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Allstate Corp  (NYSE:ALL)
Q1 2019 Earnings Call
May. 02, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to The Allstate First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, John Griek, Head of Investor Relations. Please go ahead, sir.

John Griek -- Head of Investor Relations

Thank you, Jonathan. Good morning, and welcome, everyone to Allstate's first quarter 2019 earnings conference call. After prepared remarks, we will have a question-and-answer session.

Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q and posted today's presentation along with our reinsurance update on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. And Jess Merten, our Chief Risk Officer, has joined us today to discuss how we evaluate risk and return decisions and use economic capital to allocate resources and establish performance targets.

As noted on the first slide of this presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement, and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements. So please refer to our 10-K for 2018, and other public documents for information on potential risks.

Now, I'll turn it over to Tom.

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Well, good morning. Thank you for joining us to stay current on Allstate. Let's begin on slide two, with Allstate's strategy to profitably grow market share and protection products.

Starting with the upper oval, the personal property-liability market has four consumer segments and provides protection by ensuring automobiles, homes and other property. We use four brands, differentiated products, sophisticated analytics, telematics, and building an integrated digital enterprise to grow market share in this protection space.

Our strategy also includes expanding by protecting people from a range of other uncertainties such as shown in the bottom oval, by leveraging our brands, customer base, investment expertise, distribution, claims capabilities, and capital. Collectively, these businesses on the bottom oval have tremendous value, which often gets overlooked by investors who focus only on the property-liability businesses or on earnings per share.

Our strategy creates shareholder value through customer satisfaction, unit growth, and attractive returns on capital. It also ensures we have sustainable profitability and diversified business platform.

Moving to slide three. This strategy is driving growth and attractive returns, policies in force increased the Allstate and Esurance brands, property-liability businesses, SquareTrade had outstanding growth. Total policies in force now exceed $123 million. The Property-liability underlying combined ratio was 84.2% in the first quarter. Total return on the investment portfolio was strong at 4.7% for the last 12 months, but reported income declined this quarter due to lower valuations and limited partnership portfolio.

Net income was $1.26 billion, as you can see from the chart on the bottom, reflecting strong operating results and significant capital gains under the accounting policy where equity valuations are reflected in net income. Adjusted net income was $776 million or $2.30 per diluted share in the first quarter. Adjusted net income return on equity was 13.5%, which is a broader measure of how we do from an overall return standpoint than just the underlying combined ratio.

Let's turn to slide four. We had a good start on 2019 operating priorities. The first three priority. Better serve customers, achieve target economic returns on capital and grow the customer base are intertwined to ensure profitable long-term growth.

Customers were better served as the enterprise net promoter score improved and customer retention increased across our three underwriting brands. Returns remained strong both in total and for our individual businesses, as Jess will discuss. The Allstate and Esurance brands grew policies in force by 2.3% and 10.9% respectively, which resulted in the property-liability policies increasing by 833,000 compared to the prior-year quarter.

When compared with the significant -- when you combine that then with the significant growth at SquareTrade, total policies in force now exceed $123 million. The $84 billion investment portfolio total return was 4.7% for the last 12 months. Net investment income for the quarter was adversely affected by lower performance-based results reflecting lower private equity asset valuation.

The performance-based portfolio did generate $57 million of capital gains this quarter. We continued to make progress building long-term growth platforms, expanding our relationship with transportation network to 15 states. We're growing Telematics usage and SquareTrade is adding capabilities and expanding markets, while achieving its acquisition goals.

Mario, will now go through the segment results in more detail.

Mario Rizzo -- Executive Vice President and Chief Financial Officer

Thanks, Tom. Moving to slide five, you can see that property-liability results remain strong. Net written premium increased 6.2% in the first quarter, due to policy growth in the Allstate and Esurance brands and higher average premium across all three underwritten brands. As you can see in the bottom left table, total policies in force increased to $33.4 million or 2.6%.

The property-liability recorded combined ratio of 91.8% was 4.3 points higher than the prior-year quarter, primarily due to higher catastrophe losses. The underlying combined ratio, which excludes catastrophes in prior-year reserve reestimates was 84.2% for the first quarter of 2019.

In the quarter, we changed to a fair value based accounting method for pension and other postretirement benefits. This change benefited the underlying combined ratio by approximately 0.2 points in the first quarter relative to the prior method. Our full-year outlook for the underlying combined ratio in 2019 was established at the beginning of the year at 86% to 88%, but we do not adjust the range based on one quarter results.

Moving to the right hand table Allstate Brand Auto and Homeowners insurance net written premium increased by 4.7% and 6.8% respectively due to policy growth and higher average premiums. Higher average premiums reflect rate changes of over 3.7% in homeowners and 1.4% in auto insurance over the last 12 months. Esurance's auto insurance rate changes were 2.3% over the last 12 months, which combined with policy growth grow total net written premium growth of 13.4%. Encompass written premiums are essentially flat as higher rates were offset by lower policies in force. On the bottom of the table you can see the underlying combined ratios were all good in the quarter.

Moving to slide six, our services businesses are growing rapidly and creating shareholder value. SquareTrade revenues increased 34% to $164 million in the first quarter of 2019 driven by significant growth in policies in force.

Adjusted net income was $11 million, an increase of $14 million from the prior year quarter due to $14 million of profits at SquareTrade as you can see on the right. Arity continues to invest in advancing our telematics platform has small loss. Total mileage analyzed is now about 10 billion miles per month and 350 trips per scond.

Allstate Roadside Services revenue was $73 million for the quarter with an adjusted net loss of $6 million comparable to the prior year quarter. Allstate Dealer Services revenue was $107 million in the first quarter. Adjusted net income was $6 million benefiting from improved loss experience. InfoArmor, which was acquired in October 2018 had revenues of $24 million with over $1.2 million policies in force. The adjusted net loss of $1 million was due to costs associated with scaling its platform for growth and integration into Allstate.

We also acquired iCracked in February, which will expand SquareTrade's protection offerings. Turning to slide seven, let's review Allstate Life and Benefits and Annuities. Allstate Life shown on the left generated adjusted net income of $73 million in the first quarter up 2.8% from the prior year quarter as higher premiums and investment income more than offset increased contract benefits and expenses. Allstate Benefits adjusted net income shown in the middle chart was $31 million in the first quarter.

The $2 million increase in the prior year quarter was primarily driven by lower contract benefits. Allstate Annuities on the right had adjusted net loss of $25 million in the quarter due to lower performance-based investment income while the utilization of performance-based investments improves long-term economic returns, increases income volatility for the annuities segment.

Let's move to slide eight and discuss our investment results. We proactively manage the investment portfolio considering relevant market conditions, the nature of our liabilities and corporate risk appetite. Our investment portfolio generated a strong 4.7% total return over the last 12 months, of which 3.3% within the first quarter.

The components of return are shown in the chart on the left. The blue bar represents net investment income, which is included in adjusted net income and varies between 80 basis points and 110 basis points per quarter approximately 75% of this is from interest income on fixed income investments, which make up 69% of the portfolio.

The change in the value of the bond portfolio and equity investment obviously varies by quarter, which is widely discussed total return over a 12-month period. Valuation changes in the quarter benefited from the client risk-free rate, tighter credit spreads and strong rebound of public equity margins.

The chart on the right shows net investment income for the first quarter was $648 million, $138 million lower than the first quarter of 2018. Market-based investment income increased to $693 million from $652 million reflecting a modest duration extension for the property-liability fixed income portfolio, partially offset by a reduced allocation to high yield bonds.

The performance-based portfolio generated investment income of $6 million in the first quarter lower than the prior year and recent trend reflecting lower private equity asset valuation. The performance-based portfolio did generate $57 million of capital gains as the ownership structure of certain investments requires we record capital gains rather than investment income. Slide nine provides an overview of our returns and capital. Our capital position remains strong and we paid $158 million in common shareholder dividends in the first quarter of 2019 .

As a reminder, the Board of Directors approved an 8.7% increase in the quarterly dividend per common share to $0.50, which was paid on April 1st and it is not included in the amount returned in the first quarter. Common shares are being purchased with a $1 billion accelerated share repurchase agreements, which began in December 2018 and will be completed this week.

Upon completion of this agreement, we will have about $1.9 billion remaining on our $3 billion share repurchase authorization. Total shares outstanding at the end of the first quarter were 6% below the prior year. So, each shareholder own 6% more of the company. We continue to generate attractive returns on capital with adjusted net income return on equity of 13.5% for the 12 months ended March 31st, 2019.

And now Jess will provide an overview how we economically evaluate risk and returns.

Jesse E. Merten -- Executive Vice President and Chief Risk Officer

Thank you, Mario. Let's turn to slide 10 and discuss how Allstate use the sophisticated analytics and economic valuation to allocate capital and establish performance goals.

Our approach to capital allocation considered multiple perspectives, while allowing us to focus on optimizing returns per unit of risk. Let's begin with establishing economic capital requirements for individual risks by products such as auto, home or life insurance. Investment risks such as interest rate or equity valuation by business and through the entire corporation.

Capital requirements are based on cash flow projections and probabilistic model especially for extreme events like catastrophes and incorporate expectations through

regulators and rating agencies. This approach allows us to evaluate risk at renewal level to enable us to optimize economic results.

Our diversified portfolio businesses result in capital benefits that we also incorporate into our strategic capital allocation partners. We retained the benefit of risk covariance between market facing businesses at the corporate level, so that each business earns an appropriate stand-alone return.

As a result of these processes Allstate capital position is strong and performance exceeds return thresholds. About three-fourth of capital utilized by the property-liability business. All major businesses earn returns above the cost of capital other than Annuities. We dynamically allocate capital based on risk and return characteristics to establish performance targets. We got two examples, Esurance and Homeowners insurance to show the benefits of this approach.

Let me walk through these points in more detail. Slide 11, provides an overview of our process for determining economic capital. Economic capital was the amount of capital needed to accept risks given expected returns and the range of possible outcomes. It's determined using a sophisticated framework built on our experience and data related individual risks

In the middle of the slide you can see the use of four-step process to determine economic capital. Step one is to identify unique risk and return attributes for different types of stand-alone risk. We start with 100 individual risks that are grouping the 35 stand-alone risk types, examples include auto insurance underwriting risks or interest rate risks.

From there we determine required capital for each line of business by aligning assets and liability risk and estimating correlation between this. For example, in establishing capital for auto insurance, accident frequency of uncorrelated with investment risk associated with reserves, so this reduced economic capital.

In step three, we aggregate the risk by product and line of business that comprise each market facing operation such as Allstate Brand's personal line Esurance or Allstate Life. The programs between risk types is retained by the market facing business will require capital reflected integrated risk profile.

The final step is to combine risk group in step three to quantify the capital required for the entire corporate with the diversified portfolio (Technical Difficulty). This four step process developing overall economic capital being left in each market facing business, as diversification between non-correlated risk lower Allstate's overall risk level.

This covariance is retained by the corporation that each business must earn an appropriate return for its risk profile. In setting the consolidated capital target we also considered regulatory and rating agency guidelines in overall financial flexibility.

Turning to slide 12, the required capital by line is shown on the upper left pie chart approximately one-third of economic capital used by auto insurance and about 40% needed for homeowners insurance which is heavily influenced by catastrophe exposure.

These economic capital, industry performance and each intent to establish performance target for our business. Actual results are then used to evaluate performance from a growth and return perspective as shown on the upper right.

First, you can see all major market facing businesses earn return above our cost of capital on a stand-alone basis with annuities. The highest return business is Allstate Brand auto insurance. SquareTrade has high returns in growth because of its relative type and modest risk profile, it generates less absolute income in Allstate businesses.

Moving to the bottom of this page. Esurance provides good examples of how we use this to evaluate performance if you compare your reported results. Esurance has combined ratio of over 100, but generates the return on capital above our target. As a result, we've invested aggressively in growth. On the lower left you can see Esurance's combined ratio has done by 100. A large part of the combined ratio however is advertising which is immediately expensed to generate policies which make premiums for years.

We acquired Esurance in 2011. We decided to invest aggressively in advertising, which is totaled about $1.3 million all been spent immediately. This has worked for Esurance to now have $2 billion premium is more than twice the original volume. To ensure this economic we established performance targets for each vintage year businesses.

The combined ratios are high as you can see on the lower right chart to reflect both the new business penalty in a significant advertising process. Combined ratio for each vintage year, however, then declines in aggregate since there are no advertising expenses and pricing changes are implemented.

With combined ratio of below 100 did generates cash was then combined with investment income results in being above our target for our vintage years. Slide 13, the homeowner insurance is an example of how economic capital support the process to establish performance goals within market facing businesses.

As we saw in the previous slides over half of the required capital for homeowners was due to capacity exposure we allocated this by state as shown in the upper right pie chart. Texas shown in blue has significantly slowed due to hurricane, hailstorms, and tornado. So, homeowners business must generate returns on the capital needed for these risks.

New York shown in dark red also has substantial risk from hurricane, while the probability of low (ph) impact is the concentration of high value homes on Long Island, and Allstate significant market share results in a large absolute (inaudible) capital required to cover this risk. Notably, Florida is shown in orange on the lower right of this chart is small in absolute dollars because of our extensive use of reinsurance and market share that is below 2%.

We use this analysis to establish combined ratio targets which vary by states. And if you can see from the top right chart, targets differ from high capital and low capital states. Our top five states utilized 45% of Allstate Brand homeowners, insurance, and non-capital with the average combined ratio target of 83. This compares to the remaining 45 states which utilized 55% of economic capital at an average combined ratio target of 88. This approach ensures we achieve strong aggregate returns but then economic target that reflects the underlying risk of these states.

We adjust these targets as the exposures change and in total this has declined over the last decade, which you can see from the bottom left chart and establishing targets we able compare ourselves to the competitors and want to have a competitive price and better performance.

As shown on the chart bottom right, we have a better combined ratio that's aggressive, liberty mutual and (inaudible) are being competitively priced for the value we deliver and earning attractive returns. These sophisticated capital allocation capabilities serves well in delivering our strategy, while generating attractive risk adjusted returns on capital.

Now, we'll open the line for your questions.

Questions and Answers:


(Operator Instructions) Our first question comes from the line of Jay Gelb from Barclays. Your question please.

Jay Gelb -- Barclays -- Analyst

Thanks very much. On personal auto, in particular, the Allstate brand. We're hearing a little bit more about increased competition on rates. I was wondering, if you could touch based on that in terms of what you're seeing from a competitive standpoint and also how Allstate is addressing that issue too? Thanks.

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

Hi, Jay. Thank you. This is Glenn. Yes, we're seeing definitely competition out there. If you look at the CPI, a year ago was at 9% now it's in the twos. That said we like our competitive position it's something we monitor in each state on an ongoing basis about how we're doing both competitively and from a return standpoint.

Our new business is up, our retention is up, and I think the most encouraging sign is that the system is helping in that, we've got about 3,000 more people in that system, selling our products, and we did a year-ago, I mean, the agents are investing and hiring more sales people and they are small business owners, and they only do that when they feel like they can compete.

So, it's a competitive market out there. I know, you've heard that from others in the market, and you can see the rates are getting filed. But we like our position and our ability to grow.

Jay Gelb -- Barclays -- Analyst

I appreciate that. And then within the Allstate brand on the -- so-called commercial lines business. Can you talk a little bit about exactly what that is and what's driving the fast growth?

Steven E. Shebik -- Vice Chairman

So, Jay, this is Steve. So, commercial lines, we generally focus on smaller businesses, that's been our historic business for a long time. So, a lot of our policyholders also own businesses. We are in a marketplace with 10,000 communities in United State, you say, most communities.

So, we have a present and we want to ensure that only auto's and home's, but other things in their lives. As Tom noted at the beginning in terms of broadening of protection. If you remember back last March, so March of 2018, we signed an agreement with Uber to ensure some of their state, some of their drivers.

So, we had three states originally and we added a fourth in June and just March this year we added 11 more states. So, the growth you've seen over the last year and a half -- year and a quarter is really based on that Uber relationship.

Jay Gelb -- Barclays -- Analyst

I see. Can you characterize -- generally characterize the profitability of that line?

Steven E. Shebik -- Vice Chairman

If you look at our balance, we say, it's early for us to really analyze how we're doing in that. We are recording and are priced on loss ratios. We feel we're pretty good with those, but the history is not really there. More than half of the potential claims with CNC (ph) would be an liability coverages, so it's longer tail on those.

And, as you know the, these businesses have not been in business for more than a handful of years of any size. And so as we see the market changing and those companies growing rapidly, you need to be careful and conservative in your reserving and pricing.

Mario Rizzo -- Executive Vice President and Chief Financial Officer

So, Jay, and let me provide a little perspective. So when we first set up the relationship with Uber, of course, they were doing a bunch of this themselves. So, and they were using some other people, we had access to all that data. One of the reasons we're value to them as a partner is our claims capabilities, and so we can look in quite fair amount of detail on how to handle those by the injury claims. So, we're confident that we're in a good place.

Jay Gelb -- Barclays -- Analyst

Appreciated. Thank you.


Thank you. Our next question comes from the line of Greg Peters from Raymond James. Your question please.

Gregory Peters -- Raymond James -- Analyst

Good morning. My first question, I guess, I'm going to focus on your -- the last piece of your presentation around capital allocation. I was wondering, if you could talk a little bit about the balance between maximizing ROEs and investing in the business and your chart, specifically, the one on the upper right hand corner of page 12, where you identify Arity, the Annuities business and Roadside services is running below your cost of capital hurdles. And I suppose this is in the context of the published reports of the possibility of the sale of your Annuity business.

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Okay. Let me take it and then, Jess, you want to jump in on the annuity piece. So first, Greg, we invest -- we run the business for the long-term. We try not to run it for quarterly earnings. So, in 2011, in the bottom of the crisis for us, we were still investing heavily in advertising. So, we always try to look long-term at whatever investing. It doesn't mean we keep throwing money, good money after bad. We do watch our expenses quite closely. But so we tried to take a longer-term view of that. It also applies to Annuities, and it applies to Arity.

Let me do Arity first then Annuities second. So, Arity, while as one of the things Jess said is that's a stand-alone number, and so, Arity, but if you look at Arity in terms of the whole company, the amount of value it's creating for us in our insurance business is in terms of better pricing. It's a net win for us. So, we evaluate them independently, but then we look collectively at how they work with all company. The same thing is true at Annuities.

So, Annuities, we've talked about multiple times, right. Annuities are not a good business for us from a return standpoint on two bases. One is economically and two is in the financial book. If you look at the economic piece of that, that's because these are long-dated liabilities, long-dated liabilities like the pension fund should be mostly invested in equities and the regulatory capital requirement for investing in equities is quite high.

So, you should be investing equities, but when you put all that money in equity, the money does bring your current return down even though on a long-term basis it's absolutely the right thing to do. We chose to do that anyway. And what we do is we allocate a portion of that corporate co-variance in our home. We can still manage the overall corporate results, but we just allocate a portion of that corporate co-variance, which is obviously a capital reduction to that business.

Financially, it's also not a good return business for us and that's because the way the reserving has been done and required for years has been, when you set up the reserves, initially you don't change it. And there's a few odd cases, but generally you don't change it , if when people live longer. These are payout annuities.

You don't change your reserves and when interest rates go down, you don't change your reserves. And so as a result of that there is a liability. It's bigger, if you look at it from a economic standpoint. We factor that it just has numbers, it just has it all factored into how we look at the company. It just doesn't show up on the financial book. So, there is some new accounting for things coming out, which Eric talked about both in the K and in the Q.

That will change their accounting and what that changed accounting will do is basically take those losses that have been incurred economically in the past that we factored into our analysis into the balance sheet and that will be a material change of the balance sheet. So we're always though manage long-term thinking economically cash flow is what drives us, but we're cognizant of what's going on in the financial results and try to help you see when those numbers are odd. Is that helpful?

Gregory Peters -- Raymond James -- Analyst

Yes, it is. Just a point on, I have a second question, but a point on your annuity comment, the material charge or the material event as it relates to annuities that's expected to happen in the fourth quarter 2020 or 2021?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

It's required to be adopted in 2021 as it is like always the case in these things you can choose once you figure it out, but it's complicated.

Gregory Peters -- Raymond James -- Analyst

Okay. My second question, and thank you for that answer. My second question. Switching gears to homeowners, the Allstate Brand homeowners underlying combined ratio still feels like it's running a little bit higher or a little bit above target, and the Encompass homeowners underlying combined ratio is even higher than that. And I'm just curious about your perspective about the homeowners business do you feel like that's a market where there's more rate in the pipeline. Are you satisfied with the returns and the growth profile?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Let me start at top and then Glenn and Steve might want to make some comments for Allstate Brand and then Encompass. So, first, we love the homeowners business. We get really good returns in it and we help customers because it is something that with the level of catastrophes it's really important one today.

And so when you look at the, you're talking about the underlying combined ratio. I think four, five ago we started talking about, it should be in the low '60s, I think it's about 63 right now, that doesn't factor in the fact that the catastrophe losses have come down over that period of time as well.

So, we don't talk, we don't share our specific targets by line, by state with people because they are just too complicated conversation to have over time, but we feel really good about our overall returns in homeowners. I do think that the Encompass returns are not as good as they need to be.

And Steve will talk about what he is going through that. That said, we manage our business at a granular level and everybody doesn't get an A on every test. We don't like throwing him out of class, right. So some states are good.

And then we have to work to get them back. Some brands are not as good on something and we work to get them back in place, and Glenn can talk about what he's doing in profitability in the first in the Allstate brand because we are, again, we don't sit still on A even though we have good returns. We have work to do. And Steve you can talk about Encompass.

Steven E. Shebik -- Vice Chairman

All right. So, I always, the first number I look at you know just for context, I look at the recorded combined and then the underlying because if you really think about this business we're accountable to manage this. The catastrophe risk too.

So, over the long period of time, you really want to produce an underwriting profit and the last seven years, I think, there's only one quarter that we didn't produce an underwriting profit. So, it's been a good stable business to building on Tom's point. We like Homeowner and we like the return we're getting overall with Homeowner the 92 in a quarter, but your question is right and that the underlying has ticked up over time, particularly look at the last five quarters or so.

And last quarter I said to you that we had last year, very wet year a lot of non-cat weather. So, more rain, less hail was my line. I think I regret that line. Actually, we had a lot of hail in the first quarter. And so if you look at the weather patterns and it is something we have to respond to.

We did take a couple of points of rate in the first quarter and the other thing I'd point you to is we do have an inflationary factor built into home. So, sometimes, we only focus on filed rate, and if you look at the trailing 12 months, it's 3.2, but the average premium is up 4.5 because of the inflationary factor.

So, if you take that 2, 1 in the first quarter and about three points in the last two quarters and look inflationary factors on there too. We are responding and reacting to sort of new weather patterns.

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

So, when you look at Encompass, as Tom said very well. We believe we need to take some actions in order to raise the returns, I mean, lower the combined ratio. We have in the business. We do have a little bit different footprint than what the Allstate Brand has and we more concentrated. Obviously, it's a much smaller book of business. There are areas where we appoint agents and there were lot of business. We don't have the same broad footprint that the Allstate Brand has.

Yes. So that leaves in places where we have certain concentrations in areas that sometimes they have significant catastrophe exposures and sometimes we have no exposure in areas of California wildfires, we've had areas where we has significant losses.

You may have seen a year before last in other areas where we had none. So, the things we're working on to improve the business. There are a number of states, we need to have significant rate increases. We're working hard to achieve those to get those particular locations up to our cost of capital and above.

Secondly, we're looking at our footprint and trying to reduce that concentration. So in some areas we're appointing agents away from the areas we are. Other we're trying to constrain business who are underwriting in areas where we are highly concentrated. And lastly, we're working on our processes, claims and sophistication. And so we can create a bit closer and better for the risk that we have. So, we hope over time that will get a very similar result of Allstate Brand. That's our goal.

Gregory Peters -- Raymond James -- Analyst

Thank you for your answers.


Thank you. Our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. My first question, going back to the auto environment a little bit more, new business growth, which you did highlight in response to an earlier question did slow year-over-year this quarter. I know it obviously last quarter -- last year was a pretty good new business growth here for your auto book. Was that expected or are you seeing kind of any change out there as some other peers are also now taking less rate and also looking to grow?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Thanks, Elyse. Yes, there's no question that, as I mentioned before that the CPI is down. And for context when you look at the CPI about 2.4% in the first quarter. That's a trailing 12 months basically because it's the rate that as people open their bill that month, what kind of surprise are they getting and obviously this year a 2.4% increase on average versus 9% the prior year does create less shockers. That said, I think you put it in your question well that this is an increase over what was a high base. We had a strong year last year and a strong first quarter last year on new business, and we're increasing over that and sort of the health of the system overall.

Jesse E. Merten -- Executive Vice President and Chief Risk Officer

Elyse, I would say, as Glenn said this earlier, also focused on retention. So, our retention was up 0.5 point and 0.5 of growth and that's 0.5 point of growth of the new business penalty associated with that.

So, one of the things we obviously want to focus on, and one of the reasons are, one of our operating priorities better serve our customers because it's good for them and good for us. So, the other part is, I think a lot of people focus on this, the percentage changes that are out there that is important.

The other part is what your absolute price. So, while some people have reduced their price recently. We still think we have a highly competitive price relative to them, so they're just coming down closer to where we are as opposed to taking into other market.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. And then my second question, you guys filed, you provided your updated on catastrophe reinsurance program last night, as well. It seems like you're nationwide coverage you have the tower goes a little bit higher compared to where it was last year later cat bond usage in the program, and it seems like your cost only modestly went up. I wasn't sure if you could just talk to us a little bit about placing the cover and what you saw in terms of the market and the price there. And then as you think the placing in the Florida portion of your coverage. Is there anything that would indicate that maybe what you're seeing, pricing there be different than when you place that nationwide cover?

Mario Rizzo -- Executive Vice President and Chief Financial Officer

This is Mario, I'll answer your question on reinsurance. So I'll take you back to what Jess talked about in the presentation around how we think about risk return of capital. Is reinsurance is one of the ways that we kind of optimize the risk and return profile of our homeowners business, and we use reinsurance extensively, and we posted the detail around our national excess of loss cat program yesterday, and we did increase the top of our tower a bit.

So we bought coverage up to $4.86 billion after a $500 million retention on a per event cover. In addition to that we repeated in the catastrophe bond market what we started last year, which was, we placed the cat bond that provides both excessive loss cover as well as serves as an aggregate.

So we now have roughly equal $800 million of aggregate protection in excess of $3.54 billion. So, we have both in excess of loss programs as well as in aggregate programs through two catastrophe bond. I think from a pricing standpoint, your comment was spot on. We did see some modest pressure on pricing. I think a lot of that was driven by reinsurers kind of reevaluating a wildfire exposure in their models.

But it was not a material move from a pricing standpoint. So, we feel really good about the placement this year. And then just to remind you we effectively renew a third of our program every year which further insulates us from any real fluctuations and reinsurance pricing year-to-year. So, we feel good about the execution, and we use both the traditional reinsurance market and the ILS market to have optimized the execution of our placements.

So, overall, we feel good about the program. With Florida, obviously, there have been a lot of a story around the upward development and some of the hurricane losses. Our recoveries over the last couple of years have been a bit more modest, I think, than others. So, we'll see what the ultimate pricing is, but I wouldn't expect a meaningful variation relative to what we saw in the national program.

Elyse Greenspan -- Wells Fargo -- Analyst

Thank you very much. I appreciate the color.


Thank you. Our next question comes from the line of Amit Kumar from Buckingham Research. Your question please.

Amit Kumar -- Buckingham Research -- Analyst

Thanks, and good morning. Two quick questions. The first question use page 21 of your supplement as a backdrop, if you look at the loss cost trends. Severity is up 6%. Frequency is usually down in the 1% to 3% range. How should we think about, I guess, that trend line versus the written premiums for the next few quarters.

Jesse E. Merten -- Executive Vice President and Chief Risk Officer

Amit, let me provide an overview of how we established the financials and then Glenn can talk about the specific operations. So, we give paid numbers and we have both, we have gross net paid incurred case reserves. We slice and dice our work and what is the right loss cost to put in the financials at some great length.

And so we feel comfortable with the reserves. We've established based on the trends that you see and paid and then the other trends we see in the other numbers. Glenn, I know we've talked at some length about on physical damage in auto insurance. I assume that's where you're at and Glenn can talk about that component.

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

Yes. So, physical damage, as you point out, it's been elevated really over the last year and you see things across the industry and we're no exception to it. It's run around six and is for the quarter as well versus the longer-term trend of around four.

One thing, I think, it's important for sort of context in the broader question you have around that relative to margins and to prices is that that's really sort of one quarter of the overall auto loss trends because if you break it out, physical damage coverage and injury coverages that splits roughly half and half.

And each of those are impacted equally by frequency and severity, as you point out, it's really when you look at overall loss trends. Three out of the four quadrants that I just described are performing at or better than expectations and one is running harder.

So, the overall loss trend is manageable right now, and you can see that in our combined ratio in the fact that rates have been relatively modest, but we're clearly focused on the physical damage and just a little color behind that. I know we talked about it last quarter is, you look at the math and auto manufacturers have definitely increased the pricing, the parts.

You look at the trajectory and some of this is complexity of cars and some of it is pricing choices because you look at the overall cost of cars and how it's accelerated over 10 years to buy a car in whole, and the cost of parts and the two trend lines are wildly different, the cost of parts have gone up dramatically faster than the cost of the car and that's definitely impacting repair costs, which then create more total losses and higher fiscal damage expenses.

Amit Kumar -- Buckingham Research -- Analyst

Got it. That's very helpful. The only other question is and this might be an easy answer here. I was looking at the expense ratio for Allstate Brand homeowners and auto, and there seems to be some sort of variability in Q1, the Q1 number seem to be down versus Q2, Q3 and Q4. Is there, how should I think about that. What exactly is causing that expense ratio to be slightly down in Q1 versus the remaining three quarters.

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Amit, I wouldn't really look at the expense ratio by quarter and determine and draw a trend line from one quarter to next because there's stuff that goes in and out every quarter. We make adjustment agency bonus and all kinds of different accruals.

So, I would note that Glenn can talk about the work we're doing on expenses, which is in an environment where you're running, let's just take home auto at 90 combined ratio, homeowners at 92, and the regulated environment on price and some even modest cost pressure, you want to maintain your margins as well as you can.

So, you look at all things you can do to control those margins including expenses. Since I might want to talk some about what we're doing at expense management.

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

Yes, we've been, we've been very focused on expenses. As Tom said, when you look at where we are and what levers you can pull, and I think the greatest value we can provide customers is to deliver the product with lower expense. So, we looked at our supplier management.

We have a lot of really good work going on with our procurement from an operational standpoint, our claims area, the team has moved materially on their expenses over the last year plus they're down 500 plus people in terms of the overall operation, and being able to manage in spite of our growth, and the frequency trend creating kind of a flat claims reported trend, and we're looking at as we go forward.

We're looking at ways that we can manage expenses more effectively with our agency force as well through things like providing services to our agency force. So, expenses are a significant focus for us.

Amit Kumar -- Buckingham Research -- Analyst

Got it. Thanks for that clarification and good luck for the future.


Thank you. Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your question please?

Yaron Kinar -- Goldman Sachs -- Analyst

Hi, good morning. So, my first question is around the increased use of Telematics. So, I think, we all intuitively understand that, it should also result in some improvement -- in the loss ratio over time. But can you maybe talk a little bit about whether you see an impact from greater use of Telematics on the expense ratio, whether through more efficient claims handling or more efficient customer acquisition?

Steven E. Shebik -- Vice Chairman

Yes, let me go up a minute and then, Don, can talk about some of the things we're doing at Telematics. Glenn, may be you can talk about claims. So, what I would rephrase your question a little bit, if you give me the space to say, it's really about integrated digital enterprise. So, it's using data analytics technology in process redesign to improve our effectiveness and our efficiency.

So, we've talked at some length about quick photo claims. So, no fixed pictures from customers payment hours, not in days, no more 937 drive throughs, fewer auto adjusters. So, there's is a variety of work we're doing around the company to build an integrated digital enterprise. One part of that is, Telematics, and that's getting information, accumulating information.

I don't think that this reduced our expenses. In fact we've been investing heavily in Telematics for the last nine or 10 years, and each year we invest more because we see it adding more value to our customers and Don can talk about the overall view of why we're doing Telematics and the benefits to our customers and our company. But maybe, Glen do you want to start with IDE and then Don with Telematics.

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

Yes. So, we really think there is a lot of opportunity going forward with Telematics. As you think about operational improvement. So, for one, and this is a go forward. This is not the in-place day that you look at the opportunity to report losses in real time.

So, eliminating the need for first notice a lot. We have instantaneous notification, and then opportunity is there in the, I'll call it, relative near term is not a far out proposition. And then we're already working with looking at information for liability determination, it's helping us understand what occurs in an accident, which can make you both more efficient and more accurate and what you're doing.

With one other piece that I don't think within the question, but I think it's really important is, we have a materially higher promoter score when people are using telematics. So, you think about retention, and you think about the interest of people have and the feedback they're getting to become better drivers and just the interesting thing with Allstate, it makes a big difference when we have those signed up with Telematics.

Dogan Civgin -- President, Service Businesses, Allstate Insurance Company

Yes. So let me talk a little bit about the early side of it. So, we talked last month about the value of Telematics and how can be used in different ways. And I think two conclusions from that.

The first is, we firmly believe that it will be the better way to price insurance because we have a better understanding of risk. I think the second thing is the access to that Telematics data also allows us to understand driving behavior, which is an important component of adding value back for customers, both our customers and our partners customers.

So, we have been investing in Arity. You mentioned the expense side of it. Arity is running at a very small loss at this point, but a large part of that is not just investment in things that we know how to do today, but it's product development as well.

So, we're investing in things that will create more value in the future for our customers and that's probably roughly half of the investment we're making on the product side. We have just under 15 million connections with customers today.

I think we talked a little bit about how much data we're collecting, how quickly we're analyzing that, we have analyzed roughly 115 billion miles and what that allows us to do is, again, not only price the insurance more accurately, but provide value for our customers.

So, if you look at our relationship with Life360 through that connection, we're able not only to give them safe driving tips for their customers, but also get them personalized insurance offers from a variety of different carriers. So, it is an investment. It offers lots of opportunities in the future around pricing and the ability to serve customers better make them safer drivers.

Yaron Kinar -- Goldman Sachs -- Analyst

Pretty well. Thank you for the comprehensive answer. I guess one other very quick one. Why was the reclassification of the pensions, why did it impact the loss ratio as opposed to the expense ratio?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Yes, that's the thing, that's the part of the loss ratio as claim expense, which is related to the people that settle claims for us. So, that's the part of the pension expense goes through the loss ratio.

Yaron Kinar -- Goldman Sachs -- Analyst

So, this pension expense, and that's the only impact that claims people as opposed to -- be?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

No, it gets allocated across all claims and underwriting expense. So, the fact that there is people embedded within our claim expense ratio that's where that the loss ratio benefits from that change?

Yaron Kinar -- Goldman Sachs -- Analyst

Okay. Got it. Thank you very much.


Thank you. Our next question comes from the line of Michael Phillips from Morgan Stanley. Your question please. You might have your phone on mute. There we go.

Michael Phillips -- Morgan Stanley -- Analyst

Hello there? Can you hear me?


We can hear you now.

Michael Phillips -- Morgan Stanley -- Analyst

Okay, thank you. So, question kind of stepping back at a high level. You guys -- so we measure a lot of things. I guess, I'm curious if you measure foot traffic in and out of your brick and mortar stores that are out throughout the country. And if you do, so kind of the number of people coming in and out of those stores, and if you do, how is that changed today versus, if you look at back maybe 10 years ago or more people coming into using that or less?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

I can't give you. This is Tom. I can't give you number 10 years versus today. And, I would say, that you had to split that into two components. What do they come in for that they want to in for and what do they come in for because you make them come in for it.

And so, for example, if you have a bill that late and you can make somebody come in and drop it off at your office or you can give them a credit card option and then they can call and put on the credit card not have to drive anywhere.

So, in general, our focus is to be there for our customers when they wanted to be their for, and to use faster, more digital technologies when they don't want it. I do think what you're seeing is the trend over 10 years, a lot more people are comfortable using digital stuff, the capabilities are better, the phones are better like so we're leaning in heavily to that whereas we used to make people come to our drive through claim places to get their car looked at. We now have them send the six picture.

So, that said, there are plenty of things that people do want to come into the office, and so but it depends on the office and the type of customers. So we try to be there for them when those people want to be there. So some agencies hold events for their customers, they hold their charity events there or they do planning processes or they have -- they go out, they don't go over to the office, but the agency goes to the school and talks about distracted driving.

So, I would say, in general, our effort though is to try to do as much as we can digitally that the customer wants to do digitally, it lowers our cost and improves our speed, and to the extent they want to do it in person and we do it in person.

Michael Phillips -- Morgan Stanley -- Analyst

Okay. Thank you, Tom. I'll let others get in given the lack of time. Thank you very much.


Thank you. Our next question comes from the line of Michael Zaremski from Credit Suisse. Your question please.

Michael Zaremski -- Credit Suisse -- Analyst

Hey, good morning. Thanks. In regards to the pension accounting changes. Can you clarify how that help underlying combined ratio and does it change how we should think about the guidance range as well?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

I'll let Mario answer how it went through the combined ratio and the guidance, but I would just say on the guidance. We knew we're making this change going into the guidance. The reason we made this change really is the trend toward financial reporting is fair value, whether that's -- your equity portfolio goes up or down in a quarter goes to net income that used to be unrealized capital gains and didn't go through net income.

And so this is just another step along the way going to sort of fair value on the overall result. In addition, it was kind of choppy the way it was before with pension settlement charges, and this just spreads it that out over a longer, not spreads it out over time. You don't get these quarterly bumps for settlement charges when people decide they want to retire, which tends to be at the end of the year. So, you're kind of dancing around in the fourth quarter is where they have a settlement charges. Just puts it all on fair value puts us all on the same basis. Mario, do you want to talk about the combined ratio?

Mario Rizzo -- Executive Vice President and Chief Financial Officer

Yeah, maybe I'll just give you a little bit of color on really when you think about pension expense I would break it out into two pieces.

So, the part Tom alluded to the fair value component which is really just the change in the valuation of plant assets and liabilities quarter-to-quarter that runs through the income statement to net income, but it gets reported below the line.

It doesn't affect adjusted net income. The portion of pension expense that is in adjusted net income is really the periods specific pension costs, things like benefit accruals for that particular period interest cost, those kinds of things, those are still in adjusted net income.

When you look at the differences as I mentioned during the presentation. When you look at the difference between kind of the previous method and the current method of pension accounting for the first quarter of 2019, and we provide you a table in the 10-Q that gives you the difference in cost in whole for the corporation that was worth about $21 million in lower cost in the quarter.

Not all of that is property-liability portion of it, it is that's where you get to about two-tenths of a point impact in the quarter. So I would view that as a reasonably small impact. And to Tom's point, we knew we were going to make the change when we established the guidance. So I don't think it really has an impact on how we think about the outlook for the combined ratio.

Michael Zaremski -- Credit Suisse -- Analyst

Okay, that's very helpful and my last question is regarding slide 13, you show your net PMLs have been reduced a lot over time. And so directionally should your catastrophe load also be lower than your, let's just say, 13 or 14-year long term historical average. And, Tom, I believe you touched on this potentially earlier in your answered about homeowners returns?

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Well, I think, what it does do is, it lowers the amount of capital you carry for catastrophe events. But I would mathematically, the probable maximum loss is really driven by large individual discrete events like a course for hurricane or some large set of events, which are low probability, that's where you're carrying all that capital for just in case not really bad happens.

When you look at the catastrophe low on a quarterly basis and say how many hailstorms do we have? How many freezes do we have? That's really driven more by the weather and that's not a, that's factored into, that doesn't reduce capital as much because those things tend to go. So I wouldn't automatically go from lower PML to go to that chart we have in the supplement that shows percentage of premiums on cap and say that should be coming down to because what really drives that is just the weather.

Now we do a bunch of things around that to make sure it's less, right. So, we do , we have house and home, we do age rate groups, but we do a whole bunch of things to manage that number, as Glenn said, that we're accountable for the total combined ratio. But I wouldn't translate lower PML, lower capital therefore lower percentage every quarter.

Michael Zaremski -- Credit Suisse -- Analyst

So, then if I could follow-up then. So, do you from us looking from the outside and should we just -- you use your very long-term historical cat load as a guide mirrored making our projections? Thanks.

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Yes, I would look at the long-term percentage, and just say that accounts not predictable. And so I would come back to on a rolling basis, as Glenn said, we've made money every quarter for except for seven years, except for one, I think, like in homeowners, you just kind of look at our longer-term basis, it's a one-year, three-year basis.

We ran, you want to run a combined ratio where you're getting a fair amount of spread on it. We don't, those, some of our competitors run combined ratios substantially higher than us in homeowners.

We don't think that appropriate because of the capital that you have to put up and you don't get a lot of investment income at homeowners. So, you should look at us and assume we can have a reported combined ratio that generates an underwriting profit and just showed you what we think those should be and that's by state.

Obviously, in total, it can be higher than that by state because we have covariance that not shown in that chart. So, when you see the one, that's 88, will be higher than 88 still get a good return on the whole company, because we have covariance in it.

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

And John we have time for one more question.


Certainly. Our final question comes from the line of Josh Shanker from Deutsche Bank. Your question please.

Joshua Shanker -- Deutsche Bank -- Analyst

I just want a quick one. Following up on Amit's question on auto expense severity a little bit as more cars hit the road with automatic emergency braking and weird gadgets and the side view mirrors and whatnot. Is the upward trend in severity a permanent part of what we're going to see happen on physical damage for the foreseeable future?

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

Yes, thanks for the question Josh, this is Glenn. I would say that there is no question, the complexity of cars is getting greater, and we've seen the increase in cost to repair than at a cost of parts. Now theoretically you get two sides of that equation that all of those things you just mentioned should help avoid some accidents. We see some evidence of that in some places and but frankly the broader trend of lower frequency is more driven by the number of miles driven than it is by that.

But over time you expect some frequency benefit as the car park increases the percentage of cars that have loss avoidance capabilities and an increase in the cost to repair those cars. So, I do think there is potential for a long-term trend that you would have the cost of the newer cars making up a bigger portion of the overall cost to repair, but it's why I think we need to work with manufacturers, and look at the cost of parts, because as I think I said last quarter, the percentage of total losses continues to go up, and I don't think it's good for society or the industry as a whole that you have cars become disposable to where if it's in an accident, you throw it out and you get new one. I think there is benefit to be able to come up with more attractive and cost effective ways to repair these cars.

Jesse E. Merten -- Executive Vice President and Chief Risk Officer

Okay. Thank you all. So, our strategy is to properly grow market share in our protection products, making sure we have good strong results, we had a good strong quarter. We'll continue to work on behalf of our shareholders by innovating and growing market share. Thanks very much and have a great quarter.


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

Duration: 64 minutes

Call participants:

John Griek -- Head of Investor Relations

Thomas J. Wilson -- Chairman, President and Chief Executive Officer

Mario Rizzo -- Executive Vice President and Chief Financial Officer

Jesse E. Merten -- Executive Vice President and Chief Risk Officer

Jay Gelb -- Barclays -- Analyst

Glenn T. Shapiro -- President, Allstate Personal Lines, Allstate Insurance Company

Steven E. Shebik -- Vice Chairman

Gregory Peters -- Raymond James -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Amit Kumar -- Buckingham Research -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Dogan Civgin -- President, Service Businesses, Allstate Insurance Company

Michael Phillips -- Morgan Stanley -- Analyst

Michael Zaremski -- Credit Suisse -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

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