Q2 2023 Allstate Corp Earnings Call

August 2, 2023

Good day, and thank you for standing by welcome to Allstate's second quarter 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 this session you will need to press star one on your telephone to remove yourself from the queue.

Simply press Star one again, please limit your inquiry to one question and one follow up.

A reminder, please be aware that today's call is being recorded and now I'd like to introduce your host for today's program Brent <unk> head of Investor Relations. Please go ahead Sir.

Thank you Jonathan Good morning, welcome to Allstate's second quarter 2023 earnings conference call. After prepared remarks, we will have a question and answer session yesterday. Following the close of market. We issued our news release Investor supplement filed our 10-Q and posted related material on our website at Allstate investors Dot.

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 there are reconciliations in the news release and Investor supplement and forward looking statements about allstate's operations Allstate's results may differ materially from these statements. So please refer to our 10-K for 2022.

And other public documents for information on potential risks.

Now I'll turn it over to Tom.

Good morning, we appreciate you investing your time in Allstate.

Let's start with an overview of results and then Mario and just to walk through our operating results and the actions being taken to increase shareholder value. Let's begin on slide two allstate's strategy has two components increased personal property liability market share and expand protection services, which are shown in the two hours on the left and the right hand.

Side, you can see a summary of results for the second quarter.

Progress is being made on the comprehensive plan to improve auto insurance profitability, which includes raising rates, reducing expenses limited growth and enhancing claim processes.

Auto insurance margins are not at target levels, the proportion of premium associated with state operating and then underlying underwriting profit has gone from just under 30% in 2022% to 50% for the first half.

This year Mario will discuss the actions being taken to continue this trend and importantly improved results in New York, New Jersey and California.

Severe weather in the quarter contributed to a net loss of $1 4 billion 42 catastrophe events impacted 160000 customers and resulted in $2 7 billion gallons of catastrophe losses in our property liability underwriting loss of $2 $1 million.

Strong fixed income results from higher bond yields generated $610 million in investment income and protection services in health and benefits generated $98 million of profits in the quarter.

The transformative growth plan to become the lowest cost protection providers, making continued progress. This both helps current results with lower costs and physicians Allstate for sustainable growth on the auto margins return to acceptable levels.

Affordable simple connected property liability products are sophisticated telematics pricing and differentiated direct to consumer capabilities are being introduced into the Allstate brand through a new technology platform.

National Channel is growing which will also increase market share specialty auto expertise along with leveraging auto is allstate's strength in preferred auto and homeowners insurance products are expected to drive sustainable growth.

Allstate protection plans is expanding its embedded protection through new products and retail relationships and in international markets.

<unk> has a strong capital position with $16 $9 billion of statutory surplus and holding company assets as Jeff will discuss later and as you know we have a long history of providing cash returned to shareholders through dividends and share repurchases over the last 12 months, we've repurchased three 9% of outstanding shares for $1 $3 billion.

We suspended this research this repurchase program in July as we had a net loss for the six months a year.

Proving profitability, increasing property liability organic growth and broadening protection offered to customers during extensive distribution platform will increase shareholder value.

Let's review the financial results on slide three.

Revenues of $14 billion in the second quarter increased 14, 4%.

Above the prior year quarter, our $1 $8 billion. The increase was driven by a higher average premiums in auto and homeowners insurance from rates taken in 2022, and 2023, resulting in property liability earned premium growth of nine 6%.

Net investment income of $610 million reflects the impact of higher fixed income yields and extended duration, which will substantially increase income.

This growth more than offset a decline in from performance based <unk>.

Investments in the quarter.

The net loss of $1 4 billion and an adjusted net loss of $1 2 billion reflects a property liability underwriting loss of $2 1 billion due to the $2 7 billion in catastrophe losses and increased auto insurance loss costs.

And auto insurance higher insurance premiums and lower expenses were largely offset by higher catastrophe losses and increased claim frequency and severity.

The underlying auto insurance combined ratio did improve slightly for the first six months of 2023 compared to the year end 2000 and trying to.

Auto insurance had an underwriting loss of $678 million.

In homeowners insurance catastrophe losses was substantially over the 15 year average, resulting in a combined ratio of 145 generating an underwriting loss of $1 $3 billion.

Underlying combined ratio on homeowners improved one nine points to 67, six is higher average premiums more than offset increased severity.

Adjusted net income of $98 million from protection services in health and benefits when combined with the $610 million of investment income offset a portion of the underwriting loss.

The target for enterprise adjusted net income return on equity remains at 14% to 17%.

I'll now turn it over to Mario to discuss property liability results.

Thanks, Tom let's turn to slide four.

We are seeing the impact of our comprehensive auto profit improvement plan in our financial results starting with the rate increases we have implemented to date.

The chart on the left shows property liability earned premium increased nine 6% above the prior year quarter, driven by higher average premiums in auto and homeowners insurance, which were partially offset by a decline in policies in force.

Price increases and cost reductions were largely offset by severe weather events and increased accident frequency and claim severity.

The underwriting loss of $2 1 billion in the quarter was $1 $2 billion worse than the prior year quarter due to the $1 $6 billion increase in catastrophe losses.

The chart on the right highlights the components of the combined ratio, including 22 six points from catastrophe losses.

Prior year reserve re estimates excluding catastrophes had a one six point adverse impact on the combined ratio in the quarter.

Of the $192 million of strengthening in the second quarter $148 million was a national general primarily driven by personal auto injury coverages in the 2022 accident year.

In addition, prior year's were strengthened by approximately $31 million for litigation activity in the state of Florida related to tort reform that was passed in March of this year.

We've been closely monitoring the increase and filed suits on existing claims and the charge reflects a combination of higher legal defense costs and a modest loss reserve adjustment.

Despite continuing pressure on the loss side, the underlying combined ratio of $92 nine improved modestly by <unk> five points compared to the prior year quarter and <unk> four points sequentially versus the first quarter of 2023 now.

Now, let's move to slide five to discuss Allstate's auto insurance profitability in more detail.

The second quarter recorded auto insurance combined ratio of 108, three was <unk> four points higher than the prior year quarter, reflecting higher catastrophe losses and increased current report year accident frequency and severity, which were largely offset by higher end premium expense reductions and lower adverse <unk>.

Catastrophe prior year reserve re estimates.

We continue to raise rates reduce expenses restrict growth and enhanced cleaning processes as part of our comprehensive plan to improve auto insurance margins.

This slide depicts the impact of our profit improvement actions on underlying auto insurance profitability trends.

As a reminder, we continually assess claim severities as the year progresses and last year as 2022 development. We continued to increase report your ultimate severity expectations.

The chart on the left shows the quarterly underlying combined ratios from 2022 through the current quarter with 2022 quarters adjusted to account for full year average severity assumptions, which removes the effects that entry year severity changes had on recorded quarterly results.

After adjusting for the timing of higher severity expectations. The quarterly underlying combined ratio trend was essentially flat throughout 2022.

As we move into 2023, the underlying combined ratio has improved modestly.

Each of the first two quarters, reflecting both the impact of our profitability actions and the continued persistently high levels of loss cost inflation.

The chart on the right depicts.

The percent change in annualized average earned premium shown by the Blue line and the average underlying loss and expense per policy shown by the light blue bars compared to prior year end.

Rapid increases in claim severity and higher accident frequency since mid 2021 resulted in significant increases in the underlying loss and expense per policy, which outpaced the change in average earned premium and drove a higher underlying combined ratio in both 2021 and 2022.

As we've implemented rate increases the annualized earned premium trend line continues to increase and has begun to outpace the still elevated underlying cost per policy in the first two quarters of 2023, resulting in a modest improvement in the underlying combined ratio.

Slide six provides an update on the execution of our comprehensive approach to increase returns in auto insurance. There are four areas of focus raising rates, reducing expenses implementing underwriting actions and enhancing claim practices to manage loss costs.

Starting with rates, you'll remember the Allstate brand implemented 16, 9% of rate in 2022, and the first six months of 2023, we have implemented an additional seven 5% across the book, including five 8% in the second quarter.

National General implemented rate increases of 10% in 2022, and additional five 5% through the first six months of 2023.

We will continue to pursue rate increases in 2023 to restore auto insurance margins back to the mid <unk> target levels.

Reducing operating expenses as core to transformative growth and we've also temporarily reduced advertising to reflect a lower appetite for new business.

We continue to have more restrictive underwriting actions on new business and locations and risk segments, where we have not yet achieved adequate prices for the risk but are beginning to selectively remove these restrictions and states in segments that are achieving target margins to this point the number of states achieving an.

The combined ratio better than 100 increased from 23 states, which represented just under 30% of Allstate brand auto insurance premium at the end of 2022 to 36 states representing approximately 50% of premium at the end of the second quarter.

Ensuring that our claim practices are operating effectively and enhancing those practices, where necessary is key to delivering customer value, particularly in this high inflation environment.

This includes modifying claim processes in both physical damage and injury coverages by doing things like increasing resources, expanding re inspections and accelerating the settlement of injury claims to mitigate the risk of continued loss development.

We're also negotiating improved vendor service and parts agreements to offset some of the inflation associated with repairing vehicles.

Slide seven provides an update on progress in three large states with a disproportionate impact on profitability.

The table on the left provides rate increases either implemented so far this year are currently pending with the respective insurance Department in California, New York and New Jersey.

Because our current prices are not adequate to cover our cost in these states. We have had to take actions to restrict new business volumes as a result, new issued applications from the combination of California, New York, and New Jersey declined by approximately 62% compared to the prior year quarter.

In California, we implemented a second six 9% rate increase in April and also filed for a 35% increase in the second quarter that is currently pending with the department of insurance.

We continue to work closely with the California Department to secure approval of this filing and restore auto rates to inadequate an adequate level.

In New York, we implemented approximately three points of weighted rate in June driven by approved increases and two closed companies and subsequently received approval for a six 7% increase in the larger open company, which was implemented in July we will continue to make further filings in 2020.

Three that will be additive to their to the rates approved so far this year.

In New Jersey, we received approval for a six 9% rate increase in the first quarter and filed subsequent 29% increase in the second quarter.

As mentioned earlier, we anticipate implementing additional rate increases for the balance of 2023 to counteract persistence loss cost increases.

Slide eight dive deeper into how we are improving customer value through expense reductions.

Chart on the left shows the property liability underwriting expense ratio and highlights the drivers of the two five point improvement in the second quarter compared to the prior year quarter.

The first Green bar shows the $1 four point impact from advertising spend which has been temporarily reduced given a more limited appetite for new business.

The second Green bar shows the decline in operating cost, mainly driven by lower agent and employee related costs and the impact of higher premiums relative to fixed costs.

Shifting to our longer term trend on the right we remain committed to reducing the adjusted expense ratio as part of transformative growth.

This metric starts with our underwriting expense ratio, excluding restructuring coronavirus related expenses amortization and impairment of purchased intangibles and advertising.

That adds in our claims expense ratio excluding costs associate associated with settling catastrophe claims because catastrophe related costs tend to fluctuate.

Through innovation and strong execution, we've driven significant improvement with our second quarter adjusted expense ratio of $24 seven.

We expect to drive additional improvement achieving an adjusted expense ratio of approximately 23 by year end 2024, which represents a six point reduction compared to our starting point in 2018.

While increasing average premiums certainly represent a tailwind our intent and establishing the goal is to become more price competitive.

This require a sustainable improvement in our cost structure with our future focus on three primary areas, including enhancing digitization and automation capabilities.

Improving operating efficiency through outsourcing business model rationalization and centralized support.

And enabling higher growth distribution at lower costs through changes in agency compensation structure and new agent models.

Now, let's move to slide nine to review homeowner insurance results, which despite improving underlying performance incurred an underwriting loss in the quarter driven by elevated catastrophe losses.

Our business model incorporates a differentiated product underwriting reinsurance and claims ecosystem that is unique in the industry.

Our approach has consistently generated industry, leading underwriting results, despite quarterly or yearly fluctuations in catastrophe losses.

Our homeowners insurance combined ratio, including the impact of catastrophes has outperformed the industry by 12 points from 2017 through 2022.

During that same time period, we generated annual average underwriting income of approximately $650 million.

Chart on the left shows key Allstate protection homeowners insurance operating statistics for the quarter.

Net written premium increased 12, 4% from the prior year quarter predominantly driven by higher average gross premium per policy in both the Allstate and National General brands and a 1% increase in policies in force.

Allstate brand average gross written premium per policy increased by 13, 2% compared to the prior year quarter, driven by implemented rate increases throughout 2022, and an additional seven four points implemented through the first six months of 2023 as well as inflation in <unk>.

<unk> home replacement cost.

While the second quarter homeowners combined ratio is typically higher than full year results, primarily due to seasonally high severe weather related catastrophe losses. The second quarter of 2023 combined ratio of 145 three was among the highest in allstate's history and increased by 37 eight points.

Compared to last years second quarter due to a 43 point increase in the catastrophe loss ratio.

The underlying combined ratio of 67, 6% improved by one nine points compared to the prior year quarter, driven by higher earned premium lower frequency and a lower expense ratio, partially offset by higher severity.

The chart on the right provides the historical perspective on the second quarter property liability catastrophe loss ratio of 75, nine points, which was elevated compared to historical experience, reflecting an increased number of catastrophe events and larger losses per event.

While the second quarter result was 33 nine points above the 15 year second quarter average of 42 point it is not unprecedented and falls within modeled outcomes contemplated in our economic capital framework.

We remain confident in our ability to generate attractive risk adjusted returns in the homeowners business and continue to respond to loss trends by implementing rate increases to address higher repair costs and limiting exposures in geographies, where we cannot achieve adequate return for our shareholders.

And now I'll hand, it over to just to discuss the remainder of our results.

Thank you Mario I'd like to start on Slide 10, which covers results fire protection services and health and benefits businesses. The chart on the left shows protection services, where we continue to broaden the protection provided to an increasing number of customers largely through embedded distribution programs.

Revenues in these businesses, excluding the impact of net gains and losses on investments and derivatives increased nine 1% to $686 million in the second quarter compared to the prior year quarter increase reflects growth in Allstate protection plans and Allstate dealer services, partially offset by a decline at parity.

By leveraging the Allstate brand excellent customer service and expanded products and partnerships with leading retailers Allstate protection plans continues to generate profitable growth, resulting in an 18% increase in the second quarter compared to the prior year quarter.

In the table below the chart you will see that adjusted net income of $41 million in the second quarter decreased $2 million compared to the prior year quarter, primarily due to higher appliance and furniture claim severity and a higher mix of lower margin business as we invest in growth at Allstate protection plans.

We will continue to invest in these businesses, which provide an attractive opportunity to broaden distribution protection offerings that meet customers' needs and create value for shareholders.

Shifting to the chart on the right health and benefits continues to provide stable revenues, while protecting more than 4 million policyholders revenues of $575 million in the second quarter of 2023 increased by $2 million compared to the prior year quarter, driven by an increase in premiums and contract charges and other revenues in <unk>.

Group Health, which was partially offset by a reduction in individual health and employer voluntary benefits.

Health and benefits continues to make progress on rebuilding core operating systems to drive down cost improve the customer experience and support growth to generate shareholder value.

Adjusted net income of $57 million in the second quarter of 2023 decreased $10 million compared to the prior year quarter, primarily due to the decline in employer voluntary benefits individual health and higher expenses related to system investments.

Now, let's move to slide 11 to discuss investment results and portfolio positioning.

Active portfolio management includes comprehensive monitoring of economic conditions market opportunities enterprise risk and return in capital as well as interest rates and credit spreads spreads by rating sector an individual name.

As you'll recall last year exposure to below investment grade bonds and public equity was reduced we maintained this portfolio allocation in the second quarter, which enabled us to extend duration of the fixed income portfolio and increased market based income levels as shown in the chart on the left net investment income totaled $610 million.

In the quarter, which was $48 million above the second quarter of last year.

Market based income of 536 million shown in blue was $168 million above the prior year quarter, reflecting repositioning of the fixed income portfolio into longer duration and higher yielding assets that sustainably increased income.

Market based income has also benefit benefited from higher yields for short term investments and floating rate assets such as bank loans.

Performance based income of $127 million shown in black was $109 million below the prior year quarter due to lower valuation increases and fewer sales of underlying assets.

Our performance based portfolio is expected to enhance long term returns and followed volatility on these assets from quarter to quarter as expected.

The chart on the right shows the fixed income earned yield continues to rise and was three 6% at quarter end compared to two 8% for the prior year quarter and three 4% in the first quarter of 2023.

This chart also shows that from the fourth quarter of 2021 through the third quarter of 2022, lowering fixed income duration mitigated losses as rates rose beginning in Q4 of 2022, we began to extend duration, which locks in higher yields for longer and the second quarter, we further extended duration.

To four four years, increasing from four years in the first quarter.

Our fixed income portfolio yield is still below the current intermediate corporate bond yield of approximately five 5%, reflecting an additional opportunity to increase yields.

To close I'd like to turn to slide 12 to discuss how Allstate proactively manage capital to provide the financial flexibility liquidity and capital resources necessary to navigate the challenging operating environment.

Capital management is based on a sophisticated framework that quantified capital targets by business product geography investment type and for the overall enterprise targets include a base level of capital for expected volatility and earnings as well as additional capital for stress events situations, where correlations between rich.

<unk> are higher than modeled and other contingencies.

This model enables us to proactively manage capital in a dynamic and uncertain environment.

Utilization of reinsurance both by event and in aggregate is SaaS relative to overall enterprise risk levels.

Robust reinsurance program is in place with multi year contracts to mitigate losses from large catastrophes.

Homeowners insurance geographic exposures are managed to generate appropriate risk adjusted returns, including lowering exposure to California, and Florida property markets. This framework was used to decided to purchase additional aggregate program coverage this year.

Producing high yield bonds, and public equities and the investment portfolio significantly reduced the amount of enterprise capital required for investments. This decision was based on market conditions and the decline in auto profitability as well as the desire to reduce volatility and statutory results. It also provided provides a sustainable source of increased <unk>.

<unk> and capital generation.

The decline in auto insurance profitability is also captured by our framework, which increased capital requirements for auto insurance from pre pandemic levels to reflect recent results.

Our capital management framework insurance, Allstate has the financial flexibility and liquidity and capital resources necessary to operate in challenging environments and be positioned for growth.

Allstate's capital position is sound with estimated statutory surplus and holding company assets totaling $16 9 billion at the end of the second quarter as shown on the table to the left.

Holding company assets of $3 3 billion represent approximately two five times, our annual fixed charges with no debt maturities for the remainder of 2023 and a modest amount maturing in 2024.

Senior debt and preferred stock refinancing in the first and second quarters of this year demonstrate our ability to readily access capital markets to address maturities as they arise.

In response to the loss this quarter, we suspended the share we have suspended share repurchases under the $5 billion authorization, which is 90% complete this authorization expires in March of 2024.

In addition to having a strong capital base Allstate has a history of generating capital and statutory net income in our largest underwriting company Allstate insurance company as you can see on the chart on the right.

Statutory net income average $1 9 billion annually in the 10 years prior to the onset of Covid you.

You can also see the impact of the rapid increase in auto insurance claims severity in recent catastrophe loss experience on 2022 and 2023 statutory net income.

We're confident that the auto insurance profit improvement plan will restore profitability. The homeowners insurance business is designed to generate underwriting profits and proactive investment management will create additional capital to grow market share expand protection offerings and provide cash returned to shareholders.

Allstate will continue to proactively manage capital to navigate the current operating environment and be well positioned for growth to increase shareholder value.

With that as context, let's open up the line for your questions.

Certainly one moment for our first question.

And as a reminder, please limit yourselves to one question and one follow up our first question comes from the line of Gregory Peters from Raymond James Your question. Please.

Well good morning, everyone.

I guess I'm going to focus on auto insurance.

The ability for my first question.

And.

Obviously, theres a bunch of slides in your presentation. The one where you identified the three states.

I guess from a bigger picture perspective, though.

Do you have updated views on frequency and severity for the second half of this year for next year versus what you were thinking at the beginning of the year.

So what I'm ultimately getting is how much more rate do we need to get that underlying combined ratio number that you use.

On slide six.

Excuse me slide five to get it down to the low to mid nineties.

Greg This is Tom let me start and Mario can jump in.

First as it relates to frequency and severity of course, it's hard to predict what's going to happen in the second half of the year. What we do know is that the.

Severity was increased.

And the second first half of this year from what we thought it would be when we looked at it last year. So we're really glad we took the rates that we did and we've been accelerating rates as Mario talked about it.

I think when you look at it it's really of course, it's hard to predict right.

What you really look at is that slide there Mario showed that had the line with the average premiums going up and then the bar with the severities and you want that line to be about the buyer of course.

What you know going forward is that the line is going to keep going up alright likely file those rates. We've got those rates, we put them in the computer we're collecting the cash.

So you know that's going to happen. What you don't know is whether severity will go up from the 11% or whether it will go down from the 11% it's come down this year from last year.

We'd like to think that all the work we're doing will have it come down even further.

And so that gap will get you back to the mid Ninety's. There we've talked about in terms of targeted combined ratio when that exactly happens of course is dependent on what happens to the second bar, which is not known what we do know is we will continue to take increased rates that make that line continue to go up.

Any specifics you want to add on the three states that he mentioned are.

I think Greg the thing I would add it's less about to Tom's point, what we expect going forward and more about what we're seeing and maybe just give you a little more color.

Underneath the loss cost trends. So as you remember last quarter, we started giving you pure premium trends as opposed to coverage specific frequency and severity because we just think it's a better way for you to evaluate where overall profitability is going and the point I'd make is if you look on slide five as Tom pointed out for.

For the first couple of quarters. This year, we've seen the average earned premium trend begin to outpace.

The increases in loss and expense.

Hard to predict what the future will hold but thats that is an encouraging development underneath that loss trend.

If you look at where we're at in the second quarter compared to where we were for the full year last year.

The increase in pure premium is about 12, 5%.

And we told you that severity is up on average across all coverages by about 11, so what we're seeing still is persistently high.

Severity across coverages with a lesser impact from from overall frequency increases but.

The point being we're going to continue to aggressively implement our profit improvement plan.

<unk> seen what we've done with rates, we've done seven five points through the first half of this year and the Allstate brand five five points on National General, we're going to continue to do that.

You see the benefits that the cost reductions is having on the combined ratio while that rate earns in.

And we've talked a lot about those three states, which make up about a quarter of our book, California, New York, and New Jersey would want to keep pushing on.

Continuing to drive rate increases into the book.

We've gotten some approvals so far this year, but theres rates pending pretty significant rates pending in California, and New Jersey, and we're prepared to file another rate in New York, we're going to keep pushing really hard on that and in the meantime, we've scaled way back on new business production in those states and while.

It's having a.

A reasonably small impact on the loss ratio. So far this year, because new business just tends to be on.

A smaller proportion of our overall book it will continue to have a favorable impact on our loss ratio going forward and until we get to adequate rates in those three states, we're going to keep.

Restricting the volume of business, we are willing to write.

Okay. Thanks for that color.

Maybe just keeping on auto.

As my follow up question on Nat Gen.

You spoke about.

<unk> strengthening in the quarter.

And I guess, you also mentioned, Florida and your comments.

Can you give us any perspective on the reserve strengthening that happened inside that Chad is it.

Is it is it.

Is it a true up and that you're comfortable with where the trends are with matching reserves at this point in time or is this going to be another.

Situation, where we have a couple of quarters.

Catch up that we're having to deal with.

Mario can answer how we feel about the growth and the profitability of that growth in natural John Greg Let me just set of context.

So first the acquisition of National General, it's exceeding our expectations.

We bought the company so that we could consolidate our encompass business into it.

And that would reduce costs and create a stronger business that we're serving independent agents, we like what we got there the consolidation and the cost reductions are exceeding our expectations and that was the basis under which we agreed to.

The economics of.

On the acquisition made sense the upside from there was growing in AIA channel both through the specialty vehicle product and by building new products for our preferred auto and homeowners rates using allstate's expertise both of which are also becoming reality Mario do you want to talk about.

Both reserves, but I think greg's underlying question. There was like you are growing is that a good thing yes.

So Greg the place I'd start with National General Youre, right, where we're growing in national General that's principally in the specialty vehicle or the non standard auto.

Part of the business, which that market continues to experience pretty significant disruption a couple of things I'd say on Nat Gen. First of all the underlying combined ratio in the quarter was <unk> 96, and 96% slightly higher than then we want to run it at but it's pretty close to our target margin in that 96.

Includes.

You kind of roll forward impact of increasing reserves principally in the 2022 accident year.

And therefore, increasing our loss expectations into 2023 years. So that's all embedded in the 96.

A couple of things in addition to that that I have mentioned, we've talked a lot about the profit improvement plan.

We're implementing that same approach in that same plan of national general across the same levers we are using in the Allstate brand. We've taken five five points of rate. This year 11 points of rate over the last 12 months and that churn and given that it is predominantly a non standard auto book the book tends.

The turnover and get repriced pretty rapidly. So we're comfortable that the rate we've taken so far this year is working its way into the system and I would say in response to a higher loss trend.

We have seen in 2023, we've accelerated our plan to take rate in 2023. So we're ahead of that five five points is ahead of where we expect it to be.

At this point in time during the year, we've also restricted.

Underwriting guidelines and a number of states, we're writing more liability only less full coverage. So we're being really selective about what we are writing.

And the other benefit as Tom mentioned part of the rationale around acquiring national General was the opportunity to lower costs and improve the expense ratio and we're benefiting from that inside that 96 underlying combined ratio, we've seen a pretty significant improvement year over year in the underwriting expense ratio.

As we essentially take advantage of scale through the growth, we're getting so comfortable where we're positioned we're taking the appropriate actions.

From a profitability perspective, and so we're comfortable with what we're writing in that churn right now.

Got it thank you for the detail on your answers.

Thank you one moment for our next question.

And our next question comes from the line of Josh Shanker from Bank of America. Your question. Please.

Yeah. Thank you very much for taking my question.

Mount of rate that you need and the amount that you can get over a certain period of time.

When you look back to the beginning of the year and you had your plan for taking rate.

You've learned about <unk> frequency and severity over the past six seven months.

Has that.

The perspective on how much rate you need and want to ask or when does that trend for 2023 plan or does that mean that the regulators will give you only so much you have to get that rate in 'twenty four and beyond.

Of.

Of course, it's I would say Josh it's a good question, but I would say, it's not like it's not like every quarter or every six months, we adapted its like everyday.

Mario and Guy are constantly looking at our pricing and we're going to maximize buyout rates everywhere we can.

And we're not getting as much pushback from regulators because the numbers are pretty clear.

It's not like we're making it up you pay for the cars and they see the cash crops.

And they do have to pay attention to what the rules are and right now we have three states, which are a problem and we're working aggressively with them. So.

So that we can get the right in my mind, but yes. So are are the right expectation for the year has gone up in the beginning of the year unable to keep going up until we get to our targeted combined ratio.

We've talked about some of the issues we have in some of those states you see us.

Agreeing to lower amounts than we actually need because the time value of money.

And the multiplication works for you so why take US six to nine when you need 35 in California, because you can get six nine right away.

As opposed you could wait 18 months to get 35, so we've.

We are very sophisticated and have good relationships with them. So we can manage it so that it meets our needs.

And we'll just keep raising it that's on auto which I assume were going just same thing applies in homeowners.

And our expect our price increases are up a little bit, but not up as much as what we thought they were going to be but they are still up from where we set out where we thought we'd be in the beginning there Mario and Ethernet, Yes, just a couple of additional data points Josh.

Tom mentioned that our data is immediately and our indications are.

Immediately responsive to the data we're seeing so we're constantly updating.

Rate indications and filing for what we need based on what we're actually experiencing versus maybe what we thought we would have needed going into the year.

And the other point I'd make is and this is on a couple of the states.

That we've spiked out for you.

We're evaluating trade offs and leaning in.

Where we think it just makes sense. So for example in California, we got the $2 six 9% rate and we turned around and file for essentially our full indication at 35, knowing that that was likely going to.

Require a longer review period, there was a little more risk there, but we thought it was the right thing to do in New Jersey. We did the same thing we got the six 9%.

Rate approved which is essentially the cap that the state hold you to but then.

We opted to utilize an administrative provision and file for a 29% right. So again, we're we're aggressively pushing on the amount of rate we need.

Based on the loss.

<unk>, we've got in real time, and we're going to keep doing that and keep pushing right through and working with all of the departments in each of the regulators to get those rates approved as quickly as we can.

To continue to bend the line on that.

That loss trend.

And outside of the three problem states.

When you are submitting the filing to the filing.

To be audited financial statements are financial data in arrears or can you pretty much file.

The new rate.

Our current data assets coming into the system.

Yes.

For for.

For file and use states certainly we're filing based on <unk>.

Current data as opposed to relying on prior to year end or any of that information. So what we're doing is Josh is reacting to the loss trend, we're seeing incorporating that into the filing and thats what gets submitted.

Okay. Thank you for the answers and questions.

Thank you one moment for our next question.

And our next question comes from the line of at least Greenspan from Wells Fargo. Your question. Please.

Hi, Thanks. Good morning, My first question I wanted to go back.

Back to the capital discussion and decision you guys made to pull the buyback program.

Can you just.

Give us a sense of what you're looking for when you return to buybacks I said, maybe some of this is also dependent we're going.

Into win season, right, which could bring additional cat losses to all state and you guys are still working on improving the profitability of your auto business. So what would you need to see.

Q2 turned back on the buyback at some point next year.

Please let me start and macro and then ask just to maybe dig into even a little more I know you spent a lot of time on capital. So we can help you show you what leads to be true first we have a long history of proactively managing camera, whether that's how we deploy it at the individual risk level.

Or what we do with different investments has just talked about.

Whether it's selling businesses like life and annuities are using alternative capital like reinsurance or cat bonds or providing cash to shareholders through dividends and share repurchase as you pointed out I think if you look at the Q, we bought back about $37 billion of stock.

Since we went public.

And so that's because we're we've got good math, which Jeff will talk about and we do have proactively I think the suspended and I think the suspending the share repurchase we just sound judgment, okay, not making money don't buy shares back it's really not a lot more complicated than that I mean, it obviously helps you preserve capital.

But just sort of good logic always serves the right kind of capital plan, which is you've got to make money and be buying shares back.

You want to talk about maybe give at least some more specifics on vision, a whole capital and good morning, Elyse I think to build on Tom's point and I think it's easiest to think about not that specific question, but more how we think about capital management more broadly.

So you focus as many others do on RBC RBC is a great measure for insurance companies is common.

Look at it as well so we certainly understand why there is a focus at times on RBC, It's a measure that serve the industry well in good times and in bad times, but I think as you know RBC has some limitation. So we use it as an input and our capital management process, but not a primary driver right.

<unk> is focused on statutory legal entities, but it doesn't incorporate the risk across the enterprise our correlation in those types of risks. It doesn't include sources of capital outside of regulated entities.

<unk> plans would be an example, there but those aspects are important to our overall capital management framework.

We also get situations that arise when we just focus on RBC, where you have entities and I think we've talked with you about this there is an example of our national General entity is reinsured all of its risk into the Allstate insurance company.

Got it retains capital so that the RBC ratio in that particular entity is quite high and the AIC RBC ratio is slightly lower because it has the risk without the capital now that capital is all available to us and our comprehensive and more precise capital management framework considers those facets. So.

And I think it's important to go back to really how we're managing capital through what we consider to be a very detailed and sophisticated economic economic capital framework that quantify as enterprise risks and establishes our targets.

As we've talked that includes regular input from regulatory capital models rating agencies, and then our own risk models that help to quantify stress events and we built those models really off of the risk models that are used to regulate banks.

And we feel very good about the output of our overall economic capital model. So we use that then.

Discuss to determine our level of base capital that we need to operate our business, while continuing to meet customer needs.

<unk> that are well above triggering any any regulatory involvement so you've got base capital on top of that we hold the stress capital.

For unexpected around frequent outcomes and then we have a contingent reserve that we use and included in our target capital range Thats really meant to incorporate extreme stress events extreme low frequency events and just basically things that are beyond the standard probabilities that we apply to our SaaS capital calculations.

Hi, catastrophes this quarter used some of the contingent capital reserve, but we continue to hold the stress capital Thats above our base capital level, and we remain confident in our capital position position and our ability to execute on strategy.

When we look ahead I think your question gets to the future right. So I wanted to build a base for reminding everyone. How we think about it but as we look to the future. It's more than just a question of the buybacks. It's what is their capital perspective look like and we continue to believe we are well capitalized even if it takes longer than we expect to get off of auto profitability back to targeted levels and.

Even if catastrophes come in at more expected levels for the rest of the year.

In 2023, even at more normal levels of catastrophes for the rest of the year 2023 will be the highest year for catastrophe losses on a pure dollar basis.

25 years, so it's a high cat quarter, we continue to feel good about.

Capital liquidity is not an issue as we've talked about we have a strong source of cash through interest payments and maturities that come over the next 12 months I think we have about $5 billion that comes off the portfolio without selling everything in the next 12 months and we have a highly liquid investment portfolio.

Also have a number of capital options that we're continuously evaluating given our proactive approach to capital management as Tom mentioned, so that includes additional reinsurance options that could allow us to lower the volatility of earnings and an attractive cost of capital and we continue to look at those things.

I think we've also proven in the last couple of quarters with open access to financial markets, where we show that to our some of our refinancing activity. So we have a lot of options I want to kind of close out with.

As it relates to capital options and capsule capital strength issuing common stock at this point is not something that we're considering it's not an option.

On the table given how we feel about our overall capital position. So maybe that I know that's more than just when youre going to turn back on.

Buybacks, but I want it I think the context around how we think about capital management is more important to how we might answer that question in the future. So hopefully that was helpful.

That was helpful and then maybe on <unk>.

Just one more right you did mentioned reinsurance and some other options that you have.

You did make you did in the first quarter right you choose to monetize part of your equity portfolio is it safe to assume that you would think about prospect going forward on the capital side Youre not looking to make any significant changes to investments and on the.

On the same thinking.

Thinking about your current businesses.

You wouldn't be thinking about monetizing any assets as a way to free up capital.

So on the investment side.

The decision was primarily made from a risk return standpoint, our first starting at the markets and we thought we were.

When we made the decision but.

But there is greater opportunity to make money by lengthening duration than by staying in equities. It had the benefit of reducing the volatility of equities and in our models of capital charges for equities is a lot higher the bonds. So it has a capital benefit.

If we felt like the time was right to go back along in public equities, then we would look at it at the time and then we say okay. How much capital do we have and how do we feel about it but we don't have we don't have a date in mind for that.

When you just look at the economic environment.

So somewhat balanced.

And I think as it relates to monetizing assets to lease in that component of the question I think we.

Certainly understand all the range of options that we don't believe we're in a position right now where we have to be considering things like monetizing assets.

To bolster capital we again, we feel good about our capital position, we have options in place and we understand the full range of options of what.

We could do in the event, we believe that we had in need.

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

Thanks for all the color.

Q1 moment for our next question.

And our next question.

Comes from the line of Michael <unk> from BMO. Your question. Please.

I guess my first as a quick follow up on the capital discussion you said bolstering capital. So I just want to clarify.

We generated a 14% to 17%.

Our Roe targets.

Believe you.

<unk> been talking about since I believe 2019 could be prior I was looking at my notes.

It seems like Theres a disconnect, though because the shareholders' equity levels <unk> are down meaningfully since 19.

There is a element of where it.

It seems like this is why the conferences coming up investors are expecting then the consensus Roe's look like they are well well above.

The 14% to 17 because.

Barb bolstering our capital assumptions I guess in the model. So I just want to make sure I'm thinking about this correctly 14 14 to 17 is still the target and.

So we feel.

Directionally it should be making sure we don't turn on the buyback until till.

Shareholders' equity levels are bolstered a bit.

So first the 14% to 17 confirmation, we're just really our way of saying, we don't see anything that diminishes the ultimate earning power of the company.

What the equity base is and what they earnings higher priced but we.

We're really just trying to say, we don't see anything that diminishes, the earning power of the building.

Company, we never said it was a cap.

And as I just mentioned our strategy is really get returns up to where they've been historically.

Which will increase shareholder value.

And then the big differential we have versus progressive and others as we need higher growth to drive the multiple up and we're going to get that two ways increased market share personal property liability to transformative growth.

And then secondly by expanding our protection offerings, which will drive the multiple up so it's like step one step two we think they can both hit at the same time to be honest.

But that's what we're driving to.

Okay.

Very helpful.

My last question is just on.

Thinking through all the <unk>.

The actions, we're taking in terms of expense ratio.

Pulling back in certain states.

I guess it.

It seems clear that in the near term, we should be thinking about <unk> growth.

Remaining.

Under pressure.

I'm just curious too is that the right way to think about it and two is there for the for your capital model does tiff growth being negative, but total revenue growth still being very positive because of pricing power does it does it help that.

Shrinking pip, but growing topline because of pricing or is it.

Dollar of growth still seamless.

Revenues still seem the same way within your capital model.

Capital miles are really driven and risk which are tied to premium so it doesn't really impact it.

So.

The right economically is the right way to do it in terms of growth. We think we can Mario talked about growth in natural generally talked about growth and 50% of the markets work in there.

And those three states that we need higher prices on.

Get to the right level, we can grow there as we continue to rollout transformative growth and we'll be in.

We expect to be in 10 states with a new product this year, which would just be in the states and that can drive the amount of growth, but we are using machine based learning some really cool direct steps. So we think there is plenty of opportunity to grow.

And so we're not concerned about the reason we're.

Reducing the growth in those states like if you're not making any money it doesn't make sense to sell it like I don't really understand the logic of we're losing money, let's go out and spend a bunch of money to get business and we will continue to lose money until we can raise the prices later.

It just raises your if you include those losses in your acquisition costs, it's hard to make the lifetime value work. So we chose not to write the business.

That really is Mario so it's not really a combined ratio.

Impact, it's just like why do something Thats on economic.

Understood.

Thank you one moment for our next question.

And our next question.

Comes from the line of Alex Scott from Goldman Sachs. Your question. Please.

Hi, first one I had is on the prior year development.

One of the things we noticed from last quarter was just that I think 2022 accident year actually looked like it developed favorably in 2021 was still a bit unfavorable and I guess I'm just interested what was the mix of that.

This quarter end.

How do we think about sort of the.

The speed up of kind of reaching settlements to reduce volatility on some of the older claims and the impact that's having and where are you in the process of doing that right. Because there is still a good amount of wood to chop there.

Gone through the 2021 claims to extent youre going to do it already.

Just any color around all of that to help us think through what development could look like for the rest of the year.

And then I will take that quickly I think the first thing I would highlight is that the development. This quarter was related to national general So a little bit different.

Then what we went through last year, and we don't separately disclose which prior years, it's attributable to but.

Is it safe to say there given the nature of that business some of the nearer in years and we continually Alex move reserves between years and coverages in prior year reserves in coming out with these estimates and so let's.

It's safe to say that we're really focused on settling getting some of those older claims settled getting the reserves right and.

Again <unk>.

A broken record on this but getting the aggregate reserve recorded properly. So this was really again. This was this quarter is certainly a story of the National General reserve levels.

The movement between prior year's and coverages as just kind of normal course of this quarter.

Got it. Thanks. The second one I had is just just to follow up on there was a comment earlier related to I think it was the 35% filing where as I mentioned is that can pick up.

10 months.

I mean that one I think was filed in late May.

So that would suggest would be like all the way towards the end of 2024, if I just sort of take that comment.

Value is.

So like when you put a choice.

Get the California approval.

I'm just trying to weigh.

Thinking through that versus some of the comments. This suggests that the regulatory environment, maybe getting a little better.

I mean that seems like a pretty long timeline.

Can you help us think through and maybe I'm just going to.

Trying to take that a little too cut and dry.

I think on the probably the one that's in 18 months that there was not to imply that we think it's right to wait 18 months or it should take 18 months. We just said sometimes it takes a long time.

The California Department, saying on all rate increases for a couple of years they are not in that mode anymore.

And we're working actively with them because they know that's not a good place to be and it doesn't create a good market. So.

I think what you can do is just look at the monthly numbers, we've put out on rate increases you can factor that in and we've given some math and how it rolls into the P&L and then I'll give you a good luck 12 months forward. It with that Blue line is that Mario talked about and what rate it's going up.

I'll tell you what's going to come in and then you can make your own judgment on what you think Ah severity and frequency will be.

Got it that's helpful. Thanks for clarifying.

Hey, Jonathan we'll take one more question.

Certainly one moment for our final question then.

And our final question for today comes from the line of <unk> <unk> from Jefferies. Your question. Please.

Thank you good morning, Thanks for first of all allow me in here.

I wanted to go back to the capital question and the decision to stop the buybacks, if I may and Tom I'm certainly I appreciate the thought of it doesn't really make sense to buyback stocks.

Our generating a loss that said I think we have seen about $2 billion of buybacks.

I think the second quarter of last year.

The loss environment.

I think.

Everything you were showing on and presenting them. The slides would suggest that we are hopefully and collecting in the auto.

Margins.

I think even a quarter ago, you were still talking about over $4 billion of Holdco liquidity. So I'd, just love to better understand what changed or shifted in the thinking here.

Make you decide to stop here, especially when your stock seems to be.

Rapidly valued relative to.

Previous buybacks.

Let me go back to the Genesis of the buyback program.

And then roll it forward. So it was $5 billion program about $3 billion of which was because we are returning capital that was generated by sale of the life and annuity businesses. So it was really a $2 billion net program, we tended to have that program that <unk>.

<unk> program was usually size by how much money, we made the prior year and we werent using and growth. So we're sort of.

In arrears kind of share repurchase program.

And that's how we got to five.

So we're 90% of the way there on five.

<unk> completed that for sure and we just cited how you're losing money don't buy stock back. It's just sometimes good capital management is just <unk>.

Common sense as opposed to a.

A specific formula.

Because formulas change correlations change and all that sort of stuff. So from our standpoint. It was really no more complicated I mean, Jess and I talked for like five minutes and we're like okay. Another quarter of a loss.

A lot of catastrophes are a lot higher almost two standard deviations away.

<unk> factored that in when we decided on the $5 billion, we factored that in when we looked at last year keeping that program going.

And it was a sensitivity, but it was a sensitivity not a reality when insurance into reality you say, okay, let's just stop buying it back in.

If we feel like getting back to it.

And we have a strong track record of buying stock back, but what will drive the value of our stock and I can close on this is.

Is not share repurchases like we've looked at share repurchases as I said, we bought $37 billion back the return on share repurchases. If you take the price that you bought to that and the price of the stock at any point in time of course it varies like it's cheap now in my opinion.

And so it would be good to buy back, but when you look at it over an extended period of time, it kind of turns into the cost of capital, which makes some sense, sometimes you get a 20% return because your buyback cheap and the stock went on to run sometimes you buy it and it stacks up and you'll get a lower return, but when you look at it over a long period of time. So you don't really create share.

Holder value by doing share buybacks.

If you don't do share buybacks, you destroy shareholder value that's a bad thing.

But so the way we're going to create shareholder value is get profitability up.

Execute transfer on our growth and broaden our.

Product offering to people and things like protection plans, which are low capital high growth.

High return businesses health and benefits and Safeway, So that's our plan.

Thank you for tuning in this quarter and we will talk to you next quarter.

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

Yeah.

[music].

One one again please limit your inquiry to one question and one follow up as a reminder, please be aware that today's call is being recorded.

And now I'd like to introduce your host for today's program Brent <unk> head of Investor Relations. Please go ahead Sir.

Dot Com our management team is here to provide perspective on these results.

And other public documents for information on potential risks and now I'll turn it over to Tom.

Good morning, we appreciate you investing your time in Allstate.

Let's start with an overview of our results and then Mario and just walk through operating result, and the actions being taken to increase shareholder value. Let's begin on slide two allstate's strategy has two components increased personal property liability market share and expand protection services, which are shown in the two hours on the left.

On the right hand side, you can see a summary of results for the second quarter.

Progress is being made on the comprehensive plan to improve auto insurance profitability, which includes raising rates, reducing expenses limited growth and enhancing claim processes.

Of this year Mario will discuss the actions being taken to continue this trend and importantly improved results in New York, New Jersey, and California severe.

Strong fixed income results from higher bond yields generated $610 million in investment income and protection services in health and benefits generated $98 million of profits in the quarter.

Transfer on our growth plan to become the lowest cost protection providers, making continued progress. This both helps current results with lower costs and positions Allstate for sustainable growth on the auto margins return to acceptable levels.

Affordable simple connected property liability products are sophisticated telematics pricing and differentiated direct to consumer capabilities are being introduced under the Allstate brand through a new technology platform.

National Channel is growing which will also increase market share specialty auto expertise along with leveraging autos allstate strength in preferred auto and homeowners insurance products are expected to drive sustainable growth.

Allstate protection plans is expanding its embedded protection through new products and retail relationships and in international markets.

Allstate has a strong capital position with $16 $9 billion of statutory surplus and holding company assets as Jeff will discuss later and as you know we have a long history of providing cash returns to shareholders through dividends and share repurchases over the last 12 months, we've repurchased three 9% of outstanding shares for $1 3 billion.

We suspended this research this repurchase program in July as we had a net loss for the six months of the year.

Improving profitability, increasing property liability organic growth and broadening protection offered to customers during extensive distribution platform will increase shareholder value.

Let's review the financial results on slide three.

Revenues of $14 billion in the second quarter increased 14, 4% above the prior year quarter of $1 8 billion. The increase was driven by a higher average premiums in auto and homeowners insurance from rates taken in 2022, and 2023, resulting in property liability earned premium growth of $9.

6%.

Net investment income of $610 million reflects the impact of higher fixed income yields and extended duration, which will substantially increase income.

This growth more than offset a decline in from performance based investments in the quarter.

And auto insurance higher insurance premiums and lower expenses were largely offset by higher catastrophe losses and increased claim frequency and severity.

The underlying auto insurance combined ratio did improve slightly for the first six months of 2023 compared to the year end 2022.

Auto insurance had an underwriting loss of $678 million.

In homeowners insurance catastrophe losses are substantially over the 15 year average, resulting in a combined ratio of 145 generating an underwriting loss of $1 $3 billion.

Underlying combined ratio on homeowners improved one nine points to $67 six is higher average premiums more than offset increased severity.

Adjusted net income of $98 million from protection services in health and benefits when combined with the $610 million of investment income offset a portion of the underwriting loss.

The target for enterprise adjusted net income return on equity remains at 14% to 17%.

I'll now turn it over to Mario to discuss property liability results.

Thanks, Tom Let's turn to slide four we are seeing the impact of our comprehensive auto profit improvement plan in our financial results starting with the rate increases we have implemented to date. The chart on the left shows property liability earned premium increased nine 6% above the prior year quarter, driven by higher average <unk>.

Premiums in auto and homeowners insurance, which were partially offset by a decline in policies in force.

Price increases and cost reductions were largely offset by severe weather events and increased accident frequency and claim severity.

The underwriting loss of $2 1 billion in the quarter was $1 $2 billion worse than the prior year quarter due to the $1 $6 billion increase in catastrophe losses.

The chart on the right highlights the components of the combined ratio, including 22 six points from catastrophe losses.

Prior year reserve re estimates excluding catastrophes had a one six point adverse impact on the combined ratio in the quarter.

Of the $182 million of strengthening in the second quarter $148 million was a national general primarily driven by personal auto injury coverages in the 2022 accident year.

In addition, prior year's were strengthened by approximately $31 million for litigation activity in the state of Florida related to tort reform that was passed in March of this year.

We've been closely monitoring the increase in filed suits on existing claims and the charge reflects a combination of higher legal defense costs and a modest loss reserve adjustments.

Now, let's move to slide five to discuss Allstate's auto insurance profitability in more detail.

The second quarter recorded auto insurance combined ratio of $108 three was <unk> four points higher than the prior year quarter, reflecting higher catastrophe losses and increased current report year accident frequency and severity, which were largely offset by higher earned premium expense reductions and lower adverse.

Non catastrophe prior year reserve re estimates.

We continue to raise rates reduce expenses restrict growth and enhanced cleaning processes as part of our comprehensive plan to improve auto insurance margins.

This slide depicts the impact of our profit improvement actions on underlying auto insurance profitability trends.

As a reminder, we continually assess claim severities as the year progresses and last year as 2022 development. We continued to increase report your ultimate severity expectations.

The chart on the left shows the quarterly underlying combined ratios from 2022 through the current quarter with 2022 quarters adjusted to account for full year average severity assumptions, which removes the effects that intra year severity changes had on recorded quarterly results.

After adjusting for the timing of higher severity expectations. The quarterly underlying combined ratio trend was essentially flat throughout 2022.

As we move into 2023, the underlying combined ratio has improved modestly each of the first two quarters, reflecting both the impact of our profitability actions and the continued persistently high levels of loss cost inflation.

The chart on the right depicts.

The percent change in annualized average earned premium shown by the Blue line and the average underlying loss and expense per policy shown by the light blue bars compared to prior year end.

As we've implemented rate increases the annualized earned premium trend line continues to increase and has begun to outpace there's still elevated underlying cost per policy in the first two quarters of 2023, resulting in a modest improvement in the underlying combined ratio.

National General implemented rate increases of 10% in 2022, and additional five 5% through the first six months of 2023.

We will continue to pursue rate increases in 2023 to restore auto insurance margins back to the mid <unk> target levels.

Reducing operating expenses as core to transformative growth and we've also temporarily reduced advertising to reflect a lower appetite for new business.

We continue to have more restrictive underwriting actions on new business and locations and risk segments, where we have not yet achieved adequate pricing for the risk but are beginning to selectively remove these restrictions and states in segments that are achieving target margins to this point the number of states achieving an.

Combined ratio of better than 100 increased from 23 States, which represented just under 30% of Allstate brand auto insurance premium at the end of 2022 to 36 states representing approximately 50% of premium at the end of the second quarter.

Ensuring that our claim practices are operating effectively and enhancing those practices, where necessary is key to delivering customer value, particularly in this high inflation environment.

We're also negotiating improved vendor service and parts agreements to offset some of the inflation associated with repairing vehicles.

Slide seven provides an update on progress in three large states with a disproportionate impact on profitability.

The table on the left provides rate increases either implemented so far this year are currently pending with the respective insurance Department in California, New York and New Jersey.

Because our current prices are not adequate to cover our costs. In these states. We have had to take actions to restrict new business volumes as a result, new issued applications from the combination of California, New York, and New Jersey declined by approximately 62% compared to the prior year quarter.

In California, we implemented a second six 9% rate increase in April and also filed for a 35% increase in the second quarter that is currently pending with the department of insurance.

We continue to work closely with the California Department to secure approval of this filing and restore auto rates to inadequate an adequate level.

Three that will be additive to their to the rates approved so far this year.

In New Jersey, we received approval for a six 9% rate increase in the first quarter and filed subsequent 29% increase in the second quarter is.

As mentioned earlier, we anticipate implementing additional rate increases for the balance of 2023 to counteract persistent loss cost increases.

Slide eight dive deeper into how we are improving customer value through expense reductions.

The chart on the left shows the property liability underwriting expense ratio and highlights drivers of the two five point improvement in the second quarter compared to the prior year quarter.

The first Green bar shows the $1 four point impact from advertising spend which has been temporarily reduced given a more limited appetite for new business.

The second Green bar shows the decline in operating cost, mainly driven by lower agent and employee related costs and the impact of higher premiums relative to fixed costs.

Shifting to our longer term trend on the right we remain committed to reducing the adjusted expense ratio as part of transformative growth.

This metric starts with our underwriting expense ratio, excluding restructuring Corona virus related expenses amortization and impairment of purchased intangibles and advertising.