Good day, and thank you for standing by. Welcome to Allstate's Special Topic Investor Call. At this time, all participants are in listen-only mode. After the prepared remarks, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please limit your inquiry to one question and one follow-up. As a reminder, please be aware that this call is being recorded. Now I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir. Thank you, Jonathan. Good morning, and welcome to Allstate's third quarter special topic investor call. This morning, we'll discuss Allstate's proactive approach to managing our investment portfolio. After prepared remarks, we'll have a question-and-answer session. Jess Merten, our CFO, and John Dugenske, our Chief Investment and Strategy Officer, are here with Tom to discuss investments. We will not be covering third-quarter operating results or trends within our other lines of business, so please hold those questions until the third-quarter earnings call in November. The slide presentation webcast can be found on our website at allstateinvestors.com. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2021 and other public documents for information on potential risks. We are recording this call, and a replay will be available following its conclusion. I'll be available to answer any follow-up questions you may have after the call. Now I'll turn it over to Tom. Well, good morning. Thank you for joining us today, particularly as you all get ready to blast off for Labor Day. Let's start on slide 2, which reiterates Allstate's strategy to increase shareholder value. Our strategy has two components, increasing personal property-liability market share, and expanding protection solutions, which are shown in the two ovals on the left. On the right-hand panel, we're focusing on both near-term performance and longer-term value creation. As you know, we're working hard to improve returns on capital by returning auto insurance margins to historically attractive combined ratios. We covered this in detail at our special topic call in March, and continue to make progress in implementing that plan. A transformative growth is the initiative to increase market share on personal property-liability by building a low-cost digital insurer with broad distribution. That would make significant progress there as well, especially on improving customer value through expense reductions and expanding customer access through the direct and independent agent channels. Shareholder value is also being increased by broadening the protection we offer to include electronic devices, appliances, furniture, identity, since these are higher-growth businesses. In total, we have almost 190 million policies in force. Today, we'll discuss how proactively managing investments is also a significant contributor to enterprise value. Let's move to slide 3 and summarize how investment results do that. There's really three main points here. First, Allstate's strong capital position and risk diversification enables us to proactively manage our investments. As you know, we use our capital and funds from insurance reserve to invest for income and capital appreciation. Given the predictability of our cash flows, and by investing a large part of the portfolio in investment-grade fixed income securities, we're able to invest in performance-based assets such as private equity, real estate, agriculture, infrastructure, and those generate higher returns because those investments have higher short-term volatility. Diversification of risk within the investment portfolio and across the enterprise also creates covariance, which enables us to increase overall return on equity. Secondly, our investment results are excellent relative to external benchmarks. That reflects a system of people, processes, and relationships. We have a $61 billion portfolio at the corporate level, which is 80% fixed income, 6% indexed public equities, and 14% in the four main categories of performance-based assets. This has generated $11 billion in value over the last 5 years. A comprehensive risk and return system that links goes from the granular CUSIP level assessment, then into a portfolio view and ultimately to the enterprise that quantify. What that does is it quantifies decision-making, establishes risk parameters, and ensures accountability. Thirdly, we're proactive in our management, and that considers both the investment alternatives, so within the investment portfolio and the overall enterprise risk and return position. That begins with comparing investment risk to underwriting and business risk. Today, we allocate about 30% of our total required capital investment and 70% to other risks. We proactively allocate between asset classes based on that 30% based on a medium-term assessment of expected results. John's gonna give you an example of that by discussing a reduction in public equities we did in early 2020. Our investment allocations, though, are also changed based on the overall enterprise risk return. To highlight how we approach that, we'll discuss a reduction in inflation-related risks that we put in place late last year. Let's move to slide 4 to put the pieces together. Enterprise risk and return is used to look across the company to optimize risk and return. As I mentioned, today we're at 30% of total capital allocated investments, but it's been higher. Pre-pandemic, it was up around 40%. From there, we create an investment strategy, which includes additional capital allocation and risk management and significant quantitative analytics. People, both internal and external, are also key to our success. As you see in the middle of the left page, our investments team has 125 front office professionals. Most of whom are either CFAs or have advanced degrees, tremendous amount of successful experience in investment. They're supported by 200 professionals in areas like IT, operations, finance, accounting, and legal. We also use third-party managers to leverage their people, processes, and relationships while expanding our asset class exposure. This team adds value through dynamic asset allocation, active management of public assets, and capturing the illiquidity premiums and idiosyncratic returns from the private markets. In total, this team oversees $71 billion of assets in both public and private markets. Now I'll turn it over to Jess. While Jess has been on our team for a decade, today is his first day as CFO, as Mario has moved over to lead our Property-Liability business. Jess, all yours. All right. Thank you, Tom. Let's start by discussing the portfolio composition and how this adds shareholder value. Moving to slide 5, the chart on the left highlights our investment team's assets under management. As you can see, the significant majority backs Allstate's insurance reserves and capital. We also manage investments for the company's pension plan and create collateralized loan obligations that generate fee income. The middle chart shows the $61 billion corporate portfolio by asset class, with fixed income as the largest category. This portfolio is highly liquid and gives us the capacity to capture value for shareholders with higher return assets that allow us to take advantage of short-term volatility and provide us the ability to reposition the portfolio. The chart on the right shows total investment returns in blue, which includes net investment income, realized gains, and changes in unrealized gains. Underwriting income is shown in orange. Net investment income is a portion of adjusted net income and was $7.6 billion over the last 5 years. The light blue portion of the bar represents net realized gains and losses on investments and unrealized gains or losses, which were reported in net income or directly to shareholders' equity, respectively. When combined, these increased book value by $3.5 billion over the 5-year period. The total value contribution from 2017 to 2021 from investments was $11.1 billion on this basis, which was slightly more than the $10.2 billion property-underwriting income. On slide 6, let's delve deeper into the fixed income portfolio. The left chart highlights the range of asset classes within our interest-bearing portfolio. We add value by allocating across these asset classes as market opportunities present themselves. Our credit research team has deep expertise in identifying opportunities across these sectors that allows us to add value through individual asset selection while managing downgrade risk. The middle chart shows the ratings profile of the fixed income portfolio. As you can see, about 89% of the portfolio is investment-grade, with about 1/3 in triple B bonds, which offer an opportunity to use our credit expertise to earn an attractive return for the higher risk. The allocation to below investment grade is concentrated at the higher end of the rating scale. The fixed income portfolio provides significant liquidity and cash flow. As you see in the right chart, we are concentrated in the shorter end of fixed income market, which in part reflects our view on interest rates. Now let's turn to slide 7 to discuss performance-based investing, which is our term for a broad group of liquid alternative investment categories. We have core capabilities and actively invest in private equity, real estate, infrastructure and energy, timber, and agriculture. On the left-hand bar chart, you can see that private equity at $5.3 billion is 60% of the total $8.9 billion, with the remainder diversified between the other categories. The large increase in performance-based assets between 2020 and 2021 was due to our decision to retain investments that were owned by our life company rather than transfer them in the disposition transaction. We retained these assets because we had the capacity to increase equity allocations, like the specific investments, and provide a good diversification to the portfolio. The categories you see on the page provide risk diversification against public equity and fixed income markets, allowing for a more efficient risk and return profile. Their long-term returns are driven more by the actions of managers fundamentally changing and improving the operating and financial performance of a given asset, whether that's a company, a building, a toll road, or an agricultural holding. In addition to the diversification by investment type, this portfolio is diversified by manner in which the investment is made, and the vintage year, as shown in the two right-hand pie charts. We invest either through funds as a limited partnership, co-investing with the fund managers, or directly. Through decades of relationship building, we've been able to invest with world-class partners whose economic incentives are aligned with our own in funds that represent 55% of the total portfolio. We negotiate co-investment rights with many funds to enable us to leverage our investment capabilities by allocating more to specific deals and reduce costs without taking on the responsibility to manage the investment. To a lesser extent, we make direct investments outside of fund investments. The right chart shows over the last decade, a broad diversified portfolio has been built with more than 400 investments in a wide range of vintage years. With that, I'll turn it over to John. Thanks, Jess, and good morning, everyone. Let's turn to slide 8, which discusses how we add and measure value creation. Foundational to our value creation is the establishment of a strategic asset allocation, which optimizes long-term return for a given level of risk capital across several asset classes. While the strategic asset allocation is designed to be optimal over the long run, it isn't necessarily optimal as economic and market conditions change. Drawing from our extensive internal and external resources, we dynamically adjust portfolio exposures considering current and expected near-term conditions with the objective of adding value above long-term strategic allocation. Portfolio returns are also enhanced by leveraging Allstate's investment research capabilities and portfolio managers to actively manage individual public asset selections and identify attractive performance-based fund managers and assets. Moving to slide 9 provides detail on how and why this adds value. Our investment processes are tailored to each asset class utilizing an overarching philosophy that deep fundamental analysis supported by quantitative tools can identify opportunities for performance enhancement within and between asset classes. A disciplined portfolio construction and market monitoring process is necessary to convert these insights into enhanced returns. The dynamic asset allocation process is outlined on the left-hand side of this page. We start by bringing together a diverse set of thinking that includes views of internal and external investors, economists, and economists to forecast risk-adjusted market returns across asset classes, formulating an overall opportunity set. Investors from across our teams debate additional qualitative factors to refine our expectations and calibrate expected returns and risk by asset class. Rigorous macroeconomic and fundamental analysis is used to test these views and identify portfolio modifications to optimize risk-adjusted return per unit of economic capital. We combine proprietary in-house analytics with external tools, including, for instance, BlackRock's Aladdin platform and others, to manage the portfolio accurately and nimbly. This nimbleness is a key component of our ability to add value within both public and private markets. Trades are executed, and we monitor ongoing pricing, and we'll shift our positioning as opportunities evolve. On the bottom right-hand side of this slide, the chart shows one example of how better analytics result in better risk-adjusted return profile. This chart shows the correlation of various performance-based asset types to the S&P 500 since these have equity-like risk profiles. As you can see, these are not highly correlated, which, as Tom mentioned, at the start, enables us to benefit from the covariance of returns. This is one simplified illustration of the type of analysis that our portfolio managers leverage to assess risk and return decisions across all of our fixed income and equity asset classes. In practice, our day-to-day processes utilize hundreds of decision support tools, allowing us to consider multiple factors that drive markets, including economic relationships, market valuations, asset risk factors, market positioning, and execution efficiency. Now let's move to slide 10 to discuss our diversity, equity, and inclusion initiatives. Promoting a diverse and equitable society is aligned with Allstate's shared purpose, and it improves our investment decisions and execution. This is a broad-based approach where we focus on how we invest, who we transact with, and who we hire and develop. Examples include allocating investment dollars to low-income housing initiatives, allocating funds to diverse-owned asset managers, and increasing trading with minority, women, and veteran business enterprises. We're also using our position in the market to foster a more diverse range of talent entering the asset management industry in the future. Moving to slide 11. Allstate has chosen a customized investment strategy informed by enterprise capital allocation and investment portfolio construction that's differentiated from our peers. The chart shows the investment allocations for six insurance competitors broken out between investment-grade, low investment-grade credit, public equity, and performance-based assets. Starting with the Allstate box in red, you can see our diversified mix of highly liquid fixed income and growth-oriented equity-like, like investments with more idiosyncratic risk. This portfolio has a significant allocation to high-quality fixed income, which provides us stable income, earns attractive credit risk premiums, and is highly liquid. This solid base enables us to invest in public equity and alternatives to capture long-run risk premiums. In comparison to the right, State Farm and GEICO have significantly more public equity exposure. To the left, the companies have a higher proportion of investment-grade credit investments. This is not to imply that any of these are right or wrong. They're just different based on a company's capital position, leverage, reserve duration, and investment capabilities. This construct also enables us to proactively manage allocations, which I'll explain with a couple of examples, starting with the reduction in public equity holdings on slide 12. In early 2020, COVID infections were rising rapidly, but there was not as much impact on financial markets. Our capital allocation process identified an increasing concern that equity valuations remained high, unsupported by S&P earnings potential, and the macroeconomic environment was weakening. As a result, we saw less value in public equities relative to investment-grade bonds at a risk-adjusted basis. As a result, our objective in this case was to optimize risk-adjusted returns over the next several years by leveraging the capital efficiency of investment-grade bonds. We did this despite potentially missing capital appreciation and equity valuations by having lower risk. Our actions were to sell $4 billion of public equity, increase our investment in investment-grade bonds. As you can see in the lower right chart, we caught a wave and sold at $32.81 billion right before the market tanked temporarily. To be clear, we didn't predict the market fall, but we did proactively assess that we weren't getting enough adequate compensation for the increase of the event. The resulting stability of investment valuations supported our proactive decision to provide customers with approximately $1 billion of shelter-in-place paybacks. In addition, we continuously evaluate our portfolio and take well-informed decisions throughout the year. For instance, we purchased $9 billion of investment grade bonds as valuations became more attractive after markets adjusted to the uncertain environment. Post this purchase, intermediate bond yields declined by 160 basis points over the next 12 months, increasing the value of our fixed income portfolio meaningfully. We did miss some of the subsequent run-up in equities, but our objective was to get the best balanced risk-adjusted return, not just to maximize total return. Now let's turn to slide 13 for a second example. This more recent example highlights how enterprise risk and return influences proactive allocation. In early 2021, fiscal stimulus and supply chain Disruptions led to dramatic increases in used car prices, which dramatically reduced auto insurance margins. Our economic assessment was that this inflation was not transitory, but it was like a pig going through a python. With yields remaining close to multi-decade lows and the Fed tone turning more hawkish, our internal assessment of various economic scenarios anticipated a longer and more severe inflationary trend, which would lead to higher interest rates. The theory of fool me once, shame on you, fool us twice, shame on us. We decided to reduce the risk that continued inflation would have on the enterprise, primarily through the bond portfolio. We were willing to accept lower investment income to reduce the risk that higher interest rates would negatively impact bond valuations. Another objective was to increase flexibility to take advantage of reinvesting in higher interest rates when they materialized. We took actions by reducing the fixed income portfolio from a duration of 4.6 to 3.2, which meaningfully reduced our interest rate risk. This did have a negative impact on investment income of about $50 million per year. That said, we avoided losses of about $800 million in the bond portfolio, and the futures position we put on also increased in value by another $470 million. If interest rates remain at current levels, investment income is expected to increase by an estimated $125 million-$150 million in 2023 relative to 2022, and this assumes normal portfolio turnover. For every 100 basis points increase in book yield, net investment income will increase by $400 million annually on our approximately $40 billion fixed income portfolio. Now let's review results in comparison to external benchmarks on slide 14 before moving to questions. We focus our talent in asset classes where we believe proactive management can generate excess returns over passive investments. Within public markets, this means building credit research and portfolio management capabilities across the sectors that we highlighted earlier. Similarly, we've built a private markets team with both direct deal and fund allocation experience across different asset types. To allow these market professionals to focus on identifying return opportunities, we've also resourced a variety of other functions, including risk managers, economists, quantitative analysts that provide insights into broader portfolio allocation decisions. Market Savvy investors are a necessary but not sufficient condition for a strong performance-focused culture. To turn this talent into excess returns, we execute deliberately, focused on asset class-specific investment processes. All our processes start with fundamental insights, such as how and why do we think a specific market opportunity exists. Where possible, we look to augment that with quantitative analysis to increase the traction of these insights. We believe in rigorous performance measurement and comparing our results to others, to other ways that Allstate could have invested. This is necessary to create a feedback loop for continuously refining our process. We know we can't do everything ourselves in isolation. Consequently, we actively seek and leverage relationships with other world-class investors. We use external managers for asset classes where they can deliver broader exposure and potential for excess returns. We also leverage the economic and market insights of others. We use our relationships across private asset industry to gain access to high-quality funds and to source co-investment deals with strong expected returns. You can see the outcome below. We hold ourselves accountable to our investment performance by measuring against various benchmarks in an internally defined set of external managers. As you can see on the right, our performance compares favorably against this external view. For the fixed income portfolio, we are in the first and second quartile of external managers. Our public equity holdings are largely indexed. The private equity portfolio has had returns far in excess of public equities and is in the second quartile of performance when compared to a fund of funds benchmark. Real estate returns are in the first quartile. This year's negative result has obviously reduced overall returns for the longer time periods, but we have the capital, liquidity, risk profile, and capabilities proactively managed as part of the cycle. We believe this approach to management adds value to Allstate and our shareholders. With that context, let's open it up to the line for questions. Certainly. As a reminder, ladies and gentlemen, if you do have a question, please press star one one. One moment for our first question. Our first question comes from the line of Charles Peters from Raymond James. Your question, please. Good morning, everyone. I guess congratulations, Jess, on your promotion. I wanted to start off with slide 9 and where you run through the correlation of performance-based strategies with the S&P 500. I guess what I'm trying to do is reconcile what looks to be a favorably uncorrelated investment strategy to the market with what happened in the first and second quarters of 2020. I know you remember how the limited partnership portion of your portfolio, when we got to the second quarter, generated some losses. Just trying to reconcile that slide with what happened in the first and second quarter of 2020, and then also, you know, what we're thinking about for the third and fourth quarter this year, given the market volatility. First, Greg, I'm assuming you didn't change your name. No, I did not. Thanks for noticing. No, you never know. Let me go way up then, and I'll get John to talk about it. Obviously, there is some relationship between equities, and you see that in the number. That's part of the reason why we invest, because they are growth-related assets. That's you wouldn't want no correlation to the public equity markets because as goes the world, so goes the equity market. As it relates to third and fourth quarter, we're gonna stay away from that one as to what it means. You do know that there's a lag between the performance-based assets and what happens in the public markets because the GPs report on a 90-day lag. John, do you want to talk about correlations? Maybe you can think about how you add a correlation around the whole portfolio. Yeah. Yeah. Greg, thanks for the question. We think about this a lot. You know, if I could expand this conversation, we have you know, pages of correlations across all asset classes. We also think about correlation, correlations and covariance about how it fits with the rest of the enterprise in itself, and that's an important way that we achieve capital efficiency. With the case that you pointed out, when I look at these correlations, I would say that there's a lot of ways that you can calculate these. These tend to be true over longer periods of time. They tend to be you know, true in most instances. There's any specific period of time where they could deviate or they could become a little bit more, a little bit less correlated. If you go back to the beginning of 2022, you may recall that you obviously recall that was a really special time in the course of human events, but we also took special precautions in the portfolio at that point in time to be somewhat extra conservative given that the situation that was going on. We loaded down prices and didn't take price increases from the previous quarter out of this, what was really, you know, a very specific one-time event. I would also say that, you know, when you think about correlations, sometimes it's hard to be overly precise on private investments. They're really made up of a lot of little investments. At any one point in time, we may have M&A activity where we have a realization of a particular deal or things come through a little bit slower. Correlations in a particular period can bounce around a little bit. We believe that these are generally true, but we don't take it as gospel that, you know, that if you look at the first number on the page, 0.65 is precise. It's meant to be a general indication over time. Got it. Maybe, Greg, just add on to that. A performance-based, I think sometimes the creation of the performance-based category to which we did to add up infrastructure, real estate. Now, sometimes people think PB equals PE, and as Jess pointed out, it's only about 60% of it. When you look at the PE piece, it is very well diversified between industrials are like 19%, healthcare is 12%, information and technology is like 12%. So you do get you get obviously correlation to what that allocation impacts the correlations. Then of course, it's mostly North America. So when you're thinking about equity correlation, there's lots of different ways, as John pointed out, to think about it. Yeah, Greg, John brings up a good point. You know, some of our some of the sectors that you see on the page there have some nice characteristics as it comes to inflation protection too, that whether it's real estate and rising rents or what can happen in timber and AG infrastructure, they have nice characteristics that if what's driving the marketplace might be one factor or another, growth or value or inflation or what have you, we believe that this mix of assets and the growing parity of other things relative to private equity in the portfolio provides a real nice mix, not only within the rest of the portfolio, but even within the performance-based portfolio, there's some correlation benefits. Got it. Thanks for that detail. The second question was on slide 11, which I really like because it provided some perspective of how you're positioned relative to your peers. I don't wanna put words in your mouth, but in time, I'm pretty sure you're ultimately focused on this target ROE, and your results compare favorably with most of those peers, except for maybe Progressive. I guess yet your valuation's sort of lagging. I guess my question to you is, do you think this investment mix is the right mix to get you to a better stock valuation, considering what's transpired at least this year? Well, I too would prefer that our multiples be higher and more reflective of our ROE. If you put it through our quantitative machine, I think it would spit out and say, "Oh, it's grade five," which is why we keep doing share buyback. As it relates to this mix and our overall results, yeah, I think it's right in total. Let me start with enterprise capital and just how much money do we need as a company. That's how we do our economic capital stuff. We have what we think we need in the insurance companies, then we keep the buffer. Once you get below that, and obviously the money that we don't need, or don't think we need, we buy back shares. When you go below that, then you're like, okay, how do you allocate what you have to your various risks? How much for cat risk, how much for straight up auto underwriting risk? We're managing through that all the time. When we look at, you know, as I said, we're at 30% now, we've been at 40, we have ranges on where we think we'll go there. This portfolio mix is the right mix for the range we look at in terms of how we allocate overall capital. We do like the fact that, you know, it's got this nice blend of a lot of fixed income, a lot of cash generated from it, pretty stable returns, and lots of liquidity, which gives us the ability to invest in less liquid. When you saw the we put the number in there of liquidity, we are still really long liquidity. Like, and when we measure liquidity, we don't say, what could we sell? We say, what could we sell at a certain price without changing the market? So like, and it's down to the basis point. So we're like, we're not interested in, you know, if we could sell something, but we take a big hit on it. We still have plenty of liquidity. We like where we're at in total in terms of our capital level, in terms of how we're allocating that capital to investments. We're comfortable being below what we were before in capital to investments. But at some point, when we think the markets are turning and we're back to, you know, I don't know if there's such a thing as normal economic growth, but I think you would expect to see our percentage of capital allocated to investments go up. And by having this portfolio, we have the capacity to do that. I mean, you can't just decide you wanna be in PE within, you know, Peter and his team have been working away on PE for over a decade. You don't just, you can't just turn that up on a dime. Yeah, I'm comfortable with where we're at. Hey, Pete, Greg, I might just add one thing too. You know, the what you see on the page there, that's kind of a static and coarse representation of what people own. There's also how you manage it and how you own it. I'll just give you a couple examples. You know, you look at the fixed income exposure there, and it's gonna look reasonably stable over time. But we've taken, as you saw or as you heard in the presentation, the interest rate exposure of that roughly in half of the portfolio during the year. As market yields moved up, we just didn't feel that hit as much as we would have liked to. You know, there's a story behind the story here. Just using some rough numbers here, in the last year ending June 2022, our portfolio was down about 3.7%, and we feel bad about that. We don't like losing money. However, during that same period of time, the corporate bond index, the Bloomberg U.S. Intermediate Corporate Bond Index, was down 9%, and the S&P was down 11%. If you just did a simple average of those, you get something like down 10%, yet our portfolio was down 3.7%. It's also how you own it and how you move it around within the portfolio. Yeah, that makes sense. Thanks for the answers. Thank you. Our next question comes from the line of Tracy Benguigui from Barclays. Your question, please. Thank you. Good morning. First, congrats to Mario and Jess on your new role. As you know, ERM is near and dear to my heart, given my background. I do like this presentation a lot, and a very fitting one for Jess, given your, one of your prior roles as CRO. I also have a question on correlation. I am struck by the reference that investments consume only 30% of total economic capital on a diversified basis. I'm curious how you're able to hold on to high levels of diversification credit post your life sale. It might be helpful context just for comparison purposes to understand what the prior proportion of capital, for investments when you used to own ALIC. Okay. I think I'm gonna get Mark Prindiville, who's our Chief Risk Officer now, to think about that. Let me maybe give you just a sense for overall. When we look at overall enterprise, we were longer interest rate exposure, when we owned the life company. One of the reasons we thought about and decided to sell or it was reducing our overall financial market risk because of that. When we sold the life company, we reduced not only that interest rate risk, but a bunch of other risks, and we still had just call it about the same amount of capital. When you take that risk off, then you have the ability to redeploy that capital, and your percentages change. Mark, maybe you can address that perhaps with more specificity than I did. Sure. I'd be glad to. Good morning, everyone, and pleasure to hear from someone, a fellow colleague with an interest in enterprise risk return management. You know, it's been referenced several times on the call here the way we proactively shape the enterprise risk profile. We do that based on three risk return principles. We maintain a strong foundation with capital and liquidity, and that means making use of the investment portfolio to supplement the returns that we expect on the insurance side. We use risk capacity to build strategic value. That means higher returns in the investment portfolio allow lower insurance prices. We optimize risk-adjusted returns. We want the best overall portfolio, and that's why we like being in the middle of this diagram, as was referenced in the previous call. You make a big corporate transaction such as selling your life and annuity businesses, you open up the whiteboard, and you say, "What do I do with my investment portfolio to get me back to an optimal mix?" Because we did lose a lot of investment risk associated with that transaction. As was mentioned earlier, we retained performance-based assets, which are high long-run sources of return. They fit really well into our P&C portfolio as well. We, you know, we like those assets. We targeted to extend the duration of the P&C portfolio to make up for some of the interest rate risk that was lost in the life annuities transaction. Now, we didn't execute all of that because of market conditions at the time, but over the long run, we will run a longer duration P&C portfolio to have a balanced mix, both within investments and the life and annuities portfolio. Then we also customize our fixed income portfolios, given that we had lost a lot of credit risk through the life and annuities transaction. We use our risk and return principles to optimize holistically across liabilities and the investment portfolio, and we have made some pretty major shifts within investments as part of that transaction in order to maintain that balance. Tracy, the other thing we do is we work hard on covariance and how that will actually get used. Obviously, auto insurance returns are not as correlated to investment returns, and home insurance returns aren't as correlated to either of those, and that creates covariance. Mark and his team actively work to make sure we allocate that covariance in a way that makes us competitive in the market. To the extent auto and home are bundled together with most customers, we leave that covariance down at the Property-Liability business for them to manage that covariance. To the extent there's covariance between investments and auto insurance, we keep it at the top of the house and we don't give it to either of them. We say, "You've got to still make the right return on your capital on a stand-alone basis." Then we get to decide what we wanna do with that covariance to either reposition the portfolio or make other strategic decisions. I would say we're probably, I don't know, which generation of risk management we're in, but we're pretty maniacal about splitting up the numbers. Okay. It sounds like you're able to get to the same spot, when you used to own ALIC in terms of how much pull investments were on capital. That was very helpful context. I'm just wondering about the other 70%. Is there anything you could say about the proportion of capital consumed by prop cat risk? Is that fair to say that's the majority? No, I don't think it's the majority. I mean, we do it a bunch of different ways. We have there's base capital, which is normal earnings. There's stress capital for 1 in 100. That's where we slice it a bunch of things. I don't think I would say that. I don't have the specific number, maybe Mark does, of how much just straight up cat risk takes of the overall capital account. But it changes by year, so auto's gotta come up with a little more. They get more capital now because the profits are down, which we think works to maintain overall long-term returns. Mark, I don't know if you have. I don't know that I've seen bers split that way, just cat. Yeah, you have to remember that we think of our risk post the reinsurance that we have on the property side. If we didn't have that reinsurance, we would be fairly highly allocated to property risk. You're absolutely right. Again, this is part of shaping the overall enterprise risk profile. We use leverage in each dimension. We may use derivatives on the investment side, the way we talked about earlier with interest rate futures. We'll use reinsurance on the liability side. If you think about our enterprise risk profile, this isn't precise, but you can almost think of it in four quadrants. The insurance risk is pretty evenly divided between auto and property once you bring into account the reinsurance we have on the property. The investment risk splits across fixed income and equity. It's almost a four-quadrant approach. Again, that's where you get to that balance in the middle of page eleven there that gives you, over the long run, there can be short-term periods where correlations differ from what you expect. Over the long run, you maximize diversification. You maximize your ROE and you build book value through time. Thank you. Thank you. Our next question comes from the line of Paul Newsome from Piper. Your question, please. Good morning. Thanks for the call. I was hoping to get a little bit more color on the asset liability matching process and. Your question, please. Good morning. Thanks for the call. I was hoping to get a little bit more color on the asset liability matching process. It looks like, and tell me if I'm wrong, Allstate is by design taking essentially a middle ground between having some sort of boundaries on, you know, duration match and cash flow matching, but some other companies that basically take a completely total return approach to the investment and kind of ignore the liabilities. If that's the case, can you talk about those boundaries a little bit more, about, you know, sort of how much of an interest rate bet you'd be willing to make from a duration perspective, for example, or how much of an equity bet you'd make based upon the market environment and matching and cash flow matching, and some other companies that basically take a complete total return approach to the investment and kind of ignore the liabilities. I'll let Mark take the asset liability matching piece. I think the answer on how big a duration that John can talk about, but if John, whatever decisions made would be embedded into how much capital the investments have. Like, if they only have 30%, there's only so much you can. They gotta work between duration and regulatory risk they have to manage in that. I would say back to page 11, the other thing that noted, and John mentioned it, but some of those numbers are based on the amount of capital people have. State Farm runs a huge equity portfolio, but, you know, they got boatloads of equity. If we had that amount of equity, you know, we wouldn't trade anywhere near some kind of multiple of book value now because their return on capital is lower in total. GEICO, of course, is embedded inside the Berkshire Hathaway thing, and I would say on a standalone basis, GEICO would not be able to run that level of equity in just the auto insurance business. When you go to the other side, it really depends, I think, in part on what people's exposure is. We have relatively short tail to the liability stuff, reserves. If you have longer tail reserves and you have greater volatility, you might not want the kind of volatility that comes with owning PE. I don't know why they chose what they did, but I'm just saying everyone's different. Like, as we said, like, we're not right or wrong because we're in the middle. We're just comparing where we are so you have a sense for by investing in Allstate, what you get from us versus what you get from other people. Do you, Mark, want to jump on asset liability, and then John, you can jump into duration? Well, I think that was exactly the right answer. If you look at page 50, you can see our fixed income allocation by tenor, and you can see it's clustered on the left side of the page. That's really for two reasons. Number one, Tom said that's where the reserves are for the P&C business. Secondly, that's embedded in our market view at the moment. If you think about the rest of, you know, beyond reserves and the surplus, we have equities that we think are a really good match for a long horizon. We can take the short-term volatility, as John mentioned, and convert that into long-run equity returns. We have deep experience in terms of asset-liability management, you know, over 3 years of owning a life annuities business. We think about that on the P&C side as well, and we think this profile appropriately matches us to the short-term nature of P&C liabilities while giving us flexibility to invest long in higher returning performance-based and public equity assets. Maybe just adding a little bit to what both Tom and Mark said. If you take a look behind the scenes, you know, we all sit around the same table and have these discussions. The common currency by which we think about risk across the firm is this concept of economic capital, that we're all extremely well-versed in it. It's not just the people that sit at the table, it's people that populate all the teams, and it's very ingrained across the culture. When it comes to, you know, how do you think about putting on a position in an investment portfolio? There's probably more than one answer to that. You know, the one answer is, what delegated authority do we have in terms of economic capital to make movements in the portfolio on a regular basis? I would say we have appropriate amount of latitude, and that appropriate amount of latitude is what shows up in our ability to compete relative to to peers and competitors outside of the firm. It's being able to move and react to markets as need be. The types of things that we're gonna look at, we look at a lot of things. You know, we're a really a multifaceted investment platform. We're gonna look at valuations. We're gonna look at what we think the Fed's gonna do. We're gonna look at what we think macroeconomic indicators are gonna do, how people are positioned, technical indicators. We're gonna, you know, talk to our traders that are trading in the markets each day and just asking us what's the pulse of the market feel like right now. We're gonna look at a lot of different things, and we're gonna come up with a very informed view supported by great proprietary quantitative tools to gauge what the magnitude of an interest rate movement could be. We apply the appropriate amount of portfolio positioning relative to that interest rate movement to figure out is that within our delegated risk authority. We, you know, do upside downside analysis, all the normal things that you do. We look at it on a trade by trade basis. Importantly, we look at it in the portfolio context of the investment portfolio and the portfolio context of the overall firm. What does this mean? If we think we have a really good opportunity or if the enterprise has a particular need, like you saw in the interest rate trade that we did earlier this year, we may work together at our enterprise risk and return forum to expand that latitude even more in a very known and open manner. That was kind of the beauty of what we did earlier in the year. We had views on both sides of the house, frankly, but it came together in a positioning that cut our interest rate exposure roughly in half in the investment portfolio and had a bigger impact on the overall firm results than if we would've just done it independently. Great. Thank you. Appreciate the help as always. Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please. Hi. Thanks. Good morning. My first question is on the below investment grade corporate portfolio. It seems like you guys trimmed that to around 11% of the portfolio from 18% at the end of last year. I was hoping we could get more color on what you guys cut within the below investment grade portfolio. Are there certain sectors that you're concerned about within the corporate market? It did look like you cut a bunch in consumer cyclical corporates. Is that in advance of a recession? You know, if you can give us color on what you might be rotating into. I'll let John talk about the trades we're making inside the high yield portfolio. Let me just start again, though, Elyse with, you know, 30% total economic capital goes to investments. We allocate that between things like PE and other, and real estate, some of which are not that flexible getting in and out of. It's like, once we're in, we're in for a while. They then have to work with inside that to allocate how they wanna do that. Then they make obviously trades inside that piece as well. We do play. I wanna just reiterate as John or I just covered it. We tend to play in the double B space, rather than the single B or C space for a variety of reasons, which, John, you might wanna cover as well. Yeah. Yeah. Thanks, Tom. Thanks for the question, Elyse. Look, we think high yield's an appropriate asset allocation, you know, used in an effective way. You know, if you think of the whole continuum of you've got cash and treasuries and municipal bonds kinda on the safer side, and you work your way out into public equity, private equity. High yield sits somewhere in between, and there's what I would say is there's kind of a really nice efficiency of returns per unit capital used. So we like it. Doesn't mean we love it. There are times when we'll reduce it. You know, right now we're carrying, you know, by my count, somewhere around 9% of the overall portfolio in below investment grade. That was a conscious choice. Just like we've, you know, reduced public equity because it's a growth asset and times are a little bit less certain, we feel the same way on the overall beta or the overall market exposure of high yield right now, so we've reduced that. You know, in terms of individual sectors, I'm not gonna go through each one and each view, but yes, we do sculpt the portfolio based on our views of the economy and what may play through, whether it's, you know, particular consumer behavior, whether it's a troubled industry, and we really do. We've got, you know, a team of analysts, we've got a team of portfolio managers and a lot of credit experience in the shop here that help us think through that, and we challenge it from a lot of different directions. You know, Tom mentioned you know, the idea of our focus is on primarily double B with some amount of single B. That's really intentional, and that's a strategy that we put forth a number of years ago. We think it fits really well with what we're trying to accomplish with the portfolio and believe that it's kind of a nice risk arbitrage that if you look at yield less default rates over longer periods of time, what you'll find is, in our opinion, when you look at that double B range and somewhat in single B, you're gonna find that that's the sweet spot to be. You know, that's the crux part on the efficient frontier where you wanna be because you get, in our opinion, more than compensated for potential downgrade or default risk by the additional yield that you have. It becomes a little less true as you move out, as you move down into triple C's and below. We like where we're at. You know, the question might be, why don't you own more of this? Well, we have a lot of tools in the toolkit, and we think that, you know, as we stated in the presentation, investment grade credit is really liquid and provides really a strong base. We also have some asset classes that are even more return oriented, and some of them have less liquidity. We are continually thinking about rebuying the portfolio on a day-to-day basis. We come in and we look at every position, and we say, "Is this exactly what we wanna own today?" We will sculpt it. You'll see us move things around. Hopefully, they move around in a manner that is predictable and logical as you look at it from the outside. The goal is always to find the best risk-adjusted return for the portfolio and more importantly, for the enterprise and our shareholders. Thanks. Then my second question, you know, you guys alluded to during the presentation, right, you have taken down, you know, your duration, right, in advance of, you know, some movement in interest rates. When would you consider lengthening that duration? And what are you guys paying attention to? Thank you. Well, we just had that conversation obviously just before. Not right now. How about that? You know, beyond that, it depends, you know, how the world goes, what happens. We would welcome the opportunity to generate more return from higher interest rates. We're positioned to do that. When it happens, I don't know, Elyse. You know, what I will tell you is, we invest for economics. Like, we don't. We tell the investment team, like, "Don't worry about the book value impact. Don't worry about what happens to operating income. You know, get total return, make the right economic choice, and the rest will work itself out. Thank you. Thank you. Our next question comes from the line of Michael Zaremski from BMO. Your question please. Hey, good morning. Just as a follow-up on the previous answer and question. It sounds like the objective is still to kind of limit the impact of inflation, if I'm kind of thinking about slide 13 and your comments about not increasing duration. Can you remind us, you know, historically, in terms of duration boundaries on the fixed income portfolio, have you gone much lower than 3? Would you be willing to go lower than 3? Um. Years. Yeah, I'm trying to think historically, Mike, just where it's been. 3's pretty low, particularly when it's related to the duration of our reserves. When you do a duration on reserves, there's lots of different ways to do it. There's what's this current $100,000 I'm holding for a case that's gonna be paid out next week. Then there's the rollover effect of you're always in the business and always have something you're gonna pay out sometime in the future. We kind of move between those. I doubt you'll see us go lower. Where we are in inflation is, you know, we still haven't solved it in auto insurance. When we solve it in auto insurance, we may feel differently about, in fact, I'm sure we will have a different set of math on where we are in inflation risk in the investment portfolio. Right now, we got a lot to do. Maybe we do one more question so we can keep you all on time. Yep. Could I ask a follow-up? Yeah, sure. Just thinking kind of longer term about the investment portfolio allocation. You know, I guess a lot of talk about telematics. If you agree that, you know, over the long term, telematics based underwriting could be more accurate, and I guess you have to tell me if you agree with that statement. I guess, you know, could Allstate take more investment portfolio risk over time? Yes, it is more accurate, and we need to make it ubiquitous in the way we think in the industry price auto insurance. What that does for the risk profile of auto insurance is based on a whole bunch of other stuff. I mean, just as a single thing, I'd be like, yeah, you have a better, you're gonna have less adverse selection. You know, you got competitive positions, you've got capital, you've got what's happening with the transportation fleet, what happens with frequency, you know. Even though we don't have that much severe weather in auto insurance, hail and floods and stuff do hit that business. I don't think you could come to a conclusion that telematics in and of itself would reduce the risk profile of auto insurance so that that would give us the freedom to, A, either hold less capital in total, which is also a choice, or allocate more to investments. Thank you. All right, let's do one more question. Certainly, Ben. Our final question for today comes from the line of Yaron Kinar from Jefferies. Your question please. Yaron, your line is open. Thank you. I didn't hear my name. I apologize. Good morning, everybody. I guess maybe following up on Elyse's question on the shift in the portfolio somewhat away from below investment grade. I did also notice that at the same time, the triple B portfolio grew a little bit. I think it's probably the other side of the coin. Maybe you can talk a little bit about, do a similar analysis of the risk-adjusted return that you see in triple Bs and how you think about the risk or potential of credit migration and impairments in that portfolio in a credit cycle. Yeah. Thanks, Yaron. You know, I think you're thinking about it the right way. It's a continuum across all asset classes. Earlier, I mentioned, you know, from cash to private equity, they all have different factors that react to the market, and it's not necessarily when you move from one to another, it's a completely different thing. That's the way that we think about it in the investment group. You know, triple B in some ways, you know, first it's investment grade. You know, when you think about bonds as they're classified, anything below triple B is high yield, anything above is investment grade. So it's a really safe and stable asset. We also find it to be a really good candidate to add additional value to the portfolio for a couple reasons. One, it has some of the characteristics that you see in double Bs and single Bs that we think relative to, you know, look at a Moody's default study or we have our own data screens on this, it's not likely you're gonna get much, you know, bad activity in that area. You do receive additional compensation in the marketplace versus single A, double A, and triple A bonds and government bonds to own it. It fits in a really nice part of asset allocation. It remains liquid, so it's something that we can move around and express our views in pretty regularly. Three, it's really a good place for our analysts and portfolio managers to play because there's a lot of opportunities to look at something that might be rated triple B, but we really think internally it looks more like a single A asset, and we anticipate that it might be upgraded at some point in time. There's also times when things get upgraded from high yield and end up in the triple B bucket. You know, if we're nimble, and nimble's a big part of our investment process, we can add those before that's fully priced into the marketplace. Over time, that triple B bucket has just grown in the industry as a percentage of overall outstanding investment-grade bonds. You look back, and I don't have the statistics in front of me, but part of what you're picking up on, if you go back, you know, 10, 15 years, that bucket was a lot smaller and it's a lot bigger, just as the posture of corporations in America have changed the way that they wanna structure their finances. You know, part of it's an intentional view of us is where we think the sweet spot is. Part of it is also just what's the makeup of the index that we can invest into. Yaron, let me maybe add just an enterprise top of that. We give investments at 30%. When they put that in bonds, that comes with both interest rate risk and credit risk and both interest rate return and credit return. When we shorten duration, and you sell a bond, you lose both. John's team is trying to make sure that we wanted to reduce the interest rate exposure, but we weren't necessarily trying to reduce the credit spread returns we're getting. They have to modulate between those. Thank you. That makes a lot of sense. I appreciate the color. Okay. Thank you all for participating in investing in Allstate. That's a triple pun. Both your time, your money, and your interest level. What we have both a capital and risk diversification processes. We have the analytics. We have people to earn additional return for our shareholders through what you've heard about is proactive. Thank you. Much time to talk about that on a quarterly opportunity. This was good opportunity for us to share with you how we do what we do. We don't purport to make every trade correctly or to have every decision right, but we do try to balance enterprise risk and return, and make the appropriate decisions to increase shareholder value. We have a great track record of doing that. Thank you for your time, and we'll talk to you on third quarter. Thank you. This concludes the special topic investor call. You may now disconnect. Good day.