Allstate Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 13 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Allstate's First Quarter Earnings Investor Call. Currently, all participants are in a listen only mode. After prepared remarks, there will be a question and answer session. And now I'd like to introduce your host for today's program, Brent Vanameet, Head of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Jonathan. Good morning, and welcome to Allstate's Q1 2024 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 onto 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.

Speaker 1

As noted on the first line 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 ks for 2023 and other public documents for information on potential risks. Before I turn the call over to Tom, I would also like to provide an update on our monthly financial disclosures. Since early 2022, implemented rate actions from the prior month have been included in our monthly release and disclosed on our Investor Relations website to provide additional transparency on our proactive response to the rapid rise in loss costs. Going forward, our implemented rate disclosures for auto and homeowners insurance will be disclosed on a quarterly basis instead of monthly within our investor supplement.

Speaker 1

And now I'll turn the call over to Tom.

Speaker 2

Well, good morning. Thank you for investing your time and have your interest why Allstate is such an attractive investment opportunity. I'll begin with an overview of results and then Mario and Jess are going to walk through the operating performance. And then as Brent mentioned, after that we'll have time for Q and A. Let's begin on Slide 2.

Speaker 2

Allstate's strategy has 2 components, which is shown on the left there, increased personal property liability market share and expand protection provided to customers. On the right hand side, you can see the highlights for the quarter. So we generated net income of $1,200,000,000 in the Q1. The profit improvement was broad based, reflects successful execution of the auto insurance profit improvement plan for active homeowners insurance margins and that also benefited from lower catastrophe losses in this quarter. Net investment income was up almost 33%, reflecting that 2022 and 2023 repositioning into longer duration higher fixed income yields and then yields also an up sum.

Speaker 2

And we had good performance based valuation this quarter as well. Protection services also had a good quarter and that was led by protection plans and roadside services. If you go down to the bottom, what do we do from here? We have a broad approach to further increase shareholder value. First, improving auto profitability in underperforming states will increase returns.

Speaker 2

Secondly, we're focused on increasing policies in force under the Allstate brand while continuing to expand National General. Mario is going to talk about that in a few minutes. Allstate's integrated approach to investing has and will continue to create value for shareholders. Expanding protection services will benefit both our customers and shareholders. And then the sale of the health and benefits business to a buyer that can further leverage our success will create more shareholder value.

Speaker 2

Although I point out it will have a short term negative impact on return on equity. Let's review the broad based profit improvement on Slide 3. So revenues were $15,300,000,000 in the Q1, reflecting a 10.9% increase in property liability earned premium and that of course was primarily due to rate increases in both auto and homeowners insurance. Over the last 12 months, property liability rate improvements have increased by almost $5,000,000,000 on an annual basis. Net investment income in the quarter was $764,000,000 or 32.9 percent for the prior year and that reflects those higher fixed income yields and the duration extension I just mentioned.

Speaker 2

The strong profitability in the quarter generated adjusted net income of $1,400,000,000 or $5.13 per diluted share. Now let me turn it over to Mario to go through property liability results.

Speaker 3

Thanks, Tom. Let's start on Slide 4. Property liability earned premium increased 10.9% in the Q1 driven by higher average premiums. Underwriting income was $898,000,000 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.

Speaker 3

Lower catastrophe losses of $731,000,000 were 8.8 points favorable to the prior year quarter, reflecting milder winter weather. The underlying combined ratio of 86.9 improved by 6.4 points compared to the prior year quarter. The improvement was driven by higher average premium and moderating loss cost increases. Expense reduction programs also benefited results more than offsetting higher advertising spend. Prior year reserve re estimates excluding catastrophes had only a small impact on results.

Speaker 3

Favorable development in personal auto and homeowners insurance largely offset increases in personal umbrella liabilities and commercial auto reserves for the transportation network contracts we began exiting in late 2022. Now let's take a closer look at auto insurance profitability on Slide 5. The Q1 recorded auto insurance combined ratio of 96 improved by 8.4 points compared to the prior year quarter showing that our profit improvement plan is working. The left chart shows quarterly underlying combined ratios. You will remember we showed this chart last year, which adjusts 20222023 quarterly reported figures to reflect the updated average severity estimates as of the end of each respective year.

Speaker 3

As you can see, the underlying combined ratio improved sequentially in each of the last 5 quarters to 95.1% in the Q1 of 2024. The chart on the right shows that in the first half of twenty twenty three, premium increases in dark blue were being offset by higher underlying losses and expenses. Profits began to improve in the Q3 of 2023 as premiums outpaced loss and expense increases and this continued in this year's Q1. The slight first quarter drop in underlying loss and expense reflects lower claim frequency that benefited from milder weather and improved operating efficiencies, partially offset by higher severity. Relative to the prior year quarter, average underlying loss and expense in the Q1 of 2024 was 6.7% higher as you can see at the top of the table.

Speaker 3

This reflects higher current year incurred severity estimates, primarily driven by bodily injury coverage, which was partially offset by lower accident frequency and the favorable impact on current year severity of favorable prior year reserve development in the Allstate brand. Given the impact that good weather had on frequency in the quarter, favorable frequency may not persist as the year progresses. While auto margins have improved due to our profit improvement actions, we remain focused on ensuring that rate levels continue to keep pace with underlying cost trends and driving improved profitability in those states not yet achieving target margins. Slide 6 shows how auto profit improvement supports pursuing policy growth. As shown on the left, Allstate brand implemented rate increases exceeding 16% in both 20222023.

Speaker 3

In the Q1 of 2024, we implemented rate increases of 2.4% to keep up with the cost trends and improve margins in states not achieving target margins. The chart on the right depicts the Allstate brand auto proportion of premium in states with an underlying combined ratio below 96 shown by the dark blue bars. As more states have achieved target returns, we have started to increase marketing investment both nationally and in those states. Slide 7 shows that while Allstate brand policies in force decreased compared to prior year, albeit at a slower rate than last quarter, over half that decline was offset by growth at National General. On the left, you can see that total protection auto policies in force decreased by 2% compared to prior year due to a decline of 5.2% in the Allstate brand reflecting the continued impact of auto insurance profit improvement actions.

Speaker 3

Underneath this decline is the positive impact of higher Allstate agent productivity and direct channel sales. Customer retention in the Allstate brand also continued to improve and that improvement has a significant impact on growth trends. Allstate brand auto retention of 86 improved by 0.3 points compared to prior year as the negative impact of large rate increases in 2022 2023 begins to moderate. As we discussed last quarter, we received approval for rate increases in the profit challenged states of California, New York and New Jersey, which were affected this quarter. Renewal trends in those states were stable in the Q1, but the full impact on customer retention has not yet impacted growth.

Speaker 3

Allstate brand new business also increased 7% versus the prior year, reflecting more advertising and increased Allstate agent productivity and direct sales. National General was another positive to growth. Policies in force increased by 12.6% over the prior year due to an increase in non standard auto insurance and the continued rollout of a new middle market standard and preferred auto insurance product also known as Custom 360. Slide 8 summarizes homeowners insurance profitability, which generated strong returns in the quarter. Homeowners insurance provides a differentiated customer experience and represents an additional growth opportunity across channels.

Speaker 3

The chart shows the homeowners combined ratio over time, achieving a 10 year average of approximately 92. The Q1 combined ratio of 82.1 translated to $564,000,000 of underwriting income and improved 36.9 points compared to prior year, primarily driven by lower catastrophe losses. The underlying combined ratio of 65.5 also improved by 2.1 points due to higher average premium and lower non catastrophe claim frequency. Allstate Protection homeowners generated double digit written premium growth compared to prior year, reflecting higher average gross written premium per policy and policies in force growth of 1.4%. Allstate agents continue to bundle auto and homeowners insurance at historically high levels and National General's Custom 360 product offers additional growth opportunities in the independent agent channel.

Speaker 3

Allstate has created an industry leading business model and we remain confident in our ability to generate attractive risk adjusted returns. Moving to Slide 9, let's discuss the property liability growth opportunities. Starting on the 1st row, improving customer retention remains key to improving our growth trajectory. Auto retention levels have stabilized and sequentially improved over the last two quarters and homeowners retention improved 0.8 points to the prior year quarter. Our agents and employees continue to guide customers through the renewal process by offering coverage options and ways to save through innovative programs and discounts like Drivewise and Milewise telematics offerings.

Speaker 3

Growth can also be increased by easing new business restrictions. As rate adequacy has been achieved in more states, restrictive underwriting policies have been unwound in states representing more than 75% of Allstate brand auto premium. Increased Allstate brand advertising is also expected to increase growth. The components of transformative growth are being implemented to create sustainable growth. An improved competitive position will result from further expense reductions.

Speaker 3

Expanded customer access comes from increased Allstate agent productivity, enhanced direct distribution and the expansion of Custom 360 to more independent agents. A new Allstate brand affordable, simple and connected auto insurance product is available in 9 states on the direct sales side. Online quote completion time has been reduced by 40% to less than 3 minutes within the new technology ecosystem. This platform will be expanded to the Allstate agent channel this year and to more states and homeowners over the next several years. With these growth levers, Allstate is positioned to generate sustainable profitable growth.

Speaker 3

Now I'll turn it over to Jess to talk about other operating results.

Speaker 4

Thank you, Mario. 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.

Speaker 4

Net investment income shown in the chart on the left totaled $764,000,000 in the quarter, which is $189,000,000 above the Q1 of last year. Market based income of $626,000,000 shown in blue was $119,000,000 above the prior year quarter as the fixed income portfolio continues to benefit from repositioning into longer duration and higher yielding assets that have sustainably increased income. Performance based income of $201,000,000 shown in black was $75,000,000 above the prior year quarter due to higher valuation increases and was above the trend that we have seen in recent quarters, but lower than 2022. The performance based portfolio is constructed to enhance long term returns and volatility on these assets from quarter to quarter is expected. Total portfolio return of 0.5% for the quarter and 4.8% for the last 12 months, which is shown in the table below the left chart indicate that balanced approach to risk and return creates shareholder value.

Speaker 4

The chart on the right shows changes made to the bond portfolio duration in comparison to interest rates over time. Higher income this quarter reflects increases in duration as interest rates rose in 20222023. The table below the chart shows fixed income portfolio earned yield was 4.1% atquarterend, a 0.7. Increase compared to 3.4% for the prior year quarter. Slide 11 breaks down the growth and profit performance of the protection service businesses.

Speaker 4

Revenues in these businesses increased 12.2 percent to 7.50 $3,000,000 in the Q1 compared to the prior year quarter. This result is mainly driven by growth in Allstate protection plans, which increased 20.5% 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 $54,000,000 in the Q1 increased $20,000,000 compared to the prior year quarter. The increase was primarily attributable to 2 businesses. Profitable growth in Allstate protection plans resulted in adjusted net income of $40,000,000 representing an increase of $12,000,000 compared to the prior year quarter as higher revenue and improved claims trends benefited the bottom line.

Speaker 4

Allstate Roadside had adjusted net income of $11,000,000 driven by increased pricing, improved provider capacity and lower costs. Shifting to Slide 12, the health and benefits business continued to perform well. For the Q1 of 2024 revenues of $635,000,000 increased by $52,000,000 compared to the prior year quarter driven by premium growth in individual and group health in addition to higher fees and other revenue in those businesses. Adjusted net income of $56,000,000 in the Q1 was consistent with prior year quarter as individual health fee income growth was offset by lower employer voluntary benefits income. On Slide 13, we'll wrap up our prepared remarks where we started by reiterating Allstate's strategy and opportunities to increase shareholder value.

Speaker 4

Improving auto insurance profitability, pivoting to growing auto and homeowners policies in force, proactive risk and return management of the investment portfolio, expanding protection services and completing the sale of health and benefits which we expect to occur in 2024. With that context, let's open up the line for your questions.

Speaker 2

Certainly.

Operator

Our first question comes from the line of Jimmy Bhullar from JPMorgan. Your question please.

Speaker 5

Hey, good morning. 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?

Speaker 2

Jimmy, we do believe that it's time to pivot to growth, that we had to restrict growth so we could get profitability up in the auto insurance business. We're not done with it yet, but we feel that the trajectory is good and we got path forward on that. Mario went through the long list of various ways we can do it. First, of course, you just keep more of your existing customers. And then there we have a bunch of other ways that we think we can grow new business.

Speaker 2

When that will actually turn by quarter will be dependent what happens in the marketplace. But it is we believe the really great opportunity to increase shareholder value because when you look at our valuation relative to a higher growth company like Progressive, there's a substantial discount and we believe that this pivot to growth will drive more shareholder value. Mario, anything you want to add to that?

Speaker 3

No, I think that covers it, Tom. The only thing I'd say is in the Allstate brand, obviously, we continue to see the impacts of the profit improvement plan that we've implemented over the last couple of years. But we're starting to see, as Tom mentioned, some positive signs on retention as well as an uptick in production. And first, we need to see sequential growth before we'll get to annual year over year growth. And then I think it's important to point out in National General, we continue to see really strong growth in that business along with really strong profitability that we're encouraged by.

Speaker 3

And we think there's most of that growth in National General's coming in the non standard auto insurance business. We think there's an additive opportunity that we're going to continue to go after, as I mentioned with Custom 360. So, opportunity across all brands and all channels going forward.

Speaker 5

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?

Speaker 4

Yes, Jimmy, this is Jeff. So as it relates to the process, I would say things are progressing as expected from the pursuit of the divestiture. You'll remember we announced the intention to pursue the sale about 6 months ago almost to the day. And as you might expect there robust interest from a large group of quality potential buyers on both strategic and financial. So diligence on a large complex business takes some time and so does selecting the right potential buyers to stay involved in the process.

Speaker 4

At this point, we're pleased with how the process is progressing and we're confident that we'll be in a position to select a buyer that sees the same potential in the business that we do and is aligned with our strategic rationale for the sale. So we continue to pursue the divestiture as we said and obviously we'll let you all know as soon as we have a definitive agreement in place and offer more details at that time. Jimmy, let

Speaker 2

me make a comment about the capital since it came up you mentioned it came up at a number of the analysts 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 right way to harvest value as Jess pointed out.

Speaker 2

We think this is a great business that's shown up in the people who've been interested in buying it, but we also think that somebody else could do more with it than we can do with it. When you look at capital utilization, I would say that it's embedded in kind of everything we do, like from our strategy to enterprise risk of return to reinsurance to how we price homeowners insurance in a local market. And a couple of things I would say, all those decisions are made with math, highly sophisticated math. Sometimes I think that confuses some people when we have more sophisticated math and things like premium to surplus ratios. But when we do that, we're looking at what the impact is economically and what the impact is on shareholder value.

Speaker 2

We look at a really wide range of alternatives. First in the first best opportunities are organic growth given the high returns in our auto home protection plan businesses. We get really good returns there. And as I mentioned, we think that will drive increased valuation in the stock per diluted earnings. After that, you said, well share repurchase, a number of people ask about share repurchases.

Speaker 2

It's another thing that we look at. We've as you know, we bought back a lot of stock since we went public. We bought back almost $42,000,000,000 worth of stock, which is 83% of shares outstanding. If you look over the last 10 years, it's about half the shares and about $20,000,000,000 You look over 5 years, that's a quarter of the shares and about $10,000,000,000 So we have no aversion to that. When you say, well, what kind of return do you get on that?

Speaker 2

Of course, it depends what price you bought it at and what day you're marking it to market. It is low point, it tends to look like the cost of capital. Today, it looks like it's in the 10% to 14% range depending what period of time you look at. So that's a good return, one that we think benefits shareholders. On the other hand, it's not as good as that which we get from deploying it in those businesses.

Speaker 2

So deploying getting growth is why we believe that we have a whole bunch of other things we look at. We could increase the equity allocation and investment portfolio As we've told you, we have a bimodal approach there, about 60% is illiquid. We hang on to over ups and downs and 40% is liquid. We're down at the lowest level we've ever been in liquid equity securities and we did it because we didn't like the risk and return. We're not trying to be a hedge fund, but we thought we had better places to put the money.

Speaker 2

We could decide we want to dial up there. Sometimes we put money in new capabilities, Arity. If you look at Arity, we've now got 1,500,000,000,000 miles of driving data. We're getting over a 1,000,000,000 a week. We're expanding that from just pricing people who are customers to pricing people before they become customers, which makes you be more efficient in marketing and advertising.

Speaker 2

Sometimes we acquire companies. So if you look at our protection plans business, it's like 10 times its size when we bought it for $1,400,000,000 If you look at National General, it would be 4 $100,000,000 I think just and that's like double its size. So we didn't haven't done as well harvesting the value out of our identity protection business yet, but we're confident we got the right pick there that people are at greater risk. We just need to figure out how to grow it faster and make more money. So we have a whole bunch of opportunities that we look at.

Speaker 2

So I don't think you should just automatically default to something that falls into an easy analysis if you got the extra money to share repurchases. No, we'll think about it hard. We'll do the right thing for shareholders and then we'll make sure we're communicating with people.

Speaker 4

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Andrew Kligerman from TD Cowen. Your question please.

Speaker 6

Hey, good morning. Yes, it seems like your PIF growth is right around the corner of pivoting down only 1.4% year over year. So I'm wondering on the Allstate brand, your expense ratio on advertising was 2.2%. Historically, if I look back at 2017 to 2019, it was roughly 2.5. So is there first question, is there much to go in terms of your ad campaigns?

Speaker 6

Or do you feel like you're kind of at a level where you need to be?

Speaker 2

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 Maurie, maybe you should talk about how you're changing your go to market.

Speaker 3

Yes. Thanks for the question, Andrew. I guess where I'd start. First, the good news as we pointed out in the presentation is more and more states are achieving rate adequacy. And right now in about 75% of the states we operate in, we've began to unwind underwriting restrictions and to your point begin investing in marketing to look to grow.

Speaker 3

The other thing we've done in anticipation of that opportunity not only being there, but continuing to expand is we're organizing ourselves in what we call go to market teams that are local market focused that are really intended to drive kind of bottoms up opportunity identification and capture again at the local market level so that we can get the highest possible return on things like the marketing investments we're making, the continued expansion of distribution as well as the growth opportunity that exists across channels in those states. So we're early days in that, but we're putting behind our organization structure to be more focused on local market growth. And you remember, we manage this business state by state, market by market. So having local market insight intelligence and the ability to move rapidly to capture opportunities is really going to be critical. And we think that alongside the expanded investment we're making in growth will create significant growth opportunity for us going forward.

Speaker 2

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

Speaker 6

That's very helpful. And then the second question with regard to National General, just trying to get my arms around how much growth potential there. How much of the book right now is non standard versus the custom 360. Is the custom 360 relatively very small? And are those the right agents to generate big time growth on the more traditional or more standard products?

Speaker 2

Well, we wouldn't give out that percentage in each, but you're correct. And that it's when we bought National General, it was mostly a non standard company. And we bought it for the strategic opportunity to leverage our capabilities in what's 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 Custom 360.

Speaker 3

Yes. So Andrew, I guess the place I'd start is, first of all, we're really happy with the acquisition of National As Tom mentioned, we've effectively doubled the size of our independent agent business since we bought it in early 2021. And there's really 3 pieces to the business. There's the non standard auto piece, which is by far the biggest component. And then there's what we call the legacy household business, which is think about our encompass business that we integrated into it along with the legacy National General Standard Auto Preferred and Home business.

Speaker 3

And then there's Custom 360. And Custom 360 is the new product offering. We're in about 17 states currently with the intent to expand pretty much into every state by the end of this year or into 2025. And we think that really represents an additive growth opportunity. The product offering itself is built on the Allstate product chassis.

Speaker 3

So think about the sophisticated rating plans that we have in standard and preferred auto in Allstate, the house and home product that we have in Allstate. So those are the products that we're launching in the independent agent channel. And really to your point, there is a different distribution, a different segment of the independent agent distribution system that we're looking to engage with to really grow that product portfolio. We're early stages. As I said, we're in 17 states.

Speaker 3

We're really encouraged by the early growth that we're seeing in the space that we've rolled out and more importantly the agency engagement we're seeing on the IA side. We're going to continue to look to expand on that and leverage that going forward. But we're really optimistic around Custom 360 and the opportunity beyond non standard auto in the IA channel.

Speaker 6

Thanks a lot.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Gregory Peters from Raymond James. Your question please.

Speaker 7

Well, good morning everyone. So for the first question, I'd like to just have you comment on both frequency and severity frequency trends through the Q1 and sort of how you're thinking about severity for 2024 both inside the Allstate brand and also at NatGen?

Speaker 3

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 a point.

Speaker 3

So I'd say the loss trend we're seeing in the protection business is 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 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. Maybe a little bit of color underneath severity broadly, because really there's 2 different emerging stories both in physical damage and in injury.

Speaker 3

In physical damage, we continue to see the benefit of things like lower used car prices, total loss severity continues to drop, But it continues to cost more to fix cars and that's made up of continually increasing parts prices and labor costs. So we've seen increasing severity and physical damage for repairable vehicles, but not at the same rate we had been seeing before. That has moderated. The real ongoing severity pressure is in beyond the injury side, which continues to run at higher than historical levels. That's driven by a lot of the things we've been talking about, medical treatments, medical consumption, inflation.

Speaker 3

It's also being driven by the fact that more of our customers continue to get sued and attorney representation levels continue to increase and that's putting pressure on severity. It's also resulting in higher cost for consumers ultimately. The cost to settle injury claims going up at the level that it is translating into higher insurance prices for consumers. I'd point out a state like Florida, where last year they passed meaningful tort reform And we're starting to see some positive impacts of that tort reform, which I think will bode well for consumers going forward. Georgia just the Georgia legislature just passed some tort reform, which again can be a positive for consumers going forward.

Speaker 3

And obviously, we're a strong proponent of that kind of reform broadening across more states going forward. But Greg to your question, positive frequency in the quarter, hard to quantify with any degree of precision what the weather was worth, but it was favorable offset with severity levels that are running lower than they had been running, but still at positive levels, which is why we're going to stay on top of pricing to make sure that our rates fully reflect loss trends and keep pace with loss trends in the states that we've reopened for growth and continue to pursue rates in states where we haven't achieved target profitability yet. And that would be true both in the Allstate brand and National General.

Speaker 7

Thanks for that detail. I guess in conjunction with that answer, you brought up rate and I know you mentioned that you're not going to provide us updates on pricing going forward because you're rate adequate. I know if you go back to previous presentations, you've called out 3 states And even after you reported Q4, you still were I think New Jersey and New York were kind of still in the question mark period. Has there been some updates there in those two states that you want to give us that leads you to believe that they're rate adequate now too as well?

Speaker 2

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 the drill, you know what we're doing and we don't need to we didn't say we're rate adequate and so don't worry about it. We're always focused on it. We just didn't think we needed to like burden people with sending out every month. That's all.

Speaker 3

Yes, Greg, it's Mario. I'll just give you a little more color on those three states. Remember last quarter we told you we had just gotten approval in the Q4 for auto rate increases in all three of those states. In California and we implemented those rate increases this past quarter. In California, we feel comfortable of where the rate level is with the increase and we've reopened California for new business.

Speaker 3

Really no change in New York and New Jersey in terms of our underwriting risk appetite even with the rate approvals that we got late last year. We still don't feel like we're at the appropriate rate level to want to grow in those 2 states. The only update I'd give you on one of the states is New Jersey recently approved a 13.9% auto rate increase, which was one of the filings we had pending. That will be effective in the second half of this year. We're still going to need more rate beyond that before we would look to reopen that market.

Speaker 3

And in New York, we're having ongoing conversations around a pending rate that's with the department, but really nothing new to report at this point. And in those 2 states in particular, we have not lifted any of the underwriting restrictions that we have in place.

Speaker 7

Got it. Thank you for the detail.

Operator

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

Speaker 8

Hi, good morning. 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?

Speaker 2

Well, that's a complicated question.

Speaker 5

Let me

Speaker 2

see if I can address it. So in all states when you have severities going up the way Mario described it, you're going to be increasing rates at levels above what is the general inflation rate. So we expect to continue to have to do that. If our customers quit getting sued every time they get in an accident, then maybe it'll back off some. But so we're always moving right up.

Speaker 2

You're really getting to where is your competitive position. And I think it's difficult right now to determine where one's competitive position is in any individual state given how rapidly rates are moving and how they're moving through books of business, given how and so that said, we're confident that with transformative growth by reducing our expenses, we'll end up in a lower cost, more competitive position than when we started this 4 years ago, whatever it was. It's just this blip in here where everyone's raising prices a lot, including us as Mario pointed out in auto alone, it was 16% in each of the last 2 years. Homeowners is not it's slightly lower, but also has the same trends to it. So we feel confident that the product offering we have, the technology we have, the agents we have, the broad set of distribution that will enable us to grow.

Speaker 2

Price is clearly an important part of that. And we're focused on making sure we're competitive, but we're not going to not take rate so that we can grow. 1 of our big competitors, State Farm has picked up almost a couple of points of market share over the last couple of years because they chose to run fairly large underwriting losses, that won't be us.

Speaker 8

Okay. Thank you. 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 rates at this point in time?

Speaker 3

No, it's like if you go back to Page 6 that you mentioned that the top bar on the right, the 26%, the vast majority of that is those 3 states, California, New York and New Jersey. And then the both

Speaker 5

the light blue and the dark blue when you kind of add those

Speaker 3

together and we talked about unwinding underwriting, adequacy versus kind of a backward looking combined ratio. And we feel good about where we're positioned, the growth opportunity. And as we said a couple of times, we're going to stay on top of the loss trend in those states. But the states that are in that top section are the ones that we're going to continue to push incremental rate through because we're not at target margins yet.

Speaker 8

Okay, excellent. Thank you.

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.

Speaker 9

Hi, thanks. Good morning. My first question is on the auto. I guess it's more on the underlying loss ratio. I thought in the past, right, the Q1 would seasonally be a better quarter for just an auto book in general.

Speaker 9

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 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?

Speaker 2

Let me start and Mario, you can jump in. First, you're correct in that Q1 is usually a better quarter in combined ratio and auto insurance than like the summer months when everybody's driving. To be able to do attribution of this current quarter versus other quarters and weather and how much what the sustainable level is really difficult to get it with any sort of precision. It's not that we don't try and we look at it and we come up with numbers, but they're not numbers that I would say would be for public consumption. What I would say is we feel really good about the trend in auto insurance profitability.

Speaker 2

As you point out, we got a lot more rates still coming through. We've gotten good control over our expenses. We're working hard on claims to try to deal with high inflationary environment, make sure we keep costs down and not just accept that they have to go up at high single digits. So we feel really good about the trend at least. I don't know that I feel like 1 quarter makes a trend in that I would say this Q1 X percent was due to just some anomaly.

Speaker 2

Mario, anything you would add to that?

Speaker 3

Yes. I think at least the components you mentioned are the right ones. And while I can't I'm not going to give you the guidance on continually improving loss ratio going forward. What we do know are a handful of things. Number 1, we took over 16 points of rate last year and another 2.4 points in the Q1.

Speaker 3

That's going to continue to earn through the book and you're going to continue to see average earned premium growth going forward. That's just based on the actions we've taken so far. I talked a little bit about the loss trend earlier and where that was running. We'll see how that plays out over the duration of the year. The only other piece I'd give you is the frequency component of that there clearly is a weather benefit we got difficult to quantify.

Speaker 3

So the frequency benefit may or may not persist going forward. That would be the only thing in addition to just the Q1 seasonality that exists. But we feel good about where the earned premium trend is going and then we're obviously going to watch both components of the loss trend and we're going to continue to push hard on expenses to drive cost out of the system, which will also help from a margin perspective.

Speaker 9

Thanks. And then my second question, going back to earlier comments on the health and benefits transaction, is your plan still to expect to announce and close the transaction this year? And then I think based on your comments to a prior question, you implied right that there was conversations with parties. It sounds like you're going down the route of 1 counterparty instead of perhaps maybe multiple, but can you just confirm, I guess, that's the thought as well just to find 1 counterparty to buy the entirety of the business?

Speaker 2

It's a normal process, at least we're not going to go through blow by blow on it. We still think we'll sell it this year. A lot of people are interested

Speaker 5

in the business and we're

Speaker 2

confident we made the right choice.

Speaker 9

Thank you.

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.

Speaker 10

Thank you. Good morning. 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 from 360 that should drive further growth. At the same time, are we also seeing maybe some competitive pressures rising in non standard auto, which may actually result in a little bit of a decrease in that segment's growth.

Speaker 10

Maybe you can help us think through the 2 combined?

Speaker 2

I'll let Mario jump into I know you're probably referring to Kemper's numbers. I'll let Mario jump in on standard. But let me just mention something I think kind of we talk about, but I'm not sure it gets as much focus as I think it should, which is homeowners. The homeowners business is a really attractive business for us. We're really good at it.

Speaker 2

We have an integrated business model that you can see Mario showed the slide where we've earned a 92% combined ratio over a 10 year period. The industry dynamics today, a lot of that business is sold through independent agents, about half of it. And industry dynamics are right for us to leverage that position. There's a great interest in independent agents in having what they call markets or we would call availability. And when you look at why that is,

Speaker 4

this is

Speaker 2

the first customer risks are increasing, right, whether that's inflation and home values, whether it's demographic trends, people moving in a way of where there's severe weather or just increased severe weather. So there's increased need for risks. And then at the same time the industry has lost money. So the industry lost money over the last 3 years, last 5 years. Over the last 10 years, it made money, but we made about 3 quarters of that money.

Speaker 2

So industry made about $10,000,000,000 over a 10 year period and we made about 75% of that. So we're really good at it. And so we think that one of the ways to grow there is in the independent agent channel is by leveraging our homeowners. So we obviously can grow in homeowners in the Allstate agent channel. You see that with our bundling stuff, whether you look at any of the industry reports, we're really good at bundling there.

Speaker 2

And you see the PIF growth there even when auto growth is going down, which wasn't always the case. They used to trend more together, but we've got so much better at bundling. So that's I don't want to leave homeowners on the cutting room floor as it relates to growth both in the National General channel and the Allstate channel. Mario, do you want to talk about non standard?

Speaker 3

Yes. Thanks for the question, Yaron. Look, where I'd start is the National General Non Standard Auto Business is a really well run business for us. And when we acquired NatGen several years ago, it allowed us to get into a business that Allstate was not in at that time in a particularly meaningful way. And we've been able to grow that pretty aggressively and grow it profitably over the last several years.

Speaker 3

Some of the ways we've been able to expand is we've expanded geographically, so we're in a lot more states with non standard auto now than when we bought the business. We've also expanded from a channel perspective. We allow Allstate agents to sell non standard auto through National General for business that's outside of Allstate's risk appetite. We sell it direct to consumer. So we've been able to expand the business both geographically as well as across channels.

Speaker 3

And the business has been subject to the same inflationary pressures that the standard and preferred auto business has been subject to. But we've stayed on top of rate need. We've taken a lot of rate over the last couple of years, I believe over 15 points the last 12 months. So we've stayed on top of the rate need. It's a business that you can effectively reprice most of the book almost every policy period just given the defection rates.

Speaker 3

And we've been able to over the last couple of years take advantage of the competitive dislocation in non standard auto as a number of carriers have backed off from that business. We've taken advantage of that opportunity and taken advantage by leveraging our capabilities in that space. And as much as the competition might be heating up there, we feel really good about our capabilities and we're going to continue to look to grow that business as well as the standard preferred and homeowners that Tom talked about with Custom 360.

Speaker 10

Thank you. Very comprehensive.

Operator

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

Speaker 11

Hi, thanks. Good morning. I had a question just on the brand auto PIF. So the brand auto PIF was down about 1.5% compared to the Q4. And I guess I'm wondering how and that was for the entire book, the entire brand auto book.

Speaker 11

I guess I'm wondering how that PIF growth trended versus the 4th 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?

Speaker 2

We wouldn't break those numbers out for competitive reasons. When it's big enough, so David, you could do math on it. So you could say, okay, here's when the churn is going to come. We would say it, but obviously there are some markets we're growing in, other markets we're not growing in, some of those are markets, some of those are states. When we get to the point where you can do the math to show when I know what you I totally get why you're where you're going, you want to figure out when the turn is.

Speaker 2

But we don't like to show what states were growing in at higher rates than others because then that gets our competitors interested in going to those states and we'd rather grow without having them be aware of where we're growing.

Speaker 11

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 look this quarter, did that improve significantly or just how to think about that as a potential growth driver?

Speaker 2

Let me go up to transformative growth and get Mario to talk about the specifics to your question. So as part of transformative growth, we said we want to improve customer value and that meant getting our agents to really focus on their work that those things that customers really want them to do for them, which includes helping them buy insurance. It doesn't necessarily include having them there when they have to pay a bill for retention. They will pay for that, but they won't pay as much as they will for when they get to new business. So we shifted our compensation program to move to a lower our cost for customers and better align it with what customers want to pay for.

Speaker 2

As a result of that, we both lowered distribution expense and we've had some agents who had built business models on higher retention leave us. So our overall agent capacity in the Allstate brand has gone down. That said, to your point, productivity has gone up and so our overall volume has been even better when you adjust for those 3 states that are not to be named. So, Mario, do you want to go there?

Speaker 3

Yes. Thanks for the question. I think the short answer to your question is yes. When you look at overall Allstate brand new business production is up about 6.5%. It was up both in the Allstate exclusive agent channel as well as direct.

Speaker 3

And then if you kind of carve out California, New York and New Jersey, because you have to remember the California rate wasn't effective until February. So we really didn't start opening things back up until the really the latter part of the quarter. We're really pleased with how our agents are responding to the changes we've made that Tom talked about, continuing to invest in their businesses, continuing to drive higher levels of average productivity. And despite the fact that we have fewer agents and have restricted or had been restricting growth in 3 pretty significant states, overall productivity is increasing and absolute production is up. So we're really happy with the productivity levels of our agents.

Speaker 3

And as we look to accelerate growth going forward, they're going to be a core part of how we grow prospectively in addition to things we've been talking about with independent agents and the direct channel.

Speaker 2

Got it. Thank you.

Speaker 1

Thank you. And John, we'll take one more question.

Operator

Certainly. And our final question for today comes from the line of Mike Zaremski from BMO. Your question please.

Speaker 12

Hey, great. Thanks for fitting me in. 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.

Speaker 12

So are there any different strategies or maybe you kind of just go slow to learn as you kind of grow into D2C or anything you'd like to you think we should be thinking about there?

Speaker 2

Yes. The first the direct customer does have different needs. So they necessarily want to pay for someone to help them buy insurance, which is why we price our direct insurance under the Allstate brand cheaper than Allstate branded insurance bought through an agent because we're trying to do exactly what our customers want. They also had different ways they want to interact with us. And so we've with our new we're transforming our growth and new tech stack, it's really everything from what's pre populated into the thing to the offers it presents to you, to the questions you require to as Mario talked about, we're down 40% in the quote time.

Speaker 2

We've been able to add other products to that flow and so increase things like roadside services and sell more products, which lowers our acquisition costs. So it is different. We're good at it. We could be better at it. And so we're working at getting better at it.

Speaker 2

About 2 years ago, we really reformed the business, put some new leadership in place and then are updating everything from the technology I talked about to also who you market to. So you mentioned their direct customers, but some of the customers direct to that's who you go to. Like if you go to people who are shopping all the time, then you will get higher risk drivers because they shop all the time as opposed to lower risk drivers don't shop as much. So it costs more to get the lower risk drivers on board. So we're working through how do we expand that.

Speaker 2

We believe that the direct channel has tremendous upside with us to serve those customers who want it that way, not just on auto insurance, but things like home insurance and whether it's protection plans or what we're doing in we've got some stuff going on in the commercial space with direct. So we think it's just another way that consumers will interact. Often not a lot of homeowners are sold over direct. We'll see how successful we are. I believe we can.

Speaker 2

I mean, people buy houses direct.

Speaker 5

So I'm

Speaker 2

like, if you buy a house, you'll probably buy home insurance from us. And so there's a great upside. You will notice that when you look over the last couple of years, one of the first places we dialed down new business was in the direct channel. So it was down like 50% or 60%, I think in 23 markets. Because we wanted to make sure we maintained our agent force levels of compensation because they have businesses running this is the revenue that comes into their business.

Speaker 2

We said, okay, well, this is a temporary window. It's easier for us to concentrate that reduction in new business in the direct channel than it is to spread it amongst a bunch of agents who are now also trying to get through a new comp plan. That turned out to be a good choice. It gave us the opportunity to build new capabilities and now we're hitting the gas side expanding direct. So you should expect to see our direct volume as go up higher as a percentage of new business than it has been in the past.

Speaker 2

Thank you all for joining us and investing your time in Allstate. We'll talk to you next quarter.

Operator

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

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Earnings Conference Call
Allstate Q1 2024
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