Allstate Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 14 speakers on the call.

Operator

Thank you for standing by, and welcome to Allstate's Third Quarter 2023 Earnings 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. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Brent Banderbez, Head of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Jonathan. Good morning. Welcome to Allstate's 3rd 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 allstateinvestors.com.

Speaker 1

Our management team is here to 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 ks for 2022 and other public documents for information on potential risks. And now, I'll turn it over to Tom.

Speaker 2

Good morning. We appreciate your investment and time in Allstate. Let's start with an overview of results And then Mario and Jess will walk through operating performance. Let's begin on Slide 2. So our strategy has 2 components, increased Personal and profit liability market share and expand protection provided to customers, which are shown in the 2 ovals on the left.

Speaker 2

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 a 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 by Farm 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.

Speaker 2

We anticipate completing a transaction in 2024. We also made progress in executing 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 progressing with Allstate Protection Plans growth. Let's review the financial results on Slide 3. Revenues of $14,500,000,000 in the 3rd quarter increased 9.8% above the prior year, that's $1,300,000,000 The increase was driven by higher property liability earned premiums in auto and homeowners insurance, primarily reflecting the 2022 2020 3 rate increases, which has resulted in property liability earned premium growth of 10%.

Speaker 2

Net investment income of $689,000,000 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 $41,000,000 and adjusted net income of $214,000,000 that's $0.81 per diluted share Reflects improved profit liability underwriting performance. Property liability recorded an underwriting loss of 4 $14,000,000 which compares to $1,300,000,000 loss in the Q3 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.

Speaker 2

Starting with rates, the Allstate brand has implemented 26.4% of rates since 2022, including 9.5% through the 1st 3 quarters of 2023. National General implemented rate increases of 10% in 2022 and an additional 8.8% through the 1st 9 months In 2023, we will continue to pursue rate increases to restore auto insurance margins back to target levels. 2nd, reducing operating expenses is core to both the profit improvement plan and importantly to transformative growth plans to become a low cost provider of protection. Expenses are down and we have a path to further reductions. 3rd, we restricted new business growth in areas and classes of business where we're not achieving target returns.

Speaker 2

Given the success we've had in some areas, we're selectively removing these restrictions in some states and segments. 4th, 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 Slide 5, let's touch base on why we believe this profit improvement plan will work in the current competitive environment. All 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 $800,000,000 That represents approximately a 5 point outperformance in the industry, which generates an incremental profit of about $1,300,000,000 annually.

Speaker 2

Only a few of the other top ten In the current competitive environment, these same capabilities will enable us to continue the progress made in improving auto insurance margins. The The rapid rise in auto claims severity eroded profits for the industry with most carriers responding by increasing auto insurance prices and lowering expenses. Allstate Progressive and GEICO have significantly raised auto insurance prices since 2019. State Farm has 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.

Speaker 2

The impact on policies in force is As Mario will discuss, the Allstate brand policies in force have 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 this 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.

Speaker 2

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 one 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 operates 3 successful businesses, which is shown in the middle there, in the $1,000,000,000,000 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 $1,000,000,000 $300,000,000 of new sales. National General's Group Health Business targets the small case size market and has $700,000,000 of premium and fee revenue and $400,000,000 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 $2,300,000,000 which is 4% of total corporate revenues And adjusted net income of $240,000,000 for the trailing 12 months, which you can see in those two pie charts on the bottom and it's kind of spread between all the businesses.

Speaker 2

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 The growth potential of these businesses can be accelerated with greater alignment with a wide range of companies in the market 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 Position the property liability market share gains as margins improve. The 5 components initiative is shown at top of Slide 7. Affordable, simple and connected protection is at the heart of the strategy to further improve customer value. Customers will have access High quality of protection that better meets your needs at a low cost with hassle free experiences, however they choose to access our broad distribution network.

Speaker 2

We're live in the market with the new business experience and further enhance the connectivity of the Allstate app 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 3 of building new model towards scaling it in Phase 4. Now I'll turn it over to Mario to go through the property liability results.

Speaker 3

Thanks, Tom. Let's start on Slide 8. Our comprehensive auto profit improvement plans 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 $414,000,000 in the quarter improved $878,000,000 compared to the prior year quarter due to the improvement in our auto loss ratio.

Speaker 3

The chart on the right highlights the components of the 103.4 combined ratio in the quarter, which improved 8.2 points Despite a 2.8. Increase in the catastrophe loss ratio compared to prior year. Prior year reserve re estimates excluding catastrophes We're $166,000,000 unfavorable or a 1.4. Adverse impact on the combined ratio in the quarter. $82,000,000 was attributable to the Runoff Property Liability Annual Reserve Review and $84,000,000 in Allstate Protection, primarily driven by National General Personal Auto Injury Coverages.

Speaker 3

The underlying combined ratio of 91.9 improved by 4.5 points Compared to the prior year quarter and 1 point sequentially versus the Q2 of 2023 despite continued elevated severity inflation. Now let's move to Slide 9 to review Allstate's auto insurance profit trends. The 3rd quarter recorded auto insurance combined ratio of 102.1 was 15.3 points favorable to the prior year quarter, reflecting higher earned premium, Lower adverse prior year reserve re estimates 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.

Speaker 3

While loss cost trends remain historically elevated, the pace of increase moderated in the 3rd 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 20222023 adjusted for current severity estimates As of the Q3, higher average premium and the continued execution of our profit improvement plan drove the sequential improvement in underlying ratio to 98.8 as reported or a 100.5 in the bar graph When removing the 1.7. Favorable impact on the 3rd quarter from improved severity for claims reported in the 1st 2 quarters of the year. 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, The Allstate brand auto insurance underlying combined ratio was 97.2.

Speaker 3

Premiums from states with an underlying combined ratio Below 100 improved to 59% of the portfolio in the 3rd quarter, doubling from the percentage at year end 2022 and up almost 10 points from 50% in the 2nd quarter. Slide 10 shows the impact on policies in force from actions to improve 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 3rd quarter Compared to the prior year, partially driven by the lower new business and also driven by lower retention due to rate increases.

Speaker 3

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 enforced 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 Q3. On Slide 11, we take a deeper look at the National General Auto Book. While 3rd quarter margins were by $95,000,000 of unfavorable non catastrophe prior year reserve re estimates primarily across liability coverages, The underlying combined ratio of 96.8% in the quarter 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.

Speaker 3

The National General Business has the product, including fee based revenue features and claims capabilities To excel in the non standard auto insurance marketplace, as you can see in the chart on the right, 75% of the written premium growth in the Q3 of 2023 is coming from non standard 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 third 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.

Speaker 3

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 1st 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 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.

Speaker 3

We continue to enhance capabilities across distribution channels and are the only major carrier with competitive offerings in branded agent, Independent agent and direct distribution. The exclusive agent channel represents the majority of Allstate's U. S. Personal lines premium At approximately $32,000,000,000 or roughly 22% market share in this channel, our exclusive agents continue to be a strength Offering personalized local advice, customers value in this $145,000,000,000 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.

Speaker 3

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.

Speaker 3

Expanded non standard 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.

Speaker 4

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 $689,000,000 in the quarter, Relatively flat to the Q3 of last year, but with a higher contribution from the market based portfolio.

Speaker 4

Market based income of $567,000,000 shown in blue was $165,000,000 above the prior year quarter, reflecting repositioning of the fixed income portfolio into longer duration bonds, 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 have 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.

Speaker 4

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, but is diversified across infrastructure, energy, Agriculture and Timber Investments. We hold more than 400 names, including funds of 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% to positive 8.6% over the last 5 years. The benefit from accepting this volatility is shown on the right with 3 5 year annualized returns of 19% 12%.

Speaker 4

The private equity portion of the portfolio has outperformed public equity benchmarks over 3, 5 10 years. Slide 16 covers the results of our Protection Services businesses. Revenues in these businesses increased 8.9 percent to 6 $97,000,000 in the Q3 compared to prior year quarter. The 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 $27,000,000 in the 3rd quarter decreased $8,000,000 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 These were partially offset by improved margins at Allstate Roadside and lower expenses at Allstate Identity Protection.

Speaker 4

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 Q3 of 2023, revenues of $587,000,000 increased $17,000,000 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 $69,000,000 in the Q3 of 2023 Increased $6,000,000 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.

Speaker 4

On the left hand of the slide, we summarize 3 discrete components we evaluate to establish Capital, which is the basis of our capital management framework. Base capital at the bottom is the capital required to meet ongoing operating requirements. Stressed 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 provides 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.

Speaker 4

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 Allstate Insurance Company, the premiums from many of our subsidiary companies are included, but over $1,600,000,000 of statutory capital is not included in the denominator. This framework also better assesses the use of catastrophe reinsurance, particularly for large tail events 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 Allstate's strategic priorities. We continue making progress on our plan to return auto insurance profitability to target We will pursue the divestiture of our Health and Benefits business.

Speaker 4

We're continuing to advance on our transformative growth initiative. 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 for your questions.

Operator

And our first question comes from the line of Gregory Peters from Raymond James. Your question please.

Speaker 5

Well, good morning, everyone. 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 that I'm thinking about the needs of preferred customers versus standard versus non standard.

Speaker 2

Good morning, Greg. Good question. Let me so first, the transformative growth is about increasing market Share and personal property liability, it's got a couple of components at the core of that is being low cost insurance, But also about raising customer value and also about being available to people however they want to get to us back to your segment and the customers. So I would say at this point, we've proven out that the underlying assumptions that we had made going into it work. So we know That lower price raises close rates.

Speaker 2

We know that's true. We know that being available through more people, whether that's Through different config bundling with exclusive agents, through independent agents or direct Also works and we can do that. We know we can raise customer value. You saw on the slide there, I didn't dig into it, but The new sales process is really slick. I mean, it pops up with 3 offers that are specifically for you.

Speaker 2

You don't have to pick your deductible. You don't have Go through a bunch of questions, people don't pick the deductible for you. It's fast, it's slick, then the renters piece, which is in the middle one takes less than a minute. And we're finding great ways to attach more protection by making it simpler for customers. We're also making it more connected, which is in the right hand side.

Speaker 2

And so we relaunched the app. We think that people are going to have fewer apps on their phone going forward. So having an app where people would just access either look at their bill or get their ID card is helpful, but it's not compelling. So we are expanding that, so you'll see on their GasBuddy. You can get figure out how to save money on buying gas, which is, of course, directly related to what we do.

Speaker 2

We have a whole bunch of other things that we've either added or going to add. For example, we are really terrific on crash detection with our telematics And do that through Light 360 and it's a terrific product. So there's a variety of things we're doing to expand that. As it relates to expenses, we're continuing to invest in this. I don't know that I would say it's over Expense, it's just like we have an objective.

Speaker 2

We have to lower our overall expenses. We're after that, but we're not backing off On investing in the new technology, one of the things that we've proved out the underlying assumptions was can we build the technology to do what you see on that screen? And the answer is yes. We've built it. It's out.

Speaker 2

It's working. It's rolling. We need to scale it, but we have high confidence that it's scalable. So You should expect us to continue to find ways to reduce costs to live into this. But I don't think like there's We're running hot in expenses today because of that.

Speaker 2

As it relates to the various segments of customers, We want to sell as many people as we can, as much stuff as we can, however they want to count this. You want an agent, we'll give you an agent. We just have to make sure Its cost is what you're prepared to pay and they do what you want, whether that's an exclusive agent or an independent agent. And if you want to buy direct for the company, you want to buy through a call center, you want to buy in the web, we just want to make it as simple and easy As you can, which we think is differentiated in the marketplace.

Speaker 5

Well, that makes sense. I guess, for my follow-up, I'm going to I'm thinking Slides 9 and 10. And I 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?

Speaker 2

Which chart are you referring to, Craig? I'm looking at the 1.9.

Speaker 5

Yes, the ones.

Speaker 2

Yes. I mean, of course, it all depends Mario can give you some color as well, but it all depends what happens in California, New York and New Jersey. Let me be very clear, we are not going to continue to lose 4 digits in 1,000,000 in those three states. So far, Mario has talked about us getting smaller by not growing. We've executed that.

Speaker 2

The next step is to not be able to serve customers who we want to serve because we can't afford to lose $0.20 on the dollar. Marty, do you want to comment on like we've been talking It's not like this, we just figured this out or they're not aware of it.

Speaker 3

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 or rates pending Across all three 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 are low teens across our open and closed books middle of the year and we just filed for another 18.3 percent in New York Auto.

Speaker 3

So we've got significant rates pending with the department. As Tom mentioned, where we're at now is we need action On those filings in the Q4 and if we can't then we believe the right thing to do for the customers in the other 47 states as well Our shareholders is to take additional action to get smaller across all three 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.

Speaker 5

Got it. Thanks for the details.

Operator

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

Speaker 6

Good morning. It's Marley on for Alex. So you mentioned in The prepared remarks that you are increasing in person inspections to reduce overall claim costs. Could you touch on this a little bit more? How impactful is this?

Speaker 6

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?

Speaker 3

Hi, Marley. This is Mario. I'll answer your question. So I would Where I would start is going back to the different components of our auto profit improvement plan, taking rate increases, reducing costs, restricting New business in states where we aren't achieving target levels of profitability and improving Operational processes and claims, what you're describing around more in person inspections is a component of that 4th piece of both in network and out of network shops, as well as doing the same thing on the property side as well That we'll be able to identify opportunities, pay what we owe, but also not pay for Say things like pre existing damage or in total loss cases cars that could be repaired versus replaced. So we think doing more in person physical In addition to continuing to leverage Quick Photo Claim capabilities is the right thing to do to best manage Loss cost going forward and that's what we intend to do to ensure that we're operationally excellent in claims and again paying what we owe, But eliminating any leakage in the system and we're prepared to invest in the claims organization To be able to execute on that, so in terms of the expense ratio, the LAE ratio is part of our adjusted expense ratio.

Speaker 3

We're still committed to hitting The 23 by the end of next year, the investments we'll make in claims are inclusive of that goal. We think we can do both.

Speaker 6

Got it. Thank you. 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.

Speaker 3

Sure. So we'll start with medical inflation. And You'll note that we talked about our severity expectations in auto being about 9% currently, which is improved from the 11% We talked about last quarter, all that improvement came from physical damage coverages. Our outlook on Casualty and injury severity is unchanged. It didn't get worse, but it's consistent with where we were last quarter.

Speaker 3

And the drivers behind that Continue to be medical inflation, more attorney representation, Higher levels of treatment being pursued, kind of all the components of both kind of Economic and social inflation that have driven injury severity is up. Over time, those will continue to be headwinds for us. But as we Again, as I talked about on the physical damage side, as we've adapted our claims processes To take into account those inflationary trends, we've seen some good progress. So we're looking to settle claims earlier In the cycle and we've seen a real improvement in terms of reduction in pending injury claims as well as faster settlement times on injury claims. We're using things like analytics and testing AI models to identify accidents where injuries are likely and those that have a higher likelihood of potentially being represented by attorneys so that we can further accelerate Claim and contact time and get out ahead of the process and manage the overall claim process.

Speaker 3

So we're doing things proactively To help mitigate some of those inflationary impacts and we'll continue to do that. And like I said, we did see some stability In injury severity trends during the quarter.

Speaker 6

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 7

Hi, thanks. Good morning. My first question, During the quarter, you guys spoke about looking to buy some additional aggregate stop loss reinsurance. Do you have any update on what you're doing on the reinsurance side in terms of looking to protect your capital position?

Speaker 2

Yes, Elyse, thanks. This is Jess. We have talked

Speaker 4

a lot about our reinsurance program in general.

Speaker 2

As you know, we have

Speaker 4

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 any 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 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 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.

Speaker 7

Thanks. And then my second question, you guys highlighted that you're looking into a potential transaction with the benefits business. Were there any diversification credits that you guys got from a capital perspective by owning the benefits business?

Speaker 2

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

Speaker 7

Okay. Thank you.

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.

Speaker 8

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

Speaker 2

I think when you go all the way up to transformative growth, yes, we think that the whole package of stuff will drive Market share growth that includes making sure that the agents do what customers want them to do and that they're Supported in doing that with technology and everything else in marketing and that they're well compensated for what they do. But yes, so there's various Amari, do you want to talk specifically about the comp changes?

Speaker 3

Yes. So again, I would characterize the most recent set of changes as a continuation of what Started really several years ago, which was intended to drive higher levels of productivity in the exclusive agent distribution system, but also reduce distribution costs over time. And I think What we're saying, particularly if you take out the impacts of the 3 large states where we're purposefully driving reduced Volume is exactly what we had hoped would happen. So from an expense standpoint, you see In the quarter, we benefited by it was either 0.02 or 0.03 from a 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.

Speaker 3

So again, if you 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.

Speaker 8

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Josh Shanker from Bank of America. Your question please.

Speaker 9

Yes. Thank you very much. I have a model that goes pretty far back. And historically, if you look at reserves and try and analyze that, It's harder to short tail lines. Historically, Allstate run at about a 95% paid to incurred loss ratio.

Speaker 9

For every dollar of loss, you put $5,000,000 in the reserve for future losses, and that's true in 3Q 'twenty three. But for the previous 5 quarters, it ran at a Astonishingly low 83%. I know that you try and get the reserves right, but it does feel over this period of Elevated loss ratio, the company put a lot more of its reserves of loss into reserve At 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 and you needed to put more reserves?

Speaker 2

Maybe I'll start and then Jess can fill in here. First, Josh, good morning. But we think the reserves are right and we put up what we think we need to put up When we need to put it up, as painful as that was last year, we felt we needed to put it up. When you look at the I don't know, I'm not looking at specific numbers you have, but I've been through reserves enough to know that, paid bounce around a lot. It depends what happened in the Pandemic with impending levels and we adjust for all that.

Speaker 2

So I would say, Jess may have some other stuff. But I think, Jess and Brent could walk through your model with you and help you see it. But I don't like we just think the reserves are right and we put them up when we I

Speaker 4

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, I mean, 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.

Speaker 9

And if you'll indulge me another question, Allstate over the next 20 years has really changed its geographic footprint away from catastrophe. And obviously, with climate change, people have seen a lot of losses and maybe the severity trend over the long term for cat exposed properties up. But how does the severity trend compare between The trend in generally non cat exposed property versus cat exposed property, are states like Illinois And a lot of the Midwest seeing a very different trend than severity trends longer term from weather along the coasts?

Speaker 2

Let me start and then Mario, just if you guys want to jump in. First, I would start with say, We've built a really great business model in homeowners, just like we make more money than the industry on auto insurance, We're even better in homeowners, and you see those results over 10 years. You do see this year A lot of catastrophes, which is led us 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 will work.

Speaker 2

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 when the storm, whether that's a hailstorm 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.

Speaker 2

And 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 South West on the coast. So, it we factored that all in, and both of those things are there. We do think though that we you've seen the raise in prices that that's been both of those factors have increased.

Speaker 2

And so the dramatic increase And homeowners insurance prices has been driven by both those factors. Anything that's Yes.

Speaker 3

The only thing I'd add, Josh, I think You take a step back and say what are the underlying drivers of the increase in homeowner severity and it's principally as Tom mentioned, it's labor costs and it's material costs To repair homes and to the extent the rates of inflation vary across different parts of the country, obviously that will have an influence on State specific severity, I think it's more driven by that than any whether it's cat exposed or not cat exposed because those Costs just get amplified when there's a large event, and we just have to repair a larger volume of homes.

Speaker 9

Thank you for the long answers.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Traci Banchiti from Barclays. Your question please.

Speaker 10

Thank you. Good morning. Is the impetus selling the health and benefits business really to Unlock capital and to restore some of your contingency capital or was the impetus to become a more lean organization and focus more on core offerings?

Speaker 2

Neither. And nor was it in relationship to any shareholder asking us Pursuit Sales, 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.

Speaker 2

I mean, we make almost $250,000,000 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 could build those.

Speaker 2

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 of 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 that 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.

Speaker 10

Okay. But maybe as a byproduct, assuming you could hit whatever valuation target range you have in mind, might be early, but Would you have any kind of implied capital relief from your internal model from the sale?

Speaker 2

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, we'll generate additional capital and then we'll decide what we want to do with that when we get there. We've got Plenty of other growth opportunities.

Speaker 2

We're doing a lot with to grow market share and property liability. We don't need to make that decision right now, so we're not going to.

Speaker 10

Okay. Or could it potentially move down to AIC or accelerate your path to resume buybacks Down the road?

Speaker 2

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 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.

Speaker 5

I would

Speaker 4

add, Tracy, our capitalization philosophy, as you know, we tend to keep the capital at the holding company to the extent that And so I don't believe we have a capital need at AIC that would cause us to want to do that. So I think we would remain with the philosophy of keeping the capital where it's At the holding company level, to the extent, we have capital management decisions to make. As Tom said, we'll make them when the time comes. But I don't think we have a need for capital in AIC, so I don't know why we would go away from the philosophy of keeping it up and holding company.

Speaker 10

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 Health and Benefits business, how you think about the optimal asset duration relative to your pro form a duration of your remaining liabilities?

Speaker 2

Well, we look at it from an enterprise risk and return standpoint. So the first thing we do is say how much capital We want to allocate to the investment portfolio. And then John and his team figure out how they best want to Allocate that amongst various asset classes. So John may want to make a comment on where we are today. I would point out that if you look at Slide 14, we made the right calls at the right time.

Speaker 11

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, I can assure you that we are doing that between the cash that we hold, Short term positions, other things that we can turn into cash in short order and just maturities by year end, we have close to $10,000,000,000 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.

Speaker 10

Okay. So it sounds like you feel comfortable with durational mismatch because of your strong liquidity position. Is that fair?

Speaker 2

Well, the property liability business is a little different than life business In terms of matching to liability, in the Life business, of course, we have a set maturity date and you In factoring 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 one claim and you get another one. Is that a separate claim or and so if you match it to that, you'd be I have been here for 90 days for a physical damage claim. So it's really more about liquidity and overall risk management.

Speaker 2

And I would also point out A large part of our capital is there in case we mess up on underwriting income.

Operator

And so that has a really long duration on it.

Speaker 11

Yes. And Tracey, one other thing to add, if you look at The slide, the blue line depicts the duration. We've really just reverted back to what's been more of a long term average for us. So we were at a point in time where we were in a lower level of duration, a lower level of interest rate exposure. We thought that was right given what was happening with the Fed and interest rates in general, now that rates have climbed back up pretty aggressively, we want to go back to the what has been a longer run central tendency for us.

Speaker 6

Thank you.

Operator

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

Speaker 12

Hey, good morning. I just had a question on the frequency trends That you guys saw in the Q3, could you just describe what you guys are seeing? It sounded like that was up a little bit. I was hoping you could put some numbers around it and sort of what you're seeing, especially as it looks like Your shrinking units, I would think that there would be some benefit from improving the mix of business, but I was hoping you could maybe just touch on that.

Speaker 3

Hi, 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 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.

Speaker 3

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 non peak 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%. So you can see the modest impact that frequency is having, Again, as people drive a bit more than they were a year ago.

Speaker 12

Got it. And you're saying it's a little bit more They will now so maybe flattens out there at those levels.

Speaker 3

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

Speaker 12

Got it. Thanks. And then for my follow-up,

Speaker 2

Just to add a question

Speaker 12

on Slide 13, and I appreciate this information on the distribution channels. I was hoping, it looks like you guys track the TAM by channel pretty closely. Within the exclusive agent channel, how has that TAM been growing? And I guess, I I'm under the impression that it's been shrinking at the expense of the direct and independent agent channels. So just given that backdrop, I'm wondering if you're Seeing signs that you think you can sort of buck that trend and start to grow within your exclusive agency channel?

Speaker 2

Let me David maybe give a couple of thoughts. First, there's a A lot of analysis of 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 A share away from some of the other 2. The independent agents, also a good place people want to come where They don't want to just buy from one insurance company.

Speaker 2

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 in the direct channel has certainly grown. But it's also growing a lot because 1,000,000,000 of dollars of advertising go into 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.

Speaker 2

If people want to have buy from Like 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 around for them, don't want to do the work, we want to be in that independent agent channel. And then in the direct channel, if they want to buy directly, then Now what we are doing is using the technology between those various things to 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 What's your deductible, that kind of stuff, what we prepopulated with, here's what we think David's deductible should be, offer David this package.

Speaker 2

So 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 one 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. Great.

Speaker 2

I appreciate the color. Thanks.

Speaker 1

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

Operator

Certainly. Then one moment for our final question. And our final question for today comes from the line of Meyer Shields from KBW. Your question please.

Speaker 13

Good morning, guys. It's Jean on for Mir. Thank you for taking my questions. Most of my questions are answered, just one on the growth in 2024. So what is your expectation and plan for next year?

Speaker 13

Is the non standard auto still be the key growth driver? Any color on that will be great. Thank you.

Speaker 2

Mario will give you some specifics. I would say that the biggest impact so first, we're starting to grow In the Allstate brand, Mario has got a number

Operator

of states where he's starting to roll out, transform

Speaker 2

our growth in a more aggressive way to capture the market share growth. So we're comfortable there. The independent agent business, we think, will grow Through continued expansion of the non standard and the Custom 360 Mario talked about, I would say that the biggest Driver the biggest thing we're unclear on right now is what happens in New York, New Jersey and California. That will be the biggest impact on policies in force that may be different than the growth measure you're talking about, but Certainly, we need to get properly priced in those states or else we'll get smaller in those states. And given that they're A large percentage for our book of business will impact overall policy comp.

Speaker 2

Mario, things you would add to that?

Speaker 3

Yes. The only thing I'd add As we look ahead, 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 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 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 independent agent Channels with things like Custom 360 and non standard auto.

Speaker 3

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 We'll 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.

Speaker 2

So let me close with 4 points, which summarize kind of the conversation we've had. What's going to drive shareholder value? Profitability increases, strategic capital allocation, great investment returns And then transform our growth, long term sustainable growth. We think those four things combined make this a great opportunity. Thank you very much.

Speaker 2

We'll see you next quarter.

Operator

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

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Earnings Conference Call
Allstate Q3 2023
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