The Allstate Corporation (NYSE:ALL) Q4 2023 Earnings Call Transcript

The Allstate Corporation (NYSE:ALL) Q4 2023 Earnings Call Transcript February 8, 2024

The Allstate Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Allstate’s Fourth Quarter Earnings Conference Call. Currently, all participants are in a listen-only mode. After prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, please be aware this call 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.

Brent Vandermause: Thank you, Jonathan. Good morning. And welcome to Allstate’s fourth 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 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 will turn it over to Tom.

Tom Wilson: Good morning. And we appreciate you taking the time and spending your efforts to explore why Allstate is an attractive investment. So I will begin with an overview of our strategy and results, and Mario and Jess, can go through the operating performance. Then we will have time for your questions at the end. Let’s begin on slide two, which depicts Allstate’s strategy to increase shareholder value. So we have two components to this strategy, increase personal Property-Liability market share and expand protection provided to customers, which are shown in the two ovals on the left. On the right-hand side, you can see the highlights for the fourth quarter. We generated net income of $1.5 billion. The strong results reflect our actions to improve auto insurance profitability and mild weather conditions, which was a welcome reprieve from the elevated level of weather related losses in the first three quarters of the year.

The proactive approach to increasing bond duration also contributed to strong results with higher income from the market based portfolio. To further increase shareholder value this year, we remain focused on improving auto insurance profitability. There is more work to be done, but we are well on our way. Additional shareholder value will then be increased by increasing policies in-force across all of our businesses. The transformative growth initiatives to drive Property-Liability market share growth can be implemented in more states this year now as auto margins have been improved. We are also focusing on expanding protection offerings to Protection Services businesses, which is shown in the lower oval as Protection Plans, Identity Protection, Roadside and Arity, all have good growth prospects.

As you know, we started the process to sell the Health and Benefits business and that process is proceeding on schedule. Let’s review the financial results on slide three. Revenues of $14.8 billion in the fourth quarter increased by 8.7%. That reflects a 10.7% increase in Property-Liability earned premium and that was due to rate increases in 2022 and — mostly in 2022, and in 2023 in both the auto and homeowners’ insurances. Net investment income in the quarter was $604 million, an 8.4% increase, reflecting higher fixed-income yields and duration extension, which is partially offset by lower performance based income. The strong profitability in the quarter generated adjusted net income of $1.5 billion or $5.82 per diluted share. Annual revenues of $57 billion were up $5.7 billion or 11.1% over the prior year.

Strong fourth quarter earnings resulted in positive adjusted net income for the year. Slide four summarizes the status of the four-part auto insurance profit improvement plan. Strong execution resulted in 6.7% point improvement in the combined ratio in 2023. Starting with rates. Since 2022, the Allstate brand implemented rate increases 33.3%, which included 16.4% in 2023 and 6.9% in the fourth quarter, driven by the recent approvals in California, New York and New Jersey. National General implemented rate increases of 10% in 2022 and an additional 12.8% in 2023. Looking forward, we will pursue rate increases in 10 states to improve margins and in other states to keep pace with increases in loss costs. Expense reductions were initiated in 2019 as part of the transformative growth plan to become a low cost provider of protections, being early in this effort helped offset the rapid inflation in loss costs.

The underwriting expense ratio decreased 1.1 points in 2023 compared to the prior year when you exclude the large decline in advertising that was directly linked to lower profitability. Looking forward, further cost reductions will improve efficiencies and our competitive price position. Given the significant improvement in perspective, auto margins will increase advertising investment this year. In addition, we implemented underwriting actions to restrict new business, where we were not achieving target returns. We are moving some underwriting restrictions as rate adequacy is achieved. Finally, enhancing claim practices in a high inflation and increasingly litigious environment are required to deliver good customer value. This includes accelerating the settlement of injury claims and increasing in-person inspections.

This program has positioned us to increase new business levels and begin to grow policies in-force in sales where acceptable margins have been restored. Now I will turn it over to Mario to discuss Property-Liability.

Mario Rizzo: Thanks, Tom. Let’s start on slide five. Property-Liability earned premium increased 10.7% in the fourth quarter, primarily driven by, excuse me, higher average premiums from rate increases, partially offset by a 2% decline in policies in-force. Underwriting income of $1.3 billion in the quarter improved $2.4 billion compared to the prior year quarter due to increased premiums earned, improved underlying loss experience, lower catastrophe losses and operating efficiencies. The chart on the right highlights the components of the 89.5 combined ratio in the quarter, which improved 19.6 points from the prior year quarter. The impact of catastrophe losses and prior year reserve re-estimates on the combined ratio as shown in light blue and gray materially improved compared to the prior year.

Catastrophe losses of $68 million were $711 million or 6.3 points lower than prior year due to the mild weather conditions experienced in the quarter and favorable loss development from prior period events. Prior year reserve re-estimates, excluding catastrophes, were unfavorable and totaled $199 million, representing a 1.6-point adverse combined ratio impact in the quarter and a 0.9-point favorable impact compared to the prior year quarter. Approximately $148 million related to personal auto driven in part by costs related to claims in litigation and adverse development in National General. The underlying combined ratio of 86.9, improved by 12.3 points compared to the prior year quarter, due to higher average premium and the favorable influence of milder weather conditions on accident frequency.

Despite the favorable results in the quarter, the full year combined ratio of 104.5 was significantly impacted by elevated catastrophe losses primarily from events in the first three quarters, resulting in a catastrophe loss ratio that was 4 points above the 10-year average from 2013 to 2022. Now let’s move to slide six to review Allstate’s auto insurance profit trends. The fourth quarter recorded auto insurance combined ratio of 98.9 improved by 13.7 points compared to the prior year quarter, reflecting higher earned premium, lower underlying losses, lower adverse prior year reserve re-estimates and expense efficiencies. The chart shows the underlying combined ratios from 2022 and 2023 with quarterly reported figures adjusted to reflect the estimated average severity level as of year-end for each year.

As you can see, the underlying combined ratio decreased each quarter in 2023, reflecting the benefits of the profit improvement plan, Tom discussed earlier. As a reminder, we continually reassess claim severity expectations as the year progresses. If the current year expected severity increases or decreases, the year-to-date impact of that change is recorded in the current quarter, despite a portion of that impact being driven by reassessment of the prior quarters. In 2023, the full year estimate of claim severity decreased in the fourth quarter. So there was a benefit from prior quarters included in reported results in the fourth quarter. When you adjust for this, the reported underlying combined ratio of 96.4, as shown in the table would be 98.2 as shown in the bar on the graph.

The three preceding quarters all benefit from the adjustments, including Q3, which improved from 100.5 in the presentation shown last quarter to 99.9, reflecting the latest severity estimates. While loss cost trends remain historically elevated, the rate of increase moderated in the second half of the year, mainly in physical damage coverages. Allstate brand weighted-average major coverage severity expectations improved from 11% as of the end of the second quarter to 9% in the third quarter and now that 8% to 9% at the end of the year. As a reminder, this trend reflects our current best estimate for the year-over-year increase in average severity. Slide seven shows the impact of our profit improvement actions across the country. As shown on the left, Allstate’s brand rate increases have exceeded 33% over the last eight quarters, including larger increases in California, New York, New Jersey and Texas, reflective of the elevated loss trends in these states.

These four states comprised 36% of Allstate brand auto total written premiums in the U.S. during 2023. As you know, increases were approved in California, New York and New Jersey in December. So we have yet to see this in earned premiums. The chart on the right shows states with an underlying combined ratio below 100, shown in the light and dark blue bars were 65% of the total in 2023, more than doubling from the percentage at year-end 2022. Excluding California, New York, and New Jersey, the Allstate brand auto insurance underlying combined ratio was 95.9 in 2023. Slide eight shows improving profitability had a negative impact on policies in-force during 2023. On the left, you can see that total Protection Auto policies in-force, decreased by 2.9% compared to prior year, as the Allstate brand decline of 6.2% more than offset a 13.3% increase at National General.

Allstate brand auto policies in-force decreased due to reduced new business volumes and lower retention. National General growth of 581,000 policies in-force was mostly driven by non-standard auto insurance and to a lesser extent, the rollout of new middle-market standard and preferred auto insurance product launches for the Custom 360 products. The chart on the right shows total personal auto new issued applications for 2023 decreased 6% compared to the prior year and the accompanying drivers. Targeted profitability actions within the Allstate brand resulted in a decline in new auto issued applications of 20% compared to the prior year. The first two red bars reflect the impact of lower new business volume in California, New York and New Jersey, as well as the direct channel decline in the remainder of the country, which was most directly impacted by the reduction in marketing investment last year.

Outside of the three states where profit actions significantly reduced new business, Allstate exclusive agents increased production by 6%, driven by higher productivity, showing the response of Allstate agents to the changes we have made to incent growth and the opportunity to continue to grow with our agency owners as part of transformative growth. The acquisition of National General strategically positioned Allstate to grow in the independent agent channel with new business applications, increasing 12% in 2023. National General continues to grow non-standard auto and generate higher volume from the Custom 360 product launches. Slide nine covers homeowners’ insurance results, which generated significant profits for the quarter, while full year results were impacted by elevated catastrophe losses in the first three quarters of the year.

On the left you can see net written premium increased 13.3% from the prior year quarter, primarily driven by higher average gross written premium per policy in both the National General and Allstate Brands, and a 1.1% increase in policies in-force. National General net written premium grew 19.6% compared to the prior year quarter, primarily due to policy in-force growth, driven by the Custom 360 offering and higher average premiums from implemented rate increases. Allstate brand net written premiums increased 12.5%, driven by average gross written premium per policy increases of 12.2% compared to the prior year quarter and a small increase in policies in-force. Allstate agents continue to bundle auto and homeowners’ insurance at historically high levels.

Catastrophe losses of $21 million in the fourth quarter were low by historical standards, reflecting milder weather conditions and favorable development from prior events contributing to a 62 combined ratio and $1.2 billion of underwriting income for the quarter. Milder weather in the fourth quarter also favorably influenced the underlying combined ratio due to lower non-catastrophe claim frequency. For the full year, higher catastrophe losses drove the combined ratio increase in 2023 compared to 2022. Full year catastrophe losses of $4.5 billion were higher than our historical experience and translated to a catastrophe loss ratio that was 17 points higher than prior year and roughly 14 points above the 10-year average from 2013 to 2022. As you can see from the chart on the right, the full year underlying combined ratio declined from 70.3 in 2022 to 67.3 in 2023, reflecting higher average premiums from rate increases, partially offset by higher claims severity due to materials and labor costs.

With an industry-leading product, advanced pricing, underwriting and analytics, broad distribution capabilities and a comprehensive reinsurance program, we will continue to leverage homeowners as a growth opportunity and remain confident in our ability to generate attractive risk-adjusted returns in this line. Moving to slide 10, let’s discuss how we are advancing transformative growth to provide customers low-cost protection through broad distribution. We remain focused on four key elements of this multiyear initiative, as you can see on this slide. We have improved our cost structure to enhance our competitive price position. In the current environment with most competitors taking large rate increases, it’s difficult to pinpoint competitive position.

That said, our relative competitive position likely deteriorated in 2023. But as many of our competitors continue to implement rate increases and our expenses decline, we believe our competitive position will improve enhancing growth opportunities as part of transformative growth. Redesigned, affordable, simple and connected products currently available for auto insurance in seven states with plans for further expansion this year, both improve customer value and deliver a differentiated customer experience. National General independent agent growth prospects will be further enhanced by expanding Custom 360 products, which were live in 16 states as of year-end 2023 and expect to be in nearly every state by the end of 2024. Expanding customer access will also support market share growth and we have made good progress in all three channels.

Increasing sophistication and customer acquisition continues to advance and will improve the effectiveness of increased advertising spend in 2024, as we look to grow in more states. A new technology ecosystem is also being deployed to improve the customer experience, speed-to-market and reduce costs for legacy technology platforms. Let me turn it over to Jess now to talk about expense reductions and other operating results.

Jesse Merten: All right. Thank you, Mario. On slide 11 we delve deeper into how we are improving customer value through expense reductions. As shown in the chart on the left, the Property-Liability underwriting expense ratio decreased two points from 2022 to 2023 as we continue to focus on lowering costs to provide more value to customers and some of the benefits of higher earned premium growth relative to fixed costs. The right half of the chart provides additional context on the drivers of the 1.3-point improvement in the fourth quarter compared to the prior year quarter. The first red bar shows the two-tenth of a point impact from increased advertising spend, reflecting the slight increase was driven by seasonal investment changes and growth investments in rate adequacy states.

The second green bar shows the 1.4 — 1.4-point decline in operating costs, which was mainly driven by lower employee-related costs and the impact of higher premiums relative to fixed costs in the quarter. Shifting to the longer term trend in the chart on the right, we remain committed to reducing the adjusted expense ratio as part of transformative growth. As a reminder, the adjusted expense ratio starts with our underwriting expense ratio, which I just covered and excludes restructuring COVID-related expenses, amortization and impairment of purchased intangibles and advertising expense. It then adds our claims expense ratio, excluding costs associated with settling catastrophe claims. Those expenses are excluded because catastrophe-related costs tend to fluctuate.

Through innovation, process improvement and strong execution, we have driven significant improvement in expenses for the fourth quarter and year-end 2023 adjusted expense ratio of 24.7. This reflects decreases in both the underwriting expense and non-cat claims expense ratio compared to the prior year quarter. Now moving to slide 12, I will cover investment results. This quarter showed how our proactive approach to duration management benefits results. The chart on the left shows changes we made in the duration of the bond portfolio in comparison to bond market yields, from the fourth quarter of 2021 through the third quarter of 2022, lowering fixed-income duration, mitigated losses as rates rose. Beginning in Q4 of 2022, we began to extend duration which when combined with higher yields has increased market-based income.

Our fixed income yield, shown in the table below the chart, remains below the current intermediate corporate bond yield, reflecting an additional opportunity to increase yields as we continue to reinvest portfolio cash flows into higher interest rates. The bar chart on the right shows the income and total return benefits of these decisions. As you can see in the table on the chart, the total return of our portfolio was 4.6% in the fourth quarter and 6.7% for the year. Portfolio returns in both periods reflect income earned, as well as higher fixed income valuations due to the decline in market yields in the fourth quarter. Net investment income totaled $604 million in the quarter, which was $47 million above the fourth quarter of last year.

Market based income of $604 million shown in blue, was $140 million above the prior year quarter, reflecting the repositioning of the fixed income portfolio into longer duration and the benefit from higher yielding assets that sustainably increase income. Market based income also benefit — benefited from higher fixed-income balances. Performance based income of $60 million shown in black, was 87 million below the prior year quarter due to lower valuation increases and fewer sales of underlying assets. As we have stated previously, the performance based portfolio is expected to enhance long-term returns as demonstrated through our five-year and 10-year internal rates of return of 12% and volatility in these assets from quarter-to-quarter is expected.

Slide 13 covers results for our Protection Services businesses. Revenue in these businesses increased 11.8% to $719 million in the fourth quarter compared to the prior year quarter. This result is mainly driven by growth in Allstate Protection Plans, which increased 19.6% compared to the prior year quarter, reflecting expanded product breadth and international growth. In the table on the right, you will see adjusted net income of $4 million in the fourth quarter decreased $34 million as compared to the prior year quarter. This decrease is attributable to the results of a state income tax examination that increased the effective state tax rate that we apply, which increased deferred income taxes by $43 million in the quarter for future tax payments and Protection Services, largely related to dealer services.

The impact of the tax change on the enterprise was a net benefit of $6 million. We do not anticipate that these tax adjustments will have a significant impact on our ongoing operations. Shifting now to slide 14, our Health and Benefits businesses continue to generate profitable growth. From the fourth quarter of 2023, revenue of $630 million increased by $50 million compared to the prior-year quarter, driven by growth in individual health, group health, as well as fees and other revenue. Adjusted net income of $60 million in the fourth quarter of 2023, increased $2 million compared to the prior year quarter as individual health revenue growth partially offset higher benefit ratios in group health. As you know, late last year, we announced a decision to pursue the divestiture of our Health and Benefits business following the successful integration of Allstate’s voluntary benefits business in National General’s Group and individual health businesses.

We continue to anticipate a transaction will be completed in 2024. We will close on slide 15 by reviewing Allstate’s financial condition and capital position. Allstate’s proactive capital management approach provides the financial flexibility, liquidity and capital resources necessary to navigate a challenging operating environment, while providing support for long-term value creation. Fourth quarter results demonstrated the company’s capital generation capabilities with a statutory surplus in holding company assets of $18 billion, increasing by $1.6 billion compared to the prior quarter. Assets held at the holding company also increased to $3.4 billion. The increase to the prior quarter primarily reflects a return of capital from National General statutory entities, partially offset by common shareholder dividends.

Additionally, GAAP shareholders’ equity of $17.8 billion increased $3.2 billion compared to the prior quarter, reflecting $1.5 billion of GAAP net income and the improved unrealized position on fixed income securities of $1.9 billion. We continue to proactively manage capital, make progress on the comprehensive profit improvement plan and invest in transformative growth. We remain confident that these strategic actions will generate attractive shareholder returns. With that as context, let’s open it up for your questions.

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Q&A Session

Operator: Certainly. One moment for our first question. And our first question comes from the line of Jimmy Bhullar from JPMorgan. Your question please.

Jimmy Bhullar: Hey. Good morning. So I had a couple of questions. First, can you talk about rate adequacy in California, New York, New Jersey, the new business that you are issuing there now is that adequate price for normal profitability or are you assuming that you are going to need another sort of stab at it in 2024 to get the normal profits?

Tom Wilson: Thank you, Jimmy. I will let, Mario, really three different stories, Mario will take you through those in, then we will do a follow-up question, and I would just remind everybody, we like — ask one question with a follow-up, hopefully, related to the first question. But so we can make sure we get through everybody’s call. So, Mario, you…

Mario Rizzo: Yeah. So, Jimmy, first thing I’d say is, we have talked a lot last quarter about the actions we needed to take in the three states, California, New York and New Jersey. I will start with a view that says, look our objective is to meet the protection needs of as many customers in as many states as possible. When that can happen, we think customers are served well, markets operate effectively and we can operate our business to achieve the appropriate levels of returns. We had rate pending in all three of those states and I will just spend a minute kind of giving you the story in each one of those, because I think it’s slightly different. In California, you will remember we filed a 35% rate. We got approval for 30 %.

But we got approval earlier than our expected effective date. So, effectively, we filed our full rate need and got approval for our full rate need. As of yesterday, we are writing business in California, again across all channels and we feel comfortable writing business in California given the rate level that we are operating. Now, of course, having said that, we have got to stay on top of loss trends going forward and we will do that, but we are comfortable with the rate level, we have gotten California that have opened up that market. In New Jersey, it’s kind of the opposite story we filed for 29 points of rate, we got approval for just under 17%. And as a result of that, we are going to continue to take the more restrictive underwriting actions that we have been taking in New Jersey, which means we will continue to get smaller in New Jersey, while we plan on filing additional rate as a matter of fact, we have two rates pending with the New Jersey Department and depending on how those things shake out that that will inform future actions we take in New Jersey.

But as of right now, we will continue to get smaller in New Jersey, just given the lack of rate adequacy. And New York is kind of somewhere in between, we got approval for a 14.6% rate in December. We have implemented that, that helps. But we still need more rate. We are actively engaged with the department and intend to file our full rate need going forward and do that in reasonably short order. And again, depending on how that plays out, that will inform the next set of actions we have taken in New York.

Jimmy Bhullar: Okay. And then just a follow-up, maybe slightly related and slightly unrelated, in those three states, if you are raising prices a lot, it’s reasonable to assume that you would suffer in terms of discount or at least at a minimum, it wouldn’t grow. But how is your PIF faring in the states where you are not taking any outsized rate actions versus what some of your peers are taking and just trying to assess whether you think it’s reasonable to assume that your overall PIF count stabilizes at some point this year for the company as a whole and potentially grows this year, later in the year or next year.

Tom Wilson: Jimmy, this is Tom. I will start and then Mario can give — can add on to that. I would say that the current competitive environment is still in flux. So, we raise our rates 30 points in California. State Farm gets another increase somewhere after that. So it’s too early to tell what impact that will have on volume in 2024. We do — our goal, though, is obviously to, one, make good money for our shareholders as first part, and as Jess said, the other part is, we need to grow. So we are — we think we have got transformative growth in place, which is differentiated in a long-term growth plan, as well as some of the short-term things you are talking about here. Mario, what would you add to that?

Mario Rizzo: Yeah. I think, specifically, on retention, Jimmy, as Tom mentioned, in the three states we talked about, those markets are still in a bit of a state of flux. One state I’d point to, to kind of tell the story about retention and how taking outsized rates and then kind of lapping that impacts retention is Texas. We took significant rates in Texas in 2022 and earlier in 2023 and we showed you last quarter there was a pretty substantial hit to retention in Texas. As we have lapped those rates, we have seen a nice bounce back which contributed to the sequential improvement in the fourth quarter retention level in auto relative to Q3. So, once the rate need stabilizes, that certainly has a positive impact on retention going forward. And hopefully, as we in more and more states are really just keeping on top of loss trend, we would expect the headwind that we faced in retention to diminish going forward.

Jimmy Bhullar: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Gregory Peters from Raymond James. Your question please.

Gregory Peters: Okay. Good morning, everyone. I — for my first question, I’d like to focus on transformative growth and it’s kind of counter intuitive, right, because you are talking about lowering expenses at the same time growing your policy count. So when I think of some of the headwinds going forward on expenses, I think, of increased agent commission because profitability is going up. I see maybe the potential for increased advertising expense. So maybe you can help us pull together on how you see growth emerging at a lower expense base?

Tom Wilson: Greg, I will start and Mario can jump in. So I don’t know that, I think, there is counterintuitive that as you grow your expenses can’t go down, and I would point out, if you look at National General, its growth has helped drive more scale and has brought its expenses down. So that’s just a scale-related comment to it. As you relate — you look at the programs we have in place on transformative growth, it’s really across the Board. Everywhere we are at where programs that are — we have been working on for three plus years and they are rolling out as we go. For example, we are cutting costs by becoming more digital. By becoming more digital, we can move more jobs either get rid of the jobs or move them offshore.

That’s a multiyear thing. You don’t just take first notice of loss and change it in three months. So the benefits of those programs, which we have been working and rolling those out for the last 18 months really still will get more of those benefits as we go forward in 2024 just based on the work we have already done. In terms of agent commission, Mario mentioned this, we have changed the agent commission structure such that it pays more for new business and less for renewals and that was one of the core parts of transformative growth was how do we distribute our products at a lower price and still give people the value of an agent. And people want an agent to buy the stuff, they don’t necessarily want to pay as much for attention. One of the underlying assumptions we validated with transformer growth, which quite honestly, a number of analysts and other people were not so sure, but you are going to keep agents head in the game?

And the answer is, yes. Look at the productivity numbers that Mario showed. Do they like having renewal compensation go down? No. Do our customers like having a better priced product? Yes. And so we choose to do what our customers want and they have worked through that. So we have a series of things that go on. Now, we do spend money, but like — we are doing our expenses to, first, take care of our customers, second, build long-term value. We are not running our expenses to make a particular P&L number in a quarter. We just don’t do that. We cut advertising, as you pointed out, because there was no sense growing if you are losing money on the product. It wasn’t because we were trying to make some combined ratio target. It certainly helped that.