Q2 2022 Allstate Corp Earnings Call

August 4, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Thank you for standing by and welcome to the Allstate second quarter 2022 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 this session you will need to press star one one on your telephone.

Remind you today's program may be recorded and now I'd 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 second quarter 2022 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 filed our 10-Q and posted today's presentation on our website at Allstate investors 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 and reconciliations in the news release and Investor supplement and forward looking statements about allstate's operations of this result may differ materially from these statements. So please refer to our 10-K for 2021 and other public documents.

So risk.

Additionally, we'll be hosting our next special topic Investor call on September one focusing on albeit investments got it now I'll turn it over.

Well good morning, Thank you for investing your time with update today.

Start on slide two.

Allstate's strategy to increase shareholder Vegas two components.

Increased personal property liability market share and expand protection services, which are shown on the left.

We're building a low cost digital insurer with broad distributions with transcon growth. We're also diversifying our business by expanding protection offerings by leveraging the Allstate brand customer base capabilities and expanding distribution.

On the panel on the right in the second quarter, we made progress executing our strategy. While we continued to implement a comprehensive strategy to improve profitability that includes broadly raising auto and home insurance rates and.

The second half of 2022, we plan to file for rate increases in excess of the increases implemented in the first half of this year, which were six 1% of Allstate brand countrywide agreements.

We're also reducing expenses advertising and growth investments.

Underwriting guidelines have been and will be changed to reduce new business Brian .

We're not earning adequate returns.

And we're also executing.

<unk> operating actions to manage loss cost in a high inflationary environment.

These actions will likely have a negative impact on policy growth.

And now while the current environment requires.

Huge focus on margin improvement, we continue to advance our transponder growth strategy, where profitability level and when profitability levels are acceptable, we'll have a business model to capture market share.

<unk> services businesses are generating profitable growth other earnings declined slightly this quarter as we invest in that growth.

Given the negative impact of inflation on the auto insurance business as you know.

Beginning late last year, we reduced the bond portfolio duration to lower exposure to higher interest rates, which helped mitigate the reduction in bond valuations by approximately $1.

$3 billion in the first half of 2022.

Our strong capital position enabled us to maintain high cash returns to shareholders in this environment.

Moving to slide eight let's review second quarter performance in more detail.

Total revenues decreased three 4%.

Our year quarter.

<unk> property liability premiums earned increased eight 6%, which reflected higher average premiums and policy growth.

Higher launch cost and the current report year in upward loss reserve development of $411 million in the prior report years resulted in the property liability recorded combined ratio of 107 nine in the second quarter.

Net investment income of $562 million was 42% below the prior year quarter since performance based income was exceptional in the prior year.

Net losses on investments and derivatives were $733 million in the quarter as lower valuations in equity investments and losses on fixed income sales, which were only were only partially offset by the derivative gains associated with the <unk> portfolio duration shortening.

Combination of these factors led to a net loss of $1 1 billion.

Quarter, and an adjusted net loss of $209 million or <unk> 76 per <unk>.

Diluted share.

The adjusted net income return on equity was six 9% over the last 12 months, which is obviously unacceptable from our standpoint, it's substantially below the levels, we achieved last year, but we remain committed to achieving our long term returns on equity of between 14 and 17%.

Now, let me turn it over to Glenn to talk walk through our property liability results in more detail.

Thank you Tom let's start by reviewing underwriting profitability on slide four the underwriting results reflect the high level of inflation, which is increasing severity leading to an underlying combined ratio of $93 four for the second quarter and recorded combined ratio of 107, nine which is.

Shown in the chart on the left.

The chart on the right compares last year's recorded combined ratio of 95, 7% This year's second quarter.

And higher auto insurance underlying loss ratio drove eight six of the $12 two point increase.

Claims severity has been increasing faster than earned rate increases.

The other large negative impact was from prior year reserve strengthening in this quarter, which I'll cover in a few minutes.

<unk> positive impact on there with the one seven points from expense reductions.

Let's move to slide five and talk about profitability and rising loss costs in more detail.

As you know we have a target combined ratio for auto insurance in the mid nineties and you can see on the chart, which shows the combined ratio by year than the first two quarters of this year that we have a long history of meeting or exceeding those targets, which is supported by our pricing sophistication underwriting claims expertise and expense management.

Now in there Youll see 2020 was an outlier because we had much better than target results then due to some of the early pandemic frequency impacts and as we move from that environment to the high inflationary environment. We're in today.

<unk> claims severities increase the underlying auto combined ratio of 102, one for the quarter and 105 year to date.

Auto non catastrophe prior year reserve strengthening in the second quarter totaled $275 million, which is primarily physical damage and injury coverages.

The most significant impact, though on the combined ratio was.

Report year incurred severity for collision and property damage and bodily injury claims, which increased by 16, 12% and 9% respectively over the average of the full year 2021 incurred.

Because the costs are rising rapidly during 2021 the quarter to quarter increase a comparison is even greater.

And frequency also went up about 5% to seven points, but it's still well below pre pandemic levels.

So let's go to slide six and we will go deeper into the prior year physical damage for reserve development. The chart on the left shows used car values. They began to rise in 2020, and if you go back looking from the beginning of 2019 to current used car prices have gone up more than 60% and continue to stay at an elevated.

Level.

At the same time OEM parts and labor rates have increased during the first half of this year, which causes severity increases for coverages like collision and property damage.

Now, we anticipated that those trends and the delays that are taking cars a long time to be repaired right now would increase the amount of claim payments. We made on 2021 losses. After the end of the year, even though these are relatively short duration claim.

The chart on the right shows gross paid losses for physical damage coverages for the six months. After the end of the calendar year now our expectation for paid losses for 2021 claims from months 13 to 18 was that it would be about $125 billion, which you can see from the chart.

Is about 40% above the prior years, you can see that from the dash line on the far right bar compared to the bars to the left of it.

But at the end of the second quarter. The actual paid losses were 148 billion, which exceeded even our higher estimate by $230 million and there's a large driver of the prior year reserve increases.

All other non catastrophe prior year development primarily from injury.

Commercial auto and homeowners totaled $268 million in the quarter.

Let's go to slide seven and discuss how higher auto insurance rates have been and will be implemented to improve profitability. Since the beginning of the year, we've implemented broad rate increases across the country as shown on the map.

Nine states, where we had increases over 10% and auto rates have been increasing 48 locations inclusive of Canadian provinces.

Those rate increases are expected to increase Allstate brand annualized written premium by six 1%.

Now we have not been able to get.

Adequate rate in New York or any increase in rate in California.

New York represents about 9% of our auto premium.

And the implemented rate there was.

Leverage the annual flex filings process, there and it gave us less than 5% rate in our current indicated indication there is significantly higher than that to get to an adequate return similarly in California, which represents about 12% of our audit premium. We recently filed in the second quarter, a six 9% increase.

Which again are significantly below the overall rate need there.

In states markets risk segments or channels, where we cannot achieve an adequate price for the risk.

We're implementing more restrictive underwriting actions in reducing new business as needed until adequate levels of radar approved.

Let's move to slide eight and we'll look at how these rate increases are impacting and will impact the combined ratio for auto insurance.

What you see here illustrates our path to target profitability, along with the magnitude of actions, we've already taken and what's required prospectively.

Starting on the left through the first six months of the year. Our auto insurance recorded combined ratio was 105 and that's shown in the Blue bar.

To start with we normalized that by removing the impact of prior year reserve increases and going to a five year average on catastrophe losses that improves the combined ratio by two five points represented by the first Green bar.

The second Green bar reflects the estimated impact of rate actions already implemented when fully earned into premium. So these are already implemented actions that are in market and renewing on policies. They total an additional $1 $7 billion of effective premium across all state and National General brands.

Those will be earned over the coming quarters and fully earned by the end of 2023.

Now of course loss costs will continue to increase whether it's inflationary impacts on severity or higher frequency.

Which would increase the combined ratio from what I. Just described there so prospective rate increases must exceed the loss cost increases that come to achieve our targeted returns.

Now everything I, just described combined with our non rate actions, such as reducing new business and expenses.

Gives us a track where we expect to achieve our target.

Combined ratio in the mid Ninety's in auto insurance now the timing of that will be largely dependent on the relative increases in pesos as increases in premium and loss costs.

So on page nine we'll take a look again at our industry, leading homeowners business.

A significant portion of our customers bundle home and auto insurance and that improves the retention and the overall economics of both products.

We have a differentiated ecosystem in homeowners.

That includes a differentiated product underwriting reinsurance claim capabilities and we discussed a lot of those capabilities and our last special topic call.

Our long term underwriting results show the strength of the system. Our five year average recorded combined ratio was 91 nine as shown in the chart on the left.

And that produced $3 $3 billion of underwriting profit since 2017, while the industry lost over $20 billion in that same period.

Now our second quarter combined ratio in most second quarter combined ratios have historically been higher than full year results, primarily due to catastrophes in the second quarter. This year was at 106, nine which reflected again higher catastrophes and one seven points of unfavorable non catastrophe prior year reserve estimates.

Our year to date recorded combined ratio for home is 95 eight.

Homeowners insurance is certainly not immune to the inflationary environment, we're in and we continue to see increases in labor and material costs to.

To combat that our product has or has sophisticated.

Decade pricing features that respond to changes in replacement values and we've taken rate. If you see on the chart on the right that shows some of the key Allstate brand homeowners operating statistics.

We have grown net written premium by 15, 2% from the prior year.

And Thats on a policy base that we grew of one 2% in the second quarter, where our Allstate agents remain in a really good position to broaden customer relationships.

So as you've heard me say.

Several times and certainly in our last special topic call, we're really well positioned and homeowners to not only maintain the competitive advantage, we have but to grow that line of business and with that I'd like to turn it over to Mario.

Thanks Glenn.

As Tom mentioned, while we are improving profitability. We also continue to invest in the core components of the transformative growth strategy to increase market share in the personal property liability business.

Slide 10 is the flywheel of growth that we have discussed on earlier calls.

Transformative growth is a multi year initiative designed to increase personal property liability market share by building a low cost digital insurer with broad distribution.

I won't get into all the pieces today, but I want to highlight two specific items.

First we remain committed to achieving our adjusted expense ratio goal 23 by year end 2024, which represents a six point improvement compared to year end 2018.

Secondly in the quarter, we launched beta versions of our new fully digital auto insurance product sales experiences made possible with new technology for relationship initiation and product delivery.

Building. These foundational elements will enable us to scale growth when adequate adequate insurance pricing is the same.

At the same time, the protection services businesses and the lower strategic global are growing and increasing shareholder value as shown on slide 11.

Revenues, excluding the impact of net gains and losses on investments and derivatives increased eight 3% to $629 million in the quarter, primarily driven by Allstate protection plans adjust.

Adjusted net income of $43 million for the second quarter of 2022 decreased $13 million compared to the prior year quarter as ongoing investments in growth are being made to position these businesses for future success.

Policies enforced did decrease by one 6%, reflecting expiring protection plan warranties and lower retail sales compared to the favorable environment in the prior year quarter.

Moving to slide 12.

State Health and benefits is also a growing is also growing and attractive set of businesses that protect millions of policyholders.

The acquisition of National General in 2021 added both group and individual health products Smart portfolio as you can see on the left.

Revenues of $574 million in the second quarter of 2022 increased four 6% for the prior year quarter, driven primarily by growth in group and individual health businesses.

Adjusted net income up $65 million increased $3 million from the prior year quarter, driven by increased revenue, which was partially offset by a higher benefit ratio primarily an individual health.

Now, let's shift to investments on slide 13 to review investment performance in the portfolio risk and return position, we have taken given higher inflation and the possibility of a recession.

Net investment income totaled $562 million in the quarter.

Which is $412 million below the prior year quarter as shown in the chart on the left.

Market based income shown in blue was $13 million above the prior year quarter, reflecting an increase in our fixed income portfolio yields which are now benefiting from investing at yields that are higher than the overall portfolio is current yield.

Performance based income of $236 million.

As shown in dark blue.

Was $413 million below what was an exceptional quarter in 2021.

The performance based internal rate of return over the last 12 months was 24, 6%, which remains above our long term return expectations.

The performance based portfolio includes private equity as well as a mix of other asset types, such as real estate and infrastructure, which diversify our performance.

Excuse me in this segment.

In the second quarter real estate investments had strong performance, including gains on asset sales, while private equity results were lower.

As a reminder, our performance based results are reported based on a one quarter lag. So second quarter results reflect March 31, sponsored financial statement and future returns will reflect market and economic conditions from the prior quarter.

The total portfolio return was negative two 8% for the quarter and negative five 6% year to date due to higher interest rates and credit spreads lowering the market value of bonds and.

And a decline in public public equity valuations.

While these market conditions negatively impacted the market value of the portfolio.

To generate operating income because of proactive portfolio actions. The results are better than the broad indices with the S&P 500 index, 20% lower than the Bloomberg U S aggregate bond index, 10% lower.

The chart on the right illustrates the shift in risk positioning we have executed to protect portfolio value and position us to take advantage of opportunities as conditions evolve.

We reduced interest rate risk towards the end of 2021 and into the first quarter through the sale of longer duration bonds and the use of derivatives.

The portfolio duration is shorter than our long term targets, which has mitigated the negative impact of higher market rates by approximately $1 $3 billion. This year.

With recession concerns rising the exposure to recession risks that asset was also reduced sales of high yield bonds bank loans and public equity.

These sales were largely executed prior to the most significant credit spread widening and equity market decline for the end of the quarter further preserving portfolio value.

Now, let's move to slide 14 to discuss Allstate strong cash returns to shareholders of $1 9 billion in the first two quarters.

Over the last year shares outstanding have been reduced by eight 7%, providing more upside per share as profitability has improved.

In addition, there was another $1 8 billion.

Remaining on the current $5 billion share repurchase authorization.

Adjusted net income return on equity of six 9% was below the prior year period, primarily due to lower underwriting income.

Achieving our target combined ratios for both auto and homeowners insurance will bring adjusted net income returns on equity back to our long term target range of 14% to 17%.

With that context, let's open up the line for questions.

Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one one on your telephone one moment for our first question.

And our first question comes from the line of Greg Peters from Raymond James Your question. Please.

Good morning, everyone.

I would like to.

Go back to slide eight for my first question.

And I guess.

The two areas of caught my attention as you were running through them, Glenn where the future loss costs arrow and the rate and other actions and then.

The box you say youre pursuit pursuing larger rate increases in the second half of 2022 relative to the first half. So maybe you can give us some additional <unk>.

Detail around what you guys are thinking on those those two areas.

With that chart.

Greg This time out.

Overview, and then Glenn you can jump right in.

For sure.

We don't give perspective.

Our earnings estimates our gift perspective line by line.

We would expect future loss costs to go up but we don't.

And we're booking to have them go up in the future.

Also as we've mentioned expect to increase the rates.

With that Glenn do you want to provide some more perspective on both.

The trends Youre seeing historically in loss cost.

And then what you were thinking about.

How youre thinking about rate increases.

Sure.

Good morning, Greg.

On the loss cost piece of it I know I know theres been some opinion out there that maybe the worst is behind us and the inflation will slow or.

Just listening to other calls out there.

We're not sure that and we certainly want to have the right outpace the loss trends one thing I'll say is when you look at our.

If there is anything you want to add on Jeff.

First.

We are fully committed to increasing rates necessary to get our combined ratio down to the target levels that Glenn talked about.

That obviously bounces around by quarter.

And what you saw is what we got implemented in the second quarter.

And the early part of your question you said submitting as an forward looking.

That's not what we're submitting what you saw and that relates to just what got implemented.

We're obviously in conversations with regulators when you have these kind of increases.

Continuously so there are some states where.

Glenn's team chooses to go down and meet with the regulators to explain the numbers and then submit it.

Minute.

So we feel good about where we're headed there Glenn anything you want to add to that.

I would just add.

It really is about timing and about which states go through select if you look at the amount we filed per state, we really haven't backed off at all David It is the states that went through in that cycle.

They arent as large and so the countrywide impact when you do a medium or smaller state population wise is lesser than the big States. We have some very large states going through the pipeline right now and and so I think youll see that timing level itself out and it's why we're able to say to you that we are seeking more.

Right in the second half of the year than the first half of the year, we have some very large states with meaningful rate increases coming through.

Got it. Thanks, Yes, I was referring to I, obviously can see the implemented right I was referring to submitted which I guess is something that they're not approved or disapproved. Yet. It's just more kind of a leading indicator that I track and you just look like you guys had slowed a little bit in the second quarter versus the first quarter.

But it does sound like that is more timing related as well.

<unk>.

Maybe four.

Just another question I was just looking through the businesses and in auto specifically and I notice that the Allstate brand combined ratio was nine points above the <unk>.

Matt Jen combined ratio for the quarter and it's been trending it's been higher for the last few quarters could you just yes, that's kind of counterintuitive to me just given the differences in the in.

And those books of business. So could you just maybe talk about what's going on.

Between those two.

David It's an astute question and let me, but let me take it up a level and then get Glenn to jump into net gen versus.

The Allstate brand.

Because many of Europe also written and asked about.

Like how do you stand versus competitors and stuff like that so let me just take it up and deal with that and then we'll go into the specifics so.

We always look at different comparisons, whether it's internal or external to get a sense of our performance.

<unk>.

Said, when it's external it tends to be more directional versus hard variance analysis because of the differences in strategy, particularly because you have different strategies and our risk profiles different state mix.

It's better if you look at the long term results rather than importantly numbers, particularly when youre using percentage changes on a quarter by quarter.

Said.

The numbers are the numbers.

Understand them and evaluate them first thing I would say is when you look at most of you have asked about progressive they are really strong competitor. So we have great respect for them.

As it relates to auto insurance over a long period of time.

Allstate Progressive and Geico, if all have attractive returns.

All dealing with the impact of.

But I would say a wide swings in frequency and severity for auto claims in particular, that's driven by the pandemic and then the related inflationary impacts.

Our repairs and prices.

They did report that is progressive a better combined ratio than us this quarter.

They began raising prices earlier in 2021, but again.

Don't know why.

We're not them.

But they did have different trends in frequency, both last year and this year.

So and of course claims statistics are different for everybody and sometimes people change from how the economy over time.

But the numbers IC are that in 2020, we both had frequency declines from 2019.

That was reflecting the impact of shutting down the economy. So we were down in collision, we were down 26% and they were down I think by 2324%.

Last year, there collision frequency increased by 26%, whereas ours increased by only 18%.

You would expect them to raise prices more than we raised them. This year theyre down in frequency and we're up.

So you would expect our combined ratio to be higher than theirs.

It's hard to say why these short term trends are different.

But Glenn will talk it may be that they have a relatively small share of the customer's statement that they call the Robinson.

And so the comparison to net Gen will be helpful for you to see.

It could be state mix it could be a whole bunch of other things so I can't intuit exactly their results.

And so Glenn will go through that risk mix and show you how that impacts the different results.

As it relates to the strength of the business model, though.

Your strategy I think it's also worthwhile looking at other lines and as we've talked about that in the last call Allstate's, an industry leader in homeowners with very attractive combined ratios.

Recorded combined ratio this quarter again as hires Glenn talked about.

It typically is in the second quarter on a longer term basis, though we've obviously done quite well to.

Put that in perspective, if we had $112 five combined ratio on our homeowners business.

Last year, our underwriting and would've been about one point.

Lower than it actually was and Thats, particularly hard on a business that requires twice as much capital as auto insurance.

As it relates to commitment to profitability speed precision, we dramatically reshape that business, which we took you through.

So.

Our business models tend to be good and precise.

Tend to look at both lines of business to see how we're doing with that Glenn do you want to talk about.

Net gen versus the Allstate brand.

Yes, I will David Youre getting a good detailed answer there from time in the afternoon, you like hit the daily double here because it is a really good question an important one.

I want to take you back and kind of look at it over the 18 months.

No.

That we've owned Nat Gen since the closing of that deal.

And it's a good timeframe to use because 18 months.

As the time it takes to earn out the full annualized premium changes also so you go back to first quarter of 2021, and this would be true by the way not only of comparison of Allstate brand and Nat Gen, but allstate to other competitors like Tom was talking about.

Allstate was running a combined ratio of about 10 points lower.

And the reason for that was the frequency.

It was lower.

Frequency on more non standard non standard business came back much quicker as people needed to use their cars to make a living in and.

There was just a difference between different books of business and so as a result, the good news was for the Allstate brand was that is it really low combined ratio is around $80.

The bad news is in the current state would be to say that well. When you are running at that level you need to take rates now I mean, you can't you can't sustain and even some places require you to refile your rates you can't sustain that level that far below target combined ratios.

And National General on the other hand, we're still taking a maintenance level of rates up over that period of time, So now flash forward to today.

Their frequency down while allstate's is up and and then you've got a higher average earned premium going through now.

And I mentioned before the $1 $7 billion of premium that we have already in the system not only filed but approved in already like renewing on policies that hasnt been earned yet we've actually only earned 15%.

The premium that's been raised through this cycle. So you can get 85% of it out there still left to be earned whereas national general is earning off of a base plus they didn't have the the hole to fill so to speak of the negative rates that again, we've appropriately took because when you're running an 80 combined.

Ratio, but you got to fill that up to get back to par and then go up from there. So there is a difference in the average earned premium.

When and where are we putting up banner ads when people are searching for auto insurance, which risk categories, which markets and flat out we've taken a lot of marketing dollars out right now, we're just reducing the marketing that we're doing one it'll improve expense to it will lower the new business flow and allow us to.

More quickly get back to profitability.

And then the last one I'll say as you know the sales incentives that are out there.

With our agents about how we're.

<unk> people to grow and in which places.

So when you put all of that together and.

And you look at how you are.

Going to market, you're really limiting in some places.

The ability to grow your business.

With the intent of being not growing and nonprofit segments.

Got it.

Okay.

I should assume then that that would be us.

A very material impact on loss ratio as we go into the back half of the year.

I don't think you should assume very material purchase subject to anybody.

Underwriting actions.

Andrew won't get us to where we need to go we need to raise prices cut.

Cut our expenses.

The big drivers this is helpful.

And as.

I'd like to say our team look anybody can give it away.

So there's no sense, writing business and knowing youre going to lose money on forever.

So this is more about managing long term profitability than what it would do for the combined ratio in the second half of the year.

Got it and then just looking looking backward a little bit.

A lot of your competitors that their rate increases.

All over the place.

And I think you've got what about two 5% across the whole book last quarter.

What was the thinking going into that why not a lot more rate was it precluded by the fact that 20% of the book is in California, and New York, and it's a lot more difficult, but but maybe just rewinding back a little bit.

Why not pushing for a lot more rate.

Five months ago.

Well.

Address part of that with a comparison of progressive.

Just to address that first that philosophical concept, we are raising prices as fast as we can everywhere. We can so we're up six 1% in six months of this year, which is would.

Would have been equal to maybe even our highest year.

And a long period of time, so we're and we expect to get at least that much in the second half. So there wasn't any thinking of less let's dial down to two five.

Let's get everything we can everywhere with it.

It obviously.

Does depend on if you don't get anything in <unk>.

Point is plant said that 12% of your stuff of your total book, so that that you've got to pick it up by.

Getting the right price and other places.

Or just getting smaller in those places so it doesn't impact your profitability as much.

As it relates to our competitors.

Again that everyone's got their own story, we have our own story inside national General's different than.

Then the Allstate brand.

Is it related to progressive their frequency was up about.

10, almost 10 points more than ours.

In 2021, so you would expect them to raise their prices faster and higher than we did.

As at the beginning of the year, we're still earning a very attractive combined ratio. So I think everyone has their own story.

I leave you with is that like we're completely committed to getting a combined ratio.

Consistent with where we've been in the past we've been able to run our business for a long time in the mid nineties.

And even when the industry has been a lot higher than that.

We see no real no change in the competitive situation, the regulatory environment or our capabilities.

Lead us to conclude that that's not possible.

Thanks, that's very helpful.

Yeah.

Thank you one moment for our next question.

And our next question comes from the line I know Tracey.

From Barclays. Your question please.

Thank you.

I wanted to touch on your higher higher physical damage loss development.

Just wondering in your transfer me to growth initiatives I presume you cut clean.

Do you feel like Youre adequately staffed in claims we can close claims in a timely fashion, maybe you could talk about how you are trying to speed up close rate.

Let me Glenn if Youll talk about what we're doing in claims.

Operating standpoint to deal with the higher inflationary environment leveraging our relationships.

Getting purchase contracts and then Mario can talk about the difference between.

Property damage, which is amounts that we have to pay to other people for accident that our customers help create to how we look at collision and Tracy that change in the prior year reserves that was really on that first category.

So Mario can talk about how that flows through the system.

So, yes, so I'll start with.

Let me just emphatically say.

We're not behind on claim staff and we are not behind on claims are pending looks good.

And we're in good shape there be expenses that we took out of the claims process. The team has done a really terrific job of automating processes, creating good self service capabilities.

Using a lot of virtual estimating capability.

With the slowdown we talked about in the system is really external and everybody is dealing with this part of it and this would be uniform across the industry. So for example.

Shop capacity is way down.

The staffing level in body shops across the repair industry is down to the point, where there's been a 33% decline in the number of hours worked per car per day. So if you think about a car is sitting in a shop.

<unk> historically.

Four hours a day it got worked on now.

<unk> three hours, a day or a little less than three hours a day. So it's moved materially on that not surprisingly the converse of that is that the average to car time in a shop has doubled and the average time to get a car into a shop has more than doubled so you put all of those together.

And consumers are frankly, just choosing to hold onto the check and wait to fix their drivable car until the time. They think they can get it back in some reasonable time and so we're seeing a way elongated repair cycle that then you get your supplements later and and you just have different dynamics.

And the way the financials are coming through.

It's like I said in the prepared remarks, we had planned for it being about 40% greater than any point prior and it turned out to be even higher than that with the way it delays coming through so I just didn't want the question that I missed the chance to tell you. It does not claim staffing we've got plenty of staff in and our team does it.

Terrific job on it.

Well in fact, Glenn you are also doing some stuff in parts buying and other things that mitigate the inflationary aspects right.

Yeah, absolutely so using our scale as a company we've doubled down on some of our parts suppliers and this is both in home and auto by the way, where we become a large and in some cases the largest in the industry buyer of certain materials, whether it's parts and auto where roofing.

And homeowners our flooring.

And we get the benefit of those broader relationships and trends. We have also doubled down on our direct repair shop network and auto so that we can get our customers access to more shops that can take their car.

And we have a better one to one relationship with that network and are able to control costs in that way.

And Mario why not why don't we talk about a reserve release piece, yes.

Yes, so I guess the reserve strengthening.

Just a couple of points I think are worth making before I jump into that first of all at the end of any reporting period.

We believe based on our processes that our reserves are adequate and that's certainly the case at the end of the second quarter and as we work our way.

Our very comprehensive.

Thorough processes to estimate reserves, taking into account all the data and inputs both in terms of internal and external data that we have so I guess, that's the place I'd start with Tracy. Your question was not physical damage development, specifically, which is.

Different than historical because these tend to be a.

Pretty short tail claims.

In the past and as Tom mentioned, there really show up in principally in two coverages collision and property damage collision as first party coverage. There are customers were fixing their ours acclaimed gets reported its open it may be subject to the same delays that Glen talked about in terms of body shops.

Waiting periods, certainly the same inflationary factors, but we have the claim we pay the claim we move on property damage as a third party coverage. So just to remind you. It's it's.

Another carrier's customer and oftentimes, we get notice of that claim and the payout on that claim our subrogation demands we get from a third party carrier and what we've seen is as Glenn talked about lack of capacity in auto repair shops, coupled with the inflation factors we've been talking about.

<unk>.

As well as changes in consumer claiming behavior a lot of consumers are waiting.

Oftentimes months to get their cars repaired, whether thats, because they can't get into queue or they can't get an appointment to get it repaired, but it's just taking longer and what thats. When all of those factors are showing up as is.

Much longer tail and property damage on those third party sub Ro demands from other carriers.

That is the physical damage.

Lengthening that we recorded in the quarter much of that was in PD and you see that on the chart that we've shown on page six of the presentation in terms of the dollar amounts getting paid after.

The end of the calendar year are much more significant than we've seen in the past the thing I would leave you with is because we have this information on kind of longer tail expectations, we're taking that into account as we established 2022 severity levels so where.

We're certainly factoring that into the severity increases that we talked about earlier.

Just a follow up on that your auto underlying loss ratio.

6% was up four seven points sequentially.

So I think that part of that was raising your loss picks from everything you said, but was there also component to that.

First quarter loss ratio.

Since that won't show up as a prior year Anthony Yang.

Yes, it's Tracy.

When we increase severity, which we did slightly this quarter relative to where we've talked about our severity trends last quarter.

That gets applied to the claim counts for the entire year. So there is a catch up component that would have been reflected in the first quarter had we had perfect information in the first quarter.

Would you be able to quantify what that first quarter drop would have looked like.

So we have a better sense of what's the right starting point.

We're taking all your loss ratio.

Tracey I think you should just think about look at the combined ratio by quarter. It does bounce around there.

Seasonality there is driving in the summer, there's all kinds of stuff. So.

I think look.

Look at it on a year basis.

We did it one year one quarter last year when it was a pretty big number it's not that big.

Looking at this quarter.

Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Paul Newsome from Piper Sandler Your question. Please.

Good morning.

Good call. Thank you very much.

I was wondering about on the home insurance side in the house do we see the same sort of.

Regulatory.

Pressure.

In the home insurance business that we do in auto.

Presumably we have inflationary issues, there and presumably.

We need to get right, there as well too to offset those issues.

Paul is.

The increase.

In home insurance you saw is 15%.

Year over year. So we don't we're getting the rates, we think we need in those areas.

The underlying assumption there is we have regulatory pressure in auto insurance and as Glenn mentioned.

We have good relationships with our regulators and when the prices are.

They got it.

So there are a few states.

And so we've been waiting to get a rate increase.

That was a great two with state of California over a year ago on homeowners.

That is yet to come through so it tends to be more of a state specific.

The issue then.

Broad based regulatory pushback, Glenn anything you want to add.

Yes, the only thing I would add there is.

Yeah.

It's that base level of premium we're getting that isn't right. It's the inflationary factors that really.

Keeps us going in that space, just a different type of product home values go up in replacement costs go up.

Other than recent history tend to not go up so it's a different type of product in that way. So when you look at it.

On average premium up over 13% year over year.

It's a mix of rate in that but to your point Paul like we've got to get right. There it's not as heavy as it is in auto.

But we deal with the same regulators and I always go back to it's the math like like we're not making up these rates and and theyre not looking to make up.

Not to do the rates in most cases, it's the math is the math support a a trend that says you need rate and we've been successful in that space.

Yeah.

No I was just curious because obviously getting rate in home is different the non U inflation factors. There just wanted to know if the dynamics.

Really any different.

And the improvement of the rate there as well.

On the home side are you implementing some of the same.

Yes.

Underwriting criteria changes or will be materially different than what we've talked about <unk>.

Understood.

Brian you want to take that yes.

Yes.

I would say it is materially different.

Like where we are in homeowners.

And that's obviously not universal I mean, there is there is from a risk standpoint from a catastrophe prone standpoint, everything there is obviously a lot of underwriting we do its one of the strengths. We have in homeowners is that we know how to underwrite this business to make money over time.

And protect a good balanced set of customers in such a way that that portfolio works.

But we are not in.

And equal or even that similar position in homeowners as auto right now in spite of the inflation, we're in a very good position to.

To continue to write and grow homeowners.

Thanks for the call and the health as always.

Thank you one moment for our next question.

So, let's let's just do one last question certainly the one moment.

And our final question for today comes from the line of Josh Shanker from Bank of America. Your question. Please.

Okay.

Yes. Thank you very much but when I think of Allstate I think you guys are second to none understanding the long term value bundler.

The progressive people call the Robinson and.

Everyone says they are going after that Allstate customer.

I'm very skeptical the level successful half on the other hand, you guys bought Nat Gen to go into non standard in a bigger way you guys have come back and forth over 20 years in that.

A number of times.

And if you look at progressive they are losing their sams at this point in time.

Whether they are unprofitable or whatnot, but they are going somewhere and when you talk about having a 1000 basis points of better margin in next Gen and it's growing.

How confident are you given that that's not your legacy business that you understand those aren't progressive customers that they can't make work coming onto your books.

Let me see if I can deal with that so I'm going to go up so.

Okay.

It's really the question of weeks.

And so always we.

Josh So we as now Allstate and Nat Gen.

As opposed to we would.

Allstate without experience in non standard so.

You may remember when we.

Oh, we got started and I went to very careful Hogan said, Hey, Barry I've got this problem not.

Not making any money in the independent agent business and I'm not really in the non standard business. So I either have to get out of the business or try to fix it had trouble fixing that so I've decided.

I'd like to get out of it but I'm going to get out of it first by buying you.

And then your team can fix our business.

What's played out.

<unk> and that team are really good at non standard they know their business well they run separately they have separate pricing separate claims base.

They know that business well.

And then they took our encompass business which was more.

Standard business and they are folding that in and so we think we have a great opportunity to expand in the independent agent channel not just for the.

Non standard piece, but in.

Whats affectionately called I guess, the Robinson by Progressive.

Because we're really set that segment.

Ed.

And we think Theres, a great opportunity for us to compete there.

And so.

I'll make this the last part of the question you favor.

And you're making it seem that national general is running separately in some ways from Allstate.

Of course, you're in charge of the Buck stops with you Tom how confident are you that you understand the underwriting going on there, but you know that what we see right now as.

The results that you were very comfortable and proud of.

Yes.

It's not that hard to understand Josh.

It's more difficult to build a set of business processes policy documents procedures.

And our relationships with <unk>.

<unk> that note. So they for example, they they run something called the war score where they look at every individual agent and see what kind of business theyre getting from them. So.

It isn't like if it's got wheels on it and it's got losses.

It's not that complicated what's really complicated is building the business model to do it.

And we are highly confident that they know what they're doing.

So thanks for answering my questions. Thanks for answering the tough question I appreciate it.

Alright first as we move forward.

Clearly based on your comments.

At a time or focus on auto insurance, we're going to get those margins up we still got to make sure we make good money and homeowners.

Expand.

And our protection services and at the same time rebuild that digital insurer call transfer of growth of that when we get margins, where we are or we can hit the accelerator.

Hard on profitable growth and drive more shareholder value. So thank you all and we'll talk to you on investments in September .

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

[music].

And now I'd 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 second quarter 2022 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 filed our 10-Q and posted today's presentation on our website at all investors Dot Com. Our management team is here to provide perspective on these results.

These results may differ materially from these statements. So please refer to our 10.

April 2021, and other public documents for information on potential risks. Additionally.

Additionally, we'll be hosting our next special topic Investor call on December 1st focusing on its investment strategy now I'll turn it over.

Well good morning. Thank you for investing your time with Allstate Tonight I'll, let's start on slide two.

Allstate's strategy to increase shareholder Vegas, two components increase.

Increased personal property liability market share and expand protection services, which are shown on the left.

We're building a low cost digital insurer with broad distributions, we transform growth. We're also diversifying our business by expanding protection offerings by leveraging the Allstate brand customer base capabilities and expanding distribution.

In the second half of 2022, we plan to file for rate increases in excess of the increases implemented in the first half of this year, which were six 1% of Allstate brand countrywide premiums.

We're also reducing expenses advertising and growth investments.

Underwriting guidelines.

And we will be changed to reduce new business volume.

Where we're not earning adequate returns.

And we're also executing claims operating actions to manage loss costs in a high inflationary environment.

These actions will likely have a negative impact on policy growth.

While the current environment requires.

Protection services businesses are generating profitable growth, although earnings declined slightly this quarter as we invest in that growth.

Given the negative impact of inflation on the auto insurance business as you know beginning late last year, we reduced the bond portfolio duration to lower exposure to higher interest rates, which helped mitigate the reduction in bond valuations by approximately $1 three.

$3 billion in the first half of 2022.

Our strong capital position enabled us to maintain high cash returns to shareholders in this environment.

Moving to slide three let's review second quarter performance in more detail.

Total revenues decreased three 4% prior year quarter. Despite property liability premiums earned increased eight 6%, which reflected higher average premiums and policy growth.

Higher loss cost and the current report year and upward loss reserve development of $411 million in the prior report years resulted in the property liability recorded combined ratio of 107 nine in the second quarter.

Net investment income of $562 million was 42% below the prior year quarter performance based income was exceptional in the prior year.

The combination of these factors led to a net loss of $1 1 billion in the second quarter, and then adjusted net loss $209 million or <unk> 76 per diluted share.

The adjusted net income return on equity was six 9% over the last 12 months, which is obviously unacceptable from our standpoint.

Abstention rate below the levels, we achieved last year, but we remain committed to achieving our long term returns on equity of between 14 and 17%.

Now, let me turn it over to Glenn to talk walk through our property liability results in more detail.

In the chart on the left.

The chart on the right compares last year's recorded combined ratio of 95, 7% This year's second quarter.

And higher auto insurance underlying loss ratio drove eight six of the $12 two point increase.

Claims severity has been increasing faster than earned rate increases.

The other large negative impact was from prior year reserve strengthening in this quarter, which I'll cover in a few minutes.

<unk> positive impact on there with the one seven points from expense reductions.

Let's move to slide five and talk about profitability and rising loss costs in more detail.

Now in there Youll see 2020 was an outlier because we had much better than target results then due to some of the early pandemic frequency impacts and as we moved from that environment to the high inflationary environment. We're in today.

Current claims severities increase the underlying auto combined ratio in the 100 to one for the quarter and 105 year to date.

Auto non catastrophe prior year reserve strengthening in the second quarter totaled $275 million, which is primarily physical damage and injury coverages.

The most significant impact, though on the combined ratio was.

Report year incurred severity for collision and property damage and bodily injury claims, which increased by 16%, 12% and 9% respectively over the average of the full year 2021 incurred.

Because the costs are rising rapidly during 2021 the quarter to quarter increase a comparison is even greater.

And frequency also went up about 5% to seven points, but it's still well below pre pandemic levels.

So let's move to slide six and we will go deeper into the prior year physical damage for reserve development. The chart on the left shows used car values. They began to rise in 2020, and if you go back looking from the beginning of 2019 to current used car prices have gone up more than 60% and continue to stay at an elevated.

Level.

At the same time OEM parts and labor rates have increased during the first half of this year, which causes severity increases for coverages like collision and property damage.

Now, we anticipated that those trends and the delays that are taking cars a long time to be repaired right now with increased the amount of claim payments. We made on 2021 losses. After the end of the year, even though these are relatively short duration claims.

The chart on the right shows gross paid losses for physical damage coverages for the six months. After the end of the calendar year now our expectation for paid losses for 2021 claims from.

<unk> 13 to 18.

Is that it would be about $125 billion, which you can see from the chart is about 40% above the prior years you can see that from the dash line on the far right bar compared to the bars to the left of it.

But at the end of the second quarter. The actual paid losses were 148 billion, which exceeded even our higher estimate by $230 million and there's a large driver of the prior year reserve increases.

All other non catastrophe prior year development primarily from injury.

Commercial auto and homeowners totaled $268 million in the quarter.

Nine states, where we had increases over 10% and auto rates have been increasing 48 locations inclusive of Canadian provinces.

Those rate increases are expected to increase Allstate brand annualized written premium by six 1%.

Now we have not been able to get.

Adequate rate in New York or any increase in rate in California.

New York represents about 9% of our auto premium.

And the implemented rate there was.

Which again is significantly below the overall rate need there.

In states markets risk segments or channels, where we cannot achieve an adequate price for the risk.

We're implementing more restrictive underwriting actions in reducing new business as needed until adequate levels of radar approved.

Let's move to slide eight and we'll look at how these rate increases are impacting and will impact the combined ratio for auto insurance.

What you see here illustrates our path to target profitability, along with the magnitude of actions, we've already taken and what's required prospectively.

Starting on the left through the first six months of the year. Our auto insurance recorded combined ratio was 105 and that's shown in the Blue bar.

The second Green bar reflects the estimated impact of rate actions already implemented when fully earned into premium. So these are already implemented actions that our end market and renewing on policies. They total an additional $1 $7 billion of effective premium across all state National General brands.

Those will be earned over the coming quarters and fully earned by the end of 2023.

Now of course loss costs, we will continue to increase whether it's inflationary impact on severity or higher frequency.

Which would increase the combined ratio from what I. Just described there so prospective rate increases must exceed the loss cost increases that come to achieve our target returns.

Now everything I, just described combined with our non rate actions, such as reducing new business and expenses.

Gives us a track where we expect to achieve our target.

Combined ratio in the mid Ninety's in auto insurance now the timing of that will be largely dependent on the relative increases in pesos as increases in premium and loss costs.

So on page nine we will take a look again at our industry, leading homeowners business.

A significant portion of our customers bundle home and auto insurance and that improves the retention and the overall economics of both products.

We have a differentiated ecosystem in homeowners.

That includes the differentiated product underwriting reinsurance claim capabilities and we discussed a lot of those capabilities and our last special topic call.

Our long term underwriting results show the strength of the system.

Five year average recorded combined ratio was 91 nine as shown in the chart on the left.

And that produced three $3 billion of underwriting profit since 2017, while the industry lost over $20 billion in that same period.

Now our second quarter combined ratio in most second quarter combined ratios have historically been higher than full year results, primarily due to catastrophes in the second quarter. This year was at $106 nine which reflected again higher catastrophes and one seven points of unfavorable non catastrophe prior year reserve estimates.

Our year to date recorded combined ratio for home is 95 eight.

Homeowners insurance is certainly not immune to the inflationary environment, we're in and we continue to see increases in labor and material costs to.

To combat that our product has or has sophisticated pricing features that respond to changes in replacement values and we've taken rate. If you see on the chart on the right that shows some of the key Allstate brand homeowners operating statistics.

We have grown net written premium by 15, 2% from the prior year and.

And Thats on a policy basis that we grew of one 2% in the second quarter, where our Allstate agents remain in a really good position to broaden customer relationships.

So as you've heard me say.

Thanks Glenn.

Slide 10 is the flywheel of growth that we have discussed on earlier calls.

Transformative growth is a multi year initiative designed to increase personal property liability market share by building a low cost digital insurer with broad distribution.

I won't get into all the pieces today, but I want to highlight two specific items.

First we remain committed to achieving our adjusted expense ratio goal 23 by year end 2024, which represents a six point improvement compared to year end 2018.

Secondly in the quarter, we launched a beta version of our new fully digital auto insurance product and sales experience made possible with new technology for relationship initiation and product delivery Bill.

Building. These foundational elements will enable us to scale growth when adequate adequate insurance pricing is at St.

At the same time, the protection services businesses and the lower strategic global are growing and increasing shareholder value as shown on slide 11.

Revenues, excluding the impact of net gains and losses on investments and derivatives increased eight 3% to $629 million in the quarter, primarily driven by Allstate protection plans adjust.

Policies in force did decrease by one 6%, reflecting expiring protection plan warranties and lower retail sales compared to the favorable environment in the prior year quarter.

Moving to slide 12.

Health and benefits is also a growing is also growing and attractive set of businesses that protect millions of policyholders.

The acquisition of National General in 2021 added both group and individual health products Smart portfolio as you can see on the left.

Revenues of $574 million in the second quarter of 2022 increased four 6% for the prior year quarter, driven primarily by growth in group and individual health businesses.

Adjusted net income of $65 million increased $3 million from the prior year quarter, driven by increased revenue, which was partially offset by a higher benefit ratio primarily an individual health.

Now, let's shift to investments on slide 13 to review investment performance in the portfolio risk and return positioning we have taken given higher inflation and the possibility of a recession.

Net investment income totaled $562 million in the quarter, which is $412 million below the prior year quarter as shown in the chart on the left.

Performance based income of $236 million.

As shown in dark blue.

Was $413 million below what was an exceptional quarter in 2021.

The performance based internal rate of return over the last 12 months was 24, 6%, which remains above our long term return expectations.

The performance based portfolio includes private equity as well as a mix of other asset types, such as real estate and infrastructure, which diversify our performance.

Excuse me in this segment.

In the second quarter real estate investments had strong performance, including gains on asset sales, while private equity results were lower.

The total portfolio return was <unk>.

Negative two 8% for the quarter and negative five 6% year to date due to higher interest rates and credit spreads lowering the market value of bonds and.

And a decline in public public equity valuations.

While these market conditions negatively impacted the market value of the portfolio. It continues to generate operating income.

Cause of proactive portfolio actions the results are better than the broad indices with the S&P 500 index, 20% lower than the Bloomberg us aggregate bond index, 10% lower.

The chart on the right illustrates the shift in risk positioning we have executed to protect portfolio value and position us to take advantage of opportunities as conditions evolve.

We reduced interest rate risk towards the end of 2021 and into the first quarter through the sale of longer duration bonds and the use of derivatives.

The portfolio duration is shorter than our long term targets, which has mitigated the negative impact of higher market rates by approximately $1 $3 billion. This year.

With recession concerns rising exposure to recession risks that asset was also reduced sales of high yield bonds bank loans and public equity.

These sales were largely executed prior to the most significant credit spread widening and equity market decline for the end of the quarter further preserving portfolio value.

Now, let's move to slide 14 to discuss Allstate strong cash returns to shareholders of $1 9 billion in the first two quarters.

Over the last year shares outstanding have been reduced by eight 7%, providing more upside per share as profitability has improved.

In addition, there was another $1 8 billion.

Remaining on the current $5 billion share repurchase authorization.

Adjusted net income return on equity of six 9% was below the prior year period, primarily due to lower underwriting income.

Leaving our target combined ratios for both auto and homeowners insurance will bring adjusted net income returns on equity back to our long term target range of 14% to 17%.

With that context, let's open up the line for questions.

Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one one on your telephone one moment for our first question.

And our first question comes from the line of Greg Peters from Raymond James Your question. Please.

Good morning, everyone.

I would like to.

Go back to slide eight for my first question.

And I guess the.

The two areas that caught my attention as you were running through them, Glenn where the future loss costs arrow and the rate and other actions and then.

The box you say youre pursuit pursuing larger rate increases in the second half of 2022 relative to the first half.

Maybe you can give us some additional.

Detail around what you guys are thinking on those those two areas.

In that chart.

Greg This time out.

Overview, and then Glenn you can jump right in.

We don't give perspective.

Our earnings estimates our gift perspective line by line.

We would.

Future loss cost to go up but we don't.

And were booking to have them go up in the future.

Also as we mentioned expect to increase the rate.

With that Glenn do you want to provide some more perspective on both.

The trends Youre seeing historically in loss cost.

And then what you were thinking about.

How you think about rate increases.

Sure Good morning, Greg.

On the loss cost piece of it I know I know theres been some opinion out there that maybe the worst is behind us and the inflation will slow or.

Just listening to other calls out there.

We're not sure that then we certainly want to have the right outpace the loss trends one thing I'll say is when you look at our.

Our frequency trend I think this is a unique time in history, where typically frequency is harder to predict than severity and I think the opposite is true right now our frequency has been really really steady.

You look at it from the low points of the pandemic up to where it is now it is just steadily crept back up but has.

Leveled out and that that creep and.

We have good data and expectation that it remains below the.

Pre pandemic levels, but continues to rise slightly as it has and on the other side severity.

That's a big wildcard out there I think in all industries right now as to how long and how severe inflation runs with the actions of the fed.

And anything else out there.

We're taking the conservative viewpoint that we need a lot more rate in order to offset that so.

Yes, I mentioned in the prepared remarks, a couple of places, where we're having trouble on it and we're working through it.

But broadly I would tell you it's gone.

Well and that the regulators, we work with good relationships across the country and we are getting some meaningful rates going through the pipeline right now and they understand I mean, the math is on our side and we need to get those rates and to offset those future rate trends because as the slide depicts if you froze.

Time and loss costs didn't move we would we would earn our way right to the mid Ninety's combined ratio over the coming quarters, but that isn't the case, we need additional rate to offset those loss trends.

Got it.

You slipped in the reference to slide seven and your answer Glenn.

Was going to be my.

Other area of focus which is you talk about reducing new business since states without appropriate rates.

In this slide I think you will you do call out, California, and New York are there other states, where you are having some problems getting the rate approved that you need or just those are the two principal states.

Greg.

<unk>.

Glenn to give you the specifics there, but it isn't just to like negotiate.

I'm reading into your statement I know you are not really saying that but.

It is also.

Like we just.

Even if we get a rate increase there may be certain.

Sells a certain segment of the state.

State at our best when.

Where we have less profitability than we want so it's also about managing profitability.

Glenn why don't you give some yes.

Yes.

Yes, I'll just build on that because that's exactly right. It really is it segments within states.

Is.

It's markets within states and it's even channels I mean look at the fact that right now National General is performing quite well both from a growth and a profit standpoint.

<unk>.

So we can position based on where we can be profitable, whether it's channel market segment of risk and Thats kind of how we're thinking about new business.

To put it very simply we don't run or run rate new business that were not profitable on and it's not as simple as looking at you can see in our disclosures the number of states, where we're above 100 or above 96.

Because it's that's the rearview mirror the prospective view is where we've already gotten rates and in some of the states that we feel good about that.

We're putting on for new business, and we will grow in those.

To answer your specific question, New Jersey would be another place that we're working hard on and need to get more rate, but the vast majority of states across the country, we've been working through and we're in good shape.

Answer makes sense. Thank you.

Thank you one moment for our next question and our next question comes from the line of Andrew <unk> from Credit Suisse. Your question. Please.

Jonathan we didn't hear them I don't know.

If you did or I don't know, Andrew if you're on mute or not but we didn't.

You can hear us.

Now I can now we can hear you now.

Now we can.

I can tell you Andrew can you hear me.

Yes, I can hear you Andrew.

Jonathan can we move to the next question we can't here.

Certainly.

Alright.

One moment for our next question.

Andrew maybe you wanted it to Mark and he can ask it for you.

If you want but it's all right let's move on.

Our next question comes from the line of David Mcmahon from Evercore ISI. Your question. Please.

Hi, Thanks, good morning.

I guess I'm, just looking through what rates you're submitting.

And that slowed down.

Yes.

Specifically talking about auto insurance rate increase filings.

It looks like the amount of the rate increase that you guys submitted during the second quarter slowed materially versus the first quarter I'm just wondering why.

Why that was.

David.

Ill make a comment then.

Is there anything you want to add Jeff.

First.

We are fully committed to increasing rates necessary to get our combined ratio down to the target levels that Glenn talked about.

That obviously bounces around by quarter.

And what you saw is what we got implemented in the second quarter.

The early part of your question you said submit Inc.

And forward looking.

That's that's not what we're submitting what you saw and that relates to just what that implemented.

We're obviously in conversations with regulators when you have these kind of increases.

Continuously so there are some states where.

Glenn's team chooses to go down and meet with the regulators to explain the numbers and then submit it.

And so we feel good about where we're headed there Glenn anything you want to add to that.

Yes, I would just add.

It really is about timing and about which states go through so like if you look at the <unk>.

We filed per state, we really haven't backed off at all David It is the states that went through in that cycle.

Right in the second half of the year than the first half of the year, we have some very large states with meaningful rate increases coming through.

Got it. Thanks, Yes, I was referring to I, obviously can see the implemented right I was referring to submitted which I guess is something that they're not approved or disapproved. Yet. It's just more kind of a leading indicator that I track and it just looked like you guys had slowed a little bit in the second quarter versus the first quarter.

But it does sound like that is more timing related as well.

Yes.

Maybe for <unk>.

Just another question I was just looking through the businesses and in auto specifically and I noticed that the Allstate brand combined ratio was nine points above the Nat Gen combined ratio for the quarter and it's been trending it's been higher for the last few quarters could you just yes, that's kind of.

<unk> intuitive to me just given the differences in the in those books of business. So could you just maybe talk about what's going on.

Between those two.

David It's an astute question and let me, but let me take it up a level and then get Glenn to jump into net gen versus.

The Allstate brand.

Because many of Europe also written and asked about.

Like how do you stand versus competitors and stuff like that so let me just take it up and deal with that and then we'll go into the specifics so.

We always look at different comparisons, whether it's internal or external to get.

For our performance.

That said when it's external it tends to be more directional versus hard variance analysis because of the differences in strategy, particularly because you've got different strategies of our risk profiles different state mix.

It's better if you look at the long term results rather than importantly numbers, particularly when youre using percentage changes on a quarter by quarter.

As said the numbers are the numbers.

Understand them and evaluate them first thing I would say is when you look at most of you have asked about progressive they are really strong competitor. So we have great respect for them.

As it relates to auto insurance over a long period of time.

Allstate Progressive and Geico have all had attractive returns.

We're all dealing with the impact of.

But I would say a wide swings in frequency and severity for auto claims in particular, that's driven by the pandemic and then the related inflationary impacts.

Repairs and prices.

They did report that is progressive a better combined ratio this quarter.

As they began raising prices earlier in 2021, but again.

Don't know why.

We're not them.

But they did have different trends in frequency, both last year and this year.

So and of course claim statistics are different for everybody and sometimes people change them, how they count them over time.

But the numbers I see it in 2020, we both had frequency declines from 2019.

That was reflecting the impact of shutting down the economy. So we were down in collision, we were down 26% and they were down I think by 2324%.

Last year, there collision frequency increased by 26%, whereas our increased by only 18%.

You would expect them to raise prices more than we raised them. This year theyre down in frequency and we're up.

So you would expect our combined ratio to be higher than theirs.

It's hard to say why are these short term trends are different.

But Glen will talk it may be that they have a relatively small share of the customer's statement that they call the Robinson.

And so the comparison to net Gen will be helpful.

It could be state mix it could be a whole bunch of other things so I can't intuit exactly their results.

And so Glenn who will go through that risk mix and show you how that impacts the different results.

As it relates to the strength of the business model, though and your strategy I think it's also worthwhile.

Looking at other lines and as we talked about that in the last call Allstate's, an industry leader in homeowners with very attractive combined ratios.

The recorded combined ratio this quarter again as buyers Glenn talked about.

It typically is in the second quarter on a longer term basis. So we've obviously done quite well.

Put that in perspective, if we had $112 five combined ratio on our homeowners business.

Last year, our underwriting and would've been about $1 billion lower than it actually was and Thats, particularly hired on a business that requires twice as much capital as auto insurance.

As it relates to commitment to profitability speed precision, we dramatically reshape that business, which we took you through.

So.

Our business models tend to be good and precise.

Tend to look at both lines of business see how we're doing with that Glenn do you want to talk about.

Net gen versus the Allstate brand.

Yes, I will David Youre getting a good detailed answer there from time in the afternoon, you like hit the daily double here because.

It is a really good question an important one.

I want to take you back and kind of look at it over the 18 months.

No.

That we've owned Nat Gen since the closing of that deal.

And it's a good timeframe to use because 18 months.

Allstate was running a combined ratio of about 10 points lower.

And the reason for that was the frequency.

It was lower.

Frequency on more non standard non standard business came back much quicker as people needed to use their cars to make a living in and.

There was just a difference between different books of business and so as a result, the good news was for the Allstate brand was that is it really low combined ratio is around $80.

Their frequency down while allstate's is up and and then you've got a higher average earned premium going through I.

As I mentioned before the $1 7 billion.

A premium that we have already in the system not only filed but approved in already like renewing on policies that hasnt been earned yet we've actually only earned 15%.

Ratio, but you got to fill that up to get back to par and then go up from there. So there is a difference in the average earned premium.

A few points of the difference is one two there is a few points difference on the frequency levels right now three and this is a really important one when you're looking across companies is.

The rest of the different policies are different so as you think about the inflationary factors and how they're hitting different policies.

National General even inside their own book, it's really fascinating if you look at their full coverage policies versus their liability only policies, they're running about 10 points different.

On trend and their combined ratio.

If you think of coverage policies versus their liability only policies, they're running about 10 points different.

<unk> trend and their combined ratio.

Because if.

If you think about a.

The liability only policy you don't have collision, which is the highest inflationary trend.

<unk> trend of any coverage right now.

One two you tend to have very low.

You tend to have very low liability limits. So on things like let's say property damage. If you have a state minimum of $10000 a property liability coverage and you hit somebody's car and you total it whether it's before the inflation factors, we're hitting us or after you are probably just going to pay that 10000 and the <unk>.

<unk> there is a competition, but that inflation, whereas when you typically have a 100000 limits youre bearing the full weight of the change in the value of vehicles. So looking at all of these components. We see just a lot of different ways and I didn't even get into state mix, which is another one a lot of different ways that the trends move differently. The nice thing is is.

Having acquired Nat Gen and it's performing really well it's growing nicely.

It's profitable is that it's really acting right now is a bit of a diversification on that that auto trend and gives us a place where we are.

And willing to grow.

I really appreciate that answer that was very helpful. Thanks, so much.

Thank you.

And as a reminder, ladies and gentlemen, if you have a question. Please press star one on your telephone.

And our next question comes from the line of Andrew <unk> from Credit Suisse.

Good morning can you hear me this time.

We can.

Thank you and sorry about that before.

First question is around non rate actions could you give a little color on some of the more material non rate actions that you could take and the potential magnitude we might be able to see in the back half of the year on on loss ratio, how much how much potential improvement could.

That officer.

Glenn can give you the items I think probably won't be able to give you an attribution of what that will do for this year's combined ratio.

Want to take that.

I'll give you a few like you've got underwriting actions, where we segment the business and we segment our pricing to where as Tom said earlier. It isn't just about geez, we're going to not write new business in this market, let's say, it's well we're profitable in these segments and that means other ones. So we are going to change.

The segmentation of our pricing would be one.

Another would be we changed the downpayment on policies and expect.

That.

There is.

<unk>.

A change in the flow of business at times with that.

Certainly the targeting of marketing is a really big one that I think can be underplayed, but we're pretty sophisticated in how we go to market. So when and where are we putting up banner ads when people are searching for auto insurance, which risk categories, which markets and flat out we've.

Taken a lot of marketing dollars out right now, we're just reducing the marketing that we're doing one it'll improve expense to it will lower the new business flow and allow us to more quickly get back to profitability.

And then the last one I'll say as you know the sales incentives that are out there.

With our agents about how we're incentivizing people to grow and in which places.

So when you put all of that together and.

And you look at how you are.

Going to market, you're really limiting in some places the the ability to grow your business.

With the intent of being not growing and nonprofit segments.

Got it.

Colin.

I should assume then that that would be us.

A very material impact on loss ratio as we go into the back half of the year.

I don't think you should assume very material purchase subject to anybody.

Underwriting actions.

Andrew won't get us to where we need to go we need to raise prices.

Cut our expenses.

The big drivers.

Is helpful.

And is it.

I'd like to say our team look anybody can give it away.

So there's no sense, writing business, knowing youre going to lose money on forever.

So this is more about managing long term profitability than what it would do for the combined ratio in the second half of the year.

Got it and then just looking looking backward a little bit.

A lot of your competitors their rate increases.

All over the place.

And I think you've got what about two 5% across the whole book last quarter.

What was the thinking going into that why not a lot more rate was it precluded by the SaaS at 20% of the book is in California, and New York, and it's a lot more difficult, but but maybe just rewinding the clock a little bit.

Why not pushing for a lot more rate.

Five months ago.

Address part of that with a comparison of progressive but let me just address that first that philosophical concept.

Using prices as fast as we can everywhere. We can so we're up six 1% in six months of this year, which is would.

Would have been equal to maybe even our highest year.

And a long period of time, so we are and we expect to get at least that much in the second half. So there wasn't any thinking of let's let's dial down to two five.

Let's get everything we can everywhere we can.

It obviously.

It does depend on if you don't get anything in.

Point is plant said that 12% of your stuff of your total book, so that that you've got to pick it up by.

Getting the right price and other places.

Or just getting smaller in those places so it doesn't impact your profitability as much.

As it relates to our competitors.

Think again that everyone's got their own story, we have our own story inside national General's different than.

The Allstate brand.

Is it related to progressive their frequency was up about.

10, almost 10 points more than ours.

In 2021, so you would expect them to raise their prices faster and higher than we did.

As at the beginning of the year, we're still earning a very attractive combined ratio. So I think everyone has their own story.

I leave you with is that we're completely committed to getting a combined ratio.

Consistent with where we've been in the past we've been able to run our business for a long time in the mid nineties.

And even when the industry has been a lot higher than that.

We see no no change in the competitive situation, the regulatory environment or our capabilities.

Lead us to conclude that that's not possible.

Thanks, that's very helpful.

Thank you one moment for our next question.

And our next question comes from the line I know Tracey.

From Barclays. Your question please.

Thank you.

I wanted to touch on your higher higher physical damage loss development.

Just wondering in your chance for me to growth initiatives I presume you cut clean.

Do you feel like Youre adequately staffed in claims we can close claims in a timely fashion, maybe you could talk about how you were trying to speed up close rate.

Let me Glenn if Youll talk about what we're doing in claims.

Operating standpoint to deal with the higher inflationary environment leveraging our relationships.

Getting purchase contracts and then Mario can talk about the difference.

Property damage, which is amounts that we have to pay to other people for accident that our customers help create to how we looked at collision and Tracy the change in the prior year reserves that was really on that first category.

So Mario can talk about how that flows through the system.

Yes, so I'll start with.

Let me just emphatically say, we're not behind on claim staff and we are not behind on claims pending looks good and.

And we're in good shape there the expenses that we took out of the claims process. The team has done a really terrific job of automating processes, creating good self service capabilities.

Using a lot of virtual estimating capability.

With the slowdown we talked about in the system is really external and everybody is dealing with this part of it and this would be uniform across the industry. So for example.

Shop capacity is way down.

Historically.

Four hours a day it got worked on now.

Three hours, a day or a little less than three hours a day. So it's moved materially on that not surprisingly the converse of that is that the average to car time in a shop has doubled and the average time to get a car into a shop has more than doubled so you put all of those together.

AMIC and the way the financials are coming through and it's like I said in the prepared remarks, we had planned for it being about 40% greater than any point prior and it turned out to be even higher than that with the way it delayed coming through so I just didn't want the question that I missed the chance to tell you. It does not claim staffing we got plenty of staff.

And our team does it.

Terrific job on it.

Well in fact, Glenn you are also doing some stuff on parts buying and other things that mitigate the inflationary aspects right.

We get the benefit of those broader relationships and trends. We have also doubled down on our direct repair shop network and auto so that we can get our customers access to more shops, they can take their car.

And we have a better one to one relationship with that network and are able to control costs in that way.

Strengthened.

Just a couple of points I think are worth making before I jump into that first of all at the end of any reporting period.

Our very comprehensive.

Pretty short tail claims.

In the past and as Tom mentioned, there really show up in principally in two coverages collision and property damage collision as first party coverage. There are customers were fixing their cars acclaimed gets reported its open it may be subject to the same delays that Glen talked about in terms of body shops.

Waiting periods, certainly the same inflationary factors, but we have the claim we pay the claim we move on property damage as a third party coverage. So just to remind you what it is.

Another carrier's customer and oftentimes, we get notice of that claim and the payout on that claim our subrogation demand we get from a third party carrier and what we've seen is as Glenn talked about lack of capacity in auto repair shops, coupled with the inflation factors we've been.

Talking about.

As well as changes in consumer claiming behavior a lot of consumers are waning.

Longer tail and property damage on those third party sub Ro demands from other carriers.

That is the physical damage.

Lengthening that we reported in the quarter much of that was in PD and you see that on the chart that we've shown on page six of the presentation in terms of the dollar amounts getting paid after.

We're certainly factoring that into the severity increases that we talked about earlier.

Just a follow up on that your auto underlying loss ratio.

Nine 6% was that $4 seven points sequentially.

So I think that part of that was raising your loss picks from everything you said, but was there also concluded you true it up.

Your first quarter loss ratio.

Since that won't show up as a prior year theme Anthony Yang.

Yes, it's Tracy.

When we increased severity, which we did slightly this quarter relative to where we've talked about our severity trends last quarter.

That gets applied to the claim counts for the entire year. So there is a catch up component that would have been reflected in the first quarter had we had perfect information in the first quarter.

Would you be able to quantify what that first quarter drop would have looked like.

So we have a better sense of what's the right starting point.

When taking all your loss ratio.

Tracey I think you should just think about look at the combined ratio by quarter. It does bounce around there.

Seasonality there is driving in the summer, there's all kinds of stuff. So.

I think look.

Look at it on a year basis.

We did it one year one quarter last year when it was a pretty big number it's not that big.

Looking at this quarter.

Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Paul Newsome from Piper Sandler Your question. Please.

Good morning.

Full call. Thank you very much.

I was wondering about on the home insurance side of the house do we see the same sort of.

Regulatory.

Pressure.

In the home insurance business that we do in auto.

Hum.

We have inflationary issues, there and presumably.

We need to get right, there as well too to offset those issues.

Paul is.

The increase.

In home insurance you saw is 15%.

Year over year. So we don't we're getting the rates, we think we need in those areas.

The underlying assumption there is we have regulatory pressure in auto insurance and as Glenn mentioned.

We have good relationships with our regulators and when the prices.

They got it.

So there are a few states.

And so we've been waiting to get a rate increase.

That was a great two with state of California over a year ago on homeowners.

And that is yet to come through so it tends to be more of a state specific.

Issue than a broad based regulatory pushback, Glenn anything you want to add.

Yes, the only thing I would add there is.

It's that base level of <unk>.

Premium, we're getting that isn't right.

The inflationary factors that really.

Keeps us going in that space, just a different type of product home values go up in replacement costs go up.

Cars other than recent history tend to not go up so it's a different type of product in that way. So when you look.

And average premium up over 13% year over year.

It's a mix of rate in that but to your point Paul.

Got to get right there, it's not as heavy as it is in auto, but we deal with the same regulators and I always go back to it's the math like like we're not making up these rates and and theyre not looking to make up.

Reason not to do the rates in most cases it's.

The math is the math support a a trend that says you need rate and we've been successful in that space.

No I was just curious because obviously getting rate in hone is different the non U inflation factors. There just wanted to know if the dynamics.

Really any different.

And the improvement of the rate there as well.

On the.

Home side is are you implementing some of the same.

Yes.

<unk> underwriting criteria changes or will be materially different than what we've talked about.

I understand.

Glenn do you want to take that yes.

Yes.

I would say it is materially different.

Do you like where we are in homeowners.

And that's obviously not universal I mean, there is there is from a risk standpoint from a catastrophe prone standpoint, everything there's obviously a lot of underwriting we do its one of the strengths. We have in homeowners is that we know how to underwrite this business to make money over time.

And protect a good balanced set of customers in such a way that that portfolio works.

But we are not in.

And equal or even that similar position in homeowners as auto right now in spite of the inflation, we're in a very good position to.

To continue to write and grow homeowners.

Thanks for the call and the health as always.

Thank you one moment for our next question.

And let's just do one last question certainly the one moment.

And our final question for today comes from the line of Josh Shanker from Bank of America. Your question. Please.

Okay.

Yes. Thank you very much but when I think of Allstate I think you guys are second to none understanding the long term value bundler.

The progressive people call the Robinson.

Everyone says theyre going after that Allstate customer.

I'm very skeptical the level of successful half on the other hand, you guys bought Nat Gen to go into non standard in a bigger way you guys have come back and forth over 20 years in that.

A number of times and if you look at progressive they are losing their Sam at this point in time, whether they are unprofitable or whatnot, but they are going somewhere.

Can you talk about having a 1000 basis points of better margin than that Jim and it's growing.

How confident are you given that that's not your legacy business that you understand those arent progressive customers that they can't make work coming onto your books.

Okay.

Let me see if I can deal with that so.

I'm going to go up.

Yes.

Okay.

It's really the question of week.

And so always we.

Josh so.

<unk> is now Allstate and Nextgen.

As opposed to we was allstate.

Our experience in non standard so.

You may remember when we.

I will get started and I went to very careful Hogan said, Hey, Barry I've got this problem.

Not making any money in the independent agent business and I'm not really in the non standard business. So I either have to get out of the business or try to fix it.

Fixing it.

Sided I'd like to get out of it but I'm going to get out of it first by buying you.

And then your team you can fix our business.

What's played out.

Peter Rendall and that team are really good at non standard they know their business well they run separately they have separate pricing separate claims.

They know that business well.

And then they took our encompass business which was more.

<unk> business and their folding that in and so we think we have a great opportunity to expand in the independent agent channel not just for the.

Non standard piece, but in.

Whats affectionately called I guess to Robinson by Progressive.

Because we're really fit that segment.

<unk>.

And we think Theres, a great opportunity for us to compete there.

And so.

I'll make this the last part of the question in your favor.

Who is we.

We're making it seem that national general is running separately in some ways from Allstate.

Rob.

Of course.

You're in charge of the Buck stops with you Tom how are you that you understand the underwriting going on there, but you know that what we see right now is.

Results that you are very comfortable and proud of.

Yes.

It's not that hard to understand Josh.

It's more difficult to build a set of business processes policy documents procedures.

And our relationships with.

Agents that note. So they for example, they are on something called the war score where they look at every individual agent and <unk>.

What kind of business theyre getting some of them so.

It isn't like if it's got wheels on it and it's got losses.

They're complicated what's really complicated it is building the business model to do it.

And we are highly confident that they know what they're doing.

So thanks for answering my questions. Thanks for answering the tough questions I appreciate it.

Alright, Thank you alright first as we move forward.

We clearly based on your comments.

Amount of time or focus on auto insurance, we're going to get those margins up we still got to make sure we make good money and homeowners.

Expand.

Our protection services and at the same time rebuild this digital insurer call transfer growth. So that when we get margins, where we are or we can hit the accelerator hard on profitable growth and drive more shareholder value. So thank you all and we'll talk to you on investments in September .

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

Q2 2022 Allstate Corp Earnings Call

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