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

Thank you, Jonathan. Good morning and welcome to Allstate's third quarter 2022 earnings conference call. After prepared remarks, we'll have a question-and-answer session. Yesterday following the close of the market, we issued our news release and investor supplement filed our 10-Q and posted today's presentation on our website 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 2021 and other public documents for information on potential risks. Additionally, we will be hosting our next special topic investor call on December 2, focusing on Allstate's auto and home insurance claims practices and reserving process. And now I'll turn it over to Tom.

Well, good morning. Thank you for investing your time with Allstate today. As you know, we pre-released earnings several weeks ago and reported the net loss for the quarter. That reflected a small underlying, underwriting margin that was offset by increases in reserves for prior years and a mark-to-market loss on public equity securities. . Mario and Jeff will go through the details of the quarter and the reserve changes after I set some context. So let's start on Slide 2. Allstate's strategy to increase shareholder value has two components: increase personal profit liability market share and expand protection services, which are shown in the two ovals on the left. We're building a low-cost digital insurer with broad distribution through transfer onto growth to increase market share. We're also broadening protection offerings and leveraging the Allstate brand, customer base and capabilities with expanded distribution. In the third quarter, we made progress executing this strategy, while we continue to implement a comprehensive approach to improve auto profitability, which is shown in the right-hand panel, that includes broadly raising auto insurance rates, which you've seen in our disclosures. Operating expenses were lowered, including advertising and more permanent reductions in the operating cost structure. Underwriting guidelines have been adjusted to reduce new business volume where we're not earning adequate returns. Our claims operating processes are being modified to manage loss cost in a high inflation environment. And we believe this plan will return auto insurance profitability to historical levels. While the current environment requires focus on improving margins, we continue to advance and transform our growth strategy to gain market share when profitability improves. In addition, the protection services businesses is generating profitable growth. Investment returns were negative for the quarter and year-to-date, but better than the overall declines in the bond and…

Thanks, Tom. Let's start by reviewing underwriting profitability for the Property Liability business in total on Slide 5. Our underwriting results reflect the high level of inflation and the impact of reserve strengthening in the quarter with a third quarter recorded combined ratio of 117.4% for auto, 91.2% for homeowners, 126.6% for all other lines and 111.6% for total property liability, which is shown on the left chart. Remember, our goal is to run the auto business with a combined ratio in the mid-90s and homeowners at around 90, while homeowners was close to our target in the quarter, we continue to focus on improving auto margins through a comprehensive plan that is being implemented to get us back to our mid-90s objective. The third quarter underlying combined ratio for auto insurance was 104, as you can see on the right. So we're raising auto insurance prices, reducing growth investments, lowering operating expenses and adapting claims practices to a high inflationary environment. While the homeowners business generated $245 million of underwriting profit, higher severity resulted in an underlying combined ratio of 74.6%, which is above where we manage it to, and we are increasing prices through both rates and the inflationary adjustment factor embedded in our homeowners product to improve underlying margins going forward. One of the reasons that we have an industry-leading homeowners business is because we proactively manage the risk and return profile of each market that we operate in. Based on this approach, we have decided to stop writing new homeowners and condo insurance in California at this time, given our inability to fully reflect the cost of providing these products in the state, including both loss and reinsurance costs. We intend to continue protecting our existing California property customers by offering ongoing coverage to them. Other…

Thank you, Mario, and good morning, everyone. On Slide 11, let's begin with our prior year reserve development, property liability, prior year reserve strengthening, excluding catastrophes totaled $875 million in the third quarter. The pie chart on the left breaks down the impact by line with $643 million, driven by personal auto, $120 million one-off property liability from our annual reserve review related to environmental and asbestos exposures, $63 million in commercial, largely related to auto bodily injury and $51 million in homeowners. . The chart on the right breaks down Allstate Protection auto prior year reserve strengthening of $643 million in the third quarter, which was primarily driven by noncustomer claim and bodily injury claims. The total cost to settle these claims continues to be impacted by more severe accidents and higher medical and litigation costs. Increases to commercial and homeowners insurance can also be attributed to these factors. Physical damage prior year reserve increases in the third quarter from property damage collision and comprehensive coverages, excluding catastrophes, were largely offset by higher subrogation collection estimates. Now let's move to Slide 12 to discuss the drivers of bodily injury development and our claims operating actions to manage loss costs. Bodily injury severities have increased as the mix of claims shifted to more costly claim segments. The chart on the left shows the relative severity of bodily injury claims by type of treatment, major versus non-major and whether the claim is unrepresented, attorney represented or litigated. Major injuries have more expensive medical treatments, greater nonmedical related damages and often more attorney involvement. As a result, paid severity for major injury claims and litigation represented by the first bar on the left costs approximately 3.9x the average paid bodily injury claim. Non-major claims shown on the right-hand side of the chart,…

[Operator Instructions] Our first question comes from the line of Greg Peters from Raymond.

I'm going to focus the first question on reserves. And I was looking at the information you provided on Slide 12 and some of the earlier slides. And I guess what we're trying to do is reconcile the charge that you took in the third quarter with the information we're getting from some of your peers? And then additionally, trying to understand why the data that you're showing now here for the third quarter results, so you can start to see it in the second quarter and make adjustments then. And I mean it's a long-winded question, but ultimately, we're trying to get at is there a risk of additional reserve charges going forward?

Greg, thank you for your question. Let me provide just a quick overview, and then Jesse can give you some more specifics. First, of course, obviously, we estimate the what's going to happen that depends on trends for the numbers. And we can't make a comment as to what other people's numbers look. People do reserving all sorts of different ways. And we believe ours is highly precise, specific, and we have external people look at it, and we put up the numbers when we think we need to put them up. And of course, this quarter, we did increase it for prior years and that's largely due to the injury trends that just saw, which have really been unfolding over the last couple of years. And these are claims that take 4 years before you get 80% paid. It takes a while before it developed. Jesse what would -- how do you want to address that?

Yes. Thanks, Tom. Greg, what I would start with is, I think it's important to be clear on one thing. At the end of every quarter, we record reserves at an appropriate level based on all the information that we have in front of us. We did that at the end of Q3 and every quarter leading up to Q3. We followed the same process that we have in the past. It's a rigorous process. It leverages internal actuarial expertise, close collaboration with our claims team and third-party reviews to analyze the most current data and assess the impact on that data on our reserves. . As I look at the quarter, the variability that we've seen continue to come through in the data that we reviewed as part of our actual process. So Q3 data supported more recent trends and continued variability in reserve development. And while these trends weren't new, an additional quarter of data did provide new insights into the persistent nature of the trends that have been emerging. So insights from actual claims development in the quarter, led us to strengthen both prior year reserves and increase our report year 2022 ultimate severities. So as I take a step back and think about where we're at from a reserve perspective, we record appropriate reserves based on what we know at the time. We used current data and all known factors to establish the reserves. So I'm confident in what we set up. And I think that the new insights that we cleaned in Q3 caused us to make the move.

Okay, makes sense. I guess my follow-up question is on capital. And just looking at it from a macro perspective, I really don't remember in recent history, a time where you guys have been growing your top line almost at a double-digit rate. And that by itself puts pressure on capital resources. And then if we look at your capital position outlined in the statistical supplement, and we see total capital resources having declined year-over-year due to a variety of issues. Just wondering if you can help frame how we should think about traditional metrics around premiums to surplus in the context of all the different moving parts?

I'll start and then Jesse can add as well. So Greg, first, we don't use the traditional -- when we look at the traditional metrics like premium surplus and as we go, but we're much more sophisticated than that. And it goes -- in the way we allocate capital is from an enterprise standpoint and looks at specificity on risk levels down to the state-based level by line. So for example, some people would blend their premium to surplus ratio for all property liability products, auto and home at the same. We don't do that. We think capital is much higher for homeowners insurance. And that's why when Mario went through our target ratios for home insurance, they're lower than they are for auto insurance. Other people just assume that same. So we're much -- we're very sophisticated in the way we do it. We manage it from an enterprise standpoint. So when we -- the answer would be we have plenty of capital, like we've got tons of money, and it's not going to do anything to our strategy. It has no impact on our future earnings power, which is, of course, what drives the company. And we're in the middle of a massive share repurchase program, and we don't feel like we have to back off on it based on what we know about our business at the granular level. So we feel very good about where we're at. We've generated good returns for shareholders by doing it that way. And so there's really -- I feel like using broad measures like that doesn't really reflect the economic reality that we're managing to. Jesse, where would you go from there?

That's a pretty complete answer, Tom. But I think the important point is that the proactive capital management that really relies on our robust economic capital approach, which looks at risk on a granular basis and takes that information to understand capital needs in an enterprise level. Premium surplus only looks at one dimension of risk and capital, and we use a more complete set of measures and metrics to establish capital levels, as Tom laid out. So I just think it's important. We're cognizant of and we monitor regulatory capital requirements, rating agency capital benchmarks, all in our proactive capital management process. But I feel the same way that Tom does it that we certainly have plenty of money to execute on our strategies and continue to implement our profit improvement plan. So nothing more to add, Tom.

And our next question comes from the line of Elyse Greenspan from Wells Fargo.

My first question is on the capital side of things. So as you guys came to the decision, I guess, to more moderate your buyback, are you assuming that there's any dividends that you're going to take out of Allstate Insurance company over the next year? And then within that question, I guess, did you guys think about pausing the buyback program completely just to have more capital flexibility within that subsidiary?

Elyse, let me answer that and Jesse can jump in. First, in terms of the dividends, we move -- first, we make sure that each of the insurance subsidiaries that large ones are appropriately capitalized based on what we think economic capital is just that with the rating agencies, whether it's an investor, others, think we should have in those and then what regulators want. So -- and we're really well capitalized at those. To the extent there is extra capital in those, we then move that out of the insurance companies into the holding company is just point out because that gives us more flexibility. As we look forward next year, it will depend how much money we make. I think in some of the announcements, like we have really strong earnings power and when you look at our profitability of our auto insurance, we think it's headed up. So we think there's plenty of earnings power. Whether that and where we think risk is and what we need to do with risk will depend on the overall enterprise risk portfolio. So for example, not covered in some of these things, we dialled down the risk for our investment portfolio late last year as a percentage of our total enterprise capital because we didn't think it was a good risk return trade-off. So we're constantly managing where do we want to move capital where do we want to make sure we get a good return on it. So we don't feel like we are capital constrained at all. Did we consider shutting the program down in total? No. We think we have plenty of moments of $5 billion of massive share repurchase program, a large 4 of which a portion of which was funded because we sold the life insurance company. and we said we should get that money back to the cat shareholders. So we have a historical track record of doing this extremely well. We're a top decile amongst the S&P of providing cash returns to shareholders. And we do that without putting our customers at risk of the company is. So we feel like we're in really good shape.

Okay. And then my follow-up, I guess, would be right. You talked about that you don't manage your premium to surplus, but I know one of your peers has mentioned looking to write their all business to a 3:1 home to 1.5:1. So I'm not sure if you have frames of references that you look at for your businesses? And then if rating agencies and regulators, what are they looking at? Are they holding you to a 3:1? Or is there other metrics that they're holding you to relative to premium to surplus or something else?

We've had -- essentially to say, from certainly my standpoint, no conversations with regulators about our cap levels because we're so well capitalized -- I might start there. And that's been true forever and it will be true far into the future. And so the regulators really were so far above their standards. It's not really been a conversation. I can't speak to how other people look at their premium surplus ratio. I think some of our competitors who don't make money in homeowners should have even more than we do. Because when you look at your capital it's -- okay, what do we think the risk is? What is the risk of loss. But you also want to factor in your earnings power. And so if you're losing $0.10 on a dollar, on a line of business, then you have to hold more capital than if you're making $0.10 on the line of business. So I think it's all very idiosyncratic to a specific company. . We factor all of those things in by state really and even sometimes looking down at different components of the state to decide what price we should get per customer from customers, how much business we want to write and then how much capital we have to keep in the company. So I feel very good about where we're at.

And our next question comes from the line of Brian Meredith from UBS.

A couple of them here for you. First, Tom, I'm just curious, this is the, I think, first quarter a little while that we've seen auto PIF actually declined somewhat sequentially. Is that due to some of the actions you're taking in California? Or is it just in general, the price increases you're taking should we expect the PIFs to kind of decline here for a couple of quarters.

Well, the PIF decline was, of course, in the Allstate brand versus in total because we went up in the independent agent channel, but it's intentional. And I would tell you that it's actually the decline was less than we thought it would be. When you look at historical price sensitivities on what your customer retention is, our retention is held up better than you would think from historical trends. It's hard to do attribution down to the specific item, but when you look at it, we'd say, first, the competitive position -- our competitors are also raising rates. So as we raise rates, we thought more people would leave, but less did. It could be because our competitors are also raising rates. Consumers still have a fair amount of cash in their bank accounts, so that helps. They also know that their houses and cars are worth more. So it makes sense to them that they should have to pay more for insurance, when explained to them. And I think that's the value of our Allstate agents at this point. they're out working hard to make sure our customers understand why the prices are going up. And then as Mario mentioned, they'll help them work to figure out how do they get the right price. So this is a case where like our mile-wise product is really helpful for people because if you're, say your senior citizen, you don't drive much and you should go to Milewise and save a bunch of money by not paying more. So when you look through all those together, we expected our auto PIF to go down more in the Allstate brand than it did. But we're happy that we're keeping the customers because with the price increases we've put through that will be good shareholder value creation when we start earning the rates.

Great. That's helpful. And then my next question, I'm just curious, and I think this question will be asked in prior quarters, but when you're pricing your auto insurance and homeowners insurance now, what type of loss trend are you expecting in the future expecting inflationary trends to moderate here? Or do you think they're going to stay relatively high here for a while?

Mario, will you take that?

Yes, sure. Brian. Yes, I think, Brian, in terms of what we're seeing, we're factoring in, obviously, the inflation we're experiencing currently, but also projecting it going forward so that we can reflect the full cost of loss costs prospectively into our prices. And so yes, we're not making any kind of significant assumptions around a deceleration in inflation going forward given the current inflationary environment, that's why we made the statement that we expect to continue to take rate increases certainly for the balance of this year but into next year, and that's really a reflection of the environment we're operating right now and the continued elevated level of inflation, which we need to kind of catch up with and then surpass going forward. So we're not assuming, as I said, any significant reduction in inflationary trends going forward.

And our next question comes from the line of Tracy Benguigui from Barclays.

All right. So used ask this question for casualty line writers. Given the consecutive adverse reserve development charges, have you worked with any external actuaries to review reserves? And if so, what is your management estimate relative to central estimates?

Tracy, we always work with external people and looking at our reserves. So we obviously have Deloitte & Touche to our auditors, but we also have an external actuary in called -- which is KPMG, which provides the statutory reports for our regulators. We look at all of their stuff. We just had a detailed review with Deloitte & Touche a couple of weeks ago, and their view ties closely to ours. .

Do you have a management estimate above the central estimate at the moment? Or is it closer to the central?

We don't put ranges in the financials. We put up what we -- as Jesse said, like we put up what we think the future liability is and we pick a number, and that's where we do it. And we're comfortable with the number and that number is very close to what our external participants or external health thinks and thought historically, by the way. So it isn't like we were in -- we built a very similar views at the end of the second quarter, end of the first quarter and end of the third quarter, and they are -- they believe that the actions we've taken are appropriate.

Got it. And just going back to capital management, given you manage capital more efficiently at the OpCo level and the way you like to hold cash at the holdco level if you could flex that up and down. I'm just curious, when was the last time you downstream capital to the operating company. How do you lever often.

It's a good question. I don't remember certainly in the last decade, I don't remember having done that at all from -- down to the Allstate insurance company. Would we move money into the health and benefits companies because they were growing or do we have to -- so we do move money around. But if you said if you really talk about Allstate insurance company as the largest business we have, I don't remember anything in the last 10 years. But Jesse or Mario, do you have any other perspective on that?

I don't have anything more than that. I think we did move some capital down into the Life company. at 1 point, Tom. But I think that certainly is no longer an issue, but that's the last thing that I remember. Mario? .

Yes, I would concur the last time I remember any meaningful movement of capital down into an operating company. would have been during the financial crisis, which obviously was a while ago. But as Tom mentioned, we moved capital around but nothing in terms of shortfalls within any of the insurance companies.

Right. but I'm not thinking about this the right way where you have capital at the parent company that you could flex it up and down in your slide when you talk about your fixed charges, is there a multiple that you want to keep like 2x minimum level?

We don't manage it that way. I just showed the level of cash we would have after we used deployable capital to finish the share repurchase program, you can see it's still well above our fixed charges, which we intentionally managed to keep at a modest level, which is even though we increased the dividend by about 50% a year ago, we tried to give a lot of money back to shareholders through share repurchases. So we don't have a multiple -- if you had a multiple and you also have to factor in how much money you're going to make over the next 12 months. And obviously, our fixed charge coverages historically have been terrific. So we don't have a -- like don't go below this because we've never even been close.

And our next question comes from the line of David Motemaden from Evercore ISI.

I think it was Jesse, who spoke about just the mix shift that you're experiencing on the BI claims side to more expensive claims. And as part of the reserving process, you weight both historical and more recent trends in the claim development patterns in the data. So I guess I'm wondering after the changes that you've made this quarter, are you -- I guess, how much are you waiting more recent experience? Is it 100% weight on these trends that you're seeing? Or is there still some weight being placed on more historical experience?

David, let me answer that, and Jesse, you can add anything else to it. So first, the reserving process uses all types of statistical analysis, triangles, link ratios, all sorts of different things. So there's no real like just 1 percentage. I think we look at it by state, by line of business, by coverage. And so it's slice and dice a whole bunch of way. So there's no really simple way to answer that. I think what I would say about you're trying to get comfortable with the reserves. It really starts -- you got to go back to say, well, what's happening in the world. And during the pandemic, we noticed when people weren't on the roads, people were driving a lot faster because there is -- they could zip around and there was no traffic and off they went. Once we get through the pandemic, at least in our data, we see people still driving pretty fast, but as a result of that, you have more severe accidents, and that trend appears to be holding. We thought that, that trend might come down because when the little ones are sort of bumps in scratches and stuff, which happen in congested traffic. Today, those, as you saw from Jesse's numbers have not gone back up and the major ones have not gone down. So people are just driving faster and hurting people more. So you have to figure out, okay, well, what are you going to do take care of it. Those are really complicated cases. I mean people have surgery, they have all kinds of services, and those services are more expensive, and they take longer to develop. So if you really severely injured, it could take 6 months, nine months, two years before you really figure out how you get back to where you should be, and it costs a lot of money and takes a lot of time. And so those cases develop over a longer period of time. So it isn't so much that it's just -- we use the same process as procedures, but as these things develop, it really comes back to -- our customers are just in a lot more severe actions and people are getting hurt, and we need to make sure we have the liability up to cover that. And that's what we did this quarter. So we said, okay, this is really continuing. Most of these are still severe. And as they develop, then you have to put the money up.

Got it. Okay. So it sounds like you had assumed that the mix which normalize somewhat away from some of these more severe accidents, and I guess now the assumption is that there is going to be no mix away from these more severe accidents and that's sort of the new normal. Is that correct?

Yes. But it's not just 1 item, I would say. So you can't pin it on just those now more majors. There's more majors. The majors are harder to estimate. They're taking longer to settle. There's more legal costs associated with settling those, and so you have to factor that in. So there's a whole bunch of factors that relate to it. So we look at it. We're comfortable we've put up the right amount of money. And what other companies do and what they're reserving are -- some people use less specific processes that we do, some processes react faster or slower to trends in the marketplace. But the important thing is we use the same process is have external views, and we all think this is the right amount of money.

Got it. Okay. And then maybe just a quick numbers follow-up here. So see that you guys are now assuming a bodily injury severity of 12%, I guess I'm just wondering what was the report year incurred severity on bodily injury for 2021 after the changes that you've made?

We have not broken out the reserve -- after the reserve changes by prior years. We won't break those out until we publish the 10-K. I mean, is that right -- correct, Jess?

That's right, Tom. We don't disclose the split, so we don't have that.

But suffice it to say, David, that is higher than it was before.

Yes. I was looking at a -- I'm just trying to get a sense for the compound if we say, okay, up 12%, but the base does matter. And so I think the base was set at 5% in the first quarter for all of 2021, which has since been changed. So I was just trying to get a sense for where that's gone. But I guess I'll look in the K for that.

Why don't we take 1 more question and then...

Our final question comes from the line of Yaron Kinar from Jefferies.

I'm going to go to my specialty of beating dead horses here, if I can. On capital, do you expect to deploy some of the hold liquidity into AIC over the coming year?

No.

Okay. And then shifting more just to the auto and home side. So I think you guys shifted the exclusive agent comp structure to be more weighted to new business. Now that you're kind of maybe taking a little bit of a step back on growth and really focusing more on fixing the margins, how is that playing out with the agent comp structure with your conversations with them? I'm assuming that can be a little bit of murmurings and rumblings around that. How are you handling that?

Well, I'm address embedded in all of this, there's a lot of good news on transformative growth that we really don't have a chance to talk about it. One is that which you talked about, which was expanding customer access is the second key lever. And that included selling direct under the Allstate brand at 7% less than it was sold through Allstate agents. And there was some concern amongst investors as to would the agents walk away and would you have a decline in volume there? And the answer is no. That is the underlying assumption that they would continue to be focused on getting more new customers given what we did to the compensation plan was true. . If you look at new business from the Allstate agents, you can see that's where it was a year ago, even though there are fewer Allstate agents out there. And then if you look at the retention numbers, as I mentioned, I think our agents are doing a great job for us talking to customers whose price changes. And so we feel good that, that part of the expanding access, all of our underlying assumptions prove to. We also have really improved our web-based and the call center close processes. So we're getting much better at selling through those two vehicles. We obviously dialled the advertising way down this year because we don't want to take on new business and then have to raise the price 15% or 20% the first time. So while you don't see the benefit of those improved processes come through new business, but when we get auto profitability improved, we feel good about the underlying assumptions we made in transformative growth and our progress in making those realities. So we're feeling good about where that's headed.

So thank you all for dialing in. As we move forward, we have a couple of things in front of us. One, we have to improve auto insurance margins, while making sure we continue to invest and transform the growth so that we can grow market share and then continuing to expand our other protection services businesses, which also had a great quarter. So thank you and we will talk to you in December.

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