Q3 2021 Allstate Corp Earnings Call
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Yeah.
Thank you for standing by and welcome to the Allstate third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder, today's program is being recorded I would now like.
To introduce your host for today's program Mark Noble head of Investor Relations. Please go ahead Sir.
Thank you Jonathan Good morning, welcome to Allstate's third quarter 2021 earnings conference call.
After prepared remarks, we will have a question and answer session.
Yesterday following the close of the market, we issued our news release and Investor supplement and posted related materials to our website at all state and Busters Dot 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.
These results may differ materially from these statements. So please refer to our 10-K for 2020 and other public documents for information on potential risks and now I'll turn it over to Tom.
Well good morning, and thank you for investing your time with us today, let's.
Let's start on slide two.
So this is allstate's strategy on the left hand side, which we've talked about before we have two components increased personal property liability market share and expand the protection solutions.
The two old ones you see on the left with the intersection between the key third quarter results are highlighted on the right hand panel.
The liability policies enforced increased by 12 and a half per cent.
Allstate protection plans continued to grow rapidly by both broadening its product offering and expanding the network of retail providers.
As a result, we now have almost 192 million policies in force across the enterprise.
Financially the results were more mixed our revenues were up substantially but net income and adjusted net income declined from the prior year, Florida.
Underwriting income declined primarily due to higher loss costs settling auto insurance claim.
Implemented price increases to proactively respond to the sharp rise in loss cost and transformative growth continues to position us for long term success, both of which we'll talk about it in a couple of minutes.
This was partially offset by the benefits from our long term risks and return program that includes significant reinsurance recoverable.
Primarily related to Hurricane Ida.
And a substantial increase in performance based investment income.
Cancel the appointment results were excellent with a billion and a half dollars of cash returned to shareholders in the quarter. We also completed divestitures of our two largest life and annuity businesses. One in October and then one just earlier this week.
So let's go to slide three.
Revenues of 12, and a half a billion in the quarter increased 16, 9% compared to the prior year quarter and that reflects both the higher earned premiums from National General acquisition, Allstate brand homeowners premium growth and higher net investment income.
Property liability premiums and policies in force increased 13 enhanced per cent in 12.5% respectfully.
Investment income was $764 million and that's up almost three arrows are about $300 million compared to the prior year quarter, reflecting strong results from the performance based portfolio.
Net income was $508 million in the quarter as compared to a 1 billion one in the prior quarter as lower underwriting income was partially offset by the higher investment income.
Adjusted net income was $270 million or <unk> 73 per diluted share.
And it's decreased $683 million compared to the prior year quarter, reflecting the lower underwriting income due to the higher auto and homeowner's insurance loss cost.
Net income for the first nine months of 2021 was below the prior year and that's largely due to the loss on the sale of the life annuity business, which we reported earlier in the year.
Adjusted net income was $10.70 per share for the first nine months. It was above the prior year as higher investment income and lower expenses more than offset higher law school.
Let's turn to slide four.
I would do is put the pandemic.
In a longitudinal perspective cause this created volatility for our results.
And it obviously requires us to adapt quickly, which we do but before we go see what the impact on the third quarter yourself of the supply chain disruption, let's talk about the initial and subsequent in Paas.
2020, the economic Lockdown resulted in fewer miles being driven.
Promoted prompted an aggressive economic support response from governments around the world.
In fact in auto insurance was a dramatic drop in the number of accidents.
And of course due to this unprecedented drop in frequency, we proactively provided our customers with some money back which increased customer retention.
Since then and since there was less road congestion and fewer accidents occurred during commuting hours.
Average speed and severity of auto claims increase offset some of the frequent.
Nevertheless, underwriting margins improved dramatically. So we introduced a temporary shelter in place payback rather than take a permanent rate reduction and took some modest overall reductions in rate level.
This year as you can see from the right hand column. The story has been just the opposite as it relates to frequency with large percentage increases.
The overall level of accident frequency for the Allstate brand is still below pre pandemic levels. The national General non standard business is fast at all levels before the pandemic.
Auto severity. This year, however has been dramatically impacted by the supply chain disruption.
And price increases on used cars and original equipment parts and Mario will take you through that in a couple of slides.
From a pricing perspective, this result, and moving from modest rate reduction significant increases in the auto insurance pricing.
From a growth standpoint at the asset into the pandemic, we began to see a material increase in the consumer acceptance of telematics and we really lead into that with our my wife's product, which is really the only national product out there pay per mile. That's led to a substantial increase in our debt telematics.
Now the pandemic has also had a significant impact on the investment portfolio and this is a tale of the beginning of the end as well. So early in the crisis equity valuations were down and this had a negative impact on our best for ourselves.
And then of course Ah.
And we have a broad base long term spread out over a decade really investing in these kinds of fun.
And so we do it on a long term basis, whether that's three five or 10 years.
So what's happened this year of course as we've had the opposite happened, which is with the economic stimulus we've had equity valuations going up and our returns have come back strongly.
And the marketing portfolio.
Interest rates at the onset of the pandemic did lead to an increase in the unrealized gains in the portfolio, but of course, what that does is reduce future interest rate income, which you see slight decline.
Many of our other businesses have been impacted positively or negatively.
But it's our ability to adapt and seize the opportunities that are presented to create shareholder value.
Mario will now go through the third quarter results in more detail and how transformative growth physicians all states for continued success.
Thanks, Tom.
Let's move to slide five to review property liability margin results in the third quarter.
The recorded combined ratio of one O 5.3 increased 13.7 points compared to the prior year quarter. This was primarily driven by increased underlying losses as well as higher catastrophe losses and non catastrophe prior year reserve re estimates.
The chart at the bottom of the slide quantified the impact of each component in the third quarter compared to the prior year quarter.
As you can see the personal auto underlying loss ratio drove most of the increase due to higher auto accident frequency and the inflationary impacts on auto severity.
Higher catastrophe losses as shown in the middle of the chart had a negative 1.4 point impact on the combined ratio is favorable reserve re estimates recorded in 2020 from wildfire subrogation settlements positively impacted the prior year quarter.
Gross catastrophe losses were higher but were reduced by nearly $1 billion of net reinsurance recoveries. Following hurricane Ida demonstrated the benefits of our long term approach to risk and return management of the homeowners insurance business and our comprehensive reinsurance program.
Non catastrophe prior year reserve strengthening of $162 million in the quarter drove an adverse impact of <unk> eight points, primarily from increases in auto and commercial lines.
This also included $111 million of strengthening in the quarter related to asbestos environmental and other reserves in the runoff property liability segment. Following our annual comprehensive Reserve review.
This was partially offset by a lower expense ratio when excluding the impact of amortization of purchased intangibles, primarily due to lower restructuring and related charges compared to the prior year quarter.
Moving to slide six let's go a bit deeper on auto insurance profitability.
Allstate brand auto insurance underlying combined ratio finished at 97, five for the quarter and $89 seven over the first nine months of 2021.
The increase to the prior year quarter reflects higher lot loss costs due to higher accident frequency increased severity and competitive pricing enhancements implemented in late 2020 and earlier this year.
While claimed frequency increased relative to prior year, we continue to experience favorable trends relative to pre pandemic levels.
Allstate brand auto property damage frequency increased 16, 6% compared to 2020, but decreased 16, 8% relative to 2019.
The chart on the lower left compares the underlying combined ratio for the third quarter of 2019 to this quarter to remove some of the short term pandemic volatility.
The underlying combined ratio was $93 one in 2019, which generates an attractive return on capital.
Favorable auto frequency in the third quarter of 2021 lowered the combined ratio by $6 four by six four points compared to 2019.
Increased auto claim severity, however increased the combined ratio by 12 points versus two years ago as you can see from the Red bar.
The cost reductions implemented as part of transformative growth.
<unk> expenses by 1.3 points, which favorably impacted 2021 results.
As Tom mentioned early in the pandemic the severity increases were driven by higher average losses due to a reduction in low severity claims.
This year the increase reflects the impact of supply chain disruptions in the auto markets, which has increased used car prices and enabled original equipment manufacturers to significantly increase part prices.
The chart on the lower right shows used car values.
Began increasing above the CPI in late 2020, which accelerated in 2021, resulting an increase and an increase of 44% since the beginning of 2019.
Similarly, OEM parts have also increased in 2021, roughly twice as much as core C. P. I.
This has resulted in higher severities for both total loss vehicles and repair repairable vehicles.
Since these increases were accelerating throughout the second and third quarters of the year, we increased expected loss cost for the first two quarters of 2021 and this prior quarter strengthening shows up in the combined ratio for the third quarter.
Increases in report your severities for auto insurance claims during the first two quarters of 2021 increase the third quarter combined ratio by two six points as you can see by the Green bar on the lower left.
So, let's flip to slide seven which lays out the steps, we're taking to improve auto profitability.
As you can see from the chart on the top Allstate has maintained industry, leading auto insurance margins over a long period of time with a combined ratio operating range in the mid nineties exhibiting strong execution and operational expertise.
To maintain industry, leading results, we are increasing rates improving claims effectiveness and continuing to lower costs.
After lowering prices and early 2021 to reflect in part allstate's lower expense ratio, we have proactively been responding with increases in the third quarter with actions continuing into the fourth quarter and into 2022.
The chart on the right provides selected rate increases already implemented in the third and fourth quarter as well as public publicly filed rates that have yet to be implemented in the fourth quarter.
Those states didn't noted with a carrot our top 10 states in terms of written premium as of year end 2020.
In the third quarter, we received rate approvals for increases in 12 states primarily in September.
We adapted quickly to higher severities in the fourth quarter with plant with plans to file rates in an additional 20 states we.
We have already implemented rate increases in eight states during the fourth quarter with an average increase of six 7% as of November 1st.
Looking ahead, we expect to pursue price increases and an additional 12 locations by year end.
We are working closely with state regulators to provide detailed support and decrease the lag time between filing implementation and premium generation.
As we move into next year. It is likely auto insurance prices will continue to be increased to reflect higher severities.
We also continue to leverage advanced claims capabilities and process efficiencies.
Cost reductions as part of transformative growth will also continue to be implemented.
Let's turn to slide eight and discuss our expectations and commitment to further improve our cost structure through transformative growth.
As you can see by the chart on the bottom of the slide we defined a new non-GAAP measure this quarter referred to as the adjusted expense ratio.
This starts with our underwriting expense ratio, excluding restructuring Corona virus related expenses amortization and impairment of purchased intangibles and investments in advertising.
But then also adds in our claim expense ratio excluding costs associated with settling catastrophe claims which tend to be more variable.
We believe this measure provides the best insight into the underlying expense trends within our property liability business.
Through innovation and strong execution, we achieved two six points of improvement when comparing 'twenty 'twenty to 'twenty 18, with FERC for with further improvement occurring through the first nine months of 2021.
Over time, we expect to drive an additional three points of improvement from current levels, achieving an adjusted expense ratio of approximately 23 by year end 2024.
This represents about a six point reduction relative to 2018 or an average of one point per year over six years, enabling an improved pricing position relative to our competitors, while maintaining attractive returns.
Future cost reductions center around continued digital enhancements to automate processes, enabling the retirement of legacy technology operating efficiency gains from combining organizations combining organizations in transforming the distribute the distribution model to higher growth and lower cost.
Transitioning to slide nine let's go up a level to show how transformative growth positions us for long term success and how the components of transformative growth work together to create a flywheel of profitable growth.
As you know transformative growth is a multi year initiative to increase personal property liability market share by building a low cost digital insurer with broad distribution.
This will be accomplished by improving customer value expanding customer access increasing sophistication and investment in customer acquisition and deploying a new technology ecosystem.
We've made significant progress to date across each component.
Starting at the top of the fly the flywheel visual our commitment to further lower our cost improves customer value and enables a more competitive price position, while maintaining attractive returns.
Enhancing and expanding distribution puts us in a position to take advantage of more affordable pricing.
Increasing the analytical sophistication of new customer acquisitions.
Let's cut lets consumers know about this better value proposition.
New technology platforms, lower costs and enable us to further broaden the solutions offered to property liability customers.
This flywheel will enable us to increase market share and create additional shareholder value.
Turning to slide 10, let's look at the changes to the just the distribution system, which are also underway.
As you can see in the chart on the left side of the slide property liability policies in force grew by 12, 5% compared to the prior year quarter.
National General, which includes encompass contributed growth of 4 million policies and Allstate brand property liability policies increased by 231000 driven by growth across personal lines.
Allstate brand auto policies enforced increased slightly compared to the prior year quarter and sequentially for the third consecutive quarter, including growth of 142000 policies compared to prior year and as you can see by the table on the lower left.
The chart on the right shows a breakdown of personal auto new issued applications compared to the prior year.
The Middle section of the right chart shows Allstate brand impacts by channel, which in total generated a 5% increase in new business growth compared to the prior year.
A 38% increase in the direct channel more than offset a slight decline from existing agents and volume that would have normally been generated by newly appointed agents.
As you know we significantly reduced the number of new Allstate agents being appointed beginning in early 2020. Since we are developing a new agent model to drive higher growth at lower cost.
The addition of National General also added 502000, new auto applications in the quarter.
I'll turn it over to Mark to cover the remainder of the slides before we move to Q&A.
Thanks Mario.
Going to slide 11 protection services continues to grow revenue and profit revenues, excluding the impact of realized gains and losses increased 23, 3% to $597 million in the third quarter.
Protection plans net written premium increased by $139 million due to the launch of the home depot relationship focusing on appliances.
Quarterly net written premium is now five five times the level of when the company was acquired in 2017.
They already expanded revenues due to the integration of <unk> cloud and transparently, which were acquired as part of the National General acquisition as well as increased device sales driven by growth in the mile wise products.
Policies in force increased 12, 5% $250 million driven by growth in Allstate protection plans and Allstate identity protection.
Adjusted net income was $45 million in the third quarter, representing an increase of $5 million compared to the prior year quarter, driven by higher profitability at Allstate identity protection and everybody. This was partially offset by higher operating costs and expenses related to investments in growth.
Now, let's shift to slide 12, which highlights our investment performance.
Net investment income totaled $764 million in the quarter, which was $300 million above the prior year quarter driven by higher performance based income shown in the chart on the left.
Performance based income totaled $437 million in the quarter, that's shown Greg reflecting increases in private equity investments.
As in prior quarters, several large idiosyncratic contributors had a meaningful impact on our results.
These results represent a long term and broad approach to growth investing with nearly 90% of year to date performance based income coming from assets with inception years of 2018 and prayer.
Market based income shown in blue was $6 million below the prior year quarter.
The impact of reinvestment rates below the average interest bearing portfolio yield with somewhat mitigated in the quarter by higher average assets under management and prepayment fee income.
Our total portfolio return was 1% in the third quarter and three 3% year to date, reflecting income and changes in equity valuation, partially offset by higher interest rates.
We take an active approach to optimizing our returns per unit of risk appropriate investment horizons.
Our investment activities are integrated into our overall enterprise risk and return process and play an important role in generating shareholder value.
While the performance based investment results continued to be strong in the third quarter, we managed the portfolio with a longer term view on returns on the right. We have provided our annualized portfolio return in total and by strategy over various time horizons.
Consistent with broader public and private equity markets. Our portfolio has experienced returns above our historical trend over the last several quarters.
All prospective returns will depend on future economic and market conditions, we do expect our performance based returns to moderate in line with our longer term results.
Now, let's move to slide 13, which highlights allstate's strong capital position.
All states balance sheet strength and excellent cash flow generation provides strong cash returns to shareholders, while investing in growth.
Significant cash returns to shareholders, including $1 $5 billion through a combination of share repurchases and common stock dividends occurred during the third quarter.
Common shares outstanding have been reduced by 5% over the last 12 months.
Already in the fourth quarter, we successfully completed the acquisition of state auto on October one for $262 million to leverage National General's integration capabilities and further increased personal lines market share.
We also recently closed on the divestitures of Allstate life Insurance company, and they'll say life insurance company in New York.
These divestitures free up approximately $1 $7 billion of deployable capital, which was factored into the $5 billion share repurchase program currently being executed.
Turning to slide 14, let's finish with a longer term view of allstate's focus on execution innovation and sustainable value creation.
Allstate has an excellent track record of serving customers, earning attractive returns on risks and delivering for shareholders. As you can see by the industry, leading statistics on the upper right.
Innovation is also critical to the execution.
And our proactive implementation of transformative growth has positioned us well to address the macroeconomic challenges facing our business today and in the future.
Sustainable value creation also requires excellent capital management and governance.
As an example.
I'll say this in the top 15% of S&P 500 companies and cash returns to shareholders by providing an attractive dividend and repurchasing, 25% and 50% of outstanding shares over the last five and 10 years respectively.
Execution innovation and long term value creation will continue to drive increased shareholder value with that context, let's open the line for your questions.
Certainly ladies and gentlemen, if you have any.
Question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the queue. Please press the pound key our first question comes from the line of Josh <unk> from Bank of America. Your question. Please.
Yeah. Thank you I want to talk about bundles and homeowners and the pricing of the dual engine of homeowners and auto together I guess, there's two things I want to understand one is when a customer sees their overall bundled price going up what is the conversation like especially as you're trying to more.
Centralize your business with a greater direct relationship with your customers.
And two given all sleep geographic footprint can all sleep.
I had incoming customers for homeowners without changing its kept footprint.
Good morning, Josh as Tom I'll start and then Glenn can jump in first.
As you know we've long been focused on bundling.
And homeowners because it was a good stable long term customers you do get a discount for putting those two together.
Vantage and a customer from buying it and putting it all in one place. Besides just having one point of contact and we've been good at that if you look at our growth in homeowners this year.
It's higher than our growth in auto insurance and that appears to be because we are doing more bundling.
Individual customers, it's a little hard to get the exact attribution, but we feel good about what our agents are doing to drive that.
As it relates to the.
The growth of it.
We've been we've repositioned this business over multiple years.
Back in the middle or late 2000, the first decade in 2000, and we've made it a bunch of money.
Over the last eight or nine years, I think almost $9 billion of underwriting income on homeowners, which you need to do.
We don't believe that at four point margin is attractive at home owners. A couple of reasons. One is you don't get.
Investment income secondly, you've got to put up more capital because the results are more volatile and.
And do you have the big tail losses, so as we seek to grow it we bring all of that math to bear on individual states is where we grow and so if there is a state where even if there is a fair amount of catastrophe exposure, but we think we can get a good return.
It's got a margin on it that compensates us for the capital we have to put up and the reinsurance we have to buy then we will do that.
And we are highly sophisticated in the way we run it as a geographic focus is really.
We have a much a highly sophisticated.
On the direct business you don't sell as much direct homeowners right now we still need to crack the code on that.
Before I E. Glenn we'll have some view on how we can continue to run the table and homeowners as we have.
So far but the.
Upcoming thing that Glenn might want to touch on is what we're doing in the independent agent channel.
Has the National General platform gives us with our products our expertise our pricing and claims management.
In our reinsurance programs gives us the ability to really serve a lot of customers when and where would you go.
Yeah, I just wanted to see can you address retention and cat footprint as well.
Yeah, well, Glenn why don't you take both of those.
Sure.
A few comments on on homeowners leading into it but.
We have really strong home purchase business and so we want it we want it.
As Tom said, so over the course of the past year.
Deep in bundling discounts. So we've made it more attractive for customers across 30 states.
<unk> shifted our agency competition over the last couple of years.
More attractive for them to bundle.
And the same is true in direct as Tom said, we're looking to crack the code right board, they're writing some want to write more and so some of the incentives for our direct team are around cross quoting and bundling.
To the point around.
That footprint.
We're in good shape like if you look at.
Our ability to write business, we can write pretty broadly we can write some cat prone areas, but we tend to offset it and create the diversity of our book by writing in other areas I mean right now.
We're on a 12 month view right now we're at 93 eight combined ratio made about $400 million underwriting profit in the last 12 months.
By that I can really say.
Quarters.
It's a good business that we're able to consistent with consistently make money in and so we're looking to grow it.
As Tom said, we have.
We have pretty stringent guidelines, where we write how we right.
So that we don't Overgrowing cat prone areas, but we're able to grow without that.
Tom mentioned something that I want to come back to you.
In terms of the breadth of our distribution is growing and that would be into our IAA channel.
You know the IAA channel is a huge opportunity independent agents write a lot of homeowners.
And our National General and Allstate company as it'll be branded is adding our middle market products, both auto and home and we have sort of a whole new greenfields there to run in and that would be a broad geographic spread not just in cat prone areas.
Hey, Josh let me just add something because I think I understand why youre trying to triangulate between sort of what's going on in the industry first we don't have a catastrophe.
Closure problem.
We don't have a profitability problem, we believe at home.
We made about we lost about 16 million Bucks and seven 3 billion. So far this year, so we'd like to make more money, but if Glenn pointed out when you look over a longer period of time, you know we've had a fair amount of ups and downs, but we still make our underwriting profit on a 12 month basis. So we don't have a catastrophe problem.
So we don't have to restrict stuff.
End up with what you're poking at it retention issue, we have been there and done that though so.
And it was called the repositioning we did.
In the latter part of the decade I've mentioned.
And when you call a customer and say you know I used to have used to being shared with us and now I'm not going to assure you with us and we were one of the biggest brokers have homeowners insurance provider.
I think in the country maybe David.
And two I vantage and even when you say to people here's another company. It has some impact on your.
On your auto business. So you know because people like well I'll take my business someplace else, where competitors decide they want to they want a bundle and they'll they'll get those customers as well. So we had some issues with auto growth.
We were downsizing, we went down by 2 million policies.
In the homeowners business over a four or.
A five year period. So it does hurt its manageable I can't speak for what our competitors are going to do what I do know is what Glenn said, which is we got a good business, we know how to run it.
We have growth opportunities and we're looking forward to serving more customers and make more money for our shareholders along the way.
Thank you.
Thank you.
Our next question comes from the line of Greg Peters from Raymond James Your question. Please.
Good morning.
I'd like to turn.
Your attention to page seven and I was particularly struck by your chart.
Where you've identified the rate increases you've deployed and then.
Ones that you're going to be implementing.
And I was wondering if you could provide us.
Some perspective on <unk>.
Given the fact that severity has been so substantial.
Where do you think that's going to go with other states. It feels like this is going to be an ongoing.
Reset of pricing as we go through most of next year.
Against that backdrop, just how you think about your competitive positioning when most of the industry is going to be raising rates.
Let me, maybe let me start and then.
Glenn why don't you jump in on what Youre doing individually so.
I think you're right Frank that there seems to be this.
A threat going through the markets today that this is kind of a once and done.
And we don't necessarily see it that way I mean, I think there's.
Never bold enough to decide and claim we're ahead or.
If anybody else because first it assumes everybody's in the same place exactly assumes the same trends are going to have in them and third is that those trends are going to end and the answer is we don't know when when they will do what we do know is what we can do differently and we do know that some of our competitors had frequency increases.
Sooner than we did so that you would expect them to raise prices sooner than we did.
We do think that we have a good plan in place that you think can take you through that which is to make sure. We get attractive returns in auto insurance, which is a key component of what we do in terms of delivering value for shareholders and we're all over that and we will go where how that will move.
Forward in terms of competitive position. That's also hard to tell what I do know is that I'm really glad we started transformative growth two years ago.
And so the cost reductions we already have in place certainly has benefited us.
It's positioned us to be able to grow through many different.
Venue. So we can dial growth up if we choose to do that so I'm really glad we are where we are.
And we're positioned to take share in the future which of course, our strategy, but we want to do that profitably. When do you want to talk about your plans.
Getting the auto insurance returns back to where they have been historically.
Yes, absolutely.
Thanks, Greg and you hit a couple of important points.
Youre right about that.
Everyone or close to everyone is going to have to take rate.
When you talk about competitive position.
So we think about that as part of the process, but does this is broad and and this is going to be around for a while like everything you look at in terms of what the root causes.
Severity, which as you know.
In its simplest terms because the price of used cars I like to talk about collision coverages. It's a it's a coverage that doesn't really have a policy limit that's david other than the value of the vehicle itself.
So in real terms, our policy limits on that coverage went up by 40% with no change in premium and that variance happen to everybody across the industry. So it's a rarity where you have something is clear and clean is that that is a root cause to your severity changes.
We think it'll be around for a bit and we're going after rate to address that.
One of the levers and we've talked about our claims capabilities and certainly our expense reductions as other ones don't.
In the third quarter, we took 12 price increases that that went effective in the third quarter. Another eight in the fourth quarter, so far with more to come.
This is broad and we will be doing it just about everywhere.
I think the key from our competitive position is that we made a lot progress so our starting point.
We made significant progress over the last year with the expenses, we've taken out and therefore, the competitive position we were in improved significantly our close rates improve significantly leading to some of the greater new business that you saw.
So as we take rates and others do.
Our goal is certainly to keep that competitive position gain that we've made but the primary goal is to get our margins back to where they can be.
And that's why we're going after right, we're doing a pretty proactively.
Great. Thanks for the color on that I wanted to pivot to slide eight which is I think another really important slide.
In your presentation.
And just to step back in <unk>.
Recognize.
The long term objective that you.
Introduced us.
Pretty striking.
I feel like when we get to 2024, if you've achieved that objective that will put you.
Clearly among the leaders in terms of our lowest adjusted expense ratio in the marketplace. So.
I'm sure a lot of thought went into this can you can you give us can you give us some more color of where the improvement where youre going to get the most leverage in terms of the expense ratio improvements where it is going to come from.
And then and then maybe also include some comments on the advertising expense because thats not included in this.
Mario do you want to start with the components of the cost reduction and then I'll come back to advertisers.
Sure. So so Greg.
Thanks for the question and the acknowledgement of the progress we've made and I guess, where I'd start is maybe to just kind of go up a level and reiterate again, what our objective is.
And reducing costs really is which is to enhance.
Customer value.
By improving our competitive price position.
And we're going to do that by continuing to drive down the expense component of our combined ratio, which is inclusive of both underwriting and claim expenses and to your point, we've made really good progress over the past.
<unk> several years.
And in addition to the progress we've made we've.
We've created plans and have line of sight.
Two the additional three point objective that we've got by 2024.
Bye.
Focusing on on things like digitizing processes to improve efficiency bye bye.
<unk> as we do that create opportunity to retire legacy technology to capture.
The the synergies associated with the National General.
Acquisition to continue to drive down distribution costs as we've talked about creating a.
Kind of a more productive, but lower cost distribution model. So we've got opportunity in both.
From an operating cost perspective, both the underwriting and the claim side and we've got a plan on how to get there and and Thats why we established the goal and we think once we can get the additional three points out of our cost structure, it's really going to position us well relative to our competitors.
To have a more competitive price point to deliver higher customer value and really position ourselves to to accelerate growth.
So.
Let me go to advertising then.
Great start with.
We didn't do transfer our growth because of the pandemic, but boy I'm sure glad we got started on transformative growth. When we did because we were able to reposition the brand we invested over a quarter of a $1 billion in repositioning the brand new advertising.
Testing out new more sophisticated ways to do it and we did it with frequency was low so we were able to use some of that reduction in frequency the margin it created.
Invest in long term growth by repositioning the brand.
When you look at transfer on Bretts pretty simple right you get a more competitive price you have more places to buy it you let people know about the increase in advertising that was talking about what we do in the future will be depending how much we want to grow so.
As we move forward.
I think our advertising will it be flat or come down some because we wanted to make sure. We've got the pricing right and the point that came up earlier about the longevity of the how.
How long ago severity keeps coming up you wanted to make sure you've got that pricing right before you go out and get that flywheel going by doing more advertising.
That said, we're always going to do a lot of advertising because as you know it is marketing.
More really out there between some of the large players, but the other part that's not as well known.
It's getting every bit as sophisticated as auto insurance and home pricing.
So you really got to be good with your math and whether it's upper funnel lower funnel getting the right price to the right customer at the right time in the right state is.
It's complicated and so the other thing that we've been working on is building out the sophistication. So that every dollar of advertising investment spend as well, but the reason we took it out of the expense ratio guidance.
It is more volatile and it will depend on what kind of growth, we're looking to achieve in that quarter and this is a measure of how effectively writing the business like how are you keeping your costs down for your customers He can't headache.
Yeah.
Thank you for your answers.
Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question. Please.
Hi, Thanks, good morning.
My first question was on <unk>.
I thought we'd go back in the quarter and some.
Commentary by starting to take place during the quarter and then more on the come but.
Little bit surprised that the 11th well if you saw there just given increase the last time that you mentioned.
And upon that and would you expect.
Well on the direct side. So as you kind of question sprinkled smell way through the system.
At least let me give that to Glenn and just Glenn and his team have done a fabulous job in getting us better at direct so some of the growth that you see is because of the advertising we talked about some of the growth you see is we're just getting a lot better at it and so once we put the Allstate brand on it.
Glenn Saturday to combine our capabilities.
We're getting much more effective at what we close on the web will be closing the call centers and you want to talk about the prospects for dress.
Yeah Yeah.
Yeah, I agree with everything Tom just said I think we've got really nice prospect, because I would say, we're making up ground in dog years, because we have.
What were 20 years newer at doing direct into the Allstate brands in some of our competitors, but we're making up for that capability as we as we move just a year and a half into into launching with Allstate brand indirect so the effectiveness of our sales whether it be our call centers or on the web.
Is that or our marketing sophistication of our partnership with marketing all of those things getting better and that helps move it up.
The other thing is.
Actually in this price environment, that's going to be disrupted.
<unk>.
We're likely to see some tailwind in new business.
But some headwind in retention.
Because if we were in a situation where we're the only ones take rate you might expect the opposite.
But we have a whole bunch of people having to take rate that will create a lot of shoppers will create shoppers of our own to cause it disrupts our own customers and when people shop, they often find a better price situation.
Even in a rising environment like this so there will be a lot of customer shopping hours and other companies and so it's an opportunity.
Tom said to leverage what we did and say, we're really happy with the transformed the growth when we did because we have more ways for customers to buy when that disrupted market happens.
Thanks, and then my second question on you know just in terms of rate I believe the majority of new auto policies are six months. So correct me if I'm wrong, there, but as we think about the rate going to this is done what you've done in the third quarter and the fourth quarter and expectations for next year.
Do you think it will take to get back to your target margins is it kind of a six to 12 months situation.
I know you don't have that.
Target margins for property liability, we've kind of gone to an overall are we well we think about you know putting your margin kind of.
And at acceptable level what.
What do you think that that would come over the next 12 months or can you give us the time lines there.
I don't think you can do a time range on it because I don't think we can predict what's going to happen in the future on the inflationary pressures.
So what we can do is say we're going to go at this aggressively.
As soon as soon as we can get there that will be like we're going to hustle Graham's got it where is he said his priority is auto insurance margins on that part of the business. We've got lots of other priorities, we'll look at but when you look at inflation.
Not in the camp.
Inflationary there like.
Used car prices are suddenly going to go back down.
I think you buy a car for 14000 hours of use of cash of $10000.
Like Youre not thinking it's worth $10000 no matter what.
And everybody else thinks about it being transitory and I think the same thing is true with when.
When you look at parts prices parts prices, it's not like the oil market where prices are at that system is built to go up and down every day. It gets embedded in there the dealers buy inventory people distributors buy inventory they price. It. So we don't really see that being transitory and coming down how long it will take to work all the way through the.
What opportunities the Oes will take to push prices further.
Is really unknown at this part so it's hard to determine when they will cross what you do know.
At least as it is top line just going to keep going up as long as we see movement in the bottom line and it will keep going up until the Bottomline flattens out.
That maintenance bottomline being loss cost and that top line then.
We'll keep going past that point in time until we get back to the margins, but when we get back to the same underwriting margin on a dollar basis or percentage basis in auto insurance you can't really predict until you can have a better handle on where frequency and severity is going to shake out.
Glenn anything you would add to that.
Yes.
The only thing I would add would be that.
The tactical answer on the rates because completely agree we don't know what the Bottomline will do exactly so we'll have to keep moving those and adjust but the tactical answer on the rates you are correct. The lease at six months and almost all of our states in all of our policy.
So.
Six months from the effective date to get all customers paying that and then another six months from the point they start paying it to where the full premium has been earned FERC for one policy period. So you really start to see the effect of the rate star.
Starting at the beginning of the year, but more impactful in the second and third quarters next year.
Okay. Thanks for the color.
Thank you. Our next question comes from the line of Michael Phillips from Morgan Stanley. Your question. Please.
Thanks, Good morning, everybody.
I think Glenn answered this question, but just want to be sure.
Ask.
First quarter second quarter, you were taking some targeted rate cuts I know youre not youre not and I think Glenn said the rate increases that are going to continue we're going to be I think you said just about everywhere just wanted to confirm that because I guess my question would be how much of an overlap would there be in states, where you took previous rate cuts pretty recently cuts now moving upward.
Those same states.
Is there overlap there in those states you know hey, I'm, asking because of what that means to consumer impact on maybe retentions CN gyrations down the back up again, and then also kind of if there is overlap there kind of what it means for something that Tom said make sure we are pricing to kind of confidence around our current rates.
Glenn do you want to take that.
Sure.
The short answer to your question would be.
Yes, there will be increases in places, where there were modest decreases.
Do think we waited a little while to really see what was happening with the frequency and ensure that it was long standing and it has remained a long standing benefit before taking them and we were modest and we've done some pretty significant give backs into shelter in place get backs, which were one time and not sort of durable goods.
No.
Actually changing rates and moving them down we were more.
Subtle ways and more modest with so I don't think people will see sort of a wild swing down and back up but they will see it in the same state and the simple fact is if you saw on the chart on page.
On page seven that the used car prices spiked dramatically.
In the second quarter.
<unk>.
And then people start having claims and then those claims start to be paid and working their way into the loss costs and you have this hyperinflationary environment on auto physical damage lines. So.
It's just the appropriate response at the appropriate time for it and.
And we'll do everything we can to maintain our our retention. It's one of the wonderful things one of the many wonderful things about our agency force for agency force through a really good job of building relationships and talking to customers through changes in their policies and helping them through things like that.
Okay. Thank you very much for that.
Kind of a different one than on parity.
I guess I'm curious how you think about arity do you think of it as either a more of a use it for our own pricing and telematics business or that plus kind of formed at all others and having more of a income generating machine.
Not giving you a lot of lift on that second piece, but do you think of it more that way longer term and we've seen more and more companies kind of Golar route.
About the only one it doesn't go there.
Farm in that business of.
Hartford.
So recently when they formed at all.
And more and more companies are doing that so how do you think about air. It is it more just for your own pricing or do you want to have it be more of a again income generating machine as well.
Michael.
Thank you for asking about something other than auto insurance margins.
We have a lot of good things going on one of which is <unk>, which has significant value has been created with <unk>. Both in the insurance business and outside of the insurance business and I don't think Thats fine.
Viewed by any analyst as if it was a separate company. We have 600 billion miles of data, we have a risk scoring operation we help people do marketing.
And more effectively and efficiently.
So we're really building quite a platform that will do a number of things. One is it does exactly what you've talked about which is in the way. We started it was telematics as a service for US we needed somebody to collect the data we needed to get a mobile app up we need to put it in files and be able to do something with it and so rather than do that inside the insurance.
As a company, we decided to do it outside the insurance company. Because we said you know this is at the point. We said you know this is.
Basically a service at other insurance companies will need and we can provide it to them and we do so arie.
Provides that service with some other insurance company and we're working to try to expand that effort for them, but it moves beyond but I would just call. It telematics is a service you know help me pull data in.
What my customers are going to we started collecting more data from ourselves and built a rating service organization.
He can help other insurance companies use telematics the primary insurance, we believe that theyre going to get that capability anyway. So we think that we might as well do it through <unk> and capture addition, additional margin rather than just assume that we can take over 100% of the insurance industry, but being a leader in telematics, which we are.
But we don't think we can get the entire market share. So we created a rating services organization around that it's been expanded to include.
Really lead generation because we.
We started collecting more data so we have data from the Allstate customers.
We have data because we have our SDK embedded other people's apps, and we have hard data and I think it's over 25 million cars. We're pulling every day really high fidelity data. That's in the same format. We also buy data that we're able to combine with that $25 million on an over another 75 million cars. So we're pulling.
Data on 100 million cars per day right now.
And so we're building this rating services organization.
The plan would you.
You know maybe sort of help reduce the amount of right that you guys would need to take I guess it is that the right way of thinking about it or.
Is it just too uncertain at this time and you guys. Just want to you know get in front of what what might be coming down the road in terms of future loss cost increases.
It's inaccurate call David that the future expense reductions will certainly help us manage profitability.
But we're increasing their prices now because we do want to grow profitably.
But being unclear as to where this inflation will short out we're being.
What we think is fair inappropriate as opposed to overly aggressive increasing prices now.
To the extent in the future, we don't need that as much in our expenses come down then we can improve our competitive position, which we've we've improved our competitive position pretty significantly in 2021.
And we don't want to give that up and we'd like to continue to improve it. So we get that flywheel of growth going.
But in this case, we're using the expense reductions for future competitive price improvement as opposed to saying, we don't need to raise prices because last costs are known that Glen or Mario anything you would add to that.
The only thing I would add is.
It is it is pretty easy to get uhm negative rates and approved and market very quickly.
And as we talked about and one of the prior answered it takes time for them to earn in the we're projecting future lost costs.
Out over the course of the next year in years.
And taking right that we think best reflects.
Our best estimates of what we're going to need your <unk>.
Deliver the right returned.
So it would be it would be a good situation to get into to where we were we slightly overshot and could dial it back but as Tom said, there's a lot of questions still on where the severity will I'm sorry, the inflation for severity reliant.
At some point I mean look we need to make money, an auto insurance payments and we're going to do that.
I think we're out of time, so let me just say as we move forward you should expect US as you preferred throughout this call to expect to focus on improving the returns an auto insurance at the same time.
We're not letting up in any of the components of increasing our market share and personal profit liability or expanded circle protection all of which we've had really good progress and success. This year and in this quarter. So you should expect at US continue to focus on a broad based approach to increasing shareholder that so thank you for irrigation.
With us again, and we will talk to 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.
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