The Allstate Corporation (ALL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Allstate Special Topic Investor Call. [Operator Instructions] As a reminder, please be aware that this call is being recorded. And now, I'd like to introduce your host for today's program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning, and welcome to Allstate's Second Quarter Special Topic Investor Call. This morning, we will discuss the value of homeowners insurance business. After prepared remarks, we'll have a question-and-answer session. Our management team is here to provide perspective on the topic. We will not be covering second quarter operating results or trends within our other lines of business. So please hold those questions until the second quarter earnings call in August. The slide presentation and webcast can be found on our website at allstateinvestors.com, along with our reinsurance update following the placement of our Florida program. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures 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. We are recording this call, and a replay will be available following its conclusion. I'll be available to answer any follow-up questions you may have after the call. And now I'll turn it over to Tom.

Well, good morning. Thank you for joining us today. Now let's start on Slide 2, which reiterates Allstate's strategy. You'll remember our strategy has 2 components: increase personal property-liability market share; and expand protection solution, which are shown in the 2 ovals on the left. On the right-hand panel, you can see our 5 operating priorities, which focus on both near-term performance and longer-term value creation. Today, we're going to go deep on homeowners insurance, which is the growth business with attractive returns and moderate volatility. So let's jump right in and move to Slide 3 to talk about how we built a sustainable competitive advantage over time. Now this chart really begins in the 1990s. So from 1970 to 1990, industry cat losses were pretty moderate. They averaged about a little over $1 billion a year. In 1992, then Hurricane Andrew hit Florida and the impact of severe weather just dramatically took off ever since then. It's over the last 30 years average annual catastrophe loss has been over $20 billion, which is all in nominal dollars, by the way. Of course, the insurance industry, we had to adapt to this, and they have -- we have adapted to higher losses. But the industry in total not enough to earn an adequate return. So underwriting losses averaged $4.5 billion over the last 5 years. And 8 of the top 10 homeowners insurers have underwriting losses over this period, but, of course, not Allstate. By continuously innovating across the entire business model over a 25-year period, Allstate's created a growth business with attractive returns and moderate volatility. So there are really 3 phases of the effort: first, we had to reduce our catastrophe exposure, we just had too much of it; then we had to innovate to generate attractive returns; and now we're expanding a profitable and attractive return business. So starting in 1996, we began aggressively lowering our catastrophe exposure. The first step in lowering catastrophe exposure was just to take out less risk. And from 2005 to 2013, we reduced the number of homeowner policies by $2 million, which was about a 25% reduction. They did have a negative impact on auto insurance growth during that period since many of our customers prefer to bundle. But as we'll talk in a few minutes, we found ways to mitigate that impact. We also helped establish state-based catastrophe pools such as California Earthquake Authority and wind pools in Florida, Texas and some other states, which provides reinsurance to keep costs lower for customers. These pools, however, didn't enable us to meet our risk reduction targets, so we became the largest U.S. primary purchaser of reinsurance. Now while reducing risk was necessary, it was not enough to create shareholder value, so we raised prices, redesigned coverages and leveraged analytics to increase the sophistication of pricing, underwriting and portfolio management. Remediation of losses is, of course, what customers trust us to do. And so we innovated throughout the claims stack by leveraging technology, analytics and scale so that we can settle claims quickly, efficiently and at the right cost. This innovation created a profitable growth business that we're now expanding. So homeowners insurance generated $1.2 billion of adjusted net income per year over the last decade with moderate volatility. We expect homeowners insurance premiums to grow faster than auto insurance, given the trends in severe weather and the value of homes. In addition to growth through Allstate agents and our direct-to-consumer offering, we believe there's a great growth opportunity through National General's independent agent distribution partners. So as you can see, we've built a great business. Glenn is going to lead us off with an overview of how all these pieces fit together; Julie then is going to discuss insurance risk and return management; and Eric is going to highlight our claim effectiveness. Mario will cover reinsurance and how this business appears to be undervalued by the market based on our returns and our volatility. Then we'll open up for your questions. Let me turn it over to Glenn.

All right. Thanks, Tom, and good morning, everyone. Slide 4 shows why homeowners insurance is a key component of serving customers and creating enterprise value. Let's start at the bottom of the page with our largest source of premium, auto insurance. We have some customers who purchase only auto policies from us, monoline. And as discussed in our last special topic call, as part of transformative growth, we're improving our competitive price position in auto by lowering costs, increasing price sophistication and leveraging telematics. Well, most of our customers do prefer to purchase auto and home insurance together from us. So we need to provide them a high-quality, fairly priced product. When we do, the household retention more than doubles, allowing us to limit customer acquisition costs, keep prices competitive and increase lifetime value. We obviously sell some monoline homeowners policies. But today, nearly 80% of Allstate brand homeowners customers have a bundled auto policy with it, and that reflects our strength in multiline offerings. Satisfied customers buy even more from us than those 2 products, and they retain at even higher levels, which you can see at the top of the page. That's part of the reason why we have a strategy that includes broadening protection services that we offer to customers. So let's move to Slide 5, and I'll describe the integrated system that creates competitive advantage for us. You really have to excel in all parts of this system to create value. And of the 5 parts: risk selection; product design and experience; pricing sophistication; claims capabilities; and meeting customer protection needs, I'll go into a little bit more here. Starting with risk selection, we created a balanced risk profile through individual market and risk actions taken over multiple years, some of what Tom just talked about. And to do that, we used advanced risk assessment and analytic tools, and it's given us a really strong base to continue innovating from. Product design is important to meet customer needs at the right price. So roofs, for example. Roofs tend to sustain the most damage in severe weather from hurricanes, hailstorm, straight-line winds, and new roof typically perform better. They're more resilient to damage than older roofs. So as a result, we age rate roofs and the pricing accordingly with newer roofs paying less than older. You can see one of the elements of our pricing sophistication pretty clearly this year when you look at increased average premiums as a result of automatic price increases to reflect higher home values and replacement costs. And product and pricing are inextricably intertwined. And we use advanced segmentation, by line peril pricing as part of our sophistication. We also established capital by geography, reflecting the risk of that area. So properties on the coast, for example, obviously, have a higher risk to losses from hurricane than inland properties do. So more capital is required to support those policies, and that leads to a lower targeted combined ratio for coastal zones or high catastrophe prone areas. Julie will cover some more detail on risk and return management coming up next. Now our claim capabilities are efficient and effective, and we've invested a lot in our claim capabilities, leveraging technology, analytics and our scale of our operation. Eric will follow Julie and talk more about that. But the system in total is designed to meet customer protection needs while earning target returns for shareholders. So to lower costs for customers and manage earnings volatility for shareholders, we use external reinsurance. And we source capital that's at a lower cost for those providers because they have the benefit of diversification as they spread risks for severe losses around the world. We also provide customers with access to third-party coverages in any areas that just simply don't meet our risk and return objectives. So let's move to Slide 6, and we'll compare outcomes from our full system to the industry. The graph on the page shows homeowners insurance combined ratios over the last 5 years, and you'll see the green dash line of the industry result on there, that's over 100%. Now that compares to our belief that to get an adequate return on capital in this line of business, you really need to run a combined ratio that's 90% or below. We also show the results of some of our competitors on there, and you can see that Allstate has superior performance. So let's turn now to Slide 7 and look at a little more detail on the competitive environment, talk about why homeowners is a real growth opportunity for us. The chart shows results for the top 10 homeowners writers in the U.S. Starting at the top, Allstate has earned $3.3 billion of underwriting income over the last 5 years. Now 8 of the 9 remaining competitors had a cumulative underwriting loss over that same period. And we believe that the actions that those competitors are going to have to take to improve results offer us a great opportunity to grow and specifically growth for our Allstate agents, independent agents and the direct distribution channel, because, as you know, a key component of our transformative growth plan is expanding customer access. So by shifting exclusive agent compensation towards new business and bundling and by improving online quoting capabilities in direct and then lastly by launching products in National General for the independent agents, we're in a really great position to grow homeowners insurance. So with that, I want to turn it over to Julie Parsons. She's our Chief Operating Officer for Property-Liability, and she'll provide some additional context on product design, risk selection and pricing sophistication.

Thank you, Glenn. Slide 8 highlights how innovative product design and risk selection are key to success. Starting with risk selection on the left, we strategically target risk levels by geographic areas, factoring in the primary types of severe weather and extreme events. Data-driven risk evaluation allows us to implement underwriting restrictions in geographies where we don't have the right price for catastrophe risk or based on concentration of exposure. Our quoting platform incorporates a coastal risk evaluation, including scoring for wind exposure based on individual home characteristics. Inspecting a home before providing insurance helps control losses. That said, inspecting every home is expensive and is burdensome to customers. But it used to be something we would do all the time when we were reducing catastrophe risk. Now we use sophisticated proprietary models to trigger home inspection decision. Aerial photos enable efficient assessment of routes and other conditions of the property, which are also incorporated into underwriting decisions. Product design is also critical to success. Over a decade ago, we launched the innovative House & Home product. Approximately 30% of homeowners losses are directly related to roof repair and replacement. The House & Home product addresses this by providing roof coverage options Glenn described earlier. House & Home now represents more than 55% of Allstate brand homeowners premiums and 85% of new business. This product incorporates a broad set of rating variables and offers customizable coverage options to personalize the experience. Customers have the choice of purchasing full replacement cost coverage for their roof or they can choose a lower-priced option with less risk coverage. In the lower-priced option, they received a scheduled percentage of full replacement cost, reflecting the depreciated value of the roof in the event of windstorm or hail damage. Depreciated value and pricing vary by the age of the roof and types of materials. The product also incorporates specific attributes and materials within the home to calculate needed coverage and replacement cost changes. We've also improved the quoting process by leveraging data from third parties and crossline quotes to make it easy to quote a multiline household. Moving on to Slide 9, let's discuss how pricing sophistication improved segmentation and ease of business. Let's start with the 3 arrows in the middle of the page. Going from left to right, you can see how we're moving from traditional aggregated loss-based pricing to a more advanced pricing capability that leverages our extensive data and deep analytics, supplemented with third-party insights. First, we've moved from pricing the risk in aggregate to understanding the expected risk and probability of loss each apparel represents. This advanced understanding of risk increases segmentation and pricing accuracy. Second, we are implementing advanced geocoding and geographic rating, reflecting the latitude and longitude of a property. This allows us to leverage highly granular geospatial variables, such as weather patterns, soil conditions, elevation and physical terrain. These enhanced variables, when combined with extensive historical data and overlaid with third-party wildfire and hurricane catastrophe models, create enhanced pricing segmentation and move beyond traditional ZIP Code-based rating territories. The images on the bottom of the slide depicts an illustrative example of the improved segmentation on the coast of Texas. By removing the previous ZIP Code constraint and adding additional variables, geographic segmentation allows us to more accurately price risk. In addition, we're allowed to incorporate both the cost of reinsurance and tail risk for extremely low probability, but high severity events into pricing. This enables Allstate to price for the tail risk retains and cover the cost of reinsurance. Third, we are moving from what a customer can tell us about their property at a given point in time to leveraging integrated third-party data and technology to look at risk over time. For example, how well we maintain the roof. This will improve accuracy, provide a simpler customer experience and also allow further understanding for how conditions change as the property ages. Let's move to Slide 10 and discuss homeowners growth and how the product addresses the impact of the current inflationary environment. Now it's widely publicized that inflation is impacting the cost of building supplies and labor. These higher prices flow through into homeowners insurance loss costs. Looking at the chart on the left, you can see how the cost for common household building materials have increased in recent quarters. This is indexed to year-end 2018. The increases in costs of many materials are significantly higher than core CPI, especially lumber, the green line, and more recently shingles, the orange line. The dark blue line is an index measuring the blended cost to replace the average home in the U.S., which has increased 1.25x compared to year-end 2018 benchmark. The replacement cost index varies by geography and by individual risk, depending on the types and amount of materials within the house and the current labor rates. To reflect the increase in cost to replace the home, Allstate has built in rating plan mechanisms responsive to inflation. As materials or labor costs change, there is an automatic adjustment to the amount of insurance needed to protect the home and the corresponding premium so that the customer's protection is not eroded by inflation. Moving on to the chart on the right, you can see the increase in homeowners and auto average premium per policy compared to the prior year. Growth in homeowners average premiums outpaced auto insurance over the past 5 years. The increase in the replacement cost and the amount of insurance is the primary driver for the 14.3% increase in homeowners average gross premium per policy across the Allstate brand in the first quarter of 2022 compared to first quarter of 2021. Moving on to Slide 11, you can see we have a solid base of homeowners risk from which to grow. The map shows property market share by state, which also includes condo, renter, landlord and other personal property policies with the dark blue being a top 2 position, the green being in the top 5 and the light blue being below the top 5. We have top 5 market share in 36 states and the District of Columbia, which represents approximately 90% of countrywide premium. In Florida, we reduced our market share from about 10% 20 years ago to approximately 3% today. We also helped shape the Florida Hurricane Catastrophe Fund, which provides reinsurance, and we use a separately capitalized company, Castle Key. In California, market share has been reduced by 50% over the last 15 years due to wildfire risks. In areas where we do not take on new policies, we offer a brokering option, providing customers with the opportunity to bundle their protection through an Allstate agent. Last year, we placed about $1.6 billion of property insurance with third-party carriers. Now I'll hand it over to Eric Brandt, Chief Claims Officer, to discuss our homeowners' claims capabilities.

Thanks, Julie. Moving to Slide 12, let's discuss how Allstate's accurate and efficient claim capabilities leverage technology, analytics and scale. We use advanced technologies such as satellite imagery or images from fixed-wing aircraft and video chat streaming live from customers and contractors to efficiently handle claims. In fact, more than 80% of our wind and hail claims are handled virtually. In conjunction with sophisticated analytics, we're able to mitigate claim damage, generate loss cost savings and resolve claims quicker to restore the lives of our customers. Leveraging weather data, we estimate claim volume and types which enable us to efficiently allocate our resources before claims occur for rapid remediation. With predictive models, we can properly route claims for best method of inspection. Our estimating platform enables loss cost accuracy by leveraging our proprietary rules engine, which support our experts in making accurate decisions on repair/replace, material grade, quantity and available discount. As an example, we found the average water claims when utilizing our loss mitigation network is 30% lower when -- with claims without networking invention. Our scale enables strategic partnerships with an expansive supplier network, giving us the capabilities to serve 95% of policyholders at lower cost, higher quality. These partnerships span across loss mitigation, restoration and material suppliers, which can drive meaningful loss cost and customer experience benefits. Let's move to Slide 13 and bring this integrated claims system to life with a hypothetical example. Through real-time weather data, we analyze events as they develop. This includes specific data such as wind speed or even hail diameter. With knowledge of where these events may occur or make landfall in the case of a hurricane, we can utilize satellite inventory to gather meaningful insights in advance, such as precise roofing features or dimensions of a home. We can then mobilize our operational response units such as the Mobile Claims Center pictured here on the slide to ensure that our adjusters on the ground are ready to assist. Using Hurricane Ida as an example, we mobilized 2,400 people in just 3 days. This all occurs before a single claim is filed. Now following the event, we utilize our video capabilities to quickly and accurately resolve low-touch claims. Through our mobile app, customers can file claims, communicate with us directly and set up payment preferences. We have caring experts available on-site and online, using data and technology as well as leveraging our loss mitigation vendor and material supplier networks to maintain claim cost accurately. Our scale enables us to settle claims at lower cost. When the claim is resolved, more than 80% of our payments to customers are made electronically through our QuickCard Pay program. And now I'll turn it over to Mario Rizzo, our Chief Financial Officer, to discuss Allstate's reinsurance program.

Thanks, Eric. Let's begin on Slide 14 to discuss our nationwide reinsurance program. We began purchasing traditional reinsurance to reduce exposure and probable maximum loss in coastal areas in 2005. Today, our reinsurance program includes a combination of both traditional reinsurance and catastrophe bonds and is designed to protect against both large individual events and the cumulative impact of catastrophe losses over an entire year. Approximately 80% of the program cost is recovered through homeowner insurance rates. The first bar shows our coverage for individual events where we have coverage above $500 million and up to $6.6 billion. Contracts within this layer are placed on both a multiyear and annual basis with traditional reinsurers and in the insurance-linked securities market to provide a diversified portfolio of protection and a number of the traditional market layers contain reinstatement provisions to provide ongoing coverage for years with multiple large events. Moving over to the right side of the slide, you see the aggregate coverage begins at $4.4 billion of loss and provides $600 million of protection. Here's how this works. If we have a wildfire with $500 million of losses, that loss is all retained by Allstate. If the wildfire is $1.5 billion, we would recover 95% of the $1 billion over our $500 million retention. In the event, our cumulative loss retention from individual events exceeds approximately $4.4 billion, then we would begin to recover under the aggregate reinsurance program, subject to the per-event deductibles and provisions contained in each catastrophe bond placement in our aggregate coverage. We also have separate reinsurance programs beyond just our nationwide program. This includes the Florida-specific program, which was recently placed with the details posted to our Investor Relations website earlier today. This year, certain insurers have been challenged to find reinsurance at a reasonable price or their desired amount of coverage, given the current state of the homeowners market in Florida and the unwillingness of some reinsurers to provide Florida capacity. While the risk-adjusted cost of our Florida program did increase, we were able to fully place our program, given our strong relationships with the reinsurance market and our operating capabilities, most notably in claim handling. We benefit from a broad portfolio with geographic spread that provides an efficient one-stop shop for reinsurers to underwrite a large proportion of U.S. catastrophe exposure. We're also a consistent and large purchaser of catastrophe capacity. In addition, when events have occurred, we generally deliver relative outperformance and protect our partners' interest, such as pursuing and receiving subrogation recoveries from at fault parties following events like California wildfires. So now let's discuss the value created by our homeowners business by turning to Slide 15, which compares Allstate's returns and volatility to publicly traded insurers to highlight both the outperformance of this line and Allstate in total. The chart plots Allstate and our peers' average combined ratio over the past 5 years on the X-axis and the volatility or standard deviation of those combined ratio results on Y-axis. Allstate is represented by the blue diamonds, while other insurance companies are represented by the various colored dots as you can see from the legend at the bottom of the slide. As you would expect, the price to earnings multiple of companies with lower combined ratios are generally higher than those with higher combined ratios. Additionally, those with both low combined ratios and lower volatility enjoying even higher relative valuation multiple. As you can see from the blue diamond, Allstate falls into the top right quadrant, which is the companies with both better combined ratios and lower volatility. This holds true for homeowners insurance and total property liability results for Allstate as well. The median price earnings ratio for this quadrant is 18x 2023 estimates, as you can see highlighted in yellow. Allstate's current price to earnings multiple of 10.4x more closely reflects those companies with higher combined ratios and higher volatility shown in the lower left quadrant as opposed to the other companies in the top right quadrant, which speaks to the relative undervaluation of the stock. Moving to Slide 16, let's use this analysis to focus on the value of the homeowners insurance business. The homeowners insurance business has generated $1.2 billion of pro forma adjusted net income over the last 3 years, which includes an allocation of property liability net investment income. At Allstate's current P/E of 10.4x, the implied value of our homeowners business is $12.5 billion or roughly $45 per share. At more appropriate valuation multiples, the homeowners valuation increases dramatically. For example, using the median P/E of 18x for the insurers in the upper right of the prior slide would generate a difference in valuation of nearly $33 per share. Even if you choose a lower multiple, the valuation difference per share is significant. Not shown on this page is a similar dynamic for our auto insurance business as well as our other protection service businesses, which also drives significant shareholder value. Moving to Slide 17, you can see why Allstate remains an attractive investment opportunity. The table below shows Allstate across key financial metrics over the past 5 years compared to the S&P 500 and 10 property and casualty insurance peers with a market cap of $4 billion or greater. As you can see by the 3 measures on the top, operating EPS, operating return on equity and cash yield, Allstate is consistently ranked among the top 3 peers. In the case of cash yield to common shareholders, Allstate is in the top 10% of the S&P 500 companies. Moving to the last row, as you can see in the previous slide, Allstate is an attractive investment opportunity with a valuation multiple below peers and the broader market despite our commitment to maintaining strong financial returns while accelerating growth. With that as context, let's open up the line for questions.

[Operator Instructions] Our first question comes from the line of Jimmy Bhullar from JPMorgan.

So I just had a question first on inflation and how that's impacting homeowners' loss costs and your view on margins in the business. Obviously, as used car prices picked up, your margins got pressured in the auto market or in the auto business with a little bit of a delay. Is the impact of higher inflation and materials costs fully felt in your loss ratio right now? Or -- and are you raising prices to where you feel that margins in the homeowners business will be stable? Or given the level of inflation, one should expect a little bit of a decline in margins in the near term?

Jimmy, Julie will take that question. It's an appropriate question. There are -- you'll see there's a couple of things. One she already talked about the automatic increases, so she can take through that. There is obviously a lag between written and earned. So she can take you through what we're doing in profitability and rates.

All right. So I'll start with we had excellent returns as we covered in the presentation, and we intend to continue to deliver our target returns. So as Tom referenced, is shown in the presentation, our average premium per policy for homeowners in Q1 2022 is 14.3% higher than it was in the prior year. This is a combination of both that automatic inflationary increase and filed rates. So the automatic increase, effectively, it values homes based on the cost to repair, rebuild, on renewal, and we get a corresponding premium increase with it. Now we will continue to take rate actions. There are things that happen outside of inflation. Reinsurance costs is an example, changes in expenses, changes in permit. Our state managers do an exceptionally good job of managing at the local level, and they will continue to take rates in addition to that automatic inflationary factor where it is necessary, and you will see those in our quarterly releases as they come through.

Okay. And if I could just ask one more. On the auto business, you disclosed your price hikes this morning. Can you comment on how competitor behavior is? And are you seeing most competitors raise prices? Or are some of them not aware like you feel that, that will impact your ability to grow the business?

Jimmy, I'd say a couple of things. First, there's -- since we last had a special topic on auto insurance that there's -- the competitive trends are pretty much the same. You're right. We did put the rate increases out today, which are -- obviously, it's self-evident in the release. If you have [ leverage ] stay focused on homeowners insurance today. So if you have any questions well Mark's around. You just call Mark and he'll help you through anything.

Our next question comes from the line of Greg Peters from Raymond James.

I guess I'd like to focus on, for my first question, Slide 7, where you run through the results of your homeowners business versus the industry. And I guess the question relates to your competitive price position and ability to grow in the context of a marketplace that seemingly is willing to accept underwriting losses. Does that put a governor on your ability to grow going forward? Or alternatively, do you think the rest of the market is moving to your position where there are going to be reporting better results going forward?

Greg, I'll let Glenn talk about the growth plans and the competitive situation. I would point out that -- a couple things. One, homeowners is less price sensitive than auto insurance for a whole bunch of reasons. One is people value it and often value the home a lot. They want to make sure it's covered. Two, it's bought through their mortgage companies so they don't necessarily get the bill in their face every day. But the true measure, of course, is are you growing and are you selling, and Glenn can cover that.

Yes. So thanks for the question, Greg. First, I would say, I think it's important the context that was right before Page 7 or a couple pages before, it was about the system. So if the conclusion was that, look, we were able to achieve $3.3 billion worth of underwriting gain and everybody else lost money because we charge more, then I think we would be concerned about the ability for that to be sustainable over time. And we probably wouldn't be growing even modestly as we have been, but it really is that whole system. We truly believe, based on the way we look across the environment, that we have a better claims model. We have pricing sophistication that doesn't exist everywhere across the industry. We have risk selection capabilities that don't exist everywhere across the industry. So we've built a system that is highly competitive, and that gives us an opportunity to grow. Second, you take that system and now with our expanded customer access, and we're incentivizing our agents to sell more by paying them more for bundled business than nonbundled and more for new business than renewals were incentivized in direct or have an opportunity in direct just from the standpoint we really didn't have a material direct business going back over time, and we're much larger at that now and growing. And then as Tom mentioned at the outset, a really big one is in the IA channel, where a lot of people buy homeowners and National General, an Allstate company. And I'd say that because it's how to be branded, going to market with our leading homeowner product in the mid-market is something that the independent agents are really clamoring for. So we think we have a real distribution opportunity out there with the system that we already have that produces really good results.

Greg, I would add to that, if you're looking at Page 7. We used to be below the line. And our saying around here was anybody can give it away. So the trick is how do you, as Glenn said, give customers a really good active price, but then we're supposed to make money. And this business requires more capital than auto insurance, so you can't be running it at the same from our ratio.

Indeed. My follow-up question, and, Glenn, you touched upon this in your comments about independent agency and NatGen opportunities. I think, Julie, in your comments, you said that over 50% of the Allstate brand is House & Home, and it accounts for 80% of new sales. So the House & Home product would be new to the NatGen channel. How is that progressing? How is the penetration and the results on, like, for example, new sales of the -- I guess it would be a NatGen like House & Home product to their channel. Can you give us an update there?

Glenn, do you want to take that, and you can cover both auto and home and what we're doing there?

Sure. So we're going according to plan, and that plan was that the first state it takes a while, like -- and we went into Arizona and we went into a handful of ZIP Codes and with a smaller test group of agents because you want to make sure that your pricing is right, that you're not either under or overselling the product and really understanding it. And then as we expand to additional states and I believe it was the 6th of this month, so June 6, we actually went fully across the comparative raters in Arizona with NatGen, with the product, essentially the Allstate product, the House & Home product, but branded as National General and across all of the comparative raters there in Arizona. And now we're going state by state across the country following that with the plan being hitting about 80% of all premium in the country in 2022 and 2023 or it might even be -- it's north of 80%. So most states and all large states rolled out this year and next and fully operational. So we're moving and excited about the opportunity there. And the reaction to it has been really strong from the independent agents. And then similarly, we're doing that on the auto side as well, bringing the mid-market auto products in at the same time.

Our next question comes from the line of Tracy Benguigui from Barclays. .

You're clearly bullish about your homeowners book. And when I think about your product mix, you just talked a little bit earlier about rolling out the homeowners product in NatGen. But I also cannot help but think about your targeted growth in nonstandard auto. And I imagine those customers do not typically opt to purchase a companion homeowner policy. So I'm wondering if you could just sketch out for us how the proportion of homeowners may represent your product mix going forward.

Tracy, first, thanks for the question. You're right in that some nonstandard customers don't have the financial wherewithal to own a home. But we also like selling renter insurance. So like we'll sell them whatever kind of property insurance they want. We don't really have -- we'd like to sell a lot of nonstandard auto, a lot of standard auto, a lot of renters, a lot of homeowners. So we don't really have a target percentage as where we're going to go with the book. We'd like to sell last of all of it.

Got it. And also, thank you for walking us through the inflation guard piece and the homeowners rate filings. What about the prevalence -- high prevalence of non-modeled risk like convective storms, wildfires, et cetera? Is that another rating factor you're having success increasing pricing? Or does that get blurred in with everything else? Would be great to have further context.

Yes. I'll go ahead and take that one. So as I referenced, we have highly refined by peril pricing and our actuarial teams do a great job of leveraging model data where it is appropriate, using external third parties and using our own internal data on other perils. And so I'm very comfortable that they are assessing the risk appropriately and projecting it forward to ensure that our prices are right to deliver the returns we made in markets.

And Tracy, here's one the reasons why having -- Julie talked about our portfolio and the nationwide spread. It's specifically these types of losses that you're talking about that give you -- that portfolio really give you strength. So like hurricanes happen kind of in the same places pretty much. You got Florida, Louisiana, Texas. And so when you're doing -- if you're in Florida or Texas, then you have those losses in Texas and you can spread the losses there. Wildfires, hailstorms in particular, kind of bounce around. So like 1 year it is Denver, next year it's Dallas, then it's Oklahoma, then you have tornadoes in Kansas. And those risks you're talking about, really Julie has the strength of that portfolio to be able to react to where we are in an individual state and get the right price, but also manage the overall profitability of the book so that you don't have 1 hailstorm and we're telling you, geez, we would have made money in homeowners except for the hailstorm in Dallas. Like we have this portfolio impact, which gives us the benefit of generating overall good returns.

Our next question comes from the line of Elyse Greenspan from Wells Fargo.

My first question, you guys spent a good amount of time talking about the elevated loss trend that you guys are seeing in home. You guys also mentioned the rate that you have coming into the book. So when we put that all together, I mean, when do you guys think that you're going to get to that 90% margin target in home, obviously, recognizing, right, that catastrophe losses can be volatile and a little bit hard to predict?

Well, Elyse, obviously, we're not -- given the trends in the business, you don't always get it every quarter. But if you look at that 1 slide, like we think we're there. Like it's gotten -- we've lost a little -- couple points of margin last year. But when you look at where we are with earned premium, what Julie is doing with rate increases, we think this business is profitable, and we're not -- this is not auto insurance and it's with that one.

And then if you guys have taken right price in home, Tom, I think you mentioned, right, that there's a little bit less of an impact on retention and bundling. But as you guys have been taking price in property and also taking price in auto, how have the bundling percentages vary? Can you give us a sense where you guys are today and how that kind of compares to historical levels or maybe targets that you guys have for bundling percentages?

Glenn, do you want to talk about that from a holistic standpoint?

Yes. So there's a couple of factors that go into our bundling. So the headline would be we've improved bundling so -- in each channel. Now the mix over time will be interesting to watch because direct business does not bundle as high as agency written business. Independent agents tend to bundle really well also like exclusive agents. But as you look at each channel individually, we've increased this year our bundling percentage. So we're making it easier for folks online, on the direct channel. We're -- with agents, we've incentivized them more around bundling, and it's a good value for customers. So the mix between channels will move over time and might change our total bundling percentage a little bit, but each channel we've improved in.

And do you have a percentage for where it kind of sits today for the company?

Yes. We -- in the -- if you look at it from a homeowner perspective, about 80% of our home policies have an auto policy connected to it. So about 80% bundling, looking at it in that direction. It is lower than that, but still a majority of customers, if you start with the auto and say how many autos also have a home because there's a higher propensity for monoline in auto. But a majority of our customers have a home associated with or renters or products in the property sphere associated with an auto, and -- but 80% is the number of an auto with a home.

Home with auto. 80% home with auto.

I'm sorry, home with an auto, correct. Turn myself around.

Our next question comes from the line of Meyer Shields from KBW.

So 2 questions. I guess the first one is, I understand that NatGen is providing paper for Florida homeowners' MGA. I was hoping you could talk about that just in the context of what I think a lot of people are describing as inadequate reforms in the special session.

Glenn, do you want to take that?

Yes. And I'll broaden it and just say, in general, in Florida, I couldn't agree more with your statement of inadequate reforms. So Julie mentioned earlier that we went from 20 years ago about 10% in Florida, we're under 3% market share. We are -- it is not a market we're looking to aggressively grow in right now, given the lack of effective reforms there and the challenge with pricing in that market. And that goes for both National General brand and the Allstate brand or Castle Key, which is a separately capitalized company that we go to market in Florida. We also have a unique and separate reinsurance program in Florida to help protect us from the risks in that state. So we are -- as you suggest, we are cautious about Florida.

Okay. No, that's perfect. Second question, when -- so Allstate has had a very consistent definition of catastrophe losses for a long time, and whether it's recent rapid inflation or just sort of long-term trends holding that line stable means that there's going to be more and more catastrophe loss. Does that require a lower ex-cat loss over time?

No. But let me see if I can -- that's a direct answer. Let me get to the various pieces. So you're right. We have had the same $1 million threshold for a long time. We've talked about changing every once in a while and then it just creates all kinds of comparability issues and you've got to restate back and forth. And so we think the real answer is how do we make sure we recover the right cost for those things that are catastrophes. And there is -- in different states, there are certain different ways you recover catastrophe costs than regular losses. But we've been able to work through that and still get good returns. So it's just simpler in terms of external communications to have it be the consistent number, but it doesn't indicate how we make. I should have also said that on reinsurance we look at that -- part Glenn also said, but we look at reinsurance on an absolute dollar basis. Like we're not worried about whether it's -- the reinsurance recoveries aren't caught up with a little $5 million, $10 million of cash use. It's the big giant ones. And those are the ones that we spend time thinking about. Below $500 million, we retain it also. It doesn't really mattered us.

Our next question comes from the line of Brian Meredith from UBS.

Yes. So first question, just curious, I'm kind of adding on to Elyse's question. Tom, I think you used to talk about getting a low 60s underlying combined ratio in the homeowners business to kind of achieve an acceptable return. Is that still the case? I know it hasn't really been turning that way the last year or 2. And is the pricing you're getting right now going to get to that low 60s underlying kind of combined ratio, if that's still your target?

I think we were in the mid-60s, by the way. I don't remember if it was -- like how we changed it over time. The key is you got to look at it in total. But -- so, of course, the underlying excludes catastrophe losses. And when you look at catastrophe losses over the -- they sort of used to be in the -- maybe it's 15% range. Now they're in kind of 30% range, sometimes 25%. So say you want to be below 90%. You got to be in that low to mid-60% -- underlying combined ratio, could be 65% and you got a 25 year. And so you're still at 90%. So we really are trying to manage it in total. When we did the underlying combined ratio targets, that's not really how we -- we run certain things -- like Julie does some segmentation of pricing around what I'll call non-cat loss. Sorry it doesn't bear in mind, actually. But when we look at the returns in total, we want to cover everything. We use that underlying combined ratio in communicating to The Street because cats are so volatile that we want to give you some sense like how we're doing without -- like we don't want to blame everything on cats and volatility. So that was why we used it. It's used as a component of pricing. But really we price -- in total, we want to get all the money back, whether it's cats or some of these kitchen fires.

Great. Great. That makes sense. And then my second question, I'm just curious, with the National General acquisition you acquired an LTI business, right? How does that fit in with your homeowner strategy? Kind of what is your thoughts on that lender-placed insurance business? Obviously, if we're going into a recession, you could see some growth there. How do you manage that from a catastrophe perspective? How do we -- how should we think about that business in the context of your homeowners business?

Well, for those who are not familiar with all the acronyms, I'll give you a summary of what it is and Glenn can describe how -- what we're doing there. So this is where people's homes go into foreclosure or they quit paying their insurance and the lenders say, "Hey, we need some protection here." And we acquired that business, National General. We're obviously quite good at homeowners. So we think it's a good place for us to deploy our capabilities. Glenn, do you want to talk about what's going on there?

Sure. Yes, first, just in the description of how it ties to homeowners. Certainly, as Tom said, we've got capability in homeowners and we know that business well. The difference here is think about it almost like in auto, writing like massive fleets as opposed to underwriting individual cars and fleets where the cars are going in and out of there and they're all different types and different drivers. You really have to underwrite in a different way. This is really about setting up full programs with the lender that cover everything that goes into that state of foreclosure. And so we're not individually underwriting properties. It's much more of a monitoring exercise of what is moving in and out of coverage and then charging an appropriate amount that covers the heightened risk when often homes are either unoccupied or not as cared for in that situation. So Peter and his team -- Peter Rendall, who runs National General, they're looking for opportunities to grow that business, to take share. They're one of the major players there. And we think the skills and capabilities of Allstate only add to that.

Our next question comes from the line of David Motemaden from Evercore ISI.

I just wanted to follow up on Elyse's question just on the timing of getting to the 90% or below combined ratio in the homeowners business. Tom, I think you said it sounded like you think you got the rate increases that you need to sort of right the ship. And obviously, you still need to get more just to keep up with the loss trends. But did I hear you right that you think you can get to the 90% or below in 2022?

Well, we obviously don't give by line -- we don't give total earnings estimate, nor do we give by line combined ratio estimates. So I won't go there. But there's just one phrase that I think I would take out of your -- the question, which is right the ship. This is a good business. In fact we're making good money in it. It bounces around from quarter-to-quarter. We just put out cat release today. Cats are up a little bit. But when you look over a 3-year period, which is a decent way to look at this business because some years are better than others, we feel good about where we're priced today. We are increasing rates, as Julie talked about, and we have the increase in the inflation factors, the PIA in homeowners. So you're seeing that, and Julie talked about the 14%. That doesn't automatically come through to the earned premium, as we've talked about just on auto insurance, particularly because this is a 1-year policy. So the lag is a little bit longer. But when we look at it economically, we feel good about this. This is not a "Oh, we've got to fix it to grow it." We feel like this is a good business. It's going to bounce around a little bit in terms of its volatility. But when you look at it over time, as Mario showed, not really that volatile in total. We've made good returns in this business. So we're happy with where it's at. We're confident in our capabilities. And we think it's a good business to grow. I know we're -- that's time for us. So let me just close by saying, look, we believe our homeowner business generate significant customer value. We run it with both precision and discipline, as you can hear from all the conversations. So thank you for learning more about why Allstate is such a good investment opportunity.

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