Good day, ladies and gentlemen, and welcome to the Allstate Third Quarter 2017 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 and then zero on your touchtone telephone. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Mr. John Griek, Head of Investor Relations. Please go ahead.
Well, thank you, Jonathan. Good morning and welcome everyone to Allstate's third quarter 2017 earnings conference call. After prepared remarks by our Chairman and CEO, Tom Wilson, Chief Financial Officer, Steve Shebik, and me, we will have a question-and-answer session. Also here are Matt Winter, our President, Don Civgin, the President of Emerging Businesses, John Dugenske, our Chief Investment Officer, Mary Jane Fortin, President of Allstate Financial, and Eric Ferren, our Controller and Chief Accounting Officer. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q for the third quarter, and posted the results presentation we will use this morning in conjunction with our prepared remarks. These documents are available on our website at allstateinvestors.com. As noted on the first slide, our discussion today will contain forward-looking statements about Allstate's operations.
Allstate's results may differ materially from these statements, please refer to our 10-K for 2016, the slides, and our most recent news release for information on potential risks. This discussion will contain some non-GAAP measures for which there are reconciliations in our news release or our investor supplement. We are recording this call, a replay will be available following its conclusion, as always, I will be available to answer any follow-up questions you may have after the call. Now I'll turn it over to Tom.
Well, good morning. Thank you for joining us to stay current on Allstate's operating results. Let's start on slide two. Overall, we made excellent progress on our 2017 operating priorities. Financially, results were also strong in the quarter. Net income was $637 million, or $1.74 per share. Operating income was $1.60 per share. Improved profitability in auto insurance reflects the profit improvement actions initiated in 2015 and a decrease in the frequency of auto accidents. Homeowners insurance profitability continues to perform well despite higher catastrophe losses. Investment income increased in both the market-based and performance-based portfolios, as a result, Allstate Financial operating income improved to $157 million in the third quarter. Operating income return on equity was 13.9%, which is shown in the bottom right of that slide, a significant improvement over last year. We turn to slide three. We continued to deliver on all five operating priorities.
The first goal is to better serve our customers. We measure customer satisfaction by a Net Promoter Score, and it increased for most of our businesses. We also continue to build an integrated digital enterprise, as evidenced by the expansion of QuickFoto Claim, which reduces auto claim settlement times from days to hours and lowers our expenses. We continue to excel in our priority to achieve target economic returns on shareholder capital. This is demonstrated by a reported combined ratio of 95.2 for the first nine months of the year. Meanwhile, Allstate Annuities' income increased significantly due to investment results. The overall returns, however, are still low. Total policies in force increased to 78 million, largely due to SquareTrade and Allstate Benefits growth.
Excluding SquareTrade, property liability policies in force did decline, but the Allstate brand auto insurance new issued applications continued to accelerate and customer retention improved for the Allstate and Esurance brands. Allstate Benefits continues its 17-year track record of growth, with policies in force up 8.1% from the prior year. Market-based portfolio returns reflect stable income and higher valuations benefiting from favorable market conditions. The performance-based portfolio results were strong on private equity appreciation and sales of underlying investments. We're also investing for long-term growth. That includes businesses such as Allstate Benefits, SquareTrade, and our connected car platform at Arity. Slide four shows property and liability results by customer segment and brand. Let's start with the table at the top. Net written premium was $8.6 billion, a 3.3% increase from the prior year. The recorded combined ratio of 94.7 was 0.8 points better than the third quarter of 2016.
Included in these results were $128 million in non-catastrophe prior year reserve releases. The favorable reserve re-estimates reflected $260 million in Allstate Protection releases, partially offset by $88 million in reserve strengthening for discontinued operations related to the annual asbestos environmental reserve review. When we exclude catastrophes and prior year reserve re-estimates, the underlying combined ratio for the first nine months of 2017 was 85.2. The full-year result is now expected to be better than the favorable end of the annual outlook range of 87%-89% provided in February. As you know, our strategy is to provide different customer value propositions for each of the four customer segments of the property and liability market, which are shown in the table down below the graph there.
The Allstate brand in the lower left competes in the local advice and branded segment, and our most prominent competitors there are State Farm, Nationwide, and Farmers. Obviously, GEICO and Progressive target these customers as well, but they don't offer the same value proposition provided by our 10,400 Allstate agencies. This segment comprises approximately 90% of our total premiums written. Net written premium was 2.5% higher in the third quarter of 2017 compared to the prior year quarter due to a 3.2% increase in auto insurance. The underlying combined ratio was 84.3, with a favorable prior year comparison being driven by improved loss trends in auto insurance, which had a 91.2 underlying combined ratio, 4.7 points below the prior year quarter. Esurance, in the lower right, serves customers who prefer a branded product but are comfortable handling their own insurance needs.
GEICO and Progressive Direct have a larger share of this segment than their overall market share. The underlying combined ratio for auto insurance continues to improve relative to prior year and was slightly below 100. Esurance also now sells homeowners in 31 states. The net written premium for the quarter is up 50% from the prior year quarter. Growth in homeowners offers a significant opportunity to bundle products, lower average acquisition costs, increase retention, and build a stronger relationship with our customers. Encompass, in the upper left, competes for customers who want local advice but are less concerned about the brand of insurance they purchase. We're making good progress in improving underlying margins, but the business is getting smaller as we exit unprofitable markets and raise prices. In states where we're rate adequate, we are executing growth plans.
John will now go through Allstate, Esurance, and Encompass results in more detail.
Thanks, Tom. Let's go to slide five to cover the results for Allstate brand auto insurance. Starting with the top left graph, the recorded combined ratio for the third quarter was 94.9, which was 4.1 points better than the prior year quarter, reflecting increased average earned premium, lower frequency, and favorable prior year reserve re-estimates, but was offset by higher catastrophe losses, particularly from Hurricane Harvey. The underlying combined ratio of 91.2 in the third quarter of 2017 improved by 4.7 points compared to the third quarter 2016, driven by a 6.1 point improvement in the underlying loss ratio. The underlying loss ratio is now performing in line with the levels achieved in early 2014, prior to the rise in auto accident frequency. The chart on the top right shows the results of the broad-based profit improvement plan initiated in 2015.
Annualized average premium, shown by the blue line, increased to $1,015, while underlying loss and expense, shown by the red line, was flat. This resulted in a favorable GAAP of $89 per policy compared to the mid-teens experienced in the third quarter of 2015. Gross frequency trends for bodily injury and property damage coverages are shown on the bottom chart. Frequency continued to show improvement across both coverages in the third quarter of 2017, and favorable trends were geographically widespread. Externally, frequency trends in 2017 have moderated across the industry, and a portion of the frequency decline can also be attributed to the shift to longer tenured and higher quality risks as a result of the profit improvement initiatives. Earlier this year, we instituted a comprehensive program to increase policy growth as Allstate brand auto insurance has returned to historical margins.
Slide six shows the underlying drivers of policies in force for Allstate branded auto insurance. As you can see from the graph at the top, the overall policy count has flattened over the last two quarters. The bottom two charts highlight both the renewal ratio and new issued applications for Allstate branded auto insurance. The renewal ratio is a bigger influence on total policies in force than new business, and we remain focused on retention drivers that are within our control. Key retention initiatives include improving customer satisfaction and engagement while maintaining a stable pricing environment. We anticipate higher customer satisfaction coupled with more moderate auto insurance pricing to translate into higher retention. The renewal ratio of 87.7 was an improvement of 0.2 points from the prior year quarter. Growth in new issued applications continues to accelerate and increased 11.5% in the third quarter compared to the prior year quarter.
41 states, including our ten largest, experienced increases in new issued applications compared to the prior year quarter, with 29 states experiencing double-digit increases. Executing our trusted advisor strategy and expanding distribution capacity should also build growth momentum for the remainder of 2017 and throughout 2018. Slide seven shows similar information for Allstate brand homeowners. The top part of the page provides detail on our profitability results. The homeowners' recorded combined ratio was 81.3 in the third quarter, which generated $319 million in underwriting income, as Allstate's effective risk management strategy mitigated significant catastrophes in the third quarter. As a result of the comprehensive reinsurance program we have in Florida, a large portion of the property losses related to Hurricane Irma were ceded and did not impact operating profit. Over the last 12 months, $1 billion of underwriting income has been generated by this product line, net of catastrophes.
The bottom half of the page provides detail on policies in force, which declined 1%. The renewal ratio of 87.5 was 0.4 points lower than the prior year quarter. New issued applications growth did accelerate to 5.3% in the quarter as six of our ten largest states experienced increases. As auto insurance retention increases and new business increases, we expect to see a favorable impact on homeowners policies in force. Slide eight highlights results for Esurance. Esurance is focused on improving financial results and positioning the business to resume growth in total policies in force. The recorded combined ratio of 104.4 in the third quarter, shown on the left chart, was 5.4 points below the prior year quarter, driven by lower expense ratios in auto and homeowners insurance.
The 5.4 point expense ratio decrease reflects reduced homeowners advertising, improved customer service efficiency, and a smaller impact from the amortization of intangible assets. The auto underlying combined ratio is 99.8 in the third quarter, 2.2 points better than the third quarter of 2016, as shown below the graph on the left. Lower expenses, coupled with better frequency and severity trends, contributed to the improvement in underlying margins. Esurance policies in force, highlighted on the right chart, declined slightly compared to the third quarter of 2016. Policy growth in homeowners is nearly offsetting the decline in auto policies. New issued applications declined as a result of lower advertising, while auto retention improved by 2.9 points as we have focused on improving customer service and targeted more standard and preferred risk business. Slide nine shows similar information for Encompass.
Encompass generated $29 million of underwriting income in the third quarter, driven by underlying profitability improvement and lower catastrophes. Shown in the left chart, the recorded combined ratio was 89.2 in the third quarter. The decline in premium and policies in force in states with inadequate returns has impacted overall top-line trends, and targeted growth plans have been initiated in states that have attractive profitability prospects. Now I'll turn it over to Steve.
Thanks, John. Let's go to slide 10, which provides detail on SquareTrade. As you know, we acquired SquareTrade in January of this year to expand our product offering and distribution channels, particularly as it relates to cell phones, computers, and televisions. Attractive acquisition economics are predicated on achieving two primary objectives. First, continued growth of the retail business through existing partners and new retail distribution. Second, improving margins by leveraging fixed costs and reducing the utilization of third-party underwriting arrangements. The acquisition will create shareholder value by achieving these two goals. Additional value can be created by leveraging SquareTrade's platform for additional growth, such as expansion in Europe. SquareTrade made good progress on these key performance metrics, as shown on the bottom half of the page. Policies in force increased by 2.8 million from the second quarter to 34.1 million. Over the last 12 months, policies in force grew 32%.
The underwriting loss total of $29 million in the third quarter, reflecting $23 million of amortization of intangible assets related to the acquisition. When you exclude the amortization of purchase intangibles and purchase accounting adjustments, the adjusted operating loss was $2 million for the quarter. Slide 11 highlights our investment results. A lot has gone right for investors in 2017, which when combined with a proactive investment approach, resulted in a 12.7% increase in investment income from the prior year quarter. Investment income, shown in blue in the top chart, has contributed approximately 1% return each quarter, with primarily stable earnings from our market-based portfolio and increasing contribution from a performance-based portfolio. The GAAP total returns on our diversified $83 billion portfolio have been fairly consistent over the first three quarters of the year, with the third quarter contributing 1.5%.
Returns have benefited from purposeful asset allocation decisions, including our shift to performance-based investments. Variability in our total returns generally arises from changes in portfolio value between quarters, as reflected by the valuation component shown in gray. Substantially all asset classes registered positive returns, which is reflected in an increase in our fixed income and equity portfolio value. Fixed income valuations increased primarily from tighter credit spreads. Equity valuations also increased on prospects of higher global economic growth. The components of net investment income are shown in the lower left graph. The portfolio is largely comprised of market-based investments. The carrying value of the market-based portfolio makes up more than 90% of the total portfolio and approximately 75% of total investment income in the quarter. Net investment income for the third quarter was $843 million, $95 million higher than the third quarter of 2016.
This increase was driven primarily by performance-based investment income of $227 million. It also includes a favorable contribution from our market-based portfolios. Performance-based assets have higher long-term returns, which compensate investors for higher variability and lower liquidity. The funding for these investments is from long-dated liabilities and capital, which enables us to stay invested despite short-term valuation volatility. As a result, on a risk-adjusted basis, these assets generate more shareholder value than fixed income investments. Effective in January of 2018, equity security and cost method limited partnership interests will be measured at fair value, with valuation changes recorded in net income. This accounting change may increase the variability of our performance-based results in 2018 and thereafter. Turning to slide 12, Allstate Financial profitability increased, reflecting strong performance-based investment income and favorable mortality.
Premiums and contract charges totaled $593 million in the third quarter, an increase of 3.9% compared to the prior year quarter. Operating income of $157 million increased 67% over the prior year quarter, as shown in the bottom left graph. Life insurance operating income was $74 million, a $23 million increase compared to the prior year quarter, as shown in blue on the bottom of the slide. This is due to favorable mortality experience and higher traditional life insurance premiums. Allstate Benefits operating income was $28 million, or $3 million above the prior year quarter. The increase was primarily due to higher premium and contract charges, partially offset by higher contract benefits. Annuities operating income of $55 million in the quarter was an increase of $37 million compared to the prior year quarter, reflecting the continued benefit of our performance-based investment strategy, as well as lower contract benefits.
Currently, regulatory required capital levels are substantially higher for performance-based assets than fixed income investments. This suppresses reported returns on capital as it relates to the immediate annuity business. In our view, there needs to be a better alignment of capital requirements with economic outcomes. This will reduce the amount of capital utilized for immediate annuities, and hence raise reported return on capital. Slide 13 provides an overview of our capital strength, financial flexibility. As you can see from the box at the top, we have delivered excellent returns, increased book value, and maintained a conservative financial position while increasing shareholders' ownership in the company by reducing the number of outstanding shares. Operating income return on equity was 13.9% for the 12 months ending September 30th, 2017.
Included in this result is a pension settlement loss of $86 million pre-tax, which was recorded in the corporate segment in the third quarter. We returned $1.24 billion to common shareholders through the first nine months of the year. This includes repurchasing 10 million shares of our common stock, or 2.7% of those outstanding at the beginning of the year. We remain on track in executing the $2 billion share repurchase program that was approved in August. Lastly, we discussed in our second quarter earnings call, we will adopt a new reporting structure in the fourth quarter that will expand our reportable segments from four to seven.
Allstate Protection will continue to include the traditional property liability businesses that address the four segments of the consumer market, Allstate Insurance, Encompass, and Answer Financial. A new service businesses segment will include operations that have a larger portion of earnings from services, but generally have less underwriting risk. This will include SquareTrade, Arity, Allstate Roadside, and Allstate Dealer Services. Allstate Financial will be split into three segments, Allstate Life, Allstate Benefits, and Allstate Annuities, which have different growth and return characteristics. This new segmentation will have an impact on goodwill impairment testing and the aggregation of Allstate financial reserves for sufficiency testing. We estimate the goodwill impairment of approximately $125 million will be recognized in the fourth quarter related to the goodwill allocated to the Allstate Annuities reporting unit. The discontinued lines and coverages and corporate other reporting segments will not be impacted.
More information on this is available on our Form 10-Q we filed yesterday. I'll ask Jonathan to open the line up for your questions.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. We also would like to ask that you please limit yourself to one question and one follow-up. You may get back into the queue as time allows. Our first question comes from the line of Jay Gelb from Barclays. Your question please.
Thank you. Can you discuss the shift toward growth in the Allstate brand auto business and whether the underlying underwriting margin can continue to improve in that scenario?
Well, good morning, Jay. Matt will cover the growth plans that were initiated earlier this year. As you think about where our situation is, I think it's important to look at the external environment. In terms of what's happening externally and what happens to your underwriting margin. Obviously, the external environment is a big component of what your competitors are doing, and as our read of the competitive situation is our competitors are either taking or need to take increased prices higher than ours, based on where we're at today, which should put us in a good competitive position. We think we're well positioned to do that. Matt, you want to talk through what we're doing?
Sure. Good morning, Jay. It's Matt. Thanks for the question. The growth plan is, I'm going to oversimplify it, probably, but first understand that it's in two large buckets. Remember, when we refer to growth, we're not only talking about new business growth, we're talking about increased retention, because as John mentioned in his earlier comments, retention can actually have a greater influence on overall PIF growth than new business. We have five buckets of growth initiatives under the new business side and three under the retention side. On the new business side, it's pretty basic. We're trying to do five separate things. Number one, increase distribution capacity. That's more exclusive agencies, more licensed sales professionals, especially in under-penetrated areas like the Heartland and parts of the U.S. where we do not have appropriate level of market share.
Number two, we want to make that distribution more productive and efficient, and that's through the use of technology, use of data and analytics, better lead generation, and more sophisticated segmentation. The third is to get that distribution more engaged and investing in their businesses, and that's through some redesigned and enhanced compensation and recognition programs and additional support and coaching. Four, we want to provide them better priced and higher value products to sell. That's using more sophisticated pricing techniques, better underwriting to improve their close rates. Fifth is to drive more quotes to them. With better marketing and more segmented marketing. On the new business side, it's pretty basic. More points of presence, capable of quoting more, and closing at higher close rates. On the retention side, there's basically three components.
Better onboarding, so that their first experience with Allstate after they make the purchase decision is a positive one. Better advice and service throughout the course of their relationship, and that means things like annual reviews of their coverage. It means appropriate amounts of touch points with the customer to ensure that they're happy with their service. Finally, on retention, less rate shock, more stable rate environment, so less triggers for shopping. We think the combination of all the work we're doing on the new business side and the retention side has started to show up in our numbers. That's why you're seeing the increased retention and new business rates, and we expect that to continue as we further execute on the growth plan.
Matt's comment is appropriate around 90% of the business called the Allstate brand. If you look at the pipeline of where the other brands are, the next one up would be Esurance. Don maybe can make a comment on that. Encompass is farther behind in the process, we won't really go through any growth plans on that.
Yeah. On Esurance, I'm actually really proud when you look at the numbers at the underlying combined ratio. The continued improvement over the last couple of years has been strong. In the third quarter, we lowered the underlying combined ratio again by 5.5 points or so over last year. It's a combination of the underlying loss ratio improvement, and a lot of it is expenses. A little over half is advertising, the rest of it is throughout the system. The improvement has been good. We're also doing a couple of other things I think that are positioning the company so that we can go back into kind of growth mode. One is we've continued to invest in improving our pricing sophistication, which has helped the loss ratio, and positions us better.
We're also taking much better care of our customers, whether it's onboarding or the way we interact with them going forward. Our MTSS is improving substantially. You don't see that, you do see our retention going up, and in the investor supplement, you can see a pretty dramatic improvement in retention year-over-year. What we don't like at this point is that the policy, the PIF, is basically flat. I could argue with a 26% year-to-date decline in advertising, that's not horrible, the reality is it's our growth vehicle. I think what we've done now is really position the company to be at a much more profitable, much more attractive level from a profitability point of view. Now we're really expecting to pivot more back to growth. I don't expect us to give up the gains we've gotten on the profitability.
I think the work that we've done that's led us to this point, will position us well, and I would expect next year to begin to grow the business again. Maybe not the 20% or 25% like we were three or four years ago, we're going to get back to growth.
Thanks for those thorough answers. My only other question was with regard to the outlook for Allstate's reinsurance protection in 2018. Clearly, the company benefited from the smart purchase of substantial reinsurance protection in the wake of Harvey and Irma, and just trying to get a sense of what your thoughts are going into next year.
Jay, obviously, our risk management programs which we've put in place over the last decade served us well, because we still made $300-plus million of underwriting income in homeowners this quarter despite the high cats. The reinsurance really was related to Irma in Florida because we had bought down so low there. I think there's still a lot of alternative capital in the reinsurance market. We don't expect to see prices grow an awful lot, but we won't know that till we get to next year.
Thank you.
Thank you. Our next question comes from the line of Paul Newsome from Sandler O'Neill. Your question, please.
Good morning. I have a somewhat related question on the growth potential. Assuming that your growth efforts work, and no reason to think not, how should we think about the tenure impact
On the auto and on the home book, respectively.
Paul, I just want to make sure I get it right. Do you mean tenure as in T-E-N-U-R-E or tenure as in-
As in the aging of the book and how that changes profitability as-
Okay. Yeah.
Paul, it's Matt. It's a really good question, because obviously, one of the impacts of our profit improvement plan that we executed over the last couple of years in response to the initial frequency spike was that we took segmented rates, and in many cases, not only did that drive out the worst-performing segments, but it lowered our overall new business growth and therefore, lowered our new business penalty. It lowered a penalty, but it comes at a huge cost. As we grow, we expect to have that "new business penalty" pick up a little bit. We'll have a lower tenured group coming into the overall book. The difference is, though, we're now priced rate adequate in all of the segments. We feel very good that we're appropriately priced, and we're moderating it, and we believe the quality of that new business will be quite high.
We believe that while there will be a lower tenured group coming in and the associated new business penalty, we think it's very manageable, and we think that we're set up perfectly to absorb it and deal with it.
Great. Thank you. I guess my second question relates to the SquareTrade. Any update on moving some of that business from your partner's books to Allstate's paper?
Yeah. There were a couple of contracts domestically. The larger of those contracts was transferred to Allstate. We're taking the underwriting risk. That was in the second quarter. I expect the other contract will transfer towards the end of this year, beginning of next year.
Great. Congratulations on the quarter.
Thank you.
Thank you. Our next question comes from the line of Sarah DeWitt from JPMorgan. Your question, please.
Hi. Good morning. Wanted to get your thoughts on the outlook for homeowners' insurance pricing following the third quarter catastrophes.
Sarah, are you speaking about ours or the industry in total?
Both. Do you think pricing could go up following all the hurricanes?
Sarah, it's Matt. It's a good question. I think what we discovered over this year with two back-to-back Category 4 hurricanes and all the associated issues that we've had this year is that our product design and our risk management, our PML work, our reinsurance work, our risk concentration work, and our consistent diligence on pricing served us well. We feel quite good about it. As you saw, we did very well. We had good underwriting income in the quarter despite what was an exceptionally difficult timeframe for homeowners. We don't feel like we have a need to react to what we've seen. We, of course, will continue to analyze it and to ensure that we understand the dynamics in severe weather and the cats and the cat load as appropriate. Right now, we feel like we're in a very good place.
Our House & Home product served us very well. The design worked well. We now have about 90% of our new business in that product and about a third of our total book. We're very pleased with the performance of that during these weather events, not only the catastrophes, but the additional weather events that we've had this year. For Allstate right now, it's pretty much steady as she goes and continue to analyze increased amounts of data as it comes in.
Okay, great. Thanks. Just on Allstate Financial, how should we be thinking about the run rate earnings in that business? In the last two quarters, we've been running over $150 million of operating income. Prior to that, it was only a little over $100 million. Any help you could provide there would be helpful.
Hey, Sarah, it is a good question because Allstate Financial did have a good quarter. Mary Jane can talk about both the various components of it, both life insurance and then annuities. I would say while the operating income was good in both of those businesses, we'd still like to do better in terms of return on the annuities book. That's still something we have to work on. We're very pleased. Mary Jane can talk about the actual results we had.
Thank you. From an earnings perspective, we'll start with the annuities. In terms of the annuities, the way you need to think about it is really the performance-based investments were very strong in performance in the quarter. They generated about a 15% return. As we look out, we would expect that asset class to generate returns in more in the 10%-12% range. When you think about the annuity line of business, consider that performance-based asset class continuing to moderate down to a 10%-12% level. The level we've experienced in the last two quarters has been higher than we would expect. The quarter also in annuities benefited from favorable lower contract benefits, favorable mortality. That can tend to fluctuate from period to period, but that did impact the quarter by about $10 million on a year-over-year basis.
In terms of the life insurance, we did experience favorable mortality in the quarter. We have been running better than expected, this too, mortality can tend to fluctuate from period to period, so you should expect to see the life business earnings come back down as mortality reverts back to an expected level. The life business and the benefits business, we run those to a 10%-12% return target, so you should expect to see returns in that range as we move forward. As Tom mentioned on the annuity side of the house, we're continuing to manage that block for long-term economics. You will see some variability in the results from period to period as that performance-based portfolio can fluctuate from quarter to quarter.
Great. Thank you.
Thank you. Our next question comes from the line of Amit Kumar from Buckingham Research. Your question, please.
Thanks, good morning. Two questions, if I may. The first question relates to the discussion on external factors contributing to frequency improvement. If you go back to slide five and look in the trend line, what should we use as a starting point if I was trying to exclude these external factors?
Amit, I think I got it all. It's a little light in terms of the voice coming through. Let me see, and then I'll turn it over to Matt. The reason we talked about the external factors was not because we thought that that was a primary driver. We do think that our profit improvement actions, which were broad-based and comprehensive, drove the thing. It's really about the external environment, the question Jay had raised, which is when you're looking forward to growth, you have to look at the external environment. One is the competitors, which we talked about, where are they in pricing? The other is where are you just in general frequency trends?
If general frequency trends are moderating from what we saw in 2015 and 2016 in terms of percentage increases, that gives us more opportunity to grow without the new business penalty that was brought up by Paul. Matt, maybe you can talk a little more specifically about the attribution.
Sure. Let me just point out, Amit, that that's always true with frequency, is it's always a product of both internal and external factors. We always talk about the fact that when we had the spike in frequency, we attributed it to miles driven, which was a product of the unemployment rate as well as lower gas prices. We have weather that influences it, and you have where you are in your own cycle as far as the tenure of your book, what segments you've been growing in, and things like that. I think the way to think about it, if you're trying to figure out how is Allstate doing versus the competitors, look at some of the industry benchmarks. I'd encourage you to look at FastTrack. The last FastTrack that came out was the second quarter 12-month mover.
That showed Allstate's year-over-year change in physical damage frequency at about three points lower than the industry. If you think of the industry as a product of external and their own internal factors, and you think of us, we look at that and say, assuming the external factors are a constant, that shows the benefit of the work we're doing on our internal factors such as tenure and quality of the business.
That's helpful. The quick follow-up to that is, I guess someone else was also asking this question on pricing. Given your commentary regarding, let's call it the excess margin that was earned this year, do you think it gives you additional room to adjust pricing downwards to generate more growth in 2018? Thanks.
Amit, just to make sure we get the words right, we don't view margin as excess or short or anything. We thought we earned a good return on our auto business. We think the work we've done has been accurate, and it's fair to our customers as opposed to excess. You wouldn't see in our history times when we've lowered prices on purpose to reflect short-term swings in frequency.
Got it. Thanks for the answers.
Thank you. Our next question comes from the line of Robert Glassman from Janney. Your question, please.
Good morning, Allstate. Tom, can you either re-give or give what your gross catastrophe losses were, what you ceded to the reinsurers in the quarter?
Gross. We ceded $90 million to our reinsurers in Florida.
In Florida. Nothing in Harvey?
Nothing in Harvey. Harvey was right at the cusp. We had $500 million retention, we had $500 million. There's nothing to cede to them.
Your reinsurers have done pretty well with you, and that's why you said you don't think your reinsurance costs will go up that much. Is that a fair characterization?
Hard to tell what happens in the reinsurance market. Certainly, we're one of the largest purchasers, but we're not the biggest driver. As you know, in Harvey, there were a lot of commercial losses. There's a variety of other things going on. At this point in the cycle, it's mostly people trying to use things to talk about what they want to happen as opposed to what will happen. We think our reinsurers and our programs have been well compensated. We think it makes sense for us because we carry less capital because of that, and we have less earnings volatility because of that. We like the program we have set up. You know this, I'll just reiterate it, that we have a very staggered and stretched-out reinsurance program, goes three to five years, some of these programs.
Any change in pricing in any given year gets muted in terms of its impact on our reported financials.
Okay. If I could squeeze one more in. These were great results, and frequencies for the industry sounds like it's a little bit better than industry. In retrospect, did you over-sedate the patient in your auto strategy and maybe should've grown a little bit faster? You're comfortable with where your sort of top line is?
I'm really pleased with the results. I think our team executed extremely well with great precision. I do remember, I think, in our call in the first quarter of 2015, you thought we were growing too fast as we were seeking to slow the process. We always seek to please. Just give us some time to get back to growth mode.
Guilty as charged. Thanks.
Thank you. Our next question comes from the line of Brian Meredith from UBS. Your question, please.
Yeah, thanks. A couple quick ones here for you. First, I'm just curious, Tom and Matt, did the hurricanes have any beneficial effect on kind of your underlying results, underlying combined ratios or frequency, x CAT typically? You've seen it in the past where typically, there is some decline in frequency during or post a hurricane.
It's a question that we always ask ourselves. We look at all the numbers. I would say it's really hard to tell. The best way to get around that really is to look at the frequency and severity numbers over longer than a quarter. That's why we always talk about homeowners, and we'll say latest 12 months, because we want you to understand that there are fluctuations. It's really hard to tell what happens with claiming behavior and whether somebody doesn't call us because they think we're too busy. We tend to find people do call when they have a problem. It doesn't normally show up there, but it's really hard to tell.
Got you. Another quick question for you, Tom and Steve. Your stock's trading at a real healthy price to book multiple right now, rightfully so, given your terrific results. I guess from a capital management perspective, when it gets to these levels, is there any kind of thought between sending capital back to shareholders via a special dividend instead of share buyback?
Well, let me make a comment on the valuation first, and Steve can talk about how we think about capital and deploying it in our existing businesses for new opportunities and then returning to shareholders. As it relates to the current valuation, I would point out that there are some companies that look like us that have substantially higher book value multiples. Like I wouldn't mind three times. It's also true when you look at the broader market.
Yeah. As you know, and we've talked about previously, we look at the capital we generate, and we look at how much we need to invest in the business to grow it, how much we've talked about for a fair amount in this call. We look at opportunities we have in terms of growing it, not only organically but inorganically, to try and once again to grow. SquareTrade's an example of that. We look, we have to pay our dividends, obviously, that we think is an important part. What's left, we look and say, what do we do with that? Generally, we don't want to hold it for a long period of time. It depresses our returns. We give it back to shareholders, or we find a use to put back in the business.
We've not found special dividends to be an attractive way to do that. We tend just to buy shares back. If the world changed and for some reason, whether it was tax policy or something else that led us to do it another way, it is our objective to give it to shareholders in the way that best meets their needs.
Great. Thanks for the answers.
Thank you. Our next question comes from the line, Meyer Shields from KBW. Your question, please.
Yeah, thanks. Good morning. Tom, I'm trying to clarify just my understanding of the strategy in terms of the speed of incorporating things like benign frequency into pricing. Is there any imperative to do that maybe more frequently with smaller moves because you also talked about pricing stability?
Meyer, we're always looking at pricing at an extremely granular level. Matt can give some points, but I would say we think of our business like a machine. It operates at an extremely granular and proactive way on both frequency and severity. Matt can talk about what they've been doing on frequency specifically, but.
Yeah. Thanks for the question. Look, it's always our objective to keep pace with changes in frequency and severity and overall loss cost in a way that maintains our margins and is as least disruptive to our customers as possible. When you have a large spike in either frequency or severity, our belief is we have to maintain margins and get back to rate adequacy as quickly as possible. We will take larger rate amounts as necessary and as justified when we have to maintain those margins. We're right now in a much different rate environment than we were in 2014 and 2015. It appears that we're able to take what I would call maintenance rates, inflationary, normal inflationary damage cost and severity increase rate adjustments. That tends to be smaller, less disruptive, and does less damage to our retentions.
That is our objective whenever we can.
Okay, thanks. Thank you. The second question, also Tom, in your prepared comments, you talked about the main competitors to Allstate being State Farm, Nationwide, Farmers. Is that true both on the business that you win and the business that goes to competitors?
I'm sorry, I missed the last point there, Meyer.
I'm sorry. When you talked about the most significant competitors to the Allstate brand and the exclusive agency distribution channels-
Yeah
Are those the companies that both provide your wins and take home business from Allstate, or are the mixes of those two categories different?
Oh, yeah, it's a really good question. When we look at the foursquare, we look at people's market share in that segment relative to their overall market share in the whole industry. In that lower left, branded local advice, State Farm, Farmers, Nationwide, and Allstate, we have a higher index market share than our overall market share. That is also true with respect to who we get business from and who we lose business to in that segment. Matt's team tracks that. We track it by state, by risk class. We look at our quote rates by competitor. We look at our close rates by competitor. Yeah, in fact, State Farm, as you would expect in that lower left, is the other large, significantly branded business. Not that Nationwide and Farmers are not, but they're the biggest, obviously, in that sector.
Their results do impact what happens to us. If you look at their results, they've been losing money in auto and home. We think we're well-positioned to grow in that business. It doesn't mean that GEICO and Progressive and everybody isn't trying to get the same customers. I'm not trying to imply like they've been just buying those people on the street corner. The customer value proposition, the advertising tends to drive increased allocation in those specific segments. We compete with Progressive, GEICO, for those customers as well. I don't want to act like they're the only people, but we just over-index a little bit in that segment. That's why we believe we have an ability to grow in that segment.
It's not just GEICO and Progressive we have to beat, it's Farmers, Nationwide, Progressive, and the hundreds of other small regional carriers that are out there that we can get business from.
That's very helpful. Thank you so much.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Tom Wilson for any closing comments.
Let me just close with a couple of comments. First, we're going to stay focused on achieving balanced operating performance, and looking at our five operating priorities. We'll stay proactive, disciplined, make sure we create economic value for our shareholders. Thank you all for participating, and we'll talk to you next quarter.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.