Earnings Call Transcript
ALLSTATE CORP (ALL)
Earnings Call Transcript - ALL Q1 2023
Operator, Operator
Thank you for standing by, and welcome to Allstate's First Quarter 2023 Earnings Conference Call. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.
Mark Nogal, Head of Investor Relations
Thank you, Jonathan. Good morning. Welcome to Allstate's first quarter 2023 earnings conference call. After prepared remarks, we'll have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and 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 10-K for 2022 and other public documents for information on potential risks. As some of you know, this will be my final earnings call as the leader of our Investor Relations team, and I will be transitioning to a new role in our P&C finance area supporting National General. I'm leaving Investor Relations in the capable hands of Brent Vandermause, who will be a great partner for all of you going forward. And now, I'll turn it over to Tom.
Tom Wilson, CEO
Good morning. We're excited for Mark, and we're completely confident that Brent is going to give you everything you need to help you decide how and why you want to invest in Allstate. So good morning. We appreciate the investment of your time in Allstate today. Let's start with an overview of results, and then Mario and Jess are going to walk through the operating results and the actions that we're taking to increase shareholder value. So let's start on Slide 2. Allstate's strategy, as you know, has two components: increased personal property-liability market share and expand protection services. Those are shown in the two ovals on the left. If you go to the right-hand side of the slide, you can see a summary of the results for the first quarter. We had a net loss of $346 million in the first quarter, which reflects a property liability underwriting loss that was only partially offset by strong investment income and profits from protection services and health benefits. We're making good progress on executing the comprehensive plans to improve auto insurance profitability, and of course, we'll have a substantive discussion on that today. Not to be overlooked, we also continue to advance the Transformative Growth plan, which is to execute the top oval there, which is to increase Property-Liability market share. At the same time, Allstate Protection Plans in the lower oval continues to expand its product offering and geographic footprint. Let's review the financial results on Slide 3. Revenues of $13.8 billion in the first quarter increased 11.8% or nearly $1.5 billion as compared to the prior year quarter. The increase was driven by higher average premiums in auto and homeowners insurance, resulting in Property-Liability earned premium growth of 10.8%. In the auto insurance line, higher insurance premiums and lower expenses were essentially offset by increased loss costs, so the profit improvement plan has not yet returned margins to historical levels. The auto insurance line had an underwriting loss of $346 million in the quarter. In homeowners, the story is really about $1.7 billion of catastrophes, which led to an underwriting loss of $534 million. The total underwriting loss was just under $1 billion. Net investment income of $575 million benefited from higher yields, which mostly offset an income decline from performance-based investments. Protection Services and Health and Benefits generated adjusted net income of $90 million in the quarter. As a result, the adjusted net loss was $342 million or $1.30 a share. Now let me turn it over to Mario to discuss Property-Liability results.
Mario Rizzo, CFO
Thanks, Tom, and good morning, everybody. Let's flip to Slide 4. The chart on the left shows the Property-Liability recorded and underlying combined ratio since 2017. As you can see, Allstate has a long history of generating strong underwriting results though the current operating environment is challenging, with combined ratios over 100 last year and into the first quarter. The underlying combined ratio of 93.3 for the first quarter was slightly below the full year 2022. The second chart compares the full year 2022 recorded combined ratio for all lines of business to the first quarter of this year, which removes the influence of intra-year severity changes that occurred throughout 2022. The first red bar shows the underlying loss ratio was essentially unchanged as higher premiums were offset by increased loss costs. The second red bar on the left shows most of the increase in the combined ratio was driven by higher catastrophe losses, reflecting the widespread severe weather in the first quarter of this year. Expenses were lower by 1.9 points of premiums and minimal non-catastrophe prior year reserve reestimates also had a positive impact. Let's move to Slide 5 to review Allstate's auto insurance profitability in more detail. As you can see from the chart on the left, which shows the auto insurance recorded and underlying combined ratios from 2017 through the current quarter, we have a long history of sustained profitability in auto insurance as we successfully leveraged our capabilities in pricing sophistication, underwriting, and claims expertise and expense management to generate excellent returns in the auto insurance business. Since mid-2021, loss costs have increased rapidly, driving combined ratios above our mid-90s target. The profit improvement plan is designed to address these significant loss cost increases, and we're making good progress. The chart on the right compares the recorded combined ratio of 104.4 in the first quarter to full year 2022 results. Starting on the left, higher average earned premiums drove a 5.7-point favorable impact, which is shown in the first green bar. The first red bar reflects a 6.5-point increase in underlying loss costs due to increased accident frequency and severity for the 2023 report year, with severity currently projected in the 9% to 11% range above the full prior report year. A lower expense ratio reflects expense reductions and higher earned premiums. The remaining difference was due to catastrophes and prior year reserve reestimates. All in all, both the recorded and underlying combined ratios of 104.4 and 102.6, respectively, improved in the first quarter of 2023 compared to the full year of 2022. Slide 6 provides an update on the execution of our comprehensive approach to increase returns in auto insurance. There are four focus areas: raising rates, reducing expenses, implementing underwriting actions, and enhancing claim practices to manage loss costs. Starting with rates. Following increases of 16.9% in 2022, the Allstate brand implemented an additional 1.7% of rate increases in the first quarter. We will continue to pursue rate increases in 2023 to restore auto insurance margins. Reducing operating expenses is core to Transformative Growth. We have also temporarily reduced advertising to reflect a lower appetite for new business. We implemented more restrictive underwriting actions on new business in locations and risk segments where we have not yet achieved adequate prices for the risk. As we move through 2023, it is likely that some of these restrictions will be removed where there are profitable growth opportunities. Enhancing claim practices in a high inflation environment is key to delivering customer value. This includes leveraging strategic partnerships and scale with repair facilities and parts suppliers to mitigate the cost of repairing vehicles. In addition, settlement of pending bodily injury claims has been accelerated to avoid continued increases in costs and settlements. Transitioning to Slide 7. Let's discuss progress in three large states with a disproportionate impact on auto profitability. The table depicts Allstate brand auto new business production and rate actions for California, New York, and New Jersey. As a result of implemented profitability actions, new issued applications from the combination of California, New York, and New Jersey declined by 40% compared to the prior year quarter. The decline in these three states meaningfully contributed to the 22% decline countrywide. The right-hand portion of the table provides rate increases either taken or needed to improve margins. In California, we just received approval for a second 6.9% rate increase implemented in April, which will be effective in June. We continue to work closely with the California Department on the best path forward to getting rates to an adequate level and expect to file for an additional increase in the second quarter, which will reflect the balance of our full rate need. In New York, we filed for additional rate in the first quarter that is currently pending with the Department of Financial Services. In New Jersey, we attained a 6.9% rate increase in the first quarter and expect to pursue additional filings in the second quarter. As mentioned earlier, we anticipate implementing additional rates across the country in 2023 to counteract persistent loss cost increases.
Tom Wilson, CEO
So Greg, I think embedded in your question is, will you be challenged on something above 6.9%? The strategy that our team put into place was take 6.9%, get 6.9%, don't have a consumer advocate come in and look at it, get another 6.9%, and then go for the full rate. So what you're seeing us do it in three chunks. Other people have tried to do it other ways. We think this is the right way for us.
Gregory Peters, Analyst
Well, good morning, everyone. A lot to unpack in your comments. I think what I'd like to do for my question and follow-up would be to focus on, first, Slide 5. And I was interested in your comments about the average underlying loss ratio, I think, up 6.5% in the first quarter versus the average earned premium being a good guide for 5.7%. I guess the question would be, is the expectation that 6.5% is going to continue? And when will the average earned premium go beyond where the underlying loss ratio deterioration is?
Tom Wilson, CEO
I'll ask Mario to discuss the claim expenses. Regarding the 5.7%, first, good morning, Greg. I want to remind you that this figure has been trending upwards as we start to recognize the rates we implemented in '21 and '22. Therefore, we anticipate that number will keep increasing as we earn in those rates. For insights on claims severity, I'll let Mario update you on our current position and our thoughts moving forward.
Mario Rizzo, CFO
Yes. Good morning, Greg. So in terms of claims severity, what we disclosed this quarter was across major coverages. We're running in the 9% to 11% range in both physical damage and in injury coverages. Really, the drivers of those costs, if you start with physical damage, we continue to see pretty persistent inflation particularly in parts and labor costs to repair cars. Actually, used car prices or total values for used cars actually came down a little bit in the first quarter in our numbers, but we had a higher percentage of total loss frequency which impacted the mix, so those are really the drivers. And on bodily injury, it's the same things we've been talking about: medical inflation, medical consumption, and attorney representation. So I think the drivers of severity continue to persist. In terms of where they're going forward, it's really anybody's guess, but I think our perspective is, and we've been pretty consistent on this point, we're going to continue to take prices up. We've been doing that really since the fourth quarter of 2021 throughout last year. That continued into the first quarter. We're going to continue to, on a forward-looking basis, implement rate increases to first catch up and then outpace loss cost trends. But our perspective on rates is we continue to need to push more price through the system, and we intend to do that throughout the balance of 2023.
Gregory Peters, Analyst
On Slide 7, you mentioned those three states. I would like to follow up by asking where you see rates heading. I believe you mentioned, Mario, that you plan to file the remainder of your full rate need in California, but won't that initiate a different process that could delay potential rate approvals? Please provide some insights on that slide.
Mario Rizzo, CFO
Sure. First, I'll mention that we recently received approval for a second 6.9% auto rate increase in California. Going back to the fourth quarter of last year, we have secured approval for two 6.9% rate increases by collaborating closely with the department to present our data and loss costs. In our discussions, the department has encouraged carriers to file for the exact rate needs in their books instead of just proceeding with the 6.9% increase filings, primarily due to the high volume of such filings they are receiving. During our conversations with the commissioner and the department, we successfully obtained approval for the two 6.9% rate increases, and we plan to file for the remaining rate needs going forward. While this approach does introduce some risk of intervention, we believe it is essential to adjust California auto prices to ensure that consumers have the availability they deserve. We will continue to work closely with the department as we make this filing, and we'll see how it progresses.
Tom Wilson, CEO
So Greg, I believe your question implies whether we will face challenges regarding anything above 6.9%. The strategy my team implemented was to aim for 6.9%, achieve that without having a consumer advocate intervene, secure another 6.9%, and then pursue the full rate. Therefore, what you're observing is us approaching this in three phases. Others have attempted it differently, but we believe this is the best approach for us.
Gregory Peters, Analyst
Got it. In New York, New Jersey?
Mario Rizzo, CFO
Yes. We got some rate filings pending with the New York department that hopefully will get resolved soon. And then New Jersey, you see, we were able to implement a rate increase and we're going to come back and file another rate increase. So we're working hard to get these three states off of this page.
Gregory Peters, Analyst
Got it. Thank you for the answers.
Operator, Operator
And our first question comes from Paul Newsome from Piper Sandler. Please go ahead with your question.
Paul Newsome, Analyst
Good morning. I was hoping you could give us a little bit more additional color on the risk inflation rate. Is it fair to say that what we saw in the first quarter was an acceleration of frequency or severity trends that was unexpected? And if so, maybe you could talk about a little bit more of the pieces that were that much worse that may have seemed to have caught some people in the industry off guard.
Tom Wilson, CEO
Paul, you're breaking up a little, so let me make sure I understand. Are we discussing the auto insurance severity trends from the first quarter compared to last year? If that's the question, Mario can provide more details on that.
Mario Rizzo, CFO
Yes. I guess what I would say about severity, again, in that 9% to 11% range is it just remains persistently high, I think, is how I would describe it, and that's true across coverages. It's certainly lower than what our expectations were for severity last year, what our ultimate forecast is for 2022. But it still remains at elevated levels, which is why I go back to we're going to need to continue to push rate through the system through the balance of this year to combat that inflation.
Paul Newsome, Analyst
Should we interpret that as a further acceleration of rate? I think you were expecting to increase the rate anyway, right? I guess the question is whether we have a slight increase from where we would have been.
Tom Wilson, CEO
Yes, Paul, I think there’s a bit of confusion when looking at percentages in a high increase environment. The numbers Mario mentioned reflect the full year of 2022, not the first quarter of last year. As you know, the percentages kept increasing throughout the year, and we adjusted our results accordingly. We’ve decided to discuss the percentages based on the full year. Mario expressed that it continues to be high. If you compare the current percentage to what we estimated in the first quarter, it would be higher than 10% to 11%, but it remains consistent with our end-of-year expectations for the first quarter. Regarding pricing, we’re focusing on total loss cost frequency and severity, and we believe we need to continue increasing prices this year. Mario noted that we were up almost 17% in the Allstate brand last year. We don’t have a specific target for this year; rather, it will be based on necessity.
Paul Newsome, Analyst
No, that's helpful. I always appreciate the help, and I'll let some other folks ask questions. Thank you very much.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please.
Elyse Greenspan, Analyst
Hi, thanks. Good morning. My first question, I just wanted to talk about your RBC ratio. I mean, we see the cat losses and we can see the impact that that would have had on statutory income in the quarter. But you guys also did cut your equity investments in half, which I think could have maybe a 20-point benefit in RBC. Is there a way for you guys to walk through the moving components of RBC in the quarter and give us a sense of where your RBC ratio would be within AIC at the end of the Q1?
Tom Wilson, CEO
Thank you for the question, Elyse. I'll give a brief overview before Jess delves into the specifics. The key point is that we don't focus solely on our RBC. To put it simply, the recent bank failures teach us that having a capital problem is not something that occurs suddenly; it's the outcome of a series of decisions made over time. In terms of our decision-making process, we have a thorough analytical framework that examines various scenarios frequently. This allows us to determine what we believe is the appropriate level of capital. Our considerations encompass factors like RBC and input from rating agencies. In some instances, we might be more cautious about the capital we believe we require compared to others. We do not engage in RBC arbitrage and deceive ourselves in the process. With that, Jess, would you like to explain how you approach capital and our current situation?
Jess Merten, CFO
Yes. Thanks, Tom. I mean I think, as you and I have talked before at least, we try and take a look at our capital position using our sophisticated economic capital. I know it's not just the RBC ratios. We don't just to be clear to your specific question. We don't publish and have not published the RBC ratio for this quarter, and so I'm not in a position to take you through the bits and pieces on this call. I think directionally, you and others have noted what the RBC impacts would be. But I think it's more important to think about the way that we manage capital and the way that we look at it on a comprehensive basis, not just an RBC basis. And I think you've seen reflected in the results that we continue to proactively manage our overall capital position. So again, I go back to our economic capital model and the sophisticated and comprehensive way that we look at capital, including all different sources and uses, and feel confident in our capital position being, as I said in my prepared remarks, above our internal targeted levels.
Tom Wilson, CEO
But you shouldn't take the fact that we have less equity as a statement that we thought we needed to save capital. We have less public equity holdings because we didn't think it was a good risk-return trade-off, which John will be happy to talk about if somebody wants to go through. But we think we have plenty of capital on this business.
Elyse Greenspan, Analyst
Thanks. My second question is about the personal auto underlying loss ratio, which did improve sequentially, correct? There were some fluctuations due to true-ups in the fourth quarter last year. Additionally, I thought that Q1 typically shows better results for auto. Considering all these factors, and with the rate increases you mentioned, do you believe the personal auto loss ratio peaked in the first quarter, and should we anticipate further improvement from this point?
Tom Wilson, CEO
Well, first, we think the profit improvement plan is working. I would say, Elyse, that if you just summarize the first quarter, I would say we held serve in the face of, if you're a tennis fan, 120-mile-an-hour serve, which was called continued high increase in severity. How will - we'll return the ball, and as you point out, it's about where it was last year. It is improved sequentially in the fourth quarter, but you're absolutely right. Yes, there were some other things going around in the fourth quarter related to the first, second, and third quarter of last year. So it's not quite fair to say that it improved. I would just say we held serve. We feel good about where we're going. In our mind, it's a question of when, not if we will get back to how we make profitability. And that's, of course, dependent on what happens with inflation and costs.
Elyse Greenspan, Analyst
Thank you.
Operator, Operator
Thank you. One moment for our next question and our next question comes from the line of Yaron Kinar from Jefferies. Your question please.
Yaron Kinar, Analyst
Thank you. Good morning. Maybe starting with the current capital position, the reallocation of some of the investments, can you maybe talk about how you see the capital in maybe capital market stress scenarios? And I'm sure you run those internally, any color you can offer around that would be much appreciated?
Tom Wilson, CEO
Yaron, I'm not exactly sure. Maybe you can give me another layer down in the question so we can get specific for you?
Yaron Kinar, Analyst
Sure. So I think you're talking about, what, roughly $4 billion of liquidity or access about the holdco and I think, $16 billion of liquidity. What happens to those - we find capital markets stressed? I don't know if there's another 25% decrease in the equity market, maybe a credit cycle. I'm not exactly sure what kind of scenario to paint, because I don't want to put you on the spot with a specific set of declines. But I'm sure you do test, this excess capital availability against stresses in the system?
Tom Wilson, CEO
Yes, that's a valid point. Let me have John address that. To provide a brief overview, I want to emphasize that analytics play a crucial role for everyone, whether it involves using advanced models, extending duration, or managing capital. When considering the extension of duration, John explored several different scenarios on how to approach it. We are thoroughly examining all options regarding stress events in the capital markets, including potential government defaults and the risk of bank failures. John can elaborate on his strategy for asset allocation in relation to these stress events in the current market. Overall, from a capital perspective, we have ample resources. As you noted, our liabilities are quite predictable, so we aren't in a situation where someone might suddenly demand their $10 billion. Additionally, our portfolio is highly liquid, largely due to our significant investment in investment-grade fixed income. Even if the investment-grade fixed income market were to completely freeze, we would likely manage well because we are consistently receiving cash from unearned premiums daily. Therefore, we do not currently face any overall liquidity challenges.
John Dugenske, CFO
Yes, Yaron, thank you so much for the question. Just a piece of data, if we can trade a security, we've had $5 billion of cash coming in the next year just by things that are rolling off. It's highly integrated into the overall data and analytics quantitative framework across the enterprise. So I answered this question, I feel confident that scores of people on the investment team could answer too, because it's part of the way that we think. We're not managing an investment portfolio separate from the way that we think about the enterprise. Tom talked a little bit about the duration trade that we did that was highlighted in the materials. That's not taken in isolation of how all the other securities in the portfolio would perform and is not taken in isolation on how we think about the entire enterprise, what happens in underwriting and other areas. We run probably 100 different scenarios on a daily basis that look back at things that have happened in the past, things that could happen in the future, what that means for returns and what that means for capital. And we subscribe to getting the order of ready, aim and fire, right? So we really aim a lot as we think about our investment profile.
Yaron Kinar, Analyst
Thanks. And then maybe shifting back to the auto book, is the piece or the cadence of rate increases that you expect to file in auto kind of similar to where it was when we ended in 2022 or do you see maybe additional rate increases are necessary today relative to the plan at the beginning of the year?
Tom Wilson, CEO
Where is the plan at the beginning of the year. So maybe I'll give an overview, Mario, with an analogy and you can bear. We're running as fast and as hard as we can on rates everywhere. If we need them, we're really running fast and hard. If we think, we're actually adequately priced in some states where we are today, we're still paying attention. We're still on the track. We're so warmed up and ready to run if we need to be.
Mario Rizzo, CFO
Yes. I want to reiterate a point I made earlier about the necessity of increasing prices, a stance we have maintained since last year. This approach hasn’t changed. However, we do adjust based on new data as it comes in, and the specific rate increase we implement will depend on this updated information. As Tom mentioned earlier, we use advanced analytics to manage the business and respond to real-time situations, so the rate we aim for will depend on how our loss costs evolve over time. We will keep pushing the necessary rate through the system and have had success with that. I wouldn’t focus too much on quarterly fluctuations, as the approved rates can vary from state to state and can change in size. Nevertheless, I want to emphasize that we will continue to take the rate adjustments needed to restore our auto margins to our targets in the mid-90s.
Yaron Kinar, Analyst
Thanks and good luck, Mark, with the new role.
Mario Rizzo, CFO
Thank you.
Operator, Operator
Thank you. One moment for our next question, and our next question comes from the line of Andrew Kligerman from Credit Suisse. Your question please.
Andrew Kligerman, Analyst
Thank you and good morning. I'm trying to unpack the earlier comment about used car prices coming down a bit, because the Manheim Index was up about 8.6%, and that's kind of a forward-looking indicator. So maybe you could kind of give a little color on what your expectation there is for used car prices? Does that kind of fit in your 9% to 11% or could - of projected severity increase or could it be materially higher as we look out in the year?
Mario Rizzo, CFO
Hi Andrew, it's Mario. Thanks for the question. I guess what I'd start with, there's a number of indices for used car prices. I think you mentioned one with Manheim that tends to focus on wholesale prices. And I think as we all know, that metric was coming down most of last year. Certainly in the back half of last year, and then it started to tick up in the end of the fourth quarter and has continued into this year. What I was referring to earlier is actual total loss severity, which tends to lag the Manheim Index and is more a function of retail used car prices, which have improved, and that's what I was referring to in the quarter. What we saw was actually used car - or I'm sorry, total loss severity actually improved a little bit year-over-year. In terms of the risk going forward, I think, yes. If you look at what's happening with the Manheim Index and other indices, certainly, they're headed in a different direction than they were headed for much of last year, which adds risk. We've tried to factor that into our severity expectations in terms of what we're recording that 9% to 11% range. But what we actually saw in the first quarter of this year was a modest improvement in total loss severity.
Andrew Kligerman, Analyst
Thank you for that. It’s interesting to see that National General now has approximately 4.6 million auto policies in force, a notable increase from 4.1 million last year. It appears you are achieving substantial rate increases, and your combined underlying was 94%, which is quite strong. As you look ahead, it seems like you haven't completely rolled out your strategy yet. Could this potentially boost your policies in force while maintaining a responsible return? I would appreciate any insights on your expectations for policy growth in the coming year and how you plan to achieve that profitably.
Tom Wilson, CEO
Andrew thanks for focusing in on National General. For summary, we feel really good about the acquisition of National General. If you just start with the math, the numbers, it's exceeded our expectations and assumptions, because as you'll remember, we've mostly bought that so we could reduce our expenses in the independent agent channel by folding, basically having them reverse acquire Encompass, we just happen to buy them first. And so they've - and that's ahead of plan and the numbers are bigger. So, we're feeling really good about that, and that's the way we price the deal. You're - strategically, which is where you're after, we're also getting the benefit of now having a solid plan for an independent agent channel, which we did not before. We've been struggling to get a good platform so they have good technology, good relationships, as you point out, mostly in the nonstandard stuffing. Mario, I think in his comments, mentioned how we're now taking those relationships and that technology platform and we're putting what we call mid-market, which is basically standard auto and homeowners, on that platform, and that's going to give us great growth opportunities because we're using the Allstate expertise in both standard auto and - not to be underestimated, one bit really is our business model and homeowners. We think that's a great growth opportunity and which is basically icing on the cake relative to the acquisition. So, we feel really good about we're in that channel. It's part of Transformative Growth. It's part of increasing market share and personal profit liability, and we're pleased with the results.
Andrew Kligerman, Analyst
Awesome, thank you.
Operator, Operator
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.
Josh Shanker, Analyst
Yes, thank you. I want to talk about segmentation and policy count. Obviously, the net decline in the auto policy count was quite high this quarter. Do you have some sort of advice or thoughts to think about how much policy count will decline over this repricing period? But two, I also note that homeowners policy count was flat which suggests in the segmentation, there are different policyholders you're keeping versus different policyholders you're losing. So I thought you might be able to touch on both things?
Tom Wilson, CEO
Good. Mario, could you discuss homeowners and our initiatives to stimulate growth in that area? Regarding auto insurance, let's reference the Allstate brand, which has declined in comparison to Andrew's mention of National General, which is also down. For Allstate, there are two key aspects to consider: the acquisition of new business and retention rates. In terms of new business, we've adopted the view that a potential rate increase acts as a penalty for acquiring new customers. When acquiring new clients, there are costs involved, and typically, new business comes with a higher loss ratio than that of existing customers. If we anticipate needing a 10-point rate increase on our current pricing, we've included that in our growth forecasts for new business, treating it as at least a 10-point penalty. The worst-case scenario is that raising prices by 10% could drive customers away, negating the investment made to acquire them. Therefore, we've reduced our focus on new business and advertising, not solely to manage the profit and loss statement but to steer economic growth. We believe that telling new customers that their premium is $1,000 only to later inform them that it's actually $1,100 is not a sound strategy. As a result, we are scaling back on new business, and this trend can be seen across different regions, with Mario noting that in areas like New York, New Jersey, and California, we could personally track every new customer we gain if this continues. This decision reflects an economic strategy. On the retention front, that ultimately depends on customer choices and market conditions. Our retention rates have declined; although we model this, it has become increasingly challenging to accurately predict outcomes with the current variables at play. The increases we are seeing are much steeper than those models anticipated, which were based on 5%, 6%, or 7%, not the 10%, 12%, or even 15% seen in Texas. Furthermore, our models do not account for the competitive landscape where others are also raising their rates. Consequently, we have halted new business initiatives, considering it an economic necessity due to the increased penalty of being underpriced. Our goal is to enhance customer value because if customers are paying more, we must also provide more in return. We are committed to conducting insurance reviews and supporting our agents in this endeavor. Homeowners is a promising area we’ve focused less on recently; it represents a strong business model, and Mario can elaborate on our strategies to expand that segment.
Mario Rizzo, CFO
Thank you for the question, Josh. We're feeling positive about the homeowners sector in terms of profitable growth. In the last quarter, we increased our policy count by approximately 1.4%, and retention has improved slightly. A few factors contribute to this retention improvement. As Tom mentioned, we are raising prices in auto insurance in a targeted manner, which benefits homeowners retention since bundled customers are typically our longest-tenured and most profitable clients. Around 80% of our homeowners' policies also include an auto policy, and the retention rate for these bundled customers is significantly higher than for standalone homeowners policies. We have implemented processes that incentivize our agents and call center sales teams to promote additional bundling, which is showing positive trends and supporting homeowner retention. We plan to keep exploring ways to grow the homeowners business, as we see it as a strong risk and return opportunity. While our results may fluctuate due to volatility, like the current quarter's catastrophe losses, we are seeing ongoing improvements in our combined and loss ratios. By leveraging the strategies we've discussed, especially for retention among bundled customers, we believe we can continue to grow this segment.
Josh Shanker, Analyst
Are the bundlers having the same problem that they get quoted or rate an entire six months later? Or is your pricing such that you can comfortably quote a bundle right now and think that you're going to retain them for 12 months?
Mario Rizzo, CFO
Yes, we're obviously quoting bundled customers right now. And when you look at the business we are writing, we're seeing really nice improvements in terms of quality and lifetime value, which is indicative of that bundling rate. And so yes, we're quoting it. And the other thing you got to remember, and this is true both from a retention and a new business perspective. Bundling, it's an easier experience and a more streamlined experience for customers. There's discounts associated with bundling as well that can help offset higher auto rates and incent customers to stay with us.
Josh Shanker, Analyst
Thank you for the detailed answers.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Brian Meredith from UBS. Your question please.
Brian Meredith, Analyst
Thanks. I have a couple of questions. First, I noticed that your expense ratio has decreased by about one percentage point in relation to ad spending. How is the Transformational Growth initiative affecting the reduction of the expense ratio? What additional decreases can we expect in the future? Also, could you provide insight into what a normalized ad spend should be as a percentage of earned premium to help us understand where the expense ratio might eventually settle?
Mario Rizzo, CFO
Yes, this is Mario. Thank you for your question. As Tom mentioned earlier regarding earned premium and loss ratio, we've maintained our position. We've experienced the advantage of a lower expense ratio in both underwriting and adjusted terms. Our aim is to reduce the adjusted expense ratio to about 23 by the end of 2024, and we are making significant progress toward that goal, as evidenced by the improvements this quarter. The increase in earned premium has helped us manage costs effectively. We are also seeing reductions in operating and distribution-related costs, which contribute positively to the expense ratio. Our focus areas include automation, digitization, and sourcing, all aimed at further reducing costs. These strategies will be essential in reaching the expense ratio target outlined in our Transformative Growth initiative, and we are optimistic about our progress. Regarding marketing spending, we have reduced our expenditure compared to last year and believe it is not prudent to invest heavily in marketing while our prices are not optimal. However, as we achieve satisfactory rates in more states and markets, we will adjust our strategy accordingly. Our marketing investments will expand in alignment with growth opportunities, but I cannot provide a specific dollar figure or target at this time. That’s why we shared the adjusted expense ratio, which excludes marketing costs, as we will invest in marketing when it makes economic sense to do so.
Tom Wilson, CEO
Let me elaborate on the Transformative Growth aspect. An important element of Transformative Growth is enhancing the sophistication and investment in acquiring customers. We believe we can and should acquire new customers at a lower cost than we currently do. We have various calculations supporting this. One example is telematics, where we have been pioneers in continuous telematics for over a decade. Now, in collaboration with Arity, we believe we can expand the use of telematics into new business areas without requiring customers to download our app or install a device in their car to assess their driving skills. By utilizing our advanced analytics, we think we can set prices based on telematics data in advance, which may help us better control our acquisition costs. There is significant work ahead, but we see ample opportunities for growth.
Brian Meredith, Analyst
Can I just ask a quick follow-up here? As we look ahead, what is your base case for rate increases for the rest of the year in relation to inflation? Are you expecting the current inflationary environment to continue throughout 2023 as you set your rates?
Tom Wilson, CEO
Let me finish and make sure we respect for people's time on that question. So first, when you look at overall inflation, the numbers Fed and everybody else sees, that's one set of numbers. If you look at the inflation in what we do, it's of course, dramatically higher. And those are subject to different things. So whether the Fed tightens the economy, it doesn't tighten economy, probably isn't going to do a lot to keep people from having severe accidents, hurting themselves and needing a lot of medical care or then more lawyers getting involved in the case, nor will it have a huge impact on what the OEs charge on parts. They tend to charge more in parts based on what they're doing to overall profitability and how many new cars are selling. So if we go into a recession, they sell new cars, I don't expect they're going to cut car prices. So we think inflation will persist in this business at a higher level than you see from the overall CPI, and that's why we're having to raise prices for our customers. Thank you all for participating today. Thank you for being generous with your time. We're going a few minutes over. Our priorities are to make sure we're going to make money in auto insurance and continue to leverage our superior position in homeowners as start to grow and execute Transformative Growth, whether that's by getting our costs down, rolling out new products, expanding our National General platform. And then we didn't spend any time today on the great stories we have in the lower oval, which is expanding Protection Services. So a lot of things we're working on hard to create more value for you. Thank you, and we'll see you next quarter.
Operator, Operator
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.