Good morning, everyone. I'm Jay Gelb from Barclays. I'm the Senior Equity Research Analyst. Thanks for joining us for day 2 of the Barclays Financial Services Conference. It's our great pleasure to have with us today, Tom Wilson, Chairman and CEO of The Allstate Corporation. Allstate is one of the largest insurers of vehicles and homes in the U.S., and also has a life insurance and retirement savings business. Tom will begin with his opening remarks, then I'll moderate a Q&A session. With that, please turn it over to Tom Wilson from Allstate.
Thank you, Jay. Good morning, everybody. Thank you for spending time with us today. Our goal is to help you decide if Allstate is the right investment for you. I'm going to start by setting some context, then, as Jay said, we'll have a conversation. Judy Griffin, our Chief Investment Officer, and Pat Macellaro, our Head of Investor Relations, will also be with us this morning. Before I begin, let me just do our statement of disclosure that says we're going to use lots of conversation today. Some of them will be GAAP, some won't. We pride ourselves on being completely transparent in providing extensive disclosure, which you can get to on our website through allstate.com. Allstate has been and is an attractive investment opportunity. The three-year return, as you can see from the lower left on this slide, is above the S&P.
That reflects a competitively differentiated strategy, attractive returns from both providing insurance to consumers throughout the United States and Canada, and from our large investment portfolio, profitable growth, a proactive approach to maximizing returns per unit of risk, then providing strong cash to shareholders. Our strategy is to segment the consumer insurance market into four different segments based on their desire for advice and assistance, which is shown on that horizontal axis, and their interest in differentiated products versus simply price, which is shown on the vertical axis. We have unique value propositions for each segment to best meet the needs of each of those customer groups, and we're the only company with a presence in all those segments, and the only company really addressing the market with these unique propositions.
Customers in the lower left-hand segment prefer to have one insurance relationship for all their protection needs, and therefore tend to bundle their purchases together. These customers are served by the Allstate brand value proposition, and that includes a wide range of proprietary products, over 35,000 people who are engaged exclusively on Allstate's business in virtually every local community in the United States. In this business, we really compete with State Farm, Nationwide, and Farmers. To further strengthen our competitive position in this segment, we're really trying to position the Allstate advisors as trusted advisors. We're changing processes, technology, products, marketing, and our Allstate Rewards all around increasing the relationship and strengthening the relationship we have with customers. In the lower right-hand segment, we've invested heavily in strengthening Esurance's brand and expanding to new states and risk classes.
As a result, we've almost doubled the size of that business since we acquired it four years ago. Esurance is also expanding its product portfolio so that it underwrites homeowners insurance, motorcycle, and renters insurance. We compete with GEICO, Progressive, Direct, and USAA in that segment. In the upper left, that's Encompass. That provides mass affluent customers with a package product, auto and homeowners combined together, and it's sold through local independent agencies. Answer Financial in the upper right is the largest online agency in the U.S. and serves customers who prefer self-service and are brand neutral. We leverage our pricing sophistication, analytics, claims expertise, and technology across all of those businesses. Allstate is well known for auto insurance, and we're going to spend some time today talking about the profitability and growth of that business. This slide shows that there's much more to Allstate than auto insurance.
As you can see from the bottom pie chart, auto insurance operating income, shown in blue, was a large part of last year's $2.4 billion of operating income. What some people don't focus on is how much money we make from homeowners investments in Allstate Financial as well. Auto insurance profitability has declined this year, which is why we'll spend some time talking about it, the reasons behind it, and how that impacts our profit improvement plan. The auto insurance combined ratio is higher than historical levels because there have been more auto accidents, and the average cost associated with those accidents has increased. The graph in the upper right shows the Allstate brand combined ratio. It's in blue. You can see that it historically has been around 95, but it's been above that level for the first six months of 2015.
You can also see that we, GEICO, and Progressive generally operate in the same zone, which is far better than the overall industry. When profitability declines, you need to understand why, of course, because the drivers of that trend impact the components of your profit improvement plan. It doesn't change the fact that you got to raise your profitability. The fact that we need to take more action to improve margins doesn't change, but how aggressively and what the various components are does. In this case, we've concluded that most of the decline in auto profitability was due to an increase in miles driven, which began to spike up in the last quarter of 2014. The external nature of this trend means we can rely more on broad price increases to improve profitability because most of our competitors are also likely to be increasing price.
Our analysis did show that there are other factors driving higher costs, but they're all either controllable or expected, or our competitors have the same issue. At Allstate, one of the ways we've maintained attractive long-term profitability over an extended period of time is by increasing prices as costs increase, which you can see from the chart on the bottom right. For short periods of time, price increases may be above cost increases, and for other periods of time, they may be below cost increases. You can see this in our results as the blue line, which is the average premium, was above the orange line in the second half of 2012 and the beginning of 2013.
You can also see that costs in the second quarter of 2015 increased by around 4% on a 12-month moving basis, and prices up a little less than 2% on a 12-month basis, which means that part of that profit improvement plan has to include raising prices. I should point out that while we're focused on getting back to historical levels, at this level of profitability, the business still generates a good return on capital. The auto profit improvement plan is being executed in all three underwriting brands and by our local operating market committees because we run this on a very local basis. We're pulling a number of profit levers in addition to the price increases I mentioned. The Allstate brand has increased prices in 40 states this first six months of the year for 1.9%. That's not an annualized number.
That's just what we got in the first six months. We'll continue to pursue price increases during the second half of the year as well. In addition to broad price increases, we're using analytics to be precise about how we address specific underperforming segments of the business from state to state, both through price increases and tighter underwriting standards. The combination of these actions will have a negative impact on policy growth into 2016. Our claims organization is responding as well by focusing on improving cycle time. With the sudden spike in frequency, adjuster workloads increased significantly, and time to claim settlement increased. That puts pressure on loss costs. We're working on getting that time to settlement down. The plan also includes increasing the growth of homeowners and our other property insurance lines because we make good returns in that business.
Esurance and Encompass also have profit improvement plans around the auto business, which have many of the same elements, but a different relative focus, which is related to their specific customer segment and their specific geographical outlay. For example, you'll see Encompass is only in 17 states are increasing, but they're mostly concentrated east of the Mississippi, so you wouldn't expect to see as many states have price increases for them. Esurance has lowered advertising costs, and Encompass is increasing prices at a faster rate than the Allstate brand. In summary, we've reacted quickly, broadly, and precisely to the uptick in the combined ratio. Allstate's homeowner business is a competitive advantage and generates a substantial amount of operating income, as you saw in the earlier pie chart. This didn't happen by accident.
We repositioned the Allstate brand homeowners business over the last six years to reflect an increase in severe weather by using a multifaceted approach at the local level, much like we're doing in auto insurance. We raised prices over 30% to ensure our rates were adequate for the environment we were operating in. We re-underwrote our existing book of business, established tighter new business underwriting standards, and migrated customers to higher deductibles while reducing the number of customers insured. We also created a new homeowners product, House and Home, which gives customers a chance to choose between roof coverage levels. As you can see from the graph on the bottom of the chart, the operating range for the Allstate brand homeowners combined ratio has been reduced significantly and is now a competitive advantage for us.
The work to improve auto returns will not take as long or be as disruptive to our customer base or competitive position as what we had experienced in fixing homeowners. We also take a proactive approach to investing by balancing risk and return. The investment portfolio is managed on a segmented basis, which is represented on this slide. You can split a portfolio many different ways, as you all know, and one of the ways is to look at the primary source of return and how actively the assets are traded, which is what this segmentation does. The vertical axis is a spectrum of what drives return, the overall market or the specific asset. The horizontal axis is a spectrum of how much trading is done in the assets. The market-based core approach in the upper left accounts for about 85% of the portfolio.
It's a stable, highly liquid, high-quality fixed income portfolio. Holdings in this portfolio are primarily composed of public and private fixed income assets, commercial mortgages, and some passively managed equities. The three other portfolios, market-based active in the upper right, performance-based opportunistic, and performance-based long, are more idiosyncratic in terms of investing. Market-based active in the upper right is less than 10% of the portfolio. We started this portfolio about three years ago, and we increased it again this year based on our success. Our goal here is to outperform the market through active management by leveraging our capabilities in public markets. We will also pursue tactical strategies that benefit from the increased market volatility we're seeing today. In the performance portfolios on the bottom, we focus on total return. These portfolios typically generate more short-term reported earnings volatility, which often shows up as limited partnership returns.
Together, they account for approximately $6 billion in assets. Our approach to the connected customer is an important way to differentiate our customer value proposition and position ourselves for future growth. With both the Allstate brand Drivewise and Esurance has the similar product, it's called DriveSense, we offer interactive products that are changing the insurance market. These offerings enable us to give customers a better, more accurate price. Just about everybody in this segment is doing that. Not everybody is doing the remainder of it, which is, we provide other features for people that help improve their driving experience. The Drivewise mobile app, which is now available across the country, is our next step in this strategy. It has a couple of features. You can download and create an account, whether you're a customer or not a customer.
The app provides interactive feedback on each trip a driver takes. You can see a map of how you did. It scores the trip based on our telematics pricing algorithms. Customers can access their last 100 trips, along with a dashboard of safe driving trends to identify and analyze patterns in the driving behavior. The app is integrated with Allstate Rewards, which is a point-based program that links to an online store where participants can spend their points on discounted merchandise or enter into auctions or sweepstakes. You can compete with your family members on who's a better driver. We've built this with an open API so that other people can tag into our platform. Here's a couple of pictures to illustrate. You're looking at the morning commute of one of our Drivewise officer leaders.
As you can see on the left, her trip on August 24th was clean with no incidents. As you can see on the right, a week later, she went over 80 miles an hour. That's the little red. She had a hard braking incident at the same time, obviously needed to slow down. A couple of points. Having a couple of incidents isn't suddenly going to make us change our price for her because she sped up. She could have been passing somebody. She could have been stopping to get out of somebody's way. That said, when you see this, if you see the difference between the behavior over and over and over again, then obviously on the right, you're a little more aggressive driver than on the left.
Here's another example of where one of our senior leaders was pursuing his passion of driving racing cars. He decided to record it on the app. You can see there's a lot more reds. That's over 80. You can see a lot more Bs, which is hard braking. He looks at this data to see how he should race because you don't want to brake too early. When he actually analyzed this, he was telling me, well, he said, "You might wonder why my Bs spread out. Well, as the tires heat up, you can brake later in the turn because they're warmer, and they grip better." You can use this data to help you decide whether to be a better driver.
Obviously, if we were rating him, we'd charge him a lot more than we would charge our other leader because he's obviously speeding a lot more and driving more aggressively. We hope you don't do this, but if you want to download the app, try not to race if you're one of our customers. I think it gives you an example of how we're using technology and using our connectivity with customers to expand our value proposition in addition to giving them a more accurate price. It clearly helps us give them a more accurate price, but we're trying to make it more than that. To summarize, Allstate represents an attractive investment opportunity for a number of reasons. Our strategy offer is to provide a competitively differentiated, unique customer value proposition to different segments.
We consistently produce good long-term underlying returns across a broad set of businesses. Our growth is diversified across customer segments, brand, geography, and product offerings. We stay focused on our priorities. We proactively address issues and execute well by balancing risk and return across the organization. We have a long history of providing solid cash returns to shareholders, as you can see from the bars on the left-hand side of this chart. With that context, Jay, why don't we get started, and Judy and Pat, you want to come up?
That's great. Thank you, Tom. Pleased when we have you here. We're also joined by Judy Griffin, who's Allstate's Chief Investment Officer, and Pat Macellaro, who's Head of Investor Relations. For this portion of the Q&A, Tom, I think a good topic to start off with would be some of the recent challenges within auto insurance. You talked about miles driven being a pretty important factor in terms of leading to increased frequency, but also alluded to some other factors. Maybe you could talk a little bit about those.
Sure. Well, first, the reason when your combined ratio is above where you want it to be, we'd like to be sort of in the 95, 96 zone, and it's higher than that. It's 97 on the last 12 months. It was up more than that in the last quarter, but there were a lot of cats in the last quarter. Obviously, we want to be at least a couple of points better than we are today. That's the most important thing. We're going to get to where we want to be. Why we got to where we are, to 97, is important only to help you decide how you're going to get back to where you want to be. Obviously, people have been driving more. As they drive more, there's more accidents.
As there's more accidents, it costs more to fix cars because there's some capacity in the restitution business, the body shops and stuff like that. Your severity goes up a little bit. There were a couple of other things that I mentioned. One, in terms of claim staffing, we took a pension charge. We changed our pension plan about a year and a half ago. We equalized it amongst all of our employees. We ended up reducing the liability on the balance sheet by about $700 million when we did that. As a result of that, we had about 600 claim employees take retirement because the way the plan worked, you weren't accumulating additional retirement at some point. A lot of people retired. At the same time as a lot of people retired, we had to hire new people.
At the same time as that happened, we got a whole bunch more accidents. As a result of that, I would say our claim effectiveness deteriorated a little bit. That's shown up in one of the ways you look at that is how long does it take to settle a claim because if you got to pay for an extra day of rent a car and that kind of stuff, it doesn't sound like a lot, if it's another $30 for a day of car. When you add it up by millions of cars, it adds up relatively quickly. We're working on getting back to where we were in terms of claims settlement practices. That'd be one thing. The growth we had, there's some people have said, "Well, geez, your growth is over 3% in auto.
That's better than Progressive at 2%. You must have written a lot of bad business. We've kind of crawled through that to make sure that our pricing algorithms are right. We think they are right. That growth does hit your combined ratio because your first time you price somebody is not as good as the second, third, fourth, and fifth time you price somebody, you can't be as accurate. That's probably hit the combined ratio by half a point to a point. That's manageable. We knew about it. We're actually okay with that because over time, at a 3% growth rate, you're picking up share, and that adds value.
I would say there's a few other things rattling around in terms of expenses and stuff like that. Those are all things we get paid to manage. When we get into this kind of environment, we'll cut those extra expenses out. None of those, though, will have any impact on the long-term growth and future trajectory of the business. We're still earning a good combined ratio. It's a good return on capital. I want to be where we want the business to run. I'm not so worried about it that we're doing what we did in homeowners, which was it was all hands on deck, get that business fixed, got smaller by a lot, raised price a lot. We're not in that kind of position.
Unlike homeowners, say, several years ago, although there's still a sense of urgency to address the margin issue within auto, it certainly sounds like a fixable issue.
Yeah, we believe it's fixable. In homeowners, we went from making $1 billion to losing a billion and a half because of severe weather. When that happens to you get focused really fast and really intensely. This is not that case. You're talking about hundreds of millions of dollars, not billions of dollars.
Allstate's target in 2015 is for an underlying property liability combined ratio between 87%-89%. In the first half, it was 89%, so at the upper end of the range. As we're late into the third quarter, what's your comfort level of achieving the full year target?
Well, obviously not as good as if I had been at 86% for the first six months. If you've got a goal, let me maybe set some context. When I became CEO almost nine years ago, I wanted to get off earnings guidance. We've been doing earnings guidance, in a business with our kind of volatility, it doesn't make sense. The trade I made at the time was, I'm not going to give you earnings guidance, I will give you a combined ratio that I think reflects how the business is running. I'll give you a range, and the range has typically been about two points. 87%-89% this year is about typical, because frequency can move on a point on any given year without really much going on, and the same thing is true of severity.
That's why we give a two-point range. We've been inside that range since we've been doing that. I would prefer to be below 89% after six months than above 89%. That said, if I thought we weren't going to be inside the range, I would have called it by now. We have two quarters to make sure we stay in the range. We're working hard on it.
Other major auto insurers like GEICO are also seeing margin compression in auto insurance, it hasn't been the case for Progressive, at least not yet. Any thoughts why?
I can't tell you why Progressive's results are what they are. This business is complicated enough, and we have enough data, so you can really rip apart your own business pretty well. Comparing that to another company is possible and doable, but it's not really that easy on a quarter-to-quarter basis because you just don't have the breadth of data. I can't tell you why their results in the second quarter or the first quarter were different than GEICO's and ours. What I can say is a couple of observations. If you look at that chart we showed on combined ratio, GEICO, Progressive, and Allstate tend to be in about the same zone for a decade, right? We all operate better than the industry, and we're all kind of in that low to mid-90s range on the combined ratio.
I don't look at GEICO and think that the wheels have fallen off and that Tony Nicely and his team suddenly are going to get their clock cleaned because Progressive's figured out something else. I'm like, yeah, it bounces around. This is a volatile business. That's why we get a good return because it's a volatile business. I can't speak it. What I can tell you is our goal is to stay in that upper echelon and better than the industry, which means we got to get our combined ratio down from where it is today into the mid-90s.
How long do you think that takes, Tom, to get auto back into the mid-90s?
Yeah, it's hard to tell. The way you would make an estimate of it, if that's what you were attempting to do, is you look at the combined ratio, obviously, and then you say, well, how much is their average price going up, and how much is the, what we call paid pure premium, which is basically total loss cost and expenses going up. As you saw in that one chart, it's going up higher than the other, and our combined ratio at 97 for the latest 12 months means we got to pick up a couple of points. How long would it take you to pick up at least a couple of points? Well, you got to get either your prices above that by a couple of points for some period of time, or you got to get your cost down.
That's actually not that hard to do. The reason it's difficult to predict when exactly it will happen is you don't know what's going to happen with frequency and severity going forward from here. If miles driven are going to continue to go up and people are going to continue to drive more, then we're going to have to continue to take more price increases, and it will take longer to get it. If frequency and severity were to flatten out, given the fact that we're accelerating our price increases from the 1.9% we had in the first half, we'll do more than that in the second half. It won't take as long. Unless you can project in the future. What I do know is that as frequency and severity goes up, we do and will raise our prices.
We will figure out how to make more money. The higher premiums actually means you make more absolute dollars. It's a little bit of a blip here, but to the extent you're charging more, you make more absolute dollars.
Slowing growth would probably be a positive contribution to margin over the intermediate term as well, right?
Yeah, we will slow growth in these. As I said, we ran, I think, 33. Is that right, Pat? 33 in the-
33
First, this last year or so. 3.3% of items in force over the prior year. We kind of talk in code sometimes in this industry. That will come down. It'll come down for three reasons. First, the Allstate brand will come down. In addition to price, there are underwriting standards and things that you ask in your agencies to do and stuff that weed people out from the customers that you will take. We've put a bunch of new underwriting standards, and that'll probably cost us on the last number I saw is 69,000 policies this year. It's a guess. We will get smaller on growth from there. Esurance will get smaller because we cut advertising there. While we're getting a return above our cost to capital, I'd like it to be higher than that.
I wanted to get us to a place where we were sustainable in terms of being able to compete in the direct business. At a billion and a half dollars, we can compete on an ongoing run rate basis with advertising. Now that we're at what I think is a sustainable level, I'm like, okay, we should make more money. We cut some advertising there. We were investing over $200 million a year. That'll come down some, which means growth will come down. Encompass, which is our independent agency business, is actually getting smaller. As a result of that, you'll see auto items in force come down. What you will see, though, is homeowner items in force will start to go up. We're getting a really great return on capital in our homeowners business today.
That wasn't the case as you saw from that chart four or five years ago. We're increasing our focus on auto insurance or on homeowners insurance so that we can drive more absolute dollar profit to the company.
Excellent. Okay. Let's switch gears to capital management. With the recent pullback in Allstate's share price and Allstate having been, over the past many years, as you pointed out, shrinking the share count already by 25% since 2010, should we expect a faster pace of the buyback?
It all depends what you thought the pace was going to be. Yes, we're buying shares back aggressively. We like this price. We think it's cheap. If you look at our history of our $ that we approve in share repurchase and the period of time through which we say we will buy those shares back, I don't think we've ever. Maybe one program we canceled back in the Financial Crisis. I think we stopped that one. Other than that, we've always done it faster than the allotted time. If you were to take it and say, I'm just going to average it over the 18-month period where it was, we're always faster than that.
Yeah.
A small drop in the auto combined ratio doesn't impact how much capital we have or how much to buy shares back because we buy it basically a year in arrears.
That should be viewed as a signal of the long-term earnings power of the company that you're comfortable in terms of deploying excess capital to buybacks even more aggressively.
Yeah. Our plan, obviously, what you'd like to do is deploy capital behind your capabilities and get a 13%-15% return for your shareholders. You can do that, you do that all day long. If you can't do that, then the money should go back to the shareholders. We kind of do it a year in arrears. When we size the program, it's not based on an assumption of how much money we're going to make in the next year. We size it saying, even if we made no money in the next year, we could buy back this amount of stock.
Excellent. Judy, it's time for you to have a perspective here. Give Tom a breather.
All right. Thank you. With my cold, I'm like, please.
There's nothing going on in the investment market.
That's right. Maybe something happens this afternoon.
Maybe.
Maybe not, with regard to the Fed. Judy, can you discuss how Allstate has been navigating the low interest rate environment in the investment operations and what kind of the outlook is there across the, I believe $75 billion portfolio-
Sure
across property casualty and the financial services business?
We've been doing a lot in the portfolio, as Tom mentioned in his remarks. First of all, we're well positioned for rates to rise. A few years back, we shortened the duration in the Allstate protection portfolio. The reason why we did that, we weren't really trying to time the market. What we were really looking at was risk-reward trade-offs in rates and just felt like there wasn't enough there to justify the risk in rates. The diagram that Tom showed you, our four-square and the investment portfolio, that really is the way that we think about the risk-reward in the markets and how we should be managing the portfolio and how we can get a great return for Allstate.
We reduced our exposure to rates. At the same time, we looked at it and said, well, we still have to get a return in the portfolio. One component of it, which Tom talked about, is that market-based active approach. We call it market-based active. It's a portion of the portfolio that we segregated that we say, you know what? We're going to make that portion of the portfolio work harder for us. A lot of asset managers manage on an active basis. We have a lot of exposure across a lot of different markets, and we decided that we wanted to get a portion of our portfolio to work harder for us. It's got fairly aggressive goals in terms of what we expect out of our team. As far as we're concerned, and our initial results have been pretty good with that component.
As Tom mentioned, we also have what we call performance-based. Really what that is just good old fashioned go out and find good investments. It is more idiosyncratic risk. You might show up in private equity, real estate, infrastructure, other areas within the portfolio. What we are trying to do there is just get good returns over the long term. As Tom also said, some of that may show up being a little bit volatile because of the way that it comes through our earnings. The LP results come through investment income. Over the long term, we look at that and say, "Those are going to be pretty good returns." In a low rate environment, we want this portfolio to continue to work for us, and over the long run, we believe it will.
Excellent. Why don't we switch to the audience response system portion of the slides? For the folks in the audience, you each have a clicker, and I will read the question, then you have about 10 seconds to weigh in on the issue. First question is, if you currently don't own shares of Allstate or happen to be underweight, what would cause you to change your mind? Have 10 seconds to log in here, and we can start the clock. The factors being faster growth in Allstate brand auto policies in force, improvement in combined ratio on an underlying basis, then potentially rationalizing or exiting financial businesses or life insurance operations, or lower valuations. The answers here are 74%, improvement in the underlying combined ratio. What do you think about that, Tom?
Well, I am glad it is not five.
Which is none of the above.
None of the above. I'm glad it's not four-square, since both of those work against our objectives. I'm not surprised by it. People are saying, they're asking, "Is it sustainable? You've made a bunch of money in auto insurance for a long period of time. This looks like a blip. Is it a trend?" I wasn't surprised that the stock ticked down some. I was surprised by how much it ticked down, to be honest. I would just say, it just depends when you think it's going to happen. I showed at least 10 or 12 years, I don't know how many years on a slide, of making money in auto insurance. We have a business process and a system that works. In the U.S., we have 14 local market operating committees. We got people who got performance management.
They slice and dice the numbers down to even below zip code level by all kinds of different risk classes. We have the analytics, the processes, the people, the performance management, and I have complete confidence that they will get that combined ratio where it needs to be. The only question is really how much does it do to growth, right? You could obviously improve your combined ratio by just shutting down new business, and getting rid of the customers you're losing money on. On a long-term basis, you want to be more thoughtful about that. I would just say in terms of buying the stock back, it just depends when you want to call it. I have found over time that the market moves before. You could say, okay, well, let's wait until a year after you get it improved.
Probably going to be too late, right? Because somebody else figured it out. You say, okay, well, would I wait until it was one quarter done? Eh, you can decide whether or not it has been fully priced in at that point. Or do you do it two quarters before because you can see it and other people don't believe it. I would just say in terms of buying stocks back, our perspective has been, if you wait until it's proven in the market, then it's probably priced in. You just have to decide whether you believe us and think we can get it done. Making a call on when is really very difficult because you don't really know whether people are going to drive more and have more accidents in the future.
What you do know is, on a long-term basis investing in our company, we do know how to make money in auto insurance.
Okay. Next question for the ARS, please. What's your confidence level in the company's ability to achieve a higher return on equity above 13% over the next several years? We can start the clock. Level of confidence and ability to achieve a high return on equity. All right, the response is here.
That print is small. What is that?
It's a normal distribution I would say. Almost half saying medium confidence and then yeah, exactly a bell curve around.
A very high confidence. You never know what's going to happen, right? I'm not surprised at that. A couple of things. First, back when the weather got worse and the homeowners business got deteriorated, our return on equity went down to 9%. I think that was like, was that Pat, maybe Jay, you remember 2010, 2011. We said we'll get to 13 by whatever year it was, and we made it a year early. Despite the fact that interest rates had come way down, the investment income went way down. We bought insurance. Whenever you're predicting what your ROE will be, there's lots of stuff that you know and you can line out, and the other stuff that you don't know.
The stuff that we don't know today that's different is if rates go up, then eventually we're going to make more money on our investment portfolio in terms of operating ROE. Also, as we shift to more idiosyncratic investments Judy was talking about, some of that'll show up as capital gains. Which it gets a little confusing to people who look at our company and operating income, but it's real wealth creation. We have those two things which are going as. In terms of the other drags on the business we haven't really talked about what hurts ROE is we have in our life business, Allstate Financial. We've reduced the size of that business by about $40 billion over the last seven or eight years. We sold our VA business back in 2006.
Had we known the market was going to crash, I would've given it away, we actually sold it, luckily. We shut down our annuity business because we didn't like the returns. We exited the broker-dealer channel. We exited the bank channel. We basically reduced that business to two elements. One is it sells life insurance through the Allstate agencies in the lower left, where people want to buy stuff, and we get good returns on that business. We have a benefits business, a workplace business, which is growing at about 8% to 9% a year. It's high teens return on capital. It's got about 2.5 million to 3 million, maybe it's even 3 million people, Pat, who are insured on a daily basis. If you compare the value of that, it makes over $100 million a year.
If you compare that to what Assurant just sold, that alone would take up the value of our company. We have two good businesses there. Then we have the legacy block of annuities, which is about $30 billion. About a little less than $20 billion is in deferred annuities. That business gets an okay return in this interest rate. We have a block of payout annuities, which is about $10 billion, which gets really no return on equity. Just to help you think about how we manage return on equity. We manage this business for our shareholders long-term cash. That business gets, today, maybe a 5% return on what we think the capital is behind that business. It's going to go down. It's going to go down to zero on purpose because these are 40- and 50-year liabilities.
We need to have those assets behind those liabilities invested in things that generate good returns. That tends to be equity-like investments, real estate, private equity. The capital charges are higher on that than they are leaving it in fixed income. We could have a higher ROE, and it just would be really unhappy day for somebody 15 years from now when that fixed income portfolio matured paying 4%, and now they are way behind the curve because we weren't invested in equities that were getting us 10% to 12%. We will give up ROE if we believe it's in our shareholders' best interest on a long-term basis. We manage it, but lots of stuff happens along the way.
When you say give up ROE, you're talking in the Allstate Financial business.
Yeah, in Allstate Financial. The ROE on that portion of the business will go down intentionally because I'd rather do what's in our best interest long-term economically. We got that $10 billion. We got to pay that off, put it in some long-term assets. We can handle the volatility. We get a cash match, we have no cash issues for next, we usually run it five to seven years, depending on the block. We make sure we have enough cash, so no matter what happens, we can pay everybody for the next future five years. We have some stuff that we're not going to need for 15 or 20 years. Why put that in a low volatility investment and get a low return when we can put it in a higher volatility investment and over the period of time really create wealth.
That has higher capital charges. The regulators and everybody else make you put more capital up. I'm like, "You know what? If it's the right thing to do, it's what we're going to do, and if that takes 20 basis points off the corporate ROE, you pay us to run your company for long-term, not for just give you some reported earnings on an annual basis.
Excellent. Well, with that, unfortunately, we're out of time.
Sorry.
Well done today.
Thank you.
Please join me in thanking Tom Wilson, Judy Griffin, and Pat Macellaro.