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

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 in time in Allstate. Let's start with an overview of results and then Mario and Jess will walk through our operating performance. Let's begin on Slide 2. Our strategy has two components: increase personal Property-Liability market share and expand protection provided to customers which are shown in the two over on the left. On the right-hand side, you can see the highlights for the quarter. We made good progress on improving auto insurance profitability. There is more to be done, but you can see the improving trend again this quarter. We decided to pursue our sale of Allstate's Health and Benefits businesses. After successful integration of Allstate's voluntary benefits business with National General's group and individual health businesses, we've created a 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 Plans growth. Let's review the financial results on Slide 3. Revenues of $14.5 billion in the third quarter increased 9.8% above the prior year at $1.3 billion. The increase was driven by higher property liability earned premiums in auto and homeowners insurance, primarily reflecting the 2022 and 2023 rate increases, which has resulted in Property-Liability earned premium growth of 10%. Net investment income of $689 million reflects proactive portfolio actions, including extending fixed income duration and lowering public equity holdings to take advantage of higher fixed income yields. Net loss of $41 million and adjusted net income of $214 million, that's $0.81 per diluted share, reflects improved profit liability underwriting performance. Property-Liability recorded an underwriting loss of $414 million, which compares to a $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 the auto insurance profit improvement plan, particularly in California, New York, and New Jersey. Slide 4 provides an update on the execution of the four components of that plan. Starting with rates; the Allstate brand has implemented 26.4% of rates since 2022, including 9.5% through the first three quarters of 2023. National General implemented rate increases of 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've restricted new business growth in areas and classes of business where we are not achieving target returns. Given the success we've had in some areas, we're selectively removing these restrictions in some states and segments; fourth, enhancing claim practices in a high inflationary and increasingly litigious environment are required to deliver customer value. That includes accelerating the settlement of injury claims and increasing in-person inspections. Turning to Slide 5. Let's touch base on why we believe this profit improvement will work in the current competitive environment. Allstate's capabilities and business model have generated industry-leading auto insurance margins over the last 10 years, with an average combined ratio of roughly 96.5% and an average underwriting income of $800 million. That represents approximately a 5-point outperformance in the industry, which generates an incremental profit of about $1.3 billion annually. Only a few of the other top 10 insurance companies have a similar record. In the current competitive environment, these same capabilities will enable us to continue the progress made in improving auto insurance margins. The rapid rise in auto claim severities eroded profits for the industry, with most carriers responding by increasing auto insurance prices and lowering expenses. Allstate, Progressive, and GEICO 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. The impact on policies in force is dependent on each company's individual profit and growth plan. As Mario will discuss, the Allstate brand policies in force have declined, particularly in four 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 primarily to improve our position in the 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 that can be realized by aligning with a broader set of product offerings, distribution, and capabilities such as medical network management. Allstate Health and Benefits separates three successful businesses, which is shown in the middle there, and the $1 trillion employer benefit market 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 in fee revenue and $400 million in new sales. The individual health protection is provided through both proprietary and third-party products which generates both underwriting and fee income. The Health and Benefits businesses have revenues of $2.3 billion, which is 4% of total corporate revenues, and adjusted net income of $240 million for the trailing 12 months, which you can see in the two pie charts in the bottom; and it's kind of spread between all the businesses. The employer voluntary benefits and group health businesses when you add them up have roughly 48,000 relationships ranging from Fortune 50 companies to small businesses and over 4.3 million policies in force. The growth potential of these businesses can be accelerated with greater alignment with a wide range of companies in the market that are shown on the right-hand side. With its attractive business profile and financial results, we expect the transaction to be completed in 2024. In addition to improving profitability and strategically allocating capital, we continue to implement the transformative growth initiative to position the Property-Liability market share gains as margins improve. The five components initiative was shown at the top of Slide 7. Affordable simple connected protection is at the heart of the strategy to further improve customer value. Customers will have access to high-quality protection that better meets 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 transformative growth element is at various stages of maturity, we're moving from Phase III of building new models towards scaling it in Phase IV. Now, I'll turn it over to Mario to go through the Property-Liability results.

Thanks, Tom. Let's start on Slide 8. Our comprehensive auto profit improvement plan is improving margins. Property-Liability earned premium increased by 10% compared to the prior year quarter, driven by higher average premiums which were partially offset by a decline in policies in force. The underwriting loss of $414 million in the quarter improved by $878 million compared to the prior year quarter due to the improvement in our auto loss ratio. The chart on the right highlights the components of the 103.4 combined ratio in the quarter which improved by 8.2 points despite a 2.8 point increase in the catastrophe loss ratio compared to prior year. Prior year reserve estimates, excluding catastrophes, were $166 million unfavorable or at 1.4 points adverse impact on the combined ratio in the quarter. $82 million was attributable to the runoff property liability annual reserve review and $84 million in Allstate Protection, primarily driven by national general personal auto injury coverages. The underlying combined ratio of 91.9 improved by 4.5 points compared to the prior year quarter and 1 point sequentially versus the second quarter of 2023 despite continued elevated severity inflation. Now let's move to Slide 9 to review Allstate's auto insurance profit trends. The third quarter recorded auto insurance combined ratio of 102.1, which was 15.3 points favorable to the prior year quarter, reflecting higher earned premium, lower adverse prior year reserve reestimates, and expense efficiencies. As a reminder, we continuously assess claim severities as the year progresses. For example, last year, as 2022 developed, we increased current report year ultimate severity expectations, which influenced the quarterly reported trends. While loss cost trends remain historically elevated, the pace of increase moderated in the third quarter. As the Allstate brand weighted average major coverage severity improved to 9% compared to the 11% estimate as of the end of last quarter. The chart on the left shows the sequential improvement in quarterly underlying combined ratios from 2022 through the current quarter with quarterly reported figures adjusted to the full year severity level for 2022 and 2023, adjusted for current severity estimates as of the third quarter. Higher average premium and the continued execution of our profit improvement plan drove the sequential improvement in underlying combined ratio to 98.8 as reported or 100.5 in the bar graph when removing the 1.7 points favorable impact on the third quarter from improved severity for claims reported in the first two 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 three large states which generated 45% of Allstate brand auto underwriting loss in 2022, Allstate brand auto insurance underlying combined ratio was 97.2. The Premiums from states with an underlying combined ratio below 100 improved to 59% of the portfolio in the third quarter, doubling from the percentage at year-end 2022 and up almost 10 points from 50% in the second quarter. Slide 10 shows the impact on policies in force from actions to improve profitability. Allstate brand rate increases have exceeded 26% over the last 7 quarters. New issued applications shown in the middle chart declined 19.5% compared to the prior year quarter, largely driven by actions to reduce growth in unprofitable states. California, New York, and New Jersey combined declined by 75% compared to the prior year. Allstate brand auto policies in force decreased by 6% in the third quarter compared to the prior year, partially driven by the lower new business and also driven by lower retention due to rate increases. Elevated loss trends in Texas required implementation of rate increases of over 50% in the last 21 months. As a result, retention has declined while profitability has improved. Policies in force in these four large states combined decreased by 8.7%, whereas the remaining states declined by 4.7% compared to the prior year through the third quarter. On Slide 11, we take a deeper look at the National General Auto book. While third quarter margins were impacted by $95 million of unfavorable non-catastrophe prior year reserve reestimates primarily across liability coverages, the underlying combined ratio of 96.8 in the quarter and 95.7 year-to-date remains largely consistent with the prior year periods, reflecting higher loss cost expectations given the reserve strengthening to date, offset by higher average premiums and expense efficiencies. The National General business as a product, including fee-based revenue features and claims capabilities to accept in the nonstandard auto insurance market. As you can see in the chart on the right, 75% of the written premium growth in the third quarter of 2023 is coming from nonstandard auto, which is more profitable than the overall national general auto insurance business. Our new middle-market product, Custom 360, is now available in nearly 1/3 of the U.S. market and is also contributing to growth. While the legacy National General and Encompass businesses, which will be run off as we implement Custom 360, are having the lowest impact on growth. Slide 12 covers homeowners insurance results which incurred an underwriting loss in Q3, driven by higher catastrophe losses. On the left, you can see net written premium increased by 12.1% from the prior year quarter, primarily driven by higher average gross written premium per policy in both the Allstate and National General brands and a 0.8% increase in policies in force. Allstate Brand average gross written premium per policy increased by 13.2% compared to the prior year quarter, driven by implemented rate increases throughout 2022 and an additional 9.5 points implemented through the first nine months of 2023, as well as inflation and insurance home replacement costs. The underlying combined ratio of 72.9 improved by 1.2 points compared to the prior year quarter, driven by higher earned premium, lower frequency, and a lower expense ratio, partially offset by higher severity. We remain confident in our ability to generate attractive risk-adjusted returns in the homeowners business. Slide 13 highlights progress on expanding customer access as part of transformative growth. We continue to enhance capabilities across distribution channels and are the only major carrier with competitive offerings in branded agency, independent agent, and direct distribution. The exclusive agent channel represents the majority of Allstate's U.S. personal lines premium at approximately $32 billion or roughly 22% market share in this channel. Our exclusive agents continue to be a strength, offering personalized local advice customers value in this $145 billion market. While exclusive agent auto new business decreased by 5% overall, applications per agency, excluding California, New York, and New Jersey, have increased by 13.4% so far this year. In addition, modifications to compensation have driven bundling at the point of sale to an all-time high of over 75%. Agent performance continues to improve as they adapt to new compensation programs. We also have great growth potential through independent agents. The acquisition of National General strategically positioned Allstate to grow in the independent agent channel. National General continues to profitably grow nonstandard auto while converting legacy Encompass and Allstate independent agent business onto their platform. Expanded nonstandard auto presence in 12 states represented 9% of National General's 12.9% increase in policies in force during 2023. As we leverage Allstate's expertise in standard auto and homeowners, this channel should represent another source of profitable growth. The direct channel had a significant decline in new business volume this year since this was the most effective place to reduce new business volume and was the most impacted by the reduction in advertising. We have improved our capabilities in this channel, so it will be another source of growth moving forward. And now, I'll hand it over to Jess to discuss the remainder of our results.

All right. Thank you, Mario. I'll start on Slide 14 to discuss investment results. We proactively repositioned our investment portfolio based on continuous monitoring of changes in the economic environment, current market conditions, and enterprise risk and return considerations. As shown in the chart on the left, net investment income totaled $689 million in the quarter, relatively flat to the third quarter of last year but with a higher contribution from the market-based portfolio. Market-based income of $567 million shown in blue was $165 million above the prior year quarter, reflecting repositioning of the fixed income portfolio into longer-duration bonds, a reduction of public equity holdings, and higher interest rates. The chart on the right shows changes we made to the duration of the bond portfolio in comparison to interest rates. In 2021, we began reducing duration to reflect the belief that interest rates would rise. This not only reduced some losses as rates increased but it provided flexibility to reposition as yields increased. Starting in the middle of last year, we began increasing duration as rates increased which has increased market-based income. On Slide 15, let's take a closer look at our performance-based portfolio which offers diversification and enhances longer-term returns. The portfolio is anchored in private equity and real estate and is diversified across infrastructure, energy, agriculture, and timber investments. We hold more than 400 names, including funds with multiple underlying positions across diversified vintage years. These investments are focused on long-term value creation, and we expect quarter-to-quarter income volatility as seen in the bars on the chart to the left, where quarterly returns have ranged from a negative 2.3% to positive 8.6% over the last 5 years. The benefit from accepting this volatility is shown on the right with 3- and 5-year annualized returns of 19% and 12%. The private equity portion of the portfolio has outperformed public equity benchmarks over 3, 5, and 10 years. Slide 16 covers the results of our Protection Services businesses. Revenues in these businesses increased by 8.9% to $697 million in the third quarter compared to the prior year quarter. Increase is mainly driven by growth in Allstate Protection Plans which increased by 19.2% compared to the prior year quarter, reflecting expanded products and international growth. In the table on the right, you will see that adjusted net income of $27 million in the third quarter decreased by $8 million compared to the prior year quarter, primarily due to the higher appliance and furniture claims severity and a higher mix of lower-margin business as we invest in growth at Allstate Protection Plans. These were partially offset by improved margins at Allstate Roadside and lower expenses at Allstate Identity Protection. Shifting to Slide 17. Our Health and Benefits business also had good results. Both revenues and income increased significantly with the National General acquisition in 2021 as we added scale and capabilities. For the third quarter of 2023, revenues of $587 million increased by $17 million compared to the prior year quarter driven by an increase in premiums, contract charges, and other revenue in group health which was partially offset by a reduction in individual health and employer voluntary benefits. Adjusted net income of $69 million in the third quarter of 2023 increased by $6 million compared to the prior year quarter primarily due to increases in group and individual health revenue and lower operating expenses. Now let's move to Slide 18 and discuss Allstate's approach to capital management to clarify how this differs from traditional methods used to evaluate capital such as the ratio of premiums to statutory surplus. On the left-hand of the slide, we summarized three discrete components we evaluate to establish target capital which is the basis of our capital management framework. Base capital at the bottom is the capital required to meet ongoing operating requirements. Stress Capital is an additional layer of capital needed to cover tail events for the occurrence of multiple negative impacts, such as lower auto profitability and high catastrophe losses. The contingent reserve is for extremely low frequency and high severity events, a severe breakdown in diversification benefits and also 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. This is more sophisticated and comprehensive than the ratio of premiums to surplus to determine the right amount of capital. For example, when calculating the premium to surplus ratio for the Allstate Insurance Company, the premiums for many of our subsidiary companies are included but over $1.6 billion of statutory capital is not included in the denominator. This framework also better assesses the use of catastrophe reinsurance, particularly for large tail events than a simple ratio. Our sophisticated model and proactive actions provide flexibility to manage capital to maximize shareholder value creation. To close, let's turn to Slide 19 and recap all state strategic priorities. We continue making progress on our plan to return auto insurance profitability to targeted levels. We will pursue the divestiture of our Health and Benefits business, we're continuing to advance on our transformative growth initiatives. Proactive investment management has increased income. Allstate Protection Plans is expanding and these strategic priorities support value creation for Allstate shareholders. With that context, let's open the line to your questions.

Our first question comes from Gregory Peters from Raymond James.

I guess for the first question 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 two separate models. And as you roll out the model, I'm curious about how it's accounting for the nuances of different customers. And I'm thinking about the needs of preferred customers versus standard versus nonstandard?

Greg, that's a great question. First, transformative growth focuses on increasing market share in personal profit liability, which involves several key elements. Central to this is providing low-cost insurance while also enhancing customer value and ensuring accessibility for customers in various ways. We’ve demonstrated that our initial assumptions have proven effective. We're aware that lowering prices increases conversion rates, and we've confirmed that making our services available through multiple channels—such as exclusive agents, independent agents, and direct sales—also works effectively. We can enhance customer value, as indicated on the slide; while I didn’t go into detail, our new sales process is very streamlined. It quickly presents offers tailored to individual needs without requiring customers to choose their deductibles or answer numerous questions. The renters insurance process is quick, taking less than a minute, and we're successfully simplifying how customers can access additional protection. Furthermore, we are enhancing connectivity, as seen on the right side of the slide. Our app has been updated to allow customers more straightforward access to their bills or ID cards, which is beneficial but not particularly compelling. We are broadening its functionality; for instance, it will help users save money on purchasing gas, directly tied to our services. We are adding several new features, like our telematics experience with crash detection through Arty, which is an excellent product. We are continuing to invest in these developments. While we aim to reduce our overall expenses, we are not scaling back on technology investments. We've confirmed that we can develop the technology showcased. It's already operational and in circulation, and we are confident it can be scaled effectively. You can expect us to keep looking for ways to cut costs while we pursue these initiatives, but we’re not currently burdened by excessive expenses. Regarding our customer segments, we aim to reach as many customers as possible with a wide range of offerings. We want to accommodate those who prefer working with an agent while ensuring our pricing aligns with customer expectations—whether they're choosing an exclusive or independent agent. For those who prefer to buy directly from us, whether by phone or online, we strive to make the process simple and efficient, which we believe sets us apart in the market.

That makes sense. For my follow-up, I want to focus on the pricing slides, specifically Slides 9 and 10. Could you provide an update on the problematic states? In Slide 9, you mentioned that 41% of your auto business is running above 100. Looking ahead to 2024, how do you expect this chart to change?

Which chart are you referring to, Greg?

I'm not able to determine what you mean.

Certainly, it all depends on the situation. Mario can provide additional insights as well. What happens in California, New York, and New Jersey will play a significant role. It's important to note that we will not continue to incur losses in the millions in these three states. Mario has mentioned that we've made the choice to reduce our size by limiting our growth, and we have implemented that. The next step involves not being able to serve the customers we want to serve due to financial constraints, which is costing us significantly. Mario, would you like to add something? We've been aware of these issues for some time; this isn't a new realization for us.

Just to give you a little additional color across the three 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 three significant 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 or low teens across our opening closed books middle of the year. We just filed for another 18.3% in New York auto. 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 fourth quarter. And if we can’t, then we believe the right thing to do for the customers in the other 47 states as well as for 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.

And our next question comes from Alex Scott from Goldman Sachs.

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

Marley, this is Mario. I will address your question. I want to start by revisiting the various elements of our auto profit improvement plan, which includes increasing rates, cutting costs, limiting new business in states where we aren't meeting our profitability targets, and enhancing operational processes and claims. The increase in in-person inspections you mentioned is part of our strategy to improve operational processes. We believe that conducting more physical inspections and maintaining oversight of both in-network and out-of-network shops, as well as the property side, will help us identify opportunities to pay what's necessary while avoiding payments for pre-existing damage or determining if cars can be repaired instead of replaced in total loss situations. We believe that increasing in-person physical inspections, while also continuing to utilize quick photo claim technologies, is essential for effectively managing loss costs going forward, and we plan to ensure operational excellence in claims by paying our dues while minimizing any inefficiencies. We are prepared to invest in the claims organization to achieve this. Regarding the expense ratio, we remain committed to reaching 23% by the end of next year, and the investments we make in claims will be part of that objective. We believe we can achieve both goals.

Got it. 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?

Sure. We’ll begin with medical inflation. Currently, our severity expectations in auto are about 9%, which is an improvement from the 11% we reported last quarter. This improvement is primarily due to enhancements in physical damage coverages. Our outlook on casualty and injury severity remains the same; it hasn't worsened but is consistent with last quarter. The factors driving this include medical inflation, increased attorney representation, and higher levels of treatment sought, all contributing to economic and social inflation that boosts injury severities. Over time, these will continue to be challenges for us. However, as I mentioned regarding physical damage, we've adapted our claims processes to address these inflationary trends and have seen good progress. We are working to settle claims earlier in the process, which has led to a noticeable reduction in pending injury claims and quicker settlement times. We're utilizing analytics and AI models to identify accidents likely to result in injuries and those with a higher chance of legal representation, enabling us to accelerate claimant contact and manage the claims process effectively. We are taking proactive measures to mitigate some of these inflationary effects, and we will persist in doing so. We did observe some stability in injury severity trends during the quarter.

And our next question comes from Elyse Greenspan from Wells Fargo.

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?

Yes, Elyse. Thanks. This is Jess. We have talked a lot about our reinsurance program in general. As you know, we have 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 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 reduce overall risk and target capital. And to the extent we find a structure where we can get that done, we'll do it. And to the extent we can't get it done 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 interested in 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.

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?

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

And our next question comes from the line of Michael Zaremski from BMO.

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 has driven greater bundling rates. I'm just wondering does also expect this change to impact overall organic growth levels? And do you expect a meaningful benefit to the company's expense ratio?

Well, 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 are various pieces on Mario, do you want to talk specifically about the account changes?

Yes. I would describe the recent changes as a continuation of our efforts from several years ago aimed at increasing productivity within our exclusive agent distribution system while also reducing distribution costs over time. If we exclude the effects of the three large states where we are intentionally reducing volume, we are seeing the results we expected. This quarter, we achieved a benefit of 2 to 3 from a distribution cost perspective. We continue to experience the positive impacts of lower distribution costs, and more importantly, the productivity of the exclusive agency system is improving. When we exclude those three states, overall production increased by 7.6%, and average productivity rose by over 13%. Among our top tier of agents, categorized as emerging, pro, and elite, the elite group saw a 15% rise in production. This indicates that our agents are investing in their businesses and responding to increased shopping levels in the market, focusing on growth that will become an asset as we target specific profitability levels in different states. We are encouraged by the performance of our agency channel, how they have adapted, and our ability to reduce costs in the distribution system concurrently.

And our next question comes from the line of Joshua Shanker from Bank of America.

I have a model that extends quite far back. Historically, when you look at reserves and try to analyze that, it can be challenging in short-tail lines. Over the years, Allstate has maintained a paid to incurred loss ratio of about 95%. This means that for every dollar of loss, we set aside 5 dollars in reserves for future losses, and that holds true for the third quarter of 2023. However, for the last five quarters, this ratio has been significantly low at 83%. While I understand the effort to accurately assess reserves, it seems that during this period of elevated loss ratios, the company allocated more reserves for losses than at any other time in my model. Is there any reason why there has been a change over the last five quarters as we return to a more normal trend, or was it simply an unusual period that required more reserve allocation?

I can start and then Jess can elaborate. First, Josh, we believe the reserves are appropriate, and we allocated what we thought was necessary at the right times, even though it was difficult last year. When reviewing the situation, I don't have specific numbers in front of me, but I have enough experience with reserves to know they can fluctuate significantly. The pandemic influenced many factors, and we accounted for everything. Jess might have additional insights, and I think Jess and Brent can help you analyze your model. However, we are confident that the reserves are adequate and were established based on our assessments. Jess, do you have anything to add?

No, I 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 and 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.

And if you'll indulge me in 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 is 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 coast?

Let me start and then Mario can jump in. First, I want to emphasize that we’ve developed an excellent business model in homeowners insurance, and we perform better than the industry does in auto insurance; we excel even more in homeowners. You can observe our results over the past decade. This year, however, we've experienced many catastrophes which result in an underwriting loss, something we'd rather avoid. Nonetheless, catastrophes do occur, and that’s the reason people buy insurance. We're confident that we can manage it. Regarding the reasons for these catastrophic losses, storms have become more severe now. A more intense storm, whether it’s hail, a tornado, or a hurricane, will lead to greater damage. Additionally, underlying both catastrophic and traditional losses are the regular inflationary pressures. The cost of materials, like lumber, increases whether your house is destroyed by fire or damaged by a hurricane. This creates a compounding effect on catastrophic losses. We are adept at managing these risks by state. For instance, Illinois experiences less pressure because it faces fewer catastrophic losses compared to states along the East Coast or in the Southwest. We’ve taken all of this into account, and we acknowledge that both factors have contributed to the rise in prices. The significant increase in homeowners insurance rates has been influenced by these elements. Mario, do you have anything to add?

Yes. 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 its 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.

And our next question comes from Tracy Benguigui from Barclays.

Is the impetus for 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?

Neither of those. It wasn't related to any shareholder urging us to pursue a sale. Some of you have speculated about this. Let me clarify. We're selling the businesses because it's the best way to realize their value. They are excellent businesses that generate nearly $0.25 billion annually and have low capital requirements. We appreciate these businesses. However, looking ahead, we believe we can achieve greater growth if we had more complementary distribution and a wider array of products and capabilities, such as network management in a health network, which we currently lack. We could build those capabilities, but it would require time and investment. Alternatively, we could tap into existing resources, but that meant letting go of the success we’ve built. Therefore, we opted for the latter route. This decision was not influenced by any shareholder suggesting a sale; it was not motivated by a need for funds; rather, it was about effectively managing our company to maximize shareholder value, which sometimes involves relinquishing what we have already achieved.

Okay. But as a potential outcome, if you were to achieve your valuation target, would there be any implied capital relief from your internal model as a result of the sale?

These are low capital businesses. So this First, I would say, the high price 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, will generate additional capital. And then we’ll decide what we want to do when we get there. We’ve got plenty of other growth opportunities. We’re doing a lot with to grow market share and profit liability. We don’t need to make that decision right now, so we’re not going to.

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

We have various options for using capital, including organic growth and share buybacks, and all of those options are available to us. Currently, we do not have specific plans for the capital. Our focus is on enhancing this great business further. Therefore, we intend to proceed with that approach.

And I would add, Tracy, our capitalization philosophy is to keep the capital at the holding company as much as possible. Therefore, I don't believe we have a capital need at AIC that would necessitate a change in this approach. We intend to maintain our philosophy of holding capital at the company level, and as Tom mentioned, we will make capital management decisions as necessary when the time is right. However, I don't see a need for capital in AIC, so I don't understand why we would deviate from our strategy of keeping it at the holding company.

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 the Health and Benefits business. How do you think about the optimal asset duration relative to your pro forma duration of your remaining liabilities?

Well, we look at it from an enterprise risk and return standpoint. So the first thing we do is say, how much capital do 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 at today. I would point out that if you look at Slide 14, we made the right calls at the right time.

Yes. I would like to add that when extending duration, it's important to maintain sufficient liquidity and flexibility in the portfolio. I can assure you that we are achieving this through the cash we hold, short-term positions, and other assets that can quickly be converted into cash. By year-end, we expect to have close to $10 billion in maturities. This approach allows us to capture the additional income available in the market while extending the duration to secure that income over a longer period. It also enhances the portfolio's resilience in case of economic shifts, all while ensuring we have enough liquidity.

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

Well, the Property-Liability business is a little different than the life business in terms of matching to liabilities. In the life business, of course, we have a set maturity date, and you can factor in 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? And so if you match it to that, you’d be having here for 90 days for a physical damage claims. So it’s really more about liquidity and overall risk management. And I would also point out a large part of our set capital is there in case we mess up on underwriting income. And so that has a really long duration on it.

Yes. Tracy, 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 what has been a longer run central tendency for us.

Our next question comes from the line of David Motemaden from Evercore ISI.

I just had a question on the frequency trends that you guys saw in the third quarter. 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 you're 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.

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 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. 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 nonpeak 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.

Got it. And you’re saying it’s a little bit more stable now, so maybe flattens out there at those levels?

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

I appreciate the information on the distribution channels presented on Slide 13. It seems you closely monitor the total addressable market by channel. Can you provide insights on how the total addressable market has been growing within the exclusive agent channel? I have the impression that it has been declining, particularly due to growth in the direct and independent agent channels. Given this context, do you see any signs that your exclusive agency channel might start to reverse that trend and grow?

Let me, David, maybe a couple of thoughts. First, there's a lot of analysis on 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 share away from some of the other two. The independent agents also are a good place where people want to come where they don’t want to just buy from an insurance company. 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, the direct channel has certainly grown. But it’s also growing a lot because billions of dollars of advertising going to 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. People want to have buy from a company like Allstate. Allstate brand name wants 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 for them; they don’t want to do the work. We want to be in that independent agent channel. And then in a direct channel, if they want to buy directly then. And 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 three offers in it. Imagine an agent now being able to not have to ask you a whole bunch of stuff; what's your deductible, what kind of stuff. But we pre-populate it with, here's what we think David's deductible should be, offering David this package 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. Jonathan, we’ll take one more question.

And our final question for today comes from Meyer Shields from KBW.

It's Jen asking about the growth expected in 2024. What are your plans for next year? Is nonstandard auto still the main driver of growth? Any insights on that would be appreciated.

Mario will provide some details. I would say that the most significant impact is that we are beginning to grow in the Allstate brand. Mario has several states where he is rolling out aggressive transformative growth to capture market share. We feel positive about that. We believe that the independent Asian business will grow through continued expansion of the nonstandard and the Custom 360, which Mario mentioned; I would say that will be the main driver. The main uncertainty we have right now is how things will play out in New York, New Jersey, and California. That will significantly influence the policies in force. This may differ from the growth metric you’re asking about, but we definitely need to ensure proper pricing in those states. Otherwise, we’ll experience a decline there. Since they represent a large portion of our business, it will affect our overall policy. Mario, do you have anything to add?

Yes. As we look ahead, it's important to recognize that we manage our business locally, focusing on each state, market, and risk segment. This approach has helped us improve profitability, and we will continue to use it as we pursue growth. Currently, we see two groups of states emerging. We need to focus on California, New York, and New Jersey, where we must increase rates to enhance profitability before considering growth investments, as it's not economically feasible at this time. Other states are showing better profitability, allowing us to make local marketing investments and utilize our capabilities, including transformative growth and momentum in the exclusive agent channel, as well as improvements in direct and independent agent channels with initiatives like Custom 360 and nonstandard auto. We believe we are well-positioned to grow when the right time comes, and we anticipate that more states will reach target profitability levels by 2024. We look forward to investing in growth in those states and leveraging our transformative growth capabilities.

So let me close with four points which summarize kind of the conversation we had. What’s going to drive shareholder back profitability increases, strategic capital allocation, great investment returns, and then transformative growth long-term sustainable growth. We think those four things combined make this a great opportunity. Thank you very much. We'll see you next quarter.

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