Q3 2024 The Allstate Corp Earnings Call
Good day and thank you for standing by. Welcome to all states third quarter investor call. At this time all participants aren't listening only mode. After the prepared remarks, there will be a question in answer session. To ask a question during this session, you'll need to press star 1 1 on your telephone. If your question has been answered, and you'd like to remove yourself from the Q-simply press star 1 1 again.
Speaker Change: Please limit your inquiry to one question and one follow-up. As a reminder, please be aware of this call as being recorded. And now I'd like to introduce your host for today's program, Alistair Gobbin. Head of Investor Relations, please go ahead there.
Alistair Gobbin: Thank you, Jonathan. Good morning. Welcome to all states 3rd quarter 2020 for birdings conference calls. Yesterday, following the close-up of the market, we issued our news release and investor supplements.
Alistair Gobbin: Files are tend to impose in related material on our website and fallsafe investors.com.
Alistair Gobbin: Our management team will provide prospective on our strategy and update on levels. After preparing the works, we will have a question and answer session.
Alistair Gobbin: As noted on the first slide of the presentation, our discussion will contain non-gact measures for which the reconciliation and the news release and investors supplement and forward-looking statements about all state-battery issues.
Alistair Gobbin: All states results may differ materially from the statements, so please refer to our 10K for 2023 and other documents for information on potential risks. And now I'll turn it over to Tissap.
Tissap: Good morning, and we appreciate you investing your time in understanding the value of creation potential at Austin. I'm going to provide an overview of how Mario and Jesse walked to the operating performance and then we'll address your questions.
Tissap: So let's begin on slide two. All state strategy has two components, increased personal property liability market share, and its ban protection provides customers, which are shown in the two levels on the left. We now have more than 200 million policies and course.
Tissap: on the right-hand side you can see all states performance fit third quarter.
Tissap: Total revenues are 16.6 billion, we're 14.7% compared to the prior year quarter. Also, you're in an income of $1.2 billion and it's just an income of $3.91 per share.
Tissap: Return on an equity was 26.1% over the last 12 months.
Tissap: The property liability business is now positioned for growth, execution of the auto-profit and proven plan has restored automargans.
Tissap: The U.S. auto insurance policy growth world choir restroom proved custom retention and increased new business models, both in which Mario will discuss.
Tissap: The homeowner's business had good returns and his grounds. The transformative growth initiatives to build a low-cost digital and a share with affordable, simple and connective protection will ensure that this growth is sustainable.
Tissap: proactive investing also benefited income as the decisions of length and duration at the right time increase portfolio. In addition, higher insurance prices and increased reserve levels, create a much larger investment portfolio, which also raises income.
Tissap: Protection Plan continues to properly grow and recently did a small air position to expand mobile device protection capabilities.
Tissap: Let's move to find three.
Tissap: Here you can see the operational extrusion generated excellent financial results.
Tissap: and Chris is 16.6 billion dollars as you can see in the upper left. Property liability earned premiums were 11.6%.
Tissap: and then investment income for the quarter was 783 million dollars, that's 13.6% higher than the prior year quarter.
Tissap: and Ankehom was 1.16 billion dollars.
Tissap: and then you can see in the lower right that the return on equity was 26.1%. This shows that I've also received operational excellence and able to dramatically improve results from last year. Now let's say for Mario, I'm properly like building results.
Mario: Thanks. Before I go into my remarks on the quarter, I want to call out a change we made to where this glows. You'll notice that we simplified our protection segments to glowsers this quarter to focus on product and channel instead of brand.
Mario: For the past several years, we've provided detail on both the all-state and national general brand separately to create transparency into national general's performance and allow you to evaluate the acquisition.
Mario: National General has been a highly successful acquisition, sensitive about twice its size, generating excellent returns and gives a strong competitive position in both independent agent distribution and non-standard auto risk.
Mario: We're now building on this success by combining operations such as expanding the sale of non-standard business under the All-Safe brand. As a result, performance should be evaluated for the protection business in total and by this distribution channel versus by brand. And that's why we made the change.
Mario: So, in keeping with this approach, my commentary today will be focused on performance, on total auto and homeowner lines and production by distribution champs.
Mario: with that background. Let's start on slide four.
Mario: On the top of the table on the left, you can see proper reliability firm premiums of $13.7 billion, increased $11.6% in the third quarter, driven by higher average premiums.
Mario: Underwriting income of $495 million improved by $909 million compared to the prior year quarter, has improved underlying margin more than offset higher catastrophes.
Mario: The expense ratio of 21.5 was 0.3 points higher than prior year to increase advertising as we continue to accelerate growth investments in rate at which states and risk segments.
Mario: The chart on the right depicts the components of the 96.4 combined ratios.
Mario: The catastrophe loss ratio shown in light blue includes losses of $1.7 billion and was 2.8 points higher than the prior year quarter.
Mario: The underlying combine ratio of 83.2 in Dark Blue and proved by 8.7 points compared to the prior year quarters. The improvement was driven by higher average earned premium and improved lost cost rates.
Mario: Prior to your reserve re-assments, excluding catastrophes, had only a minor impact on current quarter results.
Mario: as favorable development in personal auto and homeowners insurance.
Mario: was more than offset by increases in personal umbrella and runoff business. Primarily related to a specialist related claims which was recorded this quarter as a result of our annual third quarter discontinued lines reserved review.
Speaker Change: Let's dive deeper into auto insurance margins on slide 5, where you can see the success of the auto-profit improvement plan.
Speaker Change: The third quarter recorded auto insurance combined ratio of 94.8 improved by 7.3 points compared to the prior year quarter as average-or-in-premium's outpaced lost cost.
Speaker Change: Average underlying loss and expense was 4.8% above prior to your quarter, reflecting higher-current your encouraged-verity estimates, primarily driven by bodily injury coverage, offset by lower accident frequency, as well as higher-advertising investments to drive new business growth.
Speaker Change: Physical damage severity increases continued to moderate while bodily injury severity continues to trend above broader inflation in disease.
Speaker Change: are clencing, continues to focus on operational actions to mitigate the impact of inflationary trends.
Speaker Change: As a reminder, we regularly review claims severity expectations throughout the year. If the expected severity for the current year changes, we record the year-to-date impact in the current quarter. Even though a portion of that impact is attributable to previous quarters.
Speaker Change: For 2022 and 2023, the bars in the graph reflect the updated average severity estimates as at the end of each of those years to remove the volatility related to entry-year severity adjustments.
Speaker Change: Simulately in the third quarter of 2024, the full-year claims severity estimate went down, so there was a benefit from prior quarters included in the third quarter's report in results.
Speaker Change: This benefit was worth 0.8 points in the third quarter, with the adjusted quarterly combined ratio of 95.6 as shown on the far right arm.
Speaker Change: Now let's review homeowners insurance on Flight 6, which generates attractive returns and growth opportunities.
Speaker Change: All state is an industry leader in homeless insurance, generating a low 90s combined ratio over the last 10 years, as you can see in the chart on the left.
Speaker Change: This performance compares favorably to the industry, which experience an underwriting loss and a combined ratio of 103 over the same time period.
Speaker Change: Moving to the table on the right, all state protection homeowners written premium increased by 10.8% compared to prior year, reflecting higher average of gross written premium propolacy and policy and force growth of 2.5%.
Speaker Change: The third quarter combined ratio of 98.2 resulted in $60 million of underwriting income compared to a $131 billion loss in the prior year quarter.
Speaker Change: The underlying Combination of 62.1 improved by 10.8 points due to higher average premium and lower non-contact non-contact stability loss costs.
Speaker Change: For the first nine months of 2024, homeowners insurance generated an underwriting profit of $249 million, despite $1.2 billion of catastrophe losses in the third quarter.
Speaker Change: Let me provide insight into the growth potential of the property liability business starting on Flight 7.
Speaker Change: In the Charna-Maleth, you see the composition of the property liability book. Homeowners in medium blue represent approximately 20% of policies and force.
Speaker Change: Paul Miller's insurance policies enforced increased by 2.5% as retention has improved by close to half a point compared to last year and new issued applications are closest 20% above prior year as you can see in the right hand column. We view homeowners as a growth opportunity.
Speaker Change: Autopolacy is in the dark blue, accounts for approximately 2-3rds of property liability policies and force. As you can see on the right side of the page, overall policies enforce declined by 1.5%.
Speaker Change: This reflects the decline in customer retention to 84.7% which is 2 tenths of a point below the prior year quarter, but much lower than historical levels.
Speaker Change: We did have a 26% increase in newest food applications which offset some of the retention losses.
Speaker Change: Now let's go through each of these components to give you insight in how to assess growth prospects.
Speaker Change: Let's start with customer retention on flight A.
Speaker Change: This chart shows all-state brand auto insurance retention over a 10-year period, which is primarily standard auto insurance risks.
Speaker Change: There is a couple of key points I want to make on this slide. First, raising prices leads to lower retention as customers shop for other options.
Speaker Change: Seconds, the large increases in the last several years have led to a significant decline in retention since 2022, which has negatively impacted policies and force.
Speaker Change: This has, however, recently leveled off as price increases have moderated.
Speaker Change: Let's look at the three parians with you.
Speaker Change: In 2015 and 2016, we raised auto insurance prices which you can see from the dotted line because of an increase in the frequency of vaccines.
Speaker Change: The graph shows how this led to lags to lags declines in retention from 88.2 and 2014 to 86.7 in 2017.
Speaker Change: Over the next three years, pricing creases will relatively modest and retention recovered reaching 88.3 by 2019.
Speaker Change: Now, there are lots of factors impacting retention, such as the amount of new business you write, the risk type of that business, number of bundle policies, and specific actions taken in big states like California and Florida, as well as customer satisfaction levels. But the biggest driver is price.
Speaker Change: Increased standardizing and price composition had a modest negative impact over the next several years, with retention hovering around 87%.
Speaker Change: You can see this in the most recent period where retention has declined by 2.7 points over the last 10 quarters, which reflects the rate increases of 36% on a cumulative basis.
Speaker Change: Looking forward, we expect lower rate increases given the profitability of auto insurance. This year, for example, all state brand rates have been increased by 6.3% compared to 9.5% in the first nine months of last year.
Speaker Change: Lower price increases should translate into higher retention.
Speaker Change: To help you model this out, every point of retention is worth approximately 350,000 policies in force each and every year for 1.4% of the current policy counts.
Speaker Change: Moving to slide nine, let's discuss the success we've had in increasing new business levels this year.
Speaker Change: We continue to invest in transforming growth while we execute it the proper improvement plan.
Speaker Change: He's foundational investments enable us to go to market with a multi-channel distribution strategy that serves customers based on their personal preferences and has resulted in a 26% increase in new business in the third quarter, shown in the far right column at the bottom.
Speaker Change: While profit actions previously restricted our new business out to say, Ray Vatic was easy, is that I'll been achieving the best majority of states.
Speaker Change: Third quarter advertising spend was roughly 60% higher than the same quarter in 2021.
Speaker Change: In the Alfa agency channel, the compensation structure was also changed to improve growth and agent productivity at lower distribution costs.
Speaker Change: All say agency new business business was up 16% over the prior year quarter with bundling rates at point of sale at all time high.
Speaker Change: The National General Acquisition enabled us to grow independent agency new business by 14% over the prior year, quarter.
Speaker Change: In the Direct Channel, we are back to 2022 levels with fewer underwriting restrictions, increased advertising and the new affordable, simple and connected auto product, which is currently available in 25 states.
Speaker Change: New Business is 56% over prior year and we expect to increase, continue increasing volume in this channel, which now represents 31% of total auto-new business.
Speaker Change: This level of new business will drive future growth. Every 5% increase in new issued applications above the current run rate increases policies enforced by approximately 250,000 items or 1% of policies and force.
Speaker Change: Looking forward, the property liability business is positioned for growth.
Speaker Change: Margin's art practice, fewer rating creases should improve retention and the components of transformative growth are working, including new products, increased advertising, lower expenses and expanded distribution.
Speaker Change: This will enable us to achieve our strategic goal of increased property liability market share. And I'll turn it over to Jess.
Jess: Thank you, Mario, let's shift inside ten to review investment performance.
Jess: The proactive approach to portfolio management that optimizes return for a unit of risk across the enterprise generated strong returns this quarter. Our discipline approach includes comprehensive monitoring of economic conditions, market opportunities, interest rates and credit spreads.
Jess: The chart on the left shows the fixed income portfolio yield and assets under management trend over the last several years.
Jess: Six-10 Camille, shown with the order of line, has steadily increased as we've repositioned into higher yielding longer duration assets.
Jess: Based on interest rates in the third quarter, our fixed income yield is now generally in line with market yields.
Jess: and the gray bars you can see growth in the portfolio book value.
Jess: Since the fourth quarter of 2021, book value has increased by 14% or 9.1 billion dollars.
Jess: was lucky in the impact of the fire underwriting cash flows, attributable to increased premiums and reserve levels, as well as portfolio cash flows that increase because of higher coupons.
Jess: wrote in assets and higher yields benefit and net investment income as shown in the chart on the right. Net investment income told $780 million in the quarter, which is $94 million above the third quarter last year.
Market-based income of $780, which is shown in blue was $141,000,000 above the prior year quarter, reflecting the impact of a 15-million-old that is 60-based points above the third quarter last year.
Jess: Performance based income of 143 million, shown in black, was $43 million below the prior year quarter reflecting lower real estate investment results.
While this quarter is installed as lower than our long-term expectation, or turns continued to be strong and volatility on these assets from quarter quarter is expected.
Slide 11 highlights strong results in the protection plans business, which is one of the five companies in the protection services segment that also includes airing, roadside, dealer services and identity protection.
The Protection Plan's business provides warranties for consumer electronics, computers and tablets, TVs, mobile phones, nature appliances and furniture, from strong domestic and international retail distribution relationships.
Jess: Revenue for this business total $512 million in the third quarter, increased 23.1% compared to prior year. We're funding growth in the International Markets.
Jess: Procedible growth resulted in a just that income of $39 million, and $19 million increase compared to the prior year quarter. As strong operational execution increased margins and enabled successful implementation of the strategy to expand distribution relationships and product offerings.
We continue to invest in the fast growing business and October, all state protection plans require a king fisher to enhance capabilities in mobile phone protection.
Speaker Change: Now let's transition to slide 12, focused on the terms and accounting treatment of the sales, the employer of all its very benefits.
Jess: As we announced August, all state finalized in agreement to sell the employer voluntary benefits business, which I will also refer to as the EVP business for purchase prices $2 billion to stamp or financial. The transaction is expected to close in the first half of 2025, pending regulatory approvals.
As a reminder, the EBB sales, the first step in a strategic decision to pursue the best future of the employee voluntary benefits, group health, individual health businesses, to capture values of greater strategic alignment.
The EVB transactions economically and financially attractive for shareholders.
All state retained the economics of the business until closing and results continue to be reflected in net income and adjust the net income. In the quarter $3.2 billion of assets and $2.2 billion of liabilities related to the EVB business have been classified as self-presailed.
Jess: As you can see on the right of the slide, we're estimating a $600 million gain and had previously disclosed that we expect the transaction to generate approximately $1.6 billion of capital.
Moving to health and benefits from health to a quarter, premium and contract charges for the segment increased by $2 per $24 million to pay the entire empire in your quarter.
The individual and group health businesses saw strong growth with premiums and contract charges up by 8.1% and 20.2% respectively. This growth is partially offset by a modest decrease in the EVV business.
A Justin Merten comes to the segment of $37 million in the quarter, with $32 million lower than the prior year quarter, and increased benefit utilization across all three businesses impacted profitability.
Underwriting and Red Action's, you're being taken to quickly address the benefit ratio trends and restore margins to store the levels.
Jess: The process to evaluate this position in the group in individual businesses is progressing.
Jess: Let's wrap up with five-thirty recap-off-age strategy and path to value creation.
Jess: Operational Excellence ensures that we react to changing business conditions and maintain margins at our level. Transformers growth investments are being made to create sustainable growth and all state delivers the attractive returns.
with that is on next with open-minded questions.
Speaker Change: and our first question for today comes from the line.
Speaker Change: of Jimmy Willer from JP Morgan, your question please.
Good morning. So first, there's an expression around your confidence and outlook for fifth growth.
and the auto business and what you're seeing in terms of competitor behavior both on prices and on advertising seems like most competitors are turn shifting to a growth mode now that margins are recovered but are you confident that we can see fifth growth turn positive over the next few quarters.
Jess: and the other.
Let me make a couple of comments on Mario Pijofin. First we don't give growth suggestions, so we're not going to comment on it. We give you, we put the numbers in there so you can do your own analysis of how you think we'll do it, or attention and how you think we'll do it.
and Business. We obviously believe we can grow market share, which is what our old strategy is about.
When you look at the competitive environment, you continue to see progressive advertising brush-wate, Dynco Rizzo gotten.
back into the market, but perhaps not as aggressive as they have in the past.
Jess: and State Farm continues to try to grow.
and she knows they have an underwriting.
Profitability, challenge that I suspect they will say, but we will only see. But I would also not just focus on those big players, but there's a whole bunch of other players that are more moderate size or smaller that either don't have the player power and advertising to compete, or don't have the price and specification. Mario, do you want to make comments about?
How you feeling about growth?
Yes, thanks for the question Jimmy, you know, and it's highest level obviously to turn positive different growth.
requires that we keep more of our existing customers, which is the retention component. And then we derive increased levels of new business. Maybe I'll talk about each of the pieces individually. Like we pointed out in the presentation, obviously a lot of the rate actions in the profit improvement plan that we've implemented over the last couple of years has set up a pretty negative impact on customer retention. Now, going forward, we would expect.
are just given where our margins are in auto. All of the things being equal, we would expect to take less rate going forward, which will have a positive impact on retention as it has in the past as we create less.
Jess: Disruption in the book.
Jess: But the other side of it is we're not just going to rely on that, we've got actions in place.
in a number of areas in terms of improving the customer experience.
working with our customers both through our agents and our contact centers to help identify opportunities to improve affordability and really kind of mitigate shopping activities from our own customers. So we're focused on retention and improving going forward both kind of organically I'll say through less rainfall we're also not sitting back, we're taking proactive actions.
to help offset some of the headwind that we've seen in retention. On the other side on the new business standpoint, just to give you some context we talked about the vast majority of markets being open for business. You know, somewhere between 75 and 80% of our premium volume when you look at it, actually, those are markets that we are open for business, we're accelerating investments. And we've really seen some good production trends across all distribution channels, our agents, our productive. They're bundling at all time high levels, which also will help retention. We believe over time we're continuing to see really good traction on the direct business and we think there's ongoing up.
and the opportunity there. And then as I mentioned earlier, the National General acquisition and what we've been able to do both in the non-standard auto market as well as in the independent agent space. More broadly is generating some good production trend. So we feel good about that. We're focused on improving retention while continuing to build on the growth momentum from a new business perspective, which has improved sequentially over the course of the year. And when those two things come together, that's what'll drive positive growth.
Speaker Change: Jimmy, let me just tell all things and longer-term perspective of Mario Rizzo. So when our own profitability went negative, we said...
and the first time I've been in the game for a long time.
Don't be too specific about it.
and what Mario is talking about is going back in now and saying, okay, we'll be clear. We got the total rate.
How many more people should be using my voice? How many more people should be using telemedics?
Speaker Change: Those are great opportunities for us to leverage our innovation and keep more customers. So there's a bunch of good work going on there. So with the priority that we gave to the team was we didn't make money in our own church. We've done that.
Now we're ready to go back in and which should drive attention. The other thing I would say is on distribution.
If you look at our historical growth, this is the first time really we give three fully functioning channels.
Like we've got three horses here already to run. You can see the growth and direct. It's not a lot this.
versus by a year. But that's because direct was the first place we shot down to when it came to how do we get profitability up in auto insurance we sell first.
Jess: The Reloads and Money Outer, which should write it, rather than take that hit-involume to the Alcid Agent Channel, which needs to be maintained in terms of its revenue and growth. We said let's just do it to direct.
and Bound Spanck is just where we are now, but in that pause we really built out our capability. So we're feeling good about having three horses to drive road.
and then on capital obviously your balance sheet is a lot stronger with the improved profitability. You've got the pending sale of the benefits business as well.
How should we think about uses of capital and profitability continues to recover and wants the sales closest between sort of your priorities for acquisitions, potential by-baths dividends?
I'm very appropriate question on Channel Jess for a minute here in Disney. We've always had a lot of capitals, I know it's not everybody believed that, but we've always been financial and very strong.
But as we think about capital, it is something we take very seriously. It's really one of the key things we do for shareholders and we feel like we've been good stewards of that. As you look forward.
We think the best and first place to put our money is organic growth, particularly when you look at a kind of our Rizzo running at.
and if you look at our growth in premiums, you look at the growth potential. We think that will be the first and best place to maximize your level of value. There's lots of other ways we use it, right? So the share repurchases, I know a number of analysts brought that question up. I may just go right to that.
So, we're not a stranger to show our purchases.
Since we went public, we bought that 83% of our shares outstanding for about $42 billion. Last 10 years, it was $20 billion and last five years, it was about $10 billion. And it quartered the shares outstanding. So we know how to and do share repurchases when it makes sense.
In this particular case, we think the growth opportunities outweigh the value of doing share repurchases.
and that's because the returns are so high. If we keep an extra money run and you'll put it in the bond portfolio and you're getting 5% then obviously you should not be doing it. We do have other places we've used the money.
Jess: Historically.
Jess: and places we might use it in the future. So as you know, we dialed down our equity allocation fact when we didn't think the risk and return was right. If we feel like that's appropriate, we'll dial that equity allocation. I'll begin that use with a capital.
If we've also looked at acquiring growth of the National General Exitio Mario, talk to about it.
and we're going to keep breaking it up so you can all see it is that business just wrapped its twice in size.
and the same thing is true with our protection plans business, which is now 90 or 10 times in size since we bought it and that was a little longer ago, it was 7 years but it was paid a billion for it and it's making over 120 million bucks a year so we're feeling really good about that business.
and it's for potential. So we just know we always have our shareholder's best interest in mind. We think about it broadly and we'll continue to do that.
Jess: The End
Jess: Thank you.
Thank you and our next question comes from the line of Greg Peters from Raymond James. Here, question please.
Good morning everyone. I'd like to for my first question focus on slide eight, which is your retention slide.
and in your comments you mentioned changing of agent compensation.
Jess: If I'm not mistaken.
some time ago you lured.
agent compensation on renewals and
I'm wondering if that's having any spillover effect on retention. Obviously, the new shoot apps are doing strong, so your competitive position looks good. Also, as part of transformative growth, I think you've been streamlining some claims costs, some claims functions. Curious if you're seeing any impact of that on retention.
Thanks, Greg. This is Mario. Let me take your questions in order. First, on retention, when we isolate and look at – we look at retention a whole bunch of different ways. When we look at retention in the agency channel, it's actually up year over year. So what's happening and what you see on page 8 is predominantly a function of price increases, which I think has the biggest impact on retention. Just from an agent compensation perspective, as you mentioned, we kind of changed and have been transforming the model for them to really align with what both we want to do strategically, but also the
Jess: value that customers see from agents. So we've incented agents to drive more into business.
deepened relationships with customers, and we see that with, you know, kind of all-time high levels of bundling. And agents were really pleased with the performance of our agency force and how productive they are, you know, and they're going to be a key part of our growth plan going forward. But that's really not the driver of retention that you see on the page. In terms of the claims organization, you know, that's an area where even though the when you look at the ratio, it's pretty flat. That's a function of just having higher average premium. We're investing in claims. We actually have been adding staff.
so that we can continue to build on our claims capabilities, pay what we owe, drive a higher level of customer satisfaction. And again, we look at those as growth levers every bit as much as profit and severity management levers, but nothing really from a claims standpoint driving the retention numbers. As I said, as a matter of fact, we're adding resources and dollars in claims to help both support growth.
that we want to achieve going forward, but enhance customer satisfaction and effectively continue to manage severity levels.
Thanks for that additional information. I guess as my follow-up question, just looking at the homeowners business, it looks like it's really performing well at a 62.1% underlying combined ratio.
Jess: I'm
You're growing that business. I assume you're not growing just your standalone homeowner's business with the policy-enforced growth. It's part of a bundle, but maybe you can provide us some perspective on how you're able to grow that business considering all the rate you've thrown in that line of business.
Speaker Change: I'll start and then Mario can jump in.
You're right in my report that we're just really good at homework.
Speaker Change: and we've made a lot of money at it and because we've repositioned the business
Really over almost a 10-year period, everything from how do we underwrite, to what's covered by the policy, to how we price, to our specificity and sophistication in pricing.
good on both sides. We do think that there's more growth potential there. Some of that is many people, because of the industry numbers that Mario quoted, have now decided not to grow in homeowners.
and that gives us more opportunity, not just through the all-state agents, but in particular through the independent agents. And I think we should be able to crack the code on direct.
Nobody's really cracked the code on direct yet.
Jess: in selling homeowners, but I think there's great potential there. So I think there's growth.
in homeowners across all three channels. Obviously, all state agents are doing well.
The independent agent, Business Mario, might want to talk about what we're doing with Custom 360. And then Direct, I think we could be an industry leader. And my logic is, you know, people buy houses off the web. If you buy a house off the web, you should buy your homeowner's insurance off the web. So we'll have to sort that one out. So we're feeling good about it. The only thing I would say is, not really yet in market.
but coming soon is ASC, Affordable Simple Connected Homeowners. Mario's talked about Affordable Simple Connected Auto, which is in market in 25 states, Mario. Yes, 25 states now. And ASC Homeowners is even better, and it's got some really nice features to it. Sophistication, which
will leave us behind.
And our classic product is far ahead of the industry, so we think it's another leap forward. Do you want to talk about like 360 or how you view homeowners, maybe by stage or something? Yeah, so Greg, again, I'll just reiterate where Tom started. We're really good at homeowners and we think...
Speaker Change: There is a real opportunity for us to grow homeowners, in part, right now, because of the disruption that exists in the market. There's just fewer...
competitors out there that are wanting
to write new business and we want to take advantage of that opportunity. We feel good about where our pricing is.
As you mentioned, average premiums have gone up pretty consistently at a double-digit clip over the last several years to keep pace with inflation. But when you look at our profit trends and you pointed out our underlying combined ratio, which is currently in the low 60s, I think that's reflective of our ability to stay on top of loss trends and write new homeowners business
at an attractive margin, we target low 90s, which generates really strong returns on capital. We think we can do that and grow the business across all the distribution channels. And I'll just end with the opportunity with Custom 360 in the independent agent channel, because I think that becomes additive to our all-state agents and our ability to grow direct in the all-state brand. You know, we're in, I believe, 24 states with Custom 360. Currently, that's a standard and preferred auto offering, along with homeowners, that leverages all-state data and mid-market capabilities to price and really design that product. So it's intended to be the same product.
broadly across all three horses. I'll use Tom's term to really grow that business and generate really attractive returns going forward. Yeah, and Greg, let me make sure we fully answer your question. Price sensitivity.
You referenced the rate of increase and it is high. It's higher than auto insurance right at this point. Not necessarily the last three years, but pretty high. But it's just less price sensitive than auto insurances.
There are a whole bunch of reasons. Some of the people like their house a lot. Second, people know their house is actually worth more. And so when we're charging more, they know their house is worth more. Not so much on cars. So, you know, we had raised auto insurance prices because the cars became worth more, but people didn't really think about it that way. They do think about their home value. So we're comfortable with where we're at.
Thanks for the additional information.
Thank you. Bye. Bye.
Speaker Change: Thank you and our next question comes from the line of Yaron Kunar from Jefferies. Your question please.
Yaron Kunar: Thank you, good morning. I actually have two on renewal ratios. First, maybe conceptually, just looking at the slide 8, as the company grows in non-standard auto and in direct
two areas where I think, and then correct me if I'm wrong, renewal rates for the industry tend to be a bit lower. Is it fair to think of a run rate renewal rate that would be a bit lower than the, call it, through cycle 87.5 or so that I see in the slide?
Insightful question, Mauro, you want to take that? Yeah, the first, just to be clear, the numbers you see on the page are all state brand, so there's not that much non-standard auto.
There's more direct, but at least currently, again, not a meaningful impact in the trends.
On a go-forward basis, I guess I'd broaden the statement a little bit, Jaron, and say the more new business we write,
retention. Again, magnitude, you know, we'll have to call that out for you when we see it, but certainly that business tends to retain at lower levels because those customers just tend to shop more. So those things, you know, will have an impact on retention going forward, but I would say what you see in page eight, pretty much a muted impact on those items at this point.
Great. And then just think about the renewal ratio from here on. I think
At times you see a little bit of a breakdown of that inverse correlation between rate increases and
the renewal ratio.
and we saw a little bit of that a bit earlier in this current cycle. Obviously, we're seeing that pick up now. But I guess bottom line is, is there a bit of a lag currently between the rate increases and the renewal ratio, one that I don't think was as pronounced in prior years?
Speaker Change: Yeah, Jerome, this is Mario again, there is almost certainly a lag when you think about implementing a rate increase.
in auto, it takes six months.
Mario Rizzo: for that to be implemented across the entirety of the book, and then you'll earn it over the six months after that. So there is a lag in terms of the rate we've taken, or the industry takes, and the impact on retention, and you see that in our numbers. One of the things, though, that I'd point out is, and we've been clear on this, we believe we will need to take less rate, given where profitability is. But again, this is a state-by-state, market-by-market business, so when we need to take prices up to keep pace with loss trends, we're going to do that. And what you saw in the third quarter, about 70% of the rate that we took was in three states. It was in New York, New Jersey, and California.
Jersey, and an increase we implemented in Texas. So we're going to continue to take rate where we need to. We just think there's going to be less of it. And again, we'll look to manage retention alongside that.
Speaker Change: But I guess what I'm trying to get at here is I think the big rate increases that we saw in the beginning of the year were really first quarter weighted. California, New York, New Jersey. I would have thought that the full impact of those rates taking effect in the first quarter would have been in the second quarter.
Speaker Change: and by the time we came out of the third quarter, call it August-September, we'd see a little less of that pressure.
Speaker Change: Yeah, the California rate was in the first quarter. New York and New Jersey were actually implemented in the third quarter. So, and I believe it was over 18% in New York.
13.7 or 13.4 in New Jersey. So again there's some pretty meaningful rates that we've implemented currently again to get those markets back to where they need to be from a margin perspective so we can open up to write new business.
So you're and I would just say that the leg
Speaker Change: is muted and it kind of goes up and goes down, right? Like, not everybody shops the minute they get the price, it's late, they get the bill, they just pay the bill, then they decide after a couple of months, geez, I should really think about this. So it's not a simple, you know, on renewal, it happens.
Got it. Thank you. Thank you and our next question comes from the line of Bob Huang from Morgan Stanley. Your question please.
Good morning. My question also kind of follows around that line of business.
So, if we think about your combined ratio and growth, right, in auto you typically target a mid-90 combined ratio. Understanding that pricing has a lagging effect and then retention and growth also does. But if we just look at the combined ratio, if the current level
Speaker Change: good enough for you to really step on the gas for growth? Or do you feel you probably need a one or two point more on the auto combined ratio side before you're fully comfortable with fully ramping up that growth going forward?
Thank you.
We think that the Auto Profit Improvement Plan has been successfully completed.
That's why we dialed up advertising by 60%.
Speaker Change: from 2021. That's not just up, that's way up over the last year. It's like, we're not even in the state zip code.
So, you know, we spend the money and are investing the money because we think it will, there are good returns. You know, and there's, like, things happen in every state, you know. So, you know, Fabiano, sometimes you get a state, sometimes you back off. Mario's team is constantly doing that. But when you just look in total...
We're feeling good about it in total. If you look at a couple of states, yeah, there's still some work to do.
Okay, that's super helpful. Thank you for that. Second question is around the homeowner side. I understand that you kind of said there are a few competitors now. The technology really makes it easier, potentially, for homeowner insurance to really grow from here. But isn't it fair to say that the states where there are opportunities, there are also states where people are trying to pull out?
So, growth, wouldn't that be geography related? Can you maybe talk about what regions do you think is more attractive on the homeowner front, or where do you think the opportunity lies in the growth on that space?
Speaker Change: So let me go up a minute and then turn it over to Mario.
First, we think homeowners do good business. There is a challenge of increased severe weather.
Speaker Change: and what it does to increase catastrophe losses, which you referenced, like why go right where there's a bunch of catastrophes. I mean, if you can get the right price, it's fine. And then you just buy reinsurance for a risk you don't want. And when you look at increased losses from weather-related events,
There are three drivers, one just more storms and more severe, mostly more severe storms actually.
Two is houses are worth more, and three, people are building houses in places that are risked, to your other point.
Those later two you can know.
Speaker Change: Those are known knowns.
You can factor those into your pricing, you can factor those into your growth opportunities, you can factor that into where you try to get new customers. It's the third one, but the third one is the smallest according to a couple of external studies.
of the DRIVE attribution on increased catastrophe losses. So, the unknown known.
Speaker Change: what will happen to the severity of storms is the smallest driver of the increase in catastrophe losses. So we feel good about it in total, from a macro standpoint, and then we execute it obviously at a, not even at a, much below a state level. You get east of Sunrise Highway, we get different standards than if you're west of Sunrise Highway on Long Island. So Mario, do you want to talk about where you see growth opportunities? Yeah, maybe I'll start with where we don't, because I think it gets to the first part of your question, and you know two states in particular, Florida and California, obviously really challenged.
homeowner markets, that there's been a lot of pullback.
across the industry. Those are not states that we're looking to get bigger in. So certainly those would not be where we focus our growth efforts. And then we'll continue to manage PML and coastal exposure to, you know, be within our risk appetite. But then once you kind of get away from that, really the rest of the country, particularly the middle part of the country, is there's real opportunity for us to continue to grow homeowners. And that's not where you get the, you know, the hurricanes or necessarily the wildfires. It's more the severe weather, tornadoes, hail, and so on. And what we found is a lot of competitors have pulled back in those states.
given severe weather experience.
I think that's where our capabilities from a product, a pricing, a risk management perspective really enable us to take advantage of the disruption of the market and grow pretty broadly, geographically, and not have to kind of grow where
I guess, where we can because nobody else wants it, but actually grow where we think we can generate attractive returns. And that, geographically, is the vast majority of the country, and again, that's why I think being good at homeowners and having an effective system and operating model to write it and write it profitably is a real competitive advantage for us, and I think you see that in the growth trends really over the course of this year.
We grew two and a half percent from the last year, and we didn't grow in two giant markets that Mario talked about, which I'm going to guess are 15 to 20 percent of the homes in the United States. So we did quite well there.
Excellent. Really appreciate the answer. Thank you very much.
Thank you. Thank you.
Thank you and our next question comes from the line of Christian Getzoff from Wells Fargo. Your question please.
Christian Getzoff: Hi, good morning. Mario, you said a 75% to 80% of your auto premiums are currently open for new business. So is it safe to assume that auto policies grew quarter over quarter in those states in the Q3?
Yeah, I won't go into any state-specific detail, but what I will say is we're open broadly. The 26 percent increase in new business that you saw was not concentrated in a handful of states. It was pretty broad as well. But so were the retention declines, so really it's a combination of all those things kind of working together. There's markets that grew in total. There's others that did not, but we're focused on having all of them turn positive at some point.
Gotcha. So with the auto-retention being down a point sequentially and then piffs were down 50 bps, this is auto.
Like, is the majority of the declines in those metrics driven by California, New York, New Jersey, just given, like, the big rate increases we saw, you know?
that were implemented, I guess, approved in December. They were kind of implemented throughout the year. And then when would you kind of expect, and I guess excluding those three states, right, that PIF improve quarter over quarter? Trying to get a sense of how big of a drag those three states have.
Yeah, the quarter-over-quarter change in retention I know came up across a number of
reports that came out. Let me just comment on that because there's really two things going on. Some of the decline, probably about 40% of the decline, is attributable to a handful of states. It's the California as well as New York and New Jersey that are having a meaningful impact quarter over quarter, and again that's driven by some of the larger rate increases that we've implemented this year.
There's another portion of it that I think reinforces why we made the disclosure change we did, which is about 60% of that sequential decline in retention is attributed to we're migrating some legacy Encompass books of business in some reasonably large states.
to National General. One of those states is California and what that does is it drags down the all-state brand renewal ratio, but as those policies, as those customers opt to take a National General policy, it shows up in National General's numbers. So that's where looking at it by brand is, I'm sorry, it was insurance. I misspoke. I said Encompass. They're legacy insurance customers.
But that's why looking at it by brand, you just see, you know, as we operate the business in total with multiple brands, some of those brand metrics get distorted. So we just think it's more constructive to look at the total.
And I think look at the long-term number, you know, we're down 2.7 points We think it should be able to go up from there. So I think quarter to quarter. We'll do full attribution I'm happy to talk about it, but it's the real drivers who just raise prices a lot. So a lot of people wouldn't shop
Christian Getzoff: Thank you.
Thank you. And our next question comes from the line of David Mockmaiden from Evercore ISI. Your question, please.
Hi, thanks. Good morning. I was wondering if you could just comment on your expectations for the timing of the retention ratio improvements.
David Mockmaiden: I know that you mentioned, you know, leveling off of rate increases should help retention. So I'm wondering, are you seeing any evidence of that here in October, or is it still too early to tell?
Christian Getzoff: I'm
Speaker Change: Obviously sooner is better than later, but we're all on it. The whole team's on it. There's a whole bunch of stuff we're doing that Mario mentioned to make it move, and you can see benefits in individual states. So we have some pretty large states that it's actually up, so we have confidence that
We know how to manage our way through this, but we haven't really done a projection on that we're comfortable giving to everybody to say, here's the number you should count on. What we do know is, as Mario pointed out, is...
Christian Getzoff: We expect to grow market share and personal property liability.
and that's by doing transformative growth in the near term we have to get retention up and continue to expand our new business but then longer term all the work we're doing there is just even more sustainable so rolling out ASC auto, ASC homeowners, all that work will drive long-term growth.
Got it. Thanks. And, you know, it definitely feels like you guys are pretty confident around just the, or feel optimistic that the tempering rate increases should help.
improve that retention? I mean from from your standpoint is it really just we're sort of
Christian Getzoff: we're sort of just having this timing impact from these three big states that need to just sort of work their way through. And like, you know, we're on the cusp here of a turn or I mean, I'm just trying to understand how you guys are thinking about it internally.
Speaker Change: Now we're thinking about we need to do a better job for our customers.
So, you know, we're charging them a lot more.
They expect more, they deserve more.
Some of that's because they're cars and stuff, and by the injury claims are higher, but like, we need to do a good job for them. So, it's not just, oh, let's wait this out and not take a bunch of price increases, and it'll bounce back. We're actively working on, this year alone, we have a goal on...
double-digit millions of improving the customer experience individual transactions.
We'll have another goal for next year that will be...
Speaker Change: We're working on how do we get more precise on the price so if you're an elderly person and you don't drive much, you shouldn't have mile wise. You'll cut your price in half.
So, we're not, we're not, it's not like we just think, oh, we're through this. I think this is just, provide our, use our operational excellence.
and capabilities to go back in now and fine-tune the fact that we had to raise prices a lot so we can keep more customers.
Thank you.
Great, thank you.
Thank you. And our next question comes from the line of Josh Henke from Bank of America. Your question, please.
Yeah, thank you for getting me at the end. Two questions, one whimsical and one numbers.
Speaker Change: and they're cracking the code on how to get people to buy homeowners insurance online.
How far away are we from being able to call Allstate and getting into an AI conversation with Dennis Haysburg or Dean Winters that's knowledgeable about what you can do to save money by switching to Allstate and what you can do for your policy?
Thank you. Thank you. Thank you.
I love whimsical questions, but I would say that one's probably not whimsical really.
sales sidekick, which will help people do a better job.
of interacting with customers. It's going to dramatically change.
the way that the people...
Speaker Change: interact with other people, which is why Mara was talking about how we have to reposition.
Speaker Change: He gives us an opportunity to do that at lower cost, so work they had to do before, or they couldn't do.
Speaker Change: or they had lower close rates because they didn't know some stuff will increase their productivity and make them even better.
So we're feeling really good about where that might go. And I think if you look at our web stuff on ASC, that's quite sophisticated too. Samari, what would you add? Yeah, the only other thing I'd add, Josh, that makes it not as whimsical as you might think is we have a lot of data on homeowners, both in terms of...
Samari: customers we've insured in the past and just on...
Speaker Change: the HOMES across the country in general, which I think facilitates our ability to do what you described and be really efficient.
Speaker Change: at intelligently being able to price and manage the homeowner risk. So that's the other component I think that gets us.
and creates the ability to do what you would you suggested.
And then, numbers, you know, look, ads spend as way up as you look to grow the business. You know, I'm multiplying your...
number on that by premium thing, it's up substantially. You also gave us a lot of data around new issued applications and we can make some guesses around gross new customers. The ad spend is up significantly more than the new customer acquisition.
Speaker Change: Can you talk a little bit about what is sensible acquisition cost per customer, how we should think about it, and clearly are you getting the kind of pack on new business that you can make a return over a two or three year period on that investment?
Speaker Change: A bunch of questions in this, let me end on this one.
Speaker Change: First
Every time things a little bit like driving a car when you first when you hit the gas pedal It doesn't take off right away. It takes a while to get to 60
So, you've seen us do that. We like the performance we see in terms of brand consideration. We like the number of quotes that have gone up. And we like our close rate.
Speaker Change: So, but if you said, you know, did we get back every dollar we spent economically as we're ramping it up? No, you're kind of investing some for the future. That said, we have highly sophisticated metrics around it.
and it's both upper and lower funnel if you're breaking it to upper funnel being you know kind of brand imagey stuff lower funnel being you know I send you a specific lead and I buy that lead
Speaker Change: and I know you're shopping. So we have highly sophisticated
math around that. It continues to be...
Speaker Change: a sophistication game.
Speaker Change: We think we're pretty good at it. Outside people tell us we're pretty good at it. That said, you can always be better, and when you're spending billions of dollars, you ought to be really good at it.
Speaker Change: So, we're feeling good about the investment to date. We think we can continue to spend more, and that will drive economic growth. But if it doesn't, we have the ability to just dial it down, you know, whenever we want. It's not really that complicated.
Thank you all for this. Our goal, of course, is to increase personal property liability market share, which we've talked a lot about today. Also, broaden our protection offerings. We're well capitalized. We have good shareholder returns. We look forward to seeing you next quarter.
Speaker Change: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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