Good morning, everyone. I'm Greg Peters. I'm the insurance analyst for Raymond James, and I'm honored to welcome our next presenter, The Allstate Corporation. We have the stock rated strong buy. When we look across the insurance industry, auto insurance is one of the more exciting lines that is in the marketplace right now. There's a lot of change. A lot of companies have reported profitability pressures due to accident severity and frequency, and we think Allstate is really well positioned to take advantage of the changing market conditions. For management today, we have Mark Nogal, who serves in the Investor Relations department, John Grieco , who also serves as Director of Investor Relations, and Mario Rizzo, who's Chief Financial Officer . With that, let me turn it over to Mario.
Thanks, Greg. Morning, everybody. Usually, you don't hear insurance and exciting in the same sentence, but I think we do have a pretty exciting story to tell about Allstate. Thanks for taking the time today to learn more about why Allstate's an attractive investment opportunity. On the first slide, before we begin, this is a statement that says I may be making forward-looking statements and references to non-GAAP measures this morning. You can get the presentation slides along with a great deal of other information by visiting our IR website at allstateinvestors.com. Allstate serves over 16 million consumer households with a wide range of businesses and product offerings, the largest of which is our personal lines business, which includes auto and homeowners insurance. We support our customers across all 50 states, D.C., and Canada with a distribution footprint of over 36,000 agencies and licensed sales professionals.
In addition to personal lines insurance, we have a number of other businesses which leverage our capabilities, brands, customer relationships, and distribution. Our operating priorities for 2017, shown on the right, are used to direct our business and be transparent with investors. 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. Our fourth priority centers on the proactive management of our $80-plus billion investment portfolio to achieve the best risk-adjusted return over time. Investment income is relatively stable, with a large fixed income portfolio with additional income from performance-based investments. The total return on the portfolio will be largely dependent on U.S. interest rates and economic growth. Our fifth priority is a continued focus on building long-term growth platforms.
We will accomplish this in the Allstate agency channel through our trusted advisor strategy. Esurance will continue to expand, Arity will build out telematics, and SquareTrade will continue to grow new retail partners. Our strategy for competing in the personalized insurance market is to segment consumers based on their desire for advice and assistance, shown on the horizontal axis, and their perception of insurance, as shown on the vertical axis. We have unique value propositions for each segment to best meet the needs and preferences of each customer group and have established strategic priorities for each segment. Across all four segments, we leverage analytics and advanced technology capabilities. The focus of today's presentation will be on the short, medium, and long-term priorities that will further strengthen our competitive position, transform our business model, and sustainably create shareholder value.
In the Allstate personal lines business, we've managed for both near- and long-term value creation and have multiple initiatives underway across various time horizons to achieve our strategic priorities. First, from a near-term perspective, we are focused on fixing and stabilizing our core business. We have worked extensively on improving auto returns and have made significant progress in catching up to the spike in auto loss costs seen across the industry. This enables us to take a more balanced approach prospectively to both continue improving margins while driving profitable growth. From a midterm perspective, our priority is to create sustainable competitive advantages that can be leveraged for ongoing value creation. Successfully achieving this priority will be dependent upon our ability to fundamentally transform our business model.
We will do this through an integrated strategy that transforms our distribution system from a transaction focus to one that consistently delivers on our trusted advisor promise to our customers, fully leverages data and analytics, and enhances our digital capabilities. Over the longer term, we will further leverage these strategic advantages by expanding our product portfolio to provide new and innovative product offerings to consumers, fully leveraging our connected car platform, and potentially monetizing the data assets it creates. Since 2015, our highest priority has been to improve auto profitability. This work is ongoing and continues to generate substantial shareholder value. Auto insurance profitability declined beginning in 2015, resulting largely from an increase in the frequency of accidents and the average cost associated with them. As a result, we implemented a broad-based, four-part auto profit improvement plan.
It included raising prices, tightening underwriting standards, focusing on claim process excellence, and reducing expenses. Approved auto price increases of approximately $2.6 billion across all three underwriting brands over the last two years were the highest in over a decade and drove an 11% increase in average annualized premium for our customers. We reacted quickly and broadly to the uptick in the auto combined ratio, and auto margins shown on the graph are improving. As a result, we will take a more balanced approach to generating value going forward by focusing on both profit and growth. Our homeowners business is a competitive advantage that has generated a substantial amount of underwriting income over time. In 2008, we began repositioning the Allstate brand homeowners business to reflect an increase in severe weather.
Over the last eight years, we executed a multifaceted local market approach with the same analytical rigor and operational focus we have applied in auto insurance. We raised prices over 35% to ensure our rates were adequate for the risk we were taking. We re-underwrote our existing book of business, established tighter new business underwriting standards, and implemented higher mandatory deductible levels in certain areas while reducing the number of homes we insured. We also created a new homeowners product, House and Home, which includes graduated roof coverage, roof type pricing, and allows for greater customer choice. As you can see from the graph on this page, the homeowners combined ratio has improved significantly, and this business is now a competitive advantage for us. Our ability to execute in a consistent but local way has been critical to our success in stabilizing our core business.
These same strong execution capabilities will serve us well in delivering on our midterm priorities. These are the initiatives that will transform our business model over the next 1-3 year time period. The first initiative I will discuss is foundational to the others. Our trusted advisor strategy is a critical component in transforming our business model. Our approach is based on three pillars, which we call the ABCs of the trusted advisor strategy, acquiring customers, building personalized solutions, and cultivating a trust-based relationship. In 2016, our focus was on relationship initiation, which cuts across the A and B pillars. Over the course of the year, we built a strong foundation while partnering with our agents to introduce new trusted advisor capabilities. This year, we will start introducing capabilities more broadly, giving agents more tangible tools they can use to drive the trusted advisor transformation.
First, we are enhancing the 5R sales process shown on the top left by optimizing the talk paths and using technology that will shift customer interactions from transactional to relationship-based conversations. At the point of sale, licensed sales professionals are pivoting their conversations to fully identify assets and liabilities and are uncovering unmet customer needs. Second, we are implementing a major overhaul of our sales platform. The front-end needs analysis is being integrated into a new platform designed to enable more personalized conversations that focus on the unique needs of the customer and allows agents to deliver value-added advice and solutions. This allows a shift in conversation from one that is exclusively focused on price to one that centers on fully meeting the unique needs of the customer at a competitive price. Third, we are making additional enhancements to the personalized insurance proposal that rolled out in late 2015.
The personalized insurance proposal sets the tone for the ongoing relationship that customers can expect from their Allstate agency. The proposals go well beyond the traditional quote to provide a professional and customized offering to the customer based on their individual household needs. It also introduces the agency and staff to the customer while establishing the commitment that the agency has to the household. In 2016, we issued over 2 million personalized proposals and can already see the meaningful improvement in close rates. Enhancements in 2017 will include the integration of life products, offering a Spanish language option, and including brokered products into the proposals. We are also creating and delivering automated agency workflows to improve efficiency, drive greater consistency, and ultimately drive higher close rates. Finally, we are focused on simplifying customer onboarding.
We introduced a new customer onboarding process in 2016 that we plan to digitize in early 2017, along with the automated workflows. The combination of automated tasks and reminders will improve the new customer purchase experience and improve new customer retention. We are also investing in digitizing the company, with claims being a principal area of focus. Through the use of technology, data, and advanced analytics, our claims business model will be transformed. Today, across the industry, the claims settlement model is a linear approach where each step is dependent on the completion of the prior step. The process puts a great deal of burden on customers in terms of reporting facts, securing estimates, and seeking repairs. Internally, the claim process is highly dependent on technical experts to execute processes that are consistent across the insurance industry.
Using an auto claim as an example, I'll take you through the current steps. An accident occurs, we determine if coverage applies, and we move the car if it is in a tow facility. We assess liability through statements of parties. We travel to the car or have the customer bring the car to us, a process that can take up to a week. We pay the assessed damages, most often by mailing a check, and deal with the body shop on any potential supplementary payments for missed damage. During the process, it is common to have six to 10 contacts with the customer. We will dramatically simplify and streamline the claim handling process using automated loss notification, real-time processing, predicted damage estimates, self-service capabilities, and electronic payments. Imagine the future process for the same claims to be something more like this.
We receive an automated notification of loss from the car. The customer can upload photos of damage. A predictive system evaluates the damages and produces a value. Fraud models run behind the scenes. Electronic payment is generated instantly to the customer within seconds of uploading the photos. This may sound like science fiction, but I would suggest that our current banking system would have sounded far-fetched 10 to 15 years ago. We dealt with paper checks, stopped at toll booths and deposited coins, mailed bills, and paid cash for goods. Today, we are seamlessly connected through a network of digitized payments through our devices. The digitization of claims is starting already. We will launch our digital operating centers for auto claims in the next few months. These centers will handle a significant portion of our auto claims by estimating through photos.
This is an interim step to eliminate the transportation of a person to the car or the car to a person. We are working on longer-term systems to predict the damages accurately. Moving forward, we will expand these capabilities to homeowner claims as well. Late last year, we launched a new immediate payment method, QuickCard Pay, the fastest claim payment method in the P&C industry, with payment directly to debit cards within seconds. This spring, we will assess damage and hail events using drones. We tested this process over the past two years and will fully operationalize it in March. These advances will drive significant benefits to our business by reducing expenses, providing greater consistency and accuracy, quicker processing of claims, more customer and agency owner control, and a better customer claims experience. We are also taking a proactive approach to building long-term growth platforms.
Two existing businesses that will continue to create additional value longer term are Allstate Benefits and Esurance. Allstate Benefits is an industry leader in the voluntary benefits market. Since acquiring the business in 1999, revenues have tripled and returns have been strong. We are investing in new generation enrollment and administrative technology to improve the customer experience and modernize our operating model and expect to continue to grow this business. Since acquiring Esurance in late 2011, we have doubled the size of the book while generating economic returns above our cost of capital. We anticipate continued growth in Esurance and have invested in developing additional products to complement its auto offering while expanding geographically in both the U.S. and Canada. This strategy has resulted in offering a more comprehensive set of protection solutions to customers and a broader footprint.
Looking towards the future, we believe that the transformation of the personal transportation system offers a substantial economic opportunity. This is much more than the autonomous car. While it is based on the same technologies driving autonomous cars, it is a fundamental restructuring of how we move people around the U.S. There is significant opportunity to reduce cost and improve efficiency. Allstate is leaning into this opportunity by leveraging our customer relationships to build a strategic platform serving connected car customers. In early 2016, we established Arity outside of the insurance company structure. This provides us with the strategic and operating flexibility to capture additional value from our growing connected customer base. It also will enable other companies, both insurance and non-insurance, to connect with their customers by using this platform and Arity's capabilities. In January, we closed on our acquisition of SquareTrade, a consumer product protection plan provider.
Their exceptional customer service, highly innovative product design, analytics, and supply chain logistics has led to a fourfold increase in revenue over the last five years. SquareTrade will expand our consumer protection offerings with additional products and new distribution. We are also focused on continuing to enhance and broaden our data and analytics capabilities across the organization. There are two main components to this strategy. The first includes our ongoing investment in data and analytics infrastructure and talent. The second involves fully leveraging this investment to create business value. We have embedded data and analytics talent across the organization to help each area achieve their business goals. We also take a proactive approach to investing. We balance risk and return and focus on creating long-term economic value. The investment portfolio is managed on a segmented basis, assessing both the primary source of return and how actively the assets are traded.
The vertical axis is a spectrum of what primarily drives return, the overall market or the specific asset. The horizontal axis is a spectrum of how actively assets are traded. The market-based core approach in the upper left accounts for 82% of the portfolio and is a stable, highly liquid, high-quality fixed income portfolio. Holdings in this portfolio are primarily comprised of public and private fixed income assets, commercial mortgages, and passively managed equities. Market-based active in the upper right is 11% of the portfolio. Our goal here is to outperform the market through active management by leveraging our capabilities in public markets. We also pursue tactical strategies that benefit from increased market volatility in this portion of the portfolio. In the performance portfolios on the bottom, we focus more on total and idiosyncratic return.
These portfolios typically generate more short-term operating earnings volatility, which often are in the form of limited partnership returns. We believe this approach to investing delivers better risk-adjusted returns over the long term. In 2016, the portfolio produced a strong 4.4% total return. Allstate is positioned well for profitable growth and represents an attractive growth and value investment opportunity, as we are proactive, disciplined, and focused on creating economic value for our shareholders. We are leveraging our brand capabilities and market position for growth in all four of our personal insurance customer segments. We are building long-term strategic growth platforms across our business through our trusted advisor strategy in the Allstate brand, in our technology company, Arity, and the continued growth of Allstate Benefits and Esurance. We're also expanding into the consumer product protection market through our acquisition of SquareTrade.
We have an investment portfolio that is over $80 billion, which generates attractive long-term returns and is positioned to continue to do so as we increase our performance-based investments and benefit from rising interest rates. If you own Allstate, there are clear paths to value creation in the short, medium, and long term. The management team is proactive in its approach to managing the business and has an operating system that reacts quickly to unexpected events to protect and increase shareholder value. Let's open it up for questions. Yes.
Yes. You were talking earlier on about how you were planning your claims process and how you were planning your claims process tomorrow. Given what we've heard in the U.K., how long will it take to get to that space of tomorrow?
I won't pretend to be the expert on how claims are handled in the U.K.
I'll repeat the question.
Oh, sure. I think the question was, given the information I shared on what we're doing to digitize the claim experience and make it a much more efficient process, how long do we think it'll take us to get from where we're at today with the process I described to what the future state will be? I think the commentary was similar to what the experience is, either consistently or at least in some cases in the U.K. I guess where I'd start is the capabilities I talked about on being able to use photos to assess claims, and being able to make payments electronically. Those are capabilities we already have. We have them, it's just a part of this is just more aggressively driving utilization of those tools.
Today on our app, there's the ability to use photos to take pictures of the damage to the car and upload those. It's not utilized all that often. I think part of our strategy is to drive that process as the principal way that customers will report damage to their cars. Opening these digital operating centers is the first step where we're going to create the organization to be able to drive the adoption and fuller utilization of those capabilities. We have very aggressive goals, beginning in 2017 with driving much higher levels of adoption of QuickFoto Claim. The electronic payment capability is already there. We launched that late last year.
Again, I think we're at a point on those processes on the auto side of driving adoption and creating both from a customer and a claim organizational perspective, a focus on driving that as the way to report claims versus the more traditional way. I think for part of it, we'll get there. Our expectation is we'll be able to drive adoption reasonably quickly. We'll have to see, time will tell on what percentage of our claims over the next year or two go through that process. We have pretty lofty internal goals to get there. There's other components, as I mentioned. We're going to start using, for example, drones to assess hail damage on homeowners' claims. Again, we've tested the capability.
It's a matter of more fully deploying and utilizing those capabilities, as well as continuing to refine the digitization of the claim process to go beyond just photos, but to actually use data analytics and technology to help assess damage as well.
Just on the analytics side, how much are they helping keep your- To use yours on that policy use the premium?
Two things. For customers in the Allstate brand, we have an offering called Drivewise, and Esurance, same thing, called Milewise or DriveSense, I believe. That is both a device that can be plugged into the car or in many states, we have an app, a phone app. That allows us to capture the data and assess the information that you're describing. However, in that case, it's done in the context of the auto policy that we offer the customer, and depending on driving behavior, you can get a discount on the policy based on the data we collect. We're also testing a product in two states, in Texas and in Oregon, called Milewise, which is a true pay-per-use insurance product. Using the same technology, but that you pre-pay, essentially for credits, and those credits are utilized as the customer drives the car.
When you run out of credits, you re-up the account balance. That's in a test phase, but that's closer to what you described in terms of a true usage-based insurance product where the customer's only paying based on their utilization and not based on a set policy premium over a six-month period.
Your credits are then going to have your
Yeah. You prepay, you utilize the credits as you drive, and then replenish those credits. You had a question?
Two-part question, team. First, how much of the current severity spike is electronic content and bumper versus total loss? Secondly, what is your timeline for autonomous vehicles and what's the impact on premium?
On the first question, I'd say they're both contributing to severity. There's kind of a barbell impact as we talk about the severity impacts. The first is that what you described, that there's more technology embedded in cars, and therefore, cars just are more expensive to repair. A side mirror that maybe was a couple hundred dollars in the past is significantly more expensive to replace because excuse me, because of the technology embedded. That's putting pressure on physical damage severity. The second part, the total losses. That's the other part of the barbell. When you think about new car sales, they really bottomed out during the financial crisis. Now they've picked back up. What that's done is through a combination of fewer new car sales, as well as I think just consumers holding onto cars longer, the age of the fleet has increased.
At the same time, the price of used cars has come down. That's put more pressure on total loss severity, if you will, because we're totaling a higher percentage of cars. We in the industry. I think there's industry data that would suggest we're all kind of subject to those same two trends. I think the way we've been able to counteract some of those pressures, both on the physical damage side as well as on the injury severity side, is by, from a process standpoint, I talked about digitization and some of the tools we're deploying to enhance the efficiency of the process. Those are intended to both drive cost out of the system, shorten cycle time, which also makes the process more efficient.
Ultimately drive improved customer satisfaction because you're able to restore the customer more quickly to the state that you're trying to get them back to. I'd say both of the factors you described are impacting severity, but I think we're doing a pretty effective job of mitigating some of those impacts through process redesign and just operational focus on the claims side. On the autonomous cars, I touched on that a little bit. I think our view is it's not if, it's when. It probably will happen sooner than people are estimating that it'll happen. We look at autonomous cars as a subset of a much broader economic opportunity that I talked about the transportation industry in the U.S.
It's a highly inefficient model, but I think a lot of the technology that's driving autonomous vehicles is going to impact the transportation industry more broadly, or the personal transportation industry in the U.S. I think our view is over time, it will drive frequency down because it'll make cars safer. We'll go back despite the recent last few years where we've seen a spike up in auto frequency. We think over time, the technology in autonomous cars will drive auto frequency down again, similar to what we've experienced over the previous 20 to 25 years.
We also think as the efficiency is extracted or improved in that transportation model, we think it ultimately does drive a contraction in the size of the auto insurance business, which is why we're proactively doing things like we're doing with the creation of Arity and the connection to our customers to be able to create a platform that we can drive additional revenue and value-creating opportunities through more frequent interaction with our customers, as opposed to just being dependent on auto insurance revenues.