Good afternoon. We've made it here to the last slots of presentations for the Raymond James Institutional Equity Conference, and I'm pleased to welcome back The Allstate Corporation. Allstate has this conference ever since I first joined Raymond James back in 2000. We certainly appreciate your support and participation in the conference. It's been a great experience, and the stock's been a very good stock for our customers to own. I think it's particularly noteworthy for the company to be here today, especially in light of some of the recent data around industry pricing for auto insurance. The CPI data that's published on a monthly basis by the Bureau of Labor Statistics came out for January and reported that auto insurance pricing nationwide for consumers is up almost 8.5%. This would be the highest month-over-month increase since dating back to 2003.
Clearly there's some moving pieces in the industry, and Allstate, as a market leader, is clearly positioned to benefit and take advantage of these opportunities. For management today, we have Mark Nogal and John Griek, who serve in the investor relations functions for Allstate. We have Mario Rizzo, who is the Chief Financial Officer. With that, I'd like to turn it over to Mario.
Thanks, Greg. Good afternoon, everybody. First off, thanks for taking the time to learn more about why Allstate's an attractive investment opportunity. As Greg mentioned, John Griek, who leads our IR team, is joining me today. Before we begin, John, if you want to click to the first slide. This statement says that I may be making forward-looking statements and references to non-GAAP measures today. This presentation and more specific information is on our website at allstateinvestors.com. Going to slide two. We delivered strong results in 2017 and are positioned for profitable growth. Net income for the full year was $3.1 billion, or $8.36 per share, which included a one-time $506 million increase to net income in the fourth quarter as a result of the recently passed tax legislation.
The one-time increase was due to a reduction in our net deferred tax liability, principally related to deferred acquisition costs, which had already been expensed for tax purposes at a higher rate, as well as unrealized investment gains. Adjusted net income of $2.5 billion was 34% above prior year, reflecting strong performance from our market-facing businesses and investments. Auto and homeowners insurance margins remained strong. Performance-based investments had outstanding results. Catastrophe losses of $3.2 billion were 26% above the prior year, but were offset by favorable prior year reserve releases and strong underlying results. Adjusted net income return on equity was 13.4%, a significant improvement over last year. This operational strength will support accelerated growth in 2018 while we maintain very attractive returns on capital. If we go to the next slide, we also had good results on our five operating priorities in 2017.
By better serving customers, the Net Promoter Score increased. Customer retention for Allstate brand auto improved in the second half of the year, and Esurance auto and homeowners insurance retention increased throughout the year, which, if maintained, will increase growth in 2018. We continue to deliver excellent returns on shareholder capitals, as you saw on the last slide. Allstate Life and Benefits generates attractive returns, and annuity income was up, though returns remain low. Total policies in force grew to 82.3 million in 2017. Property liability policies in force declined year-over-year due to the continued impact of the profit improvement actions we started in 2015. We expect these lines to return to unit growth in 2018. SquareTrade policies grew 10 million, or nearly 36%, in 2017, and we continue to be pleased with the performance of the business since we closed on the transaction in early 2017.
Allstate Benefits continued its 17-year track record of growth, with policies in force increasing by 7.4% in 2017. Total return on the $83 billion investment portfolio was 5.9%, reflecting strong results from both the market-based and performance-based portfolios. We also made progress in building long-term growth platforms. SquareTrade's first-year performance was very strong across the three factors of success we've laid out previously. The first is to rapidly grow domestic retail customers. Second, raise profitability and returns on capital deployed. Third, to create a sustainable growth opportunity beyond the U.S. retail market. In addition, Arity signed its first third-party insurance customer to expand its platform outside Allstate entities. If we go to the next slide, our objectives in 2018 are to accelerate growth while maintaining strong returns. Our operating priorities for 2018 are consistent with those that we set out for in 2017.
The first three priorities, better serve our customers, achieve target economic returns on capital, and grow the customer base, are intertwined and ensure that the corporation has multiple paths to profitable long-term growth. In 2018, the Allstate brand, Allstate Benefits, SquareTrade, and Esurance are expected to contribute towards growth. These priorities will generate shareholder value through accelerating profitable growth in our core businesses, further leveraging connected car capabilities and investment expertise, and entering high-growth markets through our service businesses segment. We will execute on these growth initiatives while continuing to generate very attractive returns on capital. If we go to the next slide, you can see that our strong profitability and a return to growth in the property liability business will create additional shareholder value.
As shown in the top left chart, Allstate Protection had great results in 2017, reflecting improved margins in auto insurance, shown in blue, as we successfully responded to an increase in auto claim frequency in 2015. Homeowners profitability, shown in gray, declined last year due to elevated catastrophes, but still generated over a half a billion dollars in underwriting income, continuing a string of annual recorded combined ratios below 100, dating back to 2011. Favorable prior year reserve re-estimates of $621 million, shown in orange, were primarily due to expectations of lower loss costs than previously estimated, mainly in auto insurance injury coverages. Accident years 2015 and 2016 contributed to this net benefit, which means the blue bars would have been higher in both of those years. The top right chart shows Allstate brand auto insurance property damage gross frequency.
You can see the large increase in frequency in 2015, which we quickly reacted to by increasing prices, tightening underwriting, and decreasing new business levels. You can see the large decrease in 2017. Since 2013, year-over-year changes in gross frequency have been as high as +6% and as low as -5%. Last month on our earnings call, there were a number of questions on why the underlying combined ratio outlook we provided for 2018 was above the actual level in 2017. Let's look at this issue in more detail. The box on the bottom shows the underlying combined ratio guidance we have provided over the last 5 years, which has been from a low of 86 to a high of 90. This range, plus expected catastrophe losses, generates very attractive returns on capital.
If you look at the top right-hand graph and the bottom graph at the same time, you can see that when frequency variances are low, such as in 2013 and 2014, or decreases like it did in 2017, we tend to be at the bottom or below the bottom end of the range. When frequency unexpectedly increases a lot, like it did in 2015, we tend to be at the higher end of the range. There are many factors that go into establishing the annual guidance range, some of which are within our control and reflect how well we are operating the business, while other factors, such as frequency, are more subject to externally driven volatility that needs to be factored into the overall range as well.
In 2018, the property liability business is expected to have an annual underlying combined ratio of between 86 and 88 as we accelerate growth while maintaining strong returns. This performance, combined with growing policies in force, creates additional value for our shareholders. If we go to the next slide, the Allstate brand business is our largest and is executing on a multifaceted profitable growth plan. The Trusted Advisor initiative will continue to better serve this customer segment and is expected to deepen household relationships, raise retention levels, and increase policy growth. Growth investments in agency deployment and marketing are being increased to accelerate new business production. We are building an integrated digital enterprise which uses technology, data, advanced analytics, and process redesign to improve effectiveness and efficiency across the entire business system.
As an example, QuickFoto Claims uses pictures sent to us by customers to settle claims, which enabled us to shut down drive-in facilities and dramatically reduce the amount of time our adjusters spend driving around. This improved both efficiency and the customer experience as claims are now settled in hours instead of days at a lower cost. We are also focused on broadening our use of telematics pricing expertise to improve growth and our competitive position. Offering new and innovative products provides additional growth opportunities. On March 1st, we entered into an agreement with Uber Technologies to provide commercial auto insurance in three states. Our business relationship with Uber expands Allstate's leadership in personal transportation solutions into commercial insurance, which is an increasingly important market as ride-sharing continues to grow. Growth momentum is building for Allstate brand auto and homeowners insurance.
Starting with the graph at the top, overall policies in force grew sequentially in the fourth quarter of 2017 for both auto and homeowners insurance. The bottom left chart highlights both the renewal ratio and new issued applications for Allstate brand auto insurance. The renewal ratio is a bigger influence on total policies in force, and we continue to focus on improving the customer experience. The renewal ratio stabilized in the first half of 2017 and improved sequentially the last two quarters. Excuse me. In the fourth quarter, the renewal ratio was 87.8, an improvement of 0.4 points from the prior year quarter. New issued applications grew year-over-year for four consecutive quarters, increasing 10.3% in the fourth quarter of 2017 compared to the prior year quarter. Executing our Trusted Advisor strategy along with expanding distribution capacity, engagement, and efficiency will help build growth momentum throughout 2018.
The bottom right chart shows the same trends for Allstate brand homeowners insurance. Similar to auto insurance, the renewal ratio showed significant improvement in the second half of 2017, and in the fourth quarter was in line with the prior year quarter. New issued applications growth accelerated to 6% in the fourth quarter of 2017. As auto insurance retention and new business have improved, we are seeing a favorable impact on homeowners policies in force as well. Allstate's life products complement the property liability business, generate good returns, and deepen customer relationships. Allstate Benefits has delivered a compound annual growth rate of 8% since we acquired it 17 years ago. Service Businesses, a new reportable segment, includes a broad range of products and services that further meet customer needs and enhance our customer value propositions.
In its first year under Allstate ownership, SquareTrade had very strong performance, with policy growth of 10 million items or nearly 36%. In the fourth quarter, Arity established relationships with other insurance companies and shared mobility companies, expanding its platform outside of Allstate entities. Allstate's Drivewise telematics product is expected to give us a substantial competitive advantage through more sophisticated pricing and a better customer value proposition. Allstate's approach is to establish continuous connections with customers through either onboard diagnostic port devices or their mobile phones. This allows us to provide customers a more accurate price and lead to more profitable growth, just as our introduction of financial responsibility pricing did 15 years ago. Drivewise will also include a broad set of consumer offerings that improve the driving experience later this year.
For example, customers can review their driving, find where their car is parked, track vehicle diagnostics, and earn rewards for being a safer driver. We were early into telematics, having initiated Drivewise in 2012, and we are currently connected with about one million customers. Shareholder value is also created by disciplined, balanced, and proactive investing. We manage our investment portfolio on a segmented basis. The market-based core strategy accounts for 80% of the portfolio and is largely a high-quality fixed income portfolio that generated $2.4 billion of investment income last year. Market-based active is 11% of the portfolio. Our goal here is to outperform the market through active management by leveraging our capabilities in public markets. The performance-based portfolio focuses on idiosyncratic returns and is largely private equity and real estate holdings. This portfolio had great returns last year, generating over $900 million of investment income.
In 2017, the aggregate portfolio produced a 5.9% total return. We continue to believe that Allstate is an attractive investment opportunity. We have a competitively differentiated strategy, generate attractive long-term returns from our broad-based business model, and are focused on creating economic value for our shareholders. Our return to profitable growth in the property liability business, while executing on the other elements of our strategy, will continue to generate sustained shareholder value. We also remain financially strong and provide meaningful cash returns to shareholders, having raised our quarterly dividend by 24% in the first quarter of 2018 and repurchased over 26% of our outstanding shares in the last six years. With this as context, let's turn it over for questions.
Okay. Well, two of the other companies you follow announced a merger or actually, it will be Kemper's acquisition of the affiliate company, Admiral. Clearly they're trying to move into the non-standard auto space in a more meaningful way, which makes them a solid entity. Can you talk to us about your views of the non-standard auto market? I know you don't look at it necessarily the way they do, but I think you can provide some perspective on where you see growth in that market.
I guess where I would start is there was a time when we did break out non-standard auto in our reporting and our disclosures. We've since created a total auto view because I think when you look at our risk segmentation and our pricing, there's been a blurring between what was traditionally part of the non-standard market and the standard market. We believe with a broader offering that really can appeal across the entire spectrum of the risk universe, that a view of total auto just makes more sense for us.
Part of that market is what would be considered non-standard, but I think our approach is one where we approach the auto market in aggregate and then believe our capabilities from a risk segmentation and a pricing perspective allow us to play across the entire spectrum as opposed to carving out non-standard auto from standard and preferred risk. The other comment I'd make is if you look at our Esurance business, which prior to our acquisition, was principally engaged, I think, in the non-standard market. Again, we've made a conscious effort to broaden its risk appetite and its capabilities to, in addition to playing in that space, to also be able to attract the more traditional standard and preferred risks.
When you look at the improvement in retention and some of the favorable operating measures we've seen in Esurance, we've been pretty successful at broadening their risk appetite as well. I think it's a viable market. It's one that I think we continue to be positioned to play in, but we do it really across the spectrum of the entire auto universe as opposed to signaling it out. I don't know, John, if you want to add anything to that or?
I would just say from a bottom-line perspective, even Mario's point on total auto and how we manage it from a claims perspective, it's the same kind of process from a claim settlement standpoint.
Just a dovetail on that. In context of Esurance, which you brought up. The street view may have been that that needed to give an opportunity to drive growth. You talked about new business applications in the auto, Allstate brand showing some improvement. When we think down just the next 12 months, maybe think about a 5-year sort of outlook. Do you anticipate more growth coming in the Esurance brand or more in the Allstate brand? Put some context around these different brands, different points of distribution.
Maybe where I'll start is if you look at our four-square strategy, which where we segmented out across both our three underwritten brands, Encompass, Allstate, and Esurance, Answer Financial, which is more of an aggregator, and it's risk that we earn fees on as opposed to underwriting. If I start in the top left on Encompass, I'd say there's a nuanced strategy there where we're still in the midst of implementing some pretty meaningful profit improvement actions, both from a pricing, underwriting, risk selection perspective, but that there are states that we feel pretty good about that from a rate adequacy perspective, and we'll look to grow. In the grand scheme of things, we don't anticipate growth by Encompass in 2018.
I think if you go down into the Allstate brand, we are clearly focused on returning to positive unit growth in 2018. I think you saw the beginnings of that kind of manifest themselves throughout 2017 as new business production was up in the 10-ish% range for much of the year. Even more importantly, we started to see retention improve in the back half. We expect a combination of that as well as some continued investments in growth, notably in marketing, and in distribution expansion to drive unit growth in the Allstate brand in 2018. On the Esurance side, we're far more comfortable with where profit levels are today relative to where they were a few years ago. We expect Esurance to contribute policy growth this year as well.
Much of the improvement you've seen in Esurance has come in the expense ratio as we've backed off marketing investment as we've looked to improve margins. We feel a lot more comfortable with where we're positioned with Esurance. We'll invest a bit more in marketing to drive growth, and we think we can grow that brand as well. We feel pretty good about the two of our largest segments, where Encompass will continue to focus more on profit improvement in the near term with some growth at a state-specific level. Other questions?
Last one there.
Yeah.
Last year, the conversation it slightly shifted away from profitability improvement given the improvement in combined ratio, more towards a focus on growing profit. I just wanted to ask you, because we know specifically what are you doing to grow profit towards sort of the marketing or pricing initiatives going into 2023?
Yeah. If I take you back to the beginning of 2017, I think our view as we established our combined ratio outlook for 2017 and our view on auto loss trends was that we were entering into a period of stability, which meant that we didn't expect the increases in auto frequency that we saw in 2015 and in much of 2016 to continue at the same level, that we expected that to level out. We were still focused on getting margins back to where we targeted them to be in the auto business. I think as 2017 played out, what we experienced was a meaningful improvement and a reduction in absolute terms in auto frequency while we continued to earn in much of the rate that we had taken in the previous couple of years.
As a result of that, our margin positioning in the auto business continued to improve throughout the year and got to a point where we're very comfortable with where we're positioned in terms of auto returns currently. As the year progressed, we got more and more focused on beginning to change some of those growth trends from a new business perspective. From a retention perspective, part of retention is about delivering on our customer value proposition, which we'll continue to be focused on. Part is driven by the amount of disruption we introduce into the channel, and given the amount of rate we took in 2015 and in 2016, there was a fair amount of disruption we introduced into the system.
As our margins got back to levels that we were more comfortable with Our expectations on rates is that we're more in a maintenance mode from a rate perspective in terms of keeping track or keeping on top of inflationary trends, as opposed to trying to improve margins. That in and of itself, I think, has started to play out in terms of better retention. We're also accelerating and increasing investments in the areas I talked about, marketing from a new customer acquisition perspective, agency deployment strategically in certain geographies where we think there's capacity and there's opportunity for us. Agency efficiency in terms of providing tools and technology that enable agents to be more productive, and provide an economic opportunity for them to continue to invest in their small businesses, which further creates capacity.
Those are the areas that I think we're going to continue to accelerate investment in. We also think when you take that as context, our positioning relative to a number of our peers, we continue to feel really bullish about. Greg talked about auto CPI. There's a number of companies that started later than we did on margin improvement in auto, still have a fair amount of work to do, and continue to take meaningful amounts of rate. We think, given where we're positioned, the investments we're making, and the opportunity ahead of us to take advantage of some of the disruption that our competitors are introducing into their books, that really creates a real good opportunity for us to accelerate growth and get back to policy growth on a year-over-year basis. You saw sequential growth in the fourth quarter.
We've been talking for the last 12, 18 months as John and I have talked to investors, the question we would get was about growth. When do you expect growth to come back? We were focused really on these are the early signs you need to look for, right? The early signs were improving new business production, flattening retention, ultimately improving retention. You started to see that. That's going to lead to sequential quarter-over-quarter growth. We saw that. Ultimately, that'll drive year-over-year growth. The story's really kind of played out pretty consistently with how we've talked about it, and we expect to be able to grow in 2018.
One thing I would add is just on one of those points with agency distribution being a key growth lever. That's something we put a lot of focus on in 2017. That's a process that, from the time you're sourcing candidates to the time they're opening their Allstate doors can take months long. We've started and have good momentum there, and you can see that through the agency count, which grew in the fourth quarter.
We have time, just a couple of minutes left. Why don't we close out, what are the hot topics in the insurance market with some of the news coming out of different commissioners, insurance commissioners in different states, specifically around tax reform and passing through theoretical savings onto consumers. Recognizing that all insurance companies aren't profitable or have a combined ratio above 100, you're not in that position you're in, right? Can you speak to it as it relates to Allstate?
Yeah. It's a good question. It's one that I think we've gotten pretty frequently. I guess, the place I'd start is with just some of the facts. The tax rate is lower. We think that's a good thing for us. Our effective tax rate will drop from what was probably in the low 30s over the last few years to somewhere between 19%-20%. It's a positive. We will absolutely take that new tax rate into account as we create our rate indications. We'll target the same return on capital that we always did, which over time, all other things being equal, would mean that we could run at a slightly higher combined ratio and achieve the same target return on capital.
Having said that, I think the near-term impact, our expectation is it's going to be a pretty immaterial impact, just given our expectations around rate, the amount that we're going to earn in 2018 and so on. We think the near-term impact is pretty small. The other thing I'd say is when you think about rate indications, taxes are one element that gets into our rate filings, right? It really only affects the profit margin that we target. It's a pretty small part of the overall combined ratio. Things like loss cost trends, frequency and severity, our expense trends, those are far more meaningful impacts to our rate filings. Finally, there's a calculation that's done for a rate indication, which may or may not be what we actually file from a rate perspective. In some states, it's the same number, in other states it's not.
That regulatory dynamic plays out differently across different states. I guess, the way I'd answer your question is, we think in the near term, very small impact. Over time, we'll absolutely, and as a matter of fact, we have already started to factor it into our rate indications. We think there are far more impactful things like loss cost trends and expenses that ultimately will drive rate need beyond the change in the tax laws. It's just one factor that plays into it. We think we can manage through it. Tax reform, net net, is a good thing for Allstate.
Great. We've run out the clock on the 30 minutes presentation time. Thank you very much for your presentation.
Thank you.