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The Allstate Corporation (NYSE:ALL) Q3 2023 Earnings Call Transcript

The Allstate Corporation (NYSE:ALL) Q3 2023 Earnings Call Transcript November 2, 2023

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.

Brent Vandermause: Thank you, Jonathan. Good morning. Welcome to Allstate's third quarter 2023 earnings conference call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of market, we issued our news release and investor supplement, filed our 10-Q and posted related material on our website at Our management team is here to provide perspective on these results and our strategy. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2022 and other public documents for information on potential risks. And now, I'll turn it over to Tom.

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: increase personal Property-Liability market share. And expand protection provided to customers which are shown in the 2 over on the left. On the right-hand side, you can see the highlights for the quarter. We made good progress on improving auto insurance profitability. There is more to be done but you can see the improving trend again this quarter. We decided to pursue our sale of Allstate's Health and Benefits businesses. After successful integration of Allstate's voluntary benefits business, with National General's group and individual health businesses, we've created a really well-positioned benefits platform and that strategy was part of the National General acquisition plan.

Our success now positions us to achieve additional growth that potential could be maximized by aligning this platform with a broader set of complementary products, distribution channels and capabilities. We anticipate completing a transaction in 2024. We also made progress in executing and transformative growth initiatives to set the stage for personal profit liability market share growth as margins improve. The second part of our strategy to broaden protection offerings also progressed with Allstate Protection Plans growth. Let's review the financial results on Slide 3. Revenues of $14.5 billion in the third quarter increased 9.8% above the prior year at $1.3 billion. The increase was driven by higher property liability earned premiums in auto and homeowners insurance, primarily reflecting the 2022 and 2023 rate increases.

Which has resulted in Property-Liability earned premium growth of 10%. Net investment income of $689 million reflects proactive portfolio actions, including extending fixed income duration and lowering public equity holdings to take advantage of higher fixed income yields. Net loss of $41 million and adjusted net income of $214 million that's $0.81 per diluted share reflects improved profit liability underwriting performance. Property-Liability recorded an underwriting loss of $414 million which compares to $1.3 billion loss in the third quarter of 2022. While the improvement was encouraging, loss cost trends remain elevated and require continued execution of auto insurance profit improvement plan, particularly in California, New York and New Jersey.

Slide 4 provides an update on the execution of the 4 components of that plan. Starting with rates; the Allstate brand has implemented 26.4% of rates since 2022, including 9.5% through the first 3 quarters of 2023. National General implemented rate increases of 10% in 2022 and an additional 8.8% through the first 9 months in 2023. We will continue to pursue rate increases to restore auto insurance margins back to target levels. Second, reducing operating expenses is core to both the profit improvement plan. And importantly, the transformative growth plan to become a low-cost provider of protection. Expenses are down and we have a path to further reductions. Third, we've restricted new business growth in areas and classes of business where we are not achieving target returns.

Given the success we've had in some areas, we're selectively removing these restrictions in some states and segments; fourth, enhancing claim practices in a high inflationary and increasingly litigious environment are required to deliver customer value. That includes accelerating the settlement of injury claims and increasing in-person inspections. Turning to Slide 5. Let's touch base on why we believe this profit improvement will work in the current competitive environment. Allstate's capabilities and business model have generated industry-leading auto insurance margins over the last 10 years with an average combined ratio of roughly 96.5% and an average underwriting income of $800 million. That represents approximately a 5-point outperformance in the industry which generates an incremental profit of about $1.3 billion annually.

Only a few of the other top 10 insurance companies have a similar record. In the current competitive environment, these same capabilities will enable us to continue the progress made in improving auto insurance margins. The rapid rise in auto claim severities eroded profits for the industry with most carriers responding by increasing auto insurance prices and lowering expenses. Allstate Progressive and GEICO has significantly raised auto insurance prices since 2019. State Farms increased its prices to a lesser degree but as a result, appears to be incurring large underwriting losses. Expense reductions are also being pursued by many companies, including lowering advertising spending which has moderated competition for new customers. The impact on policies in force is dependent on each company's individual profit and growth plan.

As Mario will discuss, the Allstate brand policies in force has declined, particularly in 4 large states. GEICO's policies in force have declined by a larger amount, while Progressive has grown. Allstate's capabilities will enable achievement of the profit improvement plan in its competitive environment. Now let's review the potential sale of the Health and Benefits business on Slide 6. We acquired National General was primarily to improve our position in independent agent channel for Property-Liability insurance and we've exceeded our goals in that integration. The acquisition also gave us the opportunity to combine Allstate's voluntary benefits business with National General's group and individual health businesses. Successfully combining these into 1 business unit has created a strong benefits platform with substantial additional value can be realized by aligning with a broader set of product offerings, distribution and capabilities such as medical network management.

Allstate Health and Benefits separates 3 successful businesses which is shown in the middle there and the $1 trillion employer benefit markets group and individual health when you add those all up. We've been the preeminent voluntary benefits provided for 24 years. With a comprehensive product offering that generates annualized premiums and contract charges of $1 billion and $300 million of new sales. National General's group health business targets the small case size market. And has $700 million of premium in fee revenue. And $400 million in new sales. The individual health protection is provided through both proprietary and third-party products which generates both underwriting and fee income. The Health and Benefits businesses have revenues of $2.3 billion which is 4% of total corporate revenues and adjusted net income of $240 million for the trailing 12 months which you can see in the 2 pie charts in the bottom and it's kind of spread between all the businesses.

The employer voluntary benefits and group health businesses when you add them up, have roughly 48,000 relationships ranging from Fortune 50 companies to small businesses and over $4.3 million policies in force. The growth potential of these businesses can be accelerated with greater alignment with a wide range of companies in the market that are shown on the right-hand side. With its attractive business profile and financial results, we expect the transaction to be completed in 2024. In addition to improving profitability and strategically allocating capital, we continue to implement the transformative growth initiative to position the Property-Liability market share gains as margins improve. The fine components initiative was shown as top of Slide 7.

Affordable simple connected protection is at the heart of the strategy to further improve customer value. Customers will have access to high-quality protection that better meets your needs at a low cost with hassle-free experiences. However, they choose to access our broad distribution network. We're live in the market with a new business experience and further enhance the connectivity of the Allstate at this week. Mario will discuss our success in expanding customer access. While each transformative growth element is at various stages of maturity. We're moving from Phase III of building new model towards scaling it in Phase IV. Now, I'll turn it over to Mario to go through the Property-Liability results.

Mario Rizzo: Thanks, Tom. Let's start on Slide 8. Our comprehensive auto profit improvement plan is improving margins. Property-Liability earned premium increased 10% compared to the prior year quarter, driven by higher average premiums which were partially offset by a decline in policies in force. The underwriting loss of $414 million in the quarter improved $878 million compared to the prior year quarter due to the improvement in our auto loss ratio. The chart on the right highlights the components of the 103.4 [ph] combined ratio in the quarter which improved 8.2 points despite a 2.8 point increase in the catastrophe loss ratio compared to prior year. Prior year reserve estimates, excluding catastrophes, were $166 million unfavorable or at 1.4 point [ph] adverse impact on the combined ratio in the quarter.

$82 million was attributable to the runoff property liability annual reserve review. And $84 million in Allstate Protection primarily driven by national general personal auto injury coverages. The underlying combined ratio of 91.9 improved by 4.5 points compared to the prior year quarter and 1 point sequentially versus the second quarter of 2023 despite continued elevated severity inflation. Now let's move to Slide 9 to review Allstate's auto insurance profit trends. The third quarter recorded auto insurance combined ratio of 102.1 was 15.3 points [ph] favorable to the prior year quarter, reflecting higher earned premium, lower adverse prior year reserve reestimates and expense efficiencies. As a reminder, we continuously assess claim severities as the year progresses.

For example, last year, as 2022 developed, we increased current report year ultimate severity expectations which influenced the quarterly reported trends. While loss cost trends remain historically elevated, the pace of increase moderated in the third quarter. As Allstate brand weighted average major coverage severity improved to 9% compared to the 11% estimate as of the end of last quarter. The chart on the left shows the sequential improvement in quarterly underlying combined ratios from 2022 through the current quarter with quarterly reported figures adjusted to the full year severity level for 2022 and 2023 adjusted for current severity estimates as of the third quarter. Higher average premium and the continued execution of our profit improvement plan drove the sequential improvement in underlying combined ratio to 98.8 as reported or a 100.5 in the bar graph when removing the 1.7 point [ph] favorable impact on the third quarter from improved severity for claims reported in the first 2 quarters of the year.

A financial advisor giving advice to a couple, illustrating the personal finance and insurance products the company offers.
A financial advisor giving advice to a couple, illustrating the personal finance and insurance products the company offers.

The chart on the right portrays how our comprehensive actions are resulting in a higher proportion of the portfolio progressing towards or achieving target levels of profitability. Excluding the 3 large states which generated 45% of Allstate brand auto underwriting loss in 2022, Allstate brand auto insurance underlying combined ratio was 97.2. The Premiums from states with an underlying combined ratio below 100 improved to 59% of the portfolio in the third quarter, doubling from the percentage at year-end 2022 and up almost 10 points from 50% in the second quarter. Slide 10 shows the impact on policies in force from actions to improve profitability. Allstate brand rate increases have exceeded 26% over the last 7 quarters. New issued applications shown in the middle chart, declined 19.5% compared to the prior year quarter, largely driven by actions to reduce growth in unprofitable states.

California, New York and New Jersey combined declined 75% compared to the prior year. Allstate brand auto policies in force decreased by 6% in the third quarter compared to the prior year, partially driven by the lower new business and also driven by lower retention due to rate increases. Elevated loss trends in Texas required implementation of rate increases of over 50% in the last 21 months. As a result, retention has declined, while profitability has improved. Policies in force in these 4 large states combined decreased by 8.7%, whereas the remaining states declined by 4.7% compared to the prior year through the third quarter. On Slide 11, we take a deeper look at the National General Auto book. While third quarter margins were impacted by $95 million of unfavorable non-catastrophe prior year reserve reestimates primarily across liability coverages.

The underlying combined ratio of 96.8 in the quarter and 95.7 year-to-date remains largely consistent with the prior year periods. Reflecting higher loss cost expectations given the reserve strengthening to date, offset by higher average premiums and expense efficiencies. The National General business as product, including fee-based revenue features and claims capabilities to accept in the nonstandard auto insurance market. As you can see in the chart on the right, 75% of the written premium growth in the third quarter of 2023 is coming from nonstandard auto which is more profitable than the overall national general auto insurance business. Our new middle-market product, Custom 360, is now available in nearly 1/3 of the U.S. market and is also contributing to growth.

While the legacy National General and Encompass businesses which will be run off as we implement custom 360, are having the lowest impact on growth. Slide 12 covers homeowners insurance results which incurred an underwriting loss in Q3, driven by higher catastrophe losses. On the left, you can see net written premium increased 12.1% from the prior year quarter. primarily driven by higher average gross written premium per policy in both the Allstate and National General brands and a 0.8% increase in policies in force. Allstate Brand average gross written premium per policy increased by 13.2% compared to the prior year quarter, driven by implemented rate increases throughout 2022 and an additional 9.5 points implemented through the first 9 months of 2023.

As well as inflation and insurance home replacement costs. The underlying combined ratio of 72.9 improved by 1.2 points compared to the prior year quarter, driven by higher earned premium, lower frequency and a lower expense ratio, partially offset by higher severity. We remain confident in our ability to generate attractive risk-adjusted returns in the homeowners business. Slide 13 highlights progress on expanding customer access as part of transformative growth. We continue to enhance capabilities across distribution channels and are the only major carrier with competitive offerings and branded agent, independent agent and direct distribution. The exclusive agent channel represents the majority of Allstate's U.S. personal lines premium at approximately $32 billion or roughly 22% market share in this channel.

Our exclusive agents continue to be a strength, offering personalized local advice customers value in this $145 billion market. While exclusive agent auto new business decreased by 5% overall, applications per agency, excluding California, New York and New Jersey has increased by 13.4% so far this year. In addition, modifications to compensation have driven bundling at point of sale to an all-time high of over 75%. Agent performance continues to improve as they adapt to new compensation programs. We also have great growth potential through independent agents. The acquisition of National General strategically positioned Allstate to grow in the independent agent channel. National General continues to profitably grow nonstandard auto, while converting legacy Encompass and Allstate independent agent business onto their platform.

Expanded nonstandard auto presence in 12 states represented 9% of National General's 12.9% increase in policies in force during 2023. As we leverage Allstate's expertise in standard auto and homeowners, this channel should represent another source of profitable growth. The direct channel had a significant decline in new business volume this year since this was the most effective place to reduce new business volume and was the most impacted by the reduction in advertising. We have improved our capabilities in this channel, so it will be another source of growth moving forward. And now, I'll hand it over to Jess to discuss the remainder of our results.

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.

Operator: [Operator Instructions] And our first question comes from the line of Gregory Peters from Raymond James.

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