Allstate Corporation (The)

standing by and welcome to the Allstate second quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Mark Noble, Head of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning. Welcome to Allstate's second quarter 2022 earnings conference call. After prepared remarks, we will have a question and answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10Q, and posted today's presentation on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which our reconciliation and reconciliation public documents for information on potential risks. Additionally, we'll be hosting our next special topic investor call on September 1st, focusing on Allstate's investment strategy. Now I'll turn it over to Tom.

Well, good morning. Thank you for investing your time with Allstate today. Let's start on slide two. So Allstate's strategy to increase shareholder value has two components, increase personal and property liability market share and expand protection services, which are shown in the two ovals on the left. We're building a low-cost digital insurer with broad distributions. We're also diversifying our business by expanding protection options by leveraging the Allstate brand, customer base, capabilities, and expanding distribution. On the panel on the right, in the second quarter, we made progress executing this strategy while we continued to implement a comprehensive strategy to improve profitability. That includes broadly raising auto and home insurance rates, In the second half of 2022, we plan to file for rate increases in excess of the increases implemented in the first half of this year, which were 6.1% of Allstate brand countrywide premiums. We're also reducing expenses, advertising, and growth investments. Underwriting guidelines have been and will be changed to reduce new business volume where we're not earning adequate returns. And we're also executing claims operating actions to manage loss costs in a high inflationary environment. These actions will likely have a negative impact on policy growth. And now while the current environment requires a huge focus on margin improvement, we continue to advance our transformative growth strategy where profitability level, and when profitability levels are acceptable, we'll have a business model to capture market share. The protection services businesses are generating profitable growth, although earnings declined slightly this quarter as we invest in that growth. Given the negative impact of inflation on the auto insurance business, as you know, beginning late last year, we reduced the bond portfolio duration to lower exposure to higher interest rates, which helped mitigate the reduction in bond valuations by approximately $1.3 billion in the first half of 2022. Our strong capital position enabled us to maintain high cash returns to shareholders in this environment. Moving to slide three, let's review second quarter performance in more detail. Total revenues decreased 3.4% in the prior year quarter, despite property liability premiums earned increasing 8.6%, which reflected higher average premiums and policy growth. Higher loss costs in the current report year and upward loss reserve development of $411 million in the prior report years resulted in a property liability recorded combined ratio of 107.9 in the second quarter. Net investment income of $562 million was 42% below the prior year quarter since performance-based income was exceptional in the prior year. Net losses on investments and derivatives were $733 million in the quarter There's lower valuations in equity investments and losses on fixed income sales, which were only partially offset by the derivative gains associated with the bond portfolio duration shortening. A combination of these factors led to a net loss of $1.4 billion in the second quarter and an adjusted net loss of $209 million, or 76 cents, per diluted year. The adjusted net income return on equity was 6.9% over the last 12 months, which is obviously unacceptable from our standpoint. It's substantially below the levels we achieved at this time last year, but we remain committed to achieving our long-term returns on equity of between 14 and 17%. Now let me turn it over to Glenn to talk, walk through our property liability results in more detail.

Thank you, Tom. Let's start by reviewing underwriting profitability on slide four. The underwriting results reflect the high level of inflation, which is increasing severity, leading to an underlying combined ratio of 93.4 for the second quarter and a recorded combined ratio of 107.9, which is shown in the chart on the left. The chart on the right compares last year's recorded combined ratio of 95.7 to this year's second quarter. A higher auto insurance underlying loss ratio drove 8.6 of the 12.2 point increase as claims severity has been increasing faster than earned rate increases. The other large negative impact was from prior year reserve strength in this quarter, which I'll cover in a few minutes. The one positive impact on there was the 1.7 points from expense reductions. Let's move to slide five and talk about profitability and rising loss costs in more detail. As you know, we have a target combined ratio for auto insurance in the mid-90s. And you can see on the chart, which shows the combined ratio by year and then the first two quarters of this year, that we have a long history of meeting or exceeding those targets, which is supported by our pricing sophistication, underwriting, claims expertise, and expense management. Now, in there, you'll see 2020 was an outlier because we had much better than target results than due to some of the early pandemic frequency impacts. And as we moved from that environment, To the high inflationary environment we're in today, incurred claims severities increased the underlying auto combined ratio to 102.1 for the quarter and 100.5 year to date. Auto non-catastrophe prior year reserve strengthening in the second quarter totaled $275 million, which is primarily physical damage and injury coverages. most significant impact though on the combined ratio was report year incurred severity for collision property damage and bodily injury claims which increased by 16 12 and 9 respectively over the average of the full year 2021 incurred because the costs were rising rapidly during 2021 the quarter to quarter increase comparison is even greater and frequency also went up about five to seven points but it's still well below pre-pandemic levels. Let's go to slide six, and we'll go deeper into the prior year physical damage reserve development. The chart on the left shows used car values. They began to rise in 2020. And if you go back looking from the beginning of 2019 to current, used car prices have gone up more than 60% and continue to stay at an elevated level. At the same time, OEM parts and labor rates have increased during the first half of this year, which causes severity increases for coverages like collision and property damage. Now, we anticipated that those trends and the delays that are taking cars a long time to be repaired right now would increase the amount of claim payments we made on 2021 losses after the end of the year, even though these are relatively short duration claims. The chart on the right shows gross paid losses for physical damage coverages for the six months after the end of a calendar year. Now, our expectation for paid losses for 2021 claims from months 13 to 18 was that it would be about $1.25 billion, which you can see from the chart is about 40% above the prior years. You can see that from the dashed line on the far right bar compared to the bars to the left of it. But at the end of the second quarter, the actual paid losses were 1.48 billion, which exceeded even our higher estimate by 230 million and is a large driver of the prior year reserve increases. All other non-catastrophe prior year development, primarily from injury, commercial auto, and homeowners totaled 268 million in the quarter. Let's go to slide seven and discuss how higher auto insurance rates have been and will be implemented to improve profitability. Since the beginning of the year, we've implemented broad rate increases across the country, as shown on the map. We have nine states where we had increases over 10%, and auto rates have been increased in 48 locations, inclusive of Canadian provinces. Those rate increases are expected to increase Allstate brand annualized written premium by 6.1%. Now, we have not been able to get adequate rate in New York, or any increase in rate in California. New York represents about 9% of our auto premium, and the implemented rate there was we leveraged the annual flex filings process there, and it gave us less than 5% rate, and our current indication there is significantly higher than that to get you an adequate return. Similarly, in California, which represents about 12% of our auto premium, We recently filed in the second quarter a 6.9% increase, which again is significantly below the overall rate need there. In states, markets, risk segments, or channels where we cannot achieve an adequate price for the risk, we're implementing more restrictive underwriting actions and reducing new business as needed until adequate levels of rate are approved. Let's move to slide eight, and we'll look at how these rate increases are impacting and will impact the combined ratio for auto insurance. What you see here illustrates our path to target profitability along with the magnitude of actions we've already taken and what's required prospectively. Starting on the left, through the first six months of the year, our auto insurance recorded combined ratio is 105, and that's shown in the blue bar. To start with, we normalized that by removing the impact of prior year reserve increases and going to a five-year average on catastrophe losses. That improves the combined ratio by two and a half points represented by the first green bar. The second green bar reflects the estimated impact of rate actions already implemented when fully earned into premium. So these are already implemented actions that are in market and renewing on policies. They total an additional $1.7 billion of effective premium across all state and national general brands. Those will be earned over the coming quarters and fully earned by the end of 2023. Now, of course, loss costs will continue to increase, whether it's inflationary impacts on severity or higher frequency, which would increase the combined ratio from what I just described there. So prospective rate increases must exceed the loss cost increases that come to achieve our target returns. Now, everything I just described, combined with our non-rate actions, such as reducing new business and expenses, gives us a track where we expect to achieve our target combined ratio in the mid-90s in auto insurance. Now, the timing of that will be largely dependent on the relative increases and pace of those increases in premium and lost costs. So on page nine, we'll take a look again at our industry-leading homeowners business. As you know, a significant portion of our customers bundle home and auto insurance, and that improves the retention and the overall economics of both products. We have a differentiated ecosystem in homeowners. That includes a differentiated product, underwriting, reinsurance, claim capabilities, and we discussed a lot of those capabilities in our last special topic call. Our long-term underwriting results show the strength of the system. Our five-year average recorded combined ratio is 91.9, as shown in the chart on the left, and that produced $3.3 billion of underwriting profits since 2017, while the industry lost over $20 billion in that same period. Now, our second quarter combined ratio and most second quarter combined ratios have historically been higher than full year results, primarily due to catastrophes. Now, second quarter this year was at 106.9, which reflected, again, higher catastrophes and 1.7 points of unfavorable non-catastrophe prior year reserve estimates. Our year-to-date recorded combined ratio for home is 95.8. Now, homeowners insurance is certainly not immune to the inflationary environment we're in, and we continue to see increases in labor and material costs. To combat that, our product has sophisticated pricing features that respond to changes in replacement values, and we've taken rate. If you see on the chart on the right that shows some of the key all-state brand homeowners operating statistics, we've grown net written premium by 15.2% from the prior year. And that's on a policy base that we grew of 1.2% in the second quarter, where our Allstate agents remain in a really good position to broaden customer relationships. So as you've heard me say several times, and certainly in our last special topic call, we're really well positioned in homeowners to not only maintain the competitive advantage we have, but to grow that line of business. And with that, I'd like to turn it over to Mario.

Thanks, Glenn. As Tom mentioned, while we are improving profitability, we also continue to invest in the core components of the transformative growth strategy to increase market share in the personal property liability business. Slide 10 is the flywheel of growth that we have discussed on earlier calls. Transformative growth is a multi-year initiative designed to increase personal property liability market share by building a low-cost digital insurer with broad distribution. I won't get into all the pieces today, but I want to highlight two specific items. First, we remain committed to achieving our adjusted expense ratio goal of 23 by year end 2024, which represents a six-point improvement compared to year end 2018. Secondly, in the quarter, we launched beta versions of a new fully digital auto insurance product and sales experience made possible with new technology for relationship initiation and product delivery. Building these foundational elements will enable us to scale growth when adequate insurance pricing is attained. At the same time, the protection services businesses in the lower strategic oval are growing and increasing shareholder value as shown on slide 11. Revenues, excluding the impact of net gains and losses on investments and derivatives, increased 8.3% to $629 million in the quarter primarily driven by Allstate protection plans. Adjusted net income of $43 million for the second quarter of 2022 decreased $13 million compared to the prior year quarter as ongoing investments and growth are being made to position these businesses for future success. Policies enforced did decrease by 1.6%, reflecting expiring protection plan warranties and lower retail sales compared to the favorable environment in the prior year quarter. Moving to slide 12, Allstate Health and Benefits is also growing an attractive set of businesses that protects millions of policyholders. The acquisition of National General in 2021 added both group and individual health products to our portfolio, as you can see on the left. Revenues of $574 million in the second quarter of 2022 increased 4.6% for the prior year quarter. driven primarily by growth in group and individual health businesses. Adjusted net income of $65 million increased $3 million from the prior year quarter, driven by increased revenue, which was partially offset by a higher benefit ratio, primarily in individual health. Now let's shift to investments on slide 13 to review investment performance and the portfolio risk and return position we have taken given higher inflation and the possibility of a recession. Net investment income totaled $562 million in the quarter, which is $412 million below the prior year quarter, as shown in the chart on the left. Market-based income, shown in blue, was $13 million above the prior year quarter, reflecting an increase in fixed income portfolio yields, which are now benefiting from investing in yields that are higher than the overall portfolio's current yield. Performance-based income of $236 million shown in dark blue, was $413 million below what was an exceptional quarter in 2021. The performance-based internal rate of return over the last 12 months was 24.6 percent, which remains above our long-term return expectations. The performance-based portfolio includes private equity as well as a mix of other asset types, such as real estate and infrastructure, which diversify our performance in this segment. the second quarter real estate investments had strong performance including gains on asset sales while private equity results were lower as a reminder our performance-based results are recorded based on a one-quarter lag so second quarter results reflect march 31st sponsored financial statements and future returns will reflect market and economic conditions from the prior quarter the total portfolio return was negative 2.8% for the quarter and negative 5.6% year-to-date due to higher interest rates and credit spreads, lowering the market value of bonds and a decline in public equity valuations. While these market conditions negatively impacted the market value of the portfolio, it continues to generate operating income, and because of proactive portfolio actions, the results are better than the broad indices with the S&P 500 index 20% lower and the Bloomberg U.S. aggregate bond index 10% lower. The chart on the right illustrates the shift in risk positioning we have executed to protect portfolio value and position us to take advantage of opportunities as conditions evolve. We reduced interest rate risk toward the end of 2021 and into the first quarter through the sale of longer-duration bonds and the use of derivatives. The portfolio duration is shorter than our long-term targets, which has mitigated the negative impact of higher market rates by approximately $1.3 billion this year. With recession concerns rising, the exposure to recession risk-sensitive assets was also reduced through sales of high-yield bonds, bank loans, and public equity. These sales were largely executed prior to the most significant credit spread widening and equity market decline for the end of the quarter further preserving portfolio value. Now let's move to slide 14 to discuss Allstate's strong cash returns to shareholders of $1.9 billion in the first two quarters. Over the last year, shares outstanding have been reduced by 8.7%, providing more upside for share as profitability has improved. In addition, there is another $1.8 billion remaining on the current $5 billion share repurchase authorization. Adjusted net income return on equity of 6.9% was below the prior year period, primarily due to lower underwriting income. Achieving our target combined ratios for both auto and homeowner's insurance will bring adjusted net income returns on equity back to our long-term target range of 14% to 17%. With that context, let's open up the line for questions.

Certainly. Ladies and gentlemen, if you do have a question at this time, please press star then 1-1. on your telephone. One moment for our first question. And our first question comes from the line of Greggie Peters from Raymond James. Your question, please.

Good morning, everyone. I would like to go back to slide 8 for my first question. I guess the two areas that caught my attention as you were running through them, Glenn, were the future loss costs arrow and the rate and other actions. And then in the box, you say you're pursuing larger rate increases in the second half of 2022 relative to the first half. So maybe you can give us some additional detail around what you guys are thinking on those two areas in that chart.

um greg this time i'll do a little overview and then glenn you can jump right in um first court as you know we don't give perspective uh uh earnings estimates in order to give perspective line by line um we would expect future loss costs to go up like we don't and we're booking to have them go up in the future uh and we also as we mentioned expect to take increased rates With that, Glenn, do you want to provide some more perspective on both the trends you're seeing historically in lost costs and then where we're thinking about how you're thinking about rate increases?

Sure. Good morning, Greg. On the lost cost piece of it, I know there's been some opinion out there that maybe the worst is behind us and the inflation will slow or, you know, just listening to other calls out there. We're not sure of that, and we certainly want to have the rate outpace the loss trends. One thing I'll say is when you look at our frequency trend, I think this is a unique time in history where typically frequency is harder to predict than severity, and I think the opposite is true right now. our frequency has been really, really steady. You look at it from the low points of the pandemic up to where it is now, it is just steadily crept back up, but has leveled out in that creep. And we have good data and expectation that it remains below the pre-pandemic levels, but continues to rise slightly as it has. And on the other side, severity, You know, it's a big wild card out there, I think, in all industries right now as to how long and how severe inflation runs with the actions of the Fed and anything else out there. We're taking the conservative viewpoint that we need a lot more rate in order to offset that. So, you know, I mentioned in the prepared remarks, you know, a couple of places where we're having trouble on it and we're working through it. But broadly, I will tell you it's gone very well in that the regulators we work with, good relationships across the country, and we're getting some meaningful rates going through the pipeline right now. And they understand. I mean, the math is on our side. And we need to get those rates in to offset those future rate trends. Because as the slide depicts, if you froze time and lost costs didn't move, we would earn our way right to the mid-90s combined ratio over the coming quarters. But that isn't the case. We need additional rate to offset those loss trends.

Got it. You slipped in the reference to slide seven in your answer, Glenn, which was going to be my other area of focus, which is you talk about reducing new business in states without appropriate rates. In this slide, I think you, well, you do call out California and New York. Are there other states where you're having some problems getting the rate approved that you need, or are just those the two principal states?

You know, Greg, I'll let Glenn give you the specifics there, but it isn't just to, like, negotiate. And I'm reading into your statement. I know you're not really saying that, but it's also to just manage a loss cost. Like, we just even if we get a rate increase, there may be certain cells or certain segments of the state that are less, where we have less profitability than we want. So it's also about managing profitability. Glenn, why don't you give some specifics? Yeah.

Yeah, and I'll just build on that because it's exactly right. You know, it really is. It's segments within states. it's markets within states, and it's even channels. I mean, look at the fact that right now, National General is performing quite well, both from a growth and a profit standpoint. And, you know, so we can position based on where we can be profitable, whether it's channel, market, segment of risk, and that's kind of how we're thinking about new business. We, you know, to put it, you know, very simply, You know, we don't want to write new business that we're not profitable on. And it's not as simple as looking at, you can see in our disclosures, the number of states where we're above 100 or above 96. Because that's the rearview mirror. The prospective view is where we've already gotten rates. And in some of the states that we feel good about the price we're putting on for new business and we'll grow in those. To answer your specific question, you know, New Jersey would be another place that we're working hard on. and need to get more rate. But the vast majority of states across the country, we've been working through and we're in good shape.

Answer makes sense. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Andrew Plagerman from Credit Suisse. Your question, please.

Jonathan, we didn't hear him.

I don't know if you did. I don't know, Andrew, if you're on mute or not, but we didn't hear him.

You can't hear him?

Now we can hear you.

Now we can't. I can hear you, Andrew. Can you hear me? Yes, I can hear you, Andrew.

Jonathan, can we move to the next question? We can't hear you. Okay, certainly.

All right. One moment for our next question.

Andrew, maybe you want to text it to Mark, and he can ask it for you if you want. But let's move on.

Our next question comes from the line of David Motemaden from Evercore ISI. Your question, please.

Hi, thanks. Good morning. I guess I'm just looking through what rates you're submitting, and that slowed down a You know, I'm specifically talking about auto insurance rate increase filings. It looks like the amount of the rate increase that you guys submitted during the second quarter slowed materially versus the first quarter. I'm just wondering why that was.

David, I'll make a comment, and then Glenn can, if there's anything you want to add, Glenn, jump in. First, we are fully committed to increasing rates necessary to get our combined ratio down to the target level that Glenn talked about. That obviously bounces around by quarter. And what you saw is what we got implemented in the second quarter. In the early part of your question, you said submitting, as in forward-looking. That's not what we're submitting. What you saw in that release is just what got implemented. We're obviously in conversations with regulators when you have these kind of increases continuously. So there are some states where Glenn's team chooses to go down, meet with the regulators, explain the numbers, and then submit it. And so we feel good about where we're headed there. Glenn, anything you want to add to that?

Yeah, I would just add. It really is about timing and about which states go through. So like, if you look at the amount we filed per state, we really haven't backed off at all. David, it is the states that went through in that cycle. It just, they aren't as large. And so the countrywide impact when you do a medium or smaller state population wise is lesser than the big states. We have some very large states going through the pipeline right now and And so I think you'll see that timing level itself out, and it's why we're able to say to you that we are seeking more rate in the second half of the year than the first half of the year. We have some very large states with meaningful rate increases going through.

Got it. Thanks. Yeah, I was referring to, you know, I obviously can see the implemented rate. I was referring to submitted, which I guess is something that's, you know, they're not approved or disapproved yet. It's just more kind of a leading indicator that I track and it just looked like you guys had slowed a little bit in the second quarter versus the first quarter. Um, but it does sound like that, that is more timing related as well. Um, maybe for, um, just another question. I was just looking through the businesses and, and in auto specifically, and I noticed that the all state brand combined ratio, uh, was nine points above the NatGen combined ratio for the quarter. It's been trending, you know, it's been higher for the last few quarters. Could you just, you know, that's kind of counterintuitive to me, just given the, you know, the differences in those books of business. So could you just maybe talk about what's going on between those two?

David, it's an astute question, but let me take it up a level and then get Glenn to jump into NatGen versus the Allstate brand, because many of you have also written and asked about, like, how do you stand versus competitors and stuff like that? So let me just take it up and deal with that, and then we'll go into the specifics. So like you, we always look at different comparisons, whether it's internal or external, to get a sense for performance. That said, when it's external, it tends to be more directional. versus hard variance analysis because of the differences in strategies. That's particularly because you get different strategies, different risk profiles, different state mix. It's better if you look at the long-term results rather than quarterly numbers, particularly when you're using percentage changes on a quarter by quarter. That said, you know, the numbers are the numbers, and you need to understand them and evaluate them. First thing I would say is when you look at it, most of you have asked about Progressive. You know, they're a really strong competitor, so we have great respect for them. As it relates to auto insurance, over a long period of time, Allstate, Progressive, and GEICO have all had attractive returns. And we're all dealing with the impact of, I would say, wide swings in frequency and severity for auto claims in particular that's driven by the pandemic and then the related inflationary impacts, car repairs and prices. They did report that it's progressive, a better combined ratio than us this quarter as they began raising prices earlier in 2021. But again, we don't know why, we're not them. But they did have different trends in frequency both last year and this year. And, of course, claim statistics are different for everybody, and sometimes people change them, how they count them over time. But the numbers I see are that in 2020, we both had frequency declines from 2019. That was reflecting the impact of shutting down the economy. So we were down in collision, we were down 26%, and they were down, I think, by 23%, 24%. Last year, their collision frequency increased by 26%, whereas ours increased by only 18%. So you would expect them to raise prices more than we raised them. This year, they're down in frequency and we're up. So you would expect our combined ratio to be higher than theirs. It's hard to say why these short-term trends are different, but Glenn will talk. It may be that they have a relatively small share of the customer statement that they call the Robinson. And so the comparison to NetGen will be helpful for you see how that's different. It could be state mix. It could be a whole bunch of other things. So I can't intuit exactly their results. And so Glenn will go through that risk mix and show you how that impacts the different results. As it relates to the strength of the business model, though, and your strategy, I think it's also worthwhile looking at other lines. And as we talked about on the last call, Allstate's an industry leader in homeowners with very attractive combined ratios. The reported combined ratio this quarter, again, is higher, as Glenn talked about, than it typically is in the second quarter. On a longer-term basis, though, we've obviously done quite well. To put that in perspective, if we had 112.5 combined ratio on our homeowner's business, last year our underwriting income would have been about $1.2 billion lower than it actually was, and that's particularly hard on a business that requires twice as much capital as auto insurance. As it relates to commitment to profitability, speed, precision, we dramatically reshaped that business, which we took you through. So our business models tend to be good and precise. We tend to look at both lines of business to see how we're doing. With that, Glenn, do you want to talk about NatGen versus the Allstate brand?

Yeah. Yeah, I will. Well, David, you're getting a good detailed answer there from Tom and now from me. You hit the daily double here because it is a really good question and an important one. I want to take you back and kind of look at it over the 18 months that we've owned NatGen and since the closing of that deal. And it's a good timeframe to use because 18 months is you know, is the time it takes to earn out the full annualized, you know, premium changes also. So you go back to first quarter of 2021, and this would be true, by the way, not only of comparison of Allstate brand and NatGen, but Allstate to other competitors like Tom was talking about. Allstate was running a combined ratio of about 10 points lower. And the reason for that was, you know, the frequency was lower. Frequency on more non-standard or near non-standard business came back much quicker as people needed to use their cars to make a living. And there was just a difference between different books of business. And so as a result, the good news was for the Allstate brand was that, you know, there's a really low combined ratios, around 80. The bad news is in the current state would be to say that, well, when you're running at that level, you need to take rates down. I mean, you can't sustain and even some places require you to refile your rates You can't sustain that level that far below target combined ratios. And National General, on the other hand, was still taking a maintenance level of rates up over that period of time. So now, flash forward to today, their frequency down while Allstate's is up, and then you've got a higher average earned premium going through. Now I mentioned before the $1.7 billion of premium that we have already in the system, you know, not only filed, but approved and already like renewing on policies that hasn't been earned yet. We've actually only earned 15% of the premium that's been raised through this cycle. So if we get 85% of it out there still left to be earned, whereas national general is earning, you know, off of a base plus they didn't have the, the, the hole to fill, so to speak, of the negative rates that, again, we appropriately took because when you're running an 80 combined ratio, but you've got to fill that up to get back to par and then go up from there. So there's a difference in the average or in premium that's a few points of the difference is one. Two, there's a few points difference on the frequency levels right now. Three, and this is a really important one when you're looking across companies, is the risks are different and the policies are different. So if you think about the inflationary factors and how they're hitting different policies, National General even inside their own book, it's really fascinating. If you look at their full coverage policies versus their liability-only policies, they're running about 10 points different on trend in their combined ratio. Because if you think of coverage policies versus their liability-only policies, they're running about 10 points different on trend and their combined ratio. Because if you think about a liability-only policy, you don't have collision, which is the highest inflationary trend of any coverage right now, one. Two, you tend to have very low liability limits. So on things like, let's say, property damage, If you have a state minimum of $10,000 of property liability coverage and you hit somebody's car and you total it, whether it's before the inflation factors were hitting us or after, you're probably just going to pay that $10,000. And the inflation, you know, there's a capitation to that inflation. Whereas when you typically have 100,000 limits, you're bearing the full weight of the change in the value of vehicles. So looking at all these components, we see just a lot of different ways, and I didn't even get into state mix, which is another one, a lot of different ways that the trends move differently. The nice thing is, you know, having acquired NatGen and it's performing really well, it's growing nicely, it's profitable, is that it's really acting right now as a bit of a diversification on that auto trend and gives us a place where we are able and willing to grow.

I really appreciate that answer. That was very helpful. Thanks so much.

Thank you. And as a reminder, ladies and gentlemen, if you have a question, please press star 1-1 on your telephone. And our next question comes from the line of Andrew Cleggerman from Credit Suisse. Hi. Good morning.

Can you hear me this time? We can. Thank you. I'm sorry about that before. First question is around non-rate actions. Could you give a little color on some of the more material non-rate actions that you could take and the potential magnitude we might be able to see in the back half of the year on loss ratio? How much potential improvement could that offer?

Glenn can give you the items. I think we probably won't be able to give you an attribution on what that will do for this year's combined ratio. Glenn, do you want to take that?

Yeah, so I'll give you a few. You've got underwriting actions where we segment the business and we segment our pricing to where, as Tom said earlier, it isn't just about, geez, we're going to not write new business in this market, let's say. It's, well, we're profitable in these segments and not in these other ones, so we're going to change the segmentation of our pricing, would be one. Another would be, you know, we change the down payment on policies and expect, you know, that, you know, there's a change in the flow of business at times with that. Certainly, the targeting of marketing is a really big one that I think, you know, can be underplayed, but we're pretty sophisticated in how we go to market. So, you know, when and where are we putting up banner ads when people are searching for auto insurance, which risk categories, which markets and flat out, we've taken a lot of marketing dollars out right now. We're just reducing the marketing that we're doing. One, it'll improve expense to, it'll lower the new business flow and allow us to, you know, more quickly get back to profitability. Um, And then the last one I'll say is the sales incentives that are out there with our agents about how we're incentivizing people to grow and in which places. So when you put all of that together and you look at how you're going to market, you're really limiting in some places the ability to grow your business with your intent of being not growing in non-profitable segments. Got it.

That's helpful. And I should assume then that that would be a very material impact on loss ratio as we go into the back half of the year?

I don't think you should assume. Very material. I mean, at first that's subject to anybody's view. Underwriting the actions alone, Andrew, won't get us to where we need to go. We need to raise prices, cut our expenses. Those are the big drivers. This is helpful, and I'd like to say to our team, look, anybody can give it away. So, like, there's no sense writing business and knowing you're going to lose money on it forever. So this is more about managing long-term profitability than what it would do for the combined ratio in the second half of the year.

Got it. And then just looking backward a little bit, and, you know, a lot of your competitors, their rate increases have been all over the place. And I think you got, what, about 2.5% across the whole book last quarter. What was the thinking going into that? Why not a lot more RAID? Was it precluded by the fact that 20% of the book is in California and New York and it's a lot more difficult? But maybe just rewinding the clock a little bit, why not pushing for a lot more RAID four or five months ago?

Well, I addressed part of that with the comparison of progressive, but let me just address the first philosophical concept. We are raising prices as fast as we can, everywhere we can. So we're up 6.1% in six months of this year, which would have been equal to maybe even our highest year in a long period of time. And we expect to get at least that much in the second half So there wasn't any thinking of let's dial down to 25. It's let's get everything we can everywhere we can. It obviously does depend on, you know, if you don't get anything in California, as Glenn said, that's 12% of your stuff, of your total book, so that you've got to pick it up by getting the right price in other places or just getting smaller in those places so it doesn't impact your profitability as much. As it relates to our competitors, I think, again, everyone's got their own story. We have our own story inside National General. It's different than the Allstate brand as it relates to Progressive. Their frequency was up almost 10 points more than ours in 2021, so you would expect them to raise their prices faster and higher than we did. Because at the beginning of the year, we were still earning a very attractive combined ratio. So I think everyone has their own story. What I would leave you with is that, like, we're completely committed to getting a combined ratio consistent with where we've been in the past. We've been able to run our business for a long time in the mid-'90s, and even when the industry has been a lot higher than that. And we see no change in the competitive situation, the regulatory environment, or our capabilities that lead us to conclude that that's not possible.

Thanks. That's very helpful. Thank you. One moment for our next question. And our next question comes in the line. I know Tracy from Barclays. Your question, please.

Thank you. I want to touch on your higher physical damage loss development, slide six. Just wondering, in your transformative growth initiative, I presume you cut claims staff. Do you feel like you're adequately staffed in claims where you can close claims in a timely fashion? Maybe you could talk about how you're trying to speed up close rates.

Let me, Glenn, if you'll talk about what we're doing in claims from an operating standpoint to deal with a higher inflationary environment, leveraging our relationships and getting purchase contracts. And then Mario can talk about the difference between property damage, which is amounts that we have to pay to other people for actions that our customers help create, to how we look at collision. And Tracy, the change in the prior year reserve stuff was really on that first category. And so Mario can talk about how that flows through the system.

So, yeah, so I'll start with, let me just emphatically say, we are not behind on claim staff and we are not behind on claims. Our pending looks good and we're in good shape there. The expenses that we took out of the claims process, the team's done a really terrific job of automating processes, creating good self-service capabilities. using a lot of virtual estimating capability. The slowdown we talk about in the system is really external and everybody's dealing with this part of it. And this would be uniform across the industry. So for example, shop capacity is way down. The staffing level in body shops across the repair industry is down to the point where there's been a 33% decline in the number of hours worked per car per day. So you think about a car sitting in a shop and, you know, historically, you know, it was, you know, four hours a day it got work done. Now it's three hours a day or a little less than three hours a day. So it's moved materially on that. Not surprisingly, the converse of that is that the average car time in a shop has doubled and the average time to get a car into a shop has more than doubled. So you put all of those together and consumers are frankly just choosing to hold onto the check and wait to fix their drivable car until a time they think they can get it back in some reasonable time. And so we're seeing a way elongated repair cycle that then you get your supplements later and you just have different dynamic in the way the financials are coming through. And it's, you know, like I said, in the prepared remarks, we had planned for it being about 40% greater than any point prior. And it turned out to be even higher than that with the way it delayed coming through. So I just didn't want, you know, with the question to miss the chance to tell you it is not claim staffing. We got plenty of staff and our team does a terrific job on it.

Well, in fact, Glenn, you're also doing some stuff on parts buying and other things that mitigate the inflationary aspects, right?

Yeah, absolutely. So, you know, using our scale as a company, we've doubled down on some of our parts suppliers. And this is both in home and auto, by the way, where we become a large and in some cases the largest in the industry buyer of certain materials, whether it's parts and auto or roofing and homeowners or flooring. And we get the benefit of those broader relationships and trends. We've also doubled down on our direct repair shop network in auto so that we can get our customers access to more shops that can take their car. And we have a better one-to-one relationship with that network and are able to control costs in that way.

And Mario, why don't we talk about a reserve release piece?

Yeah. So I guess, A couple of points I think are worth making before I jump into that. First of all, at the end of any reporting period, we believe, based on our processes, that our reserves are adequate. That's certainly the case at the end of the second quarter as we work our way through what are very comprehensive and thorough processes to estimate reserves, taking into account you know, all the data and inputs both in terms of internal and external data that we have. So I guess that's the place I'd start. Now, Tracy, your question was on physical damage development specifically, which is, you know, different than historical because these tend to be pretty short tail claims in the past. And as Tom mentioned, they really show up principally in two coverages, collision and property damage. Collision is first party coverage. There are customers. We're fixing their cars. claim gets reported, it's open, it may be subject to the same delays that Glenn talked about in terms of body shops, waiting periods, certainly the same inflationary factors. But we have the claim, we pay the claim, we move on. Property damage is a third-party coverage. So just to remind you, it's another carrier's customer. And oftentimes, we get notice of that claim and the payout on that claim are subrogation demands we get. from a third-party carrier. And what we've seen is, as Glenn talked about, lack of capacity in auto repair shops, coupled with the inflation factors we've been talking about, as well as changes in consumer claiming behavior. A lot of consumers are waiting oftentimes months to get their cars repaired, whether that's because they can't get into queue or they can't get an appointment to get it repaired, but it's just taking longer. And what all those factors are showing up as is a much longer tail in property damage on those third-party subroad demands from other carriers. And that, you know, is the physical damage strengthening that we recorded in the quarter. Much of that was in PD, and you see that on the chart that we showed on page six of the presentation. In terms of the dollar amounts getting paid after the end of the calendar year are much more significant than we've seen in the past. The thing I'd leave you with is because we have this information on kind of longer tail expectations, we're taking that into account as we establish 2022 severity levels. So we're certainly factoring that into the severity increases that we talked about earlier.

So just to follow up on that, your auto underlying loss ratio of 79.6% was up 4.7 points sequentially. So should I think that part of that was raising your loss picks from everything you said, but was there also a component that you trued up your first quarter loss ratio since that won't show up as a prior year, it's in the same accident year?

Yeah, Tracy. So, as you know, when we increase severity, which we did slightly this quarter relative to where we talked about our severity trends last quarter, that gets applied to claim counts for the entire year. So, there is a catch-up component that would have been reflected in the first quarter had we had, you know, perfect information in the first quarter.

Would you be able to quantify what that first quarter drop would have looked like? Just so we have a better sense of what's the right starting point when thinking about your loss ratio.

Tracy, I think you should just think about looking at the combined ratio by quarter. It does bounce around. There's seasonality. There's driving in the summer. There's all kinds of stuff. So I would, I think, you know, look at it on a year basis. We did it one year, one quarter last year when it was a pretty big number. It's not that big as we're looking at this quarter.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Paul Newsom from Piper Sandler. Your question, please.

All right. Good morning. Very full call. Thank you very much. I was wondering about the home insurance side of the house. Do we see the same sort of regulatory pressure in the home insurance business that we do in the auto. Presumably, we have inflationary issues there, and presumably you need to get rate there as well to offset those issues.

Paul, the increase in home insurance you saw is 15% year over year, so we're getting the rates we think we need in those areas. The underlying assumption there is we have regulatory pressure in auto insurance, and as Glenn mentioned, we have good relationships with the regulators, and when the price of fixing cars goes up, they got it. So there are a few states, and so we've been waiting to get a rate increase that was agreed to with the state of California over a year ago on homeowners. And that has yet to come through. So it tends to be more of a state-specific issue than a broad-based regulatory pushback. Glenn, anything you want to add?

Yeah, the only thing I would add there is... You know, it's that base level of premium we're getting that isn't great. It's the inflationary factors that really, you know, keeps us going. And that's just a different type of product. You know, home values go up and replacement costs go up. Cars, other than recent history, tend to not go up. So it's a different type of product in that way. So when you look at an average premium up over 13% year over year, It's a mix of rate and that. But to your point, Paul, we've got to get rate there. It's not as heavy as it is in auto, but we deal with the same regulators. And I always go back to, it's the math. We're not making up these rates, and they're not looking to make up a reason not to do the rates in most cases. It's the math. Does the math support a trend that says you need rate? And we've been successful in that space.

No, I'm just curious because obviously getting a rate in a home is different than not using inflation factors there and such. I just want to know if the dynamics were really any different in the improvement of the rate there as well. And on the home side, are you implementing some of the same you know, underwriting criteria changes, or are they materially different than what we've talked about for vandalism in this corridor on the other side?

Glenn, do you want to take that?

Yeah, no, I would say it is materially different. We like where we are in homeowners. That's obviously not universal. I mean, there's, from a risk standpoint, from a catastrophe-prone standpoint and everything, there's obviously a lot of underwriting we do. It's one of the strengths we have in homeowners is that we We know how to underwrite this business to make money over time and protect a good balanced set of customers in such a way that that portfolio works. But we are not in an equal or even that similar position in homeowners as auto right now in spite of the inflation. We're in a very good position to continue to write and grow homeowners.

Thanks for the call and the help is always.

Thank you. One moment for our next question.

Jonathan, let's just do one last question.

Certainly. Then one moment. And our final question for today comes from the line of Josh Anker from Bank of America. Your question, please.

Yes, thank you very much. When I think of Allstate, I think you guys are second to none in understanding the long-term value bundler concept. that the progressive people call the Robinsons. And when anyone says they're going after that Allstate customer, I'm very skeptical of the level of success they'll have. On the other hand, you guys bought NetGen to go into non-standard in a bigger way. You guys have come back and forth over 20 years in that a number of times. And if you look at progressive, they're losing their SAMs at this point in time. Whether they're unprofitable or whatnot, they are going somewhere. when you talk about having a thousand basis points of better margin in that gen and it's growing um how confident are you given that that's not your legacy business that you understand that those aren't progressive customers that they can't make work coming onto your books um let me see if i can deal with that so um i'm going to go up a minute so uh

It's really the question of we. And so who is we, Josh? So we is now Allstate and NatGen, as opposed to we was Allstate without experience in non-standard. So you may remember when we got started on NatGen, I went to Mary Carponco and said, hey, Barry, I got this problem. I'm not making any money in the independent agent business, and I'm not really in the non-standard business, so I either have to get out of the business or try to fix it. I've had trouble fixing it, so I've decided I'd like to get out of it, but I'm going to get out of it first by buying you, and then your team can fix our business, and that's exactly what's played out. Peter Rundell and that team are really good at non-standard. They know their business well. They run separately. They have separate pricing, separate claims. They They know that business well. And then they took our Encompass business, which was more standard business, and they're folding that in. And so we think we have a great opportunity to expand in the independent Asian channel, not just for the non-standard piece, but in what's affectionately called, I guess, the Robinson's by Progressive, because we're really good at that segment. And we think there's a great opportunity for us to compete there.

And so I just, I'll make this the last part of the question. You say, who is we? And you're making it seem that National General is running separately in some ways from all states. You know, of course, you're in charge and the buck stops with you, Tom. How confident are you that you understand the underwriting going on there, that you know that what we see right now is

Results that you're very comfortable and proud of Yeah, it's not that hard to understand Josh It's more difficult to build a set of business processes policy documents procedures and relationships with Agents that to note so they for example They they run something called the war score where they look at every individual agent and see what kind of business they're getting from them. So I It isn't, you know, like if it's got wheels on it and it's got losses and that kind of stuff, it's not that complicated. What's really complicated is building the business model to do it. And we are highly confident that they know what they're doing.

So thanks for answering the tough questions. Thanks for answering the tough questions, Tom. Appreciate it.

Thank you. All right, first, as we move forward, we clearly, based on your comments and the amount of time, we're focused on auto insurance. We're going to get those margins up. We've still got to make sure we make good money in homeowners, expand on our protection services, and at the same time, rebuild this digital insurer called Transformer Growth so that when we get margins where we are, we can hit the accelerator and hard on profitable growth and drive more shareholder value. So thank you all, and we'll talk to you on investments in September.

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