Allstate Corporation (The)

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. And now I'd like to introduce your host for today's program, John Creek, 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 10Q 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. Jess Merton, 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 all states' 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.

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 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 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 a diversified business platform. Moving to slide three, this strategy is driving growth and attractive returns. Policies enforce increase for the Allstate and insurance brands, property liability businesses. Square Trade had outstanding growth. Total policies enforced 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's operating priorities. The first three priorities, better serve customers, achieve target economic returns and 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 All-State Insurance Brands Group policies enforced 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 you combine that then with the significant growth at Square Trade, total policies, of course, 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 Square Trade 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 liability results remain strong. Net written premium increased 6.2% in the first quarter, due to policy growth in the Allstate and insurance 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 and prior year reserve re-estimates, with 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 to 88. but 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. e-surance'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. Square Trade revenues increased 34% to $164 million in the first quarter of 2019, driven by significant growth in policies and force. Adjusted net income was $11 million, an increase of $10 million from the prior year quarter due to $14 million of profits at Square Trade, 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. All state roadside services revenue was 73 million for the quarter with an adjusted net loss of 6 million comparable to the prior year quarter. All state 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 all states. We also acquired iCraft in February, which will expand SquareTrade's protection offering. Turning to slide seven, let's review Allstate life, 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. All state 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 discussed 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 trend, 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 nine 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 for common share to 50 cents, 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 13.5% for the 12 months ended March 31, 2019. And 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 risks 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-based and businesses at the corporate level so that each business earns an appropriate standalone return. As a result of these processes, All state capital provision is strong and performance exceeds return thresholds. About three-fourths of capital is 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. I will show two examples, insurance 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 risks 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 one is to identify the unique risk and return attributes for different types of stand-alone risks. We start with hundreds of individual risks that are grouped into 35 stand-alone risk types. Examples include auto insurance underwriting risk or interest rate risk. From there, we determine required capital for each line of business by aligning asset and liability risk and estimating correlations 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 three, we aggregate the risk by product and line of business that comprise each market-facing operation, such as all-state brands, personal lines, e-sherms, or all-state licenses. The covariance between risk types is retained by the market-facing businesses, though required capital reflects an integrated risk profile. The final step is to combine the risks grouped in step three to quantify the capital required to the entire corporation with a diversified portfolio of risk. This four-step process results in overall economic capital being less than each market-facing business. That diversification between non-correlated risks lowers all things 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 side 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 capacity 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 business insurance returns above our cost of capital on a standalone basis except annuities. The highest-returned business is Allstate Brand Auto Insurance. Square Trade has high returns and growth, but because of its relative size and modest risk profile, it generates less absolute income than Allstate Business. Moving to the bottom of the page, eSurance provides a good example of how we use this to evaluate performance in comparison to reported results. e-surance has a combined ratio of over 100, but generates a return on capital above our target. As a result, we have invested aggressively in growth. On the lower left, you can see e-surance'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 e-surance in 2011, we decided to invest aggressively in advertising. which has totaled about $1.3 billion, and all have been dispensed immediately. This has worked, and he now has $2 billion premium, 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. The combined ratio for each vintage year, however, then declines dramatically since there are no advertising expenses and pricing changes are implemented. With a combined ratio of below 100, this generates cash, which then combined with investment income results in returns being above our target for all interest rates. Slide 13 uses homeowner insurance as an example of how economic capital supports the process to establish performance goals within market-facing businesses. As we saw in the previous slide, What would happen to 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 test, the concentration of high-value homes on Long Island and also 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. And 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 all state-brand homeowners' insurance and economic capital, with an average combined ratio of a target of 83. This compares to the remaining 45 states, which utilize 55% of economic capital and an average combined ratio of a target of 88. This approach ensures we achieve strong aggregate returns by setting economic targets that reflect the underlying risks of each state. We adjusted targets as catastrophe exposures changed, 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 the 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 Safe Farm while being competitively priced for the value we deliver and earning attractive returns. These sophisticated capital allocation capabilities serve us well in delivering our strategies while generating attractive risk-adjusted returns on cash. Now I'll open the line to your questions.

Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone 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 is up. And 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. And 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. 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 that are getting filed. But we like our position and our ability to grow.

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?

So, Jay, this is Dave. So commercial lines, we generally focus on smaller businesses. That's been our historic business for a long time. So, you know, a lot of our policyholders also own businesses. We're on the marketplace in 10,000 communities in the United States. You see most communities. So we have a presence, and we want to ensure not only autos and homes, but other things in their lives, as Tom noted at the beginning, in terms of broadening our protection. You remember back last March, so March of 2018, we signed an agreement with Uber to ensure some of their states with some of their drivers. So we had three states originally. When we added a fourth in June and just March 1 this year, we added 11 more states. So 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 characterize or generally characterize the profitability of that line?

You know, if you look at our filings, what we say is it's early for us to really analyze you know, how we're doing in that. We are recording at our priced loss ratios. We feel we're pretty good with those. But, you know, the history is not really there. More than half of the potential claims from the T&Cs would be in liability coverages. So there's a longer tail on those. And as you know, 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.

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, 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. And so we can look in quite a fair amount of detail at how to handle those bodily injury claims. So 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 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.

Okay. Let me take it and then Jeff, if 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 – 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 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 that. It also applies to annuities, and it applies to arity. Let me do arity first and then annuity second. So arity... while one of the things Jeff said is that 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 businesses 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 for the whole company. The same thing is true with annuities. So annuities we've talked about multiple times. 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, 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. So you should be investing in equities, but when you put all that money in equities, 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, and 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. And, you know, there's a few odd cases in which it 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. And so 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 just as numbers, just as 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 things coming out, which Eric talked about both in the K and the Q, that will change that 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 to the balance sheet. So we're always, though, managed long-term. I think 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 at odds. Is that helpful?

Yes, it is. Just a point on, and 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?

It's required to be adopted in 2021. But it's like always the case in these things, you can choose to do what you want once you figure it out. But it's complicated.

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 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?

Let me start up top, and then Glenn and Steve might want to make some comments about 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 catastrophe, is really important to them today. And so when you look at the, you were 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. So we don't talk to you, we don't, share our specific targets by line, by state with people, because it's just too complicated a 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'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. 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 Allstate brand. Because again, we don't sit still on any of this. Even though we have good returns, we have work to do. And Steve can talk about Encompass.

All right. 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. So over the long period of time, you really want to produce an underwriting profit. And over the last seven years, I think there's only been 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 the quarter. But 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, so 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. And so 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 the 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 at inflationary factors on there too, we are responding and reacting to sort of new weather patterns.

So when you look at Encompass, Tom said it 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 run a lot of business, but we don't have the same broad footprint that the Allstate brand has. So 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've had significant losses you may have seen a year before last and 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, 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 through underwriting in areas we're in where we are too highly concentrated. And lastly, we're working on, you know, our processes, claims, price and sophistication, so we can price closer and better for the risk that we have. So, we hope that over time that we'll get a very similar result as Austin Brand has. That's our goal.

Thank you for your answers.

Thank you. Our next question comes in the line of Elise 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 kind of any change out there as some other peers are also now taking less rate and also looking to grow?

Thanks, Elise. Yeah, there's no question that, you know, as I mentioned before, that, you know, the CPI is down. And, you know, 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? And obviously this year a 2.4% increase on average versus a 9% the prior year, you know, 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.

At least I would, and Glenn said this earlier, It also focused on retention. So our retention was up half a point. That's half a point of growth. And that's half a point of growth of all the new business penalty associated with it. So one of the things we obviously want to focus on and one of the reasons one of our operating partners is better serve our customers is because it's good for them and good for us. So the other part is I think a lot of people are focused on this, the percentage changes that are out there. That is important. The other part is what's 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 us out of market.

Okay, that's helpful. And then my second question, you guys provided your updated catastrophe reinsurance program last night as well. It seems like you're nationwide cover. You have the Tower Go's. a little bit higher compared to where it was last year, greater cap on 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 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. So I'll take you back to what Jess talked about in the presentation around how we think about risk, return, and capital. Because reinsurance is one of the ways that we kind of optimize the risk and return profile of our homeowner's business. And we use reinsurance extensively. And we posted the details around our national excess of loss cap 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 a cap bond that provides both excess of loss cover as well as serves as an aggregate. So we now have roughly $800 million of aggregate protection in excess of $3.54 billion. So 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. 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 in 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 kind of optimize the execution of our placement. So 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. 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.

Thank you very much. I appreciate the color.

Thank you. Our next question comes from the lineup. Amit Kumar from Buckingham Research. Your question, please.

Thanks, and good morning. Two quick questions. The first question uses page 21 of your supplement as a backdrop. If you look at the lost 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 written premiums for the next few quarters?

Ahmed, let me provide an overview of how we establish financials, and 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 the our work on 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 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. And Glenn can talk about that component.

Yes, sir.

Yeah, so 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. And then 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. So the overall loss trend is manageable right now, and you can see that in our combined ratio and 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 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. You know, 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.

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 all state brand homeowners and auto, and there seems to be some sort of variability in Q1. The Q1 numbers seem to be down versus Q2, Q3, and Q4. How should I think about that? What exactly is causing that expense ratio to be slightly down in Q1 versus the remaining three quarters?

I wouldn't... I wouldn't really look at the expense ratio by quarter 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 all kinds of different accruals. So I wouldn't like that. Glenn can talk about the work we're doing on expenses, which is in an environment where you're running, let's just say, auto at 90 combined ratio, homeowners at 92, and a 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. So 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 know, you look at, you know, you know, where you are and what leverage you can pull. And I think, you know, the greatest value we can, you know, provide customers is to deliver the product with a 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 in our claims area, the team has moved materially on their expenses over the last, you know, year plus. They're down, you know, 500 plus people in terms of the overall sales 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.

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

Thank you. Our next question comes from the line. Your question, please.

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.

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. So I would rephrase your question a little bit if you'd give me the space to say it's really about integrated digital enterprises. So it's using data, analytics, technology, and process redesign to improve our effectiveness and our efficiency. So we've talked at some length about quick photo claims. So six pictures from customers, pay them in hours, not in days, no more 937 drive-throughs, fewer auto adjusters. So 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 ten 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 telematics. why we're doing telematics and the benefits to our customers and our company. But maybe, Glenn, do you want to start with IDE and then Don?

Yeah, so we really think there's 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 in place today, but you look at the opportunity to report losses in real time. So eliminating the need for a first notice of loss if you have instantaneous notification. And that opportunity is there in the, I'll call it relative near term. This is not a far out proposition. And 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. But 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. So 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, so let me talk a little bit about the ERDI side of it. So we talked last month about the value of telematics and how it 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 driver 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, you know, 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.

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's the thing about part of the loss ratio is claim expense, which is related to the people that settled claims for us, so part of the pension expense flows through the loss ratio.

So this pension expense impact only impacted claims people as opposed to the rest of the?

No, no, no. It gets allocated across both claims and underwriting. fact that there's people vetted 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, I know I'm here. Can you hear me? We can hear you now. Okay, thank you. So a question kind of stepping back at a high level. You guys clearly 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 has that changed today versus if you look back maybe 10 years ago? Are more people coming in to use that or less?

I can't give you a number, 10 years versus today. And 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? And so, 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 it on their credit card and not have to drive anywhere. So 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 the trend over 10 years, a lot more people are comfortable using digital stuff. The capabilities are better. The Your phones are better. And 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 us six pictures. So that said, there are plenty of things that people do want to come into the office on. But it depends on the office and the type of customer. So we try to be there for them when those people want to be there. So some agencies hold... you know, events for the customers. They hold the charity events there or they do planning processes or they have, you know, they go out, they don't go 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 and so that it lowers our costs and improves our speed. And 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. Michael Zeromsky from Credit Suisse. Your question, please.

Hey, good morning. Thanks. In regards to the pension fund, pension accounting changes. Can you clarify how that helped the underlying combined ratio? And 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. But let me just say on 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. And so 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. and 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. So you're kind of dancing around in the fourth quarter as to whether you have a settlement charge. It just puts it all on fair value, puts us all on the same basis.

Mario, do you want to talk about the... 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 the plan assets and liabilities quarter to quarter, that runs through the income statement, not through net income, but it gets recorded below the liability rule. It doesn't affect adjusted net income. The portion of pension expense that is in adjusted net income is really 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, and we provide you a table in the 10Q that gives you the difference in cost, in total for the corporation, it was worth about $21 million in lower costs in the quarter, Not all of that is property liability. A portion of it is. That's where you get through about the 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.

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, you know, 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 answer about homeowners' returns.

Well, 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 forceful 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, You know, how many hailstorms do we have? How many freezes do we have? That's really driven more by the weather, and 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 capital. and say that should be coming down, too, 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 have house and home where we age rate roofs. We do a whole bunch of things to manage that number, as Glenn said, because we're accountable for the total combined ratio, but I wouldn't translate lower PML, lower capital, therefore lower percentage every quarter.

So then if I could follow up then, so do you, from us looking from the outside in, should we just, you use your, you know, very long-term historical catload as a guide when we are making our projections? Thanks.

Yeah, I would look at the long-term percentage, you know, and just say that, you know, cats are not predictable. And so I would come back to on a rolling basis. Glenn said, you know, we've made money every quarter except for seven years out of it. except for one. I think in homeowners, you've 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. So you should look at us and assume we can have a reported combined ratio that generates an underwriting profit, and Jess 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's not shown in that chart. So 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 Inker 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 fiscal damage for the foreseeable future?

Yeah, so thanks for the question, Josh. 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. But 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. So 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. 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 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. to come up with more attractive and cost-effective ways to repair these cars.

Great. 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. 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.