Q1 2023 Allstate Corp Earnings Call
And there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone if you wish to remove yourself from the queue simply press star one again.
As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Mr. Mark <unk> head of Investor Relations. Please go ahead Sir.
Thank you Jonathan Good morning, welcome to Allstate's first quarter 2023 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 related material on our website at Allstate investors Dot Com. Our management team is here to provide perspective on these <unk>.
As noted on the first slide of the presentation. Our discussion will contain non-GAAP measures for which there are reconciliations in the news release and Investor supplement and forward looking statements about allstate's operations.
<unk> results may differ materially from these statements. So please refer to our 10-K for 2022 and other public documents for information on potential risks.
Some of you know this will be my final earnings call as the leader of our Investor Relations team and that will be transitioning to a new role in our P&C finance area supporting National General I'm, leaving Investor relations in the capable hands of Brent Vander months, it will be a great partner for all of you going forward and now I will turn it over to Tom.
Good morning, we're excited for Mark and we're completely confident that Brent has kind of gives you everything you need to help you decide.
How and why you want to invest at all.
Good morning, we appreciate the investment of your time and I'll say I'll, let's start with an overview of results and then Mario and yes, we're going to walk through the operating results.
That we're taking to increase shareholder value. So let's start on slide two allstate's strategy. As you know has two components increased personal property liability market share and expand protection services. Those are shown in the tools on the left if you go to the right hand side of the slide you can see a summary of the results for the first quarter.
We had a net loss of $346 million in the first quarter, which reflects a property liability underwriting loss, which was only partially offset by strong investment income and profits from protection services in health and benefits.
Making good progress on executing the comprehensive plan to improve auto insurance profitability and of course, we will have substantive discussion on that today not.
Not to be overlooked we also continue to advance transport for our plan, which is to execute the top over there which has increased property liability market share.
At the same time Allstate protection plans and the lower oil continues to expand its product offering and geographic footprint.
Let's review the financial results on slide three.
Revenues of $13 8 billion in the first quarter increased 11, 8% or nearly $1 5 billion.
Compared to the prior year quarter. The increase was driven by higher average premiums in auto and homeowners insurance, resulting in a property liability earned premium growth of 10, 8%.
In the auto insurance line higher insurance premiums and lower expenses were essentially offset by increased loss cost. So the profit improvement plan has not yet return margins to historical levels.
The auto insurance buying had an underwriting loss of $346 million in the quarter.
In homeowners. The story is really about $1 $7 billion of catastrophes, which led to an underwriting loss of $534 million of total underwriting loss was just under $1 billion.
Net investment income of $575 million benefited from higher yields, which was mostly which mostly offset in income decline from performance based investments.
Section services in health and benefits generated adjusted net income of $90 million in the quarter. As a result, the adjusted net loss was $342 million or $1 30, a share now.
Now, let me turn it over to Mario to discuss property liability results.
Thanks, Tom and good morning, everybody, let's flip to slide four the chart on the left shows the property liability recorded and underlying combined ratios. Since 2017 as you can see Allstate has a long history of generating strong underwriting results, though the current operating environment is challenging with combined ratios over 100 last.
Year and into the first quarter.
The underlying combined ratio of $93 three for the first quarter was slightly below the full year of 2022.
The second chart compares to full year 2022 recorded combined ratio for all lines of business to the first quarter of this year, which removes the influence of entry year severity changes that occurred throughout 2022.
The first Red bar shows the underlying loss ratio was essentially unchanged as higher premiums were offset by increased loss costs.
The second Red bar on the left shows most of the increase in the combined ratio was driven by higher catastrophe losses, reflecting the widespread severe weather in the first quarter of this year.
Expenses were lower by one nine points of premiums and minimal non catastrophe prior year Reserve re estimates also had a positive impact.
Let's move to slide five to review Allstate's auto insurance profitability in more detail.
As you can see from the chart on the left which shows the auto insurance recorded and underlying combined ratios from 2017 through the current quarter.
We have a long history of sustained profitability in auto insurance as we successfully leveraged our capabilities and pricing sophistication underwriting and claims expertise and expense management to generate excellent returns in the auto insurance business.
Since mid 2021 loss costs have increased rapidly driving combined ratios above our mid <unk> target.
The profit improvement plan is designed to address the significant loss cost increases and we're making good progress.
The chart on the right compares the recorded combined ratio of $104 four in the first quarter to full year 2022 results starting on the left higher average earned premiums drove a five seven point favorable impact which is shown in the first green bar.
The first Red bar reflects a six five point increase in underlying loss costs due to increased accident frequency and severity for the 2023 report year with severity currently projected in the 9% to 11% range above the full prior reporting here.
A lower expense ratio reflects expense reductions and higher earned premiums. The remaining difference was due to catastrophes and prior year Reserve re estimates all in both the recorded and underlying combined ratios of $104 four and $102 six respectively improved in the first quarter of 2023.
Compared to the full year 2022.
Slide six provides an update on the execution of our comprehensive approach to increase returns in auto insurance.
There are four focus areas raising rates, reducing expenses implementing underwriting actions and enhancing claim practices to manage loss costs.
Parting with rates following increases of 16, 9% in 2022, the Allstate brand implemented an additional one 7% of rate increases in the first quarter.
We will continue to pursue rate increases in 2023 to restore auto insurance margins.
Reducing operating expenses as core to transformative growth. We've also temporarily reduced advertising to reflect a lower appetite for new business.
We implemented more restrictive underwriting actions on new business and locations and risk segments, where we have not yet achieved adequate prices for the risk.
As we move through 2023, it is likely that some of these restrictions will be removed where there are profitable growth opportunities.
Enhancing claim practices and a high inflation environment is key to delivering customer value. This.
This includes leveraging strategic partnerships and scale with repair facilities and part suppliers to mitigate the cost of repairing vehicles.
In addition settlement of pending bodily injury claims has been accelerated to avoid continued increases in costs and settlements.
Transitioning to slide seven let's discuss progress in three large states with a disproportionate impact on auto profitability.
The table depicts Allstate brand auto new business production and rate actions for California, New York and New Jersey.
As a result of implemented profitability actions new issued applications from the combination of California, New York, and New Jersey declined by 40% compared to the prior year quarter.
The decline in these three states meaningfully contributed to the 22% decline countrywide.
The right hand portion of the table provides rate increases either taken or needed to improve margins.
In California, we just received approval for a second six 9% rate increase implemented in April which will be effective in June .
We continue to work closely with the California Department on the best path forward to getting rates to an adequate level and expect to file for an additional increase in the second quarter, which will reflect the balance of our full rate need.
In New York, we filed for additional rate in the first quarter that is currently pending with the department of financial services.
In New Jersey, we obtained a six 9% rate increase in the first quarter and expect to pursue additional filings in the second quarter.
As mentioned earlier, we anticipate implementing additional rate across the country into 2023 to counteract persistent loss cost increases.
Slide eight dive deeper into how we are improving customer value through expense reductions.
The chart on the left shows the property liability underwriting expense ratio over time and highlights drivers of the two nine points of improvement in the first quarter compared to the prior year quarter.
The first Green bar on the left shows a two point improvement impact from advertising spend which has been reduced given a limit a limited interest in new business at current rate levels.
The last two green bars show a decline in operating and distribution costs, mainly driven by lower agent and employee related costs and the impact of higher premiums.
Shifting to our longer term target on the rate we remain on pace to reducing the adjusted expense ratio to 23 by year end 2024, as part of transformative growth.
This metric starts with our underwriting expense ratio, excluding restructuring Corona virus related expenses amortization and impairment of purchased intangibles and advertising.
That adds in our claims expense ratio excluding costs associated with settling catastrophe claims because of the catastrophe related costs tend to fluctuate.
Through innovation and strong execution, we've driven significant improvement relative to 2018 with our first quarter adjusted expense ratio of $24 nine.
We expect to drive additional improvement achieving an adjusted expense ratio of approximately 23 by the end of next year, which represents a six point reduction compared to 2018.
The increase the increase in average premiums certainly represents a tailwind however, our intent and establishing the goal is to become more price competitive.
This requires sustainable reduction in our cost structure with the future focused on three principal areas, including enhancing digitization and automation capabilities.
Improving operating operating efficiency through outsourcing business model rationalization, and centralized support and enabling higher growth distribution at lower costs through changes in agency compensation structure and new agent models.
Now, let's move to slide nine to review homeowner insurance results, which incurred an underwriting loss in the quarter, despite favorable underlying performance due to elevated catastrophe losses.
We have a superior business model that includes differentiated product underwriting reinsurance and our claims ecosystem that is unique in the industry.
As you can see by the chart on the left this approach consistently generates industry, leading underwriting results, despite quarterly or yearly fluctuations in catastrophe losses.
The chart on the right shows key Allstate protection homeowners insurance operating statistics for the first quarter.
Net written premium increased 11, 1% from the prior year quarter predominantly driven by higher average gross written premium per policy in both the Allstate and National General brands and a one 4% increase in policies in force.
The first quarter homeowners combined ratio of 119 increased by 35, one points compared to the prior year quarter, reflecting higher catastrophe losses, primarily related to five large wind events in March.
<unk> accounted for more than 70% of catastrophe losses in the quarter.
The first quarter catastrophe loss ratio was significantly elevated compared to the prior year and 10 year historical average by 36, 2% and 35 points respectively.
The underlying combined ratio of 67, 6% improved <unk> four points compared to the prior year quarter, driven by higher earned premiums and a lower expense ratio, partially offset by higher claims severity.
Slide 10 provides an update on transformative growth.
Transformative growth remains a focus and is being executed in parallel with our profit improvement actions. We continue to make good progress on this multi year initiative that spans five main components, improving customer value expanding customer access increasing sophistication and investment in <unk>.
Customer acquisition, modernizing the technology ecosystem and driving organizational transformation.
The bottom half of the slide highlight recent progress by intended outcome.
Providing the lowest cost insurance through expense reductions broad distribution and pricing sophistication is key to growth our allstate brand relative competitive position has deteriorated recently as rate increases have exceed some exceeded some competitors. We expect that those competitors will eventually raise rates.
Improving our competitive position and growth prospects.
Distribution has been expanded by launching middle market and preferred products through independent agents under the National General brand.
These products are currently available in approximately 25% of the U S market with a plan to be in nearly every market by the end of next year.
Our new affordable simple and connected auto product creates a differentiated customer experience, which is which is expected to become available in approximately one third of the U S through the direct distribution channel by the end of this year.
Deploying a new technology stack.
Integrating technology across brands and retiring legacy technology applications provides increased agility and lowers costs. This will be reflected in the sunset of the <unk> and encompass technology platforms next year.
We believe transformative growth will lead to increased market share and hence higher company valuation multiples and now I'll turn it over to just to discuss the remainder of our results alright. Thank you Mario let's start with slide 11, which covers results fire protection services and health and benefits businesses.
On the left shows protection services revenues, excluding the impact of net gains and losses on investments and derivatives, which increased 7% to $671 million in the first quarter compared to the prior year quarter increase reflects growth in Allstate protection plans and Allstate dealer services, partially offset by a decline.
And Aaron.
By leveraging the Allstate brand excellent customer service expanded product offerings and partnerships with leading retailers protection plans continues to generate profitable growth, resulting in a 17% increase in the first quarter compared to the prior year quarter.
In the table below the chart you will see that adjusted net income of $34 million in the first quarter decreased $19 million compared to the prior year, primarily due to higher appliance and furniture claims severity and a higher mix of lower margin business as we invest in growth at Allstate protection plans.
We'll continue to invest in these businesses, which provide an attractive opportunity to meet our customers' needs and create value for shareholders.
Shifting to the chart on the right health and benefits provide stable revenues and is consistently profitable while protecting more than 4 million customers.
Revenues of $583 million in the first quarter of 2023 increased by $3 million compared to the prior year quarter as an increase in group health and other revenue was partially offset by a reduction in individual health and employee benefits.
Health and benefits operating systems are being rebuilt to lower costs and support growth, which will leverage the allstate brand and customer base to generate shareholder value.
Adjusted net income of $56 million was in line with the prior year quarter.
Effective January one 2023, we adopted the FASB guidance revising the accounting for certain long duration insurance contracts in the Allstate health and benefits segment using the modified retrospective approach to the transition date of January one 2021. This had an immaterial impact on our results.
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Now, let's move to slide 12, which depicts trends in our investment portfolio allocations.
Our active portfolio management includes comprehensive monitoring of market sectors.
Sectors and individual names and we proactively reposition based on our views of economic conditions market opportunities and the risk return trade off.
Asset class holdings are shown on the left our.
Our $63 $5 billion investment portfolio includes a large allocation to high quality interest bearing assets, which had increased in recent years in response to increasing recession risk, we defensively positioning the portfolio in 2022 by reducing our exposure to below investment grade bonds and public equity.
We maintain this defensive position in the first quarter with additional reductions in our public equity exposure.
Our performance based portfolio shown in green and Grey enhances long term returns and is broadly diversified with more than 400 assets.
The portfolio is largely U S exposures that spanned vintage years sponsors and sectors.
Exposure to real estate and commercial mortgage loans is modest at $2 8 billion or 4% of the portfolio is focused on more resilient sectors, such as industrial and multifamily, we hold only $230 million and office properties or mortgages.
In addition to real estate, we have selective exposure to the banking sector totaling about $4 $5 billion. It consists.
Primarily of investment grade fixed income securities issued by large financial institutions.
$240 million of exposure of regional banks, primarily primarily larger regional banks and we did not realize significant losses related to recent bank failures are.
Our high quality portfolio provides flexibility to take advantage of investment opportunities as economic conditions evolve, while providing substantial liquidity and protect to protect our customers.
<unk> from investment allocation to performance on slide 13.
As shown in the table at the bottom of the chart on the left total return on our portfolio was two 4% in the first quarter and one 2% over the last 12 months.
Net and net investment income shown in the chart on the left totaled $575 million in the quarter, which is $19 million below the first quarter of last year.
Market based income of 570 $507 million shown in blue was $184 million above the prior year quarter. Following the proactive decision to reposition market the market based portfolio into higher market yields and Inc. And an increase in fixed income funded by a reduction in public equity.
Performance based income of 126 million shown in black was $180 million below a strong prior year quarter volatility from quarter to quarter on these assets is expected.
Our portfolio management and the allocation of risk capital to investments is highly integrated with the assessment of risk adjusted return opportunities across the enterprise.
As Youll recall in response to declines in auto insurance profitability last year, we defensively positioned the portfolio against rising rates and reduced our exposure to reset recession sensitive assets.
As market rates Rose, we began to increase the duration in the fourth quarter and ended the first quarter at four years. This duration extension locks and higher yields and income for longer while positioning the portfolio to benefit from potential future reductions in interest rates.
The chart on the right shows the fixed income earned yield continues to rise and was three 4% at quarter end our portfolio yield is still below the current intermediate corporate bond yield of approximately five 1%.
Collecting an additional opportunity to increase yields if rates stay at these levels.
To close lets turn to slide 14 to discuss Allstate strong financial position and prudent approach to capital management.
In light of recent financial events impacting the banking industry and let's start with an overview of Allstate liabilities as you can see in the chart on the left our liabilities primarily consists of property casualty claim reserves and unearned premiums that are not subject to unpredictable our immediate demands for repayment.
Our sophisticated sophisticated economic capital framework quantified enterprise risk to establish capital targets by business product geography, and investment while also providing additional capital for stress events for contingencies.
The framework incorporates regulatory capital standards proprietary.
Economic metrics econometric modeling I struggle with that.
Rating agency criteria and other external assessments as used through the company from individual product and state based decisions to establishing the appropriate amount of capital for each company and the overall Corporation.
Ill fated capital of $19 2 billion exceeds our target capital based on this framework.
Our ratings remained strong with S&P and Moodys assigned an issuer credit rating of AA minus and a three respectively to our recent senior debt offering.
Holding company assets of $4 2 billion.
As at the end of the first quarter represents approximately two five times, our annual fixed charges, we returned $377 million to shareholders in the quarter through dividends and share repurchases as a sign of our financial strength and commitment to shareholder returns. The common dividend was increased by four 7% in the first quarter and paid in early April .
With that as context, let's open up the line for questions.
Certainly ladies and gentlemen, as a reminder, if you have a question at this time. Please press star 111 moment for our first question.
And our first question comes from the line of Gregory Peters from Raymond James Your question. Please.
Well good morning, everyone lots to unpack in their comments.
I think what I'd like to do for my question and follow up would be to focus on first slide five.
And.
I was interested in your comments about the average underlying loss ratio I think up six 5% in first quarter versus <unk>.
Versus the average earned premium.
Being a good guy for five seven.
I guess the question would be.
It is the expectation that six five is going to continue and when will the average earned premium go beyond where the underlying loss ratio deterioration is.
Okay Mario to dig in on claim expenses. When you look at five to $5 seven I'll remind you first good morning, Craig I'll remind you that.
Remember this that's a number that's been trending up as the grades that we took in 'twenty. One 'twenty two start to be earned in so we would expect that number to continue to increases as we earn in the rates we've already implemented.
And so we think that in terms of claim severity I'll, let Mario will give you an update on where we are at lower thinking about yes. Good morning, Greg. So in terms of claims severity. What we disclosed this quarter was across major coverages were running in the 9% to 11% range in both physical damage and an engine.
The coverages are really the drivers of those costs. If you start with physical damage, we continue to see pretty persistent inflation.
Particularly in parts and labor costs to repair cars.
Sure.
Actually used used car prices, our total values for used cars actually came down a little bit in the first quarter in our numbers, but we had a higher percentage.
Of total loss frequency, which impacted the mix. So those are really the drivers and on on bodily injury. It's the same things we've been talking about medical inflation medical consumption attorney representation. So I think the drivers of severity continue to persist in terms of where theyre going forward.
It's it's really anybody's guess, but I think our perspective is and we've been pretty consistent on this point.
To continue to take prices up we've been doing that.
Really since the fourth quarter of 2021 throughout last year Battle that continued into the first quarter, we're going to continue to.
On a forward looking basis basis implement rate increases to.
First catch up and then outpace loss cost trends, but our perspective on on rates as we continue to need to push more price through the system and we intend to do that throughout the balance of 2023.
Right.
On slide seven you in your comments you talked about those three states.
And I.
I guess.
Follow up question would be.
Where do you think that's going to go from a rate perspective, I think you said.
In your comment Mario that you expect to file the.
Balance of the full rate need in California.
Won't that trigger a different process, causing a delay in potential right.
State approvals.
Some give us some color on that slide please thanks.
Sure. So first of all I'll start with as we as we talked about we just got approval for our second six 9% auto rate increase in California, So going back to the fourth quarter of last year, we've gotten approval for $2 six 9% rates and we've done that by.
Working closely with the department to lay out our data and our loss cost in those conversations and I think you've seen some of this across the industry.
The department is really encouraging carriers to file for the rate need that they have in their book as opposed to.
Going forward with six 9%.
Rate increase filings and it's really based on just the volume of re filings, they're getting so as we talk to the commissioner and the Department. We got we were able to secure approval for the $2 six 9% rate increases and we intend on filing the balance of our rate need.
Forward does that create risk.
And intervention it does but.
I think we need to get California auto prices back to where they need to be so that we can create the kind of availability for consumers really that they deserve in California. So we're going to work with the department closely where it make that filing.
And then.
We'll see where that takes us going forward. So Greg I think embedded in your question is.
Will you be challenged that something above six nine the strategy that Guy Hill and team put into place was it takes six to nine six.
<unk> don't have to have a consumer advocate come in and look at it get another six nine.
And then go for the pro rate. So what you are seeing us do it in three chunks. Other people have tried to do it other ways. We think this is the right way for us.
Got it in New York, and New Jersey.
Yes, we've got a.
We got some rate filings pending with the New York Department.
That hopefully will get resolved soon and then new Jersey Youll see we were able to implement a rate increase and we are going to come back and file another rate increase. So we're we're we're working hard to get these three states off of this page.
Got it thank you for the answers.
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.
Maybe give us a little.
Little bit more additional coverage.
Color on the claims inflation.
Right.
Is it fair to say that.
What we saw in the first quarter was.
And acceleration.
Severity trends.
It was unexpected and if so maybe you could talk about a little bit more of the pieces that were.
That much worse.
Soon.
Some people in the industry of growers.
Paul Youre breaking up a little bit so let me just make sure I got it. So we're talking about auto insurance severity trends first quarter versus is that is that a tick up from what you saw.
Last year or is it the level if thats. The question I'll, just Mario can jump into that.
I guess, what I say.
What I would say about severity again in that 9% to 11% range.
Is it just remains persistently high I think is how I would describe it and that's true across coverages.
Certainly lower than what our expectations were.
Severity last year, what our ultimate forecast is for 2022, but it still remains at elevated levels, which is why I go back to we're going to need to continue to push rate through this through the system through the balance of this year to combat that inflation.
Is that should we interpret that as further acceleration.
No I think you were expecting to put more.
Right I guess.
Okay.
The question is do we have a step function up.
From where we would've been.
Paul I think that's a little bit.
It was a little bit of I mean, when youre looking at the percentage as it gets a little <unk>.
Using when you're in a high <unk>.
Increase environment. So if you looked at the the numbers that Mario is talking about are the percentages up versus the full year of 2022 not versus the first quarter of last year as you know.
The percentages kept going up as we move throughout the year.
We adjusted our results for so what we've decided to do is to talk about the percentages up versus the full year.
And I think Mario.
As said it well, which is it continues to be high.
And so we're trying to you if you look at the percentage up versus what we thought it was in the first quarter it would be higher than 10 to 11, but it's not higher than what we thought the first quarter was at the end of last year, so as it relates to pricing.
We're looking at just total loss cost frequency and severity and we have to believe we have to continue to increase prices. This year as Mario and talked about we were up almost 17% in the Allstate brand last year I don't know, we don't have a target for what it will be this year.
As Mario said, he is going to be what it needs to be.
That's helpful.
To help and Oh.
Other folks ask questions. Thank.
Thank you very much.
Thank you one moment for our next question.
And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question. Please.
Hi, Thanks, Good morning, Mike.
My first question I, just wanted to talk about your RBC ratio.
We see the cat losses, you can see the impact that that would have had in statutory income in the quarter, but you guys also good.
Got you.
Equity investments in half, which I think could have you know maybe a 20 point benefit in RBC is there a way for you guys to walk through the moving components of RBC in the quarter and give us a sense of where your RBC ratio would.
It would be within AIC.
At the end of the Q1.
Thanks for the question, let me provide a little over than just to jump into the specifics.
Headline would be we don't just look at RBC.
And so as Jeff said, so I mean, if you step back and say what are the learnings from the recent bank failures.
Having a capital problem is not something that just happens to be like an auto accident.
As a result of a series of choices made over time.
In terms of our series of choices. We have this really comprehensive set of processes around those choices are high van elliptical we look at all kinds of scenarios, we look at it frequently and as a result of that we come up with what we think the right amount of catalogs. It includes things like RPC. It includes things like the rating agencies.
And includes in some cases, we are more restrictive in terms of the amount of capital. We think we need than other people. So we don't play the game of RBC.
Arbitrage, so to speak and prove ourselves with that just you want to talk about how you think about capital and where we're at.
Yes, Thanks, Tom I mean, I think as you and I have.
Talked before at least we try and take a look at our capital position.
Using our sophisticated economic capital model and not just the RBC ratios. We don't just to be clear. Your specific question. We don't publish and have not published the RBC ratio for this quarter and so I'm not in a position to take you through the bits and pieces on this call I think directionally.
Have noted what the RBC impacts will be but I think it's more important to think about the way that we manage capital in the way that we look at it on a comprehensive basis, not just an RBC basis.
<unk> seen reflected.
In the results that we continue to proactively manage our overall capital position. So again I go back to our economic capital model.
<unk> comprehensive way that we look at capital, including all different sources and uses.
And feel confident in our capital position being as I said in my prepared remarks above our internal targeted levels, but you shouldn't take the fact that we have less equity as a <unk>.
Statement that we thought we needed to save capital, we have less public equity openings, because we didn't think it was good risk return tradeoff, which John will be happy to talk about if somebody wants to go through but.
We think we have plenty of capital in this business.
Thanks, and then my second question on <unk>.
Your personal auto on.
Underlying loss ratio did improve sequentially right. There some noise might as there were some true ups in the fourth quarter last year and also I had thought that seasonally Q1 for auto tends to be better, but I guess, if you put this all together and you guys you were talking about taking still earning in some.
Good amount of rate increases.
That the personal auto loss ratio peaked in the first quarter and should we expect it to improve from here.
Well.
We think the profit improvement plan is working.
I would say at least that if you just summarized the first quarter I would say we held serve.
We held serve in the face of if Youre, a tennis fan 120 mile an hour serve.
Which was called continued high increase in severity.
<unk>.
How will we return the ball and as you point out.
It's about where it was last year. It is improved sequentially fourth quarter, but you're absolutely right. There are some other things going around in the fourth quarter related to the first second and third quarter of last year. So it's not quite fair to say that it improved I would just say we held share we feel good about where we're going.
In our mind, it's a question of when.
If we will get back to how we make profitability and that's of course dependent on what happens with inflation in costs.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Huron Qunar from Jefferies. Your question. Please.
Thank you good morning.
Maybe starting with the.
The current capital position and the reallocation of some of the investments can you maybe talk about.
How you see the capital.
And that.
Maybe capital market stress scenarios and I am sure you run those internally or any any color you can offer around that would be much appreciated.
I'm not exactly sure maybe you can give me another layer down in that question. So we can get specific point.
Sure. So I think you were talking about our roughly $4 billion of.
Liquidity or access control at the Holdco and.
$16 billion of liquidity.
What happens to those.
We find capital market stress sign out there is another 25% decrease in the equity markets maybe credit cycle.
Yes.
I'm not exactly sure what kind of scenario to paint because I don't want to put you on the spot with a specific set of.
Declines, but I'm sure you do test.
Excess capital availability.
Availability against stresses in the system.
Yes, no. It's a good point, let me get John to answer that I gave you. The first I would just say analytics everywhere as kind of a flavor around this place.
So whether that's using sophisticated meiosis and weather totaled the car or extending duration or what we're doing with capital.
And so when you look at the extension of duration I think John ran like nine different scenarios, how to do it what to do so so we're all over that when it when it comes to stress events in the capital markets. We look at all kinds of alternatives there everything from and what do we do with the government defaults.
To what do we do if there's a.
More bank failures and so we have that.
And Jon can tell you is sort of how he's thinking about how we allocate assets in the portfolio relative to stress events in today's market I would say from an overall capital standpoint, which is we've got plenty of money like.
You saw our liabilities they are very predictable.
And nobody is going to run in as they give us back our $10 billion and we don't have it at the same time, we have a really highly liquid portfolio because so much of its investment grade fixed income fixed investment grade fixed income markets completely shut down.
We would still probably five.
Probably we would be fine because we are we're having cash come in in terms of unearned premiums every day. So we don't really have any overall liquidity issues, but in terms of capital market stress and how you would think about that from an investment.
Decisions and where we're investing today John can give you some perspective.
Thank you so much for the question.
Sufficient data if we if we could trade security right at $5 billion of cash coming in in the next year, just like things that are rolling off it's highly integrated into an overall data and analytics for quantitative framework.
<unk> enterprise so.
Answer this question I feel confident that.
Scores of people on the on the investment team could answer too because it's part of the way that we think we're not managing and investment portfolio separate from the way that we think about the enterprise Tom talked a little bit about the duration trade that we did that was highlighted in the materials.
That's not taken in isolation.
All of the other securities in the portfolio would perform.
It's not taken in isolation and how we think about the entire enterprise what happens in underwriting and other areas we run.
Got it.
Probably 100 different scenarios on a daily basis that look back at things that have happened in the past things that could happen in the future what that means for returns and what that means for capital and we subscribe to getting the order of ready aim fire right. So we really aim a lot as we think about our investment profile.
Thanks.
And then maybe shifting back to.
The auto book.
Alright.
The piece or the cadence of rate increases that you expect.
File and auto.
Similar to where it was when we ended the 2022, where do you see maybe additional.
Rate increases unnecessary today relative to the plan at the beginning of the year.
What's the plan to be in a year or so.
Maybe I could.
Ill give a overview Mario with an analogy and you can you can figure we're running as fast and as hard as we can at rates everywhere.
If we need them, we're really running fast and hard.
We think we're actually adequately priced in some states, where we are today.
Where we're still paying attention, we're still on track or still warmed up and ready to run it if we need to be.
Yes.
I would add your own I'm going to go back to a comment I made earlier, which is we've been pretty consistent on this point of the need to to take prices up going back to last year and that Hasnt changed now obviously, we react to new data new information in real time.
The absolute amount of rate, we take is going to be dependent on that updated data as Tom mentioned earlier, we rely on.
If you do the analytics to to manage the business and we respond to what's happening in real time so.
The amount of rate, we need we will will be dependent on how loss costs.
Lay out over time for us.
We're going to continue to push right through the system. We've been successful at that I wouldn't get too hung up on quarter to quarter fluctuations.
Because that quarterly number is going to bounce around in terms of the.
<unk> that were approved in a particular state and the size of those rates, but I think thematic Lee will go back to what we've been saying now for.
Over the last year, which is we're going to continue to to take the rate that we need.
Two to get auto margins back to where they need to be which is in the mid 90% target that we have.
Yes.
Thanks, and good luck Mark with Anoro.
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.
Thank you and good morning.
Trying to unpack.
The earlier comment about.
Used car prices coming down a bit because the manheim index was up about eight 6% and and Thats kind of a forward looking indicator.
So maybe you could.
Let me give a little color on what your expectation there.
For used car prices is that kind of fit in your nine to 11 or where could it.
Projected severity increase or could it be materially higher as we look out in the year.
Hi, Andrew It's Mario Thanks for the question I guess, what I'd start with there is a number of indices for used car prices I think you mentioned one with manheim.
That tends to focus on wholesale prices and I think as we all know that that metric was coming down most of last year certainly in the back half of last year, and then started to tick up in the end of the fourth quarter and has continued.
At the end of this year.
Was referring to earlier is actual total loss severity.
Which tends to lag the Manheim index and is more a function of retail used car prices, which which have improved.
And that's why what I was referring to in the quarter. What we saw was actually used car or I'm, sorry, total loss severity actually improve a little bit year over year.
In terms of the risk going forward I think if you look at what's happening with with the Manheim index and other indices.
Certainly they're headed in a different direction than they were headed.
For much of last year, and which which adds risk we've tried to factor that into our severity expectations in terms of what we're recording that 9% to 11% range, but what we actually saw in the first quarter of this year was a.
A modest improvement in total loss severity.
Got it alright. Thank you on that and then it was interesting.
It's an interesting following national general with.
Auto policies in force now for.
$4 6 million.
All up pretty significantly from $4, one last year it looks like Youre getting good rate increases youre combined underlying was 94%, so which is pretty decent so so looking forward.
It took it sounds like you haven't fully rolled it out.
Uh huh.
Is this something that could really.
Catapult you policy enforce it at a very.
Responsible return I mean, maybe a little color on.
What your expectations over the next year or two.
Policy growth and doing so profitably.
Okay.
Andrew Thanks for folks had on National General summary, we feel really good about the acquisition of National General and we just start with the math the numbers, it's exceeded our expectations and assumptions.
Because as you will remember, we mostly bought that so we could reduce our expenses in the independent agent channel by folding basically having them reverse acquire encompass.
Just happened to buy them first.
And so I think and that's ahead.
Ahead of plan and the numbers are better so we're feeling really good about that and thats the way we price the deal.
Strategically, which is where you are after.
We're also getting the benefit of now having a solid platform independent agent channel, which we did not before we've been struggling to get a good platform. So they have good technology good relationships and as you pointed out mostly in the nonstandard Mario I think in his comments mentioned, how we're now taking those relationships.
And that technology platform, and we're putting what we call mid market, which is basically standard auto and homeowners on their platform and that's going to give us great growth opportunities because we are using the allstate expertise.
<unk> standard auto and not to be underestimated what that really is our business model on homeowners. We think that's a great growth opportunity and which is basically icing on the cake.
Relative to the acquisition. So we feel really good about where in that channel as part of transformative growth is part of increasing market share in personal property liability and we're pleased with the results.
Awesome. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Josh Shanker from Bank of America. Your question. Please.
Yes. Thank you I wanted to talk about.
Segmentation and policy counts, obviously not climb your auto policy count was.
Hi.
Do you have some sort of advice for thoughts to think about how much policy count will decline over this repricing period, but two of them.
We also noted that homeowners policy count was flat which suggests.
The segmentation, there's different policyholders, who are keeping versus different policyholders youre, losing so I thought you might be able to touch upon both things.
Good.
Mario why don't you.
Talk about homeowners and what we're doing there to drive growth.
As it relates to auto insurance, we just talked about sort of the Allstate brand I think which may be the numbers, you're referring to which is down versus Andrew's comment about national General which is up on the Allstate piece. There's obviously two components. One is are you selling more new business and then the second is what's had.
With retention.
And as it relates to new business, we've taken the approach it.
Our.
<unk> rate increase.
Is like a new business penalty.
As you know when you sell business Youre going to have it got expenses. She is getting the customers more and get them right upfront and then the loss ratio is typically higher for new business as it is for existing business. If you need 10 points of rate on top of which are currently selling at too we've factored that into our growth projections in there.
Business and said well that's at the very least it's an additional 10 points of new business penalty.
The worst is that when you raise your prices by 10% all of the money spent getting the customer.
Is wasted because they go away.
And your churn and so we.
We've dialed back new business and advertising.
Not so much because we're trying to manage the P&L, but because we're managing the economic growth and we think.
Needing rate increases and going out and getting a new customer and saying. This is great you bought it for 1000 Bucks and then.
Six months later, St. While it was really.
$1100 is not a good plant so we've dialed back new business and you see that really across the board at Mario showed in some places even more aggressively like New York New Jersey.
And the California, Kitted, Mario that's like Youll know every new business customer, we get into New York, If we keep this up personally.
So that's base gained economic choice on retention of course, that's the customer's choice.
And it depends what happens in the marketplace and what other people are doing our retention has gone down.
We do model that out it's really very difficult to take those old model. So.
And give yourself any kind of a good estimate on the current view because a couple of things have changed one these are much bigger increases than those models had them. So those models are based on 567% not at 10, 12, or 15 or 40 in Texas.
And.
And at the same time those models don't have the kind of competitive environment, you're operating in where everybody else is raising rates at the same time so.
We've shut down new business, because we think it's economic and there is a increased new business penalty associated with being under priced and then we're managing to what we wanted to do of course is we're highly focused on improving customer value because if people pay more you got to do more for them.
And so we're working hard on making sure we do insurance reviews get our agents targeting homeowners is another great story that I think we've kind of we get so focused on auto we haven't really told us. It's a great business model Mario can talk about what we're doing to grow that business. Yes. Thanks for the question Josh in homeowners again as I talked about in the prepared remarks.
As a business that we continue to feel really good about.
In terms of where it's positioned from a from a profitable growth perspective, and what you saw in the quarter that we actually increased policy count by about one 4% retention actually picked up by attempting.
There's a couple of things when you kind of unpack, what's happening with retention and homeowners as much as Tom talked about we're having to take prices up in auto the way, we're taking price increases is in a highly segmented and targeted way.
And that's helping from a retention perspective on homeowners because those bundled customers tend to be our longest tenured most profitable customers. We also bundle about 80% of homeowners policies have a supporting auto line and our retention on a bundled customer or a homeowner that has an auto policy is.
Meaningfully higher than our Monoline homeowners and we're continuing to see the benefit of that and we've put processes in place in place both in terms of of.
Economic incentives for our agents and sales processes.
And the call centers.
On the direct side to Incent additional bundling and we're seeing some nice trends in terms of bundling rate, so which is certainly helping.
Homeowner growth through homeowner retention, we're going to continue to look for ways to grow the homeowner business. We think it provides a really.
Compelling risk and return opportunity for us the results are going to bounce around because theres volatility this quarter as an example of that with catastrophe losses, but.
We continue to see our underlying combined ratio and loss ratio improve and both through leveraging the tactics I talked about for retention and also looking to drive up production, particularly with bundled customers. We think we can continue to grow that line.
The bundle is having the same problem that they get quoted.
The entire six months later or is your pricing such that you can comfortably quota bundle right now and think that youre going to retain them for 12 months.
Yes, we're obviously quoting bundled customers right now and when you look at the business we are writing.
Seeing really nice improvements in terms of quality and.
And lifetime value, which is indicative of that bundling rate.
And so yes, we're quoting it the other thing to remember and this is true both from a retention and a new business perspective bundling.
It's an easier experience and a more streamlined experience for customers.
There is discounts associated with bundling as well that can help offset.
Higher auto rates and incent customers to stay with us.
Thank you for the detailed answers.
Okay.
Thank you one moment for our next question.
And.
Okay.
Our next question comes from the line of Brian Meredith from UBS. Your question. Please.
Yes. Thanks, a couple questions here for you first one I'm just curious I saw your expense ratios down about a point X ad spend.
Where are we in this transformational growth as far as the expense ratio reduction how much can we potentially see here. Additionally, going forward and then maybe an add on to that.
Kind of a normalized AD spend as a percentage of earned premium. So we can kind of get a view on where expense ratio should ultimately end up.
Yes, Brian This is Mario thanks, Thanks for the question again expenses as much as Tom talked earlier about.
Earned premium and loss ratio, we kind of held serve there we did see the benefit of a lower expense ratio. Both in terms of the underwriting expense ratio and the adjusted expense ratio.
What where we're at.
And the kind of continuum on the adjusted expense ratio, we set a goal.
To get that adjusted ratio down to about 23.
By the end of 2024, and we're making really good progress on that and you saw continued progress on that.
This quarter, we certainly are being helped by higher earned premium which helped leverage our cost but.
We're continuing to see reductions in both operating costs and distribution related costs, which are helping the expense ratio and I I talked a little bit earlier about the areas. We're focused on whether it's automation digitization sourcing and continuing to drive.
Both operating and distribution costs down.
Those are really going to be the the levers we pull to push the expense ratio ultimately to that goal that we set with transform their growth. So we're making good progress fuel.
Really good about that in terms of the level of marketing spend certainly we spent less this quarter.
On marketing than we did a year ago, and we've pulled that back I think as Tom said earlier.
Really from a from an economic risk and return perspective, it doesn't make a lot of sense for us to invest aggressively in marketing.
At a time when our prices aren't adequate.
But what we will do over time as more rates in our I'm, sorry, more states and more markets get too.
Rate level that we're comfortable with we're going to surgically lean in and.
You know as one of the components of of transformative growth, we're going to look to both increase the level and the.
The sophistication of the marketing investment that we make and that'll be commensurate with what we think the opportunity is to grow so I can't sit here today and give you a specific dollar amount of our targets that we're focused on that's why we gave you the adjusted expense ratio, which excludes marketing cost because we're going to continue to invest in marketing when it makes economic.
Sense, and where it makes economic sense.
For us to lean in so let me just double click on the transformative growth piece. So the third piece of transferring both is to increase the sophistication in Pennsylvania and customer acquisition.
We think we can it should be able to get new customers cheaper than we do today theres lots of math, we have around that one of those is telematics. So we were the first out there with continuous telematics we've been at it over a decade, we're now taking telematics and with <unk> we.
Now I think we can take telematics into new business.
Brian and it.
Actually not have to have them download our app or put a device in their car to figure out how to drive there are we think we can use our sophisticated analytics to price them using telematics ahead of time, which will enable you to better manage your acquisition. So lots of work to go there. So.
Plenty of plenty of opportunity to grow.
Can I just one quick follow up here.
If I think of kind of going forward here when youre looking at putting rate increases through the remainder of the year. What's your kind of base case with respect to how youre thinking about inflation here are you assuming that the current inflationary environment.
Persisting through the remainder of 2023 years, you're filing for rates.
Let me finish and make sure I'll be respectful of People's time on that question.
So.
First when you look at overall inflation the numbers fed and everybody elses Thats one set of numbers. If you look at the inflation and what we do is of course dramatically higher.
And those are subject to different things, so whether the fed tightens the economy doesn't tightening economy, probably isn't going to do a lot to keep people from having severe accidents hurting themselves needing a lot medical care are then or lawyers getting involved in the case.
Or will it have a huge impact on what the oes charge on parts they tend to charge more on parts based on what they're doing to overall profitability and how many new cars are selling so if we go into recession. They sell new cars I don't expect youre going to cut parts prices. So we think inflation will persist in this.
Business at a higher level than you see from the old Cross API.
And that's why we're having to raise prices for our customers. Thank you all for participating today. Thank you for being generous your time going in a few minutes over our priorities to make sure we make money in auto insurance and continue to leverage our superior position in homeowners.
I will start to grow and execute transparency.
Yes.
Getting our costs down rolling out new products, expanding our national General.
And then we didn't spend any time today on the great stories, we have and the lower overall.
Which is expanding protection service. So a lot of things, we're working on hard to create more value.
Thank you and we'll see you next quarter.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.