Good day, and thank you for standing by. Welcome to Allstate’s Second Quarter Investor Call. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please limit your enquiry to one question and one follow-up. As a reminder, please be aware that today’s call is being recorded. And now, I’d like to introduce your host for today’s program, Brent Vandermause, Head of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning. Welcome to Allstate’s second quarter 2023 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 related material 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 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 2022 and other public documents for information on potential risks. And now, I’ll turn it over to Tom.

Good morning. We appreciate you investing your time in Allstate. Let's start with an overview of results and then Mario and Jesse will walk through operating results and the actions being taken to increase shareholder value. Let's begin on Slide 2. Allstate's strategy has two components; increase personal profit liability market share, and expand protection services, which are shown in the two with on the left. On the right-hand side, you can see a summary of results for the second quarter. Progress is being made on the comprehensive plan to improve auto insurance profitability, which includes raising rates, reducing expenses, limiting growth and enhancing claim processes. While auto insurance margins are not at target levels, the proportion of premium associated with states operating and that underlying -- underwriting profit has gone from just under 30% in 2022 to 50% for the first half of this year. Mario will discuss the actions being taken to continue this trend and importantly, improved results in New York, New Jersey and California. Severe weather in the quarter contributed to a net loss of $1.4 billion, 42 catastrophe events impacted 160,000 customers and resulted in $2.7 billion of catastrophe losses and a property liability underwriting loss of $2.1 billion. Strong fixed income results from higher bond yields generated $610 million of investment income and Protection Services and Health and Benefits generated $98 million of profits in the quarter. The transformative growth plan to become the lowest cost protection provider is making continued progress. This both helps current results with lower costs and positions Allstate for sustainable growth when auto margins return to acceptable levels. Affordable, simple and connected property liability products with sophisticated telematics pricing and differentiated direct-to-consumer capabilities are being introduced under the Allstate brand through a new technology platform. National General was growing,…

Thanks, Tom. Let's turn to Slide 4. We are seeing the impact of our comprehensive auto profit improvement plan in our financial results, starting with the rate increases we have implemented to date. The chart on the left shows Property-Liability earned premium increased 9.6% above the prior year quarter, driven by higher average premiums in auto and homeowners insurance, which were partially offset by a decline in policies in force. Price increases and cost reductions were largely offset by severe weather events and increased accident frequency and claim severity. The underwriting loss of $2.1 billion in the quarter was $1.2 billion worse than the prior year quarter due to the $1.6 billion increase in catastrophe losses. The chart on the right highlights the components of the combined ratio, including 22.6 points from catastrophe losses. Prior year reserve reestimates, excluding catastrophes, had a 1.6 point adverse impact on the combined ratio in the quarter. Of the $182 million of strengthening in the second quarter, $148 million was in National General, primarily driven by personal auto injury coverages in the 2022 accident year. In addition, prior years were strengthened by approximately $31 million for litigation activity in the state of Florida related to torque reform that was passed in March of this year. We've been closely monitoring the increase in filed suits on existing claims and the charge reflects a combination of higher legal defense costs and a modest loss reserve adjustment. Despite continuing pressure on the loss side, the underlying combined ratio of 92.9 improved modestly by 0.5 points compared to the prior year quarter and 0.4 points sequentially versus the first quarter of 2023. Now, let's move to slide five to discuss Allstate's auto insurance profitability in more detail. The second quarter recorded auto insurance combined ratio of 108.3% was…

Thank you, Mario. I'd like to start on Slide 10, which covers results for our Protection Services and Health and Benefits businesses. The chart on the left shows Protection Services where we continue to broaden the protection provided to an increasing number of customers largely through embedded distribution programs. Revenues in these businesses, excluding the impact of net gains and losses on investments and derivatives increased 9.1% to $686 million in the second quarter compared to the prior year quarter. Increase reflects growth in Allstate Protection Plans and Allstate Dealer Services, partially offset by a decline in parity. By leveraging the Allstate brand, excellent customer service and expanded products and partnerships with leading retailers, Allstate Protection Plans continues to generate profitable growth, resulting in an 18% increase in the second quarter compared to the prior year quarter. In the table below the chart, you will see that adjusted net income of $41 million in the second quarter decreased $2 million compared to the prior year quarter, primarily due to higher appliance and furniture claims severity and a higher mix of lower-margin business as we invest in growth at Allstate Protection Plans. We'll continue to invest in these businesses, which provide an attractive opportunity to broaden distribution protection offerings that meet customers' needs and create value for shareholders. Shifting to the chart on the right, Health and Benefits continues to provide stable revenues while protecting more than four million policyholders. Revenues of $575 million in the second quarter of 2023 increased by $2 million compared to the prior year quarter, driven by an increase in premiums, contract charges and other revenues in group health, which was partially offset by a reduction in individual health and employer voluntary benefits. Health and Benefits continues to make progress on rebuilding core operating systems to…

Certainly, one moment for our first question. [Operator Instructions] Our first question comes from the line of Gregory Peters from Raymond James. Your question, please.

Well, good morning, everyone. I guess, I'm going to focus on auto insurance profitability for my first question. And obviously, there's a bunch of slides in your presentation, the one where you identified the three states. I guess from a bigger picture perspective, though, -- do you have updated views on frequency and severity for the second half of this year or for next year versus what you were thinking at the beginning of the year I guess what I'm ultimately getting is how much more rate do we need to get that underlying combined ratio number that you use on the slide 6 -- excuse me, slide 5 to get it down to the low to mid-90s.

Greg, this is Tom. Let me start, and then Mario can jump in. First, as it relates to frequency and severity, of course, it's hard to predict what's going to happen in the second half of the year. What we do know is that the severity was increased in the second -- first half of this year from what we thought it would be when we looked at it last year. So we're really glad we took the rates that we did, and we've been accelerating rates, as Mario talked about. I think when you look at it, it's really -- of course, it's hard to predict, right? What you're really looking at is that slide that Mario showed that had the line with the average premiums going up and then the bar with the severities and you want that line to be above the bar, of course. What you know going forward is that the line is going to keep going up, right? Like we filed those rates, we've got those rates. We put them in the computer, we're collecting the cash. And so you know that's going to happen. What you don't know is whether severity will go up from the 11% or whether it will be down from the 11%. It's come down this year from last year. We'd like to think that all the work we're doing will have it come down even further. And so that gap will get you back to the mid-90s that we talked about in terms of targeted combined ratio. When that exactly happens, of course, is dependent on what happens to the second bar, which is not known. What we do know is we'll continue to take increased rates and make that line continue to go up. Mario, any specifics you want to add on the three states that you mentioned or?

I think, Greg, the thing I'd add is less about to Tom's point, what we expect going forward and more about what we're seeing and maybe just give you a little more color underneath the loss cost trend. So as you remember, last quarter, we started giving you pure premium trends as opposed to coverage specific frequency and severity because we just think it's a better way for you to evaluate where overall profitability is going. And the point I'd make is if you look on Slide 5, as Tom pointed out, for the first couple of quarters this year, we've seen the average earned premium trend begin to outpace the increases in loss and expense. It's hard to predict what the future will hold, but that's an encouraging development. Underneath that loss trend, if you look at where we're at in the second quarter compared to where we were for the full year last year, the increase in pure premium is about 12.5%, and we told you that severity is up on average across all coverages by about 11%. So what we're seeing still is persistently high severity across coverages with a lesser impact from overall frequency increases. The point being we're going to continue to aggressively implement our profit improvement plan, you've seen what we've done with rates. We've done 7.5 points through the first half of this year in the Allstate brand, 5.5 points on National General. We're going to continue to do that. You see the benefit that the cost reductions is having on the combined ratio while that rate earns in. And we've talked a lot about those three states, which make up about one-quarter of our book, California, New York and New Jersey. We want to keep pushing on continuing to drive rate increases into the book. We've gotten some approvals so far this year, but there's rates pending, pretty significant rates pending in California and New Jersey, and we're prepared to file another rate in New York. So we're going to keep pushing really hard on that. And in the meantime, we've scaled way back on new business production in those states. And while it's having a reasonably small impact on the loss ratio so far this year, because new business just tends to be a smaller proportion of our overall book, it will continue to have a favorable impact on our loss ratio going forward. And until we get to adequate rates in those three states, we're going to keep restricting the volume of business we're willing to write.

Okay. Thanks for the color. Maybe just keeping on auto as my follow-up question on NatGen, you spoke about the reserve strengthening in the quarter, and I guess you also mentioned Florida in your comments. Can you give us any perspective on the reserve strengthening that happened inside NatGen? Is it a true-up and that you're comfortable where the trends are with matching reserves at this point in time, or is this going to be another situation where we have a couple of quarters of catch-up that we're having to deal with?

Mario can answer how we feel about the growth and the profitability of the growth in National General, Greg, let me just settle up context. So first, the acquisition of National General is exceeding our expectations. As, you know, we bought the company so that we could consolidate our Encompass business into it that would reduce the cost and create a stronger business that we're serving independent agents. We like what we got there. The consolidation and the cost reductions are exceeding our expectations. And that was the basis under which we agreed to where the economics of the acquisition made at. The upside from there was growing in the IA channel, both through the specialty vehicle product and by building new products for preferred auto and homeowners insurance using Allstate's expertise, both of which are also becoming reality. Mario, do you want to talk about, I guess, both reserves. But I think Greg's underlying question there was like you're growing, is that a good thing?

Yes. So, Greg, the place I'd start with National General, you're right. We're growing in National General that's principally in the specialty vehicle or the non-standard auto part of the business, which that market continues to experience pretty significant disruption. A couple of things I'd say on NatGen. First of all, the underlying combined ratio in the quarter was 96%, and 96% is slightly higher than we want to run it at, but it's pretty close to our target margin. And that 96% includes the kind of roll-forward impact of increasing reserves principally in the 2022 accident year and therefore, increasing our loss expectations in the 2023 year. So, that's all embedded in the 96%. A couple of things in addition to that, that I mentioned. We've talked a lot about the profit improvement plan, we're implementing that same approach in that same plan in National General across the same levers we're using in the Allstate brand. We've taken 5.5 points of rate this year, 11 points of rate over the last 12 months in NatGen. And given that it's predominantly a non-standard auto book, the book tends to turn over and get repriced pretty rapidly. So, we're comfortable that the rate we've taken so far this year is working its way into the system. And I would say in response to a higher loss trend that we've seen in 2023, we've accelerated our plan to take rate in 2023. So, we're ahead of that 5.5 points is ahead of where we expected to be at this point during the year. We've also restricted underwriting guidelines in a number of states, we're writing more liability-only less full coverage. So, we're being really selective about what we're writing. And the other benefit, as Tom mentioned, part of the rationale around acquiring National General was the opportunity to lower costs and improve the expense ratio, and we're benefiting from that inside that 96% underlying combined ratio. We've seen a pretty significant improvement year-over-year in the underwriting expense ratio as we essentially take advantage of scale through the growth we're getting. So, comfortable where we're positioned. We're taking the appropriate actions from a profitability perspective. And so we're comfortable with what we're writing in NatGen right now.

Got it. Thank you for the detail and your answers.

Thank you. And our next question comes from the line of Josh Shanker from Bank of America. Your question please.

Thank you very much for taking my question. Yes. Tom, there's the amount of rate that you need and the amount that you can get over a certain period of time, but when you look back to the beginning of the year and you had your plan for taking rates and you've learned about some changes in frequency and severity over the past six, seven months. Has that changed the perspective on how much rate you need and want to ask for? And does that change the 2023 plan, or does that mean that the regulators will give you only so much and you have get that rate in 2024 and beyond?

Of course, it's -- I would say, Josh, it's a good question, but I would say it's not like not like every quarter or every 6 months, we adapt it is like every day. So Mario and Guy are constantly looking at our pricing, and we're going to maximum file rates everywhere we can, and we're not getting as much pushback from goes because the numbers are pretty clear. Like it's not like we're making it up, you pay for the cars and they see the cash go out so you -- and they do have to pay attention to what the rules are in the rating. Now we have 3 states, which are a problem, and we're working aggressively with them. so that we can get the right amount of it. But yes, so our -- the rate expectation for the year has gone up from the beginning of the year. And it will keep going up until we get to our target combined ratio. We have -- we've talked about some of the issues we have in some of those states, you see us agreeing to lower amounts than we actually need because the time value of money and the multiplication works for you. So why take a 6.9 when you need 35 in California because you can get 6.9 right away as opposed you could wait 18 months to get 35. So we've we're very sophisticated and have good relationships with them, so we can manage it so that it meets our needs. So and we'll just keep rate that's on auto, which I assume where you're going, Josh. Same thing applies in homeowners and our price increases are up a little bit, but not up as much as what we thought they were going to be.…

Okay. Thank you for the answers to the question.

One moment for our next question. And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question, please.

Hi. Thanks. Good morning. My first question, I wanted to go back to the capital discussion and the decision you guys made to pull the buyback program. Can you just give us a sense of what you're looking for when you return to buybacks? I sense maybe some of this is also dependent going into wind season, right, which could bring additional cat losses to Allstate and you guys are still working on improving the profitability of your auto business. So what would you need to see to turn back on the buyback at some point next year?

Elyse, let me start macro and then ask Jesse to maybe dig in even a little more. I know you spend a lot of time on capital, so we can help you show you what we believe to be true. First, we have a long history of proactive managing capital, whether that's how we deploy it at the individual risk level or what we do with different investments, as Jesse talked about, whether it's selling businesses like life and annuities or using alternative capital like reinsurance or cat bonds or providing cash to shareholders through dividends and share repurchases. As you point out, I think if you look at the Q, we bought back about $37 billion of stock since we went public. And so that's because we're -- we got good math, which Jesse will talk about, and we do a proactively. I think the suspending the share repurchase we just sound judgment. If you're not making money, don't buy shares back. It's really not a lot more complicated than that. I mean, it obviously helps you preserve capital, but just sort of good logic always serves the right kind of capital plan, which is you got to make money to be buying shares back. Jesse, do you want to talk about maybe give at least some more specifics on this whole capital?

Yes. Good morning, Elyse. I think to build on Tom's point, and I think it's easiest to just think about not the specific question, but more how we think about capital management more broadly. So you focus as many others do on RBC. RBC is a great measure for insurance companies, it's common. We look at it as well. So we certainly understand why there's a focus at times on RBC. It's a measure that served the industry well in good times and in bad times. But I think as you know, RBC has some limitations. So we use it as an input in our capital management process, but not a primary driver, right? RBC is focused on statutory legal entities, but it doesn't incorporate the risk across the enterprise or correlation in those types of risks. It doesn't include sources of capital outside of regulated entities. Protection plans would be an example there. But those aspects are important to our overall capital management framework. eyes: Now that capital is all available to us and our comprehensive and more precise capital management framework considers those facets. So -- and I think it's important to go back to really how we're managing capital through what we consider to be a very detailed and sophisticated economic capital framework that quantifies enterprise risk and establishes our targets. As we've talked, that includes inputs from regulatory capital models, rating agencies and then our own risk models to help to quantify stress events, and we built those models really off of their risk models that are used to regulate banks. We feel very good about the output of our overall economic capital model. So we use that then as we've discussed, to determine a level of base capital that we need to operate our business…

That was helpful. And then maybe just one more, right? You did mention reinsurance and some other options that you have. And you did make -- you did in the first quarter, right, you choose to monetize part of your equity portfolio. Is it safe to assume that you think about prospect going forward on the capital side, you're not looking to make any significant changes to investments? And on the same thinking about your current businesses, you're not -- you wouldn't be thinking about monetizing any assets as a way to free up capital?

Elyse, so on the investment side, that decision was primarily made from a risk and return standpoint, first starting at the markets. And we thought -- when we made the decision, we thought there is greater opportunity to make money by lengthening duration than by staying in equities. It had the benefit of reducing the volatility of equities. And in our models, the capital charges for equities is a lot higher the bot. So it has that capital benefit. If we felt like the time was right to go back long in public equities, then we would look at it at the time and then we'd say, okay, how much capital do we have and how do we feel about it? But we don't have a date in mind for that. I think when you just look at the economic environment, it's somewhat balanced.

And I think as it relates to monetizing assets, Elyse, in that component of the question. I think we certainly understand all the range of options but we don't believe we're in a position right now where we have to be considering things like monetizing assets to bolster capital. Again, we feel good about our capital position. We have options in place, and we understand the full range of options of what we could do in the event we believe that we had a need.

We have the capital to make our strategy is, of course, the way we're going to increase shareholder value. One, get profit up. Two, get growth up. And three, broaden the portfolio, which those lands to will lead to a higher multiple, and that's what we're trying to drive to.

Thanks for all the color.

Thank you, one moment for our next question. And our next question comes from the line of Michael Zaremski from BMO. Your question, please.

I guess, my first is a quick follow-up on the capital discussion, you said bolstering capital. So I just want to clarify, you reiterated the 14% to 17% ROE targets, which I believe you've been talking about since I believe 2019 could be prior looking at my notes. It seems like there's a disconnect, though, because the shareholders' equity levels ex OCI are down meaningfully since 2019. There's an element of where -- it seems like this is why this company is coming up, investors are expecting that the consensus ROEs look like they're well above the 14% to 17% because people aren't bolstering their capital assumptions, I guess, in the model. So I just want to make sure I'm thinking about this correctly. It's 14% to 17% is still the target. And so we directionally should be making sure we don't turn on the buyback until Cereal's equity levels are bolstered a bit.

So first, the 14% to 17% confirmation was just really our way saying we don't see anything that diminishes the ultimate earning power of the company. What the equity base is and what the earnings are, of course, but we -- so we're really just trying to say we don't see anything that diminishes the earning power of the building company. We never said it was a cap. And as I just mentioned, our strategy is really get returns up to where they've been historically, which will increase shareholder value. And then the big differential we have versus progressive and others is we need higher growth to drive the multiple of and we're going to get that two ways to increase market share, personal profit liability to transformative growth. And then secondly, by expanding our protection offerings, which will drive the multiple up. So it's like step 1, step 2. We think they can both hit at the same time, to be honest, but that's what we're driving to.

Okay. That's okay. That's very helpful. My last question is just thinking through all the actions you're taking in terms of expense ratio, pulling back in certain states. I guess it seems clear that in the near term, we should be thinking about PIF [ph] growth remaining under pressure. I'm just curious, too, is that one the right way to think about it? And two, is there -- for your capital model, does PIF growth being negative with total revenue growth still being very positive because of pricing power? Is it -- does it help that you're shrinking PIF, but growing top line because of pricing, or is every dollar of growth still seems the revenue still seem the same way within your capital model?

Capital models are really driven on risk, which are tied to premium. So PIF doesn't really impact it. So -- which is the right economically, we believe the right way to do it. In terms of growth, we think we can -- Mario talked about growth in National General. We talked about growth in 50% of the markets were working there. When those 3 states that we need higher prices on get to the right level, we can grow there as we continue to roll out transformative growth and we'll be in -- we expect to be in 10 states with our new product this year, which will just be in the states and that we drive a lot of growth. but we're using machine-based learning some really cool direct stuff. So we think there's plenty of opportunity to grow. And so we're not concerned about it. The reason we're reducing the growth in those states like if you're not making any money, it doesn't make sense to sell it. Like I don't really understand the logic of we're losing money. Let's go out and spend a bunch of money to get business, and we'll continue to lose money until we can raise the prices later. That just raises your -- if you include those losses in your acquisition cost, it's hard to make the lifetime value work. So we chose not to write the business it's not quite really, as Mario said, it's not really a combined ratio impact. It's just like why do something that's uneconomic.

Understood

Thank you. One moment for our next question. And our next question comes from the line of Alex Scott from Goldman Sachs. Your questions please.

Hi. First one I had is on the prior year development. One of the things we noticed from last quarter was just that I think 2022 accident year actually looked like it developed favorably and 2021 was still a bit unfavorable. And I guess I'm just interested what was the mix of that this quarter? And how do we think about sort of the speed up of kind of reaching settlements to reduce volatility on some of the older claims and the impact that's having? And where are you in the process of doing that? Like is there still a good amount of wood to chop there? Have you sort of, gone through the 2021 claims to the extent you're going to do it already. Just any color around all that to help us think through what development could look like through the rest of the year? A – Jesse Merten: And I'll take that quickly. I think the first thing I would highlight is that the development this quarter was related to National General, so a little bit different than what we went through last year. And we don't separately disclose which prior years, it's attributable to. But it's safe to say -- given the nature of that business, some of the near and years, we continually, Alex, move reserves between years and coverages and prior year reserves and coming up with these estimates. And so it's safe to say that we're really focused on settling -- getting some of those older claims settled, getting the reserves right. And, sort of, again, I'm a broken record on this, but getting the aggregate reserve recorded properly. So this was really -- again, this was -- this quarter is certainly a story of the National General reserve levels. And the movement between prior years and coverage is just normal course this quarter.

Got it. Thanks. And the second one I had is just a follow-up on, there was a comment earlier related to, I think it was the 35% filing where it was mentioned that, that can take up to 18 months. I mean that one, I think, was filed in late May. So that would suggest would be like all the way towards the end of 2024, if I just take that comment at face value as to like when you potentially get the California approval. I'm just trying to weigh thinking through that versus some of the comments that suggested the regulatory environment may be getting a little better, I mean that seems like a pretty long time line. Can you help us think through and maybe I'm just trying to take that a little to cut and dry?

I think I'm probably the one that said 18 months that was not to imply that we think it's right to wait 18 months or it should take 18 months. We just said sometimes it takes a long time, the California department stayed on all rate increases for a couple of years. They're not in that mode anymore, and we're working actively with them because they know that's not a good place to be and it doesn't create a good market. So I think what you can do is just look at the monthly numbers we've put out on rate increases. You can factor that in. You can -- we've given some math on how it rolls into the P&L. And that will give you a good look 12 months forward at what that blue line is that Mario talked about and at what rate is going up. They will tell you what's going to come in. And then you can make your own judgment on what you think severity and frequency will be.

Got it. That’s helpful. Thanks for clarifying.

Hey, Jonathan, we’ll take one more question.

Certainly. One moment for our final question then. And our final question for today comes from the line of Yaron Kinar from Jefferies. Your question please.

Thank you. Good morning. Thanks for first allowing me in here. I want to go back to the capital question and the decision to stop the buybacks, if I may. And Tom, I'm certainly -- I appreciate the thought of it doesn't really make sense to buy back stock when we're generating a loss. That said, I think we have seen about $2 billion of buybacks since I think, the second quarter of last year in a loss environment. I think everything you're showing on -- and presenting in the slides would suggest that we are hopefully inflecting in the auto margins. I think even a quarter ago, you were still talking about over $4 billion of holdco liquidity. So I'd just love to better understand what changed or shifted in the thinking here to make you decide to stop here, especially when stock seems to be attractively valued relative to previous buybacks?

Let me go back to the genesis of the buyback program and then roll it forward. So it was a $5 billion program, about $3 billion of which was because we're returning capital that was generated by sale of the life and annuity businesses. So it was really a $2 billion net program. We tended to have that program -- that buyback program was usually sized by how much money we made the prior year and we weren't using in growth. So it was in arrears kind of share repurchase program. And that's how we got to $5 billion. So we're 90% of the way there on $5 billon, we couldn't complete it, for sure, and we just decided you're losing money, don't buy stock back. It's just sometimes good capital management is just a common sense as opposed to a specific formula because it's formulas change, correlations change and all that sort of stuff. So from our standpoint, it was really no more complicated. I mean, Jess and I talked for like five minutes were like, okay, another quarter of a loss. A lot of -- lot catastrophes are a lot higher, almost two standard deviations away. We factored that in when we decided on the $5 billion. We factored that in when we looked at last year, keeping the program going. And it was a sensitivity, but it was a sensitivity, not a reality when insurance into a reality, you say, okay, let's just stop buying it back. And if we feel like getting back to it, we will. And we have a strong track record of buying stock back, but what will drive the value of our stock, and I can close on this is not share repurchases. Like we've looked at share repurchases. As I said,…

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