Earnings Call Transcript - ALL Q3 2022

Operator, Operator

Good day and thank you for standing by. Welcome to Allstate's Third Quarter Investor Call. At this time, all participants are in a listen-only mode. After prepared remarks, there will be a question-and-answer session. As a reminder, please be aware that this call is being recorded. And now I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Mark Nogal, Head of Investor Relations

Thank you, Jonathan. Good morning and welcome to Allstate's third quarter 2022 earnings conference call. After prepared remarks, we'll have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement filed our 10-Q and posted today's presentation on 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 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 2021 and other public documents for information on potential risks. Additionally, we will be hosting our next special topic investor call on December 2, focusing on Allstate's auto and home insurance claims practices and reserving process. And now I'll turn it over to Tom.

Thomas Wilson, CEO

Well, good morning. Thank you for investing your time with Allstate today. As you know, we pre-released earnings several weeks ago and reported a net loss for the quarter. That reflected a small underlying underwriting margin that was offset by increases in reserves for prior years and a mark-to-market loss on public equity securities. Mario and Jeff will go through the details of the quarter and the reserve changes after I set some context. So let's start on Slide 2. Allstate's strategy to increase shareholder value has two components: increase personal profit liability market share and expand protection services, which are shown in the two ovals on the left. We're building a low-cost digital insurer with broad distribution through transfer onto growth to increase market share. We're also broadening protection offerings and leveraging the Allstate brand, customer base and capabilities with expanded distribution. In the third quarter, we made progress executing this strategy, while we continue to implement a comprehensive approach to improve auto profitability, which is shown in the right-hand panel, that includes broadly raising auto insurance rates, which you've seen in our disclosures. Operating expenses were lowered, including advertising and more permanent reductions in the operating cost structure. Underwriting guidelines have been adjusted to reduce new business volume where we're not earning adequate returns. Our claims operating processes are being modified to manage loss cost in a high inflation environment. And we believe this plan will return auto insurance profitability to historical levels. While the current environment requires focus on improving margins, we continue to advance and transform our growth strategy to gain market share when profitability improves. In addition, the protection services business is generating profitable growth. Investment returns were negative for the quarter and year-to-date, but better than the overall declines in the bond and equity markets. This reflects risk reductions implemented late last year. Our capital position is strong, and as a result, we were able to deliver attractive returns to shareholders. And Jess is going to discuss capital in his section, but let me provide a few summary points since this was covered in some of the reports issued last night. First, we have plenty of capital, and there's $4.5 billion of deployable capital at the holding. Secondly, the significant reduction in risk with the sale of the life and annuity operations occurred last October and that needs to be considered. This divestiture reduced assets by $34 billion and freed up capital. Thirdly, we use a really sophisticated approach to determining our capital that goes far beyond statutory capital and premium to surplus ratios. For example, if you just use statutory capital measure, the life company equity would be included in capital historically, which we did not believe was appropriate, so we never included it. Our methodology has led to strong results. We did decide to complete the remaining $1.4 billion stock repurchase over more than the next six months, which was our prior target we had disclosed to, but we still expect to complete it in the second or third quarter of next year. So in summary, we're really well capitalized, and this year's results have not changed our strategy or earnings power. Now let's move to Slide 3 to go through the third quarter performance in detail.

Mario Rizzo, CFO

Thanks, Tom. Let's start by reviewing underwriting profitability for the Property Liability business in total on Slide 5. Our underwriting results reflect the high level of inflation and the impact of reserve strengthening in the quarter with a third quarter recorded combined ratio of 117.4% for auto, 91.2% for homeowners, 126.6% for all other lines and 111.6% for total property liability, which is shown on the left chart. Remember, our goal is to run the auto business with a combined ratio in the mid-90s and homeowners at around 90, while homeowners was close to our target in the quarter, we continue to focus on improving auto margins through a comprehensive plan that is being implemented to get us back to our mid-90s objective. The third quarter underlying combined ratio for auto insurance was 104, as you can see on the right. We're raising auto insurance prices, reducing growth investments, lowering operating expenses, and adapting claims practices to a high inflationary environment. While the homeowners business generated $245 million of underwriting profit, higher severity resulted in an underlying combined ratio of 74.6%, which is above where we manage it to, and we are increasing prices through both rates and the inflationary adjustment factor embedded in our homeowners product to improve underlying margins going forward. One of the reasons that we have an industry-leading homeowners business is that we proactively manage the risk and return profile of each market that we operate in. Based on this approach, we have decided to stop writing new homeowners and condo insurance in California at this time, given our inability to fully reflect the cost of providing these products in the state, including both loss and reinsurance costs. We intend to continue protecting our existing California property customers by offering ongoing coverage to them. Other lines are mainly traditional small commercial auto and shared economy insurance, both of which have recorded an underlying combined ratio above target levels. As a result, we made the decision to exit five states in the traditional small commercial business and no longer provide insurance to transportation network companies unless pricing begins to utilize a telematics-based framework for pricing. These actions are expected to reduce commercial business premiums by over 50% next year.

Jess Merten, CFO

Thank you, Mario, and good morning, everyone. On Slide 11, let's begin with our prior year reserve development. Property liability prior year reserve strengthening, excluding catastrophes totaled $875 million in the third quarter. The pie chart on the left breaks down the impact by line with $643 million driven by personal auto, $120 million one-off property liability from our annual reserve review related to environmental and asbestos exposures, $63 million in commercial, largely related to auto bodily injury, and $51 million in homeowners. The chart on the right breaks down Allstate Protection auto prior year reserve strengthening of $643 million in the third quarter, which was primarily driven by noncustomer claim and bodily injury claims. The total cost to settle these claims continues to be impacted by more severe accidents and higher medical and litigation costs. Increases to commercial and homeowners insurance can also be attributed to these factors.

Charles Peters, Analyst

I'm going to focus the first question on reserves. And I was looking at the information you provided on Slide 12 and some of the earlier slides. And I guess what we're trying to do is reconcile the charge that you took in the third quarter with the information we're getting from some of your peers? And then additionally, trying to understand why the data that you're showing now here for the third quarter results, so you can start to see it in the second quarter and make adjustments then. And I mean it's a long-winded question, but ultimately, we're trying to get at is there a risk of additional reserve charges going forward?

Thomas Wilson, CEO

Greg, thank you for your question. Let me provide just a quick overview, and then Jesse can give you some more specifics. First, of course, obviously, we estimate the what's going to happen that depends on trends for the numbers. And we can't make a comment as to what other people's numbers look. People do reserving all sorts of different ways. And we believe ours is highly precise, specific, and we have external people look at it, and we put up the numbers when we think we need to put them up. And of course, this quarter, we did increase it for prior years and that's largely due to the injury trends that just saw, which have really been unfolding over the last couple of years.

Jess Merten, CFO

Yes. Thanks, Tom. Greg, what I would start with is, I think it's important to be clear on one thing. At the end of every quarter, we record reserves at an appropriate level based on all the information that we have in front of us. We did that at the end of Q3 and every quarter leading up to Q3. We followed the same process that we have in the past. It's a rigorous process. It leverages internal actuarial expertise, close collaboration with our claims team and third-party reviews to analyze the most current data and assess the impact of that data on our reserves. As I look at the quarter, the variability that we've seen continue to come through in the data that we reviewed as part of our actual process. So Q3 data supported more recent trends and continued variability in reserve development. And while these trends weren't new, an additional quarter of data did provide new insights into the persistent nature of the trends that have been emerging.

Elyse Greenspan, Analyst

My first question is on the capital side of things. So as you guys came to the decision, I guess, to more moderate your buyback, are you assuming that there's any dividends that you're going to take out of Allstate Insurance company over the next year? And then within that question, I guess, did you guys think about pausing the buyback program completely just to have more capital flexibility within that subsidiary?

Thomas Wilson, CEO

Elyse, let me address that and Jesse can add in. Regarding dividends, we ensure that the larger insurance subsidiaries are sufficiently capitalized according to our assessments of economic capital, what the rating agencies and investors expect, and the regulators' requirements. We are indeed well capitalized in those areas. Any excess capital in the insurance companies is then transferred to the holding company, which provides us with greater flexibility. Looking ahead to next year, our decisions will depend on our earnings. As mentioned in some announcements, we have strong earnings potential, and when we analyze our auto insurance profitability, we believe it is on an upward trajectory.

Brian Meredith, Analyst

The decline in the Allstate brand's PIF was anticipated, especially since we saw an increase in the independent agent channel. It's important to note that while we expected a larger drop, the actual decline was less severe. Historical data on customer retention indicates that our retention has performed better than expected based on past trends. Although pinpointing specific causes is challenging, our competitive position plays a role. Our competitors are also increasing their rates, and we initially thought this would lead to greater customer loss, but the actual impact was less than anticipated. This could be due in part to our competitors also raising their rates. Additionally, consumers still have a considerable amount of cash available, which contributes positively.

Yaron Kinar, Analyst

On capital, do you expect to deploy some of the hold liquidity into AIC over the coming year?

Thomas Wilson, CEO

No.

Operator, Operator

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