Morning, everyone. I'm Tracy Dolin-Benguigui, Insurance Analyst at Barclays, and I'm pleased to host a Fireside Chat with Jess Merten, CFO of Allstate. The way we're going to do this setup is Jess is going to go through just a couple of slides, and then we're going to have a Q&A session, including some questions from the audience. With that, Jess, I'll kick it off to you.
All right. Thank you, Tracy. Morning, everyone. Thank you for coming and taking the time to learn a little bit more about why Allstate is an attractive investment. I'm Jess Merten, I'm the CFO, and I'm here with Brent Vandermause, our Head of Investor Relations. As Tracy said, I'll make a few comments, and then we'll sit down and do some Q&A, and hopefully hear from all of you. Our first slide is a reminder that we'll be using forward-looking statements and references to non-GAAP measures, and they must be considered in the context of all information that we provide, including information on potential risks in our 10-K for 2022 and other public documents. This presentation and more specific information are available on our website at allstateinvestors.com.
I'm going to start on the second slide, which shows Allstate's strategy to increase shareholder value and their strategic priorities. This overview will center our discussion, and it'll remind you all about the broad set of objectives that we're working on. We have two ovals on the left that show the components of our customer-focused strategy. In the upper oval, you see that we're focused on increasing personal property liability market share through our Transformative Growth plan, while the lower oval shows the broad range of businesses we have that allow us to expand protection services that we offer our customers. The bullets on the right highlight our priorities in areas that we're focused on as we execute against this strategy. We're making progress on the comprehensive plan to improve auto insurance profitability by raising rates, continuing to reduce expenses, implementing underwriting restrictions, and enhancing claims processes.
At the same time, we continue to advance our Transformative Growth plan to build a low-cost digital insurer with broad distribution and enhanced connectivity. This both helps our current margins as we lower costs and positions Allstate for sustainable growth when auto margins return to targeted levels. The protection services and health and benefits businesses are generating profitable growth and expanding the protection solutions that we offer our customers. We continue to actively manage our investment portfolio to optimize risk and return in this higher yield environment. Wrapping up our priorities, we remain focused on proactive capital management. Capital is managed to levels that provide financial flexibility, liquidity, and resources necessary to navigate the operating environment. Allstate's capital remains sound, with $16.9 billion of statutory surplus and holding company assets well in excess of regulatory requirements.
Our capital model incorporates layers of capital to absorb stress from infrequent and low-probability events without impacting our operating, strategic, or financial flexibility. We continue to proactively evaluate capital management options, including purchasing additional reinsurance that lowers volatility and therefore reduces required capital at an economically attractive rate. We're confident that actions to improve auto insurance results will restore profitability, and the homeowners insurance business will generate target underwriting profits. Strong underwriting results and proactive management will generate capital to grow market share, expand protection offerings, and create shareholder value. Now I'll shift to slide 3, where we'll go a little bit deeper on profitability and our actions to achieve a mid-90s targeted combined ratio. Severe weather in the quarter contributed to a net loss of $1.4 billion.
42 catastrophe events impacted 160,000 of our customers and resulted in $2.7 billion in catastrophe losses and a property liability underwriting loss of $2.1 billion, or a combined ratio of 117.6, as you can see on this slide. Despite sustained elevation in loss costs, underlying performance is showing modest improvement. The Q2 underlying combined ratio of 92.9, sorry, was favorable by 2.2 points compared to the prior year and 0.4 points sequentially versus the first quarter of 2023. Improvement in underlying results reflects the impact of our profitability actions against the backdrop of persistently high levels of loss cost inflation. The pace of increases in auto annualized average earned premium modestly outpaced the rate of increase in the underlying loss and expense per policy in Q2.
The table on the right provides progress on our comprehensive action plan and aggressive approach to increasing auto margins to targeted levels. As you can see, we have four areas of focus. These are consistent with what we've been talking about for a while. Rates, of course, tops the list. In 2022, we implemented 16.9% of rate in the Allstate brand. In the first seven months of 2023, we've implemented an additional 8.4%. National General implemented rate increases of 10% in 2022 and an additional 7.1% through July 2023. We'll continue to pursue rate increases to restore auto insurance margins back to mid-90s target levels. Reducing operating expenses is core to transformative growth, and we continue to push on expense reduction. We've also temporarily reduced advertising to reflect a lower appetite for new business.
Implementing underwriting actions that restrict new business in locations or risk segments where we cannot achieve adequate prices for the risk continues, but we are beginning to selectively remove these restrictions in states and segments that are achieving targeted margins. Finally, we're enhancing claims practices in both physical damage and injury coverages by increasing resources, expanding inspections, and accelerating the settlement of injury claims to mitigate the risk of adverse development. Now, I want to turn to slide four and spend a few minutes on our homeowners insurance results, which showed improved underlying performance that was more than offset by catastrophe losses in the first half of the year. The chart on the left shows key Allstate Protection Homeowners Insurance operating statistics for the quarter.
Net written premium increased 12.4% from the prior year quarter, driven by average gross written premium per policy and a 1% increase in policies in force. Our business model incorporates differentiated products, strong underwriting capabilities, a robust reinsurance program, and a claims ecosystem that we believe is unique in the industry. And our approach has consistently generated strong underwriting results, despite quarterly or yearly fluctuations in catastrophe losses. We expect that to continue. The graph on the right shows components of Allstate's homeowners insurance combined ratios. The light blue segments highlight the impact of higher catastrophes in 2023, generating catastrophe loss ratios that are nearly three times higher than 2022 levels.
While the second quarter homeowners combined ratio is typically higher than the full year results, primarily due to seasonally higher severe weather-related catastrophe losses, the second quarter 2023 combined ratio of 145.3 was among the highest in Allstate's history. The second quarter catastrophe loss ratio was 33.9 points above the 15-year second quarter average of 42 points, but is not unprecedented and falls within modeled outcomes contemplated in our risk management and capital framework. The underlying combined ratio of 67.6 improved by 1.9 points compared to the prior year quarter. Our industry-leading homeowners business generated nearly $4 billion of underwriting income from 2017 to 2022, and a combined ratio of 92, including the impact of catastrophes.
We remain confident in our ability to generate attractive risk-adjusted returns in the homeowners business, and continue to respond to loss trends by implementing rate increases to address higher repair costs and limit exposure in geographies where we cannot achieve adequate returns for our shareholders. Now, I want to move briefly to slide five and touch on how our investment portfolio is positioned to create shareholder value. Active portfolio management includes comprehensive monitoring of economic conditions, market opportunities, enterprise risk and return, capital, interest rates, credit spreads, and ratings by sector and individual names. As you'll recall, last year, exposure to below investment grade bonds and public equity was reduced. We maintained this portfolio allocation in the second quarter, which enabled us to extend the duration of the fixed income portfolio and increase market-based income levels.
As shown in the chart on the left, net investment income totaled $610 million for the quarter. Market-based income of $536 million, which is shown in the blue, reflects the repositioning of the fixed income portfolio into longer duration, higher yielding assets that sustainably increase income. Our performance-based portfolio, which generated income of $127 million and is shown in black, is expected to enhance long-term returns, and volatility on these assets from quarter to quarter is expected. The chart on the right shows the fixed income earned yield continues to rise. Our fixed income portfolio yield is still below the current intermediate corporate bond yield of approximately 5.5%, reflecting an additional opportunity to increase yields. Now I'll move to slide six and talk about transformative growth.
As you all may recall, transformative growth is our multi-year initiative that's going to position us to grow market share through innovative products and broad distribution. We remain focused on transformative growth and continue to execute as we implement our profit improvement actions. We're making progress across five main components that you can see on the slide: improving customer value, expanding customer access, increasing sophistication and investment in customer acquisition, modernizing our technology ecosystem, and driving organizational transformation. The lower table on this chart shows the progress we're making by intended outcome. In the past few years, rate increases have impacted our competitive position, but we continue to implement sustainable cost reduction initiatives that will allow us to deliver low-cost insurance.
New, affordable, simple, and connected products are available with a differentiated customer experience, and they'll, they'll be in market for approximately one third of the United States by the end of this year. We're making progress on middle market and preferred product offerings available through independent agents and continuing progress on retiring legacy systems that leverage new technologies and reduce cost. We believe transformative growth is going to be to increase market share and higher company valuations that create shareholder value. To summarize my prepared remarks, we remain confident that the auto insurance profit improvement plan will restore profitability, and investments in organic growth will allow us to capture market share. Profitable growth in underwriting businesses and collective investment management will generate the capital we need to execute our strategy and provide value to shareholders.
With that, I will make my move here and take some questions with Tracy. All right, stop. All right.
Thanks, Jess, for the overview. So most of the questions I do get from investors is on your capital position. Just to get grounded, if you could just walk us through, you lost $3.1 billion of statutory surplus in the last 18 months, and you discussed on the earnings call that you've eroded the agency buffer in your internal capital model. What are some of the actions you think you could take to return to, you know, a buffer in the contingent layer?
Yes. So a few things, Libby. The simple answer on the actions is you implement the auto profit improvement plan. We make money, and Allstate has a long history of generating capital. As Tracy mentioned, we have—we think about capital in three buckets. You referenced the contingent reserve at the base capital level, which is the largest portion of capital, which is what we really think we need to have on a long-term basis to run the business with the right amount of strategic flexibility and operational flexibility. We then have a stress layer that is meant to absorb stress events, so times like this. And then we put a contingent reserve on top of the stress layer that really incorporates additional capital for deeper tail stress scenarios.
So, think multiple stress scenarios, similar to what we're having right now, where you've got high caps in a time where auto insurance isn't returning what you would think. So certainly we have, as we said recently on the call, we've eroded the contingent capital layer. We have a significant stress capital layer before you get to base capital. And just to center everyone, base capital isn't a regulatory minimum. So even if you were at base capital, you're significantly above the regulatory minimums, basically, the RBC threshold. So that's really a rating agency and an internally driven base capital calculation. So long way of getting to that, while into that stress layer, we don't need to take immediate action to replenish it.
So what would happen? You know, my vision of how you replenish it, there's a few things we can do to lower our required capital, and I think we've talked to some folks about that. So reinsurance option that I mentioned in my prepared remarks, we could buy additional reinsurance, think aggregate stop loss coverage. That basically reduces our required capital because we've taken volatility and risk out. So that's a capital reduction that would then flow through our model to create additional capital. So think, you know, both stress layer to potentially rebuild the contingent reserve. But otherwise, at this point, we feel very comfortable with capital. I know you get a lot of questions. I certainly get a lot of questions, and I understand why, but we're comfortable that we have the capital that we need to operate the business through this cycle.
And I'm very confident that we have enough power to rebuild any capital that's been eroded as we sort of implement our profit improvement.
I'm cognizant that there's Monte Carlo going on. So you mentioned reinsurance. Just to, to be clear, when you were talking about an aggregate reinsurance stop loss, in your reinsurance update, you talk about purchasing reinsurance from 1 in 100 aggregate PML for multiple perils, which is up to $2.5 billion. So are you thinking about a higher risk return period when you mention?
Yes. I mean, effectively, and again, we haven't finalized terms, so I'm not trying to be intentionally vague, but we are looking at a something that's a bit further out in the tail that gives us total capital relief, and it's also an aggregate. So when we talk about aggregate in our standard program, that's aggregate catastrophe-
Mm-hmm.
-loss coverage, and this would be aggregate loss coverage and not just catastrophe. But yeah, it's going to be a little bit out in the tail in comparison. But all we, you know, what that does is significantly reduce the volatility of earnings that we retain for those outside of 1 in 100 events.
Yes. So to be sure, this is not our frequency cover?
No.
Right. Okay. And is it fair to assume that you're going to be paying operating dividends from the operating company to the whole co for the remainder of the year?
We don't... I mean, we typically don't give forward guidance. We have, as you know, there's the 10% minimum that we're able to take of statutory surplus. And just to be clear, I'm talking about Allstate Insurance Company, our main operating entity. We have a number of entities. So when we talk about operating dividends, it's typically AI that we're talking about. We do have the ability to take 10% out. Again, I don't typically give forward guidance on what we're going to do. We do have significant holdco liquidity and assets, 2.5 times what we need at this point. So there's not a compelling reason to take an operating dividend out of those companies at this point, but, you know, we'll have to see what happens.
On that 2.5x whole co cash, do you have a minimum threshold, like 1x or something more, north of 1x, you want to maintain at the whole co balance sheet?
We don't. But we watch it, as you might expect, incredibly carefully. So we know, you know, at any point in time, what multiple of our fixed charges we have at the holding company. And while we don't set a minimum, it is something we keep pretty careful.
Got it. So you mentioned reinsurance, but if you had to, let's say, access the capital markets to restore your capital position, what would be a more palatable choice, debt or equity?
You're sort of putting me in a box in the way that you frame the question. Most palatable way to rebuild capital. We said, you know, we made a point on our recent call to say that we don't raise equity capital. And so I guess if you had to ask me of the two, we've said we don't want to raise equity capital. I don't intend to raise debt capital to build a capital, a perceived capital deficit at this point. But certainly, I guess if I had to pick between one and the other, I would probably raise that capital. To be clear, we have capital management things we have to do in the next year. So we go out and we access capital markets to refinance debt. That's not a capital move, it's a-
Got it. Are there brands or businesses you think you could get good value by divesting, and it could improve your capital position?
We have a portfolio of businesses that we've either acquired or built. It's the sort of why I like making those introductory comments, is it gives me a few anchor points. We have the 2-oval strategy, and when you look at the bottom oval of our strategy, we have a number of businesses that we've either acquired or built in that space that are valuable businesses. We know that they're valuable businesses. Now, divesting of those to raise capital has a significant trade-off that we're cognizant of, which is strategic flexibility, and we believe that they support our strategy. They allow us to protect, to offer more protection solutions to more customers, and we think all of those businesses are highly strategic.
At this point, it's a, there certainly is value in the, in the lower oval and in those businesses, but we believe that strategically, the right thing to do is to absolutely hang on.
Okay. You reiterated on the earnings call your 14%-17% ROE. I've noted also that your shareholders' equity has declined. How does that ROE translate to your combined ratio target? And are you about maybe lowering the combined ratio target, given how volatile we've seen results?
The simplest answer would be all of that is long term, right? The 14%-17% is long term. We can do the math just like all of you. That suggests that once we get back to earning the way that we historically have, given some erosion in capital, ROE is the way. But we're going to stick with our current guidance on a long-term basis. It's always been 14%-17% as long term. How it translates through to Combined Ratio targets, at this point, we don't intend to change our Combined Ratio targets for any of our lines of business. We think they provide the right return to our shareholders on an ROE, but more importantly for us, return on economic capital basis. Again, we've managed capital on an economic capital basis. We look at returns by line of business on that same basis.
What that does is that takes some of the volatility of what capital you've held out of the equation, and so you know exactly on a risk basis, how much return you need. Our combined ratio targets are based on economic returns, and we won't adjust those based on current events at this point.
Just listening to your opening remarks and more recent presentations, you've moved over to a more simplified underlying loss trend. In the past, you did provide a little bit more granularity. I'm just wondering if you could, you know, maybe talk about what you've seen with attorney representation, bodily injury, or physical damage.
Yeah, I mean, we did that actually, to provide more transparency. It might be counterintuitive, but when we gave a lot of granular pieces of information, we spent a lot of time talking about fluctuations that weren't really the heart of the issue. So as we've gone to the paid pure premium or the sort of loss plus expense view, and then talking about severity on an aggregate basis, we think that sort of takes some of the quarter-to-quarter volatility out and provides better insight. So what we're seeing from a severity perspective is, on average, I think we disclosed 11% last quarter. That's across coverages. It's a weighted average across coverages. So we're seeing pressure, right? We're seeing continued pressure in attorney representation rates. In auto physical damage, there's still pressure in the system, right?
I know there's, you know, a lot of talk about Manheim and what that's doing to used. That helps. That can help, but then you've got the offsetting impacts of, you know, continued pressure in the labor market. Makes it hard for, you know, auto body repair facilities to hire folks. The parts continue to be expensive. So, you know, I think everything, certainly that I would share about severity trends is what we talked about in the quarter.
Okay. I would note, though, that your pure premium or your underlying loss trend did move up. It was 12.5 in the second quarter, 10.7% in the first quarter. Why haven't we seen the loss trend trajectory work more in tandem with CPI?
CPI, it's difficult to find a good CPI number that truly correlates those underlying costs, even if you look back, right? And I've had a number of folks in this room and a number of folks within Allstate ask about, like, what's the thing we should all track? But I... There are components of CPI that I think track more closely, Tracy, to what we're seeing, and I think the industry is seeing results that are pretty consistent with what Allstate reported. I can't point to exactly what's going on within CPI more broadly headline, and say that's exactly what I would be looking at to translate through to our underlying cost trends.
Okay. So definitely, you know, you're continuing to take rate. If you had a crystal ball, when would you think pricing on an earned basis reflects with accumulation of loss trend?
Well, if we all had a crystal ball, we probably wouldn't even need to be here, right? That'd be great. Consistently, my answer to that question is, if you tell me what's going to go on with the underlying loss cost trends, then I can answer when the inflection point comes. And that's very difficult to answer right now. That comes back a little bit to your earlier question, what are you seeing in rep rates and underlying inflationary trends? We're going to take rate aggressively until we get to where we need to be from a rate adequacy and profitability perspective. So I can't tell you exactly when that's going to happen, unless you can help me understand exactly when we're going to see some stabilization in the underlying loss trends. Like, I'm not even talking about going down, right?
If we could just see some stability in those underlying loss trends, then I think the whole industry's got enough rate coming that you'd start to see some inflection. But right now, even at an 11% trend, historically, that's pretty aggressive underlying loss cost.
Well, let's be optimistic and just stick with the stabilization and the loss trend. When would your crystal ball be? Would it be mid-2024? Is there a-
I don't have an exact date.
Okay. I would love to hear, you have a rating increase out there in California above the 6.9. How have those discussions been with the DOI in California? It doesn't seem like they've given an approval for rate increases in a while.
They did some small in August, so they're still, I think they're still working away. We, you know, the intervention did intervene in our rate filing over the last few weeks. So from where I sit, the discussions with the DOI continue to be constructive. This is part of the process, we're going to continue to push to get that rate, and we believe there's evidence to suggest that people are getting the rate and they're going through the process. So we can be optimistic that we'll get the rate that we need. At least that we get the rate we need in California.
... You were like one of the first companies to say, okay, I'm not going to write new homeowner business in California. Are you at that point for auto in California, where you would say, I wouldn't want to write new business?
Well, that depends on what our view is on the path to getting it to an adequate return. If we came to a point where we believe we could never make an adequate return on auto insurance in California, I don't think on behalf of our shareholders, I would say that we should continue to write business at a loss in the state of California. But we're not at that point.
Same question. Maybe New York, New Jersey.
I think it's. I don't think there's any state that we should be writing at what would appear to be a professional loss. If we can't make money long term in a state, I don't think that Allstate should write there. And I do believe we stay in those states because we see a path to getting there.
Got it. Are there states other than Georgia, North Carolina, where their regulators are feeling fatigued about the rate increases?
I wouldn't highlight any specific state. You mentioned a few where there's, there appears to be some fatigue. I, frankly, I'm empathetic to the regulators who are dealing with constituents in their state who are seeing the increase. So the reality is, I think while they may be fatigued by it, I think carriers are fatigued by loss cost trends and the need to continue to file rates with adequate returns, right? So I think the whole system probably is feeling a little bit fatigued, but I wouldn't highlight any specific state.
So if we could have, in a time machine, move forward, I mean, eventually the loss trends are going to have to get better. What do you think the regulators are going to do? Are they going to reverse, you know, say, okay, now we've given you enough rate increases, now we're going to force three decreases?
I think it depends on, as we hop in our time machine, what scenario you paint. If it's stabilization that I mentioned, I think that there's. I don't see where the regulators would come back for a decrease, because we would collectively have a view that says, Allstate's earning an adequate return on the filed rate. Now, we wouldn't need to be taking rates. I don't see where they would come back and say, now you have to take a decrease, because we would show them, no, we're just earning an adequate return, right? That's a stabilization scenario. If for some reason you saw a significant decline, maybe they could ask for decreases. I think the likelihood of that is very, very low. I don't understand. I don't understand.
I don't foresee a scenario by which these underlying components go down so much that you see that, you see downward pressure that's meaningful, right? Like labor costs are going to stay high. I don't see parts costs coming down. You have a little bit in used, but it's not going to be enough, I don't think, to- that's just the physical damage coverage, you know, to satisfy PI. I don't see where you have a significant downturn. Stabilization, though, I think we all can probably get on the same page with the regulators and say, you may be a period where we're taking less rate, but I don't see a down scenario.
I'm wondering if the regulators are more sympathetic to your rate increase request, given that you've had a couple of downgrades by agencies. Is that part of the discussion at all?
No. It's, I think the rate, the regulatory capital regime sits very separate apart from the rating agencies. And they look at, as you and I were talking before we got here, it's very binary. It's RBC based. They have very defined thresholds, and I think they're focused on long-term solvency and meeting customer commitments. I, you know, certainly as a regulator looks at Allstate, I don't think there's any question that we meet our obligations, that we're, we have very strong solvency. So it doesn't, I don't think it's particularly helpful getting rate.
Okay, let's just talk about homeowner. How effective do you think your inflation guard piece is in getting ahead of inflationary pressures? Like, does it serve an effective stopgap, where you're limited on actual price increases?
I think the inflation protection that we've built into the policies is effective. It's helped us get rate as not just home values, but the underlying components to repair homes has gone up. And so we like the way that feature worked when we, you know, originally built the product. I do think it's an effective mechanism to get rate to make sure that we're earning those long-term returns that we expect on the homeowner side.
Are regulators thinking about containing all insurance costs, whether it's home or auto? You know, are they looking at the full picture here?
The regulators?
Yeah.
I think that they have to be, but not everyone in the auto space is also writing homeowners, right? So I think that if you're a regulator, you're looking at consumer, the cost to a household, right? And whether it's homeowners or renters or auto, they have to be cognizant of that because carriers don't all sort of operate in both lines, I think that there's a unique focus on auto, and then when you do auto and home, there's maybe a slightly different lens for the carriers that do both. Because I have to believe as a regulator in certain states, you want a healthy insurance market, not just an auto insurance market with a non-functional homeowners market, right? So I think they do probably look at those things together.
I don't think they link the filings and the rate approvals, but they have to be looking at the whole picture.
I recognize that you're not running new biz, homeowner business in California, but you still have an in-force there. What do you think about some of the proposals for Prop 103, including reinsurance costs and vendor catastrophe models? Do you think that would improve rate adequacy?
Oh, certainly. I think that if I take a step back, we want to serve customers, we want to provide solutions, and that includes people who have homes in California. We need to get paid for the risk. And if the regulator in California will allow us to earn an adequate return on the risk, and allow us to actually identify and underwrite around that risk, I think Allstate would say that's a huge leap forward, and it changes what that market looks like. So when you talk about, you know, the two big issues for us is, you know, we would like to be able to pass along the cost of reinsurance. Other states tell you to do it. It's a reasonable thing. We have to buy the re- to protect.
So passing that along, which seems like table stakes to me, and then using actual catastrophe models, the most specific example in California is wildfire models. The wildfire models exist. They would help us underwrite and price risk. We're not allowed to use those. So if we can use risk modeling and get paid for reinsurance, I think that materially changes what the homeowners market looks like in that state. And would allow a company like Allstate to change that view that if you go back to one of your earlier questions, I said, "Oh, we don't think we can ever get an adequate return on the risk. We won't write it." Well, if they could change that regulatory regime, we might be able to rethink what that looks like.
Do you think the wildfire catastrophe models are robust enough that you could rely on that for adequate price?
Oh, I think certainly better than not having to use it at all. I think there, I've not back-tested them myself. I think that there's enough data that you certainly... We have a view on wildfire risk now, just based on the geographies and zip codes, but you know, the area around the home looks like. I think if you would put a wildfire model over the top of that, it certainly would provide valuable insight that would allow us to better underwrite risk.
One more question. I'm going to take a pause and see if there's any questions in the room. Anyone wants to raise their hand? Here we go.
On your slide, you mentioned. Hi.
Hi.
On your slide, you mentioned that you were doing things with auto insurance, claims processing, enhanced vehicle inspections, that kind of thing. I was wondering if you could delve a little bit more deeply, and part of that, are you partnering with any of the, do you work with any of the, salvage auction vehicle companies to help facilitate this process?
Yeah, so we have strong partnerships across the chain as it relates to repairing, repairing vehicles and disposing of total losses. We have really good partnerships there, and we continue to work aggressively with our partners, whether it's our Good Hands Repair Network, so those are the preferred auto facilities, whether it's our salvage and subrogation provider, to make sure that we're optimizing across the claims life cycle. Specifically, you know, what I think I was getting at some of those claims process things are what are we doing? So in—one of the things I mentioned was inspection. So we look at a certain number of cars in person. We can make decisions to look at more cars. We can throttle that up and down, and in certain environments, you may want to put a few more eyes on a few more cars.
We're just looking at making sure... This all goes back, in my mind, to customers, customer value, and the premium they're paying. So we're focusing on claims because that's a big area where you incur costs as a, you know, as an insurance company, and we want to be as, you know, sort of top-notch, best in class as we can be. And so we're just looking at all those processes to say: How do we get out and make sure we absolutely are paying the right amount, but we're not paying too much? And sometimes that requires we just get folks out into the body shop to see a car. It's things like that. We'll continue to push on partnerships. We have nationwide partnerships on parts, as I said, repair facilities, so there's a lot of opportunity there.
We're looking for that incremental opportunity on top of some of the things we've done for a long time to see if we can drive more value.
Just given all the changes that have gone on over the last couple of years, maybe you could just, you know, reflect on the credit rating, where you think, maybe optimized levels might be?
Of our credit rating?
Or, you know, an intermediate term once, you know, loss costs kind of stabilize, have you rethought what your most capital efficient rating would be?
That's a good question. And certainly, the recent actions by the rating agencies change how you think about that, right? Because getting, you know, getting to go back up a notch after we've faced some downgrades, is something that we'll have to carefully consider, because having been downgraded, now it recalibrates some of the capital targets that we can choose to hold. So we haven't, in all fairness, that all happened pretty recently. We haven't gone back to say, long term, whether we want to try and get, you know, increased back to whether we're comfortable where we're at from a rating agency perspective. And that's something that, you know, we'll be thinking about in connection with overall capital management, looking at return to shareholders and looking at our, you know, capital mix in general. Good question.
You know, I kind of hate to ask an impossible question, but it just seems that the frequency of cats and the loss cost coming off catastrophes is not falling down. It appears to be increasing to me. When I look at the first half of 2023, it's just an accumulation of a number of storms, 42 storms, I think you said, and that doesn't appear to me to be slowing. So how is Allstate—how do you get to a path to profitability? Are you expecting a change in weather patterns? I know you talked about rate. I saw everything you said on your slides, but at the end of the day, if catastrophes continue at sort of the rate or grow at the rate, I just, I'm trying to figure out how you get to a path to-
... profitabilities, or do we need to redefine what a cat is? Because it just, I mean, at some point, they're just so frequent it becomes sort of less catastrophe and sort of that's the new normal. So how is the insurance industry dealing with it? How is Allstate dealing with that?
Yes, I'll speak for Allstate versus the whole industry. I, you know, to the extent it became so frequent that it was regular, the pricing mechanisms within the homeowners insurance policy will allow you to get paid for that. Now, but I'll do those, I'll take a step back to say, while the first half of this year felt very unusual, statistically, it's not. We run a lot of risk models, and so we're able to go in and say, like, as bad as this felt, and it didn't feel good, particularly given some of the other things that are going on, how out, you know, sort of how out of the norm is it? The reality is, it's not a detailed event to have that much catastrophe activity. In fact, we had it I think it was in 2011, right?
We had similar activity in 2011. So while it's not something that you are necessarily wanting, it's something that does happen. It's not as, you know, it's not a one in a 100 or one in 500 type scenario. And I believe that we can continue to make adequate returns on the homeowners business with catastrophes at, you know, normal levels. And that normal levels includes recent trends, right? So as catastrophe trends go up, we're able to incorporate that in our pricing and our views of our cat loads. So I continue to firmly believe we can make money in homeowners, even in an environment where it feels right now like catastrophes are higher.
Maybe just one more on homeowners then. As part of this, have you contemplated maybe a change in what the coverage actually looks like, some kind of policy form change? We talk a lot about roofs and how we compensate people for damage there. Thank you.
I think Allstate has been on the front of policy changes in homeowners and roofs in particular. So at this point, we're not thinking about additional, at least that I'm aware of, additional changes to the policy. We think our policy language helps to appropriately compensate folks for the loss and mitigate the overall risk to the company.
Less than speechless.
Yeah, just my last question. So you've mentioned you haven't reached stabilization of loss trends. How is the element of the UAW strikes maybe adding to?
So it's something that we're watching. I don't... You know, I was thinking as I was reading the paper coming in yesterday, you know, what could the impacts be? Listen, anything in the automotive industry can affect all, right? The extent the strike affects parts manufacturers, it might have an impact. To the extent the strike is extended and affects new car production, that sort of creates a supply and demand challenge the way that we had during COVID. You can see potential carry-through impact to used and pressure on used again. But right now that feels like it's abating. So I think, it's something that we're watching closely. I think that a protracted strike would have some impact on our industry. It's going to be too early to probably say exactly where we're going to see that.
It looks like, oh, you have questions. Yeah. Last question.
Thank you. I noticed that the bond durations moved back up after you guys nicely avoided some of the worst of the rate hit 18 months ago. What's the thinking on bringing it almost back to where it was, say, two years ago?
Bond duration?
Yeah. The portfolios, I think it's 4. I think it's 44 from 30-
Yeah.
a couple quarters ago.
At this point, you know, I, you know, we're, we like the duration extension in this high-rate environment. It creates a lot of net investment income, so we don't have any immediate plans to take the duration back down to where it was.
Okay, I think we're out of time. With that, let's thank Jess. Let's give a round of applause.
Thank you, Chris.