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Allstate Corp (NYSE:ALL)
Q3 2019 Earnings Call
Oct 30, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by and welcome to the Allstate Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

And now, I'd like to introduce your host for today's program Mr. John Griek, Head of Investor Relations. Please go ahead sir.

John Griek -- Head of Investor Relations

Well thank you, Jonathan. Good morning, and welcome everyone to Allstate's Third Quarter 2019 Earnings Conference Call. After our 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 on our website at allstateinvestors.com. Our management team is here to provide perspective on these results and discuss the strength and leading competitive position of Allstate's homeowners insurance business. As noted on the first slide of the presentation our discussion will contain non-GAAP measures 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. Beginning in the fourth quarter 2019 Allstate plans to announce catastrophe losses every month removing the current $150 million reporting threshold. The enhancement to our catastrophe announcement process, increases transparency for analysts and shareholders. As many of you know, this will be my final earnings call as the leader of our Investor Relations team as I've transitioned to a new role in our P&C finance area. I'm leaving Investor Relations in the capable hands of Mark Nogal who will be a great partner for all of you going forward.

Now I'll turn it over to Tom.

Tom Wilson -- Chair, President and Chief Executive Officer

Well, good morning. Thank you for joining us, to stay current on Allstate. Let's begin on Slide twoith Allstate's strategy. So our strategy has two components: increase personal Property-Liability market share and then expand into other protection businesses. Starting with the upper oval. The personal Property-Liability market provides consumers protection. We insure their autos their homes motorcycles boats personal liability. We use differentiated products sophisticated pricing claims expertise and are building an Integrated Digital Enterprise to lower costs, which I'm sure will come up later. We're also diversifying our businesses by expanding our protection offerings and that's highlighted in the bottom oval. Allstate offers customers a circle of protection. It's a wide range of products from Allstate Life workplace benefits commercial insurance Roadside Services car warranties protection plans and identity protection. These growth platforms have extremely broad distribution including major retailers insurance brokers work sites, auto dealers and manufacturers telcos, and directly to consumers.

They now comprise about 75% of our policies in force, although a much smaller percentage of our overall premiums. We leverage y'all say brand customer base and capabilities to drive growth in these businesses. Some of these businesses also support the property liability businesses. This strategy create shareholder value to customer satisfaction, unit growth and attractive returns on capital. It also ensures that we have both sustainable profitability in a diversified business platform. You move to slide three, I'll say strategy is delivering growth and attract returns. Revenues exceeded 11 billion in the third quarter of 2019. Property liability earned premium which grew 5.6%. Strong operating capabilities enable us to generate net income of 880 $9 million in the quarter adjusted net income was 940 $6 million or $2 and 84 cents per diluted share. You can see in the bottom of slide returns were also attractive with adjusted net income return on equity a 14.2%. Return the slide for NASA did really well and all of our 2019 operating partners, we have five of those you know, they focus on both near term performance and long term value creation.

The first three priorities better serve customers grow the customer base and achieve target returns on capital are all intertwined to ensure profitable long-term growth. Customers were better served and the enterprise Net Promoter Score improved. Property-Liability policies increased by 664000 from the prior year quarter to 33.6 million as the Allstate and Esurance brands grew 1.9% and 5.9% respectively. Allstate Protection Plans which of course was formerly SquareTrade grew to 89.8 million. Total policies in force now exceed 136 million, an increase of 40.7% compared to the prior year quarter. Returns remained excellent with most individual businesses performing well. The $89 billion investment portfolio had excellent total returns and generated $880 million of net investment income in the quarter. Shareholder value is also being created by building long-term growth platforms. We increased telematics usage in the Property-Liability businesses, and that's supported by having industry-leading insurance solutions from Arity. Allstate Protection Plans is achieving the acquisition goals we established two years ago and sales in Europe are growing. Allstate Identity Protection which we acquired about a year ago is integrating its products into our customer value propositions.

Mario will now discuss our results by segment in more detail.

Mario Rizzo -- Executive Vice President and Chief Financial Officer

Thanks Tom. Moving to slide five, you can see that Property-Liability results continued to reflect strong operating capabilities. Net written premium increased 5.8% in the third quarter or $1.5 billion for the first nine months. This reflects policy growth in the Allstate and Esurance brands and higher average premium for auto and homeowners insurance across all three underwritten brands. As you can see in the middle of the left table total policies in force increased 2% to 33.6 million. Underwriting income of $737 million was substantially better than the prior year quarter due to lower catastrophe losses. Moving to the bottom of the table. The Property-Liability recorded combined ratio of 91.6 was 2.3 points better than the prior year quarter reflecting a planned improvement in the expense ratio offsetting an increase in the noncatastrophe loss ratio. The underlying combined ratio which excludes catastrophes and prior year reserve reestimates was 85.0 through the first nine months of 2019. Moving to the right-hand table.

Allstate Brand Auto and homeowners insurance now Britain premium increased 4.5% and 6.7% respectively, compared to the prior year quarter, due to increase policies and force and higher average premium. Insurance auto insurance policy growth was 5.5%, which combined with average premium increases resulted in total net written premium growth of 8.3%. encompass written premium increased 2.6% as higher average premium more than offset a small decline in policies and force. on the bottom of the table, you can see that underlying combined ratios remain strong across our brands. Each utterance reflects primarily auto insurance, which has a higher combined ratio than homeowners when catastrophes are excluded. encompass, on the other hand, reflects a 6040 mix of auto and homeowners insurance premiums. Let's go to slide six which highlights investment performance, which benefited from overall market returns and proactive risk and return management The portfolio generated a strong 7.8% return over the last 12 months, of which 1.9% within the third quarter.

Approximately half of this total return came from interest income on the fixed-income investment portfolio and returns on the performance-based portfolio. The remainder was due to portfolio appreciation reflecting lower market yields and higher equity values. The chart at the bottom shows net investment income for the third quarter of $880 million $36 million higher than the third quarter of 2018. Market-based investment income shown in blue increased to $727 million from $683 million a year ago reflecting investment at market yields above the portfolio yield. Performance-based income shown in gray was $202 million in the third quarter $12 million lower than the prior year quarter. Slide seven highlights results for Allstate Life Benefits and Annuities. Allstate Life shown on the left generated adjusted net income of $44 million in the third quarter $31 million lower than the prior year quarter. This is largely due to the writedown of deferred acquisition costs driven by lower interest rates and model refinements in connection with the annual actuarial assumption review. Excluding the impact of the noncash unlock charge in both periods adjusted net income was $86 million in the third quarter an increase of $6 million or 7.5% compared to the prior year quarter.

Allstate Benefits adjusted net income was slightly lower than the prior year quarter as higher premiums were more than offset by increased DAC amortization driven by lower projected investment returns related to our annual actuarial review of assumptions. Excluding the impact of the noncash unlock charge in both periods adjusted net income was $32 million in the third quarter an increase of $1 million or 3.2% compared to the prior year quarter primarily due to higher premiums. Allstate Annuities on the right generated adjusted net income of $16 million in the quarter which was $4 million lower than the third quarter of 2018 due to higher contract benefits and reduced investment income. Adjusted net income of $43 million for the first nine months was substantially below the prior year reflecting lower performance-based investment income in the first quarter of this year. Let's turn to slide eight. Service Businesses continued to grow the number of consumers protected with policies in force increasing 67.7% to 95.9 million. This is largely due to Allstate Protection Plans. Revenues increased 27.1% to $418 million as you can see from the lower left table due to growth in Allstate Protection Plans and Allstate Dealer Services as well as the acquisition of Allstate Identity Protection last year.

Revenues through the first nine months now exceed $1.2 billion. Adjusted net income was $8 million in the quarter shown in the lower right a $7 million improvement over the prior year quarter largely due to improved loss experienced in Allstate Protection Plans and Allstate Dealer Services. Slide nine highlights the continued strength of our capital position and financial flexibility. In the third quarter we issued $1.15 billion of 5.1% fixed-rate noncumulative perpetual preferred stock. The proceeds from this issuance were used to redeem $1.13 billion of fixed-rate perpetual preferred stock with an average dividend yield of 6.54%. These actions will lower annual dividend costs by about $16 million. We continue to deliver excellent returns to shareholders. In the third quarter of 2019 we returned $775 million to common shareholders through a combination of $166 million in common stock dividends and $609 million of share repurchases. We have repurchased 6.7% of common shares outstanding over the last 12 months. Book value per share is up over $9 over the last 12 months.

Now I'll turn it over to Glenn who will discuss our special topic of Allstate Brand Homeowners Insurance and how we are positioned to generate industry-leading returns while growing market share.

Glenn Shapiro -- President, Allstate Personal Lines

Thanks Mario. Homeowners insurance is, a great business for Allstate as you can see on Slide 10. Allstate is the second largest homeowners insurer in the United States with 6.6 million policies in force. We have written premiums of $7.6 billion in the Allstate Brand over $400 million in Encompass and Esurance is also expanding in homeowners insurance using Allstate's capabilities and now has over 100000 policies in force. A significant portion of our customers bundle home and auto which improves retention and overall economics of both product lines. The key message on homeowners insurance is it generates substantial underwriting income and attractive returns on capital. To achieve these results we target an underlying combined ratio in the low 60s to handle the volatility that comes with catastrophe losses. Since 2012, we've generated over $1 billion of underwriting income on average annually including catastrophe losses. As a result returns on economic capital are in the mid to high teens.

This profitability also provides diversification to auto insurance profitability. The graph at the bottom of the page shows homeowners insurance combined ratios for Allstate in the industry since 2012. As you can see Allstate has consistently outperformed the industry. The results is that we've earned over half of the industrywide underwriting income in that period. Turning to Slide 11. Allstate optimizes returns through sophisticated portfolio management. We've improved returns and decreased homeowners insurance volatility through advanced catastrophe modeling geographic diversification of business and strategic use of reinsurance. Our spread of the business across the country works to our advantage by providing a significant diversification benefit as timing type and magnitude of weather events differ based on geography. As you can see, on the U.S. map we have a top three market share in 20 states which are shown in green but much lower shares in states like California and Florida prone to catastrophes like wildfire earthquakes and hurricanes. We take a proactive approach to managing our exposure to different types of risks. We substantially reduced our exposure in California to earthquakes by helping establish the California Earthquake Authority in 1996 and we've decreased our underwritten policies in force there in the last decade. In Florida we reduced our market share from about 10% in 2003 to less than 2% today.

We also helped shape the Florida Hurricane Catastrophe Fund which provides reinsurance and we use a separately capitalized company there Castle Key for external reinsurance. The overall objective is to meet customer protection needs while optimizing shareholder risk and return. We underwrite risk directly where we can achieve target returns. We also broker nearly $1.4 billion of other insurers' property policies. This allows us to meet our customer protection needs leverage our distribution strength with more customers bundle additional Allstate products but not directly write risks outside of our underwriting appetite. In total we manage our portfolio of states to target a combined ratio that generates attractive returns. For new competitors in homeowners insurance the state-level product -- profit dynamic makes it difficult, for them to achieve the same level of overall profitability or have the resources to expand. We shift an extensive amount of catastrophe risk to reinsurance markets which reduces our capital requirements and protects annual returns. The reinsurance program covers individual large events utilizing traditional reinsurance and alternative capital. The current nationwide reinsurance program provides over $4.3 billion of limits above a $500 million retention for any single event. We also use an aggregate cover in case there are multiple events below $500 million. This provides additional protection in case the accumulation of those events throughout the year exceeds $3.5 billion. Moving to Slide 12. We're not standing still and we're constantly innovating in this space.

We're focused on customer value and ease of doing business to accelerate growth. We streamline the homeowner quoting process by using both proprietary and third-party data sources to increase efficiency and accuracy. Using this information we've reduced the number of questions asking the quoting process from over 40 to just three when bundling homeowners and auto insurance together. In many cases after a quote is complete and we bind coverage there's an inspection of the home. Technologies such aerial imagery and predictive modeling has enhanced the speed, and efficiency of those inspections and lowered our expenses. We continue to enhance the design of our homeowners product while increasing our pricing sophistication. Our homeowners product House & Home is better able to address severe weather risks and unique customer needs. For example the product includes a graduated roof coverage schedule but would still provide the ability for customers to purchase full replacement if they choose. House & Home now represents 90% of our new business and about 45% of our total policies in force.

The pricing of House & Home is more sophisticated than traditional homeowners insurance products with more occupant and residents characteristics. We've also improved the efficiency and effectiveness of our claims handling through technology and innovation. We leverage our scale data and analytics to rapidly deploy more than 700 full-time catastrophe resources to quickly help customers when they need it most while mitigating damage and managing costs. We use aerial imagery to improve our efficiency and customer experience. We've expanded virtual claim handling capabilities, including the use of drones airplanes and satellites so that now nearly 70% of all wind and hail claims have some aspect of the claim handled virtually compared to less than 10% in 2017. The bottom line is Allstate has a significant competitive advantage in homeowners insurance. We'll continue to leverage our scale pricing sophistication risk management distribution system and claims capabilities to deliver industry-leading returns and market share gains.

We'll now open the line for your questions.

Questions and Answers:

Operator

Certainly. (Operator Instructions) Our first question come from the line of Elyse Greenspan from Wells Fargo. Your question, please.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good morning. My first question I wanted to spend some time on the expense ratio in Property-Liability. It's been low now for a couple of quarters. And I know last quarter you guys had pointed to a combination of improvement in processes automation as well as incentive comp is driving down the second quarter expense ratio. If you could, just give us a sense if it's kind of the similar components that drove down the ratio in the third quarter and just how we should think about modeling through that expense level going forward.

Glenn Shapiro -- President, Allstate Personal Lines

Yes. Thanks for the question Elyse. This is Glenn. We're definitely focused on improving expenses. We've been after this and going after it hard. I mentioned a few of the examples last quarter where we've been able to reduce customer inquiry calls which is a win-win because it's better customer experience because we've eliminated the need for those calls on the front end but it also is more efficient on the back end. I mentioned a special topic there some of the aerial imagery and data and analytics we're using in both claims and the reduced inspection. So, we've gone after some real tangible ways we can manage expense. As with any quarter there's a mix of things in there. So similar to last quarter there are some components of compensation some components of marketing some components of sustainable improvements in the baseline of that but we've made some real tangible improvements that we will sustain. And we're going after expenses in a real way because we think it's a path toward growth where we can maintain margins.

Elyse Greenspan -- Wells Fargo -- Analyst

Can you break down, give a little bit of color on what might be in the sustainable bucket versus maybe what was kind of onetime in nature in this quarter and the expense level?

Glenn Shapiro -- President, Allstate Personal Lines

I don't know that there was a lot of onetime in this. So we've got -- where it is sustainable it's those operational improvements which is a meaningful chunk of the change that we've got. When you look at some of the compensation components we've managed both our employee compensation and agency compensation over time. And we reset every year with a new program so there's a little bit of benefit in there from that that we were short to our growth aspirations in the year. But otherwise we've got sustainable expense improvements in here.

Tom Wilson -- Chair, President and Chief Executive Officer

Elyse, this is Tom. One place we were light this quarter was marketing which, we will dial up. As we talked about last quarter we're dialing up. There's some select markets where we know that we can generate economic growth. That said that won't change the overall trend line of expenses should be coming down over time. But every quarter's a new quarter. so...

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. That's helpful. And then my second question we've seen some of your peers that have seen higher bodily injury severity trends within their auto book of business. I was just -- could you just give us an update on what you're seeing on that BI severity side? And just have you seen any pockets where trend has picked up in the U.S.?

Tom Wilson -- Chair, President and Chief Executive Officer

Let me give you -- first we can't comment on everybody else's numbers because as you know in bodily injury those are long-dated claims. It takes you three, four years to really get them paid out depending -- the little ones get closed early. The big ones get closed late. So you always have some bounce of mix in the paid BI that you have to get underneath. That said we feel good about where our overall bodily injury reserves are set and our trends. Glenn can talk about the pay trend.

Glenn Shapiro -- President, Allstate Personal Lines

Yes. So we feel good about where we are in bodily injuries. We've put in the Q we're running around medical inflation. As Tom mentioned on the reserving our -- it's all in the numbers I think would be a headline there because our reserving actuaries are talented folks. They work very closely, with our claims team our underwriters our product organization. They all work together to ensure that we have the right reserves on the books. And if you look at the trends over time we've had, a lot more favorable development than unfavorable development through the years which is a good bellwether for you to look at in terms of our overall trends.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, thank you very much.

Operator

Thank you. Our next question come from the line of Greg Peter from Raymond James. Your question, please.

Greg Peter -- Raymond James -- Analyst

Good morning. My first question I'd like to revisit how your guidance is going to look for 2020. John I know you mentioned in your prepared remarks that they're going to start disclosing monthly cat loss numbers. I also remember from a previous presentation that, you said you were going to shift from an underlying combined ratio target to a target return sort of guidance. And I'm, just wondering if this is a trailing ROE target. Do you plan to adjust it for changes in interest rates etc.? Just looking for some color there.

Tom Wilson -- Chair, President and Chief Executive Officer

Well Greg thanks for the question. We love the fact you are paying attention to what we say. It makes us feel good. The monthly cat numbers so just to clean up what people were like is it above $150 million ? What if it's $149 million? I always felt like it was confusing stuff. So we'll just put out monthly. You can do what you people everyone's got different things they use it for. So I'll just make your lives easier and us more transparent. As it relates to the return on equities we're replacing the annual underwriting -- underlying combined ratio guidance with longer-term ROE goals. ROE is a better measure of the overall business results because it includes, first it goes to our business. It includes investment income and it ties directly to reported results which includes catastrophe. The underlying combined ratio of course only reflects the Property-Liability businesses and it excludes catastrophes which bounce around a lot from quarter-to-quarter and year-to-year. But on a long-term basis as a management team we're accountable for making sure that we get a good return on homeowners with catastrophes included in it because that's the risk that our shareholders take. So what we're going to do when we report full year 2019 results is give you what we think a long-term range is on return on equity and that management should be held accountable to.

Greg Peter -- Raymond James -- Analyst

What do you define as long range? And is this adjusted earnings that it's on?

Tom Wilson -- Chair, President and Chief Executive Officer

Yes. It will be on adjusted earnings just because the accounting, as we move to fair value accounting the book value in reported income bounces around a lot with equity investment. So we feel like adjusted net income return on equity is a better measure of what we want to do. Long term would be sort of what do you expect to do over two to three years? But the goal really is to get you -- to get people focused and our shareholders focused on what's the overall return we're generating on the capital that we have and focus on the overall side of the business as opposed to just one component. And while auto insurance and homeowners insurance are extremely important to our business they're not the only thing we got going and not the only thing we should be held accountable to. So ROE is just a much better measure under which you can judge how well you think we're doing as a team.

Greg Peter -- Raymond James -- Analyst

Great. My second question is just a follow-up on the expense. I noted from the Page nine of your supplement that your agency count was up year-over-year and sequentially and your license sales professional account was up year-over-year and sequentially. And I'm trying to reconcile this with the fact that you're not reporting any restructuring charges which is unusual considering the improvement you've realized. And then, secondly in the -- and on previous calls Glenn has mentioned something along the lines of an integrated services platform. And so the numbers are kind of moving contrary to what I think they would be. So maybe you can provide some additional color there.

Tom Wilson -- Chair, President and Chief Executive Officer

Well let me deal with some components. Glenn can talk about what we're doing with our agency platform to make it more effective and efficient including things like integrated service and what we're doing in compensation to drive growth. As it relates to restructuring we do end up with some little minor restructuring charges that go through -- they're in the Q some place but they're not big numbers. As we move forward as we move to an Integrated Digital Enterprise we just record what we think we have to record under the rules. If it means we have head count go down because we're using Integrated Digital Enterprise and we have to record a charge then we do it. But we don't feel like there's one big bucket that's needed at this point that we then carve it out and don't come back and hold ourselves accountable for because it's some other charge some places.

Glenn Shapiro -- President, Allstate Personal Lines

Yes. Thanks for the question Greg. And as Tom said you're definitely paying attention to the details in there. So if you look at the agent count I'll start with that some of that is a reflection of the investment folks are willing to make in the business based on the opportunity and there's good opportunity with Allstate. And we're growing items and we're profitable and have been successful. So agents are putting their nickel down. These are small business owners who are opening up a shop and going out and selling product and serving the needs of consumers. In terms of the licensed sales professionals that's reflective of the hiring they're doing mostly on the sales side of that. Now that said I'll mention as Tom said a compensation component leading into next year as well as the integrated service that you've brought up. From a compensation standpoint we're leaning more the compensation toward new business production.

We're interested in growing. So as we increase marketing we've improved our expenses it'd be more effective and cost effective for customers and we lean more into new business production in terms of the compensation as we shift that -- in that direction. We think that's a good systemwide approach to go drive growth. In terms of integrated service we have talked about it before. It's in the early stage. It's a big system. We have 40000 people in that agency system when you take the agents and all of their employees licensed and unlicensed sales and service. And so today we do that service in a decentralized way. A lot of the service is done in individual offices which you're not scaling is not ultimately going to be as cost effective as you can do it in a more scaled way. So we've built an integrated service model. We're doing that with -- we're getting into hundreds of agents not thousands of agents at this point. So from a scale perspective you wouldn't see it showing up in the numbers that you looked at there at this point.

Tom Wilson -- Chair, President and Chief Executive Officer

And Greg just a -- the change in agency compensation we don't expect to raise overall compensation as a percentage of premiums.

Glenn Shapiro -- President, Allstate Personal Lines

Correct. Yes it was a shift. Yes.

Greg Peter -- Raymond James -- Analyst

Great. Thank you for your answers.

Operator

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

Yaron Kinar -- Goldman Sachs -- Analyst

Good morning. Can you talk about the increase in property damage frequency in Allstate Brand Auto this quarter? I guess I was just a little surprised to see that given the more recent trends.

Glenn Shapiro -- President, Allstate Personal Lines

Yaron, it's Glenn. So first of all I always like to go back to the overall profitability of auto. We're doing very well there 92 combined ratio. Some of that is the expenses and I'll come back to sort some of the intentionality there. Frequency first of all is hard to predict. You can't predict what's going to happen in the next year next quarter but you can understand the trends and where things are moving. So miles driven were up. We saw some change in what has been a declining trend of frequency. That said it was a little bit mixed so I'll point you to a few different numbers. Gross frequency was up two points as you pointed out. But paid frequency which on a short-term tail line tends to be pretty accurate was flat. And then BI frequency was slightly down. So I look at the overall frequency picture and say it's kind of a mixed story in there and something that we're keeping a close eye on. Now you go a level below that and at a local level every state manager is out there looking at their competitiveness their trends their frequency their severity in every state and we're managing that profitability at that local level. So that's what rolls up into a really favorable return as we've delivered. And then lastly on expenses I want to keep going back to that because part of the reason -- or the main reason you go after expenses the way we are is it actually allows you to let the loss ratio float up and deliver the same return. And that's what it looks like in our ratios when you're giving back more value to the customers.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay that's helpful. And then the second question going to homeowners also saw an increase in severity there. I guess just given the amount of pricing that the company has pushed through over the last year I was so surprised to see the deterioration in accident year loss ratio from a pretty weak prior year quarter to begin with even with that increase in severity. So can you maybe talk about that dynamic of where the severity has come from and why the price increases we've seen to date have not been sufficient to offset it?

Tom Wilson -- Chair, President and Chief Executive Officer

Homeowners is one of those businesses where it's really difficult to look at it by quarter what happens with severity because it's obviously impacted by weather. Sometimes it's cat. Sometimes it's not a cat. And so you have to really look at it on kind of a rolling 12-month basis. And when you look at our business it's got great returns. We feel really good about it. If you look at the average premium it's way up. And when you go underneath that and as Glenn said we like to segment this down. Not only do we segment it by state, we segment it by coverage. And in homeowners depending what kind of loss you have it changes your paid severity a lot. And again those tend to be relatively short tail line. But -- so a fire loss has a much different severity if a house burns than obviously if somebody runs into their garage door or hail damage can tend to be much more expensive because it could take out a whole roof than some leaky pipes. So it really depends. The mix drives a lot of it. Theft is not as big as water damage. So what I would say is, Glenn's comments on the special topic we feel really good about homeowners. Like it's a really good business making really good money much better -- and I want to just underline what he said. With the 9% share of the market we've captured half of the overall profits generated in homeowners in the industry. So we feel like that's indicative of good operating expertise and capabilities.

Yaron Kinar -- Goldman Sachs -- Analyst

No pushback from me on that. hank you very much. And good luck to John on the new role.

John Griek -- Head of Investor Relations

Thanks Yaron.

Operator

Thank you. Our next question come from the line of Jay Gelb from Barclays. Your question please.

Jay Gelb -- Barclays -- Analyst

Thank you. My first question was on commercial auto and the ridesharing agreement with the major providers there. One other competitor in that market has had some issues negatively so just wanted to understand how Allstate is going to position that business.

Steve E. Shebik -- Chief Executive Officer, Allstate Life Insurance Company

Jay, it's Steve. So let me start off and say we called it a shared economy business. So it's not just ridesharing and carsharing. We look more broadly. And so obviously you focus on the largest customer we have but we have a handful of others. And we're building an entire team and technology all around that. Obviously we are well aware of other competitors in the industry. And the particular competitor you talked about strengthened their reserves in the 2016 and '17 year when the industry was kind of early in development. We started last year. And if you remember I think in prior calls I've talked about how we've triangulated our loss reserves in the basis -- of the prior history that was provided by the transition network company that we've used our own internal both personal lines and commercial auto experience. And we've also looked at industry experience and our telematics-type information we get. And we're just at the state level because remember we have 15 states we're insuring not the entire country. So we're comfortable with where we're sitting. We're still recording essentially at the price amount for the reserves primarily because the vast majority of the coverage is the long tail coverage. So it's still early 19 months into that first month. I think long-tail coverages historically take longer than that to develop. So it's still coming along for us. We look at it every quarter. As you may remember independently our reserves are reviewed and set by a team that works in plain reserve working for Mario and not for me. So we have different eyes on it from our actuarial department from our financial department obviously of the business too. So we're comfortable with where we are. Does that answer your questions?

Jay Gelb -- Barclays -- Analyst

It does. It does. And then on a separate topic thinking about the underlying combined ratio in the protection business -- the underlying loss ratio excuse me having that sort of increase year-over-year my sense is some investors are a little concerned about what's going on in terms of price competition in auto and then also the potential for claims inflation to increase. So can you just remind us how Allstate's managing that issue to restrain underlying loss ratio deterioration?

Tom Wilson -- Chair, President and Chief Executive Officer

Jay, let me provide some overall context and Glenn can jump in on the relationship between expenses and loss ratios. So first as you know auto insurance is our largest product line. It comprises about 65% of our total premiums. It's obviously an important lead line as well because it helps us expand into the homeowners insurance business which is also highly profitable. So it's a really important question of are you going to maintain your profitability on auto insurance so you can keep growing it. But before we go into the specifics on expenses and loss ratio let me just talk about principles for a minute and a little bit of our history. So we have some guiding principles on growth. First we only want to grow when we get a good return for our shareholders. I mean it seems simple but it's -- not everybody follows that path. And as you know the auto business generates really attractive returns. It's in the low 90s. When you add that and homeowners insurance to the equation that's a big driver of our return on equity which was 14.2% the last 12 months. But when you adjust out annuities it's over 17%.

So we're getting a really good return on that business. So what we've put in place has been working. Secondly we do segment the business by -- in terms of growth and profitability by business geography customer group and risk so that we get attractive margins in each segment. And that gives us that solid base from which we can be sustainable in terms of growth. So if auto margins drop in one state or in one coverage we have the benefit of good margins in auto insurance and other state around another coverage or in the homeowners business. Our third principle is we create shareholder focus -- or create shareholder value by focusing on profit and growth at the same time but we default to profit if necessary. And so we employ that philosophy across everything we do. So for example let's go to Esurance. And when we first bought Esurance it was running a combined ratio well over 100 and we invested heavily in that. We believe and know now that growth created shareholder value because the return on the business we were writing was higher than our cost of capital. The accounting however required us to write off all the advertising expenses upfront of which resulted in an underwriting loss. So after the first year of course then that advertising expense goes away you capture all the underwriting profit and it's very profitable.

And so it took a while before that profitable business can offset the negative of first-year business particularly when you're spending $200 million a year on advertising. So as a result that growth reduced underwriting income even though it was positive for shareholder value. So we tried to think about are we creating shareholder value our first principle. We're creating shareholder value when we're doing this. We can do it and we chose to do it on Esurance because we had strong profitability coming from the Allstate Brand Auto and Homeowners business. And so the concept of portfolio growth Glenn talked about how it applies at the auto insurance level and it applies for homeowners it also applies across the whole company. And so now Esurance is 2.5x the size of when we bought it. A similar situation exists for Allstate Protection Plans. So we acquired SquareTrade which has been renamed Allstate Protection Plans a couple of years ago for $1.4 billion which is equivalent to about $4 a share the Allstate share. As you know now that business is over twice its size. We've had 89 million policies in force. It's got great distribution.

It's growing the European cellphone business. And now it has reported profits albeit small reported profits. And so valuing that business on an earnings basis clearly understates shareholder value. So our challenge has been to make sure we give you the information to see value creation but not get everybody so focused on the 65% of the business that that's the only thing that matters in terms of creating shareholder value. So it's a really important question how are you growing that 2/3 of the business to make sure you make money? But I also want to just take this opportunity to say like don't forget about everything else because there's 1/3 of the rest of the business that drives shareholder value. That when we get so focused on just auto insurance margins it takes people's eye off the other stuff which is why we moved to ROE. But obviously we're very focused on auto insurance. Profit we feel really good about it and we need to make sure we keep doing that. So Glenn will talk about what Mario mentioned is our intentional strategy to grow the business offer really good value to our customers by reducing our expenses and then having the loss ratio drift up which enables us to maintain margins and still keep clocking that high teens return on equity from that business.

Glenn Shapiro -- President, Allstate Personal Lines

Yes. So thanks Tom. I think as you lay out the principles there clearly we're in an environment in auto that meets those growth principles. And so we want to go after that. That said it's an environment we've chosen to grow in but it's a competitive environment. We've got significant increases in advertising out there. We have an extremely low CPI. So we acknowledge all of that in terms of the competition and we're doing things smart as to how we grow as opposed to chasing it. I think you could call our combined ratio now a little bit of a restructured combined ratio because as you pointed out Jay the loss ratio was up the expense ratio was down. I would argue that it's a lot better than the other way around that if you think about sustainability if we were here having this conversation and we were like one point or two up on expenses but we had a huge tailwind because frequency dropped to the floor in the quarter I think we'd be having a different conversation. So I look at this as a positive sustainable way for us to go after growth and show that we can do it in a way that's going to continue to provide that mid high teens returns that Tom talked about.

Jay Gelb -- Barclays -- Analyst

excellence very helpful, much appreciated.

Operator

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

Mike Zaremski -- Credit Suisse -- Analyst

Thanks. I guess staying on the expense ratio improvement which is enabling you to grow more. There was a media report or two about shifting certain customers' service responsibilities out of the agencies and into call centers which can service customers potentially more cost effectively. I'm kind of curious if that's part of the reason agent comp is falling and why maybe a permanent decline or just you can correct me if I'm totally off on that.

Tom Wilson -- Chair, President and Chief Executive Officer

First let me go up for a minute Mike and say we want to use technology and our people to do a really great job for our customers. And with what you can do in technology today you can make your people a lot more productive and make them give a great service and spend less money. So we've talked multiple times of our QuickFoto Claim where the productivity of a claim adjuster is multiples of what it used to be because they're not driving around from body shop to body shop. They're sitting in front of a computer looking at pictures deciding what should be done with the customers. So that's ripping through our business. We have lots of ways we're working on doing that. And that's what gives us the confidence that we can do a better job for our customers with less expenses. Glenn talked about integrated service which is the thing you're referring to and you don't see it in the numbers.

It would be what I would say today it's not -- we started with 50 agents this year. We're getting the processes done. We're not going to turn this loose on 22 million customers until such -- policies until such time as we make sure it works really well because the system we have works really well. Our Net Promoter Score was up again this quarter. We like what our agents are doing. That said we think we can do better by leaning into innovation rather than grow. So you're not seeing anything on integrated service. That -- the media I think you're referring to I mean there's -- even though there's so much media out there these days. It -- I don't know whether it's fake news or not but like the reality is we are doing everything possible to give our customers great service support our agencies but do it in a cheaper way. And we're all in on that.

Mike Zaremski -- Credit Suisse -- Analyst

Okay. Great. That's helpful. And lastly Glenn in your prepared remarks you -- I might be a little off. You talked about the state-level profit dynamics making it difficult for competitors to achieve Allstate's homeowners' profitability. Maybe you can elaborate on that. And also I'm curious if there's any parallels to auto insurance as well.

Glenn Shapiro -- President, Allstate Personal Lines

Yes. So thanks for the question on it. I think the basic premise there is we have a lot of scale. And we've got breadth across the states. And our blend and our mix across the state is not only a 50-state view and so we've gotten everywhere but we've also been thoughtful and made choices about where we're larger and smaller given the types of risks we face. What's really challenging for the smaller or newer carrier going into it is getting that type of breadth across the system where you can offset your highs and lows. It's similar to what you do with an investment portfolio. You're mixing your investment portfolio in different ways so that when one thing's up another one's down and you're getting an overall good return. That's really challenging if you're starting out and you're only allowed to buy four stocks.

Tom Wilson -- Chair, President and Chief Executive Officer

Let me also add to that. So let's just compare homeowners to auto insurance. So homeowners is more volatile on an individual location basis than auto insurance. So you should put up more capital for homeowners insurance than you should for auto insurance. In addition with homeowners insurance you get very little investment income because it's a relatively short tail as opposed to auto insurance you get a decent amount of investment income off it. So as a result of that you have to run a combined ratio in homeowners insurance that's below that what you run in auto insurance. So your combined ratio in homeowners should always be below your combined -- that's not true for everybody but that -- so in total you got to get there. The problem is like if there's hail in Dallas one year and then not for two more years there's hail in Oklahoma because it got dumped in Oklahoma before it got to Dallas the next year. And so if you're only in Dallas and you've got to earn that low combined ratio and the hail happens to get you in that year it's pretty hard to then have the money to expand into Oklahoma. So that's what Glenn's talking about. It's -- but the business is -- when you look at the homeowners business and as more people get into it I think it's worthwhile focusing on what is the actual return on capital in that business as opposed to just its growth.

Mike Zaremski -- Credit Suisse -- Analyst

Helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Ryan Tunis from Autonomous Research. Your question, please.

Crystal Lu -- Autonomous Research -- Analyst

Hi, This is Crystal Lu in for Ryan Tunis. First question again on the expense ratio. It seems like the expense ratio has improved a lot but it doesn't seem to be translating into auto policy growth acceleration yet. And it seems like some of that expense improvement came from advertising which tends to grow -- to drive growth. So I'm wondering what actions are being taken right now where you're investing in growth and going to see that policy growth acceleration in the future.

Tom Wilson -- Chair, President and Chief Executive Officer

Well first if you look at our auto insurance growth it's about two points which we think is more than the number of cars and have grown in the United States. So we think we're picking up market share albeit a small amount of market share and we'd like to have more. So we are investing more in marketing but that doesn't change the overall trend that Glenn talked about. I mean we're going to -- our overall trend is reduce expenses be competitive in price maintain margins at levels that are attractive. Is it going to be the same level each quarter? It bounces around a lot depending where frequency happens. But we like the returns. We're good at getting returns in auto insurance. And we've proven that we can grow it and we're going to work on -- keep producing expenses so we can continue to be competitive.

Crystal Lu -- Autonomous Research -- Analyst

Okay. And on the auto rate increases that you guys have been getting this year it doesn't seem to have slowed very much in the first nine months despite efforts to pass along more savings to customers and grow the business. So can you kind of describe the auto pricing environment right now and how you're thinking about auto pricing in terms of growing?

Glenn Shapiro -- President, Allstate Personal Lines

Yes. Thank you Crystal. First of all we manage all of our pricing on a state-by-state basis. And I would say in terms of the slowing I would look at it relative to the loss cost trends. And so I would say it's slowed. We're -- we've taken over trailing 12 months 2.2 auto rate. That's translated into an average gross premium of 3%. But if you look at the severity trends running five this quarter but in the trailing 12 months higher than that we've not had rate that keeps up with that. And as we talked about earlier we've offset it with lower expenses. And that's where you give more value to the customers not taking rate that has to keep all the way up with those type of inflationary factors. But as Thomas said several times we manage this for profitable growth and we're committed to a strong return. And when we look state-by-state at that we're looking at our competitiveness what our price looks likes relative to our competitors by different customer cohorts in each market but also what our return on all of those cohorts are in each market. And so I think our pricing has trailed the loss trend which is part of what we're offsetting with the expenses.

Tom Wilson -- Chair, President and Chief Executive Officer

It's hard Crystal to -- and I'm not trying to -- it's really the level of sophistication and pricing today in auto insurance is so high that while the numbers overall are important to maintaining looking at the trend in the margins and definitely look at those in terms of growth a lot of it depends what sales you're growing in what your new business discount is. There's a lot of things we do and our competitors do to make sure we capture business which is -- generates long-term economic growth. So it's -- but it's a pretty -- it's not a robust -- you're not seeing people take a bunch of rates right now. State Farm's taken some decreases. But given where they are in overall price we think they probably need to take some price decreases because they're pretty high priced. We feel competitively priced right now.

Crystal Lu -- Autonomous Research -- Analyst

Okay. That makes sense. And then one more quick one on the auto bodily injury reserve releases this quarter. Could you just give a little bit more detail on which accident years those are coming from and whether that reflects the level of severity being in line with medical inflation? Is that running at a lower level than you're expecting in those years?

Mario Rizzo -- Executive Vice President and Chief Financial Officer

So Crystal this is Mario. I guess the first thing I'd say is just reiterate what Glenn said in terms of we establish reserves and look at reserves every quarter. We have some pretty robust processes that we follow. We take all relevant facts and circumstances both internal and external trends into account. And then we also take into account any changes in claim handling practice. So we have a really thorough reserve setting process. And we tend to be conservative in how we set those reserves. What you saw this quarter in terms of the releases were predominantly in Allstate Brand Auto injury coverages. And we continue to feel good not only about the severity trends that we're seeing in the current year but we're seeing favorable development in the prior years that is better than what we expected when we established the reserve. So it's really coming across a number of accident years but we continue to feel really good about our reserve position and our injury severity trends.

Tom Wilson -- Chair, President and Chief Executive Officer

And the amount from each prior year wouldn't really help you sorry. It's because it's what we picked as opposed to what the trend -- the absolute trends are. But when we do the K there's obviously the triangles around there. So...

Crystal Lu -- Autonomous Research -- Analyst

Yep. Okay. Great. Thank you so much for all the answers.

Tom Wilson -- Chair, President and Chief Executive Officer

Hey Jonathan, will we have time for one more Question.

Operator

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

Josh Shanker -- Deutsche Bank -- Analyst

Yes, thank you. I was looking at the policy count numbers on auto and was -- it seemed that there was a slowdown. But I'm wondering if we can sort of break it down to gross policy adds versus gross policy declines. Are Allstate customers sticking with you and the new customers have slowed? How should we parse that out?

Tom Wilson -- Chair, President and Chief Executive Officer

That's a pretty detailed level of question Josh. I mean -- so first of all retention was flat this quarter basically for statistical reasons. I mean it's kind of down slightly but it's basically flat. So that means we are keeping in total as many as a percentage of our customers. And you're correct in assuming that new business doesn't have as high a retention as people who have been with you 10 years. By the time somebody's been with you -- actually if people are going with you three, four years they pretty much tend to stay with you. Really high attention levels. So growth will drive your retention down. Despite the fact that we were growing over the last couple of years our retention is going up because we're doing a better job on customer service with our Net Promoter Score up. So I don't -- I think in terms of our overall growth you should expect to see more of it come from new business in the future than further increases in retention if that's helpful.

Josh Shanker -- Deutsche Bank -- Analyst

And when I look at the decline in ad spend and I guess compensation to agents or maybe I'm seeing that incorrectly is that directly tie-able to the amount of new business coming in?

Tom Wilson -- Chair, President and Chief Executive Officer

You sound like you're looking at a specific number. Maybe what we can do is Glenn can answer for you what the new -- so we're going to -- we've said we're going to spend more money in advertising. We're working on that. And we expect to still bring our overall expenses down as we do that over time. It may not be every quarter but we're headed down in that direction. And then -- but Glenn can talk about what we're doing on compensation.

Glenn Shapiro -- President, Allstate Personal Lines

And a quick add I'll make to the marketing because it's come up a couple of times. It's true on a year-over-year basis the marketing was lower. On a sequential quarter basis it was up. We're comparing to a quarter last year where there was a new brand launch. And so -- but we're ramping up and we'll continue to do that with marketing. From a compensation standpoint as we talked about earlier it really is about shifting toward new business production. You -- ultimately you compensate agents for the service they provide to customers and for going out and hunting and getting new business. And we're within the confines of that amount of money that compensation system. We're shifting money toward new business production to incentivize that more in the compensation plan going into next year.

Tom Wilson -- Chair, President and Chief Executive Officer

So what we're trying to do is on a great customer value proposition we want a good price we want good service we're lowering expenses. And you should expect to see us continue to lower expenses as we go forward from here. And then as the loss ratio goes up that just means you're offering greater value they're paying less for expenses and more for fixing stuff that got broken.

Josh Shanker -- Deutsche Bank -- Analyst

Thanks for the answers and good luck with that.

Tom Wilson -- Chair, President and Chief Executive Officer

Okay. First thank you for being on the call. Let me thank John for being both a transparent and direct source to you for a little over three years. He's done a fabulous job. We're excited to see him move on in his career and know Mark will do a great job. He's worked with John so it will be seamless for you and us. As it relates to Allstate yes we've made really good progress this year on our strategy our operating priorities. We remain focused on profitable growth and we'll talk to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

John Griek -- Head of Investor Relations

Tom Wilson -- Chair, President and Chief Executive Officer

Mario Rizzo -- Executive Vice President and Chief Financial Officer

Glenn Shapiro -- President, Allstate Personal Lines

Steve E. Shebik -- Chief Executive Officer, Allstate Life Insurance Company

Elyse Greenspan -- Wells Fargo -- Analyst

Greg Peter -- Raymond James -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Jay Gelb -- Barclays -- Analyst

Mike Zaremski -- Credit Suisse -- Analyst

Crystal Lu -- Autonomous Research -- Analyst

Josh Shanker -- Deutsche Bank -- Analyst

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