Good day, ladies and gentlemen and welcome to The Allstate first quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's program is being recorded. And now, I would 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. So please refer to our 10-K for 2018 and other public documents for information on potential risks. Now, I will 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 has four consumer segments and provides protection by ensuring automobiles, homes and other property. We have four brand. 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 in force increased for the Allstate and Esurance brands, Property-Liability businesses. SquareTrade had outstanding growth. Total policies in force now exceed $123 million. The Property-Liability underlying combined ratio was 84.2% in the first quarter. Total return on the investment portfolio was strong at 4.7% for the last 12 months but reported income declined this quarter due to lower valuations and limited partnership portfolio. Net income was $1.26 billion, as you can see from the chart on the bottom, reflecting strong operating results and significant capital gains under the accounting policy where equity valuations are reflected in net income. Adjusted net income was $776 million or $2.30 per diluted share in the first quarter. Adjusted net income return on equity was 13.5%, which…

Thanks Tom. Moving to slide five. You can see that Property-Liability results remained strong. Net written premium increased 6.2% in the first quarter, due to policy growth in the Allstate and Esurance brands and a 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 reported 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 reestimates was 84.2% for the first quarter of 2019. In the quarter, we changed to a fair value based accounting method for pension and other 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 premiums decreased 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, grew total net written premium growth of 13.4%. Encompass written premiums are essentially flat as higher rates were offset by lower policies in force. On the bottom of the table, you can see the underlying combined ratios were all good in the quarter. Moving to slide six. Our services businesses are growing rapidly and…

Thank you Mario. Let's turn on slide 10 which shows how Allstate uses sophisticated analytics and economic valuation to allocate capital and establish performance goals. Our approach to capital allocation considers multiple perspectives while allowing us to focus on optimizing returns per unit of risk. This begins with establishing economic capital requirements for individual risk by products such as auto, home or life insurance, investment risk 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 results in a capital benefit that we also incorporate into our strategic capital allocation process. We retain the benefit of risk forbearance between market facing businesses at the corporate level so that each business runs an appropriate standalone return. As a result of these processes, Allstate's capital position is strong and performance exceeds return thresholds. About three-fourth of capital is utilized by the Property-Liability business. All major businesses earned return above the cost of capital other than annuities. We dynamically allocate capital based on risk and return characteristics to establish performance targets. I will start with two examples, Esurance and homeowners insurance to show the benefits of this approach. Let me walk through these point 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. This is determined using a sophisticated framework built on our experience and data related to individual risks. In the middle of the…

[Operator Instructions]. Our first question comes from the line of Jay Gelb from Barclays. Your question, please.

Thanks very much. On personal auto, in particularly the Allstate brand, we are 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 are seeing from a competitive standpoint and also how Allstate is addressing that issue too? Thanks.

Hi Jay. Thank you. This is Glenn. Yes. We are seeing definitely 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 are doing both competitively and from a return standpoint. Our new business is up. Our retention is up. And I think the most encouraging sign is that the system is helping in that, we have 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 sales people and they are 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 have heard that from others in the market and you can see the rates are getting filed, but we like our position and our ability to grow.

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

So Jay, this is Steve. So at commercial lines, we generally focus on smaller businesses. That's been our historic business for a long time. So a lot of our policyholders also own businesses. We are out in the marketplace within 10,000 communities in the United States. I would say 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 of protection. If you remember, back last March, so March of 2018, we signed an agreement with Uber to insure some of their drivers. So we had three states originally. Then we added a fourth in June. And just March, we initially added 11 more states. So the growth you have seen over the last year-and-a-half, about a year in the quarter, is really based on that Uber relationship.

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

If you look at our balance, we say it's early for us to really analyze how we are doing in that. We are recording at our priced loss ratios. We feel we are pretty good with those. But the history is not really there. More than half of the potential claims from the T&C's would be in liability coverages. So it's 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 are using some other people. We had access to all that data. One of the reasons we are a value to them as a partner is our claims capabilities. And so we can look in quite fair amount of detail at how to handle those bodily injury claims. So we are confident that we are in a good place.

I 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 am 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, Jess, if you want to jump on the annuity piece. So first, Greg, we run the business for the long term. We try not to run it for quarterly earnings. So in 2011, in the bottom of the crisis for us, we were still investing heavily in advertising. So we always try to look long-term at whatever we are investing in. It doesn't mean we keep throwing money, good money after bad. We do watch our expenses quite closely. So we tried to take a longer term view of that. That also applies to annuities and it applies to Arity. Let me do Arity first then annuity second. So Arity, one of the things Jess said is that's a standalone 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 with our company. The same thing is true with annuities. So at annuities, we have talked about multiple times, right. Annuities are not a good business for us from a return standpoint on two basis. One is economically and two is in the financial book. If you look at the economic piece of that, that's because these are long-dated liabilities. Long-dated liabilities like the pension fund should be mostly invested in equities and the regulatory capital requirement for investing in equities is quite high. So you should be investing equities but when you put all that money in equity, but it doesn't bring your current return down even though on a long-term basis, it's absolutely the right thing to do.…

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 as like always the case in these things, you can choose to do it 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 even higher than that. And I am 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 for Allstate brand and then Encompass. So first, we love the homeowners business. We get really good returns in it and we help customers because it is something that with these level of catastrophes is really important today. And so when you look at the, you are 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 it. We don't share our specific targets by line, by state with people and probably because it is 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 is going to do that. That said, we manage our business at a granular level and everybody doesn't get an A on every test. We don't, like, throw them out of the class, right. So some states are good. And then we have to work to get them back. Some brands are not as good on something and we work to get them back in place. And Glenn can talk about what he's doing in profitability in the first and the Allstate brand because again we don't sit still on edge even though we have good returns. We have work to do. And Steve can talk about Encompass.

All right. Yes. So I always say, 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 are 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 are 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. And 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. Actually, a lot 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 would point you to is, we do have an inflationary factor built into home. So sometimes we are not only focused on a 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 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 are more concentrated. Obviously, it's a much smaller book of business. There are areas where we point agents and they have had a lot of business. We don't have the same broad footprint that the Allstate brand has. So that leaves in places where we have switched certain concentrations in areas that sometimes they have significant catastrophe exposures and sometimes we have no exposure in areas. So California wildfires, we had areas where we had significant losses. You may have seen a year before last. In other areas we had none. So the things we are working on to improve the business, there are a number of states we need to have significant rate increases. And we are working hard to achieve those to get those particular locations up to our cost of capital and above. Secondly, we are looking at our footprint. I am trying to reduce that concentration. So in some areas, we are appointing agents away from the areas we are. In other, we are trying to constrain business through underwriting in areas where we are too highly concentrated. And lastly, we are working on our processes, claims, pricing sophistication so we can create a bit closer and better for the risk that we have. So we hope over time that we will get a very similar result as Allstate brand has. That's out goal.

Thank you for your answers.

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

Hi. Thanks. My first question, I am 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 here for your auto book. Was that expected? Or are you seeing kind of any change out there as some other peers are also now taking less rate and also looking to grow?

Thanks Elyse. Yes, there's no question that, as I mentioned before, that the CPI is down and for context, when you look at the CPI 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 build that month, what kind of surprises they are getting. And obviously this year, at 2.4% increase on average versus a 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 are increasing over that in that sort of the health of the system overall.

Elyse, I would add and Glenn said this earlier, we are 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 new business penalty associated with it. So one of the things we obviously want to focus on, one of the reasons are one of our operating priorities, better serve our customers is because it is good for them and good for us. So the other part is, I think a lot of people focus on this. The percentage changes that are out there, that is important. The other part is, what'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 are just coming down closer to where we are as opposed to taking us out of the market.

Okay. That's helpful. And then my second question, you guys filed, you provided your updated catastrophe reinsurance program last night as well. It seems like your nationwide cover you have, the tower goes a little bit 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? And then as you think of placing in the Florida portion of your coverage, is there anything that would indicate that maybe what you are seeing in the pricing there would be different than when you placed that nationwide cover?

This is Mario. I will answer your question on reinsurance. So I will take you back to what Jess talked about in the presentation around how we think about risk return on capital. As reinsurance is one of the ways that we kind of optimize the risk and return profile of our homeowners business and we use reinsurance extensively. And we posted the details around our national excess of loss cat program yesterday and we did increase the top of our tower a bit. So we bought coverage up to $4.86 billion after a $500 million retention on a per event cover. In addition to that, we repeated in the catastrophe bond market what we started last year, which was, we replaced a cat bond that provides both excessive 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 on 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 have optimized the execution of our placements. So overall, we feel good about the program. With Florida, obviously, there have been a lot of a stories around the upward development on 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 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 and 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 1% to 3% range. How should we think about, I guess, that trend line versus the written premiums for the next few quarters?

Amit, let me provide an overview of how we establish financials and then Glenn can talk about the specific operations. So we give paid numbers and we have both, we have gross net paid incurred case reserves. We slice and dice our work 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 have 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 have talked at some length about on physical damage in auto insurance. I assume that's where you are at. And Glenn can talk about that component.

Yes. So physical damage, as you point out, has been elevated really over the last year and you see things across the industry and we are no exception to it. It's run around 6% and is for the quarter as well versus the longer term trend of around 4%. 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 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 higher. So 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. But we are 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 a 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 and this might be an easy answer here. I was looking at the expense ratio for Allstate brand homeowners and auto. And there seems to be some sort of variability in Q1. The Q1 number seem to be down versus Q2, Q3 and Q4. 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 and draw a trend line from one quarter to next because there's stuff that goes in and out every quarter. We make adjustment, agency bonus and these all kinds of different accruals. So I would note that. Glenn can talk about the work we are doing on expenses, which is in an environment where you are running, let's just take home 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 are doing at expense management.

Yes. We have been very focused on expenses. As Tom said, when you look at where we are and what levers you can pull and I think the greatest value we can provide customers is to deliver the product with lower expense. So we looked at our supplier management. We have a lot of really good work going on with our procurement. From an operational standpoint, in our claims area, the team has moved materially on their expenses over the last year-plus, they are down 500-plus people in terms of the overall operation and being able to manage in spite of our growth and the frequency trend creating kind of a flat claims reported trend. And we are looking at, as we go forward, we are 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 that clarification and good luck for the future.

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

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?

Yes. Let me go up a minute and then, Don can talk about some of the things we are doing at telematics. Glenn, may be you can talk about claims. So well, I would rephrase your question a little bit, if you give me the space to say, it's really about integrated digital enterprise. So it's using data, analytics, technology and process redesign to improve our effectiveness and our efficiency. So we have 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 is a variety of work we are doing around the company to build an integrated digital enterprise. One part of that is telematics. And that's getting information, accumulating information. I don't think that that's reduced our expenses. In fact, we have been investing heavily in telematics for the last nine or 10 years. And each year we invest more because we see it adding more value to our customers. And Don can talk about the overall view of why we are doing telematics and the benefits to our customers and our company. But maybe, Glen do you want to start with IDE and then Don with telematics.

Sure. Yes. So we really think there is a lot of opportunity going forward with telematics as you think about operational improvement. So for one and this is a go forward, this is not in place today but you look at the opportunity to report losses in real time. So eliminating the need for first notice a lot because we have instantaneous notification. And then opportunity is there in the, I will call it, relative near term, is not a far out proposition. And then we are already working with looking at information for liability determination. It's helping us understand what occurs in an accident, which can make you both more efficient and more accurate in what you are doing. But one other piece that I don't think was in the question, but I think it's really important is, we have a materially higher promoter score when people are using telematics. So you think about retention and you think about the interest that people have and the feedback they are getting to become better drivers and just the interesting thing with Allstate, it makes a big difference when we have those signed up with telematics.

Yes. So let me talk a little bit about the early side of it. So we talked last month about the value of telematics and how 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 driving behavior, which is an important component of adding value back for customers, both our customers and our partners' customers. So we have been investing in Arity. You mentioned the expense side of it. Arity is running at a very small loss at this point. But a large part of that is not just investment in things that we know how to do today, but it's product development as well. So we are investing in things that will create more value in the future for our customers. And that's probably roughly half of the investment we are 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 are collecting, how quickly we are 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 are 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 that will make them safer drivers.

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

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

So this pension expense only impacted that claims people as opposed to --?

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

Okay. Got it. Thank you very much.

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

Hello there? Can you hear me?

We can hear you now.

Okay. Thank you. So a question kind of stepping back at a high level. So we measure a lot of things. I guess I am curious if you measure foot traffic in and out of your brick and mortar stores that are out throughout the country, 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 at back maybe 10 years ago? Are more people coming into using that or less?

This is Tom. I can't give you 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 then they can call and put it on the credit card, 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 are saying is the trend over 10 years, a lot more people are comfortable using digital stuff. The capabilities are better. The phones are better. And so we are 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. But it depends on the office and the type of customers. So we try to be there for them when those people want to be there. So some agencies hold events for their customers. They hold their charity events there or they do planning processes or they go out, they don't go over to the office, but the agency goes to the school and talks about distracted driving. So I would say, in general, our effort though is to try to do as much as we can digitally that the customer wants to do digitally so that it lowers our cost 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. I will let others get in given the lack of time. Thank you very much.

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

Hi. Good morning. Thanks. In regards to the pension accounting changes, can you clarify how that helped underlying combined ratio? And does it change how we should think about the guidance range as well?

I will let Mario answer how it went through the combined ratio and the guidance. But I would only add just 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 your equity portfolio goes up or down in a quarter, goes to net income that used to be unrealized capital gains and didn't go through net income. And so this is just another step along the way going to sort of fair value on the overall result. Now in addition, it was kind of choppy the way it was before with pension settlement charges and this just spreads it out over a longer or spreads it out over time. You don't get these quarterly bumps or settlement charges when people decide they want to retire, which tends to be at the end of a year. So you are kind of dancing around in the fourth quarter is where they have a settlement charges. 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?

Yes. Maybe I will 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 planned assets and liabilities quarter-to-quarter, that runs through the income statement through net income, but it gets reported below the line. So it doesn't affect adjusted net income. The portion of pension expense that is in adjusted net income is really the period specific pension costs. Things like benefit accruals for that particular period, interest cost, those kinds of things. Those are still in adjusted net income. When you look at the differences, as I mentioned during the presentation, when you look at the difference between kind of the previous method and the current method of pension accounting for the first quarter of 2019 and we provide you a table in the 10-Q that gives you the difference in cost, in whole for the corporation 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. 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 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, I think, what it does do is, it lowers the amount of capital you carry for catastrophe events. But mathematically the probable maximum loss is really driven by large individual discrete events like, of course for hurricane or some large set of events, which are low probability. That's where you are 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. 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 cap 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 it to make sure it's less, right. So we have house and home, we do age rate groups. We do a whole bunch of things to manage that number, as Glenn said, because we are 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 from us looking from the outside in, should we just use your very long-term historical cat load as a guide mirror for making our projections? Thanks.

Yes. I would look at the long term percentage and just say that cats not predictable. And so I would come back to, on a rolling basis, as Glenn said, we have made money every quarter for seven years, except for one. I think, like in homeowners, you just kind of look at it on a longer-term basis. Just a one-year, three-year basis, you want to run a combined ratio where you are 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 that you have to put up and you don't get a lot of investment income at homeowners. So you should look at us and assume we can have a reported combined ratio that generates an underwriting profit. And just talked 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 co-variance 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 co-variance in it.

And Jonathon, we have time for one more question.

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

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

Yes. Thanks for the question, Josh. This is Glenn. I would say that there is no question, the complexity of cars is getting greater and we have seen the increase in cost to repair than that of 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 would 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 you have cars become disposable to where if it's in an accident, you throw it out and you get new one. I think there is benefit to be able to come up with more attractive and cost effective ways to repair these cars.

Okay. Thank you all. So our strategy is to properly grow market share in our protection products, making sure we have good strong results. We had a good strong quarter. We will 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.