Earnings Call Transcript
ALLSTATE CORP (ALL)
Earnings Call Transcript - ALL Q2 2022
Mark Nogal, Head of Investor Relations
Thank you, Jonathan. Good morning. Welcome to Allstate's Second Quarter 2022 Earnings Conference Call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q and posted today's presentation on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures, for which 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 2021 and other public documents for information on potential risks. Additionally, we will be hosting our next special topic investor call on September 1, focusing on Allstate's investment strategy. Now I'll turn it over to Tom.
Thomas Wilson, CEO
Good morning. Thank you for taking the time to join Allstate today. Let's begin with Slide 2. Allstate's strategy for increasing shareholder value consists of two key components: gaining market share in personal property-liability and expanding our Protection services, which are illustrated in the two ovals on the left. We are developing a low-cost digital insurer with extensive distribution and have seen growth transformation. We are also diversifying our offerings by expanding protection services and leveraging our brand, customer base capabilities, and distribution channels. On the right panel, during the second quarter, we progressed in implementing this strategy while working on a comprehensive plan to improve profitability, which includes broadly increasing auto and home insurance rates. In the latter half of 2022, we intend to file for rate increases beyond the 6.1% implemented across Allstate brand countrywide premiums in the first half of this year. We are also cutting expenses related to advertising and growth investments. Changes to underwriting guidelines have been made to reduce new business volumes where we are not achieving adequate returns. Additionally, we are taking actions on claims operations to manage costs in a high inflation environment. These measures may negatively impact policy growth. Although the current situation demands a strong focus on margin improvement, we are continuing to advance our transformative growth strategy where profitability levels are sufficient to capture market share. Our Protection Services segment is producing profitable growth, although earnings slightly decreased this quarter as we invest in this segment. Due to the adverse effects of inflation on the auto insurance sector, we have reduced the bond portfolio duration since late last year to limit exposure to rising interest rates, which helped lessen the bond valuation decline by about $1.3 billion in the first half of 2022. Our robust capital position has allowed us to sustain strong cash returns to shareholders during this time. Moving on to Slide 3, let's take a closer look at our second quarter performance. Total revenues were down 3.4% compared to the same quarter last year, even though property liability premiums earned increased by 8.6%, which reflected higher average premiums and policy growth. The current year's higher loss costs and an increase in loss reserves of $411 million from prior years resulted in a recorded combined ratio of 107.9 for property liability in the second quarter. Net investment income was $562 million, down 42% from the previous year due to exceptional performance-based income last year. We experienced net losses on investments and derivatives of $733 million in the quarter, primarily stemming from decreased equity valuations and losses on fixed-income sales, which were partially offset by gains from derivatives related to the bond portfolio duration shortening. All these factors culminated in a net loss of $1.4 billion in the second quarter, with an adjusted net loss of $209 million or $0.76 per diluted share. The adjusted net income return on equity was 6.9% over the last 12 months, which is clearly not acceptable from our perspective and is significantly lower than the levels we reached at this time last year. Nonetheless, we remain dedicated to achieving our long-term returns on equity target of between 14% and 17%. Now I will pass it over to Glenn to provide a detailed overview of our property liability results.
Glenn Shapiro, CFO
Thank you, Tom. Let's start by reviewing underwriting profitability on Slide 4. The underwriting results reflect the high level of inflation, which is increasing severity leading to an underlying combined ratio of 93.4 for the second quarter and a recorded combined ratio of 107.9, which is shown in the chart on the left. The chart on the right compares last year's recorded combined ratio of 95.7 to this year's second quarter. A higher auto insurance underlying loss ratio drove 8.6 of the 12.2 point increase as claims severity has been increasing faster than earned rate increases. The other large negative impact was from prior year reserve strengthening this quarter, which I'll cover in a few minutes. The one positive impact was the 1.7 points from expense reductions. Let's move to Slide 5 and talk about profitability and rising loss costs in more detail. As you know, we have a target combined ratio for auto insurance in the mid-90s. And you can see on the chart, which shows the combined ratio by year and then the first two quarters of this year, that we have a long history of meeting or exceeding those targets, which is supported by our pricing sophistication, underwriting, claims expertise, and expense management. Now in there, you'll see 2020 was an outlier because we had much better than target results due to some of the early pandemic frequency impacts. And as we move from that environment to the high inflationary environment we're in today, incurred claims severities increased the underlying auto combined ratio of 102.1 for the quarter and 100.5 year-to-date. Auto non-catastrophe prior year reserve strengthening in the second quarter totaled $275 million, which is primarily physical damage and injury coverages. The most significant impact, though, on the combined ratio was report-year incurred severity for collision, property damage, and bodily injury claims, which increased by 16%, 12%, and 9%, respectively, over the average of the full year 2021 incurred. Because the costs were rising rapidly during 2021, the quarter-to-quarter increase comparison is even greater. And frequency also went up about 5 to 7 points, but it's still well below pre-pandemic levels. So let's go to Slide 6, and we'll go deeper into the prior year physical damage for reserve development. The chart on the left shows used car values. They began to rise in 2020. And if you go back looking from the beginning of 2019 to the current, used car prices have gone up more than 60% and continue to stay at an elevated level. At the same time, OEM parts and labor rates have increased during the first half of this year, which causes severity increases for coverages like collision and property damage. Now we anticipated that those trends and the delays that are taking cars a long time to be repaired right now would increase the amount of claim payments we made on 2021 losses after the end of the year, even though these are relatively short-duration claims. The chart on the right shows gross paid losses for physical damage coverages for the six months after the end of the calendar year. Now our expectation for paid losses for 2021 claims from months 13 to 18 was that it would be about $1.25 billion, which you can see from the chart is about 40% above the prior year. You can see that from the dashed line on the far-right bar compared to the bars to the left of it. But at the end of the second quarter, the actual paid losses were $1.48 billion, which exceeded even our higher estimate by $230 million and is a large driver of the prior year reserve increases. All other non-catastrophe prior year development, primarily from injury, commercial auto, and homeowners, totaled $268 million in the quarter. Let's go to Slide 7 and discuss how higher auto insurance rates have been and will be implemented to improve profitability. Since the beginning of the year, we've implemented broad rate increases across the country, as shown on the map, in 9 states where we had increases over 10%, and auto rates have been increased in 48 locations, inclusive of Canadian provinces. Those rate increases are expected to increase Allstate brand annualized written premium by 6.1%. Now we have not been able to get adequate rate in New York or any increase in rate in California. New York represents about 9% of our auto premium. And the implemented rate there was, we leveraged the annual flex filings process there. And it gave us less than 5% rate in our current indicated indication there, which is significantly higher than that to get to an adequate return. Similarly, in California, which represents about 12% of our auto premium, we recently filed in the second quarter for a 6.9% increase, which again is significantly below the overall rate needed there. In states, markets, risk segments, or channels where we cannot achieve an adequate price for the risk, we're implementing more restrictive underwriting actions and reducing new business as needed until adequate levels of rate are approved. Let's move to Slide 8 and look at how these rate increases are impacting and will impact the combined ratio for auto insurance. What you see here illustrates our path to target profitability, along with the magnitude of actions we've already taken and what's required prospectively. Starting on the left, through the first six months of the year, our auto insurance recorded combined ratio is 105, and that's shown in the blue bar. To start with, we normalized that by removing the impact of prior year reserve increases and going to a 5-year average on catastrophe losses; that improves the combined ratio by 2.5 points represented by the first green bar. The second green bar reflects the estimated impact of rate actions already implemented when fully earned into premium. So these are already implemented actions that are in the market and renewing on policies. They total an additional $1.7 billion of effective premium across Allstate and national general brands. Those will be earned over the coming quarters and fully earned by the end of 2023. Now, of course, loss costs will continue to increase, whether it's inflationary impacts on severity or higher frequency, which would increase the combined ratio from what I just described there. So prospective rate increases must exceed the loss cost increases that come to achieve our target returns. Now everything I just described, combined with our non-rate actions such as reducing new business and expenses, gives us a track where we expect to achieve our target combined ratio in the mid-90s in auto insurance. Now the timing of that will be largely dependent on the relative increases and pace of these increases in premium and loss costs. So on Page 9, we'll take a look again at our industry-leading homeowners business. As you know, a significant portion of our customers bundle home and auto insurance, and that improves the retention and the overall economics of both products. We have a differentiated ecosystem in homeowners that includes a differentiated product, underwriting, reinsurance, claim capabilities, and we discussed a lot of those capabilities in our last special topic call. Our long-term underwriting results show the strength of the system. Our 5-year average reported combined ratio is 91.9, as shown in the chart on the left. And that produced $3.3 billion of underwriting profit since 2017, while the industry lost over $20 billion in that same period. Now our second quarter combined ratio and most second quarter combined ratios have historically been higher than full-year results, primarily due to catastrophes. And the second quarter this year was at 106.9, which reflected again higher catastrophes and 1.7 points of unfavorable non-catastrophe prior year reserve estimates. Our year-to-date recorded combined ratio for home is 95.8. Now homeowners insurance is certainly not immune to the inflationary environment we're in, and we continue to see increases in labor and material costs. To combat that, our product has sophisticated pricing features that respond to changes in replacement values, and we've taken rate. If you see on the chart on the right that shows some of the key Allstate brand homeowners operating statistics, we've grown net written premium by 15.2% from the prior year. And that's on a policy base that we grew of 1.2% in the second quarter, where our Allstate agents remain in a really good position to broaden customer relationships. So as you've heard me say several times and certainly in our last special topic call, we're really well positioned in homeowners to not only maintain the competitive advantage we have but to grow that line of business. And with that, I'd like to turn it over to Mario.
Mario Rizzo, Chief Investment Officer
Thanks, Glenn. As Tom mentioned, while we are improving profitability, we also continue to invest in the core components of the transformative growth strategy to increase market share in the personal property-liability business. Slide 10 is the flywheel of growth that we have discussed on earlier calls. Transformative growth is a multi-year initiative designed to increase personal property-liability market share by building a low-cost digital insurer with broad distribution. I won't get into all the pieces today, but I want to highlight two specific items: first, we remain committed to achieving our adjusted expense ratio goal of 23 by year-end 2024, which represents a 6-point improvement compared to year-end 2018; secondly, in the quarter, we launched beta versions of a new fully digital auto insurance product and sales experience made possible with new technology for relationship initiation and product delivery. Building these foundational elements will enable us to scale growth when adequate insurance pricing is achieved. At the same time, the Protection Services businesses, in the lower strategic oval, are growing and increasing shareholder value, as shown on Slide 11. Revenues, excluding the impact of net gains and losses on investments and derivatives, increased 8.3% to $629 million in the quarter, primarily driven by Allstate Protection Plans. Adjusted net income of $43 million for the second quarter of 2022 decreased $13 million compared to the prior year quarter as ongoing investments and growth are being made to position these businesses for future success. Policies in force did decrease by 1.6%, reflecting expiring Protection Plan warranties and lower retail sales compared to the favorable environment in the prior year quarter. Moving to Slide 12. Allstate Health and Benefits is also growing. It is also growing an attractive set of businesses that protect millions of policyholders. The acquisition of National General in 2021 added both group and individual health products to our portfolio, as you can see on the left. Revenues of $574 million in the second quarter of 2022 increased to 4.6% for the prior year quarter, driven primarily by growth in group and individual health businesses. Adjusted net income of $65 million increased $3 million from the prior year quarter, driven by increased revenue, which was partially offset by a higher benefit ratio, primarily in individual health. Now let's shift to investments on Slide 13 to review investment performance and the portfolio risk and return position we have taken given higher inflation and the possibility of a recession. Net investment income totaled $562 million in the quarter, which is $412 million below the prior year quarter, as shown in the chart on the left. Market-based income, shown in blue, was $13 million above the prior year quarter, reflecting an increase in the fixed income portfolio yields, which are now benefiting from investing in yields that are higher than the overall portfolio's current yield. Performance-based income of $236 million, shown in dark blue, was $413 million below with an exceptional quarter in 2021. The performance-based internal rate of return over the last 12 months was 24.6%, which remains above our long-term return expectations. The performance-based portfolio includes private equity as well as a mix of other asset types such as real estate and infrastructure, which diversify our performance in this segment. In the second quarter, real estate investments had strong performance, including gains on asset sales, while private equity results were lower. As a reminder, our performance-based results are reported based on a one-quarter lag, so second quarter results reflect March 31 sponsored financial statements, and future returns will reflect market and economic conditions from the prior quarter. The total portfolio return was negative 2.8% for the quarter and negative 5.6% year-to-date due to higher interest rates and credit spreads, lowering the market value of bonds and a decline in public equity valuations. While these market conditions negatively impacted the market value of the portfolio, it continues to generate operating income. And because of proactive portfolio actions, the results are better than the broad indices, with the S&P 500 Index 20% lower and the Bloomberg U.S. Aggregate Bond Index 10% lower. The chart on the right illustrates the shift in risk positioning we have executed to protect portfolio value and position us to take advantage of opportunities as conditions evolve. We reduced interest rate risk towards the end of 2021 and into the first quarter through the sale of longer-duration bonds and the use of derivatives. The portfolio duration is shorter than our long-term targets, which has mitigated the negative impact of higher market rates by approximately $1.3 billion this year. With recession concerns rising, the exposure to recession risk-sensitive assets was also reduced through sales of high-yield bonds, bank loans, and public equity. These sales were largely executed prior to the most significant credit spread widening and equity market decline at the end of the quarter, further preserving portfolio value. Now let's move to Slide 14 to discuss Allstate's strong cash returns to shareholders of $1.9 billion in the first two quarters. Over the last year, shares outstanding have been reduced by 8.7%, providing more upside per share as profitability has improved. In addition, there is another $1.8 billion remaining on the current $5 billion share repurchase authorization. Adjusted net income return on equity of 6.9% was below the prior year period, primarily due to lower underwriting income. Achieving our target combined ratios for both auto and homeowners insurance will bring adjusted net income returns on equity back to our long-term target range of 14% to 17%. With that context, let's open up the line for questions.
Operator, Operator
Our first question comes from Greg Peters from Raymond James.
Charles Peters, Analyst
I would like to go back to Slide 8 for my first question. And I guess the two areas that caught my attention as you were running through them, Glenn, were the future loss costs arrow and the rate and other actions. And then in the box, you say you're pursuing larger rate increases in the second half of 2022 relative to the first half. So maybe you can give us some additional detail around what you guys are thinking on those two areas in that chart?
Thomas Wilson, CEO
Greg, this is Tom. I'll provide a brief overview. Glenn, feel free to add your input. First, Greg, as you know, we don't provide specific earnings estimates or go through details line by line. We do anticipate an increase in future loss costs, and we are planning for that increase. Additionally, as previously mentioned, we expect to implement rate increases. With that, Glenn, would you like to share more insights on the historical trends regarding loss costs and your thoughts on upcoming rate increases?
Glenn Shapiro, CFO
Sure. Greg, on the loss cost piece of it, I know there's been some opinion out there that maybe the worst is behind us and inflation will slow or just listening to other calls out there. We're not sure of that, and we certainly want to have the rate outpace the loss trends. One thing I'll say is when you look at our frequency trend, I think this is a unique time in history where typically frequency is harder to predict than severity. And I think the opposite is true right now. Our frequency has been really, really steady. You look at it from the low points of the pandemic up to where it is now; it has just steadily crept back up but has leveled out in that creep, and we have good data and expectation that it remains below the pre-pandemic levels, but continues to rise slightly as it has. And on the other side, severity is a big wild card out there, I think, in all industries right now as to how long and how severe inflation runs with the actions of the Fed and anything else out there; we're taking the conservative viewpoint that we need a lot more rate in order to offset that. So I mentioned in the prepared remarks a couple of places where we're having trouble on it, and we're working through it. But broadly, I will tell you, it's gone very well in that the regulators we work with have good relationships across the country, and we're getting some meaningful rates going through the pipeline right now, and they understand. I mean the math is on our side, and we need to get those rates in to offset those future rate trends because as the slide depicts, if you froze time and loss costs didn't move, we would earn our way right to the mid-90s combined ratio over the coming quarters, but that isn't the case. We need additional rate to offset those loss trends.
Charles Peters, Analyst
You mentioned Slide 7 in your response, Glenn, which aligns with my other point of interest regarding the reduction of new business in states with inadequate rates. In the slide, you mention California and New York; are there other states encountering issues with rate approval that you require, or are those the main two states?
Thomas Wilson, CEO
Greg, I'll let Glenn provide more details on that. It's not only about negotiating. While I understand your implication, it's also crucial for us to maintain our loss costs. Even with a rate increase, there might be particular areas or segments within the state that don’t meet our profitability expectations. So, managing profitability is also a key factor. Glenn, could you share some specifics on that?
Glenn Shapiro, CFO
Yes. And I'll just build on that because it's exactly right. It really is segments within states, it's markets within states, and it's even channels. I mean look at the fact that right now, National General is performing quite well, both from a growth and a profit standpoint. And so we can position based on where we can be profitable, whether it's a channel, market, or segment of risk, and that's kind of how we're thinking about new business. To put it very simply, we don't want to write new business that we're not profitable on. And it's not as simple as looking at, you can see in our disclosures, the number of states where we're above 100 or above 96. And because that's the rearview mirror. The prospective view is where we've already gotten rates. And in some of the states that we feel good about the price we're putting on for new business, we will grow in those. To answer your specific question, New Jersey would be another place that we're working hard on and need to get more rate. But the vast majority of states across the country, we've been working through, and we're in good shape.
Operator, Operator
Our next question comes from Andrew Kligerman from Credit Suisse.
Thomas Wilson, CEO
Jonathan, we didn't hear him. I don't know if you did or I don't know, Andrew, if you're on mute or not, but we didn't hear him.
Operator, Operator
You couldn't hear him?
Thomas Wilson, CEO
Now we can hear you. Now we can't.
Mark Nogal, Head of Investor Relations
Jonathan, I think we move to the next question. We can't hear...
Operator, Operator
Our next question comes from the line of David Motemaden from Evercore ISI.
David Motemaden, Analyst
I guess I'm just looking through what rates you're submitting, and that slowed down. And I'm specifically talking about auto insurance rate increase filings. It looks like the amount of the rate increase that you guys submitted during the second quarter slowed materially versus the first quarter. I'm just wondering why that was?
Thomas Wilson, CEO
David, I'll make a comment and then Glenn can, if there's anything you want to add, you might jump in. First, we are fully committed to increasing rates necessary to get our combined ratio down to the target levels that Glenn talked about, that obviously bounce around by quarter. And what you saw is what we got implemented in the second quarter; in the early part of your question, you said submitting as in forward-looking, that's not what we're submitting. What you saw in that release is just what got implemented. We're obviously in conversations with regulators when you have these kinds of increases continuously. So there are some states where Glenn's team chooses to go down and meet with the regulators, explain the numbers, and then submit it, so we feel good about where we're headed there. Glenn, anything you want to add to that?
Glenn Shapiro, CFO
Yes. I would just add that the timing and which states progress are crucial factors. If you examine the amount we filed in each state, we haven't scaled back. It depends on the states that went through in that cycle, and they are not as large. Consequently, the overall impact is reduced for medium or smaller states compared to the larger ones. Currently, we have some very large states in the pipeline. I believe the timing will balance out, which is why we expect to seek more rate increases in the second half of the year compared to the first half. There are significant rate increases in large states that we are working on.
David Motemaden, Analyst
I see the implemented rate, but I'm referring to the submitted rate, which hasn't been approved or disapproved yet. It's more of a leading indicator that I monitor, and it appeared that there was a slight slowdown in the second quarter compared to the first quarter. However, it seems that this is largely due to timing. Regarding another question, I've been reviewing the auto business and noticed that the Allstate brand's combined ratio was 9 points higher than NatGen's combined ratio for the quarter, and it has been consistently higher over the past few quarters. This seems counterintuitive to me, considering the differences in those business segments. Could you explain what is happening between the two?
Thomas Wilson, CEO
That's a great question, David. Let me elevate the discussion before handing it over to Glenn to address the differences between NatGen and the Allstate brand. Many of you have also inquired about our position relative to competitors. We always analyze various comparisons, both internal and external, to gauge our performance. However, external comparisons often provide more directional insight compared to our variance analysis due to various strategies, risk profiles, and state distributions. It's more beneficial to focus on long-term outcomes rather than quarterly statistics, especially when using percentage shifts on a quarter-to-quarter basis. Still, it’s important to understand and assess the actual numbers. When discussing Progressive, many of you have pointed out their strength as a competitor, and we respect that. Over the long term in auto insurance, Allstate, Progressive, and GEICO have all shown solid returns, and we are navigating the significant fluctuations in frequency and severity of auto claims influenced by the pandemic and inflationary pressures affecting repairs and pricing. Progressive reported a better combined ratio than ours this quarter due to them starting to raise prices earlier in 2021. We do not know the specifics behind their performance, but their frequency trends have varied from ours in both the current and previous year. Claims statistics can differ across companies, and methods of counting can change over time. In 2020, we both saw frequency declines from 2019 due to the economic shutdown — we experienced a 26% drop in collision claims compared to Progressive's reduction of around 23-24%. Last year, their collision frequency rose by 26%, while ours increased by only 18%, which would lead to an expectation that they would raise prices more significantly than we did. This year, they have seen a decrease in frequency while we have seen an increase, which would naturally result in our combined ratio being higher than theirs. The reasons behind these short-term fluctuations can be elusive, but Glenn will delve into the risk mix and demonstrate how it influences the differing results, particularly in comparison to NatGen.
Glenn Shapiro, CFO
Yes, I will. Well, David, you're getting a good detailed answer there from Tom. And after me, you hit the daily double here because it is a really good question and an important one. I want to take you back and kind of look at it over the 18 months that we've owned NatGen, and it's a good time frame to use because 18 months is the time it takes to earn out the full annualized premium changes also. So you go back to the first quarter of 2021, and this would be true, by the way, not only of the comparison of Allstate brand and NatGen, but Allstate to other competitors, like Tom was talking about. Allstate was running a combined ratio about 10 points lower. And the reason for that was the frequency was lower; frequency on more nonstandard or near nonstandard business came back much quicker as people needed to use their cars to make a living, and there was just a difference between different books of business. And so as a result, the good news was for the Allstate brand was that is a really low combined ratio. It's around 80. The bad news is, in the current state, would be to say that, well, when you're running at that level, you need to take rates now. I mean you can't sustain and even in some places, require you to refile your rates; you can't sustain that level that far below target combined ratios. National General, on the other hand, was still taking a maintenance level of rates up over that period of time. So now flash forward to today; their frequency down while Allstate is up. And then you've got a higher average earned premium going through. And I mentioned before the $1.7 billion of premium that we have already in the system, not only filed but approved and already like renewing on policies that hasn't been earned yet; we've actually only earned 15% of the premium that's been raised through this cycle. So we get 85% of it out there still left to be earned, whereas National General is earning off of a base, plus they didn't have the hole to fill, so to speak, of the negative rates that again we appropriately took because when you're running an 80 combined ratio, you got to fill that up to get back to par and then go up from there. So there's a difference in the average earned premium that's a few points to the differences, one. Two, there's a few points difference on the frequency levels right now. Three, and this is a really important one when you're looking across companies, is the risks are different and the policies are different. So as you think about the inflationary factors and how they're hitting different policies, National General, even inside their own book, it's really fascinating. If you look at their full coverage policies versus their liability-only policies, they're running about 10 points different on trend in their combined ratio. Because if you think about a liability-only policy, you don't have collision, which is the highest inflationary trend of any coverage right now, one. Two, you tend to have very low liability limits, so on things like, let's say, property damage; if you have a state minimum of $10,000 of property-liability coverage and you hit somebody's car and you total it, whether it's before the inflation factors that were hitting us or after, you're probably just going to pay that $10,000. And the inflation, there's a computation to that inflation. Whereas when you typically have $100,000 limits, you're bearing the full weight of the change in the value of vehicles. So looking at all these components, we see just a lot of different ways, and I didn't even get into state mix, which is another one; a lot of different ways that the trends move differently. The nice thing is having acquired NatGen, and it's performing really well, it's growing nicely, it's profitable; is that it's really acting right now as a bit of a diversification on that auto trend and gives us a place where we are able and willing to grow.
Operator, Operator
Our next question comes from Andrew Kligerman from Credit Suisse.
Andrew Kligerman, Analyst
Can you hear me this time?
Thomas Wilson, CEO
We can.
Andrew Kligerman, Analyst
I'm sorry about that before. First question is around non-rate actions. Could you give a little color on some of the more material non-rate actions that you could take and the potential magnitude we might be able to see in the back half of the year on loss ratio? How much potential improvement could that offer?
Thomas Wilson, CEO
Glenn can provide you with the details. However, I don't think we'll be able to specify how that will affect this year's combined ratio. Glenn, would you like to address that?
Glenn Shapiro, CFO
Yes. So I'll give you a few. Like you've got underwriting actions where we segment the business, and we segment our pricing to where, as Tom said earlier, it isn't just about, geez, we're going to not write new business in this market, let's say; it's, well, we're profitable in these segments and not those other ones. So we're going to change the segmentation of our pricing, would be one. Another would be, we changed the down payment on policies and expect that there's a change in the flow of business at times with that. Certainly, the targeting of marketing is a really big one that I think can be underplayed, but we're pretty sophisticated in how we go to market. So when and where we put up banner ads when people are searching for auto insurance, which risk categories, which markets? And flat out, we've taken a lot of marketing dollars out right now. We're just reducing the marketing that we're doing: one, it will improve expense; two, it will lower the new business flow and allow us to more quickly get back to profitability; and then the last one I'll say is the sales incentives that are out there with our agents about how we're incentivizing people to grow in which places. So when you put all of that together and you look at how you're going to market, you're really limiting in some places the ability to grow your business with your intent of being not growing in nonprofitable segments.
Andrew Kligerman, Analyst
Got it. That's helpful. And I should assume then that, that would be a very material impact on loss ratio as we go into the back half of the year?
Thomas Wilson, CEO
I don't think you should assume it's very significant. First, it's dependent on underwriting actions, and those won't get us where we need to be. We need to increase prices and reduce our expenses. Those are the main factors. This is useful. And I'd like to tell our team that anyone can give business away, so there's no point in writing business if you know you're going to incur losses. This is more about managing long-term profitability rather than its effect on the combined ratio in the second half of the year.
Andrew Kligerman, Analyst
Got it. And then just looking backwards a little bit and a lot of your competitors, their rate increases have been all over the place, and I think you got what about 2.5% across the whole book last quarter. What was the thinking going into that? Why not a lot more rate? Was it precluded by the fact that 20% of the book is in California and New York, and it's a lot more difficult? But maybe just rewinding back a little bit, why not pushing for a lot more rate 4 or 5 months ago?
Thomas Wilson, CEO
I addressed part of that with the comparison to Progressive, but let me discuss the philosophical concept first. We are increasing prices as quickly as possible in every area we can. We're up 6.1% in the first six months of this year, which might be the highest increase we've seen in a long time. We expect to achieve at least the same increase in the second half. There was no consideration to reduce our target to 2.5%. Our aim is to maximize what we can get across the board. Of course, it does depend on circumstances; for instance, if we don't achieve anything in California, which constitutes 12% of our total book, we need to compensate by securing the right pricing in other areas or by reducing our presence in those markets. This won't affect our profitability significantly. Regarding our competitors, everyone has their own narrative. Our situation at National General differs from Allstate's, which is connected to Progressive. They experienced a frequency increase of almost 10 points more than we did in 2021. Thus, it's reasonable for them to raise their rates more swiftly and to a greater extent than us, especially since we were still enjoying a favorable combined ratio at the start of the year. Each company has its distinct circumstances. I want to emphasize that we are fully dedicated to achieving a combined ratio in line with our historical performance. We have successfully operated at mid-90s ratios for an extended period, even when the industry averages were significantly higher, and we don't foresee any changes in the competitive environment, regulatory landscape, or our capabilities that would lead us to believe that maintaining this is unattainable.
Operator, Operator
And our next question comes from the line of Tracy Benguigui from Barclays.
Tracy Benguigui, Analyst
I want to touch on your higher physical damage loss development, Slide 6. Just wondering, in your transformative growth initiative, I presume you cut clean staff. Do you feel like you're adequate staff in claims where you can close claims in a timely fashion? Maybe you could talk about how you're trying to speed up close rates?
Thomas Wilson, CEO
Let me ask Glenn to discuss our operations in claims and how we are addressing the challenges posed by a higher inflationary environment, focusing on our partnerships and purchase contracts. After that, Mario can explain the difference between property damage, which refers to the payments made to others for accidents caused by our customers, and how we view collision. Additionally, Tracy, the changes in the prior-year reserves were primarily related to that first category, and Mario can elaborate on how this impacts the overall system.
Glenn Shapiro, CFO
We are not behind on claims staff or claims. Our pending situation looks positive, and we're in a good position. The expenses we reduced in the claims process are a result of our team's excellent work in automating processes, enhancing self-service options, and utilizing virtual estimating. The slowdown we've mentioned is external and affects everyone in the industry uniformly. For instance, shop capacity has significantly decreased, with body shop staffing levels leading to a 33% drop in hours worked per car daily. Cars that used to receive four hours of work per day are now getting closer to three hours or less. Consequently, the average time a car spends in a shop has doubled, and the time to get a car into a shop has more than doubled as well. As a result, consumers are choosing to hold onto their checks and delay fixing drivable cars until they believe they can have them repaired in a reasonable time frame. This has led to a much longer repair cycle, which impacts the way financials are processed. We had anticipated this cycle to be about 40% longer than any previous point, but it turned out to be even longer than expected. I want to emphasize that it is not an issue of claim staffing; we have sufficient staff, and our team is performing exceptionally well.
Thomas Wilson, CEO
Well, in fact, Glenn, you're also doing some stuff and parts buying and other things that mitigate the inflationary aspects, right?
Glenn Shapiro, CFO
Yes, absolutely. So using our scale as a company, we've doubled down on some of our parts suppliers; and this is both in home and auto, by the way, where we become a large and in some cases the largest in the industry buyer of certain materials, whether it's parts in auto or roofing and homeowners or flooring, and we get the benefit of those broader relationships and trends. We've also doubled down on our direct repair shop network in auto, so that we can get our customers access to more shops that can take their car, and we have a better one-to-one relationship with that network and are able to control costs in that way.
Mario Rizzo, Chief Investment Officer
Yes. I have a few points to make before diving into that. First, at the end of any reporting period, we believe our reserves are sufficient based on our processes. This was definitely true at the end of the second quarter as we went through a comprehensive process to estimate reserves, considering both internal and external data. Tracy, your question was about physical damage development, which differs from historical trends as these are usually short-tail claims. As Tom mentioned, these claims mainly fall into two categories: collision and property damage. Collision involves first-party coverage, where we are fixing customers' cars. A claim is reported and open, potentially facing delays due to body shop wait times and inflationary pressures. However, we have the claim, we pay it, and we move on. Property damage is third-party coverage, which means it's another carrier's customer. We often receive notice of claims through subrogation demands from third-party carriers. As Glenn discussed, the lack of capacity in auto repair shops, inflationary factors, and changes in consumer claiming behavior are leading to longer wait times for car repairs. Many consumers are waiting months to get their cars fixed due to queue and appointment issues. All these factors are extending the tail on property damage related to those third-party subrogation demands, which is reflected in the physical damage strengthening we reported this quarter, especially in property damage as shown on the chart on Page 6 of the presentation. The dollar amounts paid after the calendar year are significantly higher than in the past. Lastly, because we have information on these longer tail expectations, we are factoring that into our severity levels for 2022.
Tracy Benguigui, Analyst
So just a follow-up on that. Your auto underlying loss ratio of 79.6% was up 4.7 points sequentially. So should I think that part of that was raising your loss picks from everything you said, but was there also a component that you trued up your first quarter loss ratio since that will show up as a prior year, it's in the same accident year?
Mario Rizzo, Chief Investment Officer
Yes, Tracy. So as you know, when we increased severity, which we did slightly this quarter relative to where we talked about our severity trends last quarter, that gets applied to claim counts for the entire year. So there is a catch-up component that would have been reflected in the first quarter had we had perfect information in the first quarter.
Tracy Benguigui, Analyst
And would you be able to quantify what that first quarter true-up would have looked like, just so we have a better sense of what's the right starting point when thinking about your loss ratio?
Thomas Wilson, CEO
Tracy, I suggest looking at the combined ratio by quarter, as it tends to fluctuate. There are seasonal factors, such as increased driving in the summer, among other influences. So, it would be better to consider it on a yearly basis. Last year, there was one quarter with a significant figure, but this quarter's number is not as high.
Operator, Operator
And our next question comes from the line of Paul Newsome from Piper Sandler.
Paul Newsome, Analyst
I was wondering thinking about on the home insurance side of the house. Do we see the same sort of regulatory pressure in the home insurance business that we do in the auto because presumably, we have inflationary issues there, and presumably, you need to get rate there as well to offset those issues?
Thomas Wilson, CEO
The increase in home insurance is 15% year-over-year. We're receiving the rates we believe are necessary in those areas. The underlying assumption is that we face regulatory pressure in auto insurance. As Glenn mentioned, we maintain good relationships with the regulators regarding the pricing of vehicles. There are a few states involved. We have been waiting for a rate increase that was agreed upon with the State of California over a year ago regarding homeowners, and that has not yet materialized. This situation tends to be more of a state-specific issue rather than a widespread regulatory challenge. Glenn, do you have anything to add?
Glenn Shapiro, CFO
Yes, the only thing I would add there is that it's that base level of premium we're getting that isn't great. It's the inflationary factors that really keeps us going in that space. It's just a different type of product. Home values go up, and replacement costs go up. Cars, other than recent history, tend to not go up. So it's a different type of product in that way. So when you look at an average premium up over 13% year-over-year, it's a mix of rate in that. But to your point, Paul, like we've got to get rate there; it's not as heavy as it is in auto, but we deal with the same regulators. And I always go back to, it's the math. Like we're not making up these rates, and they're not looking to make up a reason not to do the rates in most cases. It's the math. Does the math support a trend that says you need rate? And we've been successful in that space.
Paul Newsome, Analyst
I was curious because getting rates for home insurance is different from auto insurance, considering inflation factors and other aspects. I want to understand if there is any difference in the improvement of rates on the home side as well. Additionally, are you implementing some of the same underwriting criteria changes for home insurance, or are they significantly different from what we've discussed regarding changes in volume this quarter for auto insurance?
Thomas Wilson, CEO
Glenn, do you want to take that?
Glenn Shapiro, CFO
Yes, I would say it is significantly different. We are pleased with our position in the homeowners market, but this is not the case universally. There is a lot of underwriting involved due to various risk factors, particularly those related to catastrophes, and this is one of our strengths. We have the expertise to underwrite this business in a way that ensures profitability over time while maintaining a balanced customer portfolio. However, our situation in the homeowners sector is not comparable to our position in auto insurance at the moment, despite the inflation concerns. We are in a strong position to continue writing and growing our homeowners business.
Thomas Wilson, CEO
Jonathan, let's just do one last question.
Operator, Operator
Certainly. And our final question for today comes from the line of Josh Shanker from Bank of America.
Joshua Shanker, Analyst
When I think of Allstate, I think you guys are second to none understanding the long-term value bundler that the Progressive people call the Robinson. And when anyone says they're going after that Allstate customer, I'm very skeptical at the level of success they'll have. On the other hand, you guys bought NatGen to go into nonstandard in a bigger way. You guys have come back and forth over 20 years in that a number of times. And if you look at Progressive, they're losing their SAMs at this point in time whether they're unprofitable or whatnot, that they are going somewhere. And when you talk about having 1,000 basis points of better margin in NatGen and it's growing, how confident are you given that that's not your legacy business that you understand that those aren't Progressive customers that they can't make work coming onto your books?
Thomas Wilson, CEO
Let me see if I can deal with that. So I'm going to go up in a minute. So it's really the question of we. And so who is we, Josh? So we as now Allstate and NatGen, as opposed to we was Allstate without experience in nonstandard. So you may remember when we got started on NatGen, I went to Barry Karfunkel and said, hey, Barry, I got this problem; I'm not making any money in the independent agent business, and I'm not really in the nonstandard business. So I either have to get out of the business or try to fix it, and I had trouble fixing it. So I've decided I'd like to get out of it, but I'm going to get out of it first by buying you, and then your team can fix our business, and that's exactly what's played out. Peter Randell and that team are really good at nonstandard. They know their business well. They run separately. They have separate pricing, and separate claims; they know that business well. And then they took our Encompass business, which was more a standard business, and they're folding that in. And so we think we have a great opportunity to expand in the independent agent channel, not just for the nonstandard piece but in what's affectionately called, I guess, the Robinson is quite progressive because we're really in that segment. And we think there's a great opportunity for us to compete there.
Joshua Shanker, Analyst
I will make this the final part of the question. You mention who as we, suggesting that National General operates somewhat separately from Allstate. Of course, you are in charge, and the responsibility ultimately lies with you, Tom; how confident are you that you have a solid understanding of the underwriting processes occurring there that assure you that the current results are ones you feel very comfortable and proud of?
Thomas Wilson, CEO
Yes, it's not difficult to grasp, Josh. The challenge lies in establishing a comprehensive set of business processes, policy documents, procedures, and agent relationships. For instance, they were assessing something known as the WAR Score, which evaluates the performance of individual agents based on the business they generate. It's not complicated like having wheels and dealing with losses. What's truly complex is developing the business model to support it. We are very confident in their expertise. Moving forward, as highlighted in your comments, our emphasis will be on auto insurance and improving those margins. We also need to ensure profitability in homeowners insurance, enhance our Protection services, and simultaneously rebuild our digital insurer, known as Transformer. Once we achieve satisfactory margins, we can aggressively pursue profitable growth and increase shareholder value. Thank you all, and we will discuss investments further in September.
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.