Q4 2022 Allstate Corp Earnings Call

February 2, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Yeah.

Good day, and thank extending my welcome to all states fourth quarter Investor call.

All participants on listen only mode.

So it will be a question and answer session and ask a question during the session you need to press star one.

If your question has been answered or you wish to move yourself from the queue simply put star one again.

Yes.

One question one follow up.

As a reminder.

This call is being recorded.

I would like to introduce your host for today's program Mr. Marketable head of Investor Relations. Please go ahead Sir.

Thank you Jonathan Good morning, welcome to Allstate's fourth quarter 2022 earnings Conference call.

The prepared remarks, we will have a question and answer session yesterday. Following the close of the market. We issued our news release Investor supplement and posted related material 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 in the news release and Investor supplement and <unk>.

Forward looking statements about allstate's operations.

Allstate's results may differ materially from these statements. So please refer to our 10-K for 2021 and other public documents for information on potential risks and now I'll turn it over to Tom.

Good morning, Thank you for investing your time and I'll state today I'll start by setting the context, and then Mario and guests would provide additional perspective on operating results.

And the actions being taken to improve auto profitability and increase shareholder value.

Ill begin on slide two so as you know allstate's strategy has two components increased personal property liability market share and <unk>.

Pam protection services, which is shown in the two hours on the left.

On the right hand side, you can see our results for the year.

Earnings were disappointing with a net loss of $1 4 billion.

Largely reflecting an underwriting loss in auto insurance and mark to market losses on the equity portfolio.

Results from homeowners insurance protection services, and fixed income investments were not enough to offset the losses in auto and commercial insurance.

Most important driver of near term shareholder value will be successfully executing our comprehensive plan to improve auto profitability that includes broadly raising auto insurance rates.

<unk> expenses, including temporary moves such as less advertising and permanent reductions, including digitizing and outsourcing work and lowering distribution costs.

Underwriting restrictions have been implemented to reduce new business volume until profitability is acceptable claims.

Claims operating processes are also being modified to manage our loss cost.

This plan is being implemented but earned premiums from auto insurance rates have not increased enough to offset higher lot Scott.

While the number one priority is to improve auto insurance margins implementation of transforming our growth strategy has made great progress in 2022, and we validated that this will drive personal property liability market share growth.

Proactive investment risk and return management mitigated approximately $2 billion of loss this year and while the total return on the portfolio was a negative 4% that compares very favorably to the performance of the S&P 500, and intermediate bond indices.

We also had another great year at Allstate protection plan.

Moving to slide three let's discuss financial results starting at the top revenues of $13 6 billion in the fourth quarter were four 9% higher than the prior year quarter, increasing the full year total to $51 4 billion.

Property liability premiums earned increased by nine 5% in the fourth quarter compared to the prior year and eight 5% for the full year due to higher average premiums in auto and homeowners insurance.

Moving down the table and adjusted net loss of $359 million was incurred in the fourth quarter, reflecting an auto insurance underwriting loss, which is impacted by reserve increases for the current and prior years.

Now, let me turn it over Mario to discuss our property liability results and then Jess will cover the other components of earnings.

Thanks, Tom let's start by reviewing underwriting profitability for the property liability business in total on slide four.

The overall message is that that the underwriting loss as a result of auto insurance operating at a combined ratio above our targets, but homeowners insurance continued to be a strong source of profit.

On the left chart the recorded combined ratio of $109. One in the fourth quarter was primarily driven by higher auto loss costs unfavorable reserve development and higher catastrophes. This led to a full year recorded combined ratio of $106, six which was 10 seven points higher than the prior year.

The table on the right shows the combined ratio and underwriting income by line of business for the quarter and the year.

Auto insurance had a combined ratio of $112 six in the quarter and $110 one for the year substantially worse than our targets given rapidly increasing loss cost throughout the year.

This result was an underwriting loss of $974 million in the quarter and over $3 billion for the year hence.

Hence you can see why Thomas said executing our auto profit improvement plan is the number one priority going forward.

Homeowners insurance on the other hand had excellent results with a combined with combined ratios in the low nineties, which generated $681 million underwriting income for the year.

This reflects industry, leading underwriting and risk management in this line of business.

Commercial insurance was negatively impacted by the same auto insurance cost pressures.

Along with inadequate pricing for the coverage provided to the large transportation network companies.

The result was an underwriting loss for the year of $464 million.

This led to the decision discussed last quarter did not provide insurance to transportation network companies unless telematics based pricing is implemented and to exit five states in the Allstate traditional commercial business. These actions are expected to reduce commercial business premiums by over 50% in 2023.

Now, let's move to slide five and discuss auto margin in more detail.

As you can see from the chart on the left which shows the auto insurance combined ratio and underlying combined ratio for 2017 through the current year, we have a long history of sustained profitability in auto insurance due to pricing sophistication underwriting and claims expertise and expense management and.

In 2020 of the combined ratio dropped to 86, even though we provided customers with over $1 billion of shelter in place payments. This was due to historically low accident frequency in the early stages of the pandemic.

In 2021 frequency increased.

Violence, driven increase but it did not reach pre pandemic levels claims.

Claim severity, however increased above historical levels because of more severe increasing cost to settle claims with third parties, who are injured in accidents with our customers in.

In addition to used car prices were increasing at unprecedented levels eventually, peaking in December reflecting an approximate 50% increase over the prior year.

Our reported combined ratio of $95 for the year. Despite all these pressures.

This year the combined ratio increased 14 seven points to 110, one the drivers of which are shown in the right hand chart.

The red bars reflect the impact of increasing loss costs, including a three six point impact from prior year reserve additions and a 16 seven point impact from current year underlying losses, excluding catastrophes, which include increases in both frequency and more significantly severity compared to last year.

As we discussed a core component of the profit improvement plan is to raise auto insurance rates and substantial progress was made on those fronts starting in the fourth quarter of 2021 and throughout last year.

In 2022, the impact of higher average earned premium drove a benefit of three six points, which is shown in green.

As I will cover in a minute there is much more benefit to be realized in earned premiums based on what was implemented in 2022.

The other part of the profit improvement plan is to reduce expenses and this contributed a favorable two point benefit this year.

Moving to slide six let's discuss prior year reserve re estimates before we look forward.

Our loss estimates and reserve liabilities used consistent practices multiple analytical methods and two external actuarial reviews to ensure reserve adequacy.

These processes led us to increase the reserve liability for prior years throughout 2022 by amounts that are larger than recent years.

Property liability prior year reserve strengthening excluding catastrophes totaled $1 7 billion.

We report three nine points on the combined ratio.

The full year 2020 to.

The Pie chart on the left breaks down the impact by line and coverage with $1 1 billion driven by Allstate brand personal auto largely related to bodily injury claims in addition $295 million.

Was related to Allstate brand commercial insurance.

Also mostly related.

To auto.

The table on the right breaks down the Allstate brand auto prior year reserve strengthening of $1 1 billion in.

In 2022 by report yet let me Orient you to the table.

Reserve increases are shown by coverage in total and then for the report year to which they apply the.

The reserve liability for physical damage coverages was increased by $211 million, which was entirely attributable to 2021.

This primarily related to adverse development and elongated repair timeframes, which were primarily addressed in the first and second quarter.

Injury reserves was the largest component at $676 million, which was spread across many report years.

Incurred but not reported was increased by $226 million as late reported claim counts have exceeded prior estimates.

This reserve balance was increased in each of the first three quarters of 2022, but a larger amount was recorded in the fourth quarter in.

In total for all coverages about 63% of the increases for 2021 and 2020.

At the bottom of the table the reported combined ratio for the calendar year is shown in compare to the reserve changes for example in 2021 the reported combined ratios for Allstate brand Auto insurance was 95. The reserve additions indicate that costs were two one points above this reported numbers.

Estimating reserve liability.

Utilizes multiple reserving technique, but is always subject to strengthening or releasing reserves over time.

This variability increases with changes in the underlying data such as claims counts settlement times or cost increases.

As has been the case over the past three years.

All reserves could change going forward based on the 2022 claim statistics and data reserves are appropriately established at year end 2022.

Moving to slide seven let's provide some clarity on what the auto insurance combined ratio trend was by quarter in 2022.

As you can see on the left hand chart. The recorded combined ratio peaked in the third quarter at $117 four largely reflect reflecting prior year reserve changes and catastrophe losses shown in light blue.

The dark blue bars are the underlying combined ratio as reported which increased each quarter included in this dark blue bar is the impact of increasing claim severities within the year.

We update the forecast on claim severities as the year progresses.

As 2022 developed loss cost trends resulted in increases to current report year ultimate severity expectations as.

As shown in the callout on the left chart 2022 incurred severity for collision and property damage and bodily injury was 17%, 21% and 14% respectively above the full report year 2021 level.

This estimate however increased throughout the year.

The impact of increasing current report your incurred severities as the year progressed influences the quarter underlying combined ratio trends.

This impact from decreasing full year severities from claims occurring in prior quarters as reflected in the financial results of the period, where severities were increased for example, the fourth quarter of 2022 reflects the impact of higher severity expectations in the auto physical damage coverage not just for claims.

Reported in Q4, but also for claims that were reported throughout the prior three quarters as well.

The chart on the right adjusted the quarterly underlying combined ratio to reflect full year average severity levels, which removes the influence of intra year severity changes.

As you can see after adjusting for the timing of severity increases in the current year.

Quarterly underlying combined ratio trend was essentially flat throughout 2022 and close to the full year level of 103 six.

Slide eight outlines our comprehensive approach to restore auto margins there are four areas of focus raising rates.

The continued focus on reducing expenses.

Implementing stricter underwriting requirements and modify and claim practices to manage loss costs.

Starting with rates since the beginning of this year, we've implemented rate increases of 16, 9% in the Allstate brand, including six 1% in the fourth quarter, which significantly increased written premium.

We expect to continue to pursue significant rate increases into 2023 to improve auto insurance margins to target levels.

We're also reducing operating expenses as part of transformative growth and have temporarily reduced advertising spend to manage new business volume.

We are implementing more restrictive underwriting actions on new business in locations, where risk segments, where we cannot achieve adequate prices for the risk.

Increased restrictions have been implemented in 37 States, including California, New York, and New Jersey, which account for a large portion of underwriting of underwriting losses.

Claim practices have been modified to deal with the higher loss cost environment.

For example, we have strategic partnerships with parts suppliers of repair facilities to mitigate the cost of repair and use predictive modeling to optimize repair versus total loss decisions and likelihood of injury and attorney representation.

Moving to slide nine, let's discuss a key component of our multifaceted plan raising auto insurance prices.

Growth in average premium per policy is accelerating due to implemented rate increases, but the impacts to average earned premium per policy is on a lag due to the six month policy chart.

The chart on the left depicts the year over year growth in auto average gross written premium in Orange, reaching 14, 4% in the fourth quarter of 2022.

The auto average earned premium growth of nine 7% in the fourth quarter represented in Blue continues to increase but on a lag due to the six month policy term.

The chart on the right is that estimation of when the rate increases implemented will be earned into premiums.

Actual earned premium growth will be influenced by changes in the number of policies in force and absolute levels of new business and retention.

This illustrative example assumes 85% of the annualized written premium will be earned since customers modify policy terms, such as deductibles or limits, where they may not renew.

Starting on the left over the last 15 months, we've implemented Allstate brand auto rate increases of 19, 8% for an estimated annualized written premium impact of approximately $4 8 billion.

Using the historical 85% effectiveness assumptions, that's a total of $4 1 billion and expected earned premium represented by the second Blue Bar <unk>.

Approximately $1 $2 billion has been earned through the fourth quarter.

Of the remaining $2 9 billion of premium yet to be earned roughly $2 6 billion.

Will be earned in 2023 and $300 million in 2024 is shown in green.

As I mentioned earlier, we expect to implement additional rate increases in 2023, which will be additive to the figures shown on this chart.

Slide 10 illustrates the drivers that will determine the timing of improved auto profitability.

The chart on this page is an illustrative view, we've shown in the past on our path to target profitability, along with the magnitude of actions already taken and required prospectively.

Starting on the left the first Blue bar shows the year end 2022 auto insurance recorded combined ratio of $110 one.

To start with a normalized base, we remove the impact of prior year reserve increases and normalizes normalize the catastrophe loss ratio for our five year historical average this improves the combined ratio by roughly four five points.

The second Green bar reflects the estimated impact of rate actions already implemented when fully earned into premium, which we discussed on the prior slide.

The impact on the combined ratio is approximately 10 five points when combining the Allstate brand and the National General brand actions.

Those two adjustments would improve the combined ratio target levels now.

Now of course, we know that loss costs will increase whether from severity or accident frequency, which would increase the combined ratio.

So prospective rate increases and other margin improvement actions.

Must meet or exceed loss cost increases to achieve historical returns. We continue to manage the auto insurance business with the expectation to achieve at auto insurance combined ratio target in the mid nineties.

Moving to slide 11, the table shows Allstate brand auto results in three major States, California, and New York and New Jersey combined contributed approximately a quarter of the Allstate brand auto written premiums in 2022, but accounted for approximately 45% of the underwriting loss.

While rates were increased in 2022 by 7% to 10%. This is not enough to achieve target margins. As a result, we have more work to do some of which is listed on the right hand side.

The right hand side of this slide is a list of actions we are taking in each of these states to improve margins.

In California, we filed for an additional six 9% rate increase in January after getting approval for an initial six 9% rate increase and our significantly increasing downpayment requirements.

In New York, while multiple rate filings were requested only partial approval of the increases requires us to make additional rate filings in early 2023.

Increased down payment requirements allowable prior incidents and channel restrictions these fewer choices for consumers until an adequate rate is approved.

In New Jersey additional rate filings, we will also be made and similar underwriting actions will be implemented as those taken in New York.

Moving to slide 12, let's look at a continued good performance story in homeowners insurance as you know a significant portion of our customers bundle home and auto insurance, which improves retention and the overall economics of both product lines.

We have a differentiated homeowners product underwriting reinsurance and claims ecosystem that is unique in the industry net.

Net written premium has increased significantly throughout 2021 and into 2022, increasing nine 3% from the prior year quarter and 12% for the full year predominantly driven by higher average gross written premium per policy and a one 4% increase in policies in force.

National General written premiums also increased as we improved underwriting margins closer to targeted levels.

The fourth quarter combined ratio for homeowners at 92, 6% increased by five five points compared to the prior year quarter, while full year combined ratio of $93 eight declined by three points compared to 2021.

For the year. This line generated $681 million of underwriting income the.

The increase in the fourth quarter as shown on the right side.

PMT increased combined ratio was driven by elevated catastrophe losses, primarily due to winter storm Elliot.

Homeowners insurance is also impacted by the higher loss cost environment as we continue to experience experienced higher severities due to increasing labor and material costs too.

To address the inflationary environment, our products has sophisticated pricing features that respond to changes in home replacement values.

And now I'll turn it over to just to discuss the remainder of our results alright. Thank you Mario.

Property liability as a core business for US there are other important drivers of financial performance to discuss starting with investment income on slide 13.

As shown in the table at the bottom left the total return of our portfolio was two 5% in the fourth quarter and negative 4% for the year. These returns for our broadly diversified portfolio compare favorably to the full year performance for the S&P 500 of negative 18% and to the Bloomberg Intermediate Bond index return of NEC.

<unk>, 9%.

Net investment income shown in the chart on the left totaled $557 million in the quarter, which is $290 million below fourth quarter of last year.

Market based income of $464 million.

Which is shown in blue was $101 million above the prior year quarter. This was the third consecutive quarter of increase as we benefit from reinvestment at higher market yields.

<unk> based income of 147 million shown in black was $369 million below a strong prior year quarter.

Income this quarter included a negative contribution from valuation of private equity fund investments that was more than offset by positive contributions from direct investments along with positive returns for infrastructure and real estate.

The chart on the right shows the fixed income yield as ryzen was three 2% at quarter end, but it's still below the current intermediate corporate bond yields at five 3%.

Also shown is that duration increased modestly to three four in the fourth quarter, primarily by removing approximately half of our duration shortening interest rate derivatives.

The migration of the portfolio the higher yields and the corresponding increase in income will happen over time, as we reinvest portfolio cash flows into higher interest rates.

With the portfolio and an unrealized loss position accelerating this shift by selling bonds with generate capital losses, but will be pursued if it optimizes enterprise risk and return.

Now, let's turn to slide 14, and talk more about how enterprise risk and return management impacts investment allocations and results.

Proactive investment management is highly integrated with risk adjusted return opportunities across the enterprise. We discussed this in detail on our September one special topic on investments in.

In 2021, we've decided to lower overall risk levels, given the declines in auto insurance profitability.

We also expected that sustained inflation would lead to higher interest rates as a result of the economic capital deployed to investments was reduced.

Led to a shortening of the bond portfolio through the sale of long corporate and municipal bonds and the use of derivatives.

<unk> market conditions negatively impacted our portfolio. These actions mitigated losses by approximately $2 billion.

In 2022, given continued auto insurance losses, we decided to lower the potential for investment losses as the U S economy went into recession at.

At the same time interest rates were increasing offering a better risk adjusted return from fixed income.

Consequently holdings in below investment grade bonds were cut almost in half from public equity holdings were lowered by 40%.

Late in the year interest rates that increased in the duration of the bond portfolio was extended as shown on the previous slide.

About half the duration shortening derivative position was removed in the fourth quarter at the same time this lowered the amount of economic capital deploy to investments.

These actions optimize enterprise risk and return and provide flexibility to take advantage of investment opportunities as economic conditions evolve.

The protection services business businesses also create shareholder value as shown on slide 15.

Revenues, excluding the impact of net gains and losses on investments and derivatives increased six 1% to $643 million in the quarter and eight 7% to $2 5 billion for the full year 2022.

The increase in revenue for the fourth quarter and full year was primarily driven by Allstate protection plans growth of 16, 9% and 15, 7% respectively.

As you can see from the table on the right Allstate protection plans continues to rapidly expand with written premium of $1 $9 billion for the year.

Allstate protection plans expansion in 2022 was primarily driven by our investment in appliance and furniture product coverages. We continue to believe there is a significant growth opportunity in these areas and in our continued expansion of European consumer electronics and other international growth.

Given the longer policy term compared to auto and homeowners insurance products.

Unearned premium balance continues to significantly grow as well, reaching $2 6 billion at the end of the year for.

The segment adjusted net income of $38 million in the quarter increased $9 million compared to the prior year due to a onetime net tax benefit in Allstate protection plans full.

Full year, adjusted net income of $169 million decreased $10 million compared to the prior year, primarily due to the lower revenue in <unk> as a result of decreased insurer client advertising.

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

Moving on to Slide 16, Allstate health and benefits is growing and attractive set of businesses that protects more than 4 million policyholders. The acquisition of National General in 2021 added both group and individual products to our portfolio as you can see on the west <unk>.

Revenues of $579 million in the fourth quarter of <unk> 22, excluding the impact of net gains and losses on investments and derivatives decreased one 5% to the prior year quarter as a reduction in individual health was partially offset by an increase in group health and other revenue.

Adjusted net income of $50 million increased $2 million compared to the prior year quarter, resulting in full year 2020 to income of $222 million for full year 'twenty to 2022 result was $14 million above prior year and reflects increases in group health revenues, partially offset by higher opera.

<unk> costs and expenses.

On group health contract benefits.

Let's close by highlighting allstate's strong financial condition and proactive approach to capital management as you can see on slide 17.

We ended the year with $4 billion and holding company assets, which represents an increase of $700 million compared to year end 2021.

We believe holding company assets and capital resources available from statutory operating companies to provide financial flexibility as we continue to implement profit improvement actions.

And transformative growth and return capital to shareholders.

As you can see our adjusted net loss in 2022 resulted in a negative adjusted net income return on equity.

Executing our comprehensive plan and achieving target combined ratios for auto and homeowners insurance will bring adjusted net income returns and equity back to our long term target range of 14% to 17%.

In 2022, we returned $3 $4 billion to shareholders through $2 5 billion in share repurchases.

$926 million from common shareholder dividends. This resulted in common shares outstanding being reduced by six 1%, reflecting the repurchase of $19 7 million shares in 2022 with.

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

Ladies and gentlemen.

Christian this is Kevin.

Donald <unk>.

And your telephone.

First question.

Our first question comes from the line of Paul Newsome from Piper Sandler Your question. Please.

Good morning, I wanted to ask about.

Claims management process.

Over the course of the last couple of years.

Think of Allstate is having a superior claims management and auto and home.

And that being kind of core advantages, but you've also been implementing a lot of cost cuts and our folks over the last couple of years. So.

How are you sort of balancing that and are there are some core metrics that we can see as outsiders that suggests that that damage relative to your peers still exists.

Thank you Paul good morning.

A few overview comments and then Mario can jump in.

You are correct.

One of our competitive advantage is really claim mix.

Both effectively and efficiently settling where millions of claims a year and we really look at it like it's a systems approach it's not the result of.

One person process or vendor arrangement, but like for example, if you look at auto insurance and we have this network of BARDA body repair facilities enables us to both source high quality costs high quality repairs good cost.

Timely steps, so cutting down things like.

Rental use and stuff at them at the same time, we have extensive use of analytics, whether thats the value of an individual car in a local market with specific actions.

Two settlements are complicated.

Multi year bodily injury claims or fraud detection.

Part sourcing and buying that Mario talked about enables us to both control the price of those parts by buying them in bulk, but also deciding with Archie units used in OA partner and aftermarket part whats available on the local market.

The reason I'm going through that is it's a really complicated system that works really well, we've got three employee training get great technology with good quality control processes and we do have metrics that you can look at to determine how we're doing versus the outside there is first call reporting and Theres. Some other external report.

<unk>, which shows for example that we have we buy we pay less per claim for parts and labor they know that people. So.

Some of that information like first call you guys have access to others, we get from other sources, but it.

What it tells US is that we're good now anytime you could narrow recently the only way you state grid as you keep changing and getting better at updating processes.

So as we've dealt with these dramatic swings in frequency and cost.

We continue to implement changes to improve the effectiveness and efficiency and Mario can talk about that.

Are we perfect. No are we can I think reassessing everything we do to make sure we're getting the right price for our parts and we're settling at the right value for customers of course.

Do we believe it's still a continued competitive advantage for all state yes.

Mario would you want to talk about some of the things you worked on last year and what you have looking forward this year.

Yeah, Thanks, Tom and thanks for the question Paul first thing I would reiterate what Tom said, we continue to view our claims capabilities is a competitive differentiator and a source of real value for Allstate's, We think thats been certainly been true in the past and it will continue to be true going forward.

The reality is given the environment, we're operating in both from us from a casualty perspective, as well as physical damage, we've talked a lot throughout the year around the drivers of inflation and the things that are driving up loss costs at such a rapid pace and I think what that does is it really forces us to keep us in the.

To continue to evolve those practices and it's certainly something we've done over time to continue to maintain.

Our leadership position in our edge when it comes to claim so let me just spend a minute and I'll break out casualties versus physical damage in terms of the action plans, we've talked a lot about changing operational processes I'll say, a couple of things starting with casualty first one of the things we've done over the past 12 plus months.

As we have meaningfully reduced the.

The volume of pending bodily injury claims by about 20% and what that does is it reduces risk of both of inflation impacting those those claims that certainly that we've settled.

And remediated going forward, but also reduces we think reserves uncertainty on those claims going forward and to just give me a sense of context the current.

Level of bodily injury pending claims in aggregate.

And its lowest level that its been since before 2016, so we'd look to de risk the <unk>.

Hardly injury pending portfolio by leaning in and settling claims were also focusing on a strategy that I would characterize as an earlier strategy when it comes to bodily injury things like earlier recognition.

Of injury claims earlier, claiming contact and earlier settlement of claims that we should settle quickly again to avoid the inflationary risks in the current environment and what we're doing is we're leveraging our advanced data and analytics capabilities.

To execute on all components of that strategy to continue to evolve and get better and casualty claim handling on the physical damage side I think it's really around.

Broadly continuing to focus on estimation accuracy cycle time, and leveraging further leveraging our scale to the fullest extent.

Continuing to increase the utilization of our good hands repair networks to reduce costs. Both in both in terms of parts and labor costs and improved cycle time, while continuing to improve our provide a high quality customer experience enhancing total loss.

Processes to reduce cycle time, and reduce costs around things like storage and rental costs and identification of pre existing damage on vehicles against a mood total losses through the system more rapidly and then continuing to look to leverage our scale. Additionally, when it comes to sourcing parts.

And getting as efficient as we can from a process perspective. So we're really attacking claims across a number of fronts again feel really good about where we're positioned with claims and this is all about continuing.

To get better and maintain that industry, leading capability on the claim side.

Okay.

Yes.

Is there any difference in how you handle claims.

Across the distribution systems at this point.

Very execution with cliffs.

Mark This is Marty.

Yes, sure I'll jump in.

Process wise.

We adopt.

Consistent processes across plants. There is certainly unique processes for example in national General given the non standard auto mix Theres, just a difference approach to those claims because they potentially have a higher risk of fraud.

There are some unique processes there, but in terms of claim handling consistency for similar types of claims we tend to leverage best practices across brands.

Thank you for your help as always really appreciate it.

Okay.

Yes.

Thank you one moment for our next question.

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

Good morning, everyone.

Tough quarter in a tough year for the company.

I was looking at slide 11 in the supplement.

And this is the slide that talks about the Allstate brand auto state profitability.

And if we look at the number of states that have a combined ratio above 100.

Italy increased through this.

Through the fourth quarter.

And kind of.

Contrary to that.

The comments you made about the rate that you applied and achieved in the year. So my question is.

What type of expectation do you have.

For that category of states above 100, as we move through 'twenty three if it kind of peaked here at 41 do you think it could get worse or what's your expectation going forward of how that might trend.

Greg Let me provide an overview of them Mario can jump in on it.

As we said and you know well that improving auto profitability will be a key to driving shareholder value. So we're all over that.

<unk> made a lot of progress Mario showed about the rate increases and so of the $4 1 billion that we think will still come true and that will come through from the rate increases we've already implemented we've got one to $2 six of that.

Should show up in 2023, and I would point out that that's not in those combined ratio numbers.

So our objective is to make line and make money in every line and every state So no cross subsidies between states.

Cross subsidies between lines now of course, that's hard to do.

With his may lines since May states as we're in but that's our objective and so.

The amount that amount that is not reflected in the some of those states. We think some of those states are probably adequately priced today. There are many that are not and so we will continue to drive those but.

We would expect to see that number come down, but we don't have a target.

We're at 41 at the end of the year, we want to be at some X X.

At the end of the first quarter.

Every state every line make money every year Mario do you want to add some additional color to that.

Sure. Thanks.

Thanks for the question Greg.

I think when you look at that trend of states above 100, and the increase throughout the year I think what I'd point you to is when you look at our underlying auto combined ratio as we reported it increasing throughout the year and being driven by.

Increases in our severity expectations quarter over quarter as the year played out as well as increasing frequency.

Between Q1 through Q4, only partially being offset by the rate that we took so I think I think that chart mirrors, what we show you in aggregate in terms of the reported underlying combined ratio.

When you look at our business from a state perspective, I think it's important to really categorize states into a couple of different buckets. I think there is a group of states that while we certainly are.

I'm pleased with the outcome of an underwriting loss given the actions, we've taken particularly from a rate perspective as well as underwriting actions, we feel like we're well positioned in a good place now you can't predict the future in terms of the path of inflation or severity going forward, but given the actions. We've taken we feel good about where we are.

Physician and what the outlook.

It looks like for 2023, I put states like Texas <unk>.

George a couple of large states for us where we've implemented significant rates.

And have been successful in doing so and so we feel good about the outlook again, we will have to adapt to what changes in the future, but I think theres a lot of states that fall into that category. Unfortunately, there is theres a number of for us pretty meaningful stage three.

<unk> three of which we highlighted in the presentation in California.

New York, New Jersey, where they are much more challenging regulatory environment and.

And we need to continue to execute on both rate increases and underwriting restrictions to curb growth to really bend align in aggregate and you're just using California. As one example, so as you all know we got a six 9% rate approved.

Late in the year.

But we immediately filed a sixth another six 9% increase pending with the department we took.

Downpayment requirements up pretty dramatically, we have not changed those down pay requirements, even with the first rates, we're working with the department on getting approval for the second six nine but then we're going to come back with another rate increase because we need more rate in California. So that's a big state for us where we're going to have to continue to really lean in and take.

<unk> continued to take dramatic and aggressive actions to improve margins and I've put New York in that same category, we got a 5% flex rate in New York Middle of the year, We got approval for a nine 4% rate in New York towards the end of the year, what we're prepared to do additional an additional round of rate filings in New York.

Early in 2023, because loss loss trends are not where they need to be.

In the interim we've taken underwriting actions around prior incidents down pay it.

Other actions to curb new business growth and we're going to continue to lean into those actions because we can't afford the right.

New business at the current rate levels.

And we will continue to take the appropriate actions. There. So I think you've got to look at the states in a different way I think we've made a lot of progress in a number of states, but we still have some work to do and as we said we expect to take some pretty significant rate increases in 2023, particularly leaning into some of those states, where we haven't really for regulatory reasons.

Been able to make the kind of progress that we would have liked.

That's good detail just the follow up question on the three States, California, and New York, and New Jersey, and I know youre not going to start negotiating with the departments of insurance on an earnings conference call.

But when I look at California. For example, you yourself said six nine is not going to be enough.

One of your competitors recently got just last month got a rate increase that was in the teens.

Why not pivot and get more aggressive with rate filings and some of these.

Challenging states.

It seems like some of your peers might be doing that and getting having some success.

Greg I would just say.

Maybe provide that I think we've been very aggressive when you look at how much we've raised rates in total.

For the year across the country, we've been very aggressive.

Pending measures you want to use.

More aggressive as you never really know where people start and what they finish and what their losses. There Mario do you want to talk specifically about California.

Yeah sure. So Greg I think we've been working really closely with that.

Department of insurance in California, we were able to pretty rapidly get approval of our first six 9%. We're in active dialogue around this the second $6 9 million and as I mentioned, when we get that one behind us thus there'll be a third one coming.

Always have the option of going down the path of filing a larger rate increase.

California generally takes a longer time period to get approvals for rates as it is in.

The one you mentioned, specifically I think had been pending with the department for over a year. So as we look at the map we want to get approval, we want to get approval as rapidly as we can so we can implement the rates and move on so the approach we've taken so.

So far in California, we're comfortable with we're going to continue to lean in.

These have the option to change course, if things change but us.

So far we've had success with the path, we've taken and we're going to continue to push on that.

Thank you for the answers.

Thank you one moment our next question.

And our next question comes from the line.

From Wells Fargo. Your question please.

Hi, Thanks.

Good morning, My first question is.

Just on capital you guys said you expect to complete the buyback program by the still by the end of the third quarter of 23 can.

Can you just.

Help us understand what metrics, you're looking at to judge the capital.

Equity of Allstate insurance company at the end of 'twenty, two I think in the past you've said you'd look at RBC ratios. There can you give us a sense of where you ended 2002, the RBC wise.

And where you would like that to be over time.

Elyse I'll, let Jeff give you specifics, but we obviously have a long history of managing capital.

Both balances our financial strength.

<unk> returned to shareholders.

Have plenty of capital to grow our business and pursue attractive risk return opportunities, we do it in a much more sophisticated way than RBC.

For example, in just talked about the things we had done.

The investment portfolio.

We allocate specific amounts of capital to different investment allocations. So when we dial up interest rate risk, we put a little more capital up for it if we dial down equities, we've put up less capital and we believe we're really well capitalized and don't have any issues.

Just wanted to go from there.

Yes, Thanks, Tom.

At least I think as it relates to your question on RBC, we haven't disclosed the RBC for the year that will come out in due course as it relates to the actual RBC in insurance company and we don't publish a target I think Tom hit on the right point because you asked what are the metrics that we look at as we think about the.

Repurchases and we really do focus on our sophisticated economic capital model that looks at a comprehensive view of risk across types around the enterprise and we use that as the basis for capital management. We obviously focused on RBC rating agency metrics a variety of other things, but we don't have specific.

Targets that we published as it relates to risk based capital so I really like to take it up a level and just think about.

How we manage it overall using our sophisticated risk based capital framework, we remain confident in our overall capital position and capital position.

<unk> insurance subsidiaries.

Okay.

Thanks, and then my second question.

Going back to it sounds like you guys have been discussing with modifying your claims practices.

Have you guys tested the predictive modeling and external data.

Against your own internal data and seen a meaningful benefit and should we how.

What time period should we think about the rollout of the program.

Over the next year 12 months to 24 months, what type of timeframe should we be thinking about.

At least I'm, not sure, which predictive models that youre talking about the.

We use predictive models for a lot in claims was there one specifically you were interested in.

I was talking about some of the kind of changes you guys have stressed that you are kind of looking to make.

On the claims side of things.

Okay.

Ill take a shot at Marrero you can jump in.

So we use.

We are a data driven company. So we use predictive models as you know well just find everything.

That could be fraud that could be.

Do we think this claim.

And that being severe enough where it gets represented by a lawyer. So it's important for us to establish a relationship with the customers as possible.

It might be do.

Do we think there is a better.

Way to settle this claim.

Whether it gets the targets totaled or we send it to a body shop.

So there is there is we use predictive analytics through our <unk>.

And.

Obviously largely in claims as well.

We're always tuning those we think we're pretty good at it.

You can't really take one specific algorithm, but when you look at our claims severities.

You can look at them externally.

And when you look at absolute dollars, we think we do really well is easier on physical damage. Obviously, because you just fixing the car bodily injury. It's like okay, well what was the case with western on average case that gets a little harder to do.

But.

In the.

The only weakness in the external stuff is it tends to be a percentage increase over the prior year, which is of course, we work in absolute dollars and our miles were down in absolute dollars.

Even though.

It all depends where you start, but we like our overall position Mario do you want to talk specifically about.

Any models.

Using now that.

Thank you can point to where we've updated.

It and increase the value added.

Yes.

The one I would point to and I think generally the.

The statement, Tom made about leveraging all the data and the capabilities, we have but also looking to tune those models and evolve over time. The example, I would use would be around bodily injuries.

Both.

Potential loss identification and attorney representation, given obviously the environment around US is has evolved pretty significantly over the past couple of years in terms of higher levels of.

Attorney representation in bodily injury claims.

And just medical inflation medical consumption and treatments those those kinds of things. So what we've been doing is tuning the models to to be able to use that.

The components and the data that we gather early on in the claims process to identify.

Claims where there is first of all the potentials for an injury more importantly, the potential for a major injury, given the higher impact accident or things like that so we can get out ahead of the claims made contact earlier and manage the claim much more effectively the same would be true around claims that have the potential ultimately to be.

Represented by an attorney again, creating contact with a third party claimants and establishing dialogue and communication and leveraging.

The tools and the model that our disposal to to better manage the claims process through the bodily injury claims. So those are just a couple of examples of how we have two models that we've had to adapt to the current environment and we're going to have to continue to as I mentioned earlier evolve our processes and those models.

To adapt to the environment contact. So this is not a static process and we're always looking to get better based on the most current information as well as the external environment.

That we're operating in.

Okay. Thank you.

The Q1 level for our next question.

And our next question comes from the line of.

Andrew.

Credit Suisse. Your question please.

Hey, Thanks, a lot for getting me in.

First question is around social inflation.

And in particular bad place.

And.

In 2022.

The court up a lot.

<unk>.

I suspect that had a big back as.

As we move into 2023.

What's your thinking about.

Further social inflation issue, Steve it'll get material.

Currently worse could you give us some measurement around that.

That's the question.

Mario do you want to take that.

Yes.

Certainly social inflation is a phenomenon that we and the industry has been dealing with for an.

An extended period of time I think in our business, we certainly see it in the personal auto side.

Casualty coverages, we've also seen it on commercial auto and in the shared economy, just given us the higher limits that we tend to write on that business.

It's hard for me to predict whether it will get better or get worse going forward I think it's a reality.

What we're experiencing right now and as I talked about some of.

The analytics and the processes, we're putting in place to identify and manage injury claims more effectively.

Reason why we're doing it is in response to the social inflationary impacts we've seen I'd also go back to something I said earlier around.

Quickly.

Not only identify but settling claims earlier in the process, where we can too.

Mitigate the potential exposure to social inflation going forward and the reduction in pending claims across a variety of segments that we've already executed on and we're going to continue to focus on going forward. So I think our approach has been.

Two more.

Modify our processes and take appropriate actions to offset the impacts of social inflation.

And again I don't want to predict whether it will get better or get worse, but we know it's a reality and we've adapted in response to it.

Was there a big pickup in bad faith claims.

I wouldn't say there was a big pickup in that space claims now.

Okay and then the next question is around the rate increase so I think Greg was touching on how your competitor guide in the teens I think it was.

17, 4% and you got six nine my question. There is should we worry that there will be anti selection. If other players are getting these big rate increases will that drive more.

More and more consumers to all state is the pricing appears better in California.

Mario you want to take that.

Yes.

As I mentioned earlier, even with the rate that we were approved for we didn't change the actions we took around don't pay requirements. So our risk appetite is not.

<unk> has not changed in California, and it won't until we get to a point, where we believe we are adequately priced and that will take a couple.

We used a couple of more rates.

Will we get anti selected against I think if we keep these.

The restrictions in place where the downplay requirements in place, we mitigate that risk.

And it's all it's all relative the the rate increase that was approved was on a much larger indication.

The one we filed so it's hard to tell what the relative price position is but again, we're not going to change our stance or our focus in California is two.

The reduced growth as much as we can until we get to rate adequate levels and that's the way we're going to manage the business.

Thanks, a lot.

Thank you.

Next question.

And our next question comes from the line of Josh Shanker from Bank of America.

Sure.

Yeah. Thank you I was looking at the new policy applications and I was trying to tease out all state first national General and <unk>.

Agency versus exclusive agency versus direct and I noticed that there was a.

Not significant amount of.

Independent agency new policy applications.

Coming from <unk>.

Non.

National General sources.

And so Im wondering is allstate brand being sold through independent.

Independent agencies and the reason why I ask this is also I noticed that.

New policy applications from Allstate exclusive agents are up but allstate branded.

New policy applications are down overall, meaning there's a channel shift that you are.

Cited about getting business from also exclusive agents, but not from the other sources, where you sold Allstate branded products last year.

Let me provide an overview of the marriage ticket.

So Josh.

First.

Let's take business from anybody's office truck price.

You are correct in that you see member of National General We took net.

When we acquired National in General we gave them both the encompass business, which was trade up independent agents.

Under the encompass brand Theres also an Allstate independent agent channel that we're transitioning to national General products and services over time so they.

National General has both of those on the direct versus.

Agent piece.

We.

And shutting down growth and reducing expenses, we went first to the direct channel because there was faster and we've got more dollars out of it.

That doesn't mean that we have a preference for allstate agent versus direct will serve customers any way they want to be sure Mario do you want to add some additional perspective on that.

Yes, and maybe I'll focus on <unk>.

First on the Allstate brand.

Josh in terms of the shift the mix shifting.

<unk> direct and exclusive agents. So youll remember a couple of things one of the things. We did this year was we reduced the amount of advertising spend particularly.

Particularly lower funnel advertising spend which directly impacts both volume through the direct channel and I think you've seen us a decline in the.

Direct Allstate branded production.

As a result of that I think the other thing <unk> seen.

Is the phenomenon, we're experiencing and the exclusive agent channel with Allstate and I'll take you back to one of the core tenants of transformative growth.

Was to.

To reduce costs, but one of the components of it was to reduce distribution costs by changing how we compensated our exclusive agents and also introducing lower cost.

Higher.

Productive.

New models and I think what you see in 2022.

Is that the model that we put in that shifts agency compensation more to new customer acquisitions has driven our level of engagement and behavior change on behalf of our exclusive agents.

This resulted in an increase in new business production. Despite the rate actions that we've taken.

Think as we go forward, we're going to continue to evolve. The agency model will continue to shift commission away from renewal to new business.

While at the same time continue to.

Enhance our direct capabilities. So that's when we do lean back into growth.

We're willing to.

The growth through any channel that we can write it but I don't think it's unreasonable to assume that the first place you would see kind of sequential growth would be in the direct channel just given that you know when we turned advertising back on that will be where a lot of the claim volume, it's driven through but at the same time.

We are pleased with the again the engagement and the behavior shift of our exclusive agents and the performance of the New agency models in terms of their levels of productivity, which I think bodes well for us from a long term growth perspective.

Is there a difference in profitability.

Over the lifetime of the customer depending on the brand and the channel sourced and long term should there be any difference.

Yeah.

Okay, Alright, thanks, Brian .

Yes, I can jump in in the Allstate brand.

I think over time it should be the same because we're.

Targeting.

And marketing to the same customer segments.

And looking to drive the same lifetime value, whether we write it in the agency channel are we right.

In the direct channel and you'll remember we've gone to differentiated pricing to match the cost of the channels with the price that the consumer's paying so that kind of normalizes for for.

For the.

The acquisition costs are the distribution costs, so we'd be getting the same lifetime values I think in the national.

General brand what we've got today is predominantly in the <unk>.

Still a non standard mix.

Which has a very different lifetime value than the standard and preferred products that we write in the Allstate brands, but we price for that we have the fee structure in place for that where we can and we.

We manage that business very effectively.

Drive value for a much shorter policy life expectancy for those nonstandard risks as we rollout more middle market product and National General and we really started on that process, but we've got a ways to go there.

What's the value the lifetime value expectancy for that policy group should look and feel a lot like the Allstate brand because we're leveraging the same data the same capabilities too.

To expand our capabilities in that market. So I think from a from a customer segment perspective should be very similar across channels given the same risk profile different in non standard auto, but we've got a really effective model and national general can manage that business.

For answering my overly belabor questions.

No. That's very helpful. So thank you all for tuning in.

Allstate's, obviously focused on using our extensive.

System, our operating expertise to improve auto insurance margins and at the same time as Mario just mentioned, we're investing in transforming the growth increase our property liability business.

Upside in front of us on the investment portfolio.

And we're having good successful expansion of our circle of protection. So thank you all and we will talk to you next quarter.

Thank you, ladies and gentlemen participation in today's conference.

Through the program.

Now disconnect good day.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good day, and thank you extending my welcome to all states.

Investor call at this time.

All participants Donaldson only mode. After the prepared remarks, there will be a question and answer session to ask the question during the session really depressed star one on your telephone with your.

My question has been answered endless remove yourself from the queue.

Throughput star one again.

Yes, Macquarie to one question and one follow up as a reminder, please be aware that this call is being recorded.

Now I'd like to introduce your host for today's program Mark Hurd.

Of Investor Relations. Please go ahead Sir.

Thank you Jonathan Good morning, welcome to Allstate's fourth 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 and posted related materials on our website at Allstate investors Dot Com. Our management team is here to provide perspective on these results.

Noted on the first flight of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and Investor supplement and forward looking statements about allstate's operations Allstate's results may differ materially from these statements. So please refer to our 10-K for 2021 and other public documents for information on potential risks and now I'll turn it over to Tom.

Yes.

Well good morning, Thank you for investing your time and I'll state today.

I'll start by setting context, and then Mario and guests would provide additional perspective on operating results and the actions being taken to improve auto profitability and increase shareholder back. So let's begin on slide two so as you know allstate's strategy has two components increased personal property liability market share and expand protection.

Services, which is shown in the two <unk> on the left and the right hand side you can see our results for the year.

Earnings were disappointing with a net loss of $1 4 billion.

Largely reflecting an underwriting loss in auto insurance and mark to market losses on the equity portfolio.

Strong results from homeowners insurance protection services and fixed income investments were not enough to offset the losses in auto and commercial insurance.

The most important driver of near term shareholder value will be successfully executing our comprehensive plan to improve auto profitability that includes broadly raising auto insurance rates, reducing expenses, including temporary moves such as by advertising and permanent reductions, including digitizing and outsourcing work and lowering distribution costs.

Underwriting restrictions have been implemented to reduce new business volume until profitability is acceptable claim.

Claims operating processes are also being modified to manage our lost Scott.

This plan is being implemented but earned premiums from auto insurance rates have not increased enough to offset higher lot Scott.

While the number one priority is to improve auto insurance margins implementation is transforming our growth strategy has made great progress in 2022, and we validated that this will drive personal property liability market share growth.