Okay, good morning, everyone. I'm Greg Peters, with Raymond James, covering insurance, insurance technology, insurance brokers, all insurance. So, welcome to the 45th Annual Institutional Investors Conference. From my sector, I'm pleased to kick off my schedule for insurance companies with the mighty Allstate Corporation. Really, what a difference a year makes from last year to this year. It's been a renaissance and a recovery period for not only Allstate, for all, many companies writing auto insurance. So, we're gonna hear from Allstate today, for 30 minutes, and then we'll do a breakup afterwards. From management, we have Jess here. He serves as Chief Financial Officer. We also have Brent and Kevin in the audience who help out with investor relations. So, if you have any questions, follow-up questions, you can email them. So with that, I'm gonna turn it over to Jess.
All right. Thank you, Greg. Good morning, everyone. It's great to be back at the Raymond James Conference this year. So, are we good? Brent? Okay. Appreciate you taking the time to learn more about Allstate and why I think it's an attractive investment. I'll make some comments, and then we'll do some Q and A. First off, we have a slide here that provides a reminder that we're gonna use forward-looking statements and reference non-GAAP measures. Evaluate these remarks in the context of all the information that we provide, including information on potential risks in our recently issued 10-K and other public documents that we prepare. This presentation and more specific information is available at our website at allstateinvestors.com.
So I know that some of you follow us more closely than others, and I wanna take some time to set some context by starting with Allstate's strategy on this slide too, which is right here. Allstate's customer-focused strategy has two components, which are shown in the ovals on the left. The top ovals focus on profitable growth and personal property liability market share through our Transformative Growth plan. We're also expanding other protection solutions provided to customers through the businesses listed in the bottom oval. The bullets on the right outline our strategic priorities, and we're confident that successful execution against these priorities will generate shareholder value. This includes making progress on our comprehensive plan to improve auto insurance profitability, which had a favorable impact on results in 2023.
Our priorities also include a focus on transformative growth, which is our multi-year initiative to increase market share by building a low-cost digital insurer with broad distribution. Proactive management of our investment portfolio continues to be a key component of our strategy and creates significant shareholder value. Finally, we believe expanding protection services will allow us to build stronger customer relationships and meet more customer needs. Since we're mid-quarter and you've had some time to digest our 2023 results, I'm gonna stick to the key themes on the next several slides, which cover Q4 and the full year of 2023. That way, we can get to your questions more quickly. So let's re-review financial results on slide three. Revenues of $57.1 billion in 2023 increased 11.1%, reflecting a 10.3% increase in property liability earned premium due to rate increases in 2022 and 2023 in both auto and homeowners insurance.
Net Investment Income of $2.5 billion increased 3.1%, reflecting higher fixed income yields and duration extension, partially offset by lower performance-based income. Strong profitability in the fourth quarter generated Adjusted Net Income of $1.5 billion, or $5.82 per diluted share, and resulted in positive Adjusted Net Income for the year. Next, I'm gonna jump to slide 4, which provides a recap of property liability performance. As you can see, results improved during the year as we executed our Auto Profit Improvement Plan. Strong returns in the fourth quarter were also helped by mild weather that favorably impacted accident frequency and resulted in low catastrophe losses. Underwriting income totaled $1.3 billion in the fourth quarter and was $2.4 billion higher than the prior year quarter. The fourth quarter Combined Ratio of 89.5 improved 19.6 points from the prior year due to low catastrophe losses and an improved Underlying Combined Ratio.
Despite the favorable results in the quarter and the improvement in our underlying margin, the full-year combined ratio of 104.5 reflected the challenging auto insurance operating environment and the impact of elevated catastrophe losses. A catastrophe loss ratio that was more in line with the 10-year average from 2013 to 2022 would have resulted in a combined ratio slightly above 100. A full-year underlying combined ratio of 90 -91.2 improved 3.9 points compared to the prior year, reflecting higher average premium and expense efficiencies, more setting, moderating, yet historically elevated underlying loss cost trends. Moving one level deeper on slide five, we look at how auto profitability is improving as a result of the execution of our comprehensive plan. The chart on the left depicts an auto underlying combined ratio with severity adjusted by quarter to reflect the impact of full-year severity levels recorded in Q4.
As a reminder, we evaluate and adjust average year-over-year severity throughout the year as claims develop, and those adjustments relate to claims that occurred in the current and prior quarters. So as 2023 developed, we lowered the full-year 2023 severity estimate from 11% as of the second quarter to 8%-9% at the end of the year. We did this in response to improving trends in average claim costs, primarily related to physical damage coverages. This dynamic, combined with average premiums outpacing underlying loss costs, resulted in sequential improvement in the underlying combined ratio each quarter of 2023. The chart on the right shows how our premium distribution has increased in states with an underlying combined ratio below 100, shown in the light and dark blue bars. Profitable states on an underlying basis were 65% of total premium in 2023, more than doubling from the percentage at year-end 2022.
Rate increases were approved in California, New York, and New Jersey in December, and we have yet to see those earned premium. Excluding California, New York, and New Jersey, the Allstate brand auto insurance underlying combined ratio was 95.9 in 2023. Slide 6 provides detail on our auto insurance profit improvement plan. While we remain encouraged by the trajectory and execution, there's still a lot of work to be done to achieve our target margins across all the four focus areas. The first component is rate. In the last 25 months, the Allstate brand implemented rate increases of almost 35%, including 1.4% in January of this year, 16.4% in 2023, and 16.9% in 2022. National General implemented rate increases of 10% in 2022 and an additional 12.8% in 2023.
Rates already implemented but not yet earned into premium should continue to increase average premium and improve the combined ratio. We will continue to pursue rate increases to restore profitability in states that are not yet at target margins, and in other states, we'll take rate to keep pace with increases in loss costs. Second, expense reductions that we initiated as part of our transformative growth initiative to become the lowest-cost provider of protection not only helps us improve profitability in the short term but will also increase customer value through lower prices over the long term. The underwriting expense ratio improved 1.1 points in 2023 compared to the prior year when you exclude the decline in advertising. Further cost reductions will improve efficiencies and competitive price position. Given the improvement in auto margins, we will increase advertising investment in 2024.
Third, we implemented underwriting actions to restrict new business where we were not achieving targeted returns in 2023. We've removed and intend to further unwind underwriting restrictions as rate adequacy is achieved by state and by segment. Finally, enhancing claims practices in a high inflation and increasingly litigious environment is required to deliver good customer value. This includes accelerating the settlement of injury claims and increasing in-person inspections. This program has positioned us to increase new business levels with the intent of profitably growing policies in force in states where acceptable margins have been restored. Slide 7 shows results for homeowners insurance, which has generated significant profit in the fourth quarter, while full-year results were impacted by elevated catastrophe losses in the first three quarters of the year.
We have an industry-leading product with advanced pricing, underwriting and analytics, broad distribution capabilities, and a comprehensive reinsurance program. Our attractive position in homeowners presents a growth opportunity, and we remain confident in our ability to generate attractive risk-adjusted returns. Allstate agents continue to bundle auto and homeowners insurance at historically high levels, which improves the lifetime value of the household. Rather than walk you through the results on this page, which you can also find in our earnings presentation, I wanna move on and discuss how we continue to invest in advance our transformative growth strategy, which we show on slide 8. We remain focused on the key elements of this multi-year initiative, which is designed to build a low-cost digital insurer with broad distribution.
I won't get into all the pieces today, but I do wanna highlight the progress that we're making in a few areas that support what we view as a flywheel that will drive profitable market share growth. First, to improve customer value, we've reduced our adjusted expense ratio, which excludes advertising, by 4.5 points over the last five years. As competitors can continue to implement rate increases and our expenses decline, we believe our competitive position will improve, enhancing growth opportunities. Deploying differentiated solutions through our affordable, simple, and connected products with integrated technology enables a personalized customer experience that will enhance agility. The redesigned products were available for the Allstate brand direct auto customers in seven states at year-end, with additional expansion planned this year.
National General independent agent growth will be enhanced by expanding our Custom 360 middle market and preferred products, which will live in 16 states at year-end. We expect to be in nearly every state with this product by the end of 2024. Expanding customer access will also support market share growth, and we have made good progress in all three personalized distribution channels. Increasing sophistication in the customer acquisition continues to advance and will improve the effectiveness of our increased advertising spend in 2024. A new technology ecosystem is also being deployed to improve the customer experience, speed to market, and reduce the cost of legacy technology platforms. All of the elements of this initiative working together will provide a strong foundation for growth. Let's transition to slide nine to briefly discuss our investment results. The fourth quarter highlighted how our proactive approach to duration management benefits results.
On the left, you can see how changes we made in the duration of the bond portfolio compared to the bond market yields. We lowered fixed income duration to mitigate losses as rates rose in late 2021 and held that position through most of 2022. Toward the end of 2022, we began to extend duration, which, combined with higher yields, has increased market-based income. The bar chart on the right shows the income and total return benefit of these decisions. Total return of our portfolio was 4.6% in the fourth quarter and brought the full year to 6.7%. Full-year net investment income of $2.5 billion increased $75 million compared to 2022. I wanna end on slide 10, and then we'll get to questions. Slide 10 is our strategic priorities. Allstate is a purpose-driven company that seeks to empower customers with protection.
We're making progress on improving auto profitability, and we have a strong homeowners insurance business. While I didn't cover them in detail in this presentation, it's important to remember our Allstate Protection Services businesses allow us to meet the needs of more customers and generate profitable growth. We continue to see strong growth in protection plans and sustained returns in our health and benefits business. With auto profit improvement, strong homeowners insurance risk-adjusted returns, and the benefits of transformative growth, along with proactive investment management, we remain confident in our ability to create shareholder value. With that, I think, Greg's gonna sit down with me and ask me some questions, or all of you can ask me questions. How's that?
I'll ask questions.
All right. Hopefully, that was a good level set.
Yeah, it was. Just for the purposes of listening and answering questions.
All right.
All right.
Yeah, of course.
So I'll kick it off, and maybe you can, given that the profitability has, it's started to recover.
Mm-hmm.
Can you talk about your level of price competitiveness, you know, as you look across the country? Which states are you more competitive in? Can you talk about some of the states where you belong and your target margins, which would characterize your level of price competitiveness in those states being better than your peers in some respect?
Yeah, so the question, for those listening in is, "Our price competitiveness as we restore profitability?" which is a good question. I think that, you know, where you're at, it varies state by state, and I know that's the qualifier on all of the what's your competitiveness, what's your pricing. But it does vary by state. Where we're at targeted margins, we're in a position where we have to do a lower level of ongoing rate increases. So what we think will happen, Greg, is our competitiveness will improve over time. It's hard to say by company how competitive you are 'cause we're all at different points in the rate-taking cycle. We think we have some competitors that have more rate to take to get to target profitability.
We have others that are, you know, where we're at in certain states where they're feeling like they're at appropriate margin. So those that have more rate to take are probably, at this point, feeling more price competitive, right, 'cause they've got more rate to take. So we think that that's gonna equalize over time as we look on a state-by-state, segment-by-segment basis and say, "Where do we need to be? The rate need will just be what we need to catch to basically keep pace with the underlying loss costs." And so what'll happen there is that your competitive, you know, competitiveness by company will shift over time.
So do you anticipate, as you look forward, that the policy challenge PIF growth is going to the institutions grow a part of that? Is that expected to happen by the end of this year, you know, sooner, or what's your sort of?
Yeah, so as you know, we're not giving. The question is, do we expect PIF growth and when? And I think that, you know, of course, we don't give a forward-looking view on what we're PIF growth is gonna do. You've got a couple things going on, as it relates to what's gonna happen with total policy count. You've got retention, right? So we have taken a lot of rate. A lot of that rate still has to come through the book, because we took it in late, you know, late last year. So that will impact retention undoubtedly. So what we have to do is get the new business growth machine to a point where we're basically selling more new policies than we're losing through retention. And, you know, obviously, we're not gonna make a call on exactly where that happens.
What we feel good about is through transformative growth and through the things that we're doing, we're opening up states, and we're opening up those states across all three distribution channels: so exclusive agents, independent agents, and direct. So the opportunity to bring those new customers in is something that we feel really optimistic about as we both achieve target profitability in a given state and then open up growth.
Any questions? I don't know.
All right.
Just on the auto side, total cost of repair, depending on who reimburses the rate, and the PPC plus the new channel, you know, are the rate increases that you're expending or haven't expended? Are you, you know, is that something that's gonna have to continue? And when do consumers ultimately start to push back? How does that interplay work?
Yeah, so the question was, if I could summarize, cost of repair continues to go up. Have you taken enough rate, and how do the customers feel about it? Cost of repair certainly has gone up for a number of reasons. I don't have any reason to believe it won't at least continue at an inflationary [rate]. It's been more than inflation, right? It's been higher than inflation. I don't have a reason to believe it's gonna go down significantly. I think you've noted it's not just EVs. It's all the technology that's on every vehicle that we fix. I think there's also dynamics within the sort of the repair network, the system, right, which is labor costs, their ability to get skilled labor to repair vehicles, the cost of parts.
Like, the system at this point just has a lot of inflationary forces. So what we do is we take rate based on current indications, and when we think we are at rate adequacy, that means some component of growth and loss cost is expected. But we also say that we have to continue to take rate to keep up with those costs, right? And so that's what'll happen is it's more of a maintenance mode than a catch-up mode, but we'll take, you know, we'll look at actual claims data that's rolling in, and we'll adjust our rates accordingly for those underlying expenses. As it relates to customers pushing back, in most places, you have to have auto insurance, and most people wanna protect that because it's one of their most expensive assets. I don't, I mean, we're all fundamentally, we're all fixing the same vehicles, right?
So, you know, the competitive advantage you have through claims and other things only goes so far, such that I think, you know, consumers are feeling the pain. There's no question about that. I think as, you know, if you go back to what I was saying about transformative growth, we're trying to lower the cost of insurance to our customers by taking out the expenses that we control and be better, you know, like we talk about enhancing claims process. That's just to drive down costs so that we can charge less to the consumer. So we're doing everything that we can to have a competitive price to relieve some of that pressure on the consumer. But the more macro factors, I think, are gonna continue to drive up the price of auto insurance, you know, in the future. Yes?
On the flip side of that question, using the crystal ball, where do you see states, the insurance regulators pushing back? So recently, California even came, and it's a reasonable place to do business. I don't suspect anybody there. When do you see the regulators saying, "Hey, the ROEs in this business are pretty good, and we don't have to approve more increases"?
So the question was sort of about the regulatory environment. When do we think we might see regulatory pushback on rate increases? The way I would answer it is it is state by state. And as you noted, we've seen some very difficult states come to the realization that big companies can't I mean, we can't lose money at this, right? I mean, fundamentally, for our shareholders, we're not in this to lose money on auto insurance in any state, whatever state you're in. And so I think that we're at a point where more and more regulators are understanding that they have to allow those rate increases, or else the companies who do business in their state are gonna pull back, right? And so that was the case for us. It's California, New York, and New Jersey.
California gave us a rate increase, and we started selling new business in that state because we're rate adequate. And so I think what we're trying to do is create an environment where the regulators understand, if we get the appropriate rate to cover the risk, we're here to do business. And where we're not, we're gonna either get smaller, which includes things like non-renewing, restricting new business, things that just aren't good for the consumers in their state. And so I think we're at a point in that sort of right now where the regulators are more understanding of the fact that this is effectively a cost-plus business. We fix cars. We get some margin on it. It's the margin, and the margin isn't that much at times, particularly in these cycles.
And so I think we've been able to help regulators understand that that's the dynamic, which makes them more open to rates, which are well supported by a lot of very advanced actuarial math. So we don't just make up these rates. We show actual loss trends. We have actuaries that work with their actuaries. So I think that the environment in the states at this point feels in most, and there's a few that continue to be a challenge, feels like it's more constructive. And so we're hopeful that that continues to be a continue. Yes?
Just, up on that, you said California gave you rate increases. Where are you in New York and New Jersey? And what is the timing in terms of your ability to increase rates where you need to? Do you do it in a year, or can you go back in July and say, "You know, it's been terrible in the first half. We need more"?
Yeah, so the question was, you mentioned California. What about New York, New Jersey, and what's our ability to take additional rate? I'll start with the last question. The ability to take additional rate depends on the state. We have some states where it's quite easy to go back in. You file the rate. You use the rate. And it, you know, so it's a little bit easier in those states. There's other states where it's a little more difficult. So California, we got a 30% rate increase, which was fantastic. We got rate in New York and New Jersey as well. The difference between those two states, it wasn't enough to get us to rate adequacy. So California gave us what we needed to be rate adequate. We opened up growth. New York, I would put sort of in the middle of the three.
So we got rate. We need more rate, but we're engaged with the New York regulator to make sure that we get the rate that we need to become rate adequate. So what that means is right now, we're still restricting growth, from a you know, from a new business perspective, but we're not getting smaller. New Jersey, on the other hand, we have a significant rate need to get back to our targeted margins. So we're actively getting smaller in New Jersey until we can get alignment with the regulator on getting basically the appropriate amount of rate in that state. So we're, you know, we have very good and constructive dialogue with all the different regulators. Just some are more willing to get us where we need to be than others.
You know, from the seat that I sit in on behalf of the shareholders, if we get to a point where we don't think we can make an adequate return, we have to start to get smaller. Yes?
Across the portfolio on the auto side, can you talk about what policy growth was in 2023 and what's here for the past few years and what you would've been expecting as part of this sort of deal?
Yeah, so the question was about policy growth across the spectrum of auto. You know, I think this the simplest way to look at it and again, I won't try and give you a forward view of what it's gonna be. You know, if you look at what happened last year, we got smaller in the Allstate brand, and National General grew, right? So the National General brand grew policies in force. It's a mix of the Custom 360 middle-market product as well as non-standard. National General does non-standard. It was a great competitive environment for National General, and we're really glad to get the growth there. In the Allstate brand, it was a combination of retention because we've taken a lot of rate, but also restriction of new business, right? When we had profitability challenges, we really restricted new business across channels.
So whether it's direct, whether it's through the agents, we put underwriting restrictions on. If you go back to the Auto Profit Improvement Plan chart, we really pulled back. So you had a retention drag, and then you had a lot less new business in 2023. So now, as I look to 2024, as we talk about state by state, we become more profitable. We get back to targeted margins, and we turn growth back on. We start in a measured way when we do that, and then start to see the results come in, and we expand across channel and expand our risk appetite. So we're excited. You know, we had 66% or 60%-65% of our premium, which was in that profitability zone at the end of the year. So we're able to turn on some new business in those areas, and we're excited about it.
Maybe maybe you could spend a minute. Just one of the, one of the successes you've had is reducing expenses over time. If you're gonna start growing again, that naturally means that you're gonna be investing more and spending more. Maybe you can help bridge the gap between an expense ratio that's been trending down plus the concept of transformative growth and the fact that you're reinvesting to grow policy counts.
Yeah, so the question was, how do you square improving expense ratios and lower expenses with growth? What I would say is a couple things. One, we established sort of this Adjusted Expense Ratio, which takes out the effect of advertising. And we did that in large part to get at what you're talking about, Greg, which is advertising is directly related to new business spend. So when everyone pulled back and their expense ratios went down because they weren't advertising, well, you know you know that has to come back, right? We've been focused on sustainable expense reduction through that Adjusted Expense Ratio, which basically takes your underwriting expense ratio, X advertising, and puts claims your claims expense ratio with it, right?
Because those are the things that we control, and we remain focused on lowering that Adjusted Expense Ratio because that makes a real difference in what we have to charge our customers and makes a real difference on our auto profit improvement. So, certainly, we're gonna have to spend more money on advertising as we look to grow. Now, one of the pillars of transformative growth was better sophistication. So we think those marketing dollars will go further and be more effective. But certainly, that component of our expense ratio is gonna have to come back. We're hoping to offset it with the other, not offset it completely, to be clear. But, we hope to continue to lower the Adjusted Expense Ratio over time as we execute, you know, digitization, outsourcing. We have a number of initiatives to keep taking that core Adjusted Expense Ratio down.
I think another of the part is what is your bond portfolio loss that you ran?
What was the bond portfolio's loss?
Yeah.
I don't know what the unrealized loss.
Yeah.
I don't, yeah, I don't know off the top, man. I can look it up.
I'm 10-K. Okay, thank you.
I can get out of the 10-K too, yeah.
Maybe you could, the investor returns are an important component. I mean.
Mm-hmm.
You did have a slide where you talked about investor returns. You talked about the yield boosting up, the core fixed income, and then the performance-based component coming down. Can you talk for a second about performance-based piece?
Yeah.
Is there some structural changes going on inside there that will limit the returns on that, you know, in the near term, or?
Yeah, so the question was about Performance-Based Investments, and can I say a little bit more about the results there? Nothing has changed structurally in the performance-based portfolio. As you all know, it's a mix of private equity and infrastructure. It's the longer-term illiquid private investments that we hold because we think it gives you good return over the long term, and we have the ability to hold those assets over that period of time. So as we look at the returns, obviously, over a more extended period. So there's more volatility inherently, particularly quarter to quarter, but even year to year in those performance-based assets. And I think that's gonna continue to be the case, Greg. If you look back, we had some really good years.
and if you have really good years, you're gonna have some years that are more modest in relation to that. And a lot of that depends on individual deals within those portfolios, right? Like, if there's a transaction where you sell one of the companies out of the portfolio, you can get a big gain. And we have that, and it occurs, you know, on a pretty regular basis. So you're gonna get I mean, I think we'd make a point in the earnings call always to add that sentence that says, "We expect these to be volatile," and they were. And so I would continue to expect that. But if you look at the actual makeup of the portfolio, nothing has changed structurally in what's happening in the performance-based portfolio.
All right. Well, I have one last question for you because it was certainly topical last year during the wake of the storms, all the losses, and for underwriting consultants brought capital.
Mm-hmm.
So you're getting a lot of questions in the middle of the year around capital adequacy, etc. Maybe you can update us on the position of the company. Clearly, auto recovering, it feels like capital might get some relief there, but.
Yeah, so for those listening in, update on capital would be my summary. We, you know, Greg, if I roll back, we felt good about our capital when we were getting a lot of questions because we have this very sophisticated economic capital model that we follow. And we and again, I won't because we're near time, I won't go through all the different layers of base and stress and contingent reserve. But the reality is, we felt good about capital. And I said a number of times during that period of time that you hold capital for stress events. And certainly, auto profitability, where it was combined with the catastrophe activity that we saw in the first half of last year, felt like a stress event. And it was, and it depleted some of our capital.
Obviously, fourth quarter results were very positive in, you know, beginning the process of rebuilding some capital. So while I felt good about it and continued to feel good about it through the cycle, certainly, the profitability that we experienced in the fourth quarter was helpful to that. And we believe that there's a very strong earnings machine, organic earnings machine, within Allstate. So as profitability comes back, we'll continue to rebuild capital. We also have, you know, announced the sale of the health and benefits business, which will, you know, while we're not saying what the number may or may not be, you know, there's an expectation that that will bolster our capital position, once we complete that transaction this year. So we feel great about capital. We did then, and we continue to feel that way now.
All right. Well, we'll do the breakout downstairs, and thank you for your presentation.
Yeah, thank you.