Allstate Corporation (The)

We're standing by and welcome to Allstate's third quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Brent Bannerman, Head of Investor Relations. Please go ahead, sir.

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

Good morning. We appreciate your investment of 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 two. So our strategy has two components, increased personal and property liability market share, and expanded protection provided to customers, which are shown in the two ovals on the left. On the right-hand side, you can see the highlights for the 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 platform. And that strategy was part of the National General Acquisition Plan. Our success now positions us to achieve additional growth. That potential could be maximized by aligning this platform with a broader set of complementary products, distribution channels, and capabilities. We anticipate completing a transaction in 2024. We also made progress in executing transformative growth initiatives to set the stage for personal profit liability market share growth as margins improve. The second part of our strategy to broaden protection offerings also progressed with Allstate Protection Plan's growth. Let's review the financial results on slide three. Revenues of $14.5 billion in the third quarter increased 9.8% above the prior year. That's $1.3 billion. The increase was driven by higher property liability earned premiums in auto and homeowners insurance, primarily reflecting the 2022 and 2023 rate increases, which has resulted in property liability earned premium growth of 10%. Net investment income of $689 million reflects proactive portfolio actions, including extending fixed income duration and lowering public equity holdings to take advantage of higher fixed income yields. Net loss of $41 million and adjusted net income of $214 million, that's 81 cents per diluted share, reflects improved property liability underwriting performance. Property liability recorded an underwriting loss of $414 million, which compares to $1.3 billion loss in the third quarter of 2022. While the improvement was encouraging, loss cost trends remain elevated and require continued execution of auto insurance profit improvement plan, particularly in California, New York, and New Jersey. Slide four provides an update on the execution of the four components of that plan. Starting with rates, the Allstate brand is implemented 26.4% of rates since 2022, including 9.5% through the first three quarters of 2023. National general implemented rate increases at 10% in 2022, and an additional 8.8% through the first nine months in 2023. We will continue to pursue rate increases to restore auto insurance margins back to target levels. Second, reducing operating expenses is core to both the profit improvement plan and, importantly, the transformative growth plan to become a low-cost provider of protection. Expenses are down, and we have a path to further reductions. Third, we restrict new business growth in areas and classes of business where we're not achieving target returns. Given the success we've had in some areas, we're selective in removing these restrictions in some states and segments. Fourth, enhancing claim practices in a high-inflation area. and increasingly litigious environment are required to deliver customer value. That includes accelerating the settlement of injury claims and increasing in-person inspections. Turning to slide five, let's touch base on why we believe this profit improvement plan will work in the current competitive environment. All state's capabilities and business model have generated industry-leading auto insurance margins over the last 10 years. with an average combined ratio of roughly 96.5 and an average underwriting income of $800 million. That represents approximately a 5.5-point outperformance in the industry, which generates an incremental profit of about $1.3 billion annually. Only a few of the other top 10 insurance companies have a similar record. In the current competitive environment, these same capabilities will enable us to continue the progress made in improving auto insurance margin. The rapid rise in auto claims severity has 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 is moderated competition for new customers. The impact on policies enforced is dependent on each company's individual profit and growth plan. As Mario will discuss, the Allstate brand policies enforced have declined, particularly in four large states. Geico's policies enforced 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 six. When we acquired National General, it was primarily to improve our position in independent agent channel for property liability insurance, and we've exceeded our goals in that integration. The acquisition also gave us the opportunity to combine Allstate's voluntary benefits business with National General's group and individual health businesses. Successfully combining these into 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 three successful businesses, which are shown in the middle there, in the $1 trillion employer benefit markets group and individual health when you add those all up. We've been the preeminent voluntary benefits provider for 24 years with a comprehensive product offering that generates annualized premiums and contract charges of $1 billion and $300 million of new sales. National General's Group Health Business targets the small case size market and has $700 million of premium and fee revenue and $400 million in new sales. The individual health protection is provided through both proprietary and third-party products, which generates both underwriting and fee income. The health and benefits businesses have revenues of $2.3 billion, which is 4% of total corporate revenues, and adjusted net income of $240 million for the trailing 12 months, which you can see in those two pie charts on the bottom, and it's kind of spread between all the businesses. The employer voluntary benefits and group health businesses, when you add them up, have roughly 48,000 relationships. ranging from Fortune 50 companies to small businesses, and over 4.3 million policies in force. The growth potential of these businesses can be accelerated with greater alignment with the wide range of companies in the market that are shown on the right-hand side. With its attractive business profile and financial results, we expect the transaction to be completed in 2024. In addition to improving profitability and strategically allocating capital, We continue to implement the transformative growth initiative to position the property liability market share gains as margins improve. The five components initiative is shown at the top of slide seven. Affordable, simple, and connected protection is at the heart of this strategy to further improve customer value. Customers will have access to high-quality protection that better meets their needs at a low cost with hassle-free experiences, however they choose to access our broad distribution network. We're live in the market with a new business experience and further enhance the connectivity of the Allstate app this week. Mario will discuss our success in expanding customer access. While each transformer growth element is at various stages of maturity, we're moving from phase three of building a new model towards scaling it in phase four. Now I'll turn it over to Mario to go through the property liability results.