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Text: Yesterday, following the close of the market, we issued our news release and investor supplement and posted related materials to our website at allstateinvestors.com.
Our management team is here to provide perspective on these results.
Let's start on slide two.
So this is Allstate's strategy on the left-hand side, which we've talked about before.
We have two components: increase personal property-liability market share and expand the protection solution.
Those are the two ovals you see on the left with the intersection between them.
The key third quarter results are highlighted on the right-hand panel.
Property-Liability policies in force increased by 12.5%.
Allstate Protection Plans continue to grow rapidly by both broadening its product offering and expanding the network of retail providers.
As a result, we now have almost 192 million policies in force across the enterprise.
Financially, the results were more mixed.
Revenues were up substantially, but net income and adjusted net income declined from the prior year quarter.
Underwriting income declined primarily due to higher loss costs in settling auto insurance claims.
We've implemented price increases to proactively respond to the sharp rise in loss cost, and Transformative Growth continues to position us for long-term success, both of which we'll talk about in a couple of minutes.
This was partially offset by the benefits from our long-term risk and return programs that include significant reinsurance recoverables.
They were primarily related to Hurricane Ida, and a substantial increase in performance-based investment income.
Capital deployment results were excellent, with $1.5 billion of cash returned to shareholders in the quarter.
We also completed the divestitures of our two largest life and annuity businesses, one in October and then one just earlier this week.
So let's go to slide three.
Revenues of $12.5 billion in the quarter increased 16.9% compared to the prior year quarter, and that reflects both the higher earned -- National General acquisition, Allstate brand, homeowners premium growth and higher net investment income.
Property-Liability premiums and policies in force increased 13.5% and 12.5%, respectively.
Net investment income was $764 million, and that's up almost about $300 million compared to the prior year quarter, reflecting strong results from the performance-based portfolio.
Net income was $508 million in the quarter, and that's compared to $1 billion in the prior quarter as lower underwriting income was partially offset by the higher investment income.
Adjusted net income was $217 million or $0.73 per diluted share, and it's decreased $683 million compared to the prior year quarter, reflecting the lower underwriting due to the higher auto and homeowners insurance loss costs.
Net income for the first nine months of 2021 was below the prior year, and that's largely due to the loss on the sale of the life annuity business, which we reported earlier in the year.
Adjusted net income was $10.70 per share for the first nine months, and that was above the prior year as higher investment income and lower expenses [Technical Issues] more than offset higher loss costs.
What I would do is put the pandemic in a longitudinal perspective because this created volatility for our results, and it obviously requires us to adapt quickly, which we do.
But before we go through the impact on the third quarter results of the supply chain disruption, let's talk about the initial and subsequent impact of the pandemic.
So in 2020, the economic lockdown resulted in fewer miles being driven and promoted -- and prompted an aggressive economic support response from, really, governments around the world.
The impact on auto insurance was a dramatic drop in the number of accidents.
And of course, due to this unprecedented driver in frequency, we proactively provided our customers with some money back, which increased customer retention.
Since then, since there was less road congestion and fewer accidents that occurred during commuting hours, the average speed and severity of auto claims increased, offsetting some of the frequency benefit.
Nevertheless, underwriting margins improved dramatically, so we introduced a temporary Shelter-in-Place payback rather than take a permanent rate reduction and took some modest overall reductions in rate levels.
This year, as you can see from the right-hand column, the story has been just the opposite as it relates to frequency with large percentage increases.
And while the overall level of accident frequency for the Allstate brand is still below prepandemic levels, the national and general nonstandard business is back to the levels before the pandemic.
Auto severity this year, however, has been dramatically impacted by the supply chain disruption, and price increases on used cars and original equipment parts, and Mario will take you through that in a couple of slides.
From a pricing perspective, this results in moving from modest rate reductions to significant increases in auto insurance prices.
From a growth standpoint, at the onset of the pandemic, we began to see a material increase in the consumer acceptance telematics, and we've really leaned into that with our Milewise product, which is really the only national product out there to pay for the mile, and that's led to substantial increase in our telematics product.
Now the pandemic has also had a significant impact on the investment portfolio, and this is the tale of the beginning and the end as well.
So early in the crisis, equity valuations were down, and this had a negative impact on investment results.
Then, of course, on -- and we have a broad-based long-term spread out over a decade really investing in these kinds of funds.
And so we do it on a long-term basis, whether that's three, five or 10 years.
But -- so what's happened this year, of course, is we've had the opposite happen, which is with the economic stimulus, we've had equity valuations going up, and our returns have come back strongly.
In the market-based portfolio, lower interest rates at the onset of this pandemic did lead to an increase in the unrealized gains in the portfolio.
But of course, what that does is reduce future interest rate income, which you see slight decline in this quarter.
And many of our other businesses have been impacted some positively, some negatively, but it's our ability to adapt and seize the opportunities that are presented that create shareholder value.
So Mario will now go through the third quarter results in more detail and how Transformative Growth positions of Allstate for continued success.
Let's move to slide five to review Property-Liability margin results in the third quarter.
The recorded combined ratio of 105.3 increased 13.7 points compared to the prior year quarter.
This was primarily driven by increased underlying losses as well as higher catastrophe losses and non catastrophe prior year reserve reestimates.
The chart at the bottom of the slide quantifies the impact of each component in the third quarter compared to the prior year quarter.
As you can see, the personal auto underlying loss ratio drove most of the increase due to higher auto accident frequency and the inflationary impacts on auto severity.
Higher catastrophe losses shown in the middle of the chart had a negative 1.4 point impact on the combined ratio as favorable reserve reestimates recorded in 2020 from wildfire subrogation settlements positively impacted the prior year quarter.
Gross catastrophe losses were higher but were reduced by nearly $1 billion of net reinsurance recoveries following Hurricane Ida, demonstrating the benefits of our long-term approach to risk and return management of the homeowners insurance business and our comprehensive reinsurance program.
Noncatastrophe prior year reserve strengthening of $162 million in the quarter drove an adverse impact of 0.8 points primarily from increases in auto and commercial lines.
This also included $111 million of strengthening in the quarter related to asbestos, environmental and other reserves in the runoff Property-Liability segment following our annual comprehensive reserve review.
This was partially offset by a lower expense ratio when excluding the impact of amortization of purchased intangibles primarily due to lower restructuring and related charges compared to the prior year quarter.
Moving to slide six.
Let's go a bit deeper on auto insurance profitability.
Allstate brand auto insurance underlying combined ratio finished at 97.5 for the quarter and 89.7 over the first nine months of 2021.
The increase to the prior year quarter reflects higher loss cost due to higher accident frequency, increased severity and competitive pricing enhancements implemented in late 2020 and earlier this year.
While claim frequency increased relative to prior year, we continue to experience favorable trends relative to prepandemic levels.
Allstate brand auto property damage frequency increased 16.6% compared to 2020 but decreased 16.8% relative to 2019.
The chart on the lower left compares the underlying combined ratio for the third quarter of 2019 to this quarter to remove some of the short-term pandemic volatility.
The underlying combined ratio was 93.1 in 2019, which generates an attractive return on capital.
Favorable auto frequency in the third quarter of 2021 lowered the combined ratio by 6.4 points compared to 2019.
Increased auto claim severity, however, increased the combined ratio by 12 points versus two years ago, as you can see from the red bar.
The cost reductions implemented as part of Transformative Growth reduced expenses by 1.3 points, which favorably impacted 2021 results.
As Tom mentioned, early in the pandemic, the severity increases were driven by higher average losses due to a reduction in low severity claims.
This year, the increase reflects the impact of supply chain disruptions in the auto markets, which has increased used car prices and enabled original equipment manufacturers to significantly increase part prices.
The chart on the lower right shows used car values began increasing above the CPI in late 2020, which accelerated in 2021, resulting in an increase of 44% since the beginning of 2019.
Similarly, OEM parts have also increased in 2021, roughly twice as much as core CPI.
This has resulted in higher severities for both total loss vehicles and repairable vehicles.
Since these increases were accelerating throughout the second and third quarters of the year, we increased expected loss costs for the first two quarters of 2021, and this prior quarter strengthening shows up in the combined ratio for the third quarter.
Increases in report year severities for auto insurance claims during the first two quarters of 2021 increased the third quarter combined ratio by 2.6 points, as you can see by the green bar on the lower left.
So let's flip to slide seven, which lays out the steps we're taking to improve auto profitability.
As you can see from the chart on the top, Allstate has maintained industry-leading auto insurance margins over a long period of time, with a combined ratio operating range in the mid-90s, exhibiting strong execution and operational expertise.
To maintain industry-leading results, we are increasing rates, improving claims effectiveness and continuing the lower costs.
After lowering prices in early 2021 to reflect in part Allstate's lower expense ratio, we have proactively been responding with increases in the third quarter, with actions continuing into the fourth quarter and into 2022.
The chart on the right provides selected rate increases already implemented in the third and fourth quarter as well as publicly filed rates that have yet to be implemented in the fourth quarter.
Those states denoted with the caret are top 10 states in terms of written premium as of year-end 2020.
In the third quarter, we've received rate approvals for increases in 12 states, primarily in September.
We adapted quickly to higher severities in the fourth quarter, with plans to file rates in an additional 20 states.
We have already implemented rate increases in eight states during the fourth quarter, with an average increase of 6.7% as of November 1.
Looking ahead, we expect to pursue price increases in an additional 12 locations by year-end.
We are working closely with state regulators to provide detailed support and decrease the lag time between filing, implementation and premium generation.
As we move into next year, it is likely auto insurance prices will continue to be increased to reflect higher severities.
We also continue to leverage advanced claims capabilities and process efficiencies.
Cost reductions as part of Transformative Growth will also continue to be implemented.
As you can see by the chart on the bottom of the slide, we've defined a new non-GAAP measure this quarter referred to as the adjusted expense ratio.
This starts with our underwriting expense ratio, excluding restructuring, coronavirus-related expenses, amortization and impairment of purchased intangibles and investments in advertising.
It then also adds in our claim expense ratio, excluding costs associated with settling catastrophe claims, which tend to be more variable.
We believe this measure provides the best insight into the underlying expense trends within our Property-Liability business.
Through innovation and strong execution, we achieved 2.6 points of improvement when comparing 2020 to 2018, with further improvement occurring through the first nine months of 2021.
Over time, we expect to drive an additional three points of improvement from current levels, achieving an adjusted expense ratio of approximately 23 by year-end 2024.
This represents about a 6-point reduction relative to 2018 or an average of one point per year over six years, enabling an improved price position relative to our competitors while maintaining attractive returns.
Future cost reductions center around continued digital enhancements to automate processes, enabling the retirement of legacy technology, operating efficiency gains from combining organization -- combining organizations and transforming the distribution model to higher growth and lower costs.
Transitioning to slide nine, let's go up a level to show how Transformative Growth positions us for long-term success and how the components of Transformative Growth work together to create a flywheel of profitable growth.
As you know, 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 improving customer value, expanding customer access, increasing sophistication and investment in customer acquisition and deploying a new technology ecosystem.
We've made significant progress to date across each component.
Starting at the top of the flywheel visual, our commitment to further lower our costs, improves customer value and enables a more competitive price position while maintaining attractive returns.
Enhancing and expanding distribution puts us in a position to take advantage of more affordable pricing.
Increasing the analytical sophistication of new customer acquisitions lets consumers know about this better value proposition.
New technology platforms, lower costs and enable us to further broaden the solutions offered to property liability customers.
This flywheel will enable us to increase market share and create additional shareholder value.
Turning to slide 10.
Let's look at the changes to the distribution system, which are also underway.
As you can see in the chart on the left side of the slide, Property-Liability policies in force grew by 12.5% compared to the prior year quarter.
National General, which includes Encompass, contributed growth of four million policies, and Allstate brand Property-Liability policies increased by 231,000 driven by growth across personal lines.
Allstate brand auto policies in force increased slightly compared to the prior year quarter and sequentially for the third consecutive quarter, including growth of 142,000 policies compared to prior year-end, as you can see by the table on the lower left.
The chart on the right shows a breakdown of personal auto new issued applications compared to the prior year.
[Technical Issues] 38% increase in the direct channel more than offset a slight decline from existing agents and volume that would have normally been generated by newly appointed agents.
As you know, we've significantly reduced the number of new Allstate agents being appointed beginning in early 2020 since we are developing a new agent model to drive higher growth at lower cost.
The addition of National General also added 502,000 new auto applications in the quarter.
Moving to slide 11.
Protection Services continues to grow revenue and profit.
Revenues, excluding the impact of realized gains and losses, increased 23.3% to $597 million in the third quarter.
Protection Plans and net written premium increased by $139 million due to the launch of the Home Depot relationship focusing on appliances.
Our quarterly net written premium is now 5.5 times the level of when the company was acquired in 2017.
Arity expanded revenues due to the integration of LeadCloud and Transparent.
ly, which were acquired as part of the National General acquisition as well as increased device sales driven by growth in the Milewise products.
Policies in force increased 12.5% to 150 million driven by growth in Allstate Protection Plans and Allstate Identity Protection.
Adjusted net income was $45 million in the third quarter, representing an increase of $5 million compared to the prior year quarter driven by higher profitability at Allstate Identity Protection and Arity.
This was partially offset by higher operating costs and expenses related to investments in growth.
Now let's shift to slide 12, which highlights our investment performance.
Net investment income totaled $764 million in the quarter, which was $300 million above the prior year quarter, driven by higher performance-based income, as shown in the chart on the left.
Performance-based income totaled $437 million in the quarter, as shown in gray, reflecting increases in private equity investments.
As in prior quarters, several large idiosyncratic contributors had a meaningful impact on our results.
These results represent a long-term and broad approach to growth investing, with nearly 90% of year-to-date performance-based income coming from assets with inception years of 2018 and prior.
Market-based income, shown in blue, was $6 million below the prior year quarter.
The impact of reinvestment rates below the average interest-bearing portfolio yield was somewhat mitigated in the quarter by higher average assets under management and prepayment fee income.
Our total portfolio return was 1% in the third quarter and 3.3% year-to-date, reflecting income and changes in equity valuations, partially offset by higher interest rates.
We take an active approach to optimizing our returns per unit risk for appropriate investment horizons.
Our investment activities are integrated into our overall enterprise risk and return process and play an important role in generating shareholder value.
While the performance-based investment results continue to be strong in the third quarter, we manage the portfolio with a longer-term view on returns.
On the right, we have provided our annualized portfolio return in total and by strategy over various time horizons.
Consistent with broader public and private equity markets, our portfolio has experienced returns above our historical trend over the last several quarters.
While prospective returns will depend on future economic and market conditions, we do expect our performance-based returns to moderate in line with our longer-term results.
Now let's move to slide 13, which highlights Allstate's strong capital position.
Allstate's balance sheet strength and excellent cash flow generation provides strong cash returns to shareholders while investing in growth.
Significant cash returns to shareholders, including $1.5 billion through a combination of share repurchases and common stock dividends, occurred during the third quarter.
Common shares outstanding have been reduced by 5% over the last 12 months.
Already in the fourth quarter, we successfully completed the acquisition of SafeAuto on October one for $262 million to leverage National General's integration capabilities and further increased personal lines market share.
We also recently closed on the divestitures of Allstate Life Insurance Company and Allstate Life Insurance Company in New York.
These divestitures free up approximately $1.7 billion of deployable capital, which was factored into the $5 billion share repurchase program currently being executed.
Turning to slide 14.
Let's finish with a longer-term view of Allstate's focus on execution, innovation and sustainable value creation.
Allstate has an excellent track record of serving customers, earning attractive returns on risks and delivering for shareholders, as you can see by the industry-leading statistics on the upper right.
F Innovation is also critical to the execution, and our proactive implementation of Transformative Growth has positioned us well to address the macroeconomic challenges facing our business today and in the future.
Sustainable value creation also requires excellent capital management and governance.
As an example, Allstate is in the top 15% of S&P 500 companies and cash returns to shareholders by providing an attractive dividend and repurchasing 25% and 50% of outstanding shares over the last five and 10 years, respectively.
Execution, innovation and long-term value creation will continue to drive increased shareholder value.

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qtrly adjusted earnings per share $0.73.
total revenues of $12.5 billion in the third quarter of 2021 increased 16.9% compared to the prior year quarter.
compname reports q3 revenue of $12.5 billion.
q3 adjusted earnings per share $0.73.
q3 revenue $12.5 billion.
auto insurance had underwriting loss in quarter as supply chain disruptions drove rapid price increases for used cars and original equipment part.

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