Thank you for standing by and welcome to the Allstate Third Quarter 2021 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. I would now like to introduce your host for today's program, Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning. Welcome to Allstate's Third Quarter 2021 Earnings Conference Call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement and we posted related materials to our website @allstateinvestors.com. Our management team is here to provide perspective on these results. 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 the investor supplement and forward-looking statements on Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2020 and other public documents for information on potential risks. And now, I'll turn it over to Tom.

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

Thanks, Tom. Let's move to Slide 5 to review property-liability margin results in the third quarter. The recorded combined ratio of 105.3 increased by 13.7 points compared to the prior year quarter. This was primarily driven by increased underlying losses, as well as higher catastrophe losses and non-catastrophe prior year reserve re-estimates. The chart at the bottom of the slide quantifies the impact of each component in the third quarter compared to the prior year quarter. As you can see, the personal auto underlying loss ratio drove most of the increase, due to higher auto accident frequency and the inflationary impacts on auto severity. Higher catastrophe losses shown in the middle of the chart had a negative 1.4 impact on the combined ratio, as favorable reserve re-estimates recorded in 2020 from wildfires subrogation settlements positively impacted the prior year quarter. Gross catastrophe losses were higher, but were reduced by nearly $1 billion of net reinsurance recoveries following Hurricane Ida, demonstrating the benefits of our long-term approach to risk and return management of the homeowners insurance business and our comprehensive reinsurance program. Non-catastrophe prior-year reserve strengthening of $162 million in the quarter drove an adverse impact of 0.8 points, primarily from increases in auto and commercial lines. This also included $111 million of strengthening in the quarter related to asbestos, environmental, and other reserves in the runoff property-liability segment, following our annual comprehensive reserve review. This was partially offset by a lower expense ratio when excluding the impact of amortization of purchased intangibles, primarily due to lower restructuring and related charges compared to the prior-year quarter. Moving to Slide 6, let's go a bit deeper on auto insurance profitability. Allstate brand auto insurance underlying combined ratio finished at 97.5 for the quarter and 89.7 over the first 9 months of 2021. The increase to the prior year quarter reflects higher loss costs due to higher accident frequency, increased severity, and competitive pricing enhancements implemented in late 2020 and earlier this year. While claim frequency increased relative to the prior year, we continue to experience favorable trends relative to pre-pandemic levels. Allstate brand auto property damage frequency increased by 16.6% compared to 2020, but decreased by 16.8% relative to 2019. The chart on the lower left compares the underlying combined ratio for the third quarter of 2019 to this quarter to remove some of the short-term pandemic volatility. The underlying combined ratio was 93.1 in 2019, which generates an attractive return on capital. Favorable auto frequency in the third quarter of 2021 lowered the combined ratio by 6.4 points compared to 2019. Increased auto claim severity, however, increased the combined ratio by 12 points versus two years ago, as you can see from the red bar. The cost reductions implemented as part of transformative growth reduced expenses by 1.3 points, which favorably impacted 2021 results. As Tom mentioned, early in the pandemic, the severity increases were driven by higher average losses due to a reduction in low severity claims. This year, the increase reflects the impact of supply chain disruptions in the auto markets, which has increased used car prices and enabled original equipment manufacturers to significantly increase part prices. The chart on the lower right shows used car values began increasing above the CPI in late 2020, which accelerated in 2021, resulting in an increase of 44% since the beginning of 2019. Similarly, OEM parts have also increased in 2021, roughly twice as much as core CPI. This has resulted in higher severities for both total loss vehicles and repairable vehicles. Since these increases were accelerating throughout the second and third quarters of the year, we increased expected loss costs for the first two quarters of 2021. And this prior quarter strengthening shows up in the combined ratio for the third quarter. Increases in reported year severities for auto insurance claims during the first two quarters of 2021 increased the third quarter combined ratio by 2.6 points, as you can see by the green bar. So let's flip to Slide 7, which lays out the steps we're taking to improve auto profitability. As you can see from the chart on the top, Allstate has maintained industry-leading auto insurance margins over a long period of time with a combined ratio operating range in the mid-90s, exhibiting strong execution and operational expertise. To maintain industry-leading results, we are increasing rates, improving claims effectiveness, and continuing to lower costs. After lowering prices in early 2021 to reflect in part Allstate's lower expense ratio, we have proactively been responding with increases in the third quarter with actions continuing into the fourth quarter and into 2022. The chart on the right provides selected rate increases already implemented in the third and fourth quarters, as well as publicly filed rates that have yet to be implemented in the fourth quarter. Those states denoted with a carrot are the top ten states in terms of written premium as of year-end 2020. In the third quarter, we received rate approvals for increases in 12 states, primarily in September. We adapted quickly to higher severities in the fourth quarter with plans to file rates in an additional 20 states. We have already implemented rate increases in 8 states during the fourth quarter with an average increase of 6.7% as of November first. Looking ahead, we expect to pursue price increases in an additional 12 locations by year-end. We are working closely with state regulators to provide detailed support and decrease the lag time between filing, implementation, and premium generation. As we move into next year, it is likely auto insurance prices will continue to be increased to reflect higher severities. We also continue to leverage advanced claims capabilities and process efficiencies. Cost reductions as part of transformative growth will also continue to be implemented.

Thanks Mario. Moving to Slide 11, protection services continues to grow revenue and profit. Revenues, excluding the impact of realized gains and losses, increased by 23.3% to $597 million in the third quarter. Protection Plans, net written premium increased by $139 million due to the launch of the Home Depot relationship, focusing on appliances. Our quarterly net written premium is now 5.5 times the level of when the Company was acquired in 2017. We've already expanded revenues due to the integration of LeadCloud and Transparently, which were acquired as part of the National General acquisition, as well as increased device sales driven by growth in the Milewise product. Policies in force increased by 12.5% to 150 million driven by growth in Allstate Protection Plans and Allstate Identity Protection. Adjusted net income was $45 million in the third quarter, representing an increase of $5 million compared to the prior-year quarter, driven by higher profitability at Allstate Identity Protection in Arity. This was partially offset by higher operating costs and expenses related to investments in growth.

Now let's shift to Slide 12, which highlights our investment performance. Net investment income totaled $764 million in the quarter, which was $300 million above the prior year quarter, driven by higher performance-based income as shown in the chart on the left. Performance-based income totaled $437 million in the quarter, reflecting increases in private equity investments. As in prior quarters, several large idiosyncratic contributors had a meaningful impact on our results. These results represent a long-term and broad approach to growth investing, with nearly 90% of year-to-date performance-based income coming from assets with inception years of 2018 and prior. Market-based income, shown in blue, was $6 million below the prior-year quarter. The impact of reinvestment rates below the average interest-bearing portfolio yield was somewhat mitigated in the quarter by higher average assets under management and prepayment fee income. Our total portfolio return was 1% in the third quarter and 3.3% year-to-date, reflecting income and changes in equity valuations, partially offset by higher interest rates. We take an active approach to optimizing our returns per unit risk for appropriate investment horizons. Our investment activities are integrated into our overall enterprise risk and return process and play an important role in generating shareholder value. While the performance-based investment results continued to be strong in the third quarter, we manage the portfolio with a longer-term view on returns. On the right, we have provided our annualized portfolio return in total and by strategy over various time horizons. Consistent with broader public and private equity markets, our portfolio has experienced returns above our historical trend over the last several quarters. While prospective returns will depend on future economic and market conditions, we do expect our performance-based returns to moderate in line with our longer-term results.

Now let's move to Slide 13, which highlights Allstate's strong capital position. Allstate's balance sheet strength and excellent cash flow generation provide strong cash returns to shareholders while investing in growth. Significant cash returns to shareholders, including $1.5 billion through a combination of share repurchases and common stock dividends occurred during the third quarter. Common shares outstanding have been reduced by 5% over the last 12 months. Already in the fourth quarter, we successfully completed the acquisition of Safe Auto on October 1st for $262 million to leverage National General's integration capabilities and further increase personal lines market share. We also recently closed on the divestitures of Allstate Life Insurance Company in New York. These divestitures free up approximately $1.7 billion of deployable capital, which was factored into the $5 billion share repurchase program currently being executed.

Turning to Slide 14, let's finish with a longer-term view of Allstate's focus on execution, innovation, and sustainable value creation. Allstate has an excellent track record of serving customers, earning attractive returns on risks, and delivering for shareholders, as you can see by the industry-leading statistics on the upper right. Innovation is also critical to the execution, and our proactive implementation of transformative growth has positioned us well to address the macroeconomic challenges facing our business today and in the future. Sustainable value creation also requires excellent capital management and governance. As an example, Allstate is in the top 15% of S&P 500 companies in cash returns to shareholders by providing an attractive dividend and repurchasing 25% and 50% of outstanding shares over the last 5 and 10 years respectively. Execution, innovation, and long-term value creation will continue to drive increased shareholder value. With that context, let's open the line for your questions.

Sustainable value creation requires excellent capital management and governance. For instance, Allstate ranks in the top 15% of S&P 500 companies in terms of cash returns to shareholders by offering a strong dividend and repurchasing 25% and 50% of outstanding shares over the last 5 and 10 years respectively. Execution, innovation, and long-term value creation will continue to drive increased shareholder value. With that said, we are now ready to take your questions.

Yes. Thank you. I want to talk about bundles and homeowners in the pricing of the dual engine of homeowners and auto together. I guess there's two things I want to understand. One is when a customer sees their overall bundled price going up, what does the conversation look like, especially if you're trying to more centralize your business with a greater direct relationship with your customers? And two, given Allstate's geographic footprint, can Allstate add incoming customers for homeowners without changing its catastrophe footprint?

Good morning, Josh, it's Tom. I'll start and then Glenn can jump in first. As you know, we've been focused on combining auto and homeowners insurance because these represent stable, long-term customers. Customers benefit from a discount when they bundle these products, which also simplifies their experience with a single point of contact. We’ve been successful in this strategy. Our growth in homeowners this year has outpaced our growth in auto insurance, which we attribute to an increase in bundling among individual customers. Although it’s challenging to pinpoint exact causes, we are encouraged by the efforts of our agents in driving this growth. In regard to the gross event, we've been adjusting our business model over the past several years. Since the mid to late 2000s, we've generated nearly $9 billion in underwriting income from homeowners. We need to improve this area because we believe a 4-point margin isn’t appealing for homeowners. This is due to minimal investment income, the requirement for more capital due to volatile results, and significant tail losses. As we aim to expand, we factor in all these considerations. We focus our growth efforts on individual states, particularly where we can achieve good returns even with substantial catastrophe exposure. If we identify a state with margin potential that justifies the capital and reinsurance costs, we will pursue that opportunity. Our approach is highly sophisticated. Currently, we do not sell a large amount of direct homeowners insurance, and we still need to find effective strategies for that market. Before I let Glenn share his insights on how we can continue our success in homeowners, I want to highlight what we are doing in the independent agent channel. The National General platform enhances our ability to serve a wide range of customers with our products, expertise, pricing, claims management, and reinsurance programs.

Glenn, can you address retention and catastrophe footprints as well?

Sure. So a few comments on homeowners leading into it, but we got a really strong home care business and so we want to grow it, and we want to handle it as Tom said. So, over the course of the past year, we've deepened bundling discounts. So we've made it more attractive for customers across 30 states. We've shifted our agency compensation over the last couple of years to where it's more attractive for them to bundle. And the same is true in direct, as Tom said, we're looking to crack the code on that. We're writing some, we want to write more, and so some of the incentives for our direct team around cross quoting and bundling. To the point around that footprint, we're in good shape. Like, if you look at our ability to write business, we can write it pretty broadly. We can write in some CAT-prone areas, but we tend to offset it and create the diversity of our book by writing in other areas. I mean, right now, we're on a 12-month view right now, we're at 93.8 combined ratio made about $400 million underwriting profit in the last 12 months, in spite of having some really big CAT quarters. Though it's a good business that we're able to consistently make money in, and so we're looking to grow it. But as Tom said, we have pretty stringent guidelines, that where we write, how we write so that we don't overgrow in CAT prone areas. But we're able to grow without that. And Tom mentioned something that I want to come back to. In terms of the breadth of our distribution and growing, and that would be into our IA channel. You know, the IA channel is a huge opportunity. Independent agents where a lot of homeowners and our National General and Allstate's Company, as it will be branded, is adding our middle market products, both auto and home. And we have sort of a whole new Greenfield there to run in. And that would be a broad geographic spread, not just the cat prone areas.

Hey, let me ask that because I think I understand why you're trying to triangulate between what's going on in the industry. First, we don't have a catastrophe exposure issue. We don't have a profitability problem. We believe in homeowners. We’ve only lost about $16 million out of $7.3 billion so far this year. While we would like to make more money, as Glenn pointed out, when you look over a longer period, we've experienced a fair amount of ups and downs, but we still generate underwriting profit on a 12-month basis. So we aren't facing a catastrophe problem, which means we don't have to restrict our offerings and end up dealing with retention issues. We've been through that before, particularly with the repositioning we executed in the latter part of the last decade. When you inform a customer that they were previously insured with us and now we're unable to provide coverage, it can hinder our position. We are one of the largest brokers of homeowners insurance products in the country, and even in competitive markets, we find that mentioning alternatives can affect our auto business as well. Customers may consider taking their business elsewhere or competitors might bundle services to attract those customers as well. We did encounter some challenges with auto growth when we were downsizing, resulting in a loss of around 2 million homeowners policies over a 4 to 5-year period. Although it was hurtful, it's manageable. I can't predict what our competitors will do, but I do know, as Glenn stated, that we have a solid business, we understand how to operate it, and we have growth opportunities ahead. We are excited about serving more customers and generating greater profits for our shareholders in the process.

Thank you.

Good morning. I'd like to draw your attention to Page 7, where I found your chart showing the rate increases you have implemented as well as those planned for the future particularly interesting. Could you share your thoughts on the potential impact of substantial severity on pricing trends in other states? It seems like we may be entering a period of ongoing pricing adjustments throughout most of next year. Given this situation, how do you view your competitive position in a landscape where many industry players will be raising rates?

Let me start, and then Glenn can discuss what he is doing individually. You are correct that there is a prevailing threat in the markets today. However, we do not view it as a one-time issue. I believe there is always more to consider when deciding claims, and we are not ahead of anyone else in that regard. First, I assume everyone is in a similar situation. Second, I believe that the same trends will occur, and third, we do not know when those trends will conclude. What we can control is how we operate differently. We are aware that some of our competitors adjusted their frequencies earlier than we did, which would reasonably suggest they would increase their prices sooner as well. We have a solid plan in place, which Glenn will explain, focused on achieving attractive returns in auto insurance, a crucial aspect of delivering value for shareholders. We are committed to monitoring how we progress in terms of competitive positioning, although predicting that is also challenging. I am confident that our initiative for transformative growth started two years ago has positioned us well, and the cost reductions we have implemented are already yielding benefits. We are now capable of growing through various pathways and can accelerate growth if we choose. I am pleased with our current standing and our ability to capture market share in the future, which is our strategy, and we aim to do so profitably. Glenn, would you like to discuss your plans to restore auto insurance returns to their historical levels?

Yes. Absolutely. So thanks, Greg. And you hit a couple of important points that you're right about that everyone or close to everyone is going to have to take rate. When you talk about competitive position. So we think about that as part of the process. But this is broad and this is going to be around for a while. Like everything you look at in terms of what the root causes of severity, is in its simplest terms, is the price of used cars. I would like to talk about collision coverage as it's a coverage that doesn't really have a policy limit that's dated other than the value of the vehicle itself. So in real terms, our policy limit on that coverage went up by 40% plus with no change in premium. And that experience happened to everybody across the industry. So it's a rarity where you have something as clean and clear as that that is a root cause to your severity changes. So we think it will be around for a bit and we're going after rate to address that as one of the levers and we've talked about our claims capabilities and certainly our expense reductions as other ones. So in the third quarter, we took 12 price increases that went effective in the third quarter and another 8 in the fourth quarter so far with more to come. So this is broad and we'll be doing it just about everywhere. And I think the key from a competitive position is that we made a lot of progress. So our starting point, we made significant progress over the last year with the expenses we've taken out, and therefore the competitive position we were in improved significantly. Our close rates improved significantly, leading to some of the greater new business that you saw. And so as we take rates and other due, it's our goal to certainly keep that competitive position gain that we've made. But the primary goal is to get our margins back to where they need to be. And that's why we're going after rate, we're doing it pretty proactively.

Great. Thanks for the color on that. I wanted to pivot to Slide 8, which is, I think another really important slide in your presentation. And just to step back and recognize the long-term objective that you've introduced is pretty striking. I feel like when we get to 2024, if you've achieved that objective, that will put you clearly among the leaders in terms of a lowest adjusted expense ratio in the marketplace. I'm sure a lot of thought went into this. Can you give us some more color on where the improvement, where you're going to get the most leverage in terms of the expense ratio improvements, where it's going to come from. And then maybe also include some comments on the advertising expense because that's not included in this.

Thank you, Greg, for your question and recognition of our progress. To begin, I want to reiterate that our goal in reducing costs is to enhance customer value by improving our competitive pricing. We plan to achieve this by continuing to lower the expense component of our combined ratio, which includes both underwriting and claim expenses. We have made significant strides over the past few years, and we have a clear plan to reach our additional objective by 2024. This involves digitizing processes to improve efficiency, retiring legacy technology, and capturing synergies from the National General acquisition, along with reducing distribution costs while creating a more efficient distribution model. We see opportunities in both operating costs and on the underwriting and claims sides. We have a clear roadmap to achieve this, and we believe that once we achieve the additional three points in our cost structure, we will be well-positioned relative to our competitors, enabling us to offer a more attractive price point and deliver greater customer value, which will allow us to accelerate our growth.

So let me go to advertising then. Let me start with we didn't do transformative growth because of the pandemic, but boy, I am sure glad we got started on transformative growth when we did because we were able to reposition the brand. We invested over $250 million in repositioning the brand, do advertising, testing out new, more sophisticated ways to do it. We did it when frequency was low, so we were able to use some of that reduction in frequency, the margin it's created, to invest in long-term growth by repositioning the brand. When you look at transfer on breast for a simple right, you get a more competitive price, you have more places to buy it. You let people know about that increase in advertising, that or restocking that. What we do in the future will depend on how much we want to grow. So as we move forward, I think our advertising will be flat or come down some because we want to make sure we've got the pricing right. The point that came up earlier about the longevity of the how long will severity keep coming up. You want to make sure you've got that pricing right before you go out and get that flywheel going by doing more advertising. That said, we're always going to do a lot of advertising because as you know, it is a marketing war really out there between some of the large players. But the other part that's not as well known is it's getting every bit as sophisticated as auto insurance in home prices. You really got to be good with your math and whether it's upper funnel, lower funnel, getting the right price to the right customer, at the right time, in the right space is complicated. And so the other thing we've been working on is building out the sophistication so that every dollar of advertising investment we spend is well done. The reason we took it out of the expense ratio guidance was because it is more volatile and it has pinned down on what kind of growth we're looking to achieve in that quarter. And this is a measure of really how effectively running the business, like how are you keeping your costs down for your customers so you can't hit at a competitive price.

Thank you for your answers.

Thanks. Good morning. My first question is about the growth in new business that you experienced in direct during the quarter. I understand from your comments that you began implementing price increases during the quarter and that more is forthcoming, but I was somewhat surprised by the level of growth you achieved, considering the increasing loss trend you mentioned. Can you elaborate on that? Also, do you anticipate that new business growth on the direct side will slow down as you aim for additional rate increases through this system?

Elyse, I'll pass that to Glenn. Glenn and his team have done an excellent job improving our direct performance. Part of the growth you're noticing is due to the advertising we discussed; some of it is because we're simply getting much better at this. Once we integrated the Allstate brand with Glenn's study to enhance our capabilities, we have become significantly more effective in what we've accomplished and the costs we've managed. Glenn, would you like to discuss the outlook for address?

Yeah. I agree with everything Tom just said. I think we've got really nice prospect because I would say we're making up ground in dog years because we have, what we're 20 years newer at doing direct than the Allstate brands and some of our competitors. But we're making up chunks of that capability as we move a year and a half into the launching with the Allstate brand in direct. The effectiveness of our sales, whether it be our call centers or on the web, etc., our marketing sophistication, our partners with marketing, all of those things are getting better and that helps move it up. The other thing is actually in this price environment that's going to be disrupted, we're really likely to see some tailwind in new business, but some headwind in retention. Because if we were in a situation where we were the only ones taking rate, you might expect the opposite. But with a whole bunch of people having to take rate, that will create a lot of shoppers; we'll create shoppers of our own too because it disrupts our own customers. And when people shop, they often find a better price for the situation. Even in a rising environment like this. So there will be a lot of customers shopping, ours, and other companies. And so it's an opportunity, as Tom said, to leverage what we did and say we're really happy we did transformative growth when we did because we have more ways for customers to buy when that disruptive market happens.

Thank you. My second question is about rates. I believe most of your auto policies are for six months, so please correct me if I'm mistaken. As we consider the rates as they move through your system, particularly what you've implemented in the third and fourth quarters and your expectations for next year, how long do you think it will take to achieve your target margins? Is it a situation that could take six to twelve months? I understand you don't have a specific target margin for Property-liability, but as we think about setting your margins at an acceptable level, do you believe this will happen within the next six to twelve months, or can you provide a time range for that?

I don't think it's possible to set a timeframe for it because we can't predict future inflationary pressures. What we can commit to is tackling this aggressively as soon as we can. As Glenn mentioned, his focus is on improving auto insurance margins, but we have many other priorities to consider. When it comes to inflation, I disagree with the notion that prices, like those of used cars, will suddenly decrease. If you purchase a car for $14,000 and the used version is priced at $10,000, it won't feel worth $10,000 regardless of what others say about inflation being temporary. The same applies to parts prices. Unlike the oil market, which fluctuates daily, parts prices are more stable because dealers and distributors build inventories and price accordingly. Therefore, we don't see these price increases being temporary. It's uncertain how long it will take for these changes to fully flow through the system or how much manufacturers will push prices higher. As of now, we know prices will continue to rise until the bottom line stabilizes, and the top line will likely keep increasing until we return to better margins. However, predicting when we’ll regain the same underwriting margins for auto insurance, whether in dollar terms or percentages, is difficult without a clearer understanding of frequency trends. Glenn, do you have anything to add?

I know that the only thing I would add would be that the tactical answer on the rates, because completely agree. We don't know what the bottom line will do exactly, so we'll have to keep moving those and adjust. But the tactical answer on the rates, you're correct, Elyse, it's 6 months in almost all of our states and all of our policies. So it's about 6 months from the effective date to get all customers paying that. And then another 6 months from the point they start paying it to where the full premium has been earned for one policy period. So you really start to see the effect of the rates starting at the beginning of the year, but more impactfully in the second and third quarters of next year.

Okay. Thanks for the color.

Thank you, good morning, everyone. I believe Glenn addressed this question, but I want to clarify. During the first and second quarters, you implemented some targeted rate cuts, and now that approach has changed. Glenn mentioned that the rate increases will continue across nearly all areas. I would like to confirm this, particularly regarding the overlap in states where you previously enacted rate cuts recently and are now increasing rates in those same regions. My inquiry pertains to the potential impact on consumers, such as retention and fluctuations in rates. Additionally, if there is indeed overlap, how does that relate to what Tom mentioned about ensuring confidence in our current pricing rates?

Yes, there will be increases in areas where there were modest decreases. We took some time to observe the frequency of claims and ensure it was a lasting trend before making changes. We have provided some significant one-time benefits during shelter-in-place situations, but we have been more conservative and subtle in altering rates downward. Customers shouldn’t expect drastic fluctuations but will see adjustments within the same state. As highlighted, used car prices surged significantly in the second quarter, leading to increased claims, which ultimately impact loss costs and create a hyperinflationary scenario for auto physical damage. We believe this is the right response at the right time. We will work hard to maintain our customer retention, which is greatly supported by our agency force. They excel at building relationships and helping customers understand policy changes.

Thank you for that. For my second question about Arity, I'm interested in how you view its role. Do you see it primarily as a tool for enhancing your own pricing and telematics business, or do you envision it as a potential revenue-generating asset that could be offered to others? While it hasn't significantly contributed to income yet, do you see it evolving in that direction over the long term? More companies are moving towards outsourcing that business; for example, Hartford recently made that decision, and many others are following suit. How do you perceive Arity's future? Is it primarily for your own use, or do you intend to develop it into a revenue-generating venture as well?

Michael, I appreciate you bringing up a topic beyond auto insurance margins. We have several positive developments underway, one being Arity, which has generated significant value both within and outside the insurance sector. I don’t believe any analysts have evaluated it as if it were a standalone entity. We’ve gathered 600 billion miles of data, implementing risk scoring and enhancing marketing effectiveness. We are developing a robust platform that serves multiple purposes. Initially, we offered telematics as a service, needing a partner to collect data, launch a mobile app, and organize the information. Instead of handling that internally, we recognized it would be beneficial to provide this service to other insurance companies, which we do through Arity. While we started with basic telematics, we expanded our data collection efforts and established a rating service organization to assist other insurers in pricing their insurance using telematics. Given that they will ultimately develop this capability, we opted to utilize Arity to capture additional margins instead of attempting to dominate the insurance market. As a leader in telematics, we don’t anticipate taking complete market share, so we’ve built a rating services organization around that concept. Our data collection has also evolved into lead generation, incorporating data from Allstate customers and from our SDK integrated into other products. We now have access to data from over 25 million vehicles on a daily basis, maintaining high data quality and consistency. Additionally, we purchase data, allowing us to merge our existing dataset with over 75 million more vehicles, totaling around 100 million vehicles monitored daily. We envision expanding our rating services for Allstate and other insurers to not only provide telematics services but also help prequalify potential buyers through a feature called Arity IQ. While substantial value has been generated, it hasn’t yet reflected in shareholder value, as I don’t see analysts thoroughly assessing its worth. However, we believe it holds significant potential, and we aim to grow this business and enlarge its addressable market.

Okay Tom. Thank you very much.

Hi, thanks. Good morning. I had a question about the 7% rate increase mentioned in Slide 7. That seems high to me, especially since the loss ratio, excluding the reserve charge, was only about 1.5 points higher than in the third quarter of 2019. Additionally, considering the expense initiatives you've implemented so far, I thought those would help bring down the rate you need to take. Am I thinking about this the right way, or is it still too uncertain at this point and you just want to prepare for potential future loss cost increases?

It's a valid point, David, that future expense reductions will help us manage profitability. We're raising prices now to ensure we grow profitably. Given the uncertainty around how inflation will settle, we're being reasonable in our price increases instead of being overly aggressive. If our expenses decrease in the future, we can enhance our competitive position, which we significantly improved in 2021. We want to maintain that progress and keep building momentum for growth. Therefore, we're focusing on using expense reductions for future competitive pricing improvements rather than assuming we don’t need to raise prices due to loss costs. Glenn or Mario, do you have anything to add?

The only thing I would add is that it is quite easy to experience negative rates in both approved and market conditions quickly. As we mentioned earlier, it takes time for these rates to become effective. Therefore, we are forecasting future loss costs over the next year and beyond, and we are setting rates that we believe accurately reflect our best estimates of what we will need to ensure the right returns. Ideally, we would find ourselves in a position where we slightly overshot and could adjust accordingly. However, as Tom pointed out, there are still many questions regarding where inflation for severity will conclude.

At some point, Glenn, look, we need to make money in auto insurance, David, and we're going to do that. I think we're out of time, so let me just say as we move forward, you should expect us, as you've heard throughout this call, to focus on improving returns in auto insurance. At the same time, we're not letting up on any of the components of increasing our market share and personal property-liability or expanding the circle of protection. All of which we've had really good progress and success on this year and in this quarter, so you should expect us to continue to focus on a broad-based approach to increasing shareholder value. So thank you for your engagement with us again, and we will talk to you next quarter.

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