The Allstate Corporation
Q4 2021 Earnings Call Transcript

Published: 3 Feb 2022

[Operator:]

Good day and thank you for standing by. Welcome to the Allstate's Fourth Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the prepared remarks there will be a question-and-answer session. As a reminder, please be aware that this call is being recorded. And now I would like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

[Mark Nogal:]

Thank you, Jerome. Good morning. Welcome to Allstate's fourth quarter 2021 earnings conference call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement and posted related materials on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2020 and other public documents for information on potential risks. Before I hand it off to Tom, I would like to turn to Slide 2 and discuss the expansion of Allstate's Investor Communications. Beginning this year, instead of a traditional Investor Day, we will be conducting a series of 60 minute investor calls to provide deeper insights into significant strategic or operational topics. These calls will be in addition to our quarterly earnings calls. Our first call will focus on the current auto insurance operating environment and will be scheduled to take place in March. Topics on future calls may include homeowners insurance, independent agent channel strategy, expansion of protection services and investments. In addition to investor calls, we will also begin disclosing the company's auto insurance implemented rate actions from the prior month on our Investor Relations website to provide additional information on premium growth. Rate disclosures will be posted on the third Thursday of every month, like our monthly catastrophe loss disclosures, though the rate postings will occur regardless of whether there is a catastrophe loss release in the month. I look forward to the additional engagement these changes will bring. And now I'll turn it over to Tom.

[Tom Wilson:]

Good morning and thank you for joining us today. Let's start on Slide 3. As you know, Allstate refocus on execution and innovation as ways to create shareholder value. And our strategy has two components

[Glenn Shapiro:]

Thank you, Tom, and good morning, everyone. Let's start by reviewing property-liability profitability in the fourth quarter on Slide 6. The recorded combined ratio of 98.9 increased 14.9 points compared to the prior year quarter, primarily driven by higher underwriting losses as well as prior year reserve strengthening. The chart on the bottom left takes you through the impact of each component compared to the prior year quarter. Auto insurance underwriting loss ratio drove most of the increase driven by the impact of rising inflation on auto severity and higher auto accident frequency compared to the prior year. Prior year reserve were strengthening of $182 million had a 1.8 point impact on the combined ratio in the quarter, primarily due to adverse loss development in auto insurance casualty coverage. There was also a sizable impact relative to the premium in shared economy business, which was primarily driven in states we no longer insure with transportation network carriers. This was partially offset by lower underwriting expense ratio, mostly due to lower advertising expenses in the quarter. We continue to focus on cost reductions, which improve our operational flexibility and competitive position. The chart on the lower right shows Allstate's adjusted expense ratio over the last few years. And the adjusted expense ratio as a measure we're using to track our progress on improving value for customers through cost reductions. The measure starts with our underwriting expense ratio, excludes restructuring, coronavirus-related expenses, amortization and impairment of purchase intangibles and investment in advertising. It then adds our claim expense ratio, excluding catastrophe claims costs. The adjusted expense ratio improved to 26 in the full year 2021, which is 0.6 point better than prior year and 3.2 lower than 2018. Our long-term objective is a further reduction of 3 points over the next three years, which would represent a 6 point reduction over the six years following 2018, allowing us to improve competitive price position while maintaining attractive returns. Slide 7 provides further insight into the drivers of rising auto insurance loss costs. Allstate Protection auto insurance underlying combined ratio was 100.2 in the fourth quarter and 92.5 through the full year 2021, representing increases of 15.3 and 7.4 points, respectively. The increases reflect higher loss costs due to severity and accident frequency, partially offset by lower expenses. While claim frequency increased relative to prior year, reflecting a return to more normal driving environment, we continue to see favorability compared to pre-pandemic levels. Allstate brand auto property damage frequency was up 21.5% in the fourth quarter of 2021 compared to 2020, but it was down 13.3% compared to 2019. While we've seen miles driven approach pre-pandemic levels, we've seen a meaningful change in time of day driving, which continues to impact both frequency and severity. Increases in auto severity reflect inflationary pressure across coverages with a number of underlying components of severity rising faster than core inflation. Chart on the lower left shows used car values began increasing in late 2020 and accelerated in mid-2021 in a total increase of 68% beginning in 2019. OEM parts and labor rates have also accelerated in 2021, resulting in higher severities and coverages like collision and property damage. The impact of inflation is also influencing our casualty coverage. During 2020, at the onset of the pandemic, when there was less road congestion and higher speeds, a higher proportion of accidents were more severe. That resulted in more severe injuries per claim and higher average casualty severity. And as 2021 developed, casualty costs continue to rise with more severe injuries, medical inflation and higher medical consumption and higher attorney representation rates. The chart on the lower right breaks down auto report year losses, excluding catastrophe over the past two years. The impact of frequency was favorable in 2020 compared to 2019 with the pandemic. And as you shift into 2021, that favorability is partially reversed, creating a negative year-over-year frequency impact, but still favorable over two years. The impact from higher severities on the other hand were compounded over the two year period and put pressure on both physical damage and casualty coverages. The combination of these factors led to the auto insurance margin pressure that we've seen in the second half of 2021. So let's move to Slide 8 and go deeper into the steps we're taking to improve auto profitability. Allstate has, as you all know, have generated strong auto insurance margins over a long period of time. This is a core capability of ours and we are taking a comprehensive and prescriptive approach to respond to the inflationary pressure and return to our auto margin targets in the mid-90s combined ratio. There are three areas of focus

[Mario Rizzo:]

Thanks, Glenn. Let's move to Slide 10 and discuss how transformative growth positions us for long-term success. So as we've discussed on past calls, transformative growth is a multiyear initiative to increase personal property-liability market share by building a low-cost digital insurer with broad distribution. This will be accomplished by delivering on four-key objectives

[Operator:]

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

[Joshua Shanker:]

Yeah, thank you. My first question, in the prepared statements in the press release, you mentioned the idea of rationalizing expenses in order to get back to profitability. You also have a goal of reducing your expense ratio by 300 basis points through transforming growth over the next three-years. Are you accelerating the process? Are you going to be taking some costs out that will return in 2023, but be offset by some more restructuring? How do the different parts of that play together? Hello? Hello?

[Glenn Shapiro:]

Hello. Tom, did you want to start?

[Joshua Shanker:]

Maybe we lost Tom.

[Glenn Shapiro:]

Mario, you should start.

[Mario Rizzo:]

Okay. All right.

[Tom Wilson:]

It sounds like – Josh, can you hear me?

[Joshua Shanker:]

Yes, yes. Go ahead.

[Tom Wilson:]

Okay Great. It only took me five tries with hash six or star six. First, I don't think you should think about – there are obviously things you do in the short term like we reduced advertising a little bit in the fourth quarter because we don't want to go get a bunch of customers and then end up with a large price increase in the next six months. So you manage that. But in general, when you look at our expense reduction program, it's well laid out. I think it's another three years. It includes everything from using digital processes and getting rid of extra labor to using more outsourcing and cleaning up our processes and reducing our technology costs with the new platform. So those things will roll out. You can't really accelerate those because it has impact on customers. So we're not doing anything for 2022 to just get to our number that then you're going to turn around and look at 2023 and say, jeez, I thought you were profitable and now you're not. So we take a longer-term view of that. That's a little different in pricing and that we will be more aggressive early on in pricing and try to get ahead of the curve as opposed to trying to smooth that out over a multiyear period. Mario or Glenn, anything you would add to that?

[Mario Rizzo:]

Yes, Josh, this is Mario. Thanks for the question. I would agree with Tom, I think what we're focused on is permanent cost reductions that will on a sustained basis improve our competitive position and improve customer value and really enable profitable growth. And we're going to continue to focus on things like operating costs and distribution costs that we can permanently take out of the system. And as Tom mentioned, leveraging tools like automation, process redesign off-shoring where we can and really kind of implement plans that do take time and aren't the kinds of things that I think you can accelerate the execution of. But we're also not focused on ripping a bunch of costs out, that's just going to come back into the system. We want to make the cost reductions permanent, achieve the three points over time because that will really position us to grow and grow at really attractive returns going forward.

[Joshua Shanker:]

So the expense ratio was a little high obviously in the quarter, and I'm actually referring to in the press release where you said that you're going to drive down expenses it seemed like it was more reactive to what's going on right now, there's a short-term benefit. At least I'm trying to find the wording in the press release. In response, Allstate is reducing expenses and claims loss management, reducing expenses here in response. I mean, obviously, you have the transformative growth plan, but is there an initiative on top of that to reduce expenses to get you to a healthy underwriting profit in the near-term associated with the spike in losses?

[Tom Wilson:]

Josh, I don't – we did not mean for it to have that interpretation. When you look at improving profitability in auto insurance, number one thing will be increased our rates. As the lowering expenses, as part of Mario said, the growth objective or transformed growth plan, that will obviously help, but we would have done that anyway. In fact, we started at like two or three years ago, and we're really glad we did it because we came into this year with, as Glenn pointed out, about 3 points lower than we would have been had we not started. But that's ongoing piece, but it's a component of improving profitability, but it's just not – not like we started in claim loss cost management is somewhere in between the two, you're always using data analytics and new claim processes, new relationships with vendors to try to reduce your cost. But as the cost change in the locus of those cost changes. Sometimes you have to adjust the programs you have in place – so I would say that the primary thing to focus on is rate increases in terms of the near-term improvement in auto profitability.

[Operator:]

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

[Greg Peters:]

Good morning, everyone. I would like to turn our attention to Slide 8 of your investor presentation and where you roll through the details about the rate increases that you're – that you've achieved and your expectations going forward. I guess just in the chart that's in the bottom left, just a further clarification on that. It's this number of locations, 25. Is locations the same thing as states? Or are we dealing with 100 locations? And then when we see an Allstate brand increase of 2.9%, is that a quarterly increase that we can annualize? And I guess where this is going is just trying to figure out the rate you're getting versus where the loss cost trend is and if you're catching up exceeding it or still behind?

[Tom Wilson:]

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

[Glenn Shapiro:]

Sure. So directly answering the question, the 2.9% is an annualized and the 25 states. So this truly is like if we stopped, if all we did was the fourth quarter, we got 2.9% rate increase across our book of business. We're not stopping in the fourth quarter, and we did a little bit in the third quarter, we took about $800 million in rate increases between the two quarters and we'll continue to. But that amount of money, when you look at the right side, you look at the 81 and the 702 that is the full impact of the rate increase.

[Tom Wilson:]

Greg, when we get to the – when we do the auto call in March, we'll give you a little more specifics on how to calculate that because the 2.9% is based on the – it's a dollar, right? We have a dollar number of what we think we're going to get. It's 2.9% is 2.9% times the prior year premiums. As the prior year premiums, if you look at the total, of course, when you're raising rates, it keeps going up, too. So the full year number is not the annualized number of December. So we'll help you figure out how to do that in March.

[Greg Peters:]

Got it. I appreciate the color. And by the way, the increased disclosure, I think, is appropriate, considering where you guys are, so applaud that change. I guess the other – the big picture question around the slide and just the market environment. Obviously, the auto market is under a lot of duress right now with inflation issues. And there's been news reports from different states and different regulators about pushback on rate increase filings. And I thought maybe you could give us an update of – I don't want to go state by state, but some of the big target states, how the regulators are responding to the data that you're showing them, is it a process that's going to take a while? Or do you think they're receptive immediately? Just if you could give us sort of a state of the union on the regulatory front, that would be helpful.

[Tom Wilson:]

Glenn, could you handle that?

[Glenn Shapiro:]

Sure, will. So Greg, it's a great question. And I know we've been the last couple of quarters. So the conversation has been a lot about will it be pushback? How do we do it? I think the evidence – this page that you pointed us back to, Page 8, the evidence is pretty clear. 25 states implemented at a 7.1% average increase. We are continuing to go at a very fast pace across other states and even in some cases, the same states, again, with rate increases as we get new data and new trends. And to this point, we have – you're always going to experience some discussions, some push on the data, some negotiation, if you will, and some back and forth. But we've – you can see it there, those are implemented rates. And we've been successful. And our people, and I give a ton of credit to our state managers and our product team who've done over years, an incredible job of building relationships because they provide a lot of detail when they do a rate increase or a decrease, any type of rate change we make. And we get great responses because ultimately, these are numbers people talking to numbers people. It is less – most often anyway, is less a political issue than it is a reality issue of looking at the numbers and what is the justifiable and supportable rate increase. And again, we've been very successful so far. We have no reason to believe we won't continue to be. We'll have pushback in places, and we'll have discussions and give and take. But overall, we're getting the rates that we need, and we're going to continue to do that.

[Tom Wilson:]

Greg, it's – the regulators come out of when they want to treat customers fairly. And as Glenn pointed out, the first thing they want is transparency, and our team spends a tremendous amount of time trying to be transparent with the regulators. It's also about what's your history with them. So we did a shelter and place payback of $1 billion. No regulator asked us or forces to do it. We did it proactively within my 10 days of noticing this guy here and his team got organized on it. So it's not like they do everything we want, but it's about treating customers fairly. And then in addition, when you're going in on the physical damage coverages, it's paid in 90 days. So there's not a great debate over whether the money went out or not. It just does. And then finally, injury, can be a little more discussion around it because there are longer-term trends, but we have good math on that as well. So we're confident we can get our combined ratio into the target level that Glenn talked about, which is in mid-90s.

[Operator:]

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

[Paul Newsome:]

Good morning. Thanks for all the help. I was hoping you could talk a little bit more about auto claim severity on sort of an ongoing basis because maybe the Manheim used car prices don't do this incredible increase again. And so I think if there's anything you can do to help us kind of figure out what that trend would be if you pull out some of the real extraordinary things that happened over the last six months. So I think that might help us get to a better kind of ongoing run rate.

[Tom Wilson:]

Glenn have some good math on that.

[Glenn Shapiro:]

Yes. So as we look at severity, a significant majority on the physical damage lines, which you were pointing to, Paul, is driven by the price of cars. It's – I think I said this last quarter, but I really like the example of if you were – if you had a life insurance company and all your policy limits went up by 50% or something, with no premium change, you'd have an issue. And really, the value of the car is the policy limit. That's the capitation method for property damage and collision. So that moving up has driven, call it, 80-ish percent of the overall severity issue. So as I look at that, there are a couple of ways you can look at it going forward, and this is not just Allstate, this is looking at the world around us that we operate in. One is when will supply chain issues and chip shortages be corrected, most of what you see externally is that, that will last through 2022. The other one is, is that there's likely some sort of structural maximum that used car prices go to because they probably won't end up exceeding new cars prices. And as we get to a year-over-year comparison, where in Q2 of 2021 was the largest single quarter of increase where there was that really steep uphill climb, at some point, you're not going to have those same type of increases on a year-over-year basis, but you may stabilize at a higher level for some period of time. And that's what we've factored in to the way we're looking at our incurred losses, and it's in there in terms of the way we've reported our results and our severities and how we're looking at it going forward.

[Paul Newsome:]

What about the inflation on that the non – sort of the nonlimit piece, that 20%? What do you think that's doing today?

[Glenn Shapiro:]

Yes. That is – so when you look at the – whether it's repair parts costs are accelerating labor like most industries, labor costs going up, that's continuing to move up. But I think an important way to look at it is if you removed the cost of cars, the used car price that limit going up, everything else combined would be in line with sort of our normal trend for severity, that mid-single-digit trend that you'd expect to see. Now then that's completely excluding one major factor, so I understand that it has a little bias to it because car prices do go up a little bit over time. But it is driving the lion's share of it because it's not like you expect severities to be flat year-over-year. They've moved up. Every year over long, long periods of time, there's just normal inflationary movement that happens in there, wherever it's low single digits, some years, mid-single digits or even higher single digits, other years. what is so extreme right now driving the double-digit increases is that change in car prices, but the 20% that I referred to is labor and repair costs, which we're really looking to tackle by increasing our use of direct repair and leveraging our scale in parts purchasing.

[Paul Newsome:]

Thank you. Very helpful.

[Operator:]

Your next question comes from the line of Yaron Kinar with Jefferies. Your line is open.

[Yaron Kinar:]

Thank you. Good morning. First question. Slide 7 shows that auto frequency is still at a $1.4 billion good guy relative to 2019. So my question is, do you expect that frequency to normalize? And if so, is the 7% rate increase that you show on Slide 8, already contemplating that normalized frequency?

[Tom Wilson:]

Glenn, do you want to take that?

[Glenn Shapiro:]

I will. Yes. So I give a ton of credit to our team that does all our math and our modeling, they've done a really nice job on frequency, and we're sitting just about right on top of where we expected to be a year ago on it. So will it normalize to some degree probably? While we can't predict different things can happen in the world, we can't predict and won't give a forward-looking prediction of frequency, you'd expect there to be some normalization to pre-pandemic levels. But as we've said for a while now that we believe that there is some durable structural change. People aren't going to be commuting to office buildings as frequently as they did before the pandemic. We probably all know many people, including some of ourselves, that don't do that and won't do that even on an ongoing basis. And 40% of our losses occur in rush hour. So the commuting time, Monday to Friday mornings and afternoons, so when you got significantly fewer drivers on 40% of your last time period and that shift in when people drive, it makes changes to both frequency and severity. So we think that there's some durable reduction there that barring all the other things that change around it, would be consistent in the way frequency stays a bit lower. But as I mentioned earlier in the prepared remarks, we also see some severity increase from that because the driving has shifted to more leisure times to times where the roads are more open, people are driving faster. It creates harder hits with greater severity, that's hitting us both on the physical damage and the casualty side. So there's just a lot of pieces and parts in there. But to summarize with your question, are we contemplating that in our rate plan? The answer is absolutely yes. We are contemplating in the rate plan, our expectations for frequency, our expectations for severity. And we're going hard after rate, as you can see, and we're not done.

[Yaron Kinar:]

That’s very helpful. I appreciate that. Maybe shifting to homeowners for a second. Look, I fully recognize that you have a tremendous track record there and certainly have earned your fair share of income there over the years. That said, if I look at the specific quarter, it seems like you saw some year-over-year deterioration, which seems to be a bit of an outlier relative to some of your earlier reporting peers. I'm just curious as to why this book maybe saw a different trend? I know you called out higher inflationary impact, but was there anything specific to the Allstate book?

[Tom Wilson:]

Yes. It's hard to compare us to other people. If you're talking about Progressive, I'd say our combined ratio is 15 to 20 points better than theirs on a billions of dollars of either theirs or ours, but I don't even think there's a comparison. But – so we – the business bounces around a little bit. We get a good return on capital on it. Was it in the high 90s? Is that where we want it to be on a long-term basis? No. There's a bounce around by year, yes. And so we feel highly confident we can continue to differentiate ourselves in this space in that business.

[Operator:]

Your next question comes from the line of David Motemaden with Evercore ISI. Your line is open.

[David Motemaden:]

Hi, thanks. Just a question on when you think you'll be able to get to that mid-90s combined ratio in auto? Glenn, I think you've talked about some of the – I guess, your thinking around some of the moving parts around physical damage or severity. So wondering if you can maybe – we can zoom out and think your timing when you guys think you guys can get back to that mid-90s targeted combined ratio in personal auto.

[Tom Wilson:]

Good question. I understand why it's important because everybody is trying to figure out the turn and when will it be in the P&L so you can get in early. And I understand the same thing is when people are looking at sort of various rate increases. The headline would be, we're not going to give a projection as to when because you can't predict what will happen to frequency, severity, rate increases. What you can do is look on a longer-term basis and say, when you look at auto insurance and you look at the broad competitive set, Allstate Progressive and GEICO tend to outperform the industry and have combined ratios, which generate attractive returns and just – you can just graph it out over five or 10 years we all sort of hover in the same place. There are other people like some of the large mutuals and stuff which don't operate at that level, but we've proven an ability to get there. So we think that we'll continue to get there as to the speed of it. Sometimes people ask about the speed, is very idiosyncratic. Like, if your frequency moved up to near – closer to pre-pandemic levels, earlier than ours did, then you should have been taking price earlier and severities, the same thing, people manage their loss costs differently. So we tend to look at it and say, with the long term, we know how to make money in this business on how we're confident we'll get there. But we've not put a date out which we said we'll be in the mid-90s.

[David Motemaden:]

Okay. Thanks. That's fair. And then for my second – or my follow-up question just on I just wanted to focus a little bit on the bodily injury severity and some of the casualty changes, some of the charges you took this quarter. Maybe you could help me understand where that's been running. What specifically happened this quarter that made you realize that charge? And I think the last time you spoke about this. You had said that it was more or less in line with medical cost inflation. I think this was a few years ago. And that was notably below your peers back then. So I guess it's sort of a long way of asking, how are you thinking about the BI severity now given the changes that you've made? And how are you reflecting that in your picks going forward?

[Tom Wilson:]

Yes, it's a good question. And the percentage is sometimes get a little confusing because it's a percentage, in other words, it's absolute dollars is the way we reserve to it. Mario, do you want to talk about the reserve changes?

[Mario Rizzo:]

Sure, Tom. So I guess the play side start is we have really strong reserving processes, and we're continually looking at our reserve levels, both for the current report year but also for prior years. And we're taking into account things that we're seeing, both in terms of inflationary trends as well as other phenomenon. And we talked a little bit earlier around things like medical inflation, consumption, attorney representation, those all factor in. So I think, David, the thing we saw this quarter was we continued to see upward development in prior years and some of the casualty coverages. And we took that into account this quarter in terms of raising our ultimate report year expectations for bodily injury in a couple of the prior years. But it was really in reaction to the continuation of some of those trends that I talked about that are causing bodily injury and other casualty severities to increase to levels that were beyond kind of the range of outcomes that we had established earlier on for those prior years. So we reacted to it. We tend to be conservative when we set reserves. But in this particular instance, we saw those trends develop out, and we reacted to it and increased the prior year reserves on auto casualty.

[Tom Wilson:]

So – and we do it by state and by coverage. I mean so if we – there's a fair amount of granularity to it, is market is not always as precise as you like because you're trying to guess what it's going to cost us settle to something. Well, thank you for participating. Let me just close by saying, there's two stories here. The narrower story is, it's about the insurance industry and Allstate dealing with auto insurance of profitability caused by inflation in fixing cars and then also fixing bodies. Great longer longitudinal story is, which I don't want to let it on the cutting of the floor is about a significant repositioning of the company while dealing with that issue. So we sold our life business. We spent $4 billion success with our National General into the fold increase our market share by 1%, which different position in the independent agent channel for transformation of the Allstate branded business is going quite well, whether that's expanding direct lowering costs or building out new products and improving our competitive position. And then our Protection Services business is really reached a substantive multibillion dollar level with large source of future revenue growth to come because of the way the time works. And at the same time, we're continuing to buy back shares and pay great dividends. So thank you all for participating, and we'll talk to the next quarter. Actually, we'll talk to you in March when we come back to auto reels.

[Operator:]

This concludes fourth quarter conference call. You can now disconnect.