Newsome:

Good morning. I wanted to ask about claims management process that over the course of the last couple of years, I think of Allstate is having a superior claims management in auto and home and that is being kind of one of the core advantages. But you’ve also been implementing a lot of cost cuts and laying off folks over the last couple years. So how are you sort of balancing that? And are there some core metrics that we can see as outsiders that suggest that advantage relative to your peers still exists?

Mario Rizzo:

Yes, thanks Tom, and thanks for the question, Paul. First thing, I would reiterate what Tom said. We continue to view our claims capabilities as a competitive differentiator and a source of real value for Allstate. We think that’s been – certainly been true in the past and it’ll continue to be true going forward. The reality is given the environment we’re operating in, both from a casualty perspective as well as physical damage, we’ve talked a lot throughout the year around the drivers of inflation and the things that are driving up loss costs at such a rapid pace. And I think what that does is it really forces us and the industry to continue to evolve those practices. And it’s certainly something we’ve done overtime to continue to maintain in our leadership position and our edge when it comes to claims. So let me just spend a minute and I’ll break out casualty versus physical damage. In terms of the action plans, we talk a lot about changing operational processes. I’ll say a couple things starting with casualty first. One of the things we’ve done over the past 12 plus months is we’ve meaningfully reduced the volume of pending bodily injury claims by about 20%. And what that does is it reduces risk of both of inflation impacting those claims that certainly that we’ve settled and remediated going forward. But also reduces we think reserve uncertainty on those claims going forward. And to just give you a sense of context, the current level of bodily injury pending claims in aggregate is at its lowest level that it’s been since before 2016. So we’ve looked to de-risk the bodily injury pending portfolio by leaning in and settling claims. We’re also focusing on a strategy that I would characterize as an earlier strategy when it comes to bodily injury. Things like earlier recognition of injury claims, earlier claimant contact and earlier settlement of claims that we should settle quickly again to avoid the inflationary risk in the current environment. And what we’re doing is we’re leveraging our advanced data and analytics capabilities to execute on all components of that strategy to continue to evolve and get better in casualty claim handling. On the physical damage side, I think it’s really around, broadly continuing to focus on estimation accuracy cycle time and leveraging – further leveraging our scale to the fullest extent. It’s continuing to increase the utilization of our good hands repair network to reduce costs, both in terms of parts and labor costs and improve cycle time while continuing to improve or provide a high quality customer experience. Enhancing total loss processes to reduce cycle time and reduce costs around things like storage and rental costs and identification of preexisting damage on vehicles, again, to move total losses through the system more rapidly. And then continuing to look to leverage our scale additionally when it comes to sourcing parts and getting as efficient as we can from a process perspective. So we’re really attacking claims across a number of fronts. Again, feel really good about where we’re positioned with claims. And this is all about continuing to get better and maintain that industry leading capability on the claim side.

Paul Newsome:

Is there any difference in how you handle claims across the distribution systems at this point that would vary the execution of claims?

Paul Newsome:

Great. Thank you for your help as always. Really appreciate it.

C. Gregory Peters:

Good morning everyone. Tough quarter and a tough year for the company. I was looking at Slide 11 in the supplement. And this is the slide that talks about the Allstate brand auto state profitability. And if we look at the number of states that have a combined ratio above 100, it steadily increased through the fourth quarter and it kind of a contrary to the comments you made about the rate that you applied and achieved in the year. So my question is what type of expectation do you have for that category of states above 100 as we move through 2023? Is it kind of peak here at 41? Do you think it could get worse? Or what’s your expectation going forward of how that might trend?

Mario Rizzo:

Sure. And thanks for the question, Greg. Look, I think when you look at that trend of states above 100 and the increase throughout the year, I think what I’d point you to is when you just – you look at our underlying auto combined ratio as we reported it, increasing throughout the year and being driven by increases in our severity expectations quarter-over-quarter as the year played out, as well as increasing frequency between Q1 through Q4, only partially being offset by the rate that we took. So I think that chart mirrors what we show you in aggregate in terms of the reported underlying combined ratio. But when you look at our business from a state perspective, I think it’s important to really categorize states into a couple of different buckets. I think there’s a group of states that while we certainly are pleased with the outcome of an underwriting loss, given the actions we’ve taken, particularly from a rate perspective as well as underwriting actions, we feel like we’re positioned in a good place. Now you can’t predict the future in terms of the path of inflation or severity going forward. But given the actions we’ve taken, we feel good about where we’re positioned and what the outlook looks like for 2023. I put states like Texas, Georgia, a couple of large states for us where we’ve implemented significant rates and have been successful in doing so. And so we feel good about the outlook. Again, we’ll have to adapt to what changes in the future, but I think there is a lot of states that falls into that category. Unfortunately, there is a number of, for us, pretty meaningful states, three of which we highlighted in the presentation

Tom Wilson:

Greg, I would just maybe provide – I think we’ve been very aggressive when you look at how much we’ve raised rates in total for the year across the country. We’ve been very aggressive. And depending whose measures you want to use, more aggressive. As you never really know where people start and what they finish and what their losses are. Mario, do you want to talk specifically about California?

C. Gregory Peters:

Thank you for the answers.

Elyse Greenspan:

Hi, thanks. Good morning. My first question is just on capital, right? You guys said you expect to complete the buyback program by the – still by the end of the third quarter of 2023. Can you just help us understand what metrics you’re looking at to judge the capital adequacy of Allstate Insurance Company at the end of 2022? I think in the past, you’ve said you look at RBC ratios there. Can you give us a sense of where you ended 2022 your RBC was, and where you would like that to be over time?

Jess Merten:

Yes. Thanks, Tom. So Elyse, I think as it relates to your question on RBC, we haven’t disclosed the RBC for the year. That will come out in due course as it relates to the actual RBC in insurance company, and we don’t publish a target. I think Tom hit on the right point, because you asked what are the metrics that we look at as we think about the repurchases. And we really do focus on our sophisticated economic capital model that looks at a comprehensive view of risk across types around the enterprise. And we use that as the basis for capital management. We obviously focus on RBC rating agency metrics, a variety of other things. But we don’t have specific targets that we published as it relates to risk-based capital. So – and I really like to take it up a level and just think about how we manage it overall using our sophisticated, risk-based capital framework. We remain confident in our overall capital position and the capital position of the insurance subsidiaries.

Tom Wilson:

Elyse, I’m not sure which predictive models are you talking about the – I mean we use predictive models for a lot in claims. Was there one specifically you were interested in?

Tom Wilson:

Okay. Yes. Let me – I’ll take a shot at it and Mario, you can jump in. So we use – I mean we’re a data-driven company, so we use predictive models as you know well, for just about everything. That could be fraud. There could be – do we think this claim might end up being severe enough where it gets represented by a lawyer? So it’s important for us to establish a relationship with the customers as possible. It might be, do we think there’s a better way to settle this claim, whether it gets – the car gets totaled or we send it to a body shop. So there’s we use predictive analytics throughout the business and obviously largely in claims as well. So we’re always tuning those. We think we’re pretty good at it. You can’t really take one specific algorithm. But when you look at our claims severities, you can look at them externally. And when you look at absolute dollars, we think we did really well. It’s easier on physical damage, obviously, because you’re just fixing a car bodily injury, it’s like, okay, well, what was the case worth? What’s the average case? That gets a little harder to do. But when in – the only weakness in the external stuff is it tends to be a percentage increase over the prior year, which is, of course, we work in absolute dollars. And our models are done in absolute dollars. And so even though it all depends where you start – but we like our overall position. Mario, do you want to talk specifically about any models that you’re using now that think you can point to where we’ve updated and increased the value-added?

Elyse Greenspan:

Okay. Thank you.

Andrew Kligerman:

Hey, thanks a lot for getting me in. First question is around social inflation, and in particular, bad price point. And in 2022, I think the court up a lot. And we – I would – I suspect that had a big impact. As we move into 2023, what’s your thinking about further social inflation issues? Do you think it will get materially worse? Could you give us some measurement around that? And that’s the question.

Mario Rizzo:

Yes. Certainly, social inflation is a phenomenon that we and the industry have been dealing with for an extended period of time. I think in our business, we certainly see it in the personal auto side, in casualty coverages. We’ve also seen it on commercial auto and in the shared economy, just given the higher limits that we tend to write on that business. It’s hard for me to predict whether it will get better or get worse going forward. I think it’s a reality of what we’re experiencing right now. And as I talked about some of the analytics and the processes we’re putting in place, to identify and manage injury claims more effectively. That’s a big reason why we’re doing it is in response to the social inflationary impacts we’ve seen. I’d also go back to something I said earlier around quickly not only identifying but settling claims earlier in the process where we can to mitigate the potential exposure to social inflation going forward. And the reduction in pending claims across a variety of segments that we’ve already executed on and are going to continue to focus on going forward. So I think our approach has been to modify our processes and take appropriate actions to offset the impacts of social inflation. And again, I don’t want to predict whether it will get better or get worse, but we know it’s a reality and we’ve adapted in response to it.

Mario Rizzo:

I wouldn’t say there’s a big pickup in bad faith claims now.

Tom Wilson:

Mario, do you want to take that?

Andrew Kligerman:

Thanks a lot.

Josh Shanker:

Yes, thank you. I was looking at the new policy application, and I was trying to tease out Allstate, National General and agency versus exclusive agency versus direct. And I noticed that there was a non-significant amount of independent agency, new policy applications coming from non-National General sources. And so I’m wondering, is Allstate brand being sold through independent agencies? And the reason why I asked this is also I noticed that new policy applications from Allstate exclusive agents are up, but Allstate branded new policy applications are down overall. Meaning that it feels like there’s a channel shift that you’re excited about getting business from Allstate exclusive agents, but not from the other sources where you sold Allstate branded products last year.

Mario Rizzo:

Yes. And maybe I’ll focus on – first on the Allstate brand, Josh, in terms of the shift, the mix shift between direct and exclusive agents. So you’ll remember a couple of things. One of the things we did this year was we reduced the amount of advertising spend, particularly lower funnel advertising spend, which directly impacts both volume through the direct channel. And I think you’ve seen a decline in the direct Allstate branded production as a result of that. I think the other thing you’ve seen is the phenomenon we’re experiencing in the exclusive agent channel with Allstate. And I’ll take you back to one of the core tenets of transformative growth was to reduce costs. But one of the components of it was to reduce distribution costs by changing how we compensated our exclusive agents, and also introducing lower cost, higher productive new models. And I think what you see in 2022 is that the model that we put in, that shifts agency compensation more to new customer acquisition has driven a level of engagement and behavior change on behalf of our exclusive agents that’s resulted in an increase in new business production, despite the rate actions that we’ve taken. I think as we go forward, we’re going to continue to evolve the agency model. We’ll continue to shift commission away from renewal to new business. And while at the same time, continue to enhance our direct capabilities so that when we do lean back into growth, we’re willing to accept the grow through any channel that we can write it. But I don’t think it’s unreasonable to assume that the first place you’d see kind of sequential growth would be in the direct channel, just given that when we turn advertising back on, that will be where a lot of the claim volume is driven through. But at the same time, we are pleased with the – again, the engagement and the behavior shift of our exclusive agents and the performance of the new agency models in terms of their levels of productivity, which I think bode well for us from a long-term growth perspective.

Mario Rizzo:

Yes, I can jump in. Any Allstate brand, I think over time, it should be the same, right? Because we’re targeting and marketing to the same customer segment and looking to drive the same lifetime value, whether we write it in the agency channel or we write it in the direct channel. And you’ll remember, we’ve gone to differentiated pricing to match the cost of the channel with the price that the consumer is paying. So that kind of normalizes for the acquisition cost or the distribution cost. So we’d be getting the same lifetime value. I think in the National General brand, what we’ve got today is predominantly still a non-standard mix, which has a very different lifetime value than the standard and preferred products that we write in the Allstate brands. But we price for that. We have the fee structure in place for that where – and we manage that business very effectively to drive value for a much shorter policy life expectancy for those non-standard risks. As we roll out more middle market products in National General, we’ve really started on that process, but we’ve got a ways to go there. The value – the lifetime value expectancy for that policy group should look and feel a lot like the Allstate brand because we’re leveraging the same data, the same capabilities to expand our capabilities in that market. So I think from a customer segment perspective, it should be very similar across channels, given the same risk profile. Different in non-standard auto, but we’ve got a really effective model in National General to manage that business.

Tom Wilson:

I know that’s very helpful. So thank you all for tuning in. Allstate’s obviously focused on using our extensive system operating expertise to improve auto insurance margins. And at the same time, as Mario just mentioned, we’re investing in transforming growth to increase our profit liability business. We have upside in front of us on the investment portfolio, and we’re having a good successful expansion of our circle of protection. So thank you all, and we will talk to you next quarter.

Operator:

Good day and thank you for standing by. Welcome to Allstate's Third Quarter Investor Call. At this time, all participants are in a listen-only mode. After prepared remarks, there will be a question-and-answer session. [Operator instructions] As a reminder, please be aware that this call is being recorded. And now I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Thomas Wilson:

Well, good morning. Thank you for investing your time with Allstate today. As you know, we pre-released earnings several weeks ago and reported the net loss for the quarter. That reflected a small underlying, underwriting margin that was offset by increases in reserves for prior years and a mark-to-market loss on public equity securities. . Mario and Jeff will go through the details of the quarter and the reserve changes after I set some context. So let's start on Slide 2. Allstate's strategy to increase shareholder value has two components

Jess Merten:

Thank you, Mario, and good morning, everyone. On Slide 11, let's begin with our prior year reserve development, property liability, prior year reserve strengthening, excluding catastrophes totaled $875 million in the third quarter. The pie chart on the left breaks down the impact by line with $643 million, driven by personal auto, $120 million one-off property liability from our annual reserve review related to environmental and asbestos exposures, $63 million in commercial, largely related to auto bodily injury and $51 million in homeowners. . The chart on the right breaks down Allstate Protection auto prior year reserve strengthening of $643 million in the third quarter, which was primarily driven by noncustomer claim and bodily injury claims. The total cost to settle these claims continues to be impacted by more severe accidents and higher medical and litigation costs. Increases to commercial and homeowners insurance can also be attributed to these factors. Physical damage prior year reserve increases in the third quarter from property damage collision and comprehensive coverages, excluding catastrophes, were largely offset by higher subrogation collection estimates. Now let's move to Slide 12 to discuss the drivers of bodily injury development and our claims operating actions to manage loss costs. Bodily injury severities have increased as the mix of claims shifted to more costly claim segments. The chart on the left shows the relative severity of bodily injury claims by type of treatment, major versus non-major and whether the claim is unrepresented, attorney represented or litigated. Major injuries have more expensive medical treatments, greater nonmedical related damages and often more attorney involvement. As a result, paid severity for major injury claims and litigation represented by the first bar on the left costs approximately 3.9x the average paid bodily injury claim. Non-major claims shown on the right-hand side of the chart, have less medical and other related costs intend not to have attorney costs, so unrepresented nonmajor injury claims are roughly 10% of the average cost. Let me be clear, in all cases, we settled the cases for what is fair and equitable regardless of attorney involvement. The table below the chart shows a significant shift from nonmajor claims that have below average cost to major injuries that are represented or in litigation in comparison to historical levels. This shift is partially attributable to more severe accidents. This shift to larger and more complex cases has also resulted in greater variability in paid and case reserve development patterns. As part of our actuarial process, we review changes in claim development patterns to define an appropriate range of estimated outcomes based on weighing historical and more recent trends in the data. The chart on the right side depicts the value of two standard deviations to the average paid in case severity development over the last six report years. As you can see, this measure of variability has almost doubled over the last two years, resulting in a wider range of estimated outcomes. The third quarter reserving process showed a continuation of these development patterns. Therefore, we increased reserves for prior years to reflect the persistence of the trends in major injuries, increased settlement costs and greater variability in case reserves. We're proactively responding to these trends by leveraging sophisticated models, increasing medical expertise, reviewing settlement processes and assessing litigation risks. Now let's move to Slide 13 and briefly discuss physical damage loss costs, which continue to pressure profitability. Rising inflation and delays in third-party carriers subrogation demands are driving higher expected severity in the property damage coverage leading to an increase in the current year -- the current report year variance from 12% to 17% when compared to 2021. The left side of the slide includes a chart we have shown before, which indexes inflation to year-end 2018 for a few of the main inputs to physical damage severity. While used car values are below their recent peak, which is a positive indicator to continue to run more than 50% above pre-pandemic levels. Conversely, labor and parts prices continue to accelerate from the prior peak levels seen just last quarter. This continues to put upward pressure on severities in the near term. The right-hand side of the page shows third-party subrogation demand dollars paid, again, indexed to the year-end 2018. Third-party demands are when our insured isn't an accident and the claimant files a claim to their carrier rather than us. As the other carrier evaluates the claim, the Allstate insured is wholly or partially at fault, they will reach out to us with subrogation demand. We have recently experienced an uptick in the volume of severity -- volume and severity of these demands compared to prior year trends and expectations. It's worth noting that a similar dynamic is also impacting our first-party collision coverages. We are demanding and receiving elevated subrogation collections from other carriers following the declines during the pandemic and backlog and claim settlements due to delayed repairs. Shifting gears now on Slide 14. The Protection Services businesses in the lower strategic growing revenues and increasing shareholder value as we invest in future expansion. Revenues, excluding the impact of net gains and losses on investments and derivatives increased 7.2% to $640 million in the quarter, primarily driven by a 12.2% increase in Allstate Protection Plans. Adjusted net income of $35 million for the third quarter of 2022 decreased $10 million compared to the prior year quarter due to increased severity on appliance repair for Allstate protection plans, in the absence of onetime restructuring expense at Allstate Identity Protection in the prior year quarter as well as investments in growth. Policies in force declined 5%, reflecting the expiration of protection plan warranties primarily due to the -- to a high volume, low premium per policy retail account and overall decline in retail sales. Moving now to Slide 15. Allstate Health and Benefits is also growing an attractive set of businesses that protect millions of policyholders. The acquisition of National General in 2021 added both group and individual health products to our portfolio, as you can see on the left. Revenues of $570 million in the third quarter of 2022 increased 1.2% to the prior year quarter as growth in group health and employer voluntary benefits was partially offset by a reduction in individual health. Adjusted net income of $54 million increased $21 million from the prior year quarter, reflecting a lower benefit ratio, lower restructuring charges and increased revenue. Shifting now to investments on Slide 16. We'll review the performance and the portfolio risk and return position that we've taken given higher inflation and the possibility of a recession. As you may recall, we reduced our portfolio risk beginning in the fourth quarter of 2021. This included shortening the fixed income duration from 4.6 years to three years through the sale of bonds and use of derivatives, which resulted in a reduction to the portfolio's sensitivity to higher interest rates caused by increasing inflation. We also reduced our exposure to recession-sensitive assets through the sales of high-yield bonds, bank loans and public equity. We maintained this defensive positioning in the third quarter, which continued to preserve portfolio value given ongoing market volatility, rising interest rates and a further decline in public equity markets. As shown in the table, at the bottom left, our total return for the quarter was negative 0.8% and year-to-date is negative 6.4%, while adverse market conditions negatively impacted the portfolio, we estimate our duration shortening mitigated portfolio losses of approximately $2 billion. These proactive actions and the broad diversification of our portfolio produced results that were better than the S&P 500 index which is down 23.9% this year and the Bloomberg Intermediate corporate bond index, which has declined 11.8%. Our net investment income, shown in the chart on the left, totaled $690 million in the quarter, which was $74 million below the third quarter of last year. Performance-based income of $335 million shown in dark blue, was $102 million below a strong quarter in 2021. Three individual investments generated approximately 97% of the performance-based investment income in the quarter, including two sizable cash realizations. Excluding those assets, results of the broader performance-based portfolio were largely flat with negative valuations in our private equity fund investments, which have a higher correlation to public equity markets, offset by increased valuations on other asset classes such as real estate and infrastructure. Our market-based income, which is shown in blue, was $50 million above the prior year quarter, benefiting from reinvestment into market yields that are significantly higher than the overall portfolio's current yield. The table on the right demonstrates how our shorter duration fixed income portfolio is positioned to generate higher levels of investment income as we reinvest into higher interest rates. Our fixed income yield has begun to rise and was 2.9% at quarter end, but is well below the current intermediate corporate bond yield of 5.6%. Now let's take a few minutes to discuss Allstate's financial condition and capital position, starting with Slide 17. Allstate's corporate organizational structure provides sources of capital to the holding company from multiple reporting entities and intermediate holding companies. We manage capital at all levels using economic capital, rating agency models and regulatory requirements to guide decisions and maximize flexibility. We commonly report a view of capital that includes both statutory surplus and parent company -- parent holding company assets. We prefer to dividend money up from subsidiaries to the holding company when possible as it provides more financial flexibility for the organization while maintaining adequate capital levels from subsidiaries to support operations. The chart on the left shows an overview of our capital position since 2016. As you can see, it grew substantially beginning in 2019 following strong results leading up to and during the pandemic. While the current level of $19.8 billion is approximately $6 billion lower than a year ago, this was largely made up of two specific items. First, $3 billion or roughly half is related to the sale of the Life and Annuity business, as represented by the first red bar on the chart. This transaction reduced our statutory capital as we sold the legal entities and significantly reduced our overall risk profile, freeing up an additional $1.7 billion of capital. We returned this capital to shareholders as part of the current $5 billion share repurchase authorization. The second bar reflects our cash returns to shareholders, excluding the impact of the life and annuity sale. Together, these factors reduced capital by $5.4 billion with more than $4 billion going back to shareholders. The last red bar primarily reflects the impact of current auto insurance profitability challenges, which have resulted in a statutory loss and then changes in unrealized gains and losses on equity investments due to recent market volatility. We also added a line to this chart that represents our average capital from year-end 2016 through Q3 of 2021, excluding surplus related to the life and annuity businesses. Our current capital position of $19.8 billion is approximately $1 billion higher than this average, demonstrating that returning cash to shareholders after adjusting our risk profile in recent years of profitability has left us in a strong capital position. The right-hand side of this page isolates holding company assets, a key component of our capital relative to the remaining authorized repurchases and fixed charges. At the end of the third quarter, we had $4.5 billion in holding company assets with $1.2 billion remaining on the current share repurchase authorization, we would still have $3.3 billion remaining in comparison to our annual fixed charges of $1.3 billion. We believe holding company assets and capital resources available from statutory operating companies provide significant financial flexibility as we continue to implement profit improvement actions and invest in transformative growth. Now let's move to Slide 18 to discuss Allstate's strong cash return to shareholders. Adjusted net income return on equity of 4.3% was below the prior year, primarily due to lower underwriting income. Achieving our targeted combined ratios for auto and homeowners insurance will bring adjusted net income returns on equity back to our long-term targeted range of 14% to 17%. Through the first three quarters of 2022, we've returned $2.8 billion to shareholders through $2.1 billion in share repurchases and $698 million in common shareholder dividends. Over the last year, shares outstanding have been reduced by 7.7%, providing more upside per share as profitability has improved. There's $1.2 billion remaining on the current $5 billion share repurchase authorization as of September 30, which we expect to be completed in the second or third quarter of 2023 and as we moderately slow the pace of our repurchases. With that context, we're going to open up the line for your questions.

Charles Peters:

I'm going to focus the first question on reserves. And I was looking at the information you provided on Slide 12 and some of the earlier slides. And I guess what we're trying to do is reconcile the charge that you took in the third quarter with the information we're getting from some of your peers? And then additionally, trying to understand why the data that you're showing now here for the third quarter results, so you can start to see it in the second quarter and make adjustments then. And I mean it's a long-winded question, but ultimately, we're trying to get at is there a risk of additional reserve charges going forward?

Jess Merten:

Yes. Thanks, Tom. Greg, what I would start with is, I think it's important to be clear on one thing. At the end of every quarter, we record reserves at an appropriate level based on all the information that we have in front of us. We did that at the end of Q3 and every quarter leading up to Q3. We followed the same process that we have in the past. It's a rigorous process. It leverages internal actuarial expertise, close collaboration with our claims team and third-party reviews to analyze the most current data and assess the impact on that data on our reserves. . As I look at the quarter, the variability that we've seen continue to come through in the data that we reviewed as part of our actual process. So Q3 data supported more recent trends and continued variability in reserve development. And while these trends weren't new, an additional quarter of data did provide new insights into the persistent nature of the trends that have been emerging. So insights from actual claims development in the quarter, led us to strengthen both prior year reserves and increase our report year 2022 ultimate severities. So as I take a step back and think about where we're at from a reserve perspective, we record appropriate reserves based on what we know at the time. We used current data and all known factors to establish the reserves. So I'm confident in what we set up. And I think that the new insights that we cleaned in Q3 caused us to make the move.

Thomas Wilson:

I'll start and then Jesse can add as well. So Greg, first, we don't use the traditional -- when we look at the traditional metrics like premium surplus and as we go, but we're much more sophisticated than that. And it goes -- in the way we allocate capital is from an enterprise standpoint and looks at specificity on risk levels down to the state-based level by line. So for example, some people would blend their premium to surplus ratio for all property liability products, auto and home at the same. We don't do that. We think capital is much higher for homeowners insurance. And that's why when Mario went through our target ratios for home insurance, they're lower than they are for auto insurance. Other people just assume that same. So we're much -- we're very sophisticated in the way we do it. We manage it from an enterprise standpoint. So when we -- the answer would be we have plenty of capital, like we've got tons of money, and it's not going to do anything to our strategy. It has no impact on our future earnings power, which is, of course, what drives the company. And we're in the middle of a massive share repurchase program, and we don't feel like we have to back off on it based on what we know about our business at the granular level. So we feel very good about where we're at. We've generated good returns for shareholders by doing it that way. And so there's really -- I feel like using broad measures like that doesn't really reflect the economic reality that we're managing to. Jesse, where would you go from there?

Operator:

And our next question comes from the line of Elyse Greenspan from Wells Fargo.

Thomas Wilson:

Elyse, let me answer that and Jesse can jump in. First, in terms of the dividends, we move -- first, we make sure that each of the insurance subsidiaries that large ones are appropriately capitalized based on what we think economic capital is just that with the rating agencies, whether it's an investor, others, think we should have in those and then what regulators want. So -- and we're really well capitalized at those. To the extent there is extra capital in those, we then move that out of the insurance companies into the holding company is just point out because that gives us more flexibility. As we look forward next year, it will depend how much money we make. I think in some of the announcements, like we have really strong earnings power and when you look at our profitability of our auto insurance, we think it's headed up. So we think there's plenty of earnings power. Whether that and where we think risk is and what we need to do with risk will depend on the overall enterprise risk portfolio. So for example, not covered in some of these things, we dialled down the risk for our investment portfolio late last year as a percentage of our total enterprise capital because we didn't think it was a good risk return trade-off. So we're constantly managing where do we want to move capital where do we want to make sure we get a good return on it. So we don't feel like we are capital constrained at all. Did we consider shutting the program down in total? No. We think we have plenty of moments of $5 billion of massive share repurchase program, a large 4 of which a portion of which was funded because we sold the life insurance company. and we said we should get that money back to the cat shareholders. So we have a historical track record of doing this extremely well. We're a top decile amongst the S&P of providing cash returns to shareholders. And we do that without putting our customers at risk of the company is. So we feel like we're in really good shape.

Thomas Wilson:

We've had -- essentially to say, from certainly my standpoint, no conversations with regulators about our cap levels because we're so well capitalized -- I might start there. And that's been true forever and it will be true far into the future. And so the regulators really were so far above their standards. It's not really been a conversation. I can't speak to how other people look at their premium surplus ratio. I think some of our competitors who don't make money in homeowners should have even more than we do. Because when you look at your capital it's -- okay, what do we think the risk is? What is the risk of loss. But you also want to factor in your earnings power. And so if you're losing $0.10 on a dollar, on a line of business, then you have to hold more capital than if you're making $0.10 on the line of business. So I think it's all very idiosyncratic to a specific company. . We factor all of those things in by state really and even sometimes looking down at different components of the state to decide what price we should get per customer from customers, how much business we want to write and then how much capital we have to keep in the company. So I feel very good about where we're at.

Brian Meredith:

A couple of them here for you. First, Tom, I'm just curious, this is the, I think, first quarter a little while that we've seen auto PIF actually declined somewhat sequentially. Is that due to some of the actions you're taking in California? Or is it just in general, the price increases you're taking should we expect the PIFs to kind of decline here for a couple of quarters.

Brian Meredith:

Great. That's helpful. And then my next question, I'm just curious, and I think this question will be asked in prior quarters, but when you're pricing your auto insurance and homeowners insurance now, what type of loss trend are you expecting in the future expecting inflationary trends to moderate here? Or do you think they're going to stay relatively high here for a while?

Mario Rizzo:

Yes, sure. Brian. Yes, I think, Brian, in terms of what we're seeing, we're factoring in, obviously, the inflation we're experiencing currently, but also projecting it going forward so that we can reflect the full cost of loss costs prospectively into our prices. And so yes, we're not making any kind of significant assumptions around a deceleration in inflation going forward given the current inflationary environment, that's why we made the statement that we expect to continue to take rate increases certainly for the balance of this year but into next year, and that's really a reflection of the environment we're operating right now and the continued elevated level of inflation, which we need to kind of catch up with and then surpass going forward. So we're not assuming, as I said, any significant reduction in inflationary trends going forward.

Tracy Benguigui:

All right. So used ask this question for casualty line writers. Given the consecutive adverse reserve development charges, have you worked with any external actuaries to review reserves? And if so, what is your management estimate relative to central estimates?

Tracy Benguigui:

Do you have a management estimate above the central estimate at the moment? Or is it closer to the central?

Tracy Benguigui:

Got it. And just going back to capital management, given you manage capital more efficiently at the OpCo level and the way you like to hold cash at the holdco level if you could flex that up and down. I'm just curious, when was the last time you downstream capital to the operating company. How do you lever often.

Jess Merten:

I don't have anything more than that. I think we did move some capital down into the Life company. at 1 point, Tom. But I think that certainly is no longer an issue, but that's the last thing that I remember. Mario? .

Tracy Benguigui:

Right. but I'm not thinking about this the right way where you have capital at the parent company that you could flex it up and down in your slide when you talk about your fixed charges, is there a multiple that you want to keep like 2x minimum level?

Operator:

And our next question comes from the line of David Motemaden from Evercore ISI.

Thomas Wilson:

David, let me answer that, and Jesse, you can add anything else to it. So first, the reserving process uses all types of statistical analysis, triangles, link ratios, all sorts of different things. So there's no real like just 1 percentage. I think we look at it by state, by line of business, by coverage. And so it's slice and dice a whole bunch of way. So there's no really simple way to answer that. I think what I would say about you're trying to get comfortable with the reserves. It really starts -- you got to go back to say, well, what's happening in the world. And during the pandemic, we noticed when people weren't on the roads, people were driving a lot faster because there is -- they could zip around and there was no traffic and off they went. Once we get through the pandemic, at least in our data, we see people still driving pretty fast, but as a result of that, you have more severe accidents, and that trend appears to be holding. We thought that, that trend might come down because when the little ones are sort of bumps in scratches and stuff, which happen in congested traffic. Today, those, as you saw from Jesse's numbers have not gone back up and the major ones have not gone down. So people are just driving faster and hurting people more. So you have to figure out, okay, well, what are you going to do take care of it. Those are really complicated cases. I mean people have surgery, they have all kinds of services, and those services are more expensive, and they take longer to develop. So if you really severely injured, it could take 6 months, nine months, two years before you really figure out how you get back to where you should be, and it costs a lot of money and takes a lot of time. And so those cases develop over a longer period of time. So it isn't so much that it's just -- we use the same process as procedures, but as these things develop, it really comes back to -- our customers are just in a lot more severe actions and people are getting hurt, and we need to make sure we have the liability up to cover that. And that's what we did this quarter. So we said, okay, this is really continuing. Most of these are still severe. And as they develop, then you have to put the money up.

Thomas Wilson:

Yes. But it's not just 1 item, I would say. So you can't pin it on just those now more majors. There's more majors. The majors are harder to estimate. They're taking longer to settle. There's more legal costs associated with settling those, and so you have to factor that in. So there's a whole bunch of factors that relate to it. So we look at it. We're comfortable we've put up the right amount of money. And what other companies do and what they're reserving are -- some people use less specific processes that we do, some processes react faster or slower to trends in the marketplace. But the important thing is we use the same process is have external views, and we all think this is the right amount of money.

Thomas Wilson:

We have not broken out the reserve -- after the reserve changes by prior years. We won't break those out until we publish the 10-K. I mean, is that right -- correct, Jess?

Thomas Wilson:

But suffice it to say, David, that is higher than it was before.

Thomas Wilson:

Why don't we take 1 more question and then...

Yaron Kinar:

I'm going to go to my specialty of beating dead horses here, if I can. On capital, do you expect to deploy some of the hold liquidity into AIC over the coming year?

Yaron Kinar:

Okay. And then shifting more just to the auto and home side. So I think you guys shifted the exclusive agent comp structure to be more weighted to new business. Now that you're kind of maybe taking a little bit of a step back on growth and really focusing more on fixing the margins, how is that playing out with the agent comp structure with your conversations with them? I'm assuming that can be a little bit of murmurings and rumblings around that. How are you handling that?

Thomas Wilson:

So thank you all for dialing in. As we move forward, we have a couple of things in front of us. One, we have to improve auto insurance margins, while making sure we continue to invest and transform the growth so that we can grow market share and then continuing to expand our other protection services businesses, which also had a great quarter. So thank you and we will talk to you in December.

Operator:

Thank you for standing by, and welcome to the Allstate Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. And now I'd like to introduce your host for today's program, Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Thomas Wilson:

Well, good morning. Thank you for investing your time with Allstate today. Let's start on Slide 2. So Allstate's strategy to increase shareholder value has 2 components

Mario Rizzo:

Thanks, Glenn. As Tom mentioned, while we are improving profitability, we also continue to invest in the core components of the transformative growth strategy to increase market share in the personal property-liability business. Slide 10 is the flywheel of growth that we have discussed on earlier calls. Transformative growth is a multiyear initiative designed to increase personal property-liability market share by building a low-cost digital insurer with broad distribution. I won't get into all the pieces today, but I want to highlight 2 specific items

Charles Peters:

I would like to go back to Slide 8 for my first question. And I guess the 2 areas that caught my attention as you were running through them, Glenn, were the future loss costs arrow and the rate and other actions. And then in the box, you say you're pursuing larger rate increases in the second half of 2022 relative to the first half. So maybe you can give us some additional detail around what you guys are thinking on those 2 areas in that chart?

Glenn Shapiro:

Sure. Greg, on the loss cost piece of it, I know there's been some opinion out there that maybe the worst is behind us and the inflation will slow or just listening to other calls out there. We're not sure of that, and we certainly want to have the rate outpace the loss trends. One thing I'll say is when you look at our frequency trend, I think this is a unique time in history where typically frequency is harder to predict than severity. And I think the opposite is true right now. Our frequency has been really, really steady. You look at it from the low points of the pandemic up to where it is now, it is just steadily crept back up but has leveled out in that creep, and we have good data and expectation that it remains below the pre-pandemic levels, but continues to rise slightly as it has. And on the other side, severity, it's a big wild card out there, I think, in all industries right now as to how long and how severe inflation runs with the actions of the Fed and anything else out there, we're taking the conservative viewpoint that we need a lot more rate in order to offset that. So I mentioned in the prepared remarks, a couple of places where we're having trouble on it, and we're working through it. But broadly, I will tell you, it's gone very well in that the regulators we work with, good relationships across the country, and we're getting some meaningful rates going through the pipeline right now, and they understand. I mean the math is on our side, and we need to get those rates in to offset those future rate trends because as the slide depicts, if you froze time and loss costs didn't move, we would earn our way right to the mid-90s combined ratio over the coming quarters, but that isn't the case. We need additional rate to offset those loss trends.

Thomas Wilson:

Greg, I'll let Glenn give you the specifics there. But it isn't just to like negotiate. And I'm reading into your statement. I know you're not really saying that, but it's also to just maintain our loss cost. Like we just -- even if we get a rate increase, there may be certain cells or certain segments of the state that are less -- where we have less profitability than we want. So it's also about managing profitability. Glenn, why don't you give some specifics on that?

Operator:

And our next question comes from the line of Andrew Kligerman from Credit Suisse.

Operator:

You couldn't hear him?

Mark Nogal:

Jonathan, I think we move to the next question. We can' hear...

Operator:

Our next question comes from the line of David Motemaden from Evercore ISI.

Thomas Wilson:

David, I'll make a comment and then Glenn can -- if there's anything you want to add, you might jump in. First, we are fully committed to increasing rates necessary to get our combined ratio down to the target levels that Glenn talked about, that obviously bounces around by quarter. And what you saw is what we got implemented in the second quarter, in the early part of your question, you said submitting as in forward-looking, that's not what we're submitting. What you saw in that release is just what got implemented. We're obviously in conversations with regulators when you have these kind of increases continuously. So there are some states where Glenn's team chooses to go down and meet with the regulators, explain the numbers and then submit it and so we feel good about where we're headed there. Glenn, anything you want to add to that?

David Motemaden:

Got it. Yes. I was referring to -- I obviously can see the implemented rate. I was referring to submitted, which I guess is something that's -- they're not approved or disapproved yet. It's just more kind of a leading indicator that I track, and it just looked like you guys had slowed a little bit in the second quarter versus the first quarter. But it does sound like that is more timing related as well. Maybe for just another question, I was just looking through the businesses in auto specifically, and I noticed that the Allstate brand combined ratio was 9 points above the NatGen combined ratio for the quarter and has been trending -- it's been higher for the last few quarters. Could you just -- yes, that's kind of counterintuitive to me just given the differences in those books of business. So could you just maybe talk about what's going on between those two?

Glenn Shapiro:

Yes, I will. Well, David, you're getting a good detailed answer there from Tom and after me, you like hit the daily double here because it is a really good question and an important one. I want to take you back and kind of look at it over the 18 months that we've owned NatGen and since the closing of that deal, and it's a good time frame to use because 18 months is the time it takes to earn out the full annualized premium changes also. So you go back to first quarter 2021, and this would be true, by the way, not only of comparison of Allstate brand and NatGen but Allstate to other competitors, like Tom was talking about. Allstate was running a combined ratio about 10 points lower. And the reason for that was the frequency was lower, frequency on more nonstandard or near nonstandard business came back much quicker as people needed to use their cars to make a living, and there was just a difference between different books of business. And so as a result, the good news was for the Allstate brand was that is a really low combined ratio. It's around 80. The bad news is in the current state would be to say that, well, when you're running at that level, you need to take rates now. I mean you can't sustain and even in some places, require you to refile your rates, you can't sustain that level that far below target combined ratios. And National General, on the other hand, was still taking a maintenance level of rates up over that period of time. So now flash forward to today, their frequency down while all states is up. And then you've got a higher average earned premium going through. And I mentioned before the $1.7 billion of premium that we have already in the system, not only filed but approved and already like renewing on policies that hasn't been earned yet, we've actually only earned 15% of the premium that's been raised through this cycle. So we get 85% of it out there still left to be earned, whereas National General is earning off of a base, plus they didn't have the hole to fill, so to speak, of the negative rates that, again, we appropriately took because when you're running an 80 combined ratio, but you got to fill that up to get back to par and then go up from there. So there's a difference in the average earned premium that's a few points to the differences, one. Two, there's a few points difference on the frequency levels right now. Three, and this is a really important one when you're looking across companies is the risks are different and the policies are different. So as you think about the inflationary factors and how they're hitting different policies, National General, even inside their own book, it's really fascinating. If you look at their full coverage policies versus their liability-only policies, they're running about 10 points different on trend in their combined ratio. Because if you think about a liability-only policy, you don't have collision, which is the highest inflationary trend of any coverage right now, one. Two, you tend to have very low liability limits, so on things like, let's say, property damage. If you have a state minimum of $10,000 of property-liability coverage and you hit somebody's car and you total it, whether it's before the inflation factors that were hitting us or after, you're probably just going to pay that $10,000. And the inflation, there's a computation to that inflation. Whereas when you typically have $100,000 limits, you're bearing the full weight of the change in the value of vehicles. So looking at all these components, we see just a lot of different ways, and I didn't even get into state mix, which is another one, a lot of different ways that the trends move differently. The nice thing is having acquired NatGen, and it's performing really well, it's growing nicely, it's profitable, is that it's really acting right now as a bit of a diversification on that auto trend and gives us a place where we are able and willing to grow.

Andrew Kligerman:

Can you hear me this time?

Andrew Kligerman:

I'm sorry about that before. First question is around non-rate actions. Could you give a little color on some of the more material non-rate actions that you could take and the potential magnitude we might be able to see in the back half of the year on loss ratio? How much potential improvement could that offer?

Glenn Shapiro:

Yes. So I'll give you a few like you've got underwriting actions where we segment the business and we segment our pricing to where, as Tom said earlier, it isn't just about, geez, we're going to not write new business in this market, let's say, it's, well, we're profitable in these segments and not those other ones. So we're going to change the segmentation of our pricing, would be one. Another would be, we changed the down payment on policies and expect that there's a change in the flow of business at times with that. Certainly, the targeting of marketing is a really big one that I think can be underplayed, but we're pretty sophisticated in how we go to market. So when and where are we putting up banner ads when people are searching for auto insurance, which risk categories, which markets? And flat out, we've taken a lot of marketing dollars out right now. We're just reducing the marketing that we're doing

Thomas Wilson:

I don't think you should assume very material. I mean, the first, it's subject to anybody's -- underwriting actions, Andrew, won't get us to where we need to go. We need to raise prices, cut our expenses. Those are the big drivers. This is helpful. And I'd like to say to our team, look, anybody can give it away, so like there's no sense writing business and knowing you're going to lose money out whatever. So this is more about managing long-term profitability than what it would do for the combined ratio in the second half of the year.

Thomas Wilson:

Well, I address part of that with the comparison of Progressive, but let me just address that first, the philosophical concept. We are raising prices as fast as we can, everywhere we can. So we're up 6.1% in 6 months of this year, which is -- would have been equal to maybe even our highest year in a long period of time. So we're -- and we expect to get at least that much in the second half. So there wasn't any thinking of let's dial down to 2.5%. It's let's get everything we can, everywhere we can. It obviously does depend on -- if you don't get anything in California, as Glenn said, that's 12% of your stuff of your total book, so that you got to pick it up by getting the right price in other places or just getting smaller in those places. So it doesn't impact your profitability as much. As it relates to our competitors, I think, again, everyone's got their own story. We have our own story inside National General is different than the Allstate brand is -- it's related to Progressive. Their frequency was up about 10 -- almost 10 points more than ours in 2021. So you would expect them to raise their prices faster and higher than we did because at the beginning of the year, we were still earning a very attractive combined ratio. So I think everyone has their own story. What I would leave you with is that like we're completely committed to getting a combined ratio consistent with where we've been in the past. We've been able to run our business for a long time in the mid-90s, and even when the industry has been a lot higher than that and we see no change in the competitive situation, the regulatory environment or our capabilities that lead us to conclude that, that's not possible.

Tracy Benguigui:

I want to touch on your higher physical damage loss development, Slide 6. Just wondering, in your transformative growth initiative, I presume you cut clean staff. Do you feel like you're adequate staff in claims where you can close claims in a timely fashion? Maybe you could talk about how you're trying to speed up close rates?

Glenn Shapiro:

So yes. So I'll start with -- let me just emphatically say we are not behind on claims staff, and we are not behind on claims. Our pending looks good. And we're in good shape there. The expenses that we took out of the claims process, the team has done a really terrific job of automating processes, creating good self-service capabilities, using a lot of virtual estimating capability. With the slowdown we talked about in the system is really external, and everybody is dealing with this part of it. And this would be uniform across the industry. So, for example, shop capacity is way down. The staffing level in body shops across the repair industry is down to the point where there's been a 33% decline in the number of hours worked per car per day. So you think about a car sitting in a shop and historically is 4 hours a day, it got work done, now it's 3 hours a day or a little less than 3 hours a day. So it's moved materially on that. Not surprisingly, the converse of that is that the average car time in a shop has doubled, and the average time to get a car into a shop has more than doubled. So you put all of those together and consumers are, frankly, just choosing to hold on to the check and wait to fix their drivable car until a time they think they can get it back in some reasonable time. And so we're seeing a way elongated repair cycle that then you get your supplements later and you just have a different dynamic in the way the financials are coming through. And it's -- like I said in the prepared remarks, we had planned for it being about 40% greater than any point prior, and it turned out to be even higher than that with the way it delayed coming through. So I just didn't want the question to miss the chance to tell you, it is not claim staffing. We've got plenty of staff, and our team does a terrific job on it.

Glenn Shapiro:

Yes, absolutely. So using our scale as a company, we've doubled down on some of our parts suppliers, and this is both in home and auto, by the way, where we become a large and in some cases, the largest in the industry buyer of certain materials, whether it's parts in auto or roofing and homeowners or flooring, and we get the benefit of those broader relationships and trends. We've also doubled down on our direct repair shop, network in auto, so that we can get our customers access to more shops that can take their car and we have a better one-to-one relationship with that network and are able to control costs in that way.

Mario Rizzo:

Yes. So I guess -- just a couple of points I think are worth making before I jump into -- to that. First of all, at the end of any reporting period, we believe, based on our processes that our reserves are adequate. That's certainly the case at the end of the second quarter as we work our way what are very comprehensive and thorough processes to estimate reserves, taking into account all the data and inputs both in terms of internal and external data that we have. So I guess that's the place I'd start. Well, Tracy, your question was on physical damage development specifically, which is different than historically because these tend to be pretty short-tail claims in the past. And as Tom mentioned, they're really -- they show up principally in 2 coverages

Mario Rizzo:

Yes, Tracy. So as you know, when we increased severity, which we did slightly this quarter relative to where we talked about our severity trends last quarter, that gets applied to claim counts for the entire year. So there is a catch-up component that would have been reflected in the first quarter, had we had perfect information in the first quarter.

Thomas Wilson:

Tracy, I think you should just think about looking at the combined ratio by quarter, it does bounce around. There's seasonality, there's driving in the summer, there's all kinds of stuff. So I would -- I think look at it on a year basis. We did it 1 year -- 1 quarter last year when it was a pretty big number. It's not that big as we're looking at this quarter.

Paul Newsome:

I was wondering thinking about on the home insurance side of the house. Do we see the same sort of regulatory pressure in the home insurance business that we do in the auto because presumably, we have inflationary issues there and presumably, you need to get rate there as well to offset those issues?

Glenn Shapiro:

Yes. The only thing I would add there is it's that base level of premium we're getting that isn't great. It's the inflationary factors that really keeps us going in that space. It's just a different type of products. Home values go up, and replacement costs go up. Cars, other than recent history, tend to not go up. So it's a different type of product in that way. So when you look at an average premium up over 13% year-over-year, it's a mix of rate in that. But to your point, Paul, like we've got to get rate there, it's not as heavy as it is in auto, but we deal with the same regulators. And I always go back to, it's the math. Like we're not making up these rates, and they're not looking to make up a reason not to do the rates in most cases. It's the math. Does the math support a trend that says you need rate? And we've been successful in that space.

Thomas Wilson:

Glenn, do you want to take that?

Thomas Wilson:

Jonathan, let's just do 1 last question.

Joshua Shanker:

When I think of Allstate, I think you guys are second to none understanding the long-term value bundler that the Progressive people call the Robinson. And when anyone says they're going after that Allstate customer, I'm very skeptical at the level of success they'll have. On the other hand, you guys bought NatGen to go into nonstandard in a bigger way. You guys have come back and forth over 20 years in that a number of times. And if you look at Progressive, they're losing their SAMs at this point in time. Whether they're unprofitable or whatnot, that they are going somewhere. And when you talk about having 1,000 basis points of better margin in NatGen and it's growing, how confident are you given that that's not your legacy business that you understand that those aren't Progressive customers that they can't make work coming onto your books?

Joshua Shanker:

And so I just -- I'll make this the last part of the question. You say who as we, and you're making it seeing that National General is running separately in some ways from Allstate. Of course, you're in charge and the buck stops with you, Tom, how comp are you that you understand the underwriting going on there that you know that what we see right now is results that you're very comfortable and proud of?

Operator:

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Operator:

Good morning, everyone. Thank you for standing by, and welcome to the Allstate First Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Mark Nogal.

Thomas Wilson:

Well, good morning, and thank you for investing your time in Allstate today. Now let's start on Slide 2. So Allstate's strategy to deliver Transformative Growth and higher valuation has two components

Mario Rizzo:

Thanks, Glenn. Let's move to Slide 10, where we'll discuss how we're improving customer value through cost reductions. The chart on the slide shows the adjusted expense ratio, which is a metric we introduced a couple of quarters ago. This starts with our underwriting expense ratio, excluding restructuring, coronavirus-related expenses, amortization and impairment of purchased intangibles and investments in advertising. It then adds in our claims expense ratio, excluding costs associated with settling catastrophe claims because catastrophe-related costs tend to bounce around quarter-to-quarter. We believe this measure provides the best insight into the underlying expense trends within our Property-Liability business. Through innovation and strong execution, we've achieved more than 3 points of improvement since 2018. Over time, we expect to drive an additional 2 points of improvement from rent levels, achieving an adjusted expense ratio of approximately 23 by year-end 2024. This represents approximately a 6-point reduction compared to 2018, enabling an improved competitive position relative to our competitors while maintaining attractive returns. While the adjusted expense ratio increased compared to the prior year quarter, primarily due to higher employee-related costs, we remain committed to our 3-year reduction goals. Not included in this measure, but in the reported expense ratio was an increase in advertising expenses versus the prior year quarter as we took advantage of a drop in advertising costs and a seasonal increase in direct shopping to ship spending earlier in the year. Advertising will fluctuate throughout the year as we implement auto price increases and could impact near-term growth. Our future cost reduction efforts are focused on digitization, sourcing and operating efficiency and distribution-related costs. Slide 11, diagrams Transformative Growth with increase market share. This multiyear initiative is designed to increase personal property-liability market share by building a low-cost digital insurer with broad distribution. This will be accomplished by delivering on 5 key objectives

Joshua Shanker:

I guess, the Agency segment, you guys added 159,000 auto policies in the quarter net and lost 5,000 homeowners policies. I don't know if those are our encompass policies or if those are net gen policies. But it does seem like you're adding a lot of monoline auto, which is a lower persistency than the overall Allstate book. Given where your pricing is in the net gen book, how comfortable are you with the monoline drivers you're adding right now? And what is the strategy there on April of 2022 versus where it will be in 1.5 years?

Glenn Shapiro:

Great. And thanks for the question, Josh. So it is definitely 2 different stories on the auto and home, as Tom mentioned. So auto, the first quarter is the shopping quarter in nonstandard auto. It's by far the biggest shopping quarter and our National General team did a really nice job of being in the market in the right places in the places they felt they had good profitability and the right pricing and growing effectively. So think of that one as -- and you're right, it's shorter duration business in terms of lifetime value, but that is their business model and they make a good return on those policies. So they grew auto in that way. . As Tom just mentioned, on the homeowner side, this has been a shift to the homeowner strategy in NatGen time that we're in we're really taking the Allstate strength and making it a strength of NatGen. So they've had to get some pricing in there. They haven't -- they've shrunk a bit in homeowners, but that's setting ourselves up for than the strategy part of this, which is as we get our middle-market products based on that Allstate data and the Allstate capabilities into the independent agent channel marketed as National General and Allstate company, the endorsed branding, that we think we have a really great opportunity to grow homeowners with the Allstate level of sophistication and pricing and all the things I talked about in the opening remarks. But in a channel, we really haven't meaningfully been in before. So that's the path forward. But as we sit from a 1-quarter basis, we're still in, I guess, correction mode of the homeowners business there, but in a really good quarter and in a really good place from a nonstandard auto standpoint.

Thomas Wilson:

No. We always appreciate your precision, Josh. First, I am not pleased -- none of us are pleased with the results of Allstate Business Insurance. So we review -- we've done a bunch of work to improve the profitability in that line. There's really 2 parts to the business. And one is the, what I would just call traditional commercial insurers, small contract or stuff like that, that we sell through Allstate agents. And then there's the shared economy business. And it's a shared economy business that has been trouble for us from a profitability standpoint, particularly a home-sharing company and then some states in the transportation network companies. . And we made a decision last year that we weren't going to chase revenue if we didn't think that the states were profitable. So we exited a number of states. I think 3 big states, in particular, in the transportation network piece because they were not profitable. And then the home-sharing business, we just got out of that contract altogether. Glenn, do you want to -- what would you like to add to that?

Operator:

Next question comes from the line of Greg Peters of Raymond James.

Glenn Shapiro:

Tom, did you want to start on that? Or do you want me to?

Glenn Shapiro:

Yes. So I'll start with how it unfolded. I mean -- I would say, we continue to see inflation run like a lot of people continue to see. We continue to see elongated time frames for development, including prior year development. And so we're taking, I think, an appropriately conservative view and saying that like we're going to need more rate on that part of it. The other part on the precision, I want to build on what Tom said, because it's an important point because we do use a lot of precision. And I think that there some folks who talk more -- or some companies talk more or less about their level of segmentation and precision. We maybe don't do a good enough job talking about the depth that we have in terms of our segmentation, which is highly sophisticated and that's what Tom is going into. But it's sophistication at that level, but also on the go-to-market level. Because clearly, we kept marketing open, and we took an opportunity to grow some business that the economics were good on. We did that because the marketing cost itself was down with others leaving that area. There were a lot of shoppers and first quarter tends to be a time that a lot of people shop. . Now we also did that with a lot of precision. It's the entire go-to-market system because we're not just -- to sort of have the open sign everywhere. It is -- we're marketing precisely where we know we have a lifetime value return based on risk type based on market within state level. And it's a combination of underwriting, marketing, pricing that all comes together -- and distribution that all comes together with how we go to market and drive where we want to grow and how we want to grow that I think goes into the need for rate as well.

Operator:

Next question comes from the line of Andrew Kligerman of Credit Suisse.

Thomas Wilson:

Glenn, do you want to take that for both the Allstate Brand and National General?

Andrew Kligerman:

Okay. So really not any real actions to -- okay, makes a lot of sense. And then if I could just quickly sneak one in. The buyback of $794 million that's pretty fast in terms of the pace. I thought you had about $3.3 billion left, and this implies you're going at a quicker pace. Is there a chance that you could complete that authorization by the end of this year or do more than you anticipated because it seems pretty robust and I was curious about the thinking there.

Mario Rizzo:

No, I think that's right, Tom. So I wouldn't read too much into any one quarter. We still have $2.5 billion left to buy. We said we'll complete it by early next year, and that's the point.

David Motemaden:

I had a question on Slide 8. It says that you guys have a higher mix of newer, more expensive vehicles. Glenn, I believe you said that those vehicles come with higher premiums, and they can adversely impact total loss severity when vehicle values rise. Does the fact that you have more of a mix of more expensive vehicles, does that increase -- or does that mean that you need to take more rate relative to peers? Or I guess, how should I interpret this mix difference that you guys have versus peers?

Glenn Shapiro:

Yes. So there's a few parts to that because I'll talk more macro about the auto -- the car park out there and like the whole system. With every new model year newer that we get and every year that passes, we've done the math through what's in our book of business, what type of safety elements are in cars, accident avoidance, technology and everything. And we know 2 things

Meyer Shields:

Fantastic. I wanted to dig in a little more to your comments on homeowners and the automatic lift because we've seen a little bit of deterioration in the underlying loss ratio all of last year into the first quarter. Is the automatic, I guess, inflation guard changing? Are there other steps that are necessary in homeowners?

Glenn Shapiro:

Yes. So first, I always start with I think we're accountable for the recorded combined ratio because ultimately, if we always had a good underlying but like we hadn't gotten the right reinsurance or we hadn't been in the right locations, and we hadn't done good risk mapping for wildfire or hail or hurricane or any other exposure and we were constantly running what the industry or key competitors run. I think you would rightfully hold us accountable for that. So I always go back to the recorded combined ratio. That said, the underlying, as Tom said, it moves up and down a little bit, and we do watch that primarily though we watch the recorded combined ratio. Right now, like Tom, I feel really good about where we are. Severity ran hot in the first quarter. It's tough to look at one quarter in homeowners and draw a lot of conclusions because there's a decent amount of volatility between the mix of perils in homeowners. It's not nearly as stable as auto in that way. And so we're watching that, that was a high number, but we got an average price increase, average earned premium of 14.3% burning through, which really ticked up in the latter part of the year last year. So we'll continue to give us benefit as that earns through. And we're in -- obviously, we're really good shape in homeowners, and I feel good about it.

Thomas Wilson:

I'll start off and then Glenn, you can jump in. I think a lot of this premier depends on what happens in the competitive environment. So as other people are taking rents, it depends where they're spreading their rates. So if you buy on the renewal book, then that will create more shoppers because those tend to be people who shop less than just putting it all on the new business. But part of it depends what happens, how people do it. That said we feel pretty good about where we track our competitive position, the LTI index with our LTI Index at this point. So we're hopeful that as we move through this, we'll still continue to grow. With Transformative Growth on top of that, we think that it all still hangs together in terms of increasing market share. Glenn, what would you add to that?

Thomas Wilson:

Yes. I think when you go back to Glenn's long term. Bottom we like prospects for sustainable profitable growth. I mean, auto insurance, we know how to buy money and with transformative growth, we really grow that business. You add homeowners on top of that, which is really a growth business. And just like price and value are important to auto insurance customers, it's also important in investing. And when you look at the price of Allstate, it's essentially less than your other options. That's why we think transformative growth is going to increase nation multiples. .

Brian Meredith:

A quick question here. On Slide 11 of your supplement, you've got an interesting chart here that looks at auto state profitability. Just my question is, is this based on an earned kind of basis? Or is on a written basis. And if it's on an earned basis, how would this chart look on a written basis, as far as what states do you think are currently pretty close to rate adequate?

Glenn Shapiro:

Yes, I'll take it. Yes. So it's definitely earned basis in that we look at our when you look at combined ratios, it's on an earned basis. So you're hitting a really important point. So it's an astute observation. Because I think about that disclosure and you could look at -- when you look at the percentage of states that are above 100, for example, that is not the same as looking at the way we look at where do we want to grow. Because the state could be above 100 right now, but we've just gotten in the rate we feel we need to be adequate. So any new business we put on is going to be at a rate adequate level that we like, and we would want to grow there. So it really does lag and you have to go back to Page 8 and see where that -- which we don't -- because that's an estimate. We don't estimate every state and disclose based on when we'll earn the premiums and what percentage will earn by state and what that will do. But the point is, while that's a snapshot of where we are today, that does not reflect all of the written premiums and increases that we've got. .

Operator:

Thank you so much to our presenters and to everyone who participated. This concludes today's conference call. You may now disconnect. Have a great day.

Operator:

Good day and thank you for standing by. Welcome to the Allstate's Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the prepared remarks there will be a question-and-answer session. [Operator Instructions] As a reminder, please be aware that this call is being recorded. And now I would like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Good morning and thank you for joining us today. Let's start on Slide 3. As you know, Allstate refocus on execution and innovation as ways to create shareholder value. And our strategy has two components

Mario Rizzo:

Thanks, Glenn. Let's move to Slide 10 and discuss how transformative growth positions us for long-term success. So as we've discussed on past calls, transformative growth is a multiyear initiative to increase personal property-liability market share by building a low-cost digital insurer with broad distribution. This will be accomplished by delivering on four-key objectives

Joshua Shanker:

Yeah, thank you. My first question, in the prepared statements in the press release, you mentioned the idea of rationalizing expenses in order to get back to profitability. You also have a goal of reducing your expense ratio by 300 basis points through transforming growth over the next three-years. Are you accelerating the process? Are you going to be taking some costs out that will return in 2023, but be offset by some more restructuring? How do the different parts of that play together? Hello? Hello?

Joshua Shanker:

Maybe we lost Tom.

Mario Rizzo:

Okay. All right.

Joshua Shanker:

Yes, yes. Go ahead.

Mario Rizzo:

Yes, Josh, this is Mario. Thanks for the question. I would agree with Tom, I think what we're focused on is permanent cost reductions that will on a sustained basis improve our competitive position and improve customer value and really enable profitable growth. And we're going to continue to focus on things like operating costs and distribution costs that we can permanently take out of the system. And as Tom mentioned, leveraging tools like automation, process redesign off-shoring where we can and really kind of implement plans that do take time and aren't the kinds of things that I think you can accelerate the execution of. But we're also not focused on ripping a bunch of costs out, that's just going to come back into the system. We want to make the cost reductions permanent, achieve the three points over time because that will really position us to grow and grow at really attractive returns going forward.

Tom Wilson:

Josh, I don't – we did not mean for it to have that interpretation. When you look at improving profitability in auto insurance, number one thing will be increased our rates. As the lowering expenses, as part of Mario said, the growth objective or transformed growth plan, that will obviously help, but we would have done that anyway. In fact, we started at like two or three years ago, and we're really glad we did it because we came into this year with, as Glenn pointed out, about 3 points lower than we would have been had we not started. But that's ongoing piece, but it's a component of improving profitability, but it's just not – not like we started in claim loss cost management is somewhere in between the two, you're always using data analytics and new claim processes, new relationships with vendors to try to reduce your cost. But as the cost change in the locus of those cost changes. Sometimes you have to adjust the programs you have in place – so I would say that the primary thing to focus on is rate increases in terms of the near-term improvement in auto profitability.

Greg Peters:

Good morning, everyone. I would like to turn our attention to Slide 8 of your investor presentation and where you roll through the details about the rate increases that you're – that you've achieved and your expectations going forward. I guess just in the chart that's in the bottom left, just a further clarification on that. It's this number of locations, 25. Is locations the same thing as states? Or are we dealing with 100 locations? And then when we see an Allstate brand increase of 2.9%, is that a quarterly increase that we can annualize? And I guess where this is going is just trying to figure out the rate you're getting versus where the loss cost trend is and if you're catching up exceeding it or still behind?

Glenn Shapiro:

Sure. So directly answering the question, the 2.9% is an annualized and the 25 states. So this truly is like if we stopped, if all we did was the fourth quarter, we got 2.9% rate increase across our book of business. We're not stopping in the fourth quarter, and we did a little bit in the third quarter, we took about $800 million in rate increases between the two quarters and we'll continue to. But that amount of money, when you look at the right side, you look at the 81 and the 702 that is the full impact of the rate increase.

Greg Peters:

Got it. I appreciate the color. And by the way, the increased disclosure, I think, is appropriate, considering where you guys are, so applaud that change. I guess the other – the big picture question around the slide and just the market environment. Obviously, the auto market is under a lot of duress right now with inflation issues. And there's been news reports from different states and different regulators about pushback on rate increase filings. And I thought maybe you could give us an update of – I don't want to go state by state, but some of the big target states, how the regulators are responding to the data that you're showing them, is it a process that's going to take a while? Or do you think they're receptive immediately? Just if you could give us sort of a state of the union on the regulatory front, that would be helpful.

Glenn Shapiro:

Sure, will. So Greg, it's a great question. And I know we've been the last couple of quarters. So the conversation has been a lot about will it be pushback? How do we do it? I think the evidence – this page that you pointed us back to, Page 8, the evidence is pretty clear. 25 states implemented at a 7.1% average increase. We are continuing to go at a very fast pace across other states and even in some cases, the same states, again, with rate increases as we get new data and new trends. And to this point, we have – you're always going to experience some discussions, some push on the data, some negotiation, if you will, and some back and forth. But we've – you can see it there, those are implemented rates. And we've been successful. And our people, and I give a ton of credit to our state managers and our product team who've done over years, an incredible job of building relationships because they provide a lot of detail when they do a rate increase or a decrease, any type of rate change we make. And we get great responses because ultimately, these are numbers people talking to numbers people. It is less – most often anyway, is less a political issue than it is a reality issue of looking at the numbers and what is the justifiable and supportable rate increase. And again, we've been very successful so far. We have no reason to believe we won't continue to be. We'll have pushback in places, and we'll have discussions and give and take. But overall, we're getting the rates that we need, and we're going to continue to do that.

Operator:

Your next question comes from the line of Paul Newsome with Piper Sandler. Your line is open.

Tom Wilson:

Glenn have some good math on that.

Paul Newsome:

What about the inflation on that the non – sort of the nonlimit piece, that 20%? What do you think that's doing today?

Paul Newsome:

Thank you. Very helpful.

Yaron Kinar:

Thank you. Good morning. First question. Slide 7 shows that auto frequency is still at a $1.4 billion good guy relative to 2019. So my question is, do you expect that frequency to normalize? And if so, is the 7% rate increase that you show on Slide 8, already contemplating that normalized frequency?

Glenn Shapiro:

I will. Yes. So I give a ton of credit to our team that does all our math and our modeling, they've done a really nice job on frequency, and we're sitting just about right on top of where we expected to be a year ago on it. So will it normalize to some degree probably? While we can't predict different things can happen in the world, we can't predict and won't give a forward-looking prediction of frequency, you'd expect there to be some normalization to pre-pandemic levels. But as we've said for a while now that we believe that there is some durable structural change. People aren't going to be commuting to office buildings as frequently as they did before the pandemic. We probably all know many people, including some of ourselves, that don't do that and won't do that even on an ongoing basis. And 40% of our losses occur in rush hour. So the commuting time, Monday to Friday mornings and afternoons, so when you got significantly fewer drivers on 40% of your last time period and that shift in when people drive, it makes changes to both frequency and severity. So we think that there's some durable reduction there that barring all the other things that change around it, would be consistent in the way frequency stays a bit lower. But as I mentioned earlier in the prepared remarks, we also see some severity increase from that because the driving has shifted to more leisure times to times where the roads are more open, people are driving faster. It creates harder hits with greater severity, that's hitting us both on the physical damage and the casualty side. So there's just a lot of pieces and parts in there. But to summarize with your question, are we contemplating that in our rate plan? The answer is absolutely yes. We are contemplating in the rate plan, our expectations for frequency, our expectations for severity. And we're going hard after rate, as you can see, and we're not done.

Tom Wilson:

Yes. It's hard to compare us to other people. If you're talking about Progressive, I'd say our combined ratio is 15 to 20 points better than theirs on a billions of dollars of either theirs or ours, but I don't even think there's a comparison. But – so we – the business bounces around a little bit. We get a good return on capital on it. Was it in the high 90s? Is that where we want it to be on a long-term basis? No. There's a bounce around by year, yes. And so we feel highly confident we can continue to differentiate ourselves in this space in that business.

David Motemaden:

Hi, thanks. Just a question on when you think you'll be able to get to that mid-90s combined ratio in auto? Glenn, I think you've talked about some of the – I guess, your thinking around some of the moving parts around physical damage or severity. So wondering if you can maybe – we can zoom out and think your timing when you guys think you guys can get back to that mid-90s targeted combined ratio in personal auto.

David Motemaden:

Okay. Thanks. That's fair. And then for my second – or my follow-up question just on I just wanted to focus a little bit on the bodily injury severity and some of the casualty changes, some of the charges you took this quarter. Maybe you could help me understand where that's been running. What specifically happened this quarter that made you realize that charge? And I think the last time you spoke about this. You had said that it was more or less in line with medical cost inflation. I think this was a few years ago. And that was notably below your peers back then. So I guess it's sort of a long way of asking, how are you thinking about the BI severity now given the changes that you've made? And how are you reflecting that in your picks going forward?

Mario Rizzo:

Sure, Tom. So I guess the play side start is we have really strong reserving processes, and we're continually looking at our reserve levels, both for the current report year but also for prior years. And we're taking into account things that we're seeing, both in terms of inflationary trends as well as other phenomenon. And we talked a little bit earlier around things like medical inflation, consumption, attorney representation, those all factor in. So I think, David, the thing we saw this quarter was we continued to see upward development in prior years and some of the casualty coverages. And we took that into account this quarter in terms of raising our ultimate report year expectations for bodily injury in a couple of the prior years. But it was really in reaction to the continuation of some of those trends that I talked about that are causing bodily injury and other casualty severities to increase to levels that were beyond kind of the range of outcomes that we had established earlier on for those prior years. So we reacted to it. We tend to be conservative when we set reserves. But in this particular instance, we saw those trends develop out, and we reacted to it and increased the prior year reserves on auto casualty.

Operator:

This concludes fourth quarter conference call. You can now disconnect.

Operator:

Thank you for standing by and welcome to the Allstate Third Quarter 2021Eearnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Tom Wilson:

Well, good morning and thank you for investing your time with us today. Let's start on Slide 2. This is Allstate strategy on the left-hand side, which we've talked about before. We have two components; increased personal profit liability market share, and expanded protection solutions. And those are the two ovals you see on the left with the intersection between. The key third quarter results are highlighted on the right-hand panel. Property-liability policies and force increased by 12.5%. Allstate Protection Plans continue to grow rapidly by both broadening its product offering and expanding the network of retail providers. As a result, we now have almost a 192 million policies force across the [Indiscernible]. Financially, the results were more mixed. Revenues were up substantially, but net income and adjusted net income declined from the prior year quarter. Underwriting income declined primarily due to higher loss costs of settling auto insurance claims. We've implemented price increases to proactively respond to the sharp rise in loss costs and transformative growth continues to position us for long-term success, both of which we'll talk about in a couple of minutes. This was partially offset by the benefits from our long-term risk and return program that includes significant reinsurance recoverable, they were primarily related to Hurricane Ida, and a substantial increase in performance-based investment income. Capital deployment results were excellent with a billion-and-a-half dollars in cash return to shareholders in the quarter. We also completed the divestitures of our two largest life and annuity businesses, one in October and then one just earlier this week. So let's go to Slide 3. Revenues of $12.5 billion in the quarter increased 16.9% compared to the prior-year quarter. And that reflects both the higher earned premiums in National General acquisition. Allstate brand homeowners premium growth, and higher net investment income, property liability premiums, and policies and force increased 13.5%, and 12.5% respectively. Net investment income was $764 million, and that's up almost [Indiscernible] by $300 million compared to the prior-year quarter, reflecting strong results from the performance-based portfolio. Net Income was $508 million in the quarter. And that's compared to a billion 1 in the prior quarter as lower underwriting income was partially offset by the higher investment income. Adjusted net income was $217 million or $0.73 per diluted share and decreased $683 million compared to the prior-year quarter, reflecting the lower underwriting income due to the higher auto and homeowners insurance loss costs. Net income for the first 9 months of 2021 was below the prior year, and it's largely due to the loss on the sale of the life annuity business which we recorded earlier in the year. Adjusted net income was $10.70 per share for the first nine months. That was above the prior year as higher investment income and lower expenses, more than offset higher loss costs. Let's turn to slide 4. How I would do is put the pandemic in the longitudinal perspective because this created volatility for our results. And it obviously requires us to adapt quickly, which we do. But before we go through the impact on the third quarter results of the supply chain disruptions, let's talk about the initial and subsequent impact of the pandemic. So in 2020, the economic lockdown resulted in fewer miles being driven and promoted -- and prompted an aggressive economic support response from really governments around the world. The impact on auto insurance was a dramatic drop in the number of accidents. And of course, due to this unprecedented driving frequency, we've proactively provided our customers with some money back which increased customer retention. Since then, and since there was less road congestion and fewer accidents that occurred during commuting hours, the average speed in severity of auto claims increased, offsetting some of the frequency benefits. Nevertheless, underwriting margins improved dramatically, so we introduced a temporary shelter in place payback rather than take a permanent rate reduction, and took some modest overall reductions in rate level. This year, as you can see from the right-hand column, the story has been just the opposite as it relates to frequency, with large percentage increases. And while the overall level of accident frequency for the Allstate brand is still below pre -pandemic levels, the national and general non-standard business is back to the levels before the pandemic. Auto severity this year, however, has been dramatically impacted by the supply chain disruption and price increases on used cars and original equipment parts in Mario will take you through that in a couple of slides. From a pricing perspective, this results in moving from modest rate reductions to significant increases on auto insurance prices. From a growth standpoint at the off set of the pandemic, we begin to see material increase in the consumer acceptance to telematics. And we've really leaned into that with our Milewise product, which is really the only national product out there to pay for the mile. And that's led to substantial increase in debt telematics products. Now, the pandemic has also had a significant impact on the investment portfolio and this is a tale of the beginning of the end as well. So early in the crisis, equity valuations were down and it had a negative impact on investment results. Then of course, we have a broad-based long-term spread out over a decade, really investing in these kinds of funds. And so we do it on a long-term basis, whether that's 3, 5, or 10 years. But so what's happened this year, of course, is we've had the opposite happen, which is with the economic stimulus, we've had equity evaluations going after and our returns have come back strongly. In the market-based portfolio, lower interest rates at the onset of this pandemic did lead to an increase in the unrealized gains in the portfolio. But of course, what that does is reduce future interest rate income, which you see slight decline in this quarter. And many of our other businesses that have been impacted, some positively, some negatively. But it's our ability to adapt and seize the opportunities that are presented that create shareholder result So Mario will now go through the third quarter results in more detail and how transformative growth positions Allstate for continued success.

Mark Nogal:

Thanks Mario. Moving to Slide 11, protection services continues to grow revenue and profit. Revenues, excluding the impact of realized gains and losses, increased 23.3% to $597 million in the third quarter. Protection Plans, net written premium increased by a $139 million due to the launch of the Home Depot relationships, focusing on appliances. Our quarterly net written premium is now 5.5 times the level of when the Company was acquired in 2017. Already expanded revenues due to the integration of LeadCloud and Transparently., which were acquired as part of the national general acquisition, as well as increased device sales driven by growth in the milewest product. Policies and force increased 12.5% to a 150 million driven by growth in Allstate Protection Plans and Allstate identity protection. Adjusted net income was $45 million in the third quarter, representing an increase of $5 million compared to the prior-year quarter, driven by higher profitability at Allstate identity protection in Arity. This was partially offset by higher operating costs and expenses related to investments and growth. Now let's shift to Slide 12, which highlights our investment performance. Net investment income totaled $764 million in the quarter, which was $300 million above the prior year quarter, driven by higher performance-based income as shown in the chart on the left. Performance-based income totaled $437 million in the quarter, as shown in gray, reflecting increases in private equity investments. As in prior quarters, several large idiosyncratic contributors had a meaningful impact on our results. These results represent a long-term and broad approach to growth investing, with nearly 90% of year-to-date performance-based income coming from assets with inception years of 2018 and prior. Market-based income, shown in blue, was $6 million below the prior-year quarter. The impact of reinvestment rates below the average interest-bearing portfolio yield, was somewhat mitigated in the quarter by higher average assets under management and prepayments fee income. Our total portfolio return was 1% in the third quarter and 3.3% year-to-date, reflecting income and changes in equity valuations partially offset by higher interest rates. We take an active approach to optimizing our returns per unit risk for appropriate investment horizons. Our investment activities are integrated into our overall enterprise risk and return process, and play an important role in generating shareholder value. While the performance-based investment results continued to be strong in the third quarter, we manage the portfolio with a longer-term view on returns. On the right, we have provided our annualized portfolio return in total, and by strategy over various time horizons. Consistent with broader public and private equity markets, our portfolio has experienced returns above our historical trend over the last several quarters. While prospective returns will depend on future economic and market conditions, we do expect our performance-based returns to moderate in line with our longer-term results. Now let's move to Slide 13, which highlights Allstate strong capital position. Allstate's balance sheet strength and excellent cash flow generation, provides strong cash returns to shareholders while investing in growth. Significant cash returns to shareholders, including $1.5 billion through a combination of share repurchases and common stock dividends occurred during the third quarter. Common shares outstanding have been reduced by 5% over the last 12 months. Already in the fourth quarter we successfully completed the acquisition of safe auto on October 1st for $262 million to leverage National General's integration capabilities and further increased personal lines market share. We also recently closed on the divestitures of Allstate Life Insurance Company in New York. These divestitures free up approximately $1.7 billion of deployable capital, which was factored into the $5 billion share repurchase program currently being executed. Turning to Slide 14, let's finish with a longer-term view of Allstate's focus on execution, innovation, and sustainable value creation. Allstate has an excellent track record of serving customers, earning attractive returns on risks, and delivering for shareholders, as you can see by the industry-leading statistics on the upper right. Innovation is also critical to the execution, and our proactive implementation of transformative growth has positioned us well to address the macroeconomic challenges facing our business today and in the future. Sustainable value creation also requires excellent capital management and governance. As an example, Allstate is in the top 15% of S&P 500 companies and cash returns to shareholders by providing an attractive dividend and repurchasing 25% and 50% of outstanding shares over the last 5 and 10 years respectively. Execution, innovation, and long-term value creation will continue to drive increased shareholder value. With that context, let's open the line for your questions.

Operator:

Our first question comes from the line of Josh Inc. from Bank of America. Your question, please.

Tom Wilson:

Good morning, Josh is Tom, I'll start and then Glenn can jump in first as you know, we've long been focused on bundling auto and homeowners because those are good, stable, long-term customers. You do get a discount for putting those two together. So there's an advantage to the customer from buying it and putting it all in one place besides just having 1 point of contact. And we've been good at that. If you look at our growth in Homeowners this year. It's higher than our growth in auto insurance. And data appears to be because we are doing more bundling of individual customers, it a little hard to get the exact attribution, but we feel good about what our agents are doing to drive that. As it relates to the Gross event. We've been we've repositioned as business over multiple years back in the middle -- late 2 thousand decade of 2,000, we've made of course a bunch of money since over the last eight or nine years, I think almost $9 billion of underwriting income on homeowners which you need to do because we don't believe that a 4 point margin is attractive for homeowners for a couple of reasons. One is you don't get much investment income. Secondly, you got to put up more capital because the results are more volatile and you have the big tail losses. So as we seek to grow it, we bring all of that math to bear. On individual states is where we grow. And so if there's a state where even if there's a fair amount of catastrophe exposure but we think we can get a good return, that's got a margin on it that compensates us for the capital we have to put up and the reinsurance we have to buy, then we'll do that. And we're highly sophisticated in the way we run it. So the geographic focus is really -- we have a much highly sophisticated model into it. On the direct business, you don't sell as much direct homeowners right now, we still need to crack the code on that. Before I -- Glenn will have some view on how we can continue to run the table in homeowners as we have so far. But the -- an upcoming thing that Glenn might want to touch on, is what we're doing in the independent agent channel because of the National General platform gives us, with our products, our expertise, our pricing, our claims management. And our reinsurance programs gives us the ability to really serve a lot of customers. [Indiscernible]

Tom Wilson:

Yeah. Glenn, mind if you take both of those?