Good day, ladies and gentlemen, and welcome to the Allstate first quarter 2019 earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, John Griek, Head of Investor Relations. Please go ahead, sir.
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, 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.
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 hits four consumer segments and provides protection by insuring automobiles, homes, and other property. We use four brands, differentiated products, sophisticated analytics, telematics, and are 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 in 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 in a diversified business platform. Moving to slide three, this strategy is driving growth and attractive returns. Policies in force increased for the Allstate and Esurance brands property and liability businesses. SquareTrade had outstanding growth. Total policies in force now exceed 123 million. The property and 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 in the 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's operating priorities. The first three priorities, 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 and liability policies increasing by 833,000 compared to the prior year quarter.
When you combine that 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 valuations. The performance-based portfolio did generate $57 million of capital gains this quarter. We continue to make progress building long-term growth platforms, expanding our relationship with the 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.
Thanks, Tom. Moving to slide five, you can see that property and 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 and 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 and prior year reserve re-estimates, 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 post-retirement 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%-88%, we do not adjust the range based on one quarter of 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, drove 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 service 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 $1 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 and had a small loss. Total mileage analyzed is now about 10 billion miles per month and 350 trips per second.
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's 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 from the prior year quarter was primarily driven by lower contract benefits. Allstate Annuities, on the right, had an 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, it increases income volatility for the annuity 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% was in 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 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 why we discuss total return over a 12-month period. Valuation changes in the quarter benefited from declines in risk-free rates, tighter credit spreads, and a strong rebound of public equity markets. 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 trends, reflecting lower private equity asset valuations. 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 9 provides an overview of 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 is not included in the amount returned in the first quarter. Common shares are being purchased through a $1 billion accelerated share repurchase agreement, 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 owns 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. Now Jess will provide an overview of how we economically evaluate risk and return.
Thank you, Mario. Let's start on slide 10. It's about how Allstate uses sophisticated analytics and economic evaluations to allocate capital and establish performance goals. Our approach to capital allocation considers multiple perspectives while allowing us to focus on optimizing return per unit of risk. This begins with establishing economic capital requirements for individual risk by product, such as auto, home, or life insurance, investment risks such as interest rates or equity valuations, by business, and for the entire corporation. Capital requirements are based on cash flow projections and probabilistic models, especially for extreme events like catastrophes, and incorporate expectations from regulators and rating agencies. This approach allows us to evaluate risk at a granular level to enable us to optimize economic results. Our diversified portfolio of businesses result in a capital benefit that we also incorporate into our strategic capital allocation process.
We retain the benefit of risk covariance between market-facing businesses at the corporate level so that each business earns an appropriate standalone return. As a result of these processes, Allstate's capital position is strong and performs exceeds return thresholds. About three-fourths of capital is utilized by the property liability business. All major businesses earned returns above the cost of capital other than annuities. We dynamically allocate capital based on risk and return characteristics to establish performance targets. I will discuss 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 is the amount of capital needed to accept risk given expected returns and the range of possible outcomes. It's determined using a sophisticated framework built on our experience and data related to individual risks.
In the middle of the slide, you can see we use a four-step process to determine economic capital. Step 1 is to identify the unique risk and return attributes for different types of standalone risks. We start with hundreds of individual risks that are grouped into 35 standalone risk types. Examples include auto insurance underwriting risk or interest rate risk. From there, we determine the required capital for each line of business by aligning asset and liability risk and estimating correlation between risks. For example, in establishing capital for auto insurance, accident frequency is uncorrelated with investment risk associated with reserves, so this reduces economic capital. In step 3, we aggregate the risk by product and line of business that comprise each market-facing operation, such as Allstate brands, personal lines, Esurance or Allstate Life.
The covariance between risk types is retained by the market-facing businesses, required capital reflects an integrated risk profile. The final step is to combine risks grouped in step 3 to quantify the capital required for the entire corporation with a diversified portfolio of risks. This four-step process results in overall economic capital being less than each market-facing business, as diversification between non-correlated risks lowers Allstate's overall risk level. This covariance is retained by the corporation so that each business must earn an appropriate return for its risk profile. In setting the consolidated capital target, we also consider regulatory and rating agency guidelines and overall financial flexibility. Turning to slide 12, required capital by line is shown on the upper-left pie chart. Approximately one-third of economic capital is used by auto insurance and about 40% is needed for homeowners insurance, which is heavily influenced by catastrophe exposure.
We use economic capital, industry performance, and strategic intent to establish performance targets 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 returns above our cost of capital on a standalone basis except annuities. The highest return business is Allstate brand auto insurance. SquareTrade has higher returns and growth, but because of its relative size and modest risk profile, it generates less absolute income than Allstate businesses. Moving to the bottom of the page, Esurance provides a good example of how we use this to evaluate performance and compare it to new reported results. Esurance has a combined ratio over 100 but generates a 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 been above 100. A large part of the combined ratio, however, is advertising, which is immediately expensed but generates policies which pay premiums for years. When we acquired Esurance in 2011, we decided to invest aggressively in advertising, which has totaled about $1.3 billion and all been expensed immediately. This has worked, as Esurance now has $2 billion in premiums and is more than twice its original size. To ensure this is economic, we established performance targets for each vintage year of business. The combined ratio starts off high, as you can see on the lower right chart, to reflect both the new business penalties and the significant advertising costs. Combined ratio for each vintage year, however, declines dramatically since there are no advertising expenses and pricing changes are implemented. The combined ratio is below 100.
This generates cash, which then combined with investment income, results in returns being above our targets for all vintage years. Slide 13 uses homeowners insurance as an example of how economic capital supports the process to establish performance goals within market-facing businesses. As we saw on the previous slide, over half of the required capital for homeowners is due to catastrophe exposure. We allocate this by state, as shown in the upper left pie chart. Texas, shown in blue, has significant exposure to hurricanes, hailstorms, and tornadoes, so its homeowners business must generate returns on the capital needed for these risks. New York, shown in dark red, also has substantial risk from hurricanes. While the probability of loss is low in the catastrophe, the concentration of high-value homes on Long Island, and Allstate's significant market share results in a large absolute amount of capital required to cover this risk.
Notably, Florida, 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 state. As you can see from the top right chart, targets differ between high-capital and low-capital states. Our top five states utilize 45% of Allstate Brand homeowners insurance economic capital, with an average combined ratio target of 83. This compares to the remaining 45 states, which utilize 55% of economic capital at an average combined ratio target of 88. This approach ensures we achieve strong aggregate returns by setting economic targets that reflect the underlying risk in each state. We adjusted targets as catastrophe exposures change, and in total, this has declined over the last decade, which you can see from the bottom left chart.
In establishing targets, we also compare ourselves to competitors and want to have a competitive price and better performance. As shown on the chart at the bottom right, we have a better combined ratio than Progressive, Liberty Mutual, and State Farm, while being competitively priced for the value we deliver in earning attractive returns. These sophisticated capital allocation capabilities serve us well in delivering our strategies while generating attractive risk-adjusted returns on capital. We'll open the line for your questions.
Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. We also ask that you please limit yourselves to one question and one follow-up. You may get back in the queue as time allows. Our first question comes from the line of Jay Gelb from Barclays. Your question, please.
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 base on that in terms of what you're seeing from a competitive standpoint, and also how Allstate is addressing that issue too. Thanks.
Hi, Jay. Thank you. This is Glenn. Yeah, we're seeing definite competition out there. If you look at the CPI a year ago, it 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's up. I think the most encouraging sign is that the system is healthy in that we've got about 3,000 more people in that system selling our product than we did a year ago. That means agents are investing and hiring more salespeople, and they're smart, small business owners, and they only do that when they feel like they can compete. It's a competitive market out there.
I know you've heard that from others in the market, and you can see the rates that are getting filed, but we like our position and our ability to grow.
Appreciate that. 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?
Jay, this is Dave. With commercial lines, we generally focus on smaller businesses. That's been our historic business for a long time. A lot of our policyholders also own businesses. We're out in the marketplace in 10,000 communities in the U.S. You'd say most communities. We have a presence, and we want to insure not only autos and homes, but other things in their lives, as Tom noted at the beginning, in terms of broadening our protection. If you remember back last March of 2018, we signed an agreement with Uber to insure up some of their states with some of their drivers. We had three states originally, then we added a fourth in June, and just March 1 this year, we added 11 more states.
The growth you've seen over the last year and a half or year and a quarter is really based on that Uber relationship.
I see. Can you generally characterize the profitability of that line?
If you look at our filings, what we say is it's early for us to really analyze how we're doing in that. We are recording at our priced loss ratios. We feel we're pretty good with those. The history is not really there. More than half of the potential claims from the TNCs would be in liability coverages, so there's a longer tail on those. As you know, these businesses have not been in business for more than a handful of years of any size. As we see the market changing and those companies growing rapidly, you need to be careful and conservative in your reserving and pricing.
Jay, let me provide a little perspective. When we first set up the relationship with Uber, of course, they were doing a bunch of this themselves, and they were using some other people. We had access to all that data. One of the reasons we're of value to them as a partner is our claims capabilities. We can look in quite a fair amount of detail at how to handle those bodily injury claims. We're confident that we're in a good place.
Appreciate it. Thank you.
Thank you. Our next question comes from the line of Greg Peters from Raymond James. Your question, please.
Good morning. My first question, I guess I'm going to focus on 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 in your chart, specifically the one on the upper right-hand corner of page 12, where you identify Arity, the annuities business, and roadside services as running below your cost to capital hurdles. I suppose this is in the context of the published reports of the possibility of the sale of your annuity business.
Okay. Let me take it and then Jeff, if you want to jump in on the annuity piece. First, Greg, we run the business for the long term. We try not to run it for quarterly earnings. In 2011, in the bottom of the crisis for us, we were still investing heavily in advertising. We always try to look long term at whatever we're investing in. It doesn't mean we keep throwing good money after bad. We do watch our expenses quite closely, so we try to take a longer-term view of it. That also applies to annuities, and it applies to Arity. Let me do Arity first and then annuity second. Arity, one of the things Jeff said is that that's a standalone number.
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. We evaluate them independently, but then we look collectively at how they work for the whole company. The same thing is true with annuities. 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 books. If you look at the economic piece of that's because these are long-dated liabilities. Long-dated liabilities, like a pension fund, should be mostly invested in equities, and the regulatory capital requirement for investing in equities is quite high.
You should be investing in equities, but when you put all that money in equities, then what it does is 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. What we do is we allocate a portion of that corporate covariance in our own mind. We can still manage the overall corporate results, but we just allocate a portion of that corporate covariance, 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. There's a few odd cases in which you were, but generally, you don't change it.
When people live longer, because these are payout annuities, you don't change your reserves, and when interest rates go down, you don't change your reserves. As a result of that, there's a liability that is bigger if you look at it from an economic standpoint. We factor that into Jess's numbers. Jeff has it all factored into how we look at the company. It just doesn't show up on the financial books. There is some new accounting things coming out, which Eric talked about both in the K and the Q, that will change that accounting. 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. That will be a material change to the balance sheet. We always, though, manage long term.
Think economically, cash flow is what drives us, we're cognizant of what's going on in the financial results and try to help you see when those numbers are at odds. Is that helpful?
Yes, it is. I have a second question, 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?
It's required to be adopted in 2021. As like always the case in these things, you can choose to do what you want once you figure it out. It's complicated.
Okay. 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. 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?
Let me start up top, and then Glenn and Steve might want to make some comments about Allstate brand and then Encompass. 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, is really important to them today. When you look at the, you're talking about the underlying combined ratio, I think four or five years 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. We don't share our specific targets by line, by state with people in total because it's just too complicated a conversation to have over time.
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's doing to do that. That said, we manage our business at a granular level, and if everybody doesn't get an A on every test, we don't throw them out of class. Right? 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. Glenn can talk about what he's doing in profitability in the first, in the Allstate brand because we're, again, we don't sit still on any of this. Even though we have good returns, we have work to do. Steve can talk about Encompass.
All right. Yeah. The first number I look at, 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 the catastrophe risk, too. Over the long period of time, you really want to produce an underwriting profit. The last seven years, I think there's only been one quarter that we didn't produce an underwriting profit. 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 the quarter.
Yeah.
Your question is right in that the underlying has ticked up over time, particularly look at the last five quarters or so. Last quarter, I said to you that we had last year a very wet year, a lot of non-cat weather. More rain, less hail was my line. I think I regret that line now because we had a lot of hail in the first quarter. 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. The other thing I'd point you to is we do have an inflationary factor built into home. Sometimes we only focus on the filed rate, and if you look at the trailing 12 months, it's 3.2%. The average premium is up 4.5% because of the inflationary factor.
If you take that 2.1% in the first quarter and about three points in the last two quarters, and look at inflationary factors on there, too, we are responding and reacting to new weather patterns.
When you look at Encompass, as Tom said very well, we believe we need to take some actions in order to raise the returns and 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're more concentrated. Obviously, it's a much smaller book of business. There are areas where we appoint agents, and they write a lot of business. We don't have the same broad footprint that the Allstate brand has. That leaves us in places where we have certain concentrations in areas that sometimes have significant catastrophe exposures, and sometimes we have no exposure in areas. California wildfires, we've had areas where we had significant losses you may have seen a year before last, and other areas where we had none.
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 trying to reduce that concentration. In some areas, we're appointing agents away from the areas we are. Other, we're trying to constrain business through underwriting in areas we're in where we are too highly concentrated. Lastly, we're working on our processes, claims, price, and sophistication so we can price closer and better for the risk that we have. We hope that over time it will get a very similar result as Allstate brand has. That's our goal.
Thank you for your answers.
Thank you. Our next question comes on the line of Elyse Greenspan from Wells Fargo. Your question, please.
Hi. Thanks. My first question, going back to the auto environment a little bit more. Your 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 year was a pretty good new business growth year for your auto book. Was that expected, or are you seeing any change out there as some other peers are also now taking less rate and also looking to grow?
Thanks, Elyse. Yeah, there's no question that, as I mentioned before, that the CPI is down. For context, when you look at the CPI at 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? Obviously, this year, a 2.4% increase on average versus the 9% the prior year does create less shoppers. 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 that's sort of the health of the system overall.
Elyse, I would, and Glenn said this earlier, also focus on retention. Our retention was up half a point, that's half a point of growth, and that's half a point of growth with all the new business penalty associated with it. One of the things we obviously want to focus on, and one of the reasons one of our operating priorities is better serve our customers is because it's good for them and good for us. The other part is, I think a lot of people are focused on the percentage changes that are out there. That is important. The other part is what's your absolute price. While some people have reduced their price recently, we still think we have a highly competitive price relative to them. They're just coming down closer to where we are as opposed to taking us out of the market.
Okay. That's helpful. My second question, you guys provided your updated catastrophe reinsurance program last night as well. It seems like your nationwide cover you have, the tower goes a little higher compared to where it was last year, greater 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. As you think of placing the Florida portion of your coverage, is there anything that would indicate that maybe what you're seeing the pricing there would be different than when you place the nationwide cover?
This is Mario. I'll answer your question on reinsurance. I'll take you back to what Jeff talked about in the presentation around how we think about risk return on capital, because 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. We posted the details around our national excess of loss cat program yesterday. We did increase the top of our tower a bit. 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 a cat bond that provides both excess of loss cover as well as serves as an aggregate.
We now have roughly $800 million of aggregate protection in excess of $3.54 billion. We have both an excess of loss program, as well as an aggregate program through two catastrophe bonds. I think from a pricing standpoint, your comment was spot on. We did see some modest pressure in pricing. I think a lot of that was driven by reinsurers kind of reevaluating their wildfire exposure in their models. It was not a material move from a pricing standpoint. We feel really good about the placement this year. Just to remind you, we effectively renew a third of our program every year, which further insulates us from any real fluctuations in reinsurance pricing year to year.
We feel good about the execution, and we use both the traditional reinsurance market and the ILS market to kind of optimize the execution of our placement. Overall, we feel good about the program. With Florida, obviously, there have been a lot of stories around the upward development from some of the hurricane losses. Our recoveries over the last couple of years have been a bit more modest, I think, than others. We will see what the ultimate pricing is, but I wouldn't expect a meaningful variation relative to what we saw in the national program.
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.
Thanks. Good morning. Two quick questions. The first question uses 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, I don't know, 1%-3% range. How should we think about, I guess, that trend line versus written premiums for the next few quarters?
Amit, let me provide an overview of how we establish financials. Then Glenn can talk about the specific operations. We give paid numbers, and we have both gross net paid, incurred, case reserves. We slice and dice our work on what is the right loss cost to put in the financials at some great length. We feel comfortable with the reserves we've established based on the trends that you see in paid and then the other trends we see in the other numbers. Glenn, I know we've talked at some length about physical damage in auto insurance. I assume that's where you're at. Glenn can talk about that component.
Yes, sir. Physical damage, as you point out, has 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 is 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 coverages and injury coverages, that splits roughly half and half. 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 hotter. The overall loss trend is manageable right now, and you could see that in our combined ratio and the fact that rates have been relatively modest. 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 of 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 physical damage expenses.
Got it. That's very helpful. The only other question is, this might be an easy answer here. I was looking at the expense ratio for Allstate brand homeowners and auto, there seems to be some sort of variability in Q1. The Q1 numbers seem to be down versus Q2, three and four. How should I think about that? What exactly is causing that expense ratio to be slightly down in Q1 versus the remaining three quarters?
Amit, I wouldn't really look at the expense ratio by quarter, determine and draw a trend line from one quarter to the next, because there's stuff that goes in and out every quarter. We make adjustments, agency bonus, and do all kinds of different accruals. I wouldn't look at 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 auto at 90 combined ratio, homeowners at 92, a regulated environment on price, and some even modest cost pressure, you want to maintain your margins as well as you can, you look at all things you can do to control those margins, including expenses. Glenn might want to talk some about what we're doing in expense management.
Yeah. We've been very focused on expenses. As Tom said, you look at where you are and what leverage you can pull, I think the greatest value we can provide customers is to deliver the product with lower expense. We looked at our supplier management, and we have a lot of really good work going on with our procurement. From an operational standpoint in 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, the frequency trend creating kind of a flat claims reported trend. 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.
Expenses are a significant focus for us.
Got it. Thanks for the clarification and good luck for the future.
Thank you. Our next question comes from the line. Yaron Kinar from Goldman Sachs. Your question, please.
Hi, good morning. My first question is around the increased use of telematics. I think we all intuitively understand that it should also result in some improvement in the loss ratio over time. 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?
Yaron, let me go up a minute, and then Don can talk about some of the things we're doing at telematics. Glenn, maybe you can talk a little bit about claims. I would rephrase your question a little bit, if you give me the space to say it's really about integrated digital enterprise. It's using data analytics technology and process redesign to improve our effectiveness and our efficiency. We've talked at some length about QuickFoto claims. Six pictures from customers, pay them in hours, not in days, no more 937 drive-throughs, fewer auto adjusters. There's 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 on getting information, accumulating information. I don't think that that's reduced our expenses.
In fact, we've been investing heavily in telematics for the last nine or 10 years. Each year we invest more because we see it adding more value to our customers. Don can talk about the overall view of why we're doing telematics and the benefits to our customers and our company. Maybe, Glenn, do you want to start with IDE and then Don do telematics?
Sure. Yeah, we really think there's a lot of opportunity going forward, with telematics as you think about operational improvement. For one, and this is a go forward, this is not the in place today, but you look at the opportunity to report losses in real time. Eliminating the need for a first notice of loss if you have instantaneous notification. That opportunity is there in the, I'll call it relative near term. This is not a far-out proposition. Then, we're already working with Looking at information for liability determination and helping us understand what occurs in an accident, which can make you both more efficient and more accurate in what you're doing. One other piece that I don't think was in the question, but I think is really important is we have a materially higher promoter score when people are using telematics.
You think about retention, and you think about the interest that people have and the feedback they're getting to become better drivers, and just the interest in staying with Allstate, it makes a big difference when we have folks signed up for telematics.
Yeah. Let me talk a little bit about the energy side of it. We talked last month about the value of telematics and how it can be used in different ways. 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 driver behavior, which is an important component of adding value back for customers, both our customers and our partners' customers. We have been investing in Arity. You mentioned the expense side of it. Arity is running at a very small loss at this point.
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. 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. What that allows us to do is, again, not only price the insurance more accurately but provide value for our customers.
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. 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.
Very well. Thank you for the comprehensive answer. I guess one other very quick one. Why was the reclassification of pensions, why did it impact the loss ratio as opposed to the expense ratio?
Yeah, that piece, think about part of the loss ratio is claim expense, which is related to the people that settle claims for us, part of the pension expense flows through the loss ratio.
This pension expense impact only impacted claims people as opposed to the.
No. It gets allocated across both claims and underwriting expense. The fact that there's people embedded within our claim expense ratio, that's where the loss ratio benefits from that change.
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. Oh, there we go.
Yeah, no, I'm here. Can you hear me?
We can hear you now.
Okay, thank you. Question stepping back at a high level. You guys certainly 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. If you do, the number of people coming in and out of those stores, and if you do, how has that changed today versus if you're looking back maybe 10 years ago? Are more people coming in to use them now or less?
I can't give you this, Tom. I can't give you a number 10 years versus today. I would say that you have to split that into two components. What do they come in for that they want to come in for, and what do they come in for because you make them come in for it? For example, if you have a bill that's 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 they can call and put down a credit card and not have to drive anywhere. In general, our focus is to be there for our customers when they want us to be there for them, and to use faster, more digital technologies when they don't want it.
I do think what you're saying is a trend over 10 years. A lot more people are comfortable using digital stuff. The capabilities are better. Your phones are better. 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 us six pictures. That said, there are plenty of things that people do want to come into the office. It depends on the office and the type of customer. We try to be there for them when those people want to be there. Some agencies hold events for their customers. They hold their charity events there, or they do planning processes, or they don't go to the office, but the agency goes to the school and talks about distracted driving.
I would say, in general, our effort, though, is to try to do as much as we can digitally if the customer wants to do digitally, so that it lowers our cost and improves our speed. To the extent they want to do it in person, then we do it in person.
Okay. Thank you, Tom. That's all I had. I'll just 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.
Hey, good morning. Thanks. In regards to the pension accounting changes, can you clarify how that helped the underlying combined ratio? Does it change how we should think about the guidance range as well?
I'll let Mario answer how it went through the combined ratio and the guidance. I was going to just add the guidance. We knew we were making this change when we did the guidance. The reason we made this change really is the trend towards financial reporting is fair value. Whether that's the amount your equity portfolio goes up or down in a quarter, goes through net income that used to be unrealized capital gains and didn't go through net income. This is just another step along the way of going to sort of fair value on the overall results. In addition, it was kind of choppy the way it was before with pension settlement charges. This just 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. You're kind of dancing around in the fourth quarters where they have a settlement charge. This just puts it all on fair value, puts us all on the same basis. Mario, do you want to talk about the combined ratio?
Maybe I'll just give you a little bit of color on, when you think about the pension expense, I would break it out into two pieces. The part Tom alluded to, the fair value component, which is just the change in the valuation of the plan assets and liabilities quarter to quarter. That runs through the income statement, not through net income, but it gets recorded below the line. It doesn't affect adjusted net income. The portion of pension expense that is in adjusted net income is the period-specific pension cost. Things like benefit accruals for that particular period, interest costs, those kinds of things. Those are still in adjusted net income.
When you look at the difference, 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, we provide you a table in the 10-Q that gives you the difference in cost. In total for the corporation, it was worth about $21 million in lower cost in the quarter. Not all of that is property liability. A portion of it is. That's where you get to about the two-tenths of a point impact in the quarter. I would view that as a reasonably small impact. To Tom's point, we knew we were going to make the change when we established the guidance. I don't think it really has an impact on how we think about the outlook for the combined ratio.
Okay. That's very helpful. My last question is regarding slide 13. You show your net PMLs have been reduced a lot over time. Directionally, should your catastrophe load also be lower than your, let's just say, 13 or 14-year long-term historical average? Tom, I believe you touched on this potentially earlier in your answer about homeowners' returns.
Well, I think what it does do is it lowers the amount of capital you carry for catastrophe events. Mathematically, the probable maximum loss is really driven by large individual discrete events like a Category 4 hurricane or some large set of events which are low probability. That's what you're carrying all that capital for, just in case something really bad happens. When you look at the catastrophe load 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. That doesn't reduce capital as much because those things tend to go. I wouldn't automatically go from lower PML to go to that chart we have in the supplement that shows percentage of premiums on cats and say, "That should be coming down too." What really drives that is just the weather.
Now, we do a bunch of things around that to make sure it's less, right? We have house and home where we age rate groups. We do a whole bunch of things to manage that number as Glenn said because we're accountable for the total combined ratio. I wouldn't translate lower PML, lower capital, therefore lower percentage every quarter.
If I could follow up then. From us looking from the outside in, should we just use your very long-term historical cat load as a guide when we are making our projections? Thanks.
Yeah, I would look at the long-term percentage and just say that cats are not predictable. I would come back to on a rolling basis, even Glenn said we've made money every quarter for seven years, except for one. I think in homeowners, you just got to look at it on a longer-term basis. It's a one-year, three-year basis. You want to run a combined ratio where you're getting a fair amount of spread on it. Some of our competitors run combined ratios substantially higher than us in homeowners. We don't think that's appropriate because of the capital you have to put up, and you don't get a lot of investment income on homeowners. You should look at us and assume we can have a reported combined ratio that generates an underwriting profit. Jess showed you what we think those should be. That's by state.
Obviously, in total, it can be higher than that by state. We have covariance that's not shown in that chart. When you see the one that says 88, we could be higher than 88, still get a good return on the whole company because we have covariance in it.
Jonathan, we have time for one more question.
Certainly. Our final question comes from the line of Josh Shanker from Deutsche Bank. Your question, please.
Yeah, I just wanted a quick one following up on Amit's question on auto accident severity a little bit. As more cars hit the road with automatic emergency braking and weird gadgets in 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?
Yes. Thanks for the question, Josh. Yeah, this is Glenn. I would say that there's no question the complexity of cars is getting greater and we've seen the increase in cost to repair them and the 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, but frankly, the broader trend of lower frequency is more driven by the number of miles driven than it is by that. Over time, you'd 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.
I do think there is the 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. 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 to have cars become disposable to where if it's in an accident, you throw it out and you get a new one. I think there's benefit to be able to come up with more attractive and cost-effective ways to repair these cars.
Thank you all. 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. Thank you very much. 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.