Allstate Q2 2023 Earnings Report

Allstate EPS Results

• Actual EPS: -$4.42
• Consensus EPS: -$3.83
• Beat/Miss: Missed by -$0.59
• One Year Ago EPS: -$0.76

Allstate Revenue Results

• Actual Revenue: $13.98 billion
• Expected Revenue: $12.30 billion
• Beat/Miss: Beat by +$1.68 billion
• YoY Revenue Growth: +14.40%

Allstate Announcement Details

• Quarter: Q2 2023
• Date: 8/2/2023
• Time: After Market Closes
• Conference Call Date: Wednesday, August 2, 2023
• Conference Call Time: 11:00AM ET

Allstate (NYSE:ALL) Corporation is a publicly traded insurance company headquartered in Northbrook, Illinois, and is one of the largest personal lines property and casualty insurers in the United States. Founded in 1931 as a subsidiary of Sears, Roebuck and Co., Allstate has grown into a diversified insurer that serves millions of consumers and businesses through a mix of distribution channels and product offerings.

The company underwrites a broad range of insurance products, with primary emphasis on auto and homeowners coverage. In addition to standard personal lines, Allstate offers renters, condominium, motorcycle and recreational vehicle insurance, as well as commercial policies for small businesses. Through its life and retirement operations, the company provides life insurance, annuities and retirement solutions. Products are distributed through a combination of local exclusive and independent agents as well as direct and digital channels.

Allstate has long emphasized claims handling, risk management and catastrophe response capabilities as core parts of its operating model. The firm’s strategy includes investing in technology and analytics to improve underwriting, pricing and customer service. Thomas J. Wilson has served as chief executive officer since 2007 and as chairman since 2010, guiding the company through product diversification and distribution development. The company’s operations are primarily focused on the U.S. market and serve a broad retail and small commercial customer base.

Allstate Q2 2023 Earnings Call Transcript

Key Takeaways

• Allstate reported a Q2 net loss of $1.4 billion (adjusted net loss of $1.2 billion), driven by 42 catastrophe events that generated $2.7 billion in losses and a $2.1 billion property liability underwriting loss.
• The underlying auto insurance combined ratio improved modestly to 92.9% in H1 2023 as rate increases (7.5% in H1) and cost reductions began to outpace elevated loss cost inflation.
• Allstate restricted new business in California, New York and New Jersey—cutting applications by ~62%—while filing for additional rate hikes ranging from the mid‐teens to mid‐thirties percent to restore adequate pricing.
• Q2 expense management yielded a 2.5-point improvement in the combined expense ratio (to 24.7%), thanks to temporary ad spend cuts and lower operating costs, with a target of ~23% by year-end 2024.
• Capital remains solid with $16.9 billion in statutory surplus and holding company assets, though the company suspended share repurchases under its $5 billion authorization after the six-month net loss.

Presentation

[Operator]

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 the session, you'll need to press star one one on your telephone. To remove yourself from the queue, simply press star 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. Now I'd like to introduce your host for today's program, Brent Vandermause, Head of Investor Relations. Please go ahead, sir.

[Brent Vandermause, Head of Investor Relations at Allstate]

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 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 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 Form 10-K for 2022 and other public documents for information on potential risks. Now I'll turn it over to Tom.

[Tom Wilson, Chair, President, and CEO at Allstate]

Good morning. We appreciate you investing your time in Allstate. Let's start with an overview of results. Then Mario and Jess will walk through operating results and the actions being taken to increase shareholder value. Let's begin on slide two. Allstate's strategy has two components: increase personal property-liability market share and expand Protection Services, which are shown in the two ovals 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, limiting growth, and enhancing claim processes.

[Tom Wilson, Chair, President, and CEO at Allstate]

While auto insurance margins are not at target levels, the proportion of premium associated with states operating in an underwriting profit has gone from just under 30% in 2022 to 50% for the first half of this, of this year. Mario will discuss the actions being taken to continue this trend and importantly, improve 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 160,000 customers and resulted in $2.7 billion of catastrophe losses and a property liability underwriting loss of $2.1 billion. Strong fixed income results from higher bond yields generated $610 million of investment income. Protection Services and health and benefits generated $98 million of profits in the quarter.

[Tom Wilson, Chair, President, and CEO at Allstate]

The transformative growth plan to become the lowest cost protection provider is making continued progress. This both helps current results with lower costs and positions Allstate for sustainable growth when auto margins return to acceptable levels. Affordable, simple, and connected property liability products with sophisticated telematics pricing and differentiated direct-to-consumer capabilities are being introduced under the Allstate brand through a new technology platform. National General is growing, which will also increase market share. Specialty auto expertise, along with leveraging 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. Allstate has a strong capital position, with $16.9 billion of statutory surplus and holding company assets, as Jess will discuss later.

[Tom Wilson, Chair, President, and CEO at Allstate]

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 3.9% of outstanding shares for $1.3 billion. We suspended this repurchase program in July as we had a net loss for the 6 months of the year. Improving profitability, increasing property liability, organic growth, and broadening protection offered to customers through an extensive distribution platform will increase shareholder value. Let's review financial results on slide three. Revenues of $14 billion in the second quarter increased 14.4% above the prior year quarter, or $1.8 billion.

[Tom Wilson, Chair, President, and CEO at Allstate]

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 from performance-based in-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. In auto insurance, higher insurance premiums and lower expenses were largely offset by higher catastrophe losses and increased claim frequency and severity.

[Tom Wilson, Chair, President, and CEO at Allstate]

The underlying auto insurance combined ratio did improve slightly for the first 6 months of 2023 compared to the year-end 2022. Auto insurance had an underwriting loss of $678 million. In homeowners insurance, catastrophe losses were substantially over the 15-year average, resulting in a combined ratio of 145, generating an underwriting loss of $1.3 billion. The underlying combined ratio on homeowners improved 1.9 points to 67.6, as higher average premiums more than offset increased severity. Adjusted net income of $98 million from Protection Services and 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%-17%.

[Tom Wilson, Chair, President, and CEO at Allstate]

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

[Mario Rizzo, CFO at Allstate]

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 9.6% above the prior year quarter, driven by higher average premiums in auto and homeowners insurance, which were partially offset by a decline in policies enforced. 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 22.6 points from catastrophe losses.

[Mario Rizzo, CFO at Allstate]

Prior year reserve reestimates, excluding catastrophes, had a 1.6 point adverse impact on the combined ratio in the quarter. Of the $182 million of strengthening in the second quarter, $148 million was in National General, primarily driven by personal auto injury coverages in the 2022 accident year. In addition, prior years 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 adjustment.

[Mario Rizzo, CFO at Allstate]

Despite continuing pressure on the loss side, the underlying combined ratio of 92.9 improved modestly by 0.5 points compared to the prior year quarter, 0.4 points sequentially versus the first quarter of 2023. 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 108.3, was 0.4 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 reestimates. We continue to raise rates, reduce expenses, restrict growth, and enhance claim 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.

[Mario Rizzo, CFO at Allstate]

As a reminder, we continually assess claim severities as the year progresses, and last year, as 2022 developed, we continued to increase report year 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 effect 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 in each of the first 2 quarters, reflecting both the impact of our profitability actions and the continued persistently high levels of loss cost inflation.

[Mario Rizzo, CFO at Allstate]

The chart on the right depicts the % 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.

[Mario Rizzo, CFO at Allstate]

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. In the first 6 months of 2023, we have implemented an additional 7.5% across the book, including 5.8% in the second quarter. National General implemented rate increases of 10% in 2022, an additional 5.5% through the first 6 months of 2023. We will continue to pursue rate increases in 2023 to restore auto insurance margins back to the mid-90s target levels. Reducing operating expenses is core to transformative growth, and we've also temporarily reduced advertising to reflect a lower appetite for new business.

[Mario Rizzo, CFO at Allstate]

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

[Mario Rizzo, CFO at Allstate]

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 are 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 or 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.

[Mario Rizzo, CFO at Allstate]

As a result, new issued applications from the combination of California, New York, and New Jersey have declined by approximately 62% compared to the prior year quarter. In California, we implemented a second 6.9% 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 an adequate, an adequate level. In New York, we implemented approximately 3 points of weighted rate in June, driven by approved increases in 2 closed companies, and subsequently received approval for a 6.7% increase in the larger open company, which was implemented in July.

[Mario Rizzo, CFO at Allstate]

We will continue to make further filings in 2023 that will be added to the rates approved so far this year. In New Jersey, we received approval for a 6.9% rate increase in the first quarter and filed a subsequent 29% increase in the second quarter. As mentioned earlier, we anticipate implementing additional rate increases for the balance of 2023 to counteract persistent loss cost increases. Slide eight dives 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 2.5 point improvement in the second quarter compared to the prior year quarter. The first green bar shows the 1.4 point impact from advertising spend, which has been temporarily reduced, given a more limited appetite for new business.

[Mario Rizzo, CFO at Allstate]

The second green bar shows the decline in operating costs, 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. It then adds in our claims expense ratio, excluding costs associated with settling catastrophe claims, because catastrophe-related costs tend to fluctuate. Through innovation and strong execution, we've driven significant improvement with a second quarter adjusted expense ratio of 24.7. We expect to drive additional improvement, achieving an adjusted expense ratio of approximately 23 by year-end 2024, which represents a 6-point reduction compared to our starting point in 2018.

[Mario Rizzo, CFO at Allstate]

While increasing average premiums certainly represent a tailwind, our intent in establishing the goal is to become more price competitive. This requires 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 supports, 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.

[Mario Rizzo, CFO at Allstate]

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. The 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.

[Mario Rizzo, CFO at Allstate]

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, an additional 7.4 points implemented through the first six months of 2023, as well as inflation and insured home replacement costs. 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 145.3 was among the highest in Allstate's history, increased by 37.8 points compared to last year's second quarter, due to a 40.3 point increase in the catastrophe loss ratio.

[Mario Rizzo, CFO at Allstate]

The underlying combined ratio of 67.6 improved by 1.9 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 a historical perspective on the second quarter property liability catastrophe loss ratio of 75.9 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 33.9 points above the 15-year second quarter average of 42 points, it is not unprecedented and falls within modeled outcomes contemplated in our economic capital framework.

[Mario Rizzo, CFO at Allstate]

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. Now I'll hand it over to Jess to discuss the remainder of our results.

[Jess Merten, CFO at Allstate]

Thank you, Mario. I'd like to start on slide 10, which covers results for our 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 9.1% to $686 million in the second quarter compared to the prior year quarter. The increase reflects growth in Allstate Protection Plans and Allstate Dealer Services, partially offset by a decline at Arity. 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.

[Jess Merten, CFO at Allstate]

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'll 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.

[Jess Merten, CFO at Allstate]

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, contract charges, and other revenues in 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 costs, improve the customer experience, and support growth that generates 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.

[Jess Merten, CFO at Allstate]

Active portfolio management includes comprehensive monitoring of economic conditions, market opportunities, enterprise risk and return, and capital, as well as interest rates and credit spread, spreads by rating, sector, and individual name. 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 increase market-based income levels. 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.

[Jess Merten, CFO at Allstate]

Market-based income has also benefited from higher yields for short-term investments in 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 volatility on these assets from quarter to quarter is expected. The chart on the right shows the fixed income earned yield continues to rise and was 3.6% at quarter end, compared to 2.8% for the prior year quarter and 3.4% 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.

[Jess Merten, CFO at Allstate]

Beginning in Q4 of 2022, we began to extend duration, which locks in higher yields for longer. In the second quarter, we further extended duration to 4.4 years, increasing from 4 years in the first quarter. Our fixed income portfolio yield is still below the current intermediate corporate bond yield of approximately 5.5%, reflecting an additional opportunity to increase yields. To close, I'd like to turn to slide 12 to discuss how Allstate proactively manages 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 quantifies capital targets by business, product, geography, investment type, and for the overall enterprise.

[Jess Merten, CFO at Allstate]

Targets include a base level of capital for expected volatility and earnings, as well as additional capital for stress events, situations where correlations between risks 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 assessed relative to overall enterprise risk levels. A robust reinsurance program is in place with multiyear 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 decide to purchase additional aggregate program coverage this year. Reducing high-yield bonds and public equities in the investment portfolio significantly reduced the amount of enterprise capital required for investments.

[Jess Merten, CFO at Allstate]

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 provides a sustainable source of increased income 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. The capital management framework ensures Allstate has the financial flexibility, 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.

[Jess Merten, CFO at Allstate]

Holding company assets of $3.3 billion represent approximately 2.5 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've 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 averaged $1.9 billion annually in the 10 years prior to the onset of COVID.

[Jess Merten, CFO at Allstate]

You can also see the impact of the rapid increase in auto insurance claims severity and 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 return to shareholders. Allstate will continue to proactively manage capital to navigate the current operating environment and be well positioned for growth to increase its shareholder value. With that as context, let's open up the line for questions.

[Operator]

Certainly. One moment for our first question. 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.

[Gregory Peters, Equity Research Analyst at Raymond James]

Well, good morning, everyone. I, I guess I'm gonna focus on auto insurance profitability for my first question. Obviously, there's a bunch of slides in your presentation, the one where you identify 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 or for next year versus what you, you were thinking at the beginning of the year? I guess 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, or excuse me, slide five, to get it down to the low to mid-90s?

[Tom Wilson, Chair, President, and CEO at Allstate]

Greg, this is Tom. Let me start, and then Mario can jump in.

[Tom Wilson, Chair, President, and CEO at Allstate]

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 in the first half of this year from what we thought it would be when we looked at it last year. We're really glad we took the rates that we did, and we've been accelerating rates, as Mario talked about. I think when you look at it, it's really, you know, of course, it's hard to predict, right? What you're really looking at is that slide that 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 above the bar, of course.

[Tom Wilson, Chair, President, and CEO at Allstate]

What you know going forward is that the line's gonna keep going up, all right? Like, we've filed those rates, we've got those rates, we've put them in the computer, we're collecting the cash, and 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 farther. That gap will get you back to the mid-90s that we talked about in terms of target combined ratio. When that exactly happens, of course, is dependent on what happens to that second bar, which is not known.

[Tom Wilson, Chair, President, and CEO at Allstate]

What we do know is we'll continue to take increased rates to make that line continue to go up. Mario, any specifics you want to add on the three states that he mentioned, or?

[Mario Rizzo, CFO at Allstate]

You know, I, I think, Greg, the, the thing I'd add is, is 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, the loss cost trend. 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, you know, if you look on, on slide five, as, as Tom pointed out, for the first couple of quarters this year, we've seen the average earned premium trend begin to outpace, the increases in, in loss and expense. It's hard to predict what, what the future will hold, but that's a, that's an encouraging development.

[Mario Rizzo, CFO at Allstate]

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, we told you that severity is up on average across all coverages by about 11. What we're seeing still is persistently high severity across coverages with a lesser impact from overall frequency increases. You know, the point being, you know, we're gonna continue to aggressively implement our profit improvement plan. You've seen what we've done with rates. We've done, you know, 7.5 points through the first half of this year in the Allstate brand, 5.5 points on National General. We're gonna continue to do that.

[Mario Rizzo, CFO at Allstate]

You, you see the benefit that the cost reductions is having on the combined ratio while that rate earns in. You know, we've, we've talked a lot about those three states, which make up about a quarter of our book, California, New York, and New Jersey. We want to keep pushing on, continuing to drive rate increases into the book. We've gotten some approval so far this year, but there's rates pending, pretty significant rates pending in California and New Jersey, and we're prepared to file another rate in New York, so we're gonna keep pushing really hard on that. In the meantime, we've scaled way back on new business production in those states.

[Mario Rizzo, CFO at Allstate]

While, you know, it's having, you know, a reasonably small impact on the loss ratio so far this year, because new business just tends to be a smaller proportion of our overall book, it will continue to have a favorable impact on our loss ratio going forward. Until we get to adequate rates in those three states, we're gonna keep restricting the volume of business we're willing to write.

[Gregory Peters, Equity Research Analyst at Raymond James]

Okay, thanks for that color. Maybe just keeping on auto, as my follow-up question on NetGen. You know, you spoke about the reserve strengthening in the quarter, and I guess you also mentioned Florida in your comments. Can you give us any perspective on the reserve strengthening that happened inside NetGen? Is it, you know, is it, is it a true up and that you're comfortable where you where the trends are with matching reserves at this point in time? Or is this gonna be another situation where we have a couple quarters of, of, you know, catch up that we're having to deal with?

[Tom Wilson, Chair, President, and CEO at Allstate]

Well, Mario can answer how we feel about the growth and the profitability of the growth at National General. Greg, let me just set a little context. First, the acquisition of National General is exceeding our expectations. As you know, we, we bought the company so that we could consolidate our Encompass business into it, that would reduce costs and create a stronger business that was serving independent agents. We like what we got there. The consolidation and the cost reductions are, are exceeding our expectations. That was the basis under which we agreed to, where the economics of the acquisition made sense. The upside from there was growing in the IA channel, both through this specialty vehicle product and by building new products for preferred auto and homeowners risk using Allstate's expertise, both of which are also becoming a reality.

[Tom Wilson, Chair, President, and CEO at Allstate]

Mario, do you want to talk about, I guess, both reserves, but I think Greg's underlying question there was like, you're growing, is that a good thing?

[Mario Rizzo, CFO at Allstate]

Yeah. So Greg, the place I'd start with National General, you're right, we're, we're growing in National General. That's principally in the, the specialty vehicle or the non-standard auto part of the business, which, you know, that market continues to experience pretty significant disruption. A couple of things I'd say on NetGen. First of all, the underlying combined ratio in the quarter was 96, and 96 is, you know, slightly higher than, than we want to run it at, but it's pretty close to our, our target margin. That 96...

[Mario Rizzo, CFO at Allstate]

includes, the, you know, kind of roll forward impact of increasing reserves, principally in the 2022 accident year, and therefore, increasing our loss expectations in the 2023 year. That's all embedded in the 96. You know, a couple things that in addition to that, that I mentioned, you know, we've talked a lot about the profit improvement plan. You know, we're implementing that same approach and that same plan in National General, across the same levers we're using in the Allstate brand. We've taken 5.5 points of rate this year, 11 points of rate over the last 12 months in NetGen. Given that it's predominantly a non-standard auto book, the book tends to turn over and get repriced pretty rapidly.

[Mario Rizzo, CFO at Allstate]

We're comfortable that the rate we've taken so far this year is working its way into the system. I would say, in response to a higher loss trend that we've seen in 2023, we've accelerated our plan to take rate in 2023. We're ahead of, that 5.5 points is ahead of where we expected to be at this point during the year. We've also restricted underwriting guidelines in a number of states. We're writing, you know, more liability only, less full coverage. We're being really selective about what we're writing. The other benefit, as Tom mentioned, you know, 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.

[Mario Rizzo, CFO at Allstate]

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. Comfortable where we're positioned, we're taking the appropriate actions, you know, from a profitability perspective, and, you know, so we're, we're comfortable with what we're writing in NetGen right now.

[Gregory Peters, Equity Research Analyst at Raymond James]

Got it. Thank you for the detail on your answers.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Josh Shanker from Bank of America. Your question, please.

[Josh Shanker, Equity Research Analyst at Bank of America]

Yeah, thank you very much for taking my question. You know, Tom, there's the amount 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 rates, and you've learned about some changes in frequency and severity over the past 6-7 months, has that changed the perspective on how much rate you need and want to ask for? Does that change the 2023 plan, or does that mean that the regulators will give you only so much, and you have to get that rate in 2024 and beyond?

[Tom Wilson, Chair, President, and CEO at Allstate]

Of course, it's I would say, Josh, it's a good question. I would say it's not like, it's not like every quarter or every six months we adapt it. It's like every day. Mario and Guy are constantly looking at our pricing, and we're going to maximum filed rates everywhere we can, and we're not getting as much pushback from regulators because the numbers are pretty clear. Like, you know, it's not like we're making it up. You pay for the cars, and they see the cash go out, so you... They do have to pay attention to what the rules are in rating. We have three states which are a problem, and we're working aggressively with them, so that we can get the right amount of money.

[Tom Wilson, Chair, President, and CEO at Allstate]

Yeah, so our, our, the rate expectation for the year has gone up from the beginning of the year, and it will keep going up until we get to, you know, our target 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. You know, why take a 69 when you need 35 in California? It's because you can get 69 right away as opposed you could wait 18 months to get 35. We've, we've, we're very sophisticated and have good relationships with them, so we can manage it so that it meets our needs. We'll just keep raising it.

[Tom Wilson, Chair, President, and CEO at Allstate]

That's on auto, which I assume where you're going, Josh. Same thing applies in homeowners, and, our price increases are up a little bit, but not up as much as what we thought they were going to be, but they're still up, from where we set out, where we thought we'd be in the beginning of the year. Mario, anything you would add?

[Mario Rizzo, CFO at Allstate]

Yeah, just a couple of additional data points, Josh. You know, as, as Tom mentioned, you know, our data is, you know, is immediately responsive to the data what we're seeing. We're constantly updating rate indications and filing for what we need based on what we're actually experiencing versus may, you know, what we thought we would have needed going into the year. The other point I'd make is, and this is on a couple of the states that we've spiked out for you. You know, we're evaluating trade-offs and leaning in, you know, where, we think it just makes sense.

[Mario Rizzo, CFO at Allstate]

For example, in California, we got the 2 6.9% rates. Then we turned around and filed for essentially our full indication at 35, knowing that that was likely gonna 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 6.9% rate approved, which is essentially the, the, the cap that the state holds you to. Then we opted to utilize an administrative provision and file for a 29% rate. Again, we're aggressively pushing on the amount of rate we need, based on the loss

[Mario Rizzo, CFO at Allstate]

... experience where we, we've got in real time, we're gonna keep doing that and keep pushing rate through and working with all the departments and each of the regulators to get those rates approved as quickly as we can, to continue to, to bend the line on that, that loss trend.

[Josh Shanker, Equity Research Analyst at Bank of America]

Outside of the three problem states, when you are submitting the filing, does the filing need to be audited financial statements or financial data in arrears? Can you pretty much file new rate with current data as it's coming into the systems?

[Mario Rizzo, CFO at Allstate]

Yeah, I mean, for filing new states, certainly, you know, we're, we're filing based on current data as opposed to relying on, you know, prior year-end or any of that information. What we're doing is, Josh, is reacting to the loss trend we're seeing, incorporating that into the filing, and that's what gets submitted.

[Josh Shanker, Equity Research Analyst at Bank of America]

Okay. Thank you for the answers to the questions.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question, please.

[Elyse Greenspan, Managing Director & Senior Equity Research Analyst at Wells Fargo]

Hi, thanks. Good morning. My first question, I wanted to go, you know, back to the capital discussion and the decision you guys made to pull the buyback program. Can you just, you know, give us a sense of what you're looking for, you know, when you, you know, return to buybacks? I sense maybe some of this is also dependent, you know, we're going into wind season, right, which could bring additional cat losses to The Allstate Corporation, and you guys are still working on improving the profitability of your auto business. What would you need to see, you know, to, you know, look to, you know, turn back on the buyback at, at some point next year?

[Tom Wilson, Chair, President, and CEO at Allstate]

Elyse, let me start at macro and then ask Jess to maybe dig in even a little more. I know you spend a lot of time on capital. We can help you show you what we believe to be true. First, you know, we have a long history of proactively managing capital, whether that's how we deploy it at the individual risk level, or what we do with different investments, as Jess talked about, whether it's selling businesses like life and annuities or using alternative capital like reinsurance or cat bonds, or providing cash to shareholders through dividends and share repurchases. You point out, I think if you look at the Q, we've bought back about $37 billion of stock since we went public.

[Tom Wilson, Chair, President, and CEO at Allstate]

That's because we're we got good math, which Jess will talk about, and we do it proactively. I think the, the, the suspending, I think, the suspending the share repurchase was just sound judgment. You know, if you're 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, it's just sort of good logic always serves the right kind of capital plan, which is you got to make money to be buying shares back. Jess, you want to talk about maybe give Elyse some more specifics on this, the whole capital?

[Jess Merten, CFO at Allstate]

Yes. Good morning, Elyse. I think to build on Tom's point, I think it's easiest to just think about not the specific question, but more how we think about capital management more broadly. You focus, as many others do, on RBC. RBC is a great measure for insurance companies, it's common. We look at it as well, we certainly understand why there's a focus at times on RBC. It's a measure that served the industry well in good times and in bad times. I think, as RBC has some limitations, so we use it as an input in our capital management process, but not a primary driver, right? RBC is focused on statutory legal entities, but it doesn't incorporate the risk across the enterprise or correlation in those types of risks.

[Jess Merten, CFO at Allstate]

It doesn't include sources of capital outside of regulated entities. You know, protection plans would be an example there. Those aspects are important to our overall capital management framework. You know, 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. You know, there's an example where a national general entity has reinsured all of its risk into the Allstate Insurance Company, but it retains capital. The, 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. That capital is all available to us, and our comprehensive and more precise capital management framework considers those facets.

[Jess Merten, CFO at Allstate]

I think it's important to go back to really how we're managing capital through what, you know, we consider to be a very detailed and sophisticated economic, economic capital framework that quantifies enterprise risk and establishes our targets. You know, as we've talked, that includes regulatory inputs from regulatory capital models, rating agencies, and then our own risk models that help to quantify stress events. We built those models really off of the, the risk models that are used to regulate banks. We feel very good about the output of our overall economic capital model. We use that then, as we've discussed, to determine a level of base capital that we need to operate our business while continuing to meet customer needs at amounts that are well above triggering any, any regulatory involvement. You've got base capital.

[Jess Merten, CFO at Allstate]

On top of that, we hold stress capital for unexpected or infrequent outcomes. Then we have a contingent reserve that we use and include in our target capital range that's 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 stress capital calculations. High catastrophes this quarter-

[Jess Merten, CFO at Allstate]

... use some of the contingent capital reserve. We continue to hold stress capital that's above our base capital level, and we remain confident in our capital position, and our ability to execute on strategy. You know, we look ahead, I think your question gets to the future, right? I wanted to build a base for reminding everyone how we think about it. As we look to the future, it's more than just the question of the buybacks. It's what does our capital perspective look like? We continue to believe we're well capitalized, even if it takes longer than we expect to get off of auto profitability back to targeted levels. Even if catastrophes come in at more expected levels for the rest of the year in 2023.

[Jess Merten, CFO at Allstate]

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, in about 25 years. So, it's a high, 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. You know, we also have a number of capital options that we're continuously evaluating, given our proactive approach to capital management, as Tom mentioned.

[Jess Merten, CFO at Allstate]

That includes additional reinsurance options that could allow us to lower the volatility of our earnings at an attractive cost of capital. We continue to look at those things. I think we've also proven in the last couple of quarters, we have open access to financial markets, where we showed that through our, some of our refinancing activity. We have a lot of options. I want to kind of close out with, you know, as it relates to capital options and capital, capital strength, issuing common stock at this point is not something that we're considering. It's not an option that's on the table, given how we feel about our overall capital position.

[Jess Merten, CFO at Allstate]

Maybe that Elyse more than just when are you going to turn back on, buybacks, but I think the context around how we think about capital management is more important to how we might answer that question in the future. Hopefully that was helpful.

[Elyse Greenspan, Managing Director & Senior Equity Research Analyst at Wells Fargo]

That was helpful. Then maybe, you know, just one more, right? You did mention, you know, reinsurance and some other options that you have. You did make, you know, 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, you know, going forward on the capital side, you're not looking to make any significant changes to investments? On the, on the same, you know, thinking about your current businesses, you're not, you wouldn't be thinking about monetizing, you know, any assets as a way to free up capital?

[Tom Wilson, Chair, President, and CEO at Allstate]

Yeah, at least. On the investment side, that decision was primarily made from a risk and return standpoint, first starting at the markets, and we thought we, you know, when we made the decision, we thought there was 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, the capital charges for equities is a lot higher than bonds, so it has that capital benefit.

[Tom Wilson, Chair, President, and CEO at Allstate]

If we felt like, the time was right, to, you know, go back long in public equities, then we would look at it at the time, and then we'd say, "Okay, how much capital do we have, and how do we feel about it?" We don't have a date in mind for that. I think when you just look at the economic environment, it's, it's so, you know, somewhat balanced.

[Jess Merten, CFO at Allstate]

I think as it relates to monetizing assets, at least in that component of the question, you know, I think we certainly understand all the range of options, but we don't believe we're in a position right now where we have to be considering things like monetizing assets, to, 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, you know, we could do in the event we believe that we had a need.

[Mario Rizzo, CFO at Allstate]

Yeah, we, we have the capital to make... You know, our strategy is, of course, you know, the way we're going to increase shareholder value, 1, get profit up, 2, get growth up, and 3, broaden the, the portfolio, which those last two will lead to a higher multiple, and that's what we're trying to drive to.

[Elyse Greenspan, Managing Director & Senior Equity Research Analyst at Wells Fargo]

Thanks for all the color.

[Operator]

Thank you. 1 moment for our next question. Our next question comes from the line of Michael Zaremski from BMO. Your question, please.

[Michael Zaremski, Senior Equity Research Analyst at BMO]

I guess my, my first is a quick follow-up on, you know, the, the capital discussion. You said bolstering capital. I just want to clarify, you reiterated the 14%-17% ROE targets, which, you know, I believe you've, you know, you've been talking about since I believe 2019, could, could be prior. I'm looking at my, my notes. It seems like there, there's a disconnect, though, because the shareholders' equity levels, ex OCI, are, are down meaningfully since 2019. You know, there's an element of where, if I am, it seems like this is why this conversation is coming up. Investors are expecting then, you know, the consensus ROEs look like they're well, well above the 14%-17% because people aren't bolstering their, their capital assumptions in, I guess, in, in the model.

[Michael Zaremski, Senior Equity Research Analyst at BMO]

I just want to make sure I'm thinking about this correctly. Like, 14, it's 14%-17% is still the target, and the, you know, so we, you know, directionally should be making sure we don't turn on the buyback till, you know, till shareholders' equity levels are, are bolstered a bit.

[Tom Wilson, Chair, President, and CEO at Allstate]

First, the 14%-17% confirmation was 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 the earnings are, of course, 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. As, as I just mentioned, our strategy is really get returns up to where they've been historically, which will increase shareholder value. Then the, the big differential we have versus Progressive and others is we need higher growth to drive the multiple up, and we're gonna get that two ways: increase market share, personal property-liability through transformative growth.

[Tom Wilson, Chair, President, and CEO at Allstate]

Secondly, by expanding our protection offerings, which will drive the multiple up. It's like step one, step two. We think they can both hit at the same time, to be honest, that's where we're driving to.

[Michael Zaremski, Senior Equity Research Analyst at BMO]

Okay, that, that's okay, that's very helpful. my, my, my last question is just, you know, thinking through all the actions you're taking in terms of, you know, expense ratio, you know, pulling back in certain states, you know, I guess it, you know, it, it seems clear that in the near term, we should be thinking about, you know, PIF growth, you know, remaining under pressure. I'm just curious, too, is, is that, one, the right way to think about it? Two, is there, for the, for your capital model, does PIF growth being negative, but total revenue growth still being very positive because of pricing power, does it, does it help that, you know, you're shrinking PIF, but growing top line because of pricing?

[Michael Zaremski, Senior Equity Research Analyst at BMO]

Is it, does every dollar of growth still seem as, you know, revenue still seem the same way within your capital model?

[Tom Wilson, Chair, President, and CEO at Allstate]

The capital models are really driven on risk, which are tied to premium, so PIF doesn't really impact it. Which, which is the right, economically, really the right way to do it. In terms of growth, you know, we think we can... Mario talked about growth in National General. We talked about growth in 50% of the markets we're working there. When those 3 states that we need higher prices on get to the right level, we can grow there, as we continue to roll out transformative growth, and we'll be in, we expect to be in 10 states with our new product this year, which will just be in the states, and that could be driving a lot of growth.

[Tom Wilson, Chair, President, and CEO at Allstate]

We're using machine-based learning, some really cool direct stuff, so we think there's plenty of opportunity to grow, and so we're not concerned about it. The reason we're reducing the growth in those states is, like, if you're not making any money, it doesn't make sense to sell it. Like, I, I don't really understand the logic of, you know, we're losing money, let's go out and spend a bunch of money to get business, and we'll continue to lose money until we can raise the prices later. That just raises your ac- if you include those losses in your acquisition costs, it's hard to make the lifetime value work. We choose not to write the business. It's not like, really, as Mario said, it's not really a combined ratio impact. It's just like, why do something that's uneconomic?

[Michael Zaremski, Senior Equity Research Analyst at BMO]

Understood.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Alex Scott from Goldman Sachs. Your question, please.

[Alex Scott, Equity Research Analyst at Goldman Sachs]

Hi, first one I had is on the prior year development. You know, one of the things we noticed from last quarter was just that, I think, 2022 accident year actually looked like it developed favorably, and 2021 was still a bit unfavorable. I guess I'm just interested, yeah, what, what was the mix of that this quarter? You know, how, how do we think about sort of the, the speed up of, of kind of reaching settlements to reduce volatility on some of the older claims and the impact that's having, you know, where are you in the process of doing that? Like, is there still a good amount of wood to chop there? Have you sort of gone through the 20 or 21 claims to the extent you're going to do it already?

[Alex Scott, Equity Research Analyst at Goldman Sachs]

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

[Tom Wilson, Chair, President, and CEO at Allstate]

I'll take that quickly. I think, you know, the first thing I would highlight is that the development this quarter was related to National General, so a little bit different than what we went through last year. You know, we don't separately disclose which prior years it's attributable to, but, you know, it's safe to say they're, given the nature of that business, some of the nearer in years. We continually, Alex, move reserves between years and coverages and prior year reserves and coming up with these estimates. So, it's safe to say that we're really focused on settling, you know, getting some of those older claims settled, getting the reserves right, and, you know, sort of, again, you know, I'm a broken record on this, but getting the aggregate reserve recorded properly.

[Tom Wilson, Chair, President, and CEO at Allstate]

This was really, again, this was, this quarter is certainly a story of the National General reserve levels, and I, you know, I, you know, the movement between prior years and coverages is just kind of normal course this quarter.

[Alex Scott, Equity Research Analyst at Goldman Sachs]

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, where it was mentioned that, that can take up to, like, 18 months. I mean, that, that one, I think, was filed in late May. You know, that would suggest we'd be, like, all the way towards the end of 2024, if I just sort of take that comment at face value as to, like, when you'd potentially, you know, get, get the California approval. You know, I'm just trying to weigh, you know, thinking through that versus some of the comments that suggest the regulatory environment may be getting a little better. I mean, that seems like a pretty long timeline.

[Alex Scott, Equity Research Analyst at Goldman Sachs]

Like, how-- can you help us think through, and maybe I'm just, you know, trying to take that a little too cut and dry?

[Tom Wilson, Chair, President, and CEO at Allstate]

I think I'm the, probably the one that said 18 months. That 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. You know, the California Department sat on all rate increases for 2 years. They're 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. I, I think what you could do is just look at the, the monthly numbers we've put out on rate increases. You can factor that in.

[Tom Wilson, Chair, President, and CEO at Allstate]

You can-- we've given some math on how it rolls into the P&L. That'll give you a good look 12 months forward at what that blue line is that Mario talked about and what rate it's going up. That'll tell you what's gonna come in. Then you can make your own judgment on what you think, severity and frequency will be. Got it. That's helpful. Thanks for clarifying.

[Brent Vandermause, Head of Investor Relations at Allstate]

Hey, Jonathan, we'll take one more question.

[Operator]

Certainly. One moment for our final question then. Our final question for today comes from the line of Yaron Kinar from Jefferies. Your question, please.

[Yaron Kinar, Equity Research Analyst at Jefferies]

Thank you. Good morning. Thanks for first allowing me in here. I wanna go back to, to the capital question and the decision to stop the buybacks, if I may. Tom, I'm certainly, I appreciate the thought of, like, doesn't really make sense to buy back stocks when we're generating a loss. That said, I, I think we have seen about $2 billion of buybacks since I think the second quarter of last year in a loss environment. I think everything you're showing on, on, and, and presenting in the slides would suggest that we are hopefully inflecting in, in the auto margins. I, I think even a quarter ago, you were still talking about over $4 billion of holdco liquidity.

[Yaron Kinar, Equity Research Analyst at Jefferies]

I'd just love to better understand what change or shifted in, in the thinking here to make you decide to stop here, especially when stock seems to be, you know, attractively valued, relative to previous buybacks.

[Tom Wilson, Chair, President, and CEO at Allstate]

Let me go back to the genesis of the buyback program, and then roll it forward. It was a $5 billion program, about $3 billion of which was because we were returning capital that was generated by sale of the life and annuity businesses. It was really a $2 billion net program. We tended to have that program. That buyback program was usually sized by how much money we made the prior year, and we weren't using in growth, so it was sort of a, in arrears kind of share repurchase program. That's how we got to 5. We're, you know, 90% of the way there on 5. We could complete it, for sure, and we just decided, you know, you're losing money, don't buy stock back.

[Tom Wilson, Chair, President, and CEO at Allstate]

It's just, you know, sometimes good capital management is just common sense as opposed to, you know, a specific formula, 'cause formulas change, correlations change, and all that sort of stuff. From our standpoint, it was really no more complicated. I mean, Justin and I talked for, like, 5 minutes, and we're like, okay, another quarter of a loss. You know, catastrophes were a lot higher, almost, you know, 2 standard deviations away. We factored that in when we decided on the $5 billion. We factored that in when we looked at last year, keeping the program going, and it was a sensitivity, but it was a sensitivity, not a reality.

[Tom Wilson, Chair, President, and CEO at Allstate]

When it turns into a reality, you say, "Okay, let's just stop buying it back, and if we feel like getting back to it, we will." We have a strong track record of buying stock back. What will drive the value of our stock, and I can close on this, is not share repurchases. Like, we've looked at share repurchases. I've said we've bought $37 billion back. The return on share repurchases, if you take the price that you bought it at 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 it back. When you look at it over an extended period of time, it kind of turns into the cost of capital, which makes some sense.

[Tom Wilson, Chair, President, and CEO at Allstate]

Sometimes you get a 20% return because you bought it back cheap, and the stock went on a run. Sometimes you buy it, and the stock's up, and you get a lower return. When you look at it over a long period of time, so you don't really create shareholder value by doing share buybacks. If you don't do share buybacks, you destroy shareholder value. That's a bad thing. So the way we're gonna create shareholder value is get profitability up, execute transformer growth, and broaden our the product offering to people and things like protection plans, which are low capital, high growth, high return businesses, health and benefits in the same way. That's our plan. Thank you for tuning in this quarter, and we'll talk to you next quarter.

[Operator]

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

Participants

Executives

• Brent Vandermause, Head of Investor Relations
• Jess Merten, CFO
• Mario Rizzo, CFO
• Tom Wilson, Chair, President, and CEO

Analysts

• Alex Scott, Equity Research Analyst at Goldman Sachs
• Elyse Greenspan, Managing Director & Senior Equity Research Analyst at Wells Fargo
• Gregory Peters, Equity Research Analyst at Raymond James
• Josh Shanker, Equity Research Analyst at Bank of America
• Michael Zaremski, Senior Equity Research Analyst at BMO
• Yaron Kinar, Equity Research Analyst at Jefferies