We're ready to get started. For our next speaker, we're very happy to have with us Allstate. It's one of the only, or the only, personal lines perspective we get through the conference here this year. Tom Wilson, CEO. He's been at Allstate since 1995, and he's had a number of leadership roles during that time, for most of those years, actually. Since becoming CEO in 2007, he's guided the company through what can only be described as tumultuous times. With that, it's my pleasure to turn the stage and the mic over to Tom Wilson.
Thank you, Alison. Tumultuous would be one way to describe 2008 to today. Get this on. Not being tall enough, so you can't look over the mic you have, so move in. Anyway, first, thank you. Good morning, everybody. My goal today is to give you a better understanding of why now is a good time to invest in Allstate. What I'll do is I'll go through our strategy and how we expect to use that to create long-term shareholder value, as well as increase our number of customers and our market share. First, let me give you a message from our lawyers. Just to note that I'll be making some forward-looking statements, and there's plenty of information available on our website to help you understand the potential risks of investing in Allstate. Today, Allstate presents a unique investment opportunity.
We have significant capabilities to draw upon, starting with our very strong brand and our presence in 16 million American households. Our strategy is to offer differentiated products in the protection and retirement space to customer segments based on the unique characteristics, whether that's price, service, or delivery channel. This strategy differentiates us from all of the competition in personal lines business. To accelerate our success in that strategy, we have a clear focus on what we need to do in 2012. First, we have to maintain profitability in the auto business. We'll do this by making further improvements in the profitability in New York and Florida, and being diligent about our costs and prices, and providing Encompass and Esurance with the capabilities to improve their results. Secondly, we must continue to raise returns in our homeowners and fixed annuity businesses.
At the same time, we need to grow insurance premiums. That means we need to overcome those negative impacts of improving the profitability in a couple of large auto states, and what we're doing in our homeowner business to raise returns. We can do that by raising customer loyalty, growing in profitable auto and home markets, and increasing the number of multi-line households. Lastly, we have to proactively manage our investments and capital to give balanced returns for shareholders. On a longer-term basis, this strategy will generate a return on equity of 13% by 2014. It also enables us to position our product portfolio and platforms to meet the changing needs of customers over a longer period of time, and particularly focused on the personal lines insurance space. Let me go through our strategy. This slide should be familiar to everybody who's been following Allstate.
It's a representation of the insurance marketplace based on customer preferences for interaction and brand. On the left-hand side of the chart, you have customers who prefer receiving local advice and assistance. On the right-hand side, you have customers who prefer to do more on their own. The vertical axis distinguishes between how customers think about insurance companies. Those at the top are brand neutral. They tend to think all insurance companies are the same. If they recognize the name, it's about the same to them. They don't really care much about that. On the lower end are people who are brand sensitive, who believe there's a difference between insurance companies, and in fact, there's differentiated products and services. Allstate obviously has an extremely strong presence in the lower left-hand column, where people prefer local advice and assistance with their insurance needs and value a strong brand.
These customers prefer to buy multiple products and display excellent retention characteristics. The profitability in this segment is much higher than the overall profitability in personal lines. Our broad array of protection products as well as life and retirement solutions appeals to this customer segment. As you know, we acquired Esurance in the fourth quarter of 2011 to provide products and services to customers who prefer to serve themselves. That's in the lower right-hand corner of this chart. We're positioning the Esurance brand, leveraging our claims and products capabilities to compete directly with GEICO and Progressive Direct. We also recently launched a new Esurance advertising campaign, and we're making good progress in supporting this team and growing their business. In the upper left-hand corner are those customers who want advice but is not as concerned about the brand.
That's served by the independent agencies, that's where our Encompass business plays. We acquired this business in 1999, and we successfully reduced the combined ratio, which did generate an attractive return on the purchase price. More recently, this business has underperformed from both a profit and growth perspective. We have a new leadership team in place and expect Encompass to produce much better results in the future. With Answer Financial in the upper right completing the picture, we're the only insurance company that is positioned in every quadrant of the insurance market. Last goal, we introduced the goal of achieving an operating return of 13% on equity by 2014. Let me take a few minutes to give you more detail on how we expect to achieve this. First, let me start out by pointing that on average, our operating return from 2000 through 2011 was 13%.
As you can see on the chart on the left, there's a fair amount of volatility around that. We're working on reducing the volatility in our business, particularly as it relates to catastrophes. On the right-hand side, you can see the main sources of return. First, we'll maintain auto margins at industry-leading levels. The majority of the improvement in ROE over the next few years will come from our actions to improve homeowners' profitability. Allstate Financial will contribute by raising returns while generating excess capital over time. Finally, we'll proactively manage our investments to support the profitability in insurance businesses, making sure we balance risk and return. Let's go through each of these components. First, let's look at our historical performance in the auto business. For the last decade, we've produced excellent underwriting results, which are shown with the blue line on the left-hand chart.
You can see that we've had outstanding combined ratio, competitive with everybody, the key leaders in the business. That translates into high returns, as you can see on the right-hand side of the chart. You can see we significantly outperformed the industry on both a five-year and a 10-year basis. Regardless of the leverage you use, the returns put Allstate in the upper echelon in the industry. We expect to remain there going forward because we're maniacally focused on utilizing our pricing product and claims capabilities to generate solid financial results while making sure we give our customers the kind of experience they expect when they purchase the Allstate brand. Good returns are, of course, the foundation for creating shareholder value, but additional value also comes from growth.
As you can see on this next slide, over the last decade, we've had growth in premium and units in standard and auto. Net premiums and items in force grew from 2001 through 2007 as we developed competitive advantages as a result of improved pricing segmentation. Then we launched our Your Choice Auto Product, which we sold 5 million units of since then. In 2008 and 2009, we declined in both measures as we worked to protect our auto margins, given the uncertainty that Alison talked about in the other parts of our business. In 2010 and 2011, the impact of aggressive profit improvement actions in homeowners and New York and Florida auto insurance created headwinds for us to overcome.
In 2012, we expect to slow that decline by broadening our pricing targets, optimizing our prices, improving the efficiency of our marketing efforts, and working with our agencies to increase their effectiveness. This next slide shows the impact of the profit improvement actions of two large states have had on both unit growth and profitability. The combined ratio results are shown on the left-hand side. In 2011 for New York and Florida, you can see they were unprofitable in 2010, and they're slightly better than break even as you look at 2011. Given the actions taken to date, we believe those states are well on their way to sustained profitability. On the right, you can see the headwinds of growth, where we've gotten much smaller in those markets, but we've managed to stay flat in the rest of the country. Let me shift the conversation to homeowners.
Raising returns in this business is critical to achieving our 13% operating return on equity goal by 2014. In the upper left-hand corner, we show our rate changes over the last decade. Early on, the level of rate changes taken proved inadequate to offset rising loss costs in homeowners, culminating with a mandatory rate reduction of $250 million in California in 2008. In the last three years, we accelerated our pricing actions, averaging about 8% in countrywide overall rate increases. As you can see on the right-hand side of this chart, there's a delay in the impact of those rate changes, both in terms of average written and average earned premium. We'll continue to file for and gain approval for rate increases as necessary. On the downside, there's been a reduction in number of units as a result of these profit improvement actions.
We now underwrite about 1.2 million fewer homes over the last four years. Those changes have been necessary to react to the rapid increase in catastrophe losses since 2008 and to raise shareholder value. They obviously create headwinds trying to grow your auto business. We are able to save many of these customers because we broker much of this business using third-party insurance. Nevertheless, making that change still has a negative impact on your growth. This next slide looks at how the rates taken over the last three years are beginning to create margin improvement necessary to get to our goal of raising returns and getting the combined ratios down into the mid-to-low 80s. First, filed rate increases are shown in the upper left. You can see the increases since 2008, which was the first year we really had high catastrophe losses.
The chart in the upper left shows how you earn those rates in green. The red bar is the increase in loss cost. As loss costs go up, what happens is obviously your profitability goes down, which is why it's below the line. If green is higher than red, your margin goes up. You can see that in 2010 and 2011, green was bigger than red. The black line is the net margin, and you can see that it started to move up and we've started to make some progress over the last couple of years. The chart on the bottom gives you the combined ratio on an underlying basis, which excludes the effect of catastrophe losses in prior year reserve re-estimates.
In 2011, that blue line, you can see that we improved the underlying margin by a full 2 points for the year and showed increasing improvement as we moved through the year. The green line shows the combined ratio with the long-term average of catastrophe losses. That number still needs to come down into the mid-80s as well. In summary on homeowners, our goal is to generate an acceptable return on capital in the homeowners business, including catastrophe losses. We'll accomplish this by continuing to seek price increases as necessary. We utilize new pricing methods and tighten underwriting standards. Last October, we launched a new product in Oklahoma called House and Home, which has some unique features in dealing with roof losses, which is a large portion of the catastrophe losses come from people's roofs.
We recently started rolling this product out in another state, and we'll roll it out as we continue through this year and next year. In those markets where we don't want the homeowners risk, we'll continue to expand our brokering capabilities to provide those kind of options for our customers. When they're in that lower left-hand corner, they want to buy all their stuff from one person, we want to be able to provide it even if we don't want to deploy our capital to do that. Last year, we brokered over $1 billion in property premium. Over the last few years, Allstate Financial has undergone a strategic shift, one focused on improving operating returns while shifting the focus to the more profitable underwritten products distributed through Allstate agencies and Allstate Benefits. The results for 2011 were very good.
We had net income of $586 million and operating income of $529 million, and a return on attributed equity of 8.2%. An important element of this strategic shift is to drive greater participation in life and retirement sales by the Allstate agencies to those customers in the lower left of our strategic customer map. Life insurance applications through Allstate agencies increased by 33% in 2011 compared to 2010, as a greater proportion of our agency force participated in those sales. Allstate Financial, if we go to the next slide, is really four businesses. We've added some new disclosure in our investor supplement last quarter, which breaks down income attributed equity and operating returns by product to provide more transparency for Allstate Financial. As you can see on this exhibit, our life business and accident and health businesses produced solid returns in 2011, with returns of 11% and 15% respectively.
They utilize about half of the capital deployed. The spread-based products represent the balance of equity and produce returns of 8.8% for deferred annuities and negative returns for immediate annuities. We've raised returns in the deferred annuity business by raising investment income and lowering credit rates, and this business is running off over time because we sell other people's book value annuities these days. That business ran off by about $4 billion of liabilities last year, and it'll continue to run off over the next four or five years. We're also working to improve returns in the immediate annuity business by diversifying the portfolio, reallocating from fixed income investments and moving to really owning assets rather than lending on assets. That should enable us to generate higher returns and protect us from a long-term rise in interest rates.
Ultimately, as we shift the mix of products to the top part of that chart, as we grow life, we grow the benefits business, which has had a 15% compound annual growth rate in operating income for the last five years, and we reduce those ones on the bottom, that should enable Allstate Financial to reach its operating goal and help support the overall corporate goal of ROE. Throughout the tumultuous investment markets in 2007, we proactively managed our investment portfolio to generate solid returns. Over the last five years, we've lowered our allocation to municipals from $21 billion to $14 billion, or about $15 billion, as you can see on the right-hand side of that slide. Structured securities from $22 billion to $12 billion. We did increase the allocation to corporates from $35 billion to $44 billion.
Underneath that as well in corporates is we've substantially reduced the amount we have in financials, both in the U.S. and foreign. In 2011, we were able to maintain overall yields in the portfolio because we sold fixed income securities in January and February, both in the short end and the long end, we brought our duration in. Rather than having a spread out duration, we brought it into about the five-year point on the curve, which we thought was the right risk return trade, and enabled us to both maintain investment yields and reduce our reinvestment risk. We'll continue to proactively manage this portfolio, making sure we balance risk and return. As has been our practice for years, we provide an outlook for the underlying combined ratio for the property liability business.
For 2011, our underlying combined ratio was 89.3, which was right in the middle of the range we gave at 88-91 for 2011. For 2012, we have established the same range, 88-91, which is based on these factors below. First, we expect improvements in the underlying combined ratio for homeowners. That should be a positive, should lower the combined ratio. We also believe that improvements in New York and Florida will continue to flow through this year, which should further bring down the combined ratio. As the big states improve in auto margins in the country, we may let the combined ratio drift up a little bit in other parts to balance growth and profit because we're getting such good returns in those areas. Investments in growth for Esurance will move the combined ratio up.
It's always difficult to predict the direction of auto loss cost trends. This range is consistent with our 2012 goals of maintaining auto margins, improving homeowner returns, and growing insurance premiums. Capital management has been a recognized strength of Allstate since we've been public. This slide gives you a recap of the capital we've returned to shareholders since 2000 and the performance relative to several of our peers. Our business generates a significant amount of capital. If we can't generate good opportunities to deploy capital, we believe in returning to our shareholders, either through dividends or share buybacks. You can see we currently have a billion-dollar share buyback underway. We repurchased about $100 million of it in the fourth quarter. In conclusion, let's review why Allstate is a great investment opportunity. First, Allstate has significant market power with the second leading market share in personal lines space.
We have a strong brand, a diverse portfolio of products, strong capabilities in pricing, product development, and claims. We expect to capitalize on those strengths going forward by broadening the target in auto insurance, increasing the overall effectiveness of our marketing while continuing to work with our agencies to strengthen them so they can service our customers effectively. Secondly, our strategy is to offer differentiated protection, retirement products, and services to unique customer segments. We're the only company that has a market presence in all four customer segments now that we've closed the acquisition of Esurance and Answer Financial. Third, we've historically outperformed the industry in terms of auto profitability and have specific actions in place to drive improvements in our other product categories. Lastly, there's substantial upside to the company's valuation. We currently trade below book value and below our peers. Historically, that has not been the case.
The actions we've laid out in terms of achieving our return on equity goal will generate significant capital, which will also generate value for shareholders over time. We have an excellent record of track our capital management. With that, I'll take any questions you have. Over there. Yep. Morning, Josh.
Tom, I saw on the slide the investment in growth for Esurance. Can you comment a little bit more on the parameters about what the payoff is there, how much you intend to put in there, and what a unit of growth at Esurance is worth?
I'm not sure I understand. Just the second part, what the growth is worth, Josh.
Well, are you getting the same types of returns?
Oh, sure. Yeah. Okay. Yeah, I got it. First, we bought Esurance. We paid $1 billion for it, $700 million above book value. We believe that's economic force. We didn't just buy it because we thought it was a good strategy idea. No strategy is good unless you make money on it. The way we will make money on that business is really threefold. The first and most important is we believe we can lower the loss costs because we're much better at claims than they are. Secondly, when you put the Allstate name attached to Esurance, it increases the consideration and increases the close rate. Third, we're better at preferred products than they are. Last year, Esurance spent about $100 million in advertising. We will spend more than that this year. I'm not sure how much yet, Josh.
We want to see the benefits of that. We've now owned it for about three months. We're on track, and I believe actually we'll do quite well on the claims team. That should enable us to continue to invest in growth. We just started a new advertising program December 26 or something. I like the current conversion rate, so that should enable us to support more growth because when you say Esurance and Allstate company, more people buy. I like what that's doing. We're going to size it as we go throughout the year. I don't want to go crazy because you want to let the consumer come along with you. You don't want to get ahead of them in terms of advertising. Clearly, we're seeing good returns.
I believe the return on that business, on a piece of business itself, we should be able to get same kind of return there we get in the Allstate brand homeowners business. I see no reason why the return should be lower than the 18%-20%+ you saw there. The business should grow, and it should grow pretty rapidly, although keep in mind it's growing from a $800 million base, not a $17 billion base. It'll have some benefit to the overall growth rate of the company. It's not going to suddenly shift us into a 10% growth company.
Oh, hi. On the reduction in municipal holdings, could you maybe remind us or go over how much of that is due to valuation considerations, security specific considerations, and how much is over concerns about the asset class?
Very little of it is due to decline in value. If you looked at the structured securities, that wouldn't be the case because we lost a couple billion dollars on structured securities.
What about the considerations of valuation versus.
Oh, I'm sorry. I thought you meant just it went down because you lost money. That's another way to reduce your allocation, not a particularly good way. You've all probably had that happen to you at some point in time. First, we had grown quite rapidly in the municipal space over the prior four or five years before we got to 2007. When we got into 2008, 2009, we first had a macro call, which was, who do you want to give your money to? To just go very macro. We said, "If you don't like their income statement, their balance sheet, governance, or management, why would you give anybody your money other than the fact that they haven't defaulted before?" Based on that, we said we think it's not a great asset class to be in.
At the time when we added the pension funds in, actually, we were, I think, over $24 billion. We then said, well, but it's not a terrible asset class. It's not like you should totally get out of it, but we thought we could reduce it. We went in and certain types of bonds we got rid of. We got rid of appropriation bonds. We're not big on GO bonds. We went in and what I would say high graded the portfolio so that we still could achieve the after-tax returns we'd like from that asset class, but not do it in such a way that we were overexposed to the weaker segments of the business. We've made that trade. We liked it from a risk return standpoint. When you look at it on a full cycle basis, it was a good trade.
If you look at it last year, munis returned about 10% last year. You could say we should have been long munis last year. We're still long munis. We just didn't want to be long at over $20 billion.
Yeah. Hi. I just wonder if you could spend a minute on the company's defined pension plan, the defined benefit plan. I'd like to know, if possible, the size of the plan is, the underfunding, if any, year end, whether it's open to current employees, and if you have very low interest rates for a long time, what sort of headwind, if any, will that provide?
Okay. First we have two pension plans. One is an agency pension plan when our agents were employees up until 1999. That plan is closed. The funding is over 80%. I'm not remembering the exact number. In total, I think the plans on a book basis are about $1.2 billion underfunded. We put $500 million into the plans last year. We're going to put over $400 million in this year. The second plan is an employee plan that is now a cash balance plan. We shifted that, I don't know, five, six, seven years ago, so we tried to get ahead of it. That plan is also pretty well-funded. When you look at our plans, we got enough money and we put a lot of money in, I'm not concerned about it.
I've got a couple of questions. It feels like another opportunity is to improve the returns at Encompass, where the margins have not been good. I'd like you to talk about what the plan is there. Secondly, Answer Financial. In that space, there does not seem to be any sort of major brand name, any category killer. Could you make that a business that frankly stands out more than it has in the past?
Okay. Two different ends of the spectrum in terms of the growth. First, Encompass. Encompass has not performed well. We're down $1.7 billion in revenue since 2007. In terms of premiums, $800 million came from Encompass. I think that gets obscured a little bit. People keep looking at auto growth, they keep thinking it's all Allstate brand. Actually, Encompass has not done well. We just had the wrong leadership. We got out over our skis on single car policies. We didn't price it well. We wrote a bunch of bad business, we've been getting smaller and getting rid of that business. That's about done. I think Encompass should grow a little bit next year. That business, about 60% of the business is packaged product, so home combined with auto for what I would call mass affluent. It's got a good niche in that business.
We're back to basics. We have to make sure we stay with that focus, and we have to improve our agent relationships because obviously when you go down that big in size, it doesn't make people happy. While they can place it with other carriers, it's extra work for them, so we need to rebuild those agency relationships. We hired Tom Ely from Willis, who's got great experience in the brokerage business. We have a new team there, so I feel good about getting that business out. I'm still a little concerned that they haven't fully addressed all the catastrophe exposure in the homeowners business. We know how to do it, so it's work as opposed to trying to solve the problem. In Answer Financial, you're absolutely right. Nobody's really in that space. Let me just describe what Answer Financial does.
Answer Financial was started as an aggregator, I don't know, maybe a decade ago. A bunch of people put like $250 million into it. The idea was to have one place where you come, you can shop, and they'll put out the prices for everybody. It didn't work. Esurance bought it a couple of years ago. Everybody looked at it. Nobody could figure out what to do with it. It had a giant NOL, but nobody else could figure out how to make the business work. What Esurance does is if you call Esurance, they will put you one of three places. One is they'll send you to the Esurance, either website or a call center, and they'll attempt to close that business. If they don't close the business, they send it to Answer Financial, and Answer Financial will sell somebody else's product to you.
They might also put you up, second option is they put you up Esurance and Answer Financial, depending on your customer characteristics. Do they think you need to be shopped? Third, they might just send you right to Answer Financial if they don't think Esurance has a good price. It is a way for Esurance to lower its acquisition costs, which GEICO and Progressive do not have. Esurance goes out and advertise. People call them. If they don't close them at Esurance, they can send them to Answer Financial, and then you get an insurance commission from it. That business is growing quite rapidly. Answer Financial also gets some leads from other financial services companies, and works to close those. It's like a giant electronic independent agency.
That business in Europe would be called aggregators, and in the U.K., that business would be responsible for about 50% of the quotes in the business. That's not true in the U.S. I don't know if it will be true in the future. We are looking to see how do we want to leverage the skills and capabilities at Answer Financial to help drive increased growth beyond insurance. We don't know what the answer to that is yet, Jay. We bought it because it fit well with Esurance, and it helped lower Esurance costs. It clearly pays for itself doing that. I think there's strategic option value beyond that, which is why being in all four segments is good. What we want to do is be in all four segments. I have no preference for how a customer wants to do business with us.
I just want to do it the way that they want to do business with us. As the trends shift over time, we sort of got as many mitts out there to catch as many balls as you can.
I actually have two very unrelated questions. One, if you could talk about your appetite for share repurchase and how you look at the capital adequacy of the company and maybe your thoughts about, I don't want to call it excess, but the capital that you might use for share repurchase. Totally unrelated, in the homeowners business, as you're working to improve the results there, I know you've been moving policies where you don't manufacture the policy yourself, but you're selling other policies. If you could talk somewhat about how that's being received and branded, and by the agents and by the insureds.
Okay. Let me start with the second one first. First, our strategy in the Allstate brand is those customers who want local advice and want to buy everything from one place. That said, that's our strategy. We don't have to have our capital allocation follow that. To the extent they want something that we don't feel like making, we'll sell them something else. We've done it many times before. We sold our variable annuity business in 2006. We don't make fixed annuities anymore. We've never made mutual funds. We sell lots of those. We took that same concept In 2006, really. We're going to do the same thing in homeowners. We now broker over $1 billion of business. The business is not run as well as it could be because we kind of did it fast.
We said, "Look, we've got hurricane problems, we've got tornadoes, we've got wildfires." We moved quickly to move that business. Don Bailey, who used to be the CEO of Willis North America, runs a group of businesses for us, one of which is this Ivantage business, which is our brokerage business. It needs to develop new, better technology and better, broader relationships with more carriers to be sustainable on a long-term basis and really to enable us to make money. We make some money on it, but we could make more. That will continue to be part of our plan. I think by improving the technology and improving the portfolio of products will enable us to further accelerate the growth in homeowners without having to move off our strategy of selling people multiple things.
In terms of capital, we have a billion-dollar share repurchase program going on now. If you look at our capital structure, we have a holding company, which has $2.4 billion of cash in it. We have two insurance. The insurance companies are below that. We try to make sure that the insurance companies are adequately capitalized on themselves. The money at the holding company we view as deployable, is the word we use. Some of that deployable capital of the $2.4 billion, you want to make sure you have if the insurance subs need any money, we have about a billion dollars a year of dividends and debt service we have to pay.
Even if you don't make any money in the insurance business, you don't get any dividends out of the insurance company, you want to be able to have cash to meet the corporate needs. Clearly, of the $2.4 billion, the billion dollars could be paid out of deployable capital. That's the way we look at capital, which is if we have extra capital, we'll give it back to shareholders, either in the form of dividends or share repurchases. That's been our strategy, will keep being our strategy.
All right. That was great. Thank you very much.
Okay, thanks.