Q4 2021 Allstate Corp Earnings Call

February 3, 2022

Good day and thank you for standing by welcome to the Old States fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After our prepared remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your Pal.

The phone please limit your inquiry to one question and one follow up as a reminder, please be aware that this call is being recorded and now I would like to introduce your host for today's program. Mr. Mark <unk> head of Investor Relations. Please go ahead Sir.

Thank you Jerome good morning, welcome to Allstate's fourth quarter 2021 earnings Conference call.

The 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 on our website at Allstate investors Dot com.

Our management team is here to provide perspective on these results.

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 also.

<unk> 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.

Before I hand, it off to Tom I would like to turn to slide two and discuss the expansion of Allstate's Investor Communications.

Beginning this year instead of a traditional investor day will be convicted conducting a series of 60 minutes investor calls to provide deeper insights into significant strategic or operational topics.

These calls would be in addition to our quarterly earnings calls our first call will focus on the current auto insurance operating environment and will be scheduled to take place in March.

Topics on future calls may include homeowners insurance independent agent channel strategy expansion of protection services and investments.

In addition to Investor calls, we will also begin disclosing the Companys auto insurance implemented rate actions from the prior month on our Investor Relations website to provide additional information on premium growth.

Great disclosures will be posted on the third Thursday of every months like our monthly catastrophe loss disclosures, though the rate postings will occur regardless of whether there is a catastrophe loss release in the month I look forward to the additional engagement. These changes will bring and now I'll turn it over to Tom.

Good morning, and thank you for joining us today I'll, let's start with slide three.

Allstate, we focus on execution innovation as ways to create shareholder value.

And our strategy has two components increased personal property liability market share and then expand protection solutions, which are shown on the tools on the left if you start with the upper oval we've.

Been a leader in product innovation.

<unk> channel distribution, and leveraging technology telematics and claim settlement. So we're now building a low cost digital insurer with broad distribution through transformative growth.

We're also diversifying your businesses by expanding protection options and as shown in the bottom oval.

We offer customers a wide range of protections and workplace benefits commercial insurance roadside services car warranties protection plans understanding.

Awesome.

Vale is a leading innovator in telematics and avail.

Eric It's Lee.

And nobody else is startup, which is basically the airbnb model for Patterson.

We leverage the Allstate brand customer base and capabilities to drive growth in those businesses as well.

On the right panel you can see our five annual operating priorities, which focus on both near term performance and long term value.

So let's move to slide four and go through those operating priorities for the fourth quarter and full year.

Revenues.

$14 13 billion in the quarter increased 18, 7% compared to the prior year.

For the quarter, resulting in over $50 billion of revenue for the full year 2021.

That reflected about a one percentage point increase in auto insurance market share grew to the National General acquisition growth in homeowners premium and then we also had strong growth at Allstate protection plans and higher investment income.

Property liability premiums increased 17%.

Net investment income of $847 million in the fourth quarter of 2021 increased to $187 million compared to FY 'twenty.

Really strong results from the performance based portfolio.

Net income was $790 million in the quarter.

Third to $2 6 billion in the prior year as lower underwriting income and a loss related to the sale of life and annuities business is only partially offset by the higher investment.

Adjusted net income remember that measure it takes out some of the things that we think are not related to the current economics.

$796 million or $2 75 per diluted share a decline compared to the $1 6 billion generated in the prior year quarter, reflecting lower underwriting you will remember that 2020 at low auto accident frequency, reflecting the impact of the pandemic.

2021 was a year.

I had two distinct paths as it relates to the profitability of auto insurance and.

In the first half of 2021 auto insurance underwriting income benefited as lower accident frequency offset increased claim severity.

As a result underwriting income for auto insurance totaled over $1 7 billion.

And the first two quarters.

In the second half of the year auto claim frequency continued to increase towards pre pandemic levels and the cost of repairing cars and settlement bodily injury claims accelerated.

We began increasing auto insurance rates in the third quarter and it's accelerated in the fourth quarter.

These rate increases however, our earned his policies renew so that the cost increases resulted in an underwriting loss of slightly over $450 million in the last two quarters.

Underlying combined ratio for auto insurance was 92 five for the full year and $100 two for the fourth quarter of 2021.

And while that generates good underwriting income for the year and a good economic return the results of the last two quarters and not acceptable. So we're highly focused on raising returns in the auto insurance is that Glenn will discuss in a few minutes.

Adjusted net income of $4 billion for the full year was $13 48 per share, which generated a return on common shareholders' equity of 16, 9%.

Let's go to slide five to go through the operating priority resulted in more detail.

To better serve customers, we lowered expenses to improve the competitive price position of waters.

The enterprise net promoter score finished slightly below the prior year, but in part that reflects the absence of the beneficial impact in 2020 of the pandemic related customer accommodation, you'll remember it included $1 billion of shelter in place program payments expanded coverage and longer payment terms.

This year, we expanded protection offerings in group and health individual products with the acquisition of National Dental.

We significantly grew our customer base in 2021 with total policies enforced increased to nine 8% to $190 9 million.

Property liability policies enforce increased by 13, 7% and the acquisition of National General expansion of our direct distribution in the Allstate brand and increased insurance provided through our city.

Protection services policies also continued growth increasing eight 9% to 148.

$4 million.

And the third priority achieve target returns of capital that was accomplished we completed the year with adjusted net income of $4 billion and our return on shareholders' equity of 16, 9%.

Despite the rising loss cost environment.

The environment the property liability combined ratio finished 2021 and 95 nine.

Protection services continues to grow profitably, it's really driven by Allstate protection plan.

Net investment income was $3 $3 billion in 2021, reflecting proactive portfolio management and exceptional performance based income Mario will take you through that later as well.

The total return on our portfolio was four 4%.

So sustainable value creation requires not only.

<unk> execution on the first four items, but long term growth platform in.

In 2021, we sold the life and annuities business were $4 4 billion.

We acquired National General for $4 billion to capture expense savings leveraging independent agent technology platform and improve our strategic position in this distribution channel.

Significant progress was made on transform this growth to be.

<unk> low cost digital insurer with broad distribution.

Allstate protection plans continued its rapid growth with written premiums of $1 $8 billion that is five times greater than when the company was acquired five years ago.

They already are telematics company continues to expand its services and launch highly innovative products.

Execution and innovation lead to sustainable value creation.

Now, let me turn it over to Glenn to discuss the property liability results in more detail.

Thank you Tom and good morning, everyone, let's start by reviewing.

Property liability profitability in the fourth quarter on slide six.

The recorded combined ratio of $98 nine increased 14 nine points compared to the prior year quarter, primarily driven by higher underwriting losses as well as prior year reserve strengthening.

The chart on the bottom left takes you through the impact of each component compared to the prior year quarter.

Auto insurance underwriting loss ratio drove most of the increase driven by the impact of rising inflation on auto severity and higher auto accident frequency compared to the prior year.

Prior year reserve strengthening strengthening of $182 million had a one eight point impact on the combined ratio in the quarter, primarily due to adverse loss development in auto insurance casualty coverage. There was also a sizable impact relative to the premium in shared economy business, which was primarily.

Driven in states, we no longer insurer with transportation network carriers.

This was partially offset by lower underwriting expense ratio.

Mostly due to lower advertising expenses in the quarter.

We continue to focus on cost reductions, which improve our operational flexibility and competitive position.

The chart on the lower right shows Allstate's adjusted expense ratio over the last few years and the adjusted expense ratio is a measure we are using to track our progress on improving value for customers through cost reductions.

A measure starts with our underwriting expense ratio excludes restructuring corona virus related expenses amortization and impairment of purchase intangibles and investment in advertising.

And then adds our claim expense ratio, excluding catastrophe claims costs.

The adjusted expense ratio improved to 26, and the full year 2021, which.

Six points better than prior year and $3 two lower than 2018.

Our long term objective is a further reduction of three points over the next three years, which would represent a six point reduction over the six years, following 2018, allowing us to improve competitive price position.

While maintaining attractive returns.

Slide seven provides further insight into the drivers of rising auto insurance loss costs.

Allstate protection auto insurance underlying combined ratio was $100 two in the fourth quarter and 92, 5% through the full year 2021.

Representing increases of 15, 3% and seven four points respectively.

The increases reflect higher loss cost due to severity and accident frequency, partially offset by lower expenses, while claim frequency increased relative to prior year, reflecting a return to more normal driving environment, we continue to see favorability compared to pre pandemic levels.

Allstate brand auto property damage frequency was up 21, 5% in the fourth quarter of 'twenty, one compared to 2020, but it was down 13, 3% compared to 2019.

While we've seen miles driven approach pre pandemic levels, we've seen a meaningful change in time of day, driving which continues to impact both frequency and severity.

Increases in auto severity reflect inflationary pressure across coverages with a number of underlying components severity rising faster than core inflation chart on the lower left shows used car values began increasing in late 2020 and accelerated in mid 2021.

A total increase of 68% beginning in 2019.

OEM parts and labor rates have also accelerated in 2021, resulting in higher severities and coverages like collision and property damage.

The impact of inflation is also influencing our casualty coverage.

During 2020 at the onset of the pandemic when there was less road congestion and higher speeds a higher proportion of accidents were more severe that resulted in more severe injuries per claim and higher average casualty severity and it's 2021 developed casualty costs continue to rise with more severe injuries medical inflation.

And higher medical consumption and higher attorney representation rates.

The chart on the lower rate breaks down auto report your losses, excluding casualty catastrophe over the past two years.

The impact of frequency was favorable in 2020 compared to 2019 with the pandemic and as you shift into 2021 that favorability is partially reversed creating a negative year over year frequency impact, but still favorable over two years.

The impact from higher severities on the other hand, we're compounded over the two year period and put pressure on both physical damage and casualty coverages.

The combination of these factors led to the auto insurance margin pressure that we've seen in the second half of 2021.

So let's move to slide eight and go deeper into the steps, we're taking to improve auto profitability.

Allstate has as you all know generated strong auto insurance margins over a long period of time.

This is a core capability of ours, and we are taking a comprehensive and prescriptive approach to respond to the inflationary pressure and returned to our auto margin targets in the mid Ninety's combined ratio.

There are three areas of focus reducing expenses, which we've talked about raising rates and managing loss costs through claim effectiveness. Since we already talked about the expenses I'll start with the rates and the chart on the lower left that provides a view into 2021 rate actions we.

We implemented rate decreases in early 2021 to reflect in part allstate's lower expense ratio.

And the reduced frequency, we were experiencing from the pandemic, but as the year progressed and inflation escalated. We responded with rate increases that began in the third quarter and continued into the fourth quarter.

As those continued.

See in the fourth quarter.

Took rate in 25 locations at an average increase of seven 1% and a weighted Allstate brand auto premium impact of two 9%.

We will continue to take rate increases to restore auto profitability to targeted levels and we will keep you posted monthly as Mark mentioned earlier.

So that you know where we are in the rates.

The chart on the right shows the estimated annual impact of the premium from the implemented rate in each quarter to relate. These two views together that large two 9% increase implemented in the fourth quarter that you see in the left table relates directly to the rightmost bar of $702 million in estimated annual written premium.

While the rate will obviously help our margin it takes a little time to be realized as Tom mentioned, there is an inherent lag between when rates are implemented and when theyre reflected in written premium and then ultimately in earned premium as auto insurance policies generally at a six month term it takes that time for all.

All of the policies to have renewed at the new rate.

And then the annualized written premium impact is fully reflected after 10 months after 12 months.

As we take more price increases in 2022.

The incremental rate will be combined and drive higher levels of written premium first and then average earned premium.

As the year progresses, and we favorably impact auto margins.

Beyond expense reductions and rate increases were also leveraging advanced claim capabilities to mitigate loss cost pressure for our customers.

We're broadening strategic partnerships with parts suppliers and repair facilities to mitigate repair costs, we're using.

Advanced claim analytics, and predictive modeling tools to optimize repair versus total loss decisions and to assess the likelihood for injury, an attorney representation on casualty claims.

The bottom line is we are highly confident in our ability to restore auto profitability to targeted levels.

And while auto results tend to dominate discussions around the personal lines industry, it's really important to recognize the broad products, we offer as Tom mentioned earlier and in particular, our homeowners insurance product. So moving to slide nine I want to spend a few minutes on our industry, leading homeowners business.

A majority of our customers bundle home and auto insurance, which improves retention and overall economics of both lines and simply put.

We have a differentiated homeowners ecosystem, including product underwriting reinsurance claims capabilities that are unique in the industry.

As a proof point to that since 2017, we've earned $3 3 billion or an average of $667 million a year.

Underwriting income while the industry has generated close to an $18 billion underwriting loss from 2017 to 2020.

The graph at the bottom left.

<unk> homeowners insurance combined ratios for Allstate.

Select competitors in the industry overall since 2011 and you can see there that Allstate has consistently outperformed.

We are well positioned to maintain our margins and homeowners and to continue growing it.

Our house and home product is designed to address severe weather risks and has sophisticated pricing features and inflation factors that respond to changes in replacement values, which is particularly important during an inflationary environment like the one we're in.

The chart on the lower right shows Allstate homeowners net written premium over time as well as policies in force.

We've grown policies enforced steadily increasing to one 5% up at year end and our Allstate agents are in a great position to continue to broaden customer relationships with homeowners product.

Net.

Written premium has really taken off through 2021, reaching 13, 8% variance by the fourth quarter now the increasing spread between those two lines. The net written premium in the policies enforced is due to an increased average premium per policy, which has steadily grown through 2021.

<unk>.

That is mostly due to the premium rising with the increases we saw in replacement costs.

And to a lesser extent.

Rate increases.

That view that difference that I, just illustrated really helps show how our product reacts quickly to inflationary forces and allows us to better match price and risk.

On the claims side, we've made investments in technology, which photo video and aerial imagery for timely and accurate loss cost management.

Shifting to National General's homeowners book.

It provides us an awesome opportunity to grow in the independent agent channel and we're really optimistic about the ability to bundle their with independent agents when we're deploying new middle market products on the National General ecosystem.

But in the near term, we're focused on improving their profitability and homeowners by leveraging allstate's expertise in data.

<unk>.

Pricing sophistication and underwriting capabilities.

Our ultimate goal is to meet customer's protection needs, while optimizing shareholder risk and return.

We underwrite risk directly in homeowners, where we can achieve targeted returns.

We also broker other insurance property policies, where we can meet protection needs for customers, but we can't achieve the adequate returns that we require and this allows us to maintain an auto relationship with them.

We also shipped a lot of our catastrophe risk.

To reinsurance markets, including traditional reinsurance and alternative capital covering both individual large events and an annual aggregate cover.

All in as I said at the start of this we have a differentiated homeowners insurance capability in the market.

And it operates as a really strong diversified book of business, while we improve auto margins. So with that let me turn it over to Mario to cover the remainder of our results before we move to questions.

Thanks, Glenn let's move to slide 10, and discuss how transformative growth positions us for long term success.

So as we've discussed on past calls transformative growth is a multiyear initiative to increase personal property liability market share by building a low cost digital insurer with broad distribution.

This will be accomplished by delivering on four key objectives, improving customer value expanding customer access increasing both the sophistication and investment in customer acquisition and.

And deploying a new technology ecosystem.

We made significant progress across each objective in 2021.

Our commitment to further lower our cost improve improves customer value and enables a more competitive price position, while maintaining attractive returns.

By leveraging our industry, leading telematics offering as well as advanced data and analytics, we are able to redesign products to create competitively differentiated offerings for our customers.

We have transformed our allstate agent model to increase growth and decreased distribution costs.

We've improved the strength of our direct channel to lower pricing and enhanced capabilities and the acquisition of National General further improved our strategic position in the independent agent channel.

Customer acquisition cost relative to lifetime value have improved with higher close rates and increased use of analytics to improve marketing effectiveness. As a result, we invested more in marketing in 2021.

We also made progress on deploying the technology necessary to achieve transformative growth.

New customer and product management ecosystems will improve ease of use and self service capabilities at lower cost. We are using both purchased and proprietary software which is currently in dark deployment before it is operationally tested this year.

Delivering on each objective in an integrated way enables us to increase market share and create additional shareholder value.

Turning to slide 11, let's look at transformative growth has already begun to successfully drive results in our property liability business.

In the chart on the left you will see property liability policies in force grew by 13, 7% compared to the prior year quarter, driven predominantly by the National General acquisition.

National General, which includes encompass contributed growth of $4 2 million policies and Allstate brand property liability policies increased 374000, reflecting enhanced direct channel capabilities and growth in homeowners sold through Allstate agents.

Property liability policies in force also grew organically by one 5% from $37 5 million to $38 3 million in 2021, driven by contributions from growth in both the Allstate and National General brands, reflecting enhanced direct and independent agent capabilities.

The chart on the right shows the breakdown of new issued applications for personal auto which grew 61% compared to the prior year.

The Middle section of the chart shows Allstate brand impacts by channel, which grew four 3% compared to the prior year.

Existing exclusive agents increased new business compared to the prior year, but that increase was offset by fewer appointments of new agents.

As you know we significantly reduced the number of new Allstate agents being appointed beginning in early 2020, as we've been developing and deploying a new agent model to drive higher growth at a lower cost.

The direct channel now represents 30% of new auto policies and grew by 28% compared to the prior year. This more than offset a slight decline from existing agents and volume that would historically have been generated by newly appointed agents.

On the far right of the chart you can see the significant impact of National General, which added 2 million applications in 2021.

Slide 12 shows how protection services continues to generate profitable growth.

Revenues, which exclude the impact of net gains and losses on investments and derivatives increased 21, 9% to $606 million in the quarter.

<unk> increased 23, 5% to $2 3 billion for the full year of 2021.

The increase in revenues was driven by continued growth at Allstate protection plans and arity.

Allstate protection plans grew revenue by 23, 8%.

And written premium by 49, 1% for the full year 2021 compared to the prior year driven by expanded products and partnerships, including the successful launch of the home depot relationship earlier in 2021.

As written premium is earned over policy periods that can range from one to five years. It will continue to generate future revenue growth as we earn the $2 billion of unearned premium associated with Allstate protection plans on our balance sheet as of year end.

<unk> expanded revenues by integrating lead cloud and transparently into its customer offerings, which were acquired as part of the National General acquisition as well as increased device revenue driven by growth in the mile Wise product.

Policies enforced increased eight 9% to $148 million, primarily due to growth at Allstate protection plans.

Adjusted net income of $179 million for the full year 2021, representing an increase of $26 million compared to the prior year driven by growth at Allstate protection plans.

We will continue to invest in growing these businesses because they provide an attractive opportunity to both meet customer needs and create economic value for our shareholders.

Let's move to slide 13, and talk about the Allstate health and benefits segment, which generated growth and increased profit, reflecting the national General acquisition.

We've been offering voluntary benefits through the employer channel for over 20 years and the acquisition of National General added both group and individual health products to our portfolio.

These additions drove a significant increase in revenue with premiums and contract charges, increasing 66, 5% to the prior year.

It also brought in a stream of $359 million of additional revenue shown as other revenue on this slide primarily from administrative fees and commissions from sales of non proprietary health products.

Adjusted net income more than doubled to $208 million in 2021 as higher income from the National General acquisition was partially offset by a higher benefit ratio.

Reflecting higher life mortality in 2021, and lower benefit utilization in the prior year.

Now, let's move to slide 14, which highlights our investment performance.

Net investment income totaled $847 million in the quarter, which was $187 million above the prior year quarter driven by higher performance based income is shown in the chart on the left.

Performance based income totaled $516 million in the <unk>.

As shown in gray, reflecting private equity appreciation and direct asset sales has in prior quarters, we experienced broad based private equity valuation increases several large idiosyncratic contributions.

Contributors meaningfully impacted results in the quarter with about 50% of performance based investment income generated by 10 individual investments.

Market based income shown in blue was $7 million below the prior year quarter.

The impact of reinvestment rates below the average interest bearing yield was largely mitigated in the quarter by higher average assets under management and prepayment fee income.

During 2021, the portfolio also generated more than $1 billion in net gains on investments and derivative instruments, including $428 million from valuation of market based equity investments and $167 million of net gains from the performance based portfolio primarily from gains.

On sales of direct real estate investments.

Our total portfolio return was one 1% in the fourth quarter and four 4% year to date, reflecting income and higher equity valuations, partially offset by higher interest rates.

On the right we've provided our annualized portfolio return in total and by strategy over various time horizons.

Total portfolio returns have been strong across these time periods with contributions from both our market based and performance based portfolios.

Our kit based portfolio delivers predictable earnings to support business needs with returns highly influenced by public markets.

The performance based portfolio is deployed against capital and longer liabilities and supplements market risk with idiosyncratic risk.

Equity investments have higher long term returns, which compensate investors for higher volatility and we have sufficient capital to hold these assets through the full investment cycle.

Our performance based portfolio has experienced returns above our historical trend over the last several quarters.

While prospective returns will depend on future economic and market conditions. We do expect these returns to moderate from last year's level.

Now, let's go to slide 15 to discuss our proactive portfolio management.

Our investment portfolio is a key contributor to shareholder value and is highly integrated into our overall enterprise risk and return processes.

The divestiture of the life and annuity businesses reduced our portfolio from $94 billion at year end 2000, $20 billion to $65 billion today and provided us an opportunity to shift our asset allocation to increase risk adjusted returns.

Since most of these of the assets backing our life and annuity business with fixed income securities. The divestiture lowered overall enterprise interest rate and credit risk.

As a result, we increased our allocation to higher returning equity investments, while maintaining the total amount of capital backing investment risks.

As you can see from the bottom left higher return public equity and performance based investments now account for 23% of the overall portfolio.

These investments do have more volatility than fixed income securities. So we allocate we allocate more capital to support them, but the higher returned more than offset more than offset the risks the risk of increased volatility, creating additional shareholder value.

Over three quarters of the portfolio is still fixed income securities, which generates consistent cash flow the.

The result is a higher returning portfolio with lower interest rate risk overall.

We actively manage interest rate risk and consider how it impacts overall enterprise risk and return as you can see in the blue bars on the right chart, we extended duration from 2018 to 2020, when when interest rates shown in the Orange line were declining.

This mitigated the impact of lower interest rates on auto insurance prices and was a balanced risk and return positioned from an enterprise perspective.

In 2021, we concluded that interest rates were not sufficiently compensating us for the risk that interest rates would rise, which would have a negative impact on the valuation of our bond portfolio.

As you know the consumer price index increased throughout 2021 shown by the light Blue line on the chart and we've discussed at length. The impact that inflation has had on auto insurance margins.

As a result, we shortened the duration of the fixed income portfolio through the sale of long corporate and municipal bonds and to a lesser extent the use of derivatives.

We're taking additional actions in 2022 to further reduce the negative impact higher interest rates would have on fixed income valuations. This will lower fixed income portfolio yield and investment income for the near term, but positions the portfolio to reinvest into higher rates if they continue to rise.

Finally, let's move to slide 16, which highlights allstate's strong capital position.

Allstate's capital position remains strong and enables significant cash returns to shareholders, while investing in growth.

We returned $4 $1 billion through a combination of share repurchases and common stock dividends in 2021.

The common dividend was increased 50% compared to 2020 and common shares outstanding were reduced by seven 8% over the last 12 months. So if you held a share of stock at the beginning of 2020, you now own seven 8% more of the enterprise.

As of year end 2021, we had $3 $3 billion remaining on the current $5 billion share repurchase program, which is expected to be completed by March 31 2023.

With that let's open the line for questions.

Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your telephone keypad until we draw. Your question press the pound key please limit your inquiry to one question and one follow up your.

Your first question comes from the line of Josh Shanker with Bank of America. Your line is open.

Yes. Thank you my first question in the prepared statements in the press release, you mentioned the idea of.

Rationalizing expenses.

In order to get back to profitability. You also have a goal of reducing your expense ratio by 300 basis points through transformed growth over the next three years are you accelerating the process are you going to be.

From a cost out that will return in 2023, but be offset by some more restructuring how the different parts of that play together.

Hello.

Tom did you want to start.

Maybe we lost him.

Yes.

Mario you should start.

Alright.

Oh.

Josh can you hear me yes.

Yes, Yes go ahead.

It only took me five tried with pound six first started.

First.

I don't think you should think about there are obviously things you do in the short term.

We reduced advertising a little bit in the fourth quarter, because we don't want to go get a bunch of customers and then end up with a large price increase in the next six months, how you manage that but in general when you look at our expense reduction program as well laid out.

It's another three years includes everything from using digital processes and getting rid of.

Extra labor to using more outsourcing.

And.

And cleaning up our processes and reducing our technology costs with the new platform. So those things will rollout you can't really accelerate those.

Because it has impact on customers so.

We're not doing anything too.

For 2022 to just get to our number that then youre going to turnaround and look to 2023 and say geez I thought you were profitable and now youre not so.

We take a longer term view of that.

A little different in pricing and that we will be more aggressive early on in pricing.

<unk> tried to get ahead of the curve as opposed to trying to smooth that out over a multiyear period.

Oreo or Glenn anything you would add to that.

Yes, Josh this is Mario thanks. Thanks for the question I would agree with Tom, but I think what we're what we're focused on.

Is permanent cost reductions.

That will on a sustained basis.

Prove our competitive position and improve customer value and really enable profitable growth and we're going to continue to focus on.

Things like operating costs and distribution costs that we can permanently take out of the system and as Tom mentioned leveraging tools like automation.

Process redesign.

Offshoring, where we can and and really kind of implement plans that do take time.

And aren't the kinds of things that I think you can accelerate the execution of but we're also not focus on ripping a bunch of cost out that's just going to come back into the system. We want to we want to make the cost reductions permanent achieved the three points over time, because that will really position us to grow and grow at really attractive returns going forward.

So.

The expense ratio was a little high obviously in the quarter and I'm actually referring to in the press release, where you said that youre going to drive that.

Expenses it seemed like it was it was it was it was.

More reactive to what's going on right now there is a short term benefit at least I'm trying to find the wording in the press release.

In response, Allstate is reducing expenses and claims loss management.

Reducing expenses here in response I mean, obviously you have the the transformed growth plan, but is their initiative on top of that to reduce expenses to get you to a healthy underwriting profit in the near term associated with the spike in losses.

I don't.

We did not mean for it to have that interpretation. When you look at improving profitability in auto insurance number one thing we will be increasing our rates.

Is the lowering expenses partner Mario said.

Growth objective, our transformative growth plan.

Obviously help.

But we would've done that anyway. In fact, we started at two or three years ago, and we're really glad we did that because we came into this year with as Glen pointed out about three points lower than we would have been had we not started but that's ongoing.

Ongoing piece, but it's a component of improving profitability, but it is just not unlike we started it in claim loss cost management.

It is somewhat in between the two.

Always using.

Data analytics.

And new claim processes, new relationships with vendors to try to reduce your costs.

But as the cost savings and the locus of those costs and sometimes you have to adjust the programs you have in place.

I would say that the primary focus on is rate increases in terms of near term improvement in auto.

Your next question comes from the line of Greg Peters with Raymond James Your line is open.

Good morning, everyone I would like to.

Turn our attention to slide eight of your Investor presentation.

And where you roll through the details about the rate increases that you're.

That you've achieved.

And your expectations going forward.

I guess just in that chart that's in the bottom left.

Just further clarification on that and it is number of locations 25 locations. The same thing as states or are we dealing with 100 locations and then when we see an Allstate brand increase of two 9% is that a quarterly increase that we can annualize and I guess.

Where this is going is just trying to.

Figure out the right youre getting versus where the loss cost trend is and if you are catching up.

Exceeding it or still behind.

Yes.

Greg.

I understand the need and desire to get to the math and that's why we've added the monthly disclosure Glenn do you want to take the specifics on supply.

Sure.

So directly answering the question the $2 nine is an annualized in the 25 our states. So this truly is like if we stopped if all we did was the fourth quarter.

Yeah.

We got to nine.

Percent rate increase across our book of business.

We're not stopping in the fourth quarter, and we did a little bit in the third quarter. So we took about $800 million and rate increases between the two quarters and we will continue to but that amount of money. When you look at the right side you look at the 81 and the 702.

That is.

The full impact of the rate increase.

Got it.

Thanks, Greg Thanks for Craig when we get to the when we do the auto call.

March.

We'll give you a little more specifics on how to calculate that because the two 9% is based on the its a dollar number right. We have a dollar number of what we think are going to get it's two 9% is is two 9% times the prior year.

Earned.

Premiums.

As the prior year premium.

If you look at the total of course, when you are raising rates it keeps going up too. So the full year number is not an annualized number of December . So we will help me figure out how to do that in March.

Got it.

I appreciate the color and by the way the increased disclosure I think is appropriate considering where you guys are so applaud that change.

I guess.

The other big picture question around this slide and just the market environment.

Obviously, the auto markets under a lot of <unk> right now with inflation issues and.

There has been.

News reports from different states and different regulators about pushback on rates increased filings and.

I thought maybe you could give us an update of.

I don't want to go state by state that some of the big target States.

How the regulators are responding to the data that you are showing them.

Is it a process, it's going to take a while or do you think they're receptive immediately just if you could give us a sort of a state of the union on the regulatory front that would be helpful.

Glen could you handle that sure sure. So Greg it's a great question and I know we've been last couple of quarters. So the conversation has been a lot about will it be pushed back how do we get it I think the evidence. This page that you pointed us back to page eight the evidence is pretty clear.

Five states implemented at a seven one average increase.

We are continuing to go at.

A very fast pace.

Across other states and even in some cases the same states again.

With rate increases as we get new data and new trends.

And to this point.

Have you are always going to experience some discussion some push on the data some negotiation, if you will and some back and forth.

You can see it there those are implemented rates and and we've been successful and.

Our people and I give a ton of credit to our state managers and our product team who've done over years, an incredible job of building relationships because they provide a lot of detail when they when they do a rate increase or a decrease any type of rate change, we make and we get great responses because ultimate.

These are numbers people talking to numbers people. It is less most often anyway is less a political issue than it is.

Our reality issue of looking at the numbers and what is the justifiable and supportable rate increase and again, we've been very successful. So far we have no reason to believe we won't continue to be we will have pushed back in places and we will have discussions and give and take but overall, we're getting the rates that we need and we are going.

Continue to do that.

Greg is the regulators come at us and they wanted to treat customers fairly.

And as Glen pointed out the person they want as transparency and our team spends a tremendous amount of time.

Trying to be transparent with the regulators.

It's also about what's your history with them. So we did shelter in place payback of $1 billion No regulator asked US Air Force us to do it we did it proactively within 10 days.

Noticing the guideline is to embed organized on it so it's not like they.

They do everything we want but its about treating our customers fairly and then in addition, when youre going in.

On the.

Physical damage coverages.

It's paid in 90 days. So there is not a great debate over whether the money went out or not.

It just does and then bodily injury can be a little more discussion around it because they're longer term trends, but we have good math on that as well. So we're confident we can get.

Combined ratio into the target level that contact about which as of midnight.

Your next question comes from the line of Paul Newsome with Piper Sandler Your line is open.

Good morning, Thanks for all the help.

I was hoping you could talk a little bit more about auto claims severity.

On sort of an ongoing basis.

Maybe the manheim used car prices don't.

Do this incredible.

The increase again.

I think if there's anything you can do to help us kind of figure out looked at.

Trend would be if you pull out some of the extraordinary things that.

Happened over the last six months I think that that might help us get to a better kind of ongoing.

Run rate.

Glen has some good math on that.

Yes so.

As we look at severity.

A significant majority on the physical damage lines, which you were pointing to Paul.

It is driven by the price of course.

I think I said this last quarter, but I really like the example of if you were if you had.

Life Insurance company in all your policy when it's went up by 50% or something.

With no premium change you have an issue and really the value of the car is the policy limit thats. The capitation method for property damage and collision so that moving up has driven our call.

Call it.

<unk> percent of the overall severity issue.

So as I look at that there are a couple of ways you can look at it going forward and this is not just.

All state. This is looking at the world around us that we operate in one is.

<unk> will supply chain issues and chip shortages be corrected most of what you see externally is that that will last through 2022.

The other one is is that there is likely some sort of structural maximum that used car prices go to because they probably won't end up exceeding new cars.

Prices and.

And as we get to a year over year comparison, where in Q2 of 2021 was the largest single quarter of increase where they were set really steep uphill climb.

At some point youre not going to have those same type of increases on a year over year basis, but you may stabilize at a higher level for some period of time and that's what we've factored in to the way, we're looking at our incurred losses and and it's in there in terms of the way, we've we've reported our results and our severities.

And how we're looking at it going forward.

Yeah.

From.

What about <unk>.

Inflation on that the non.

So the non limit at 20% what do you think that's doing today.

Yes that is.

So when you look at the.

Whether it's repair parts costs are accelerating labor like most industries labor costs going up.

That's continuing to move up but I think an important way to look at is if you removed the cost of cars.

Used car price that limit going up.

Everything else combined would be.

In line with sort of our normal trend for severity that mid single digit trend that you'd expect to see.

Now then that's completely excluding one major factor, so I understand that a little bias to it because.

Car prices do go up a little bit over time, but it is driving the lion's share of it because it's not like you expect severity to be flat year over year, they've moved up.

Every year over long long periods of time, Thats, just normal inflationary movement that happens in there wherever it's low single digit some years mid single digits or even higher single digits other years.

What is so extreme right now driving the double digit increases is that change in car prices, but the 20% that I referred to is labor and repair costs, which we're really looking to tackle by increasing our use of direct repair.

And leveraging our scale and parts purchasing.

Thank you very helpful.

Your next question comes from the line of your own Qunar with Jefferies. Your line is open.

Thank you good morning.

First question.

Slide seven shows that auto frequency is still quite a $1 $4 billion good guy relative to 2019.

So my question is do you expect that frequency to normalize and if so is the 7% rate increase that you show on slide eight.

Contemplating that normalized frequency.

Glenn do you want to take that.

I will.

Yes so.

I give you a ton of credit to our team that does all our math in our modeling.

Done a really nice job on frequency and we're sitting just about right on top of where we expect it to be a year ago on it so.

Will it normalize to some degree probably while we can't predict differ.

Different things can happen in the world, we can't predict and won't.

Give a forward looking prediction of frequency.

You would expect there to be some normalization to pre pandemic levels, but as we've said for a while now that we believe that there is some.

Durable structural change people arent going to be commuting to office buildings as frequently as they did before the pandemic.

All know many people, including some of ourselves that don't do that and we won't do that even on an ongoing basis.

40% of our losses occur in rush hour.

So the commuting time Monday to Friday mornings and afternoons, so when you've got.

Significantly fewer drivers on 40% of your loss time period in that shift and when people drive it makes changes to both frequency and severity. So we think that there is some durable.

Reduction there.

<unk>.

Barring all the other things that change around it would be consistent in the way frequency stays a bit lower but as I mentioned earlier in the prepared remarks, we also see some severity increase from that because that.

Driving has shifted to more leisure times, two times, where the roads are more open people are driving faster it creates harder hits with greater severity, that's hitting us both on the physical damage in the casualty side. So theres just a lot of pieces and parts in there but to summarize with your question.

Are we contemplating that in our rate plan the answer is absolutely yes.

We are contemplating in the rate plan, our expectations for frequency our expectations for severity and and we're going hard after rate as you can see and we're not done.

Okay. That's very helpful. I appreciate that.

Maybe shifting to homeowners for a second.

I fully recognize that you have.

Tremendous track record there and certainly.

Your fair share of.

Income there.

For the year is that set if I look at the specific quarter seems like you saw some year over year deterioration, which seems to be a bit of an outlier relative to some of your.

Earlier reporting peers I'm, just curious as to why this book maybe saw a different trend.

I know you called out higher.

<unk> impact, but was there anything specific to the Allstate book.

It's hard to compare us to other people.

Youre talking about progressive I would say combined ratios, 15% to 20 points better than ours and theirs.

I'm, a billions of dollars of either theirs and ours.

During the quarter as a comparison.

But so.

The business bounces around a little bit we get a good return on capital on it.

Was it.

In the high 90% is that where we want it to be on a long term basis no.

Is it bounce around by year, yes.

And so we feel highly confident we can continue to differentiate ourselves in this space.

Yeah.

Your next question comes from the line of David Miller to Madden with Evercore ISI. Your line is open.

Hi, Thanks.

Just a question on when you think you'll be able to get to that mid ninety's combined ratio.

Auto.

Glenn I think you've talked about some of the.

I guess youre thinking around some of the moving parts around physical damage.

Severity.

So I'm wondering if you could maybe we can zoom out and think you're timing. When you guys think you guys can get back to that mid nineties targeted combined ratio in personal auto.

Good question I understand why its important because everybody is trying to figure out the turn.

And when will it be in the P&L. So you can given an early.

I understand the same thing as when people are looking at sort of various rate increases the headline would be we're not going to give a projection as to when because we can't predict what will happen to the frequency severity rate increases what you can do is look on a longer term basis.

<unk>.

When you when you look at auto insurance.

And you look at the broad competitive set.

Allstate Progressive Geico tend to outperform the industry and have combined ratios, which generate attractive returns and just given just scrap it out over five or 10 years and you too we all sort of hover in the same place. There are other people like some of the large mutuals and stuff, which don't operate at that level, but we've proven.

And ability to get there. So we think that we will continue to get there as to the speed of it sometimes people ask about the speed very idiosyncratic and like.

If your frequency moved up too.

Mirror.

Our pre pandemic levels.

Earlier than our slip and you should've been taking price earlier.

Severity is the same thing people manage their loss costs differently.

So we tend to look at it.

Long term, we know how to make money in this business.

Tampa and we'll get there, but we've not put a date out and which we said will be in the mid nineties.

Okay. That's fair and then for my My second my follow up question just on.

I just wanted to focus a little bit on the bodily injury severity and some of the casualty changes some of the charges you took this quarter.

Maybe you could help me understand.

Where thats been running.

What specifically happened in this quarter that made you realize that charge.

And I think the last time you spoke about this you had said that it was it was more or less in line with medical cost inflation. I think this was a few years ago.

And that was notably below your peers.

Back then so.

I guess sort of a long way of asking how are you. How are you thinking about the bi severity now given the changes that you've made and how are you reflecting that in your picks going forward.

Yes, it's a good question.

The percentage is sometimes capable confusion, because it's a percentage and.

Absolute dollars is the way we reserve for it.

Mario do you want to talk about the reserve changes.

Sure Tom.

I guess the.

The place I'd start is we are.

Really strong reserving.

Processes and we're continually looking at our reserve levels. Both for the current report year, but also for prior years.

And we're taking into account things that we're seeing both in terms of inflationary trends as well as other phenomenon, we talked a little bit earlier around things like medical inflation consumption attorney representation. Those all factor in so I think David the thing we saw.

This quarter was we continued to see upward development in prior years and some of the casualty coverages and we took that into account.

This quarter in terms of raising our ultimate report your expectations for bodily injury and a couple of the prior years, but it was it was really in reaction to.

The continuation of some of those those trends that I talked about that are causing bodily injury and other casualty severities to increase to levels that were beyond kind of the range of outcomes that we had established.

Established.

Earlier on for those prior years, so we reacted to it.

We tend to be conservative when we set reserves.

But in this particular instance, we saw those trends develop out and we we reacted to it and increase the prior year reserves on auto casualty.

So and we do it by state and by coverage.

Theres, a fair amount of gray.

Granularity to it.

It is not.

Not always as precise as you like because you're trying to guess, what it's going to cost to settle a suite with somebody.

Well. Thank you for participating let me just close by saying, there's two stories here and there.

There were stories about the insurance industry in Allstate dealing with auto insurance profitability caused by inflation.

Fixing cars and then also at <unk> great.

Great longer longitudinal story is I don't want to lead on the cutting on Florida is about a significant repositioning of the company while dealing with that issue. So we sold out of our life business.

<unk> $4 billion success with National General linked to the fold increase our market share by 1%, which different position in the independent agent channel.

Transformation of the Allstate branded business is going quite well, whether that's expanding in fact lowering cost.

Building out new products and improving our competitive position and then our protection services business has really reached a subs and it's their multibillion dollar level.

Large stores.

Future revenue growth.

Accounting works.

And at the same time, we're continuing to buyback shares pay great dividends. So thank you all for participating and will affect next quarter extra will talk to you in March when we come back to auto and stuff.

This concludes <unk> fourth quarter conference call you can now disconnect.

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Good day and thank you for standing by welcome to the Allstate fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After our prepared remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your Pal.

The phone please limit your inquiry to one question and one follow up as a reminder, please be aware that this call is being recorded and now I would like to introduce your host for todays program. Mr. Mark <unk> head of Investor Relations. Please go ahead Sir.

Thank you Jerome good morning, welcome to Allstate's fourth quarter 2021 earnings Conference call.

The prepared remarks, we will have a question and answer session.

Today following the close of the market, we issued our news release Investor supplement and posted related materials on our website and I'll say investors Dot com.

Our management team is here to provide perspective on these results.

Allstate's results may differ materially from these statements. So please refer to our 10-K for 2020 and other public documents for information on potential risks.

Before I hand, it off to Tom I would like to turn to slide two and discuss the expansion of Allstate's Investor Communications.

These calls would be in addition to our quarterly earnings calls our first call will focus on the current auto insurance operating environment and will be scheduled to take place in March.

Topics on future calls may include homeowners insurance independent agent channel strategy expansion of protection services and investments.

In addition, two investor calls we will also begin disclosing the Companys auto insurance implemented rate actions from the prior month on our Investor Relations website to provide additional information on premium growth.

Great disclosures will be posted on the third Thursday of every month like a monthly catastrophe loss disclosures, though the rate postings will occur regardless of whether there is a catastrophe loss release in the month I look forward to the additional engagement. These changes will bring and now I'll turn it over to Tom.

Good morning, and thank you for joining us today I'll, let's start on slide three as you.

Allstate, we focus on execution and innovation as ways to create shareholder value.

Strategy has two components increased personal property liability market share and then expand protection solutions, which are shown on the two old wells on the left you can see.

Start with the upper oval.

We've been a leader in product innovation, our multichannel distribution and leveraging technology telematics and claims settlement. So we're now building a low cost digital insurer with broad distribution to transform itself.

We're also diversifying your businesses by expanding protection options that are shown in the bottom oval.

For customers a wide range of protection and workplace benefits commercial insurance roadside services car warranties protection plans somebody they need protection.

<unk> is a leading innovator in telematics and avail.

Eric.

And nobody else that startup.

Basically the Airbnb model for Patterson.

We leverage the Allstate brand customer base and capabilities to drive growth.

Well on.

On the right panel you can see our five annual operating priorities, which focus on both near term performance and long term value creation.

So let's move to slide four and go through those operating priorities for the fourth quarter in the full year.

Revenues.

<unk> 13 billion in the quarter increased 18, 7% compared to the prior year.

For the quarter, resulting in a $50 billion of revenue for the full year 2021.

That reflects about a one percentage point increase in the auto insurance market share with a national General acquisition growth in homeowners premium and then we also had strong growth at Allstate protection plans and higher investments.

Property liability premiums increased 17%.

Net investment income of 847 million in the fourth quarter of 2021 increased to $187 million compared to FY 'twenty, which reflects really strong results from the performance based portfolio.

Net income was $790 million in the quarter compared to $2 $6 billion in the prior year as lower underwriting.

And a loss related to the sale of life and annuity business. It was only partially offset by the higher investment.

Adjusted net income number that's how I measure it takes out some of the things that we think are not related to the current economics with $796 million or $2 75 per diluted share.

As compared to the $1 6 billion generated in the prior year quarter, reflecting lower underwriting.

Remember that 2020 at low auto accident frequency, reflecting the impact of a 10 minute.

2021 was a year.

I had two distinct paths as it relates to the profitability of auto insurance.

In the first half of 'twenty or 'twenty, one auto insurance underwriting income benefited as lower accident frequency offset increased claim severity.

As a result underwriting income for auto insurance totaled over $1 $7 billion in the first two quarters.

In the second half of the year auto claim frequency continued to increase towards pre pandemic levels and the cost of repairing cars and sediment bodily injury claims accelerated.

We began increasing auto insurance rates in the third quarter and it's accelerated in the fourth quarter.

These rate increases however, our earned his policies renew so that the cost increases resulted in an underwriting loss of slightly over $450 million in the last two quarters.

The underlying combined ratio for auto insurance was 92 five for the full year and $100 two for the fourth quarter of 2021.

Adjusted net income of $4 billion for the full year was $13 48 per share, which generated a return on common shareholders' equity of 16, 9%.

Let's go to slide five to go through the operating priority resulted in more detail.

To better serve customers, we lowered expenses to improve the competitive price position of water heater.

Enterprise net promoter score finished slightly below the prior year, but in part that reflects the absence of the beneficial impact in 2020.

Endemic related customer accommodation, you'll remember it included $1 billion of shelter in place program payments and expanded coverage at longer payment terms.

This year, we expanded protection offerings in group and help individual products the.

The acquisition of National General.

We significantly grew our customer base in 2020 , one with total policies enforced increased nine 8%.

<unk> hundred $90 9 million.

Property liability policies in force increased by 13, 7%.

The acquisition of National General expansion of our direct distribution in the Allstate brand and increase personal insurance provided through all city.

Protecting surfaces policies also continued growth increasing eight 9% to 148.

4 million.

And the third priority achieve target returns of capital that was accomplished we completed the year with adjusted net income of 4 billion and our return on shareholders' equity of 16, 9%.

Despite the rising loss cost.

Environment the property liability combined ratio finished 2021 and 95 nine.

Protection services continues to grow profitably, it's really driven by Allstate protection plan.

Net investment income was $3 $3 billion in 2021, reflecting proactive portfolio management and exceptional performance basis.

I'll take you through that later as well.

The total return on our portfolio was four 4%.

So sustainable value creation for not only <unk>.

Execution on the first four items, but long term growth platform in.

In 2021, we sold the life and annuities business for $4 4 billion.

We acquired National General for $4 billion to capture expense savings leveraging independent agent technology platform and improve our strategic positioning, especially from China.

Significant progress was made on transform their growth to be.

<unk> low cost digital insurer with broad distribution.

Allstate protection plans continued its rapid growth.

Is that $1 $8 billion, that's five times greater than when the company was acquired five years ago.