Good morning, everyone. Pleased to be here for the 44th annual institutional investors conference for Raymond James. We got a full lineup today and attendance is back to pre-COVID levels, so very strong. So I'm Greg Peters, and I'm the Insurance analyst for Raymond James. It's an honor to welcome back Allstate. Allstate has been participating in this conference since I first joined the company of Raymond James years ago. It's a particularly interesting time in the history of Allstate considering the results of the last 24 months and the effect of inflation on both profitability and pricing. From the management team today, we have a number of executives, including Allister Gobin, who serves as Treasurer. We have Mark Nogal and Brent Vandermause, who serve in the investor relations office and effort.
Last, certainly not least, we have Jess Merten, who is the Chief Financial Officer. This morning, Jess is gonna provide 10-15 minutes of an overview. We'll open up to Q&A. After the Q&A, we'll, at the 30-minute mark, we'll pivot downstairs for a breakout. With that, let me turn it over to Jess.
All right. Thanks, Greg. Good morning, everyone. We appreciate you for taking the time to learn about Allstate and why it's a great investment. On the first slide, we have a reminder that we'll be using forward-looking statements and references to non-GAAP measures. Evaluate our remarks in the context of all the information that we provide, including information on potential risks in our recently issued 10-K for 2022 and other public documents. The presentation and more specific information are available on our website at allstateinvestors.com. With that warning, we'll move on to slide two. We start with an overview of our strategy to increase shareholder value as a reminder of our enterprise-wide strategic focus and the broad set of strategic priorities we're executing against. The two ovals on the left show the components of our customer-focused strategy.
The top oval focuses on increasing personal property liability market share through our Transformative Growth Plan, and we're also expanding other protection solutions provided to customers through the businesses listed on the bottom oval. The bullets on the right, excuse me, highlight our priorities to advance our strategy and increase shareholder value. Rather than touch on each during my remarks, I wanna focus my comments on the two that seem to be most top of mind at recent conversations with investors. Returning auto insurance profitability to historical levels and capital management. We're confident that accomplishing these priorities along with our Transformative Growth Plan will result in our achieving our long-term return on equity expectation of 14%-17%.
I'm gonna assume that you're all familiar with our results for 2022, and I'm gonna skip an overview of previously reported results and move right into our comprehensive approach to returning auto profitability to historical levels and increased returns, which begins on slide three. We have four focus areas: increasing rates, reducing expenses, implementing stricter underwriting requirements, and modifying claims practices to manage our loss costs. I'll start with rates, where I implemented increases that were 16.9% in the Allstate brand in 2022. Additional rates are being pursued in 2023, and we're focused on three challenging states, California, New York, and New Jersey, where we're working closely with our regulators to implement rates that are needed to restore profitability in those states. Reducing operating expenses is a core part of our Transformative Growth Plan.
We're about halfway to the goal that we established to reduce expenses from 2018 to 2024 by approximately 6% of premiums to 23%. We started our expense initiative several years ago and believe that lowering operating costs not only helps us improve profitability in the near term, but it also increases customer value in the long- term through lower prices. Restrictive underwriting actions on new business are in place for states or risk segments where rates are not yet adequate and where profitability is not at the levels that we expect. Claims practices have also been modified in response to the higher loss cost environment. This includes leveraging strategic partnerships with repair facilities and parts suppliers to mitigate the cost of auto repairs.
We also leverage predictive modeling to optimize repair versus total loss decisions and the likelihood of injury and attorney representation earlier in the claims process. We remain confident that these actions will restore auto profitability to targeted levels. Slide 4 illustrates how these actions impact the timing of improving auto profitability. Starting on the left with the first blue bar, the auto insurance recorded combined ratio was 110.1 in 2022. The absence of the 4.5 impact from prior year reserves, reserve increases and higher than normal catastrophe losses in 2022 improves the combined ratio. It gives us a baseline of sorts to move forward from. The second green bar reflects the estimated impact of auto insurance rate actions implemented through year-end 2022 when fully earned into premium.
Since over 90% of our auto policies have six-month terms, it takes a little more than a year to fully earn the rate into premiums in the income statement. The impact of rates already implemented but not yet earned into premium on the combined ratio is expected to be about 10.5 points, improving the combined ratio. The majority will be earned by the end of 2023. Of course, we anticipate loss cost will increase, whether from frequency or severity, increasing the combined ratio. Prospective rate increases in 2023 and other margin improvement actions must meet or exceed loss cost increases to achieve our historical returns. We continue to manage the auto insurance business with the expectation to achieve an auto insurance combined ratio target in the mid-90s. I'm gonna move on to capital management, which starts on page five or slide five.
At the end of 2022, we had $6.1 billion of senior debt. Our diversified capital strategy, with a balanced debt maturity profile that strategically incorporates senior and hybrid debt along with preferred stock, helps us to optimize the cost of capital. At the end of 2022, we had $6.1 billion of senior debt with a balanced maturity profile. This includes three separate issuances totaling $1.1 billion that will mature in 2023 and 2024. Hybrid debt of $1.8 billion has no maturities prior to 2053. $1.3 billion either is or will be callable during 2023. Our preferred stock of $2 billion includes $575 million of Series G that will be redeemed at the first available redemption date, which is coming up in April.
This redemption is consistent with recent preferred stock redemptions that were subsequently refinanced with similar instruments that receive rating agency equity credit without a mandatory deferral provision that was included in prior issuances based on rating agency criteria. We're confident in our ability to access capital markets to maintain a consistent capital structure following the redemption in upcoming maturities. As a sign of our continued confidence in our financial strength, the board recently increased the common dividend by 5%. We repurchased $2.5 billion of common shares in 2022 and had $800 million remaining on the current $5 billion authorization, which we expect to complete in the third quarter of 2023.
With that as context, I think it's important to go a bit deeper on how we think about target capital and why we continue to be confident in our financial condition and capital position. Let's move on to slide six. The basis for capital management at Allstate is a detailed and sophisticated economic capital framework that quantifies enterprise risk to establish the capital targets that we manage to. The framework incorporates regulatory and rating agency criteria, as well as the output of risk models that evaluate and quantify the impact of stress events. We determine a level of base capital needed to operate our businesses while continuing to meet customer needs at the amounts that are well above levels that might trigger regulatory concern or regulatory involvement. We have a comprehensive understanding of the regulatory framework and maintain good relationships with our regulators.
Adequacy of capital from a regulatory perspective is embedded in our base capital calculations. In addition to base capital, we hold capital for stress events that capture unexpected and infrequent outcomes. We certainly experienced an unexpected and infrequent outcome in 2022 with auto insurance profitability, where capital was available to absorb unexpected losses. Stress events across all risk types are evaluated and included in our stress capital calculations. Target capital includes one more important component, a contingent reserve. This amount is held for extreme stress events or extreme low-frequency events beyond the standard probabilities that we apply to our stress capital calculations. These three components are used to establish a capital target. At the end of the year, Allstate's available capital exceeded the target capital based on this framework.
To provide additional context and insight into how we apply the framework, we can look at the shift in risk profile after the divestiture of our life & annuity business. We'll move on to slide seven to do that. As I'll cover on the next page, the divestiture had an approximately $3 billion impact on statutory capital in holding company assets when compared to Q3 of 2021. This pie chart demonstrates how our Economic Capital, which is our quantification of enterprise risk, shifted to reflect the divestiture. This page also incorporates the impact of acquiring National General and repositioning our investment portfolio, which can have a significant impact on target capital as we balance risk and return with available capital to optimize shareholder returns.
We continually evaluate capital needs using this dynamic framework and adjust the enterprise risk profile based on risk and return trade-offs in the current operating environment. Let's wrap up the capital section on slide 8 with a reminder of the drivers of change in Allstate's capital position. As you know, we hold capital to provide a buffer when unexpected, adverse or extreme outcomes occur. As I stated previously, we built our Economic Capital model to include base capital as well as capital for stress events. When unexpected events occur, like the challenging increase in the auto loss cost environment last year, capital is available to absorb the impact of those losses, and that happened in 2022, where you can see the statutory results decreased capital by approximately $1 billion. Allstate's corporate organizational structure provides sources of capital to the holding company from multiple reporting entities and intermediate holding companies.
We manage capital at all levels using Economic Capital, rating agency models, regulatory requirements, these all come together to guide decisions and maximize our financial flexibility. We commonly report a view of capital that includes both Statutory Surplus and parent holding company assets. We prefer to dividend money up from subsidiaries to the holding company whenever possible, as it provides more financial flexibility for the organization while maintaining adequate capital levels in subsidiaries to support operations. The chart shows an overview of our capital position since 2016. As you can see, it grew substantially beginning in 2019, following strong results leading up to and during the pandemic. While the current level of $19.3 billion is approximately $7 billion lower than our position 5 quarters ago, the change is largely made up of two specific items.
First, $3 billion, or roughly half, is related to the sale of the life & annuity business, as represented by the first red bar on this chart. The second bar reflects our cash return to shareholders, excluding the impact of the life & annuity sale. The cash returns include dividends as well as share repurchases, representing a portion of prior year earnings. Together, these factors reduced capital by $6 billion, with roughly $4.7 billion going back to shareholders. We added a dashed line on this chart that represents our average capital from the year-end 2016 through Q3 of 2021, excluding surplus related to the life & annuity business. Our year-end 2022 capital position of $19.3 billion, which includes our Statutory Surplus and holding company assets of $4 billion, is in excess of this average.
I also wanted to clearly provide some context on Statutory Surplus and Risk-Based Capital requirements governed by state insurance regulators. Our largest subsidiary, the Allstate Insurance Company, we refer to as AIC. Total capital and Statutory Surplus was $12.2 billion at year-end 2022. This represents nearly twice the amount of capital, or roughly $6 billion in excess of the Company Action Level, which is when a regulator would require us to file a remediation plan. Our level of capital in AIC is also more than four times, or approximately $9 billion higher than the Authorized Control Level from the regulator. Simply put, capital resources available from statutory operating companies, combined with the additional $4 billion in holding company assets, provide significant financial flexibility as we continue to implement profit improvement actions and invest in Transformative Growth.
Hopefully, a more complete understanding of our capital management framework helps you see why we are confident in our financial condition and capital position. Before I wrap up, I want to remind you that we do continue to invest in our Transformative Growth strategy to increase personal property liability market share, as shown on slide nine. This is a multi-year strategy that's designed to build a low-cost insurer with broad distribution in all three primary channels. This includes enhancing our pricing sophistication utilizing Telematics and continued commitment to lowering our expense structure. Deploying differentiated product solutions through our affordable, simple, and connected products with integrated technology enables a personalized customer experience and enhanced agility.
Recent increases in auto loss costs may slow the realization of benefits in the near- term, but we continue to invest for the future and believe this will lead to increased market share and higher valuation multiples. I'm gonna end on slide 10, which is where we started. We're a purpose-driven company that seeks to empower customers with protection. We are well-capitalized and confident in our comprehensive plan that we have in place to return auto profitability to our mid-nineties targeted combined ratio. Combined with a strong homeowners insurance business, Transformative Growth implementation, and expanding our customer base along with proactive investment management, Allstate is poised to continue to create shareholder value. With that, as opening context, we can move to questions. Greg?
I'm sure others are gonna ask some questions, but please repeat the question for the line.
Yes.
You didn't really talk about California, New York, New Jersey. You talked about the rates overall, so maybe you can spend a minute and talk about those three states from a pricing perspective and profitability perspective.
Sure. California, New York, and New Jersey are all, I touched on the more challenging profitability states, as you know, right? We've got specific actions in place in every state. In California, we were one of the first, if not the first, to get a 6.9% increase in fall. We immediately filed another 6.9%, and that is pending approval. There's a window, as many of you know, where the consumer watchdog can intervene and request a hearing. That came at the end of February, and we have not yet heard back on what the outcome of that was yet, Greg. That's Our strategy in California specifically is to take a series of 6.9% increases to become rate adequate as quickly as possible.
We can pivot and change that plan if we think that the regulator is not going to move quickly enough, right? We can always pull a six-nine and file our full indicated rates. We believe that in the state of California, specifically a series of 6.9% That you get more quickly is better for, you know, our overall premium levels, and we will return that business to profitability more quickly using that strategy. New York and New Jersey, we're engaged with regulators. They're slightly different states, right? You don't have some of the same issues. We're working actively with the state of New York on a rate filing to make sure that we get rate adequate in that state.
The same is true in New Jersey, and I think we actually got something approved recently in New Jersey, and that's that was made publicly available. I feel like we're getting traction in all of these three most challenged states, but that requires active, you know, active engagement with the regulator. We met with the commissioner in California just a week ago. Mario Rizzo was on, helping them understand we do have profitability issues and what's good for the market is to get, you know, allow us to get our rates to an adequate level. That helpful?
Yes.
Okay, good. The question is what are we seeing on policy retention rates as we put rate through. What we've seen through the end of the year, and what we've talked about is that the retention is actually holding in a bit better than we may have expected with the amount of rate that we're putting in. That's largely because the whole industry has profitability challenges. You've seen some of our largest competitors, certainly have similar issues. If there's a lot of rate going in, we're finding that retention is holding in better than our historical retention models would have indicated. We feel like, you know, we have work to do to continue to take rate to improve profitability.
At this point, we're optimistic that retention is holding in, at levels that are at a minimum in line with what we would expect.
Can you talk about reinsurance and considering it's a hard market, can you talk about your view on how reinsurance is gonna shape up your company this year?
That's a great question. The question is about reinsurance and how I feel about reinsurance in the hard market. I feel very good about our ability to place our program. I think that Allstate's long-term commitment to the reinsurance markets, both the traditional and the ILS market, has paid off for us, to be quite honest. We have long-standing relationships with very, very well-established reinsurers, and I think that will come through as we get through this cycle and our ability to place our program because we've been committed in hard markets, we've been committed in soft markets. That commitment and that long-term relationship with reinsurance partners will result in, I believe, us being able to place a program that we're really comfortable with and we feel good about.
Is it an expectation that deductibles are gonna be higher for 2023, 2024 or how do you have any visibility on that yet?
We have visibility on what our total retention may be. We haven't disclosed. I think certainly if you ask the reinsurers, they would expect retentions to go up. You know, we tend to like where our program is at. As with any market, Greg, I think there's some push and some pull, and I feel like we'll end up in a good spot as it relates to the overall program. As we place the program, obviously, we'll publicly disclose what we get. You know, it's like many things, it's a negotiation. We're in the throes of that negotiation right now.
Can you tell us a bit more about the initiatives on both the total loss and on the repair side, and what sort of difference can those initiatives make to combined ratios with these kinds of.
The question was a little bit more on the initiatives, profit improvement initiatives on total loss and repair, basically repairability, I think was the question. We have invested in data analytics for a number of years. We have hundreds of people in a data and analytics group, and we think applying better data analytics to these types of decisions can make a meaningful difference in our ability to control total loss costs, right? Whether that's a decision to total a car versus repair, that's key, right? We think we've gotten a lot better using, you know, automated tools with overlay of experienced adjusters to make that call better.
It also will help us, I think using a data analytic framework will help as used car values or replacement values really, because we don't pay used car values in a, in a wholesale sense, we pay in a retail sense. I think as that dynamic continues to shift and as that moves quickly, having this data analytic framework will help us make better calls. They'll help us reduce overall loss costs as we're making a repair versus replace type decision. You know, as it relates to the actual ability or the cost to repair a vehicle, we've got good relationships with network providers that allow us to drive down the cost as much as far-possible on both labor and material, 'cause labor and material are the two largest components. We think we've got good relationships in place. It makes a difference.
There's also things that we're doing on the claims side to drive down costs from a bodily injury perspective. More than just fixing the car, fixing the people, and how can you use early identification to move claims through more quickly, to manage attorney involvement, to manage sort of the aspects of the bodily injury claims that can become more expensive. We're really focused on doing that as well, given what happened with bodily injury costs last year. I think better information, more rapid response within our claims organization, can make a meaningful difference in our ability to control loss costs.
In your slide on inflation, well on pricing, there was a component that sort of aren't spoken, is just continuing inflationary pressures on loss costs. We know what's happened last year. What are you factoring in for assumptions for inflation trends this year versus last year?
I can't give you the exact numbers, you know, Greg, about what we're factoring in. If I would have told you a year ago what we were factoring in versus what we actually saw, it was materially different, right? We are expecting loss costs to continue to increase, which is why if you think of that slide, one of the two arrows, right? One was the loss cost going up and one was more rate counterbalancing it. We're aggressively continuing to take rate because we do think loss costs will continue to rise. If you took this slide in isolation, took the future loss cost up, down off in the rates, like we'd be in our mid-90s combined ratio. We're taking more rate with the expectation that loss costs will continue to increase. It's very difficult to predict at what level.
I would certainly hope that they don't increase at the levels that we saw in 2022. But our philosophy at this point is we have to get auto profitability back to historical levels, and we're gonna take rate until we see. Because, you know, there's a delay function on rate. We need to take rate until we see some sort of change in the overall loss cost trends actually emerge in the data. How much of the profitability problem is specifically related to those 3 states? I think we disclosed about half is related to three states. I mean, it's a broader issue. What I would say about that, though, is our ability to restore profitability in other states is we have a lot more flexibility, so that's coming more quickly, right?
There's certain states, because of the regulatory regime, where they may have contributed to the 2022 problem, but we're gonna be able to get them back to where they need to be more quickly. Whereas California, New York, and New Jersey tend to have a more difficult regulatory regime that takes a little more time to get to adequate rate. It's about half. Yes.
One of your larger competitors who believes they are already adequate appears to have started to spend more actively in marketing and trying to increase the size of their customer base.
Yeah.
When do you think you will be in a position that you will be able to resume spending in that area to be able to combat any potential market share losses and perhaps gain market share?
Absolutely. The question for everyone was one of our largest competitors is believes they're rate adequate, has started to spend on advertising to increase the size of their market share, and when might we be in a position to do that? I'm not gonna make a call on exactly when it's gonna be. What I will say is we're watching closely the way that actual results will emerge this year. When we start to see the whites of the eyes of auto insurance profitability, we'll start to look to pivot towards growth. What I would emphasize for this group is that that pivot for Allstate will look different than it's looked in the past because of our Transformative Growth strategy.
That's why I ended with Transformative Growth, where we're gonna have distribution through all of the large distribution channels in the personal lines auto insurance market. We hadn't had that in the past in the same meaningful way that we do now. When we start to see profitability, we'll be able to turn things back on in a more granular way through our more robust direct channel. We've got the Allstate agents. You know, turning that system around takes a little bit longer than it does in direct, right? We've got a strong direct channel, we've got a strong agency channel, and we're building out in IAs as well. What I feel good about is when auto profitability is back to our target, we're gonna be able to move and grow market share more quickly. That would include, of course, investment in marketing, right?
We're not gonna pull the marketing lever until we feel good that we've got the profitability where it needs to be, because that's the priority for us right now, is to get profitability at the right level. We'll start to invest in marketing, which will drive the growth through all three channels. I just feel really excited that we have all those channels available in a different way than we've had in cycles of other, you know, where we've had other profitability challenges. How we doing on time, Greg?
We're about at the time stop. You know, thank you very much for your presentation.
Thank you.
We're done for now.
Yeah.