The operator welcomed participants to Allstate's Second Quarter Investor Call and introduced Brent Vandermause, Head of Investor Relations. Vandermause noted the availability of the company's 10-Q and other materials on their website, and Tom Wilson gave an overview of the company's strategy and results for the quarter. The strategy includes increasing personal profit liability market share and expanding protection services.

Allstate is making progress on its comprehensive plan to improve auto insurance profitability, with the proportion of premium associated with underwriting profit increasing from 30% to 50%. Severe weather in the quarter led to a net loss of $1.4 billion, while strong fixed income results and Protection Services and Health and Benefits generated $98 million of profits. The company is introducing new technology platforms and products to drive sustainable growth, and has a strong capital position with $16.9 billion of statutory surplus and holding company assets.

The company has a history of providing cash returns to shareholders through dividends and share repurchases. Over the last 12 months, they repurchased 3.9% of their outstanding shares. Revenues for the second quarter increased 14.4% from the prior year quarter due to higher average premiums in auto and homeowners insurance. However, the net loss for the quarter was $1.4 billion due to a profit liability underwriting loss of $2.1 billion, mostly from higher catastrophe losses. The underlying auto insurance combined ratio improved slightly for the first six months of 2023, but the homeowners insurance combined ratio was 145, resulting in an underwriting loss of $1.3 billion.

Tom discussed the adjusted net income of $98 million from protection services and health and benefits, which combined with $610 million of investment income, offset a portion of the underwriting loss. Mario then discussed the impact of the comprehensive auto profit improvement plan on the financial results, with Property-Liability earned premium increasing 9.6% due to higher average premiums in auto and homeowners insurance, partially offset by a decline in policies in force. The underwriting loss of $2.1 billion was $1.2 billion worse than the prior year quarter due to $1.6 billion in catastrophe losses, including 22.6 points from catastrophes. The quarter also saw $182 million of strengthening in the second quarter, $148 million of which was in National General, due to personal auto injury coverages in the 2022 accident year and $31 million for litigation activity in Florida related to torque reform.

Allstate's auto insurance combined ratio of 108.3% in the second quarter of 2023 was 0.4 points higher than the prior year quarter due to higher catastrophe losses and increased current report year accident frequency and severity. However, their comprehensive plan to improve auto insurance margins, such as raising rates, reducing expenses, restricting growth, and enhancing claim processes, has had a positive effect on underlying auto insurance profitability trends. The underlying combined ratio has improved modestly in each of the first two quarters of 2023, reflecting both the impact of their profitability actions and the continued persistently high levels of loss cost inflation.

The Allstate and National General brands have implemented rate increases in order to restore auto insurance margins back to the mid-90s target levels. They have also reduced operating expenses and temporarily reduced advertising. Underwriting actions have been more restrictive on new business, but are beginning to be selectively removed in states and segments that are achieving target margins.

Allstate has increased the number of states with an underlying combined ratio better than 100 from 23 to 36, representing an increase in premium from 30% to 50%. To offset inflation, Allstate is modifying claim processes, negotiating improved vendor service and parts agreements, and increasing rates in California, New York, and New Jersey. As a result, new issued applications from these three states have declined by 62%. Allstate is currently working with the California Department of Insurance to secure approval of a 35% rate increase and restore auto rates to an adequate level.

In New Jersey, the company received approval for a 6.9% rate increase in the first quarter and filed a subsequent 29% increase in the second quarter. Through expense reductions, the company has achieved a 2.5 point improvement in the second quarter compared to the prior year quarter. This improvement was mainly driven by lower agent and employee-related costs and the impact of higher premiums relative to fixed costs. The company is also committed to reducing the adjusted expense ratio as part of transformative growth, with the goal of achieving an adjusted expense ratio of 23 by year-end 2024.

Allstate Protection homeowners insurance saw a 12.4% increase in net written premiums, driven by higher average gross premiums and an increase in policies in force. Allstate brand premiums were increased by 13.2%, due to rate increases throughout 2022 and inflation in insured home replacement costs. Despite the increase, the company incurred an underwriting loss in the quarter due to elevated catastrophe losses. The company's approach has consistently generated industry-leading underwriting results, with a combined ratio outperforming the industry by 12 points from 2017-2022.

Allstate experienced a historically high second quarter combined ratio of 145.3%, which increased by 37.8 points compared to the prior year due to an elevated catastrophe loss ratio of 75.9 points. Despite this, Allstate remains confident in its ability to generate attractive risk-adjusted returns in the homeowners business and is responding to the increased losses by implementing rate increases and limiting exposures. The Protection Services business is continuing to broaden the protection provided to an increasing number of customers.

Allstate Protection Plans and Allstate Dealer Services experienced growth in the second quarter of 2023, while adjusted net income decreased due to higher appliance and furniture claims severity and a lower-margin mix of business. Health and Benefits also grew, with increased premiums, contract charges and other revenues in group health, partially offset by a reduction in individual health and employer voluntary benefits. Allstate is continuing to invest in these businesses to broaden protection offerings, drive down costs, improve the customer experience and create value for shareholders.

In the second quarter of 2023, adjusted net income decreased by $10 million compared to the prior year quarter due to a decline in voluntary benefits, higher individual health expenses, and system investments. The net investment income was $610 million, which was $48 million higher than the prior year quarter due to the repositioning of the fixed income portfolio into longer duration and higher yielding assets. The performance-based income was $109 million lower than the prior year quarter due to lower valuation increases and fewer sales of underlying assets. The fixed income earned yield rose to 3.6%, compared to 2.8% for the prior year quarter and 3.4% in the first quarter of 2023.

Allstate proactively manages capital through a sophisticated framework that quantifies capital targets based on business, product, geography, investment type and for the overall enterprise. This framework includes a base level of capital for expected volatility and earnings as well as additional capital for stress events. Reinsurance programs are in place to mitigate losses from large catastrophes, and geographic exposures are managed to generate appropriate risk-adjusted returns. The framework was used to decide to purchase additional aggregate program coverage this year, and reducing high-yield bonds and public equities in the investment portfolio significantly reduced the amount of enterprise capital required for investments.

Allstate has taken the decision to reduce volatility and statutory results due to market conditions and the decline in auto profitability. The company has a strong capital base and has been able to access capital markets to address maturities. Allstate has a history of generating capital and statutory net income, however it has been impacted by the increase in auto insurance claim severity and recent catastrophe losses. Allstate has suspended share repurchases and is confident that its auto insurance profit improvement plan will restore profitability.

Allstate is proactively managing capital to navigate the current operating environment and increase shareholder value. They are accelerating rates due to an increase in severity in the first half of the year, and it is difficult to predict what will happen in the second half of the year. The ultimate goal is to get the combined ratio down to the low to mid-90s.

Mario Rizzo adds to Tom's point that the average earned premium trend is beginning to outpace the increases in loss and expense, which is an encouraging development. They hope that this trend will continue and that the gap between the line of average premiums and the bar of severities will get back to the mid-90s, though the future is uncertain.

The Allstate and National General brands have implemented a profit improvement plan, increasing rates by 7.5 and 5.5 points respectively. California, New York and New Jersey, which make up a quarter of the book, have seen rate increases, but more are pending. New business production has been scaled back in these states to keep the loss ratio low. There was also a reserve strengthening in the quarter, particularly in Florida.

Tom Wilson discussed the acquisition of National General, which has exceeded expectations, and the growth in the independent agent (IA) channel. Mario Rizzo added that the underlying combined ratio in the quarter was 96%, which is slightly higher than the target but still close to it. The increase in reserves is due to the 2022 accident year roll-forward impact, increasing the loss expectations in the 2023 year.

National General has taken 5.5 points of rate this year and 11 points of rate over the last 12 months in order to respond to a higher loss trend. In addition, they have restricted underwriting guidelines and are writing more liability-only policies, as well as taking advantage of scale to improve their expense ratio. They are comfortable with the actions they have taken and the policies they are writing.

Tom Wilson explains that the company is constantly adjusting their pricing and are able to maximize the amount of rate they can get. They have an increased rate expectation for the year and are working aggressively with 3 states that are a problem. The company is also taking into account the time value of money and are using sophisticated relationships with the states to get the rates they need.

Mario Rizzo explains that the company is constantly updating rate indications and filing for what they need based on current data. They are aggressively pushing for the amount of rate needed based on their real-time loss experience and are working with regulators to get the rates approved quickly. They can file new rates with current data as it is coming into their systems.

Allstate has a long history of proactive managing capital and has bought back about $37 billion of stock since they went public. However, they have suspended their share repurchase due to the lack of profitability. Jesse will provide more details on the math behind the decision.

Jesse Merten discusses the limitations of RBC, which is a measure of capital used by insurance companies, and explains that the company uses it as an input in their capital management process but not as a primary driver. He goes on to explain that the company has a comprehensive and more precise capital management framework which considers sources of capital outside of regulated entities, as well as quantifying enterprise risk and establishing targets. The output of their economic capital model is considered to be very good.

The company has base capital, stress capital, and a contingent reserve to prepare for unexpected events. Despite the high catastrophe losses this quarter, the company remains confident in their capital position and liquidity. They have a strong source of cash through interest payments and maturities, and a highly liquid investment portfolio.

The company is proactively evaluating capital options, such as additional reinsurance, to reduce the volatility of earnings while maintaining an attractive cost of capital. They have also shown they have access to financial markets, and have ruled out issuing common stock as a capital option. They have chosen to monetize part of their equity portfolio in the first quarter, and are not looking to make any significant changes to investments or monetize any assets going forward.

The company does not have any plans to monetize assets to bolster capital in order to meet their 14-17% ROE targets, which they have been discussing since 2019. They have the capital to make their strategies to increase shareholder value, such as increasing profit and growth and broadening the portfolio, which would lead to a higher multiple.

Tom Wilson explains that the 14-17% ROE confirmation is not a cap, but rather a statement that nothing is diminishing the company's earning power. The strategy is to get returns up to their historical levels, and the company will do this by increasing market share and expanding protection offerings. Michael Zaremski's last question is about PIF growth remaining under pressure in the near term, and Wilson confirms that PIF growth could be negative while total revenue growth is still positive due to pricing power.

Tom Wilscon explains that capital models are driven on risk which are tied to premium, so reducing PIF does not impact the model. Mario discussed growth in National General, and they are expecting to be in 10 states with their new product this year, which will drive growth. They are not writing business in states where they are losing money, as it does not make sense economically.

Jesse Merten explains that the development this quarter was related to National General and that they continually move reserves between years and coverages. They are focused on settling older claims and getting the reserves right. The movement between prior years and coverages is a normal course this quarter. Alex Scott follows up with a question about a 35% filing that was filed in late May, which can take up to 18 months.

Tom Wilson and Alex Scott discuss the timeline for California regulatory approval and how it will affect the company's P&L. Wilson clarifies that the 18 month timeline he mentioned was not meant to imply that it should take that long, and suggests looking at the monthly rate increases and doing the math to get a better idea of what the impact will be. Yaron Kinar then asks about the decision to stop the buybacks, and Wilson explains that it doesn't make sense to buy back stock when the company is generating a loss.

Tom Wilson explains that the original buyback program was for $5 billion, of which $3 billion was from the sale of the life and annuity businesses. Since the company was losing money, they decided to stop buying back stock. He emphasizes that good capital management is using common sense and not following a specific formula. He also notes that they factored in the possibility of catastrophes when they decided on the $5 billion, but when it became a reality, they chose to stop buying back stock, but may resume the program if they feel it is necessary.

Share repurchases have been a part of the company's track record, but the company does not believe it is the best way to create value for shareholders. Instead, the company will focus on increasing profitability, executing transformational growth, and broadening the product offering with protection plans, health and benefits. The company thanked those who tuned in for the quarterly conference and will speak to them again next quarter.

This summary was generated with AI and may contain some inaccuracies.