Happy once again to have with us, Allstate. We've got Chairman and CEO, Tom Wilson, and CFO, Steve Shebik. Tom's going to start with some slides. Let me do a quick intro first. Tom has been CEO since 2007. Question for you, are you the longest tenured CEO since the company's been public now?
I don't know. Close, probably, yeah.
I think you are.
Ed was there.
I'm going to give you credit for that
I think Ed was seven, I'm at eight. Yeah.
He has been with the company since 1995, and I was talking to my daughter last night, and I said, "I'm sitting down with the CEO of Allstate," which she's 16, she knows your company. Said, "What do you want me to tell him or ask him?" She likes the Mayhem commercials. She wants to see more of the Mayhem commercials. Good. Just to give you a sense of that. Tom, we can go through your slides, and then we'll do a Q&A after.
Okay. Thank you, Jay. Good morning. Thank you for taking your time to come hear our story. Our goal today is to help you understand our strategy, and how we create shareholder value. I'll use a handful of slides to just set some context, and then we'll have a conversation with Jay and with you. Also available, of course, are Steve, and then Pat Mascolo, who's our Vice President of Investor Relations. Before we begin, let me do the obligatory forward-looking statements, references to GAAP. I'm sure you can read this faster than I can say it. I would just tell you we have a long history of good, full transparency, whether it's our SEC filings or our website. Allstate is a unique and attractive investment opportunity. Through three strong property liability brands with different customer value propositions, we serve 60 million households in America.
We also serve many small businesses and have strong investment capabilities. There are five key components to Allstate's investor value proposition. First, our strategy differentiates us from our competitors. Secondly, we generate attractive returns on both auto insurance, home insurance, other personal lines, life insurance, workplace benefits, and through investing an $81 billion portfolio. We're growing total policies in force by leveraging these value propositions and expanding our product and geographic footprint. The outcomes of all of that is we have a history of generating excellent returns for shareholders. I'm going to move a little away from insurance for just a minute, the auto insurance industry is evolving rapidly with technology developments that offer huge benefits to society, whether that's fewer auto accidents or more lives saved.
These advancements also support vehicle sharing and connect cars to infrastructure and then to each other. Allstate's broad-based strategy supports growth, even with the potential impact this could have on reducing the size of the auto insurance market. We're often asked questions by investors, "What happens to the auto insurance market if Google or the auto companies are successful in building driverless cars?" We looked at this question using scenario analysis, which shows that the impact is likely to be modest over the next 10 years. On a longer-term basis, these technologies create both risk and opportunity. The scenario analysis contemplates four different future states of personal transportation, which are shown in the box on the left. Each scenario considers the commercialization of new car technologies, the fleet size, technology cost and efficacy, as well as inflation of medical and repair costs.
While the scenario analysis is not determinative, of course, the work concluded that the two largest drivers of future industry trajectory are the size and changing composition of the auto fleet and the cost of accidents. Let's start at the bottom of this box, with a decreasing size of the U.S. auto fleet. In this case, there'd be fewer cars because new transportation models such as car sharing would be better and cheaper than owning your own car. As a result, there'd be fewer cars in the United States. At the other end of the spectrum would be an increasing number of affordable cars that use technology to provide efficient and effective transportation. The other key driver is the cost of accidents, which reflects both the number of accidents and the cost per accident.
On the left-hand side is where new technologies such as crash avoidance reduce the number of accidents, there's a declining cost curve on the technology systems used in automobiles. As a result, there are fewer accidents, when that happens, the cost of remediation is lower. The other end of the spectrum is cars are more expensive because of the amount of technology required in the car, there's higher inflation in medical and repair costs. This is only partially offset by fewer accidents, that the total cost of accidents increases. Let's start with the one that most concerns investors. That's in the bottom left, this one, the one we call The Jetsons. In this scenario, significant and rapid adoption of car sharing and other new transportation models, coupled with highly effective new and aftermarket crash avoidance technologies, dramatically reduces the fleet size and the number of accidents.
This more than offsets the upward pressure from inflation. As a result, the need for and cost of auto insurance declines over time. Back to the '70s, in the upper right, is the converse to The Jetsons. In this scenario, consumers continue to value owning their cars because they like the freedom of choice, or they live in rural areas. The cost of cars increases because of all the embedded technology and higher inflation of medical and repair costs. While crash avoidance technologies reduce the number of accidents, they do not offset those upward cost pressures. As a result, demand for and the cost of auto insurance continues to grow. The other two scenarios, Love My Car and Easy But Expensive, are hybrids of those two cases. We then forecasted potential future auto insurance premiums.
As you would expect, The Jetsons scenario results in the most downward pressure on auto insurance premiums, which is shown by the green line on the graph on the right. In this case, premiums stay relatively flat for about 10 years and then begin to decline in absolute terms for another decade. This makes sense given that people don't buy new cars that often, and it will take a number of years before new technology is fully deployed into the auto fleet. While inflation is modest in this scenario, it does increase costs somewhat. The other three cases show an increase in insurance premiums, as you can see from the red, yellow, and orange lines. Our broad-based strategy will drive growth in all of these situations. The use of differentiated value propositions provides the best price value relative to our competitors, which supports customer retention and new customer acquisition.
Secondly, homeowners and other personal lines products such as renters and boat insurance make up 30% of Allstate brand personal lines premiums and would not be directly impacted by these trends. As you know, the trend towards more severe weather has led to an increase in average homeowners premiums. Our strong brands and operational performance also enable us to pick up share in tough markets. We also have a number of higher growth businesses such as roadside services, Allstate Benefits, business insurance, and dealer services. These technology trends, they create upside beyond those three scenarios where it goes up. That is, for example, our Drivewise and DriveSense products leverage connected customers through our car technology, which enables us to give customers a more accurate price, improve their driving experience, and monetize data. As you know, no forecast of 10 or 20 years is really that accurate.
We continue to work to take advantage of any innovative disruptions. The point of this analysis was to verify that our strategy enables us to grow even in the face of tough macro conditions. Our strategy is to segment the consumer insurance market and provide unique value to each segment. Personalized insurance customers fall into four distinct 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. Our approach is to position each of our underwriting brands, Allstate, Esurance, and Encompass, with segment-specific value propositions in a broad range of product offerings. They then compete directly with competitors for a share of premiums and profits.
This approach provides us with flexibility to align our brands with the needs and preferences in each segment, and we are the only company with a presence in each of these segments. 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. These customers are served by the Allstate brand value proposition. This includes a wide range of proprietary products and over 32,000 highly engaged Allstate exclusive agency owners, financial specialists, and licensed sales professionals that are in virtually every local community in the United States. This is our largest and most profitable segment, and we compete aggressively with State Farm, Nationwide, and Farmers.
To further strengthen our competitive position in this segment, we're changing our processes, technology, products, and rewards to position Allstate agencies as trusted advisors, which leans into that local advice need of customers. In the lower right, we're expanding Esurance's product portfolio so it underwrites homeowners, motorcycle, and renters risk for self-service customers, which will lower acquisition costs per policy. We compete with GEICO, Progressive Direct, and USAA in this segment. In the upper left, Encompass provides mass affluent customers with a packaged auto and homeowner policy through local independent agencies. Answer Financial in the upper right is an aggregator of insurance policies that serves customers who prefer self-service and are brand neutral. Our goal is to provide the best value for each segment through low cost by using superior analytics and pricing, risk management and claims, and advanced telematics and digital technology.
This strategy is resulting in increased policies in force, and generates attractive returns. Unit growth is diversified geographically amongst brands and products. The largest driver of growth last year was the Allstate brand, which comprises about 90% of premiums. We're also investing heavily in growing Esurance's market share. You can see the upward trend in the Allstate brand auto insurance starting in early 2013 by the green line in the chart on the right. Homeowners policies, in force, began to grow in the second half of last year as we had largely completed efforts to improve returns in this line. Growth in both lines is reflective of effective marketing, a growing and highly engaged agency force, and sophisticated pricing and underwriting. Profitability is also a key driver of shareholder returns and also is in a good place.
The chart on the bottom right highlights the consistent zone of returns from Allstate brand auto insurance and the significant improvement in Allstate brand homeowners returns since 2011. The auto insurance combined ratio is shown in green, and it's consistently below 96, reflecting a micro-segmented approach that uses all of our countrywide learnings to manage the business locally. Allstate brand homeowners has adapted to an increase in the severity of weather and improved profitability, as you can see from the orange line on the right. The combined ratio last year was 82.5, which generates long-term returns on capital in the mid-teens. We've repositioned that business to be a source of profit for us, even in periods with higher relative catastrophe losses.
Allstate has always focused on returns on capital, given its importance to shareholder value, there are a number of other value considerations, however, which are beyond current earnings. For example, Esurance is operating at an underwriting loss because we're investing heavily in marketing to grow share. This business has 87% more policies at the end of 2014 than it did when we acquired it three years before and is generating long-term returns above our cost of capital. We believe this business is worth substantially more than the $1 billion we paid for it in 2011, despite the fact that it shows up as an underwriting loss in the P&L. Allstate Benefits is growing rapidly and has a return on capital in excess of 15%, and would justify a higher premium on its $114 million of operating income than a traditional property liability multiple.
There are different stories for Roadside, Dealer Services, and Answer Financial, but the valuation implications are similar. Secondly, our proactive approach in managing capital has created shareholder value. We took advantage of investors' desire for fixed cash returns to restructure the balance sheet in 2013 and 2014 using preferred stock to replace common stock. Today our debt-to-equity ratio is below 19%. As capital markets continue to develop alternative sources of risk capital for reinsurance, we'll take advantage of our expertise and market position to improve returns or lower earnings volatility. We have a successful track record in selectively pursuing adjacent acquisitions, whether that be Allstate Benefits in 1999, the Partnership Marketing Group in 2008, or Esurance in 2011. Allstate Benefits is one of the largest insurance providers of voluntary workplace benefits in the U.S., generating almost $1 billion in revenue in 2014 with 3 million policies in force.
We acquired this business in 1999, it is now more than three times its size of when we purchased it. The acquisition of Partnership Marketing Group more than doubled our Allstate Motor Club, which provides 24-hour roadside service through a national network of service providers. Our investments in Connected Car are also building future value but reduce current earnings. With both the Allstate brand's Drivewise and Esurance's DriveSense program, we offer interactive products that have the potential to change the insurance market. These offerings enable us to give customers a better, more accurate price, and it broadens the service they get from Allstate. We invest a substantial amount of money in these offerings each year and are making considerable progress in creating future revenue sources. Most of this investment, however, is a direct reduction in current profitability.
To summarize, Allstate represents an attractive investment opportunity for a number of reasons. Our strategy is to provide competitively unique value propositions to each consumer segment by leveraging analytics and advanced technology. We consistently produce good 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, 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 charts on the right. When you combine actual common dividends with the cash return versus share repurchases, cash returns generated by investing in Allstate have been in the range of 9% annually over the past four years.
For 2015, we increased our common stock dividend by 7% and authorized another $3 billion share repurchase program to be completed by the end of July 2016. Allstate shareholders have also experienced a total return of about 160% over the past five years, compared with just over 100% for the broad market and our P&C insurance group. With that context, let's address your questions.
Great stuff, very interesting new slides up there. Let's start with the goals for 2015, your strategic priorities. They were essentially the same as 2014. Two things. One is just remind everyone what those goals are. Secondly, have the priorities changed? Would you rank order them differently than you did a year ago?
Well, our business tends to work in sort of two or three-year cycles. We had a great 2014. Some of that work was done in 2012, some in 2013, some in 2014. Some of the work we did in 2014 obviously will pan out in 2015 and 2016. We try not to change the priorities too much from year to year. We have five priorities. The first is to grow units in force. We'll continue to do that. We grew about 2.5% this year, about 840,000 new policies. We expect to continue to grow this year. The priorities are basically the same. The Allstate brand will continue to grow, drive most of that. We expect Esurance to keep picking up share.
Probably the difference, Jay, between last year and this year is Encompass may not grow at all because of our focus on improving its combined ratio. The second priority is to maintain our combined ratio, and we've committed to the same underlying combined ratio, 87 to 89 this year as we did last year, and we feel good about what we have going in terms of our profitability, in part because we manage that business so locally. Sometimes people think it's just one number, but we're adjusting it in lots of micro segments by territory, by price, by product, each and every day. The third is to proactively manage our investments. We are in the investment world. Our $81 billion portfolio is really positioned for U.S. growth and continued weakness in the international markets, and we expect that to be the same.
We've shortened the duration in the property liability portfolio a couple of years ago, despite the impact it had on operating income, because we just didn't like the risk-return trade-off. It's not like we're trying to trade interest rates or something like that. We just didn't like the risk-return trade-off. The fourth is to modernize our operating model. That's simplify technology, do continuous improvement to take costs out so we're delivering the best value. An effort we call integrated digital enterprise, which is about using advanced technology and digitization to redo the back office of the company. The last is to build growth platforms, which are things like Drivewise that's leading into the future.
The Allstate brand has been a phenomenal profit builder for the company, certainly in the auto side. The other brands, the track record's been a bit spottier, let's say. Let's talk about Esurance. The growth has been significant. The loss ratio is still above where you want it to be. First of all, is that fair?
That's fair. Maybe I'll make a general comment about the strategy and see if we can pick up Esurance's profitability. We bought Esurance because we started to see that GEICO and Progressive were starting to move into the left-hand side by trying to offer more bundled products. GEICO has been starting to add some agencies because they can provide that local service. We said we could not let them come into the heart of our business unattacked. We said we need to out-GEICO GEICO with our theory, out-GEICO Progressive Direct by having a really strong value proposition in the self-service segment. That's why part of Esurance's message is seven and a half minutes, not 15. We're trying to really lean into that self-serve question. We are investing a fair amount of money to grow it.
Last year, we probably spent over $100 million of incremental advertising over what the size of the business would generate so that we grow share, so we build a bigger position there. Steve can talk about the loss ratio and what they're doing.
Yeah, the loss ratio side, we're running a little higher than we would like. If you looked at our earnings call, we had a slide, and it showed kind of the history from when we bought Esurance, and our loss ratio rose by the last half of 2013 into 2014, and we started taking action, raising rates, better underwriting in a select number of states to try to bring that down. We've been successful the last couple of quarters of 2014. When you grow a business, we expect some volatility, some stress from growth across the country. We rolled it out from, I think it was 33 states when we bought it, and we're at 43 states now we're in. That you expect some pressure. As we learn.
As a direct business, part of the reason we bought Esurance was they had expertise we didn't have at Allstate. We have put our pricing expertise in with Esurance. We're making really good progress now at getting the loss ratio down to something we think will be better than where it is today, more along the lines we want it to. With that said, we're still earning an economic return over the long term, and that's what's probably most important to us.
Really, like I said, we're starting to roll out homeowners in that business as well. That's a good business for us. We know how to do that business well.
What about Encompass? You guys know how to price auto and home. I had assumed when you had gotten into this other distribution channel, you'd be able to develop profitability that was not dissimilar to the Allstate brand. What's going on there? Why is it not doing exactly what you guys want it to do?
Well, you're correct. It's not doing what either of us want. They need to make some more money. We're working hard on that. I think there's a combination of things. One would be that the growth and aggressive use of comparative raters, and the sophistication of a couple of people in that independent agency channel and how they price, we got caught a little behind. I think some of that would be we just weren't used to competing in that rapidly changing comparative price shopping market in P&C like we were in life insurance. We used to be in that segment in life insurance. We knew how to work the spreadsheets there. We had to develop that capability.
I think some of it is we missed the call on how much the market was going to change and get more competitive using comparative raters. Our people didn't really have the talent and expertise. We fixed that. We fixed the talent part. We'll see how we fix the market part.
The outlook is for that loss ratio to begin to come down in 2015?
Yes.
Yes.
By our decree and their work, hopefully.
Under the Allstate brand, clearly the dominant part of this company, one of the ways to grow it is growing the number of agency owners. Can you talk about that strategy, what your outlook is for 2015 as far as agency growth?
We have about 10,000 agency owners in the U.S., and then about 32,000 people who work in those agencies who only do our stuff every day long. Those are called licensed sales professionals, exclusive financial specialists. We look at both of those figures because a new agency owner enables you to go to a new market where you don't have anybody, right? If you look at our spread, we're strong in large urban areas. We're not as strong in the middle part of the country or in some rural areas. We have places where we could add agency owners, and they could build staff around them and grow the business. At the same time, we're also trying to just expand the number of licensed salespeople in the 10,000 agencies we already have. We're working with our agency owners to do that.
The number of agency owners was up 4% last year. I think the total licensed sales producers was up a shade more than that. It could have been 6% or 5% or 6%.
Yeah.
We're both adding new locations and adding more people per location, which drives growth because when you add those people, they know people locally, they work the local system, they do local marketing. There tends to be a little bit of lag in that, though, Jay. The 4% agency owners we added last year probably really didn't add much in net volume last year.
Right.
It'll add volume in 2015, 2016, and 2017. If they get their businesses up, they get a position in the marketplace.
As far as the agency owner growth in 2015, should we expect a similar trajectory?
You should expect it to be positive. We don't have a specific percentage because we find when we get a specific percentage, we hire to the percentage as opposed to hire to the skill capability and market opportunity. We have plans in all the local areas. They all have plans they've built. We have a plan number, but we don't have a plan as it relates to overall strategic growth from Steve and I's standpoint. Matt's got a number he manages, but we try not to make it so precise from a performance management stuff because we can't hire people. We do know how to hire people. We just want to hire the right people.
Any questions in the audience? Just raise your hand and we'll get you a mic. We've got a couple on this side over here.
I should say, we don't actually hire them. We contract with them.
Yeah, good morning. A question about your clients. Can you talk us through how many clients have both car insurance as well as home insurance with Allstate? To what extent does that allow you to improve your insight in terms of risk and pricing?
Well, we cover 60 million households. There's lots of different ways to do that number, I'll give you one way to do it. We have 60 million households, and we sell 6 million homeowners policies. A large percentage of those have at least one car with us. It all depends how you want to do it. We have 24 million policies in force in auto insurance, but it's different brands. A fair number. Depends how you want to slice and dice the number, but it's good. We like not to give out that too much from a competitive position. I will tell you that the retention of those customers is significantly higher if they have multiple products with us. Now, some of that is because they have multiple products with us.
Some of it is because they like us enough to buy multiple products. You got to be a little careful with the numbers as to what kind of retention list it gives you. Definitely, it's a good thing. It's good for the long-term growth of the business. In the Encompass segment, almost all of them. Because Encompass, I think it's over 80%.
Yeah.
It wouldn't be that high in the Allstate channel, but it would be more than half of the Allstate channel.
Any question over here?
There were some rumors, or there were some articles a few weeks ago that Google might be moving into a price comparison website for P&C insurance. Do you see that as potentially disruptive?
Well, I think, anytime a company that has the kind of profit margins and cash flow that Google has, and they say they want to get in your business, you ought to be paying attention. Start there. I don't care whether you're a retailer or auto insurance company or anybody else, you ought to be paying attention. You should know that Google provides services to the insurance industry, we pay them a fair amount of money each year for leads. They take their traffic, and they monetize it and generate profit off it by selling it to us. If they chose to not sell it to us, but to get in the business of selling somebody else's insurance, then obviously we would not be paying them for those leads.
They'd have to determine whether they could make more money off a brokerage commission for an insurance company than they would by selling us the lead. We are the largest online aggregator in the United States, we believe, with Answer Financial. We do over half a billion dollars worth of business in that channel. We know the economics of that channel. We're not sure the economics of being a broker outweigh the economics of being a lead generator. We know both sides, so we both buy them in. We know what you make by selling other people's products. We do not think they're likely to get into the underwriting claims settlement side of the insurance business because that's relatively complicated. We're paying attention to it. We're obviously in conversations with Google about whether they're our friend or our enemy.
We'll act accordingly when we figure that out.
About one minute left. Any other questions? Matt, why don't you take the last one?
Thank you. In the slide where you lined up insurance for driverless cars, have you assumed that the driverless car insurance will be a personal lines product or a commercial lines product in those scenarios?
In those scenarios, we assume that the driverless car will be a commercial product, so it would not be in the auto insurance numbers that we showed.
Got it. Why don't we wrap it up here? Tom, Steve, great conversation. Great slides, too. Thank you very much.
Thank you very much.
Thank you.