Allstate Corp (The) (ALL) — Q4 2019 Earnings Call Transcript

Thank you, Jonathan. Good morning and welcome everyone to Allstate's fourth quarter 2019 earnings conference call. After prepared remarks, we will have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement and posted today's presentation on our website at allstateinvestors.com. Our management team is here to provide perspective on these results and further context on our recently announced transformative growth plan. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements. So please refer to our 10-K for 2018 and other public documents for information on potential risks. And now I'll turn it over to Tom.

Well, good morning. Thank you for joining us to stay current on Allstate. Let's begin on Slide 2 with Allstate strategy. So as you know, our strategy has two components: to increase personal property liability market share and expand into other protection businesses. Starting with the upper oval, we've been a leader in creating differentiated insurance process features, such as declining deductibles and new car replacement. We used sophisticated pricing, have strong claims expertise and are building an integrated digital enterprise to lower costs. We're also diversifying our businesses by expanding our protection offerings, which are highlighted in the bottom oval. We leverage the Allstate brand, customer base and capabilities to drive growth in these businesses. So we offer customers a circle of protection that includes Allstate life, workplace benefits, commercial insurance, roadside services, car warranties, protection plans and identity protection. These growth platforms have extremely broad distribution, including major retailers, insurance brokers at the worksite, auto dealers, manufacturers, telcos and directly to consumers. On the right hand, you can see that this strategy creates shareholder value and boosts customer satisfaction, unit growth, and attractive returns on capital. It also ensures we have sustainable profitability and a diversified business platform. Moving to Slide 3, Allstate strategy continued to deliver excellent results in 2019. Revenues were nearly 11.5 billion in the fourth quarter and 44.7 billion for the full year 2019. Net income was 1.7 billion in the fourth quarter and 4.7 billion for the full year. Adjusted net income was 1.02 billion or $3.13 per diluted share in the fourth quarter. For the full year, adjusted net income rose 11.1% compared to the prior year to $3.48 billion or $10.43 per share. That reflects excellent underlying profitability and lower catastrophe losses. Returns were also excellent with an adjusted return on equity of 16.9%. If you turn to Slide 4, Allstate delivered on all of five 2019 operating priorities, which focused on both near term performance and long-term value creation. The first three priorities, better serve customers, grow our customer base and achieve target returns on capital, they are all intertwined to ensure profitable long-term growth. Customers were better served as Enterprise Net Promoter Score improved at most of our businesses. Total policies in force reached 145.9 million, which is an increase of 20.7% compared to the prior year. Property liability policies, which are now our bigger dollar amounts, increased by 428,000 compared to the prior year to 33.7 million as Allstate insurance brands grew 1.3% and 2.3% respectively. Allstate protection plans, which of course was formerly SquareTrade, continued its rapid growth due to the addition of a major retail partner with items in force reaching 99.6 million. Returns remain excellent, driven primarily by strong property liability results. The underlying combined ratio of 85 finished 2019 at the favorable end of our revised full year guidance of 84.5 to 86.5. And you’ll remember as part of our second quarter earnings release last year, we had improved this annual outlook range due to excellent operating results. As you know, Allstate will no longer provide underlying combined ratio guidance since return on equity is a better measure of performance, and Mario is going to provide some additional context on this measure. The 88 billion investment portfolio generated 3.2 billion in net investment income in 2019, which reflects higher market-based portfolio yields. This was offset by lower performance-based results. Performance-based results were below expectations for the quarter, but longer-term results have been strong. Total portfolio return was 9.2% in 2019. Shareholder value has also been created by building long-term growth platforms. We announced new features of a transformative growth plan, which we’ll discuss next. Arity continued to expand capabilities. Allstate indemnity protection is growing and launching new digital footprint offerings and a car-sharing platform initiated operations. Moving to Slide 5, let's discuss the transformative growth plan to increase property liability market share. The plan is built on our strengths and reflects current competitive conditions. Allstate has a significant number of competitive strengths, as you know, particularly in property liability. We have the Allstate brand, we have pricing sophistication, claim expertise, product breadth and a broad distribution platform that ranges from Allstate agents to Esurance's direct capabilities that encompass independent agents. As a result, we're growing, but GEICO and Progressive are growing auto insurance market share faster through massive advertising spending and low-cost structures. Our plan also recognizes that customer needs are changing due to increased connectivity and advanced analytics. Our leading positions in telematics and digital auto collision estimates are two examples of how we're embracing these changes. At the same time, a majority of customers prefer Allstate and an insurance agent when purchasing a policy, but are comfortable with self-service. So we're increasing mobile application capabilities and building low cost centralized integrated service capabilities. We're now accelerating these efforts with a transformative growth plan, which has three components. Expand customer access, improving the customer value proposition by lowering expenses and redesigning property liability products and investing in technology and marketing. Standard customer access will be provided by utilizing Esurance’s direct capabilities to sell Allstate branded products. Esurance has strong direct capabilities, having more than doubled in size since it was acquired a little over eight years ago. As a result, we can further leverage these capabilities by selling Allstate branded policies directly to consumers. This will require us to reposition the Allstate brand, and the advertising previously deployed for the Esurance brand will be shifted to the Allstate brand and then the Esurance brand will be phased out in late 2020. Expense reductions will improve affordability while funding investments in technology and marketing. We'll also strengthen the independent agent platform by merging the Allstate independent agent offering into Encompass. This is a comprehensive plan that will make us a stronger competitor and lead to increased market share. Now let me turn it over to Mario to go through the property liability and investment results.

Thanks, Tom. Let's go to Slide 6, where we highlight strong results within our property liability segment. Policy and premium growth continued, and all of the brands had strong underlying profitability. Underwriting income of 1 billion in the fourth quarter was significantly higher than the prior year, driven by lower catastrophe losses and the continued improvement in the expense ratio despite increased marketing investments and the write-off of the remaining Esurance acquisition and tangible related to the brand name. Moving to the table, net written premium increased 4.4% in the fourth quarter and 5.6% for the full year, driven by policy and average premium growth in Allstate brand auto and homeowners insurance and the Esurance brand. Total policies enforced increased 1.3% to 33.7 million in 2019. Underwriting income of 1 billion in the fourth quarter and 2.8 billion for the full year were substantially higher than the respective prior year periods, driven by continued progress on improving our cost structure, average premium increases and lower catastrophe losses. The underlying combined ratio shown in the bottom left, which excludes catastrophes, prior year reserve estimates and the 51 million pre-tax impairment charge related to our decision to utilize the Allstate brand for direct sales, was 84.9 for the fourth quarter. The 2019 result of 85.0 was at the favorable end of the full year guidance range of 84.5 to 86.5. Focusing on the table on the bottom right of the page, you can see our recorded combined ratio trend over time by line of business as well as total property liability. Auto insurance profitability remained strong with a combined ratio of 92.8, excluding the Esurance impairment, increased average earned premium and lower property damage and bodily injury frequency offset higher severity in 2019. Property damage severity continues to be impacted by higher costs to repair vehicles while increased bodily injury severity increased at a rate above medical inflation indices, but we factor these severity trends into our pricing algorithms. Homeowners insurance continues to generate excellent returns. Lower catastrophe losses were significant in achieving a combined ratio of 88.4 for the year. In total, Allstate has industry-leading combined ratios for our property liability businesses. Let's go to Slide 7, which highlights investment performance for the year and the fourth quarter. Our investment portfolio total return for 2019 was 9.2%. Net investment income contributed 3.7% to total return with a stable contribution from interest income on fixed income investments, but a lower contribution from our performance-based portfolio. Higher bond and equity valuation contributed 5.5% to total return in 2019. The chart at the bottom shows net investment income for the fourth quarter of 689 million, 97 million lower than the fourth quarter of 2018. Market-based investment income shown in blue increased to 735 million and benefited from proactive actions we've taken, including a duration extension in our property liability portfolio. Performance-based income shown in gray was lower than recent trends and included lower valuations of 74 million pre-tax on two private equity limited partnerships. Given the performance-based portfolio's impact on recorded income, let's turn to Slide 8 to review the purpose, makeup and results of these investments. Our performance-based strategy delivers attractive long-term risk-adjusted returns and is well-suited for long-dated liabilities and capital. The strategy diversifies our portfolio through idiosyncratic equity returns that complement our market-based strategy. The portfolio is broadly diversified by asset type, including private equity and real estate, as well as geography, sectors and partners. We invest in funds, co-invest and have direct investments as well. The 8.7 billion portfolio had a one-year return through September of 7.6%, and three and five-year returns of around 11%. While idiosyncratic investments generate higher returns, they do create income volatility, as you can see on the right. The portfolio generated 469 million of investment income in 2019, but all of that occurred in the first three quarters. In 2018, the portfolio generated 716 million of investment income and 145 million in the fourth quarter. We continuously monitor the portfolio and do not believe the lower valuations on two private equity investments in the fourth quarter are indicative of the broader portfolio. Slide 9 highlights results for Allstate life, benefits and annuities. Allstate life, shown on the left, generated adjusted net income of 76 million in the fourth quarter and 261 million for the year. The fourth quarter improved by 7 million compared to the prior year quarter, driven by higher net investment income and lower operating costs. The full-year income of 261 million was 11.5% below 2018 due to the third-quarter write down of deferred acquisition costs in connection with the annual actuarial assumption review, which reflected lower interest rates. Allstate benefits adjusted net income of 16 million in the fourth quarter was 10 million below the prior year quarter. This decline was primarily driven by the write-off of acquisition costs related to the nonrenewal of a large underperforming account. For the full year, adjusted net income of 115 million was 9 million below the prior year. Allstate annuities, shown on the bottom right, had an adjusted net loss of 33 million in the fourth quarter, driven by lower performance-based income. Adjusted net income of 10 million for the full year 2019 was below the prior year, reflecting lower performance-based investment income in the first and fourth quarters. Let's turn to Slide 10. The service businesses continued to grow the number of customers protected with policies in force increasing 42% to 105.9 million. This is largely due to the increase in Allstate protection plans. Revenues grew 21.9% to 434 million in the fourth quarter, reaching 1.6 billion for the full year 2019. Adjusted net income was 3 million in the fourth quarter and 38 million for the full year. Adjusted net income increased in 2019 compared to the prior year period as improved loss performance in Allstate protection plans and Allstate dealer services were partially offset by continued growth and integration investments at Allstate identity protection. Slide 11 highlights the excellent cash returns provided to shareholders. In 2019, we returned 2.5 billion to common shareholders through a combination of 1.8 billion in share repurchases and 653 million in common stock dividends. We repurchased 16.4 million or 4.9% of common shares outstanding over the last 12 months and increased our book value per share by more than 15 to 73.12. The 3 billion share repurchase program announced in October 2018 was completed in late-January 2020. And yesterday, the board approved a new 3 billion share repurchase authorization to be completed by the end of 2021. We also reduced the cost of capital in 2019 by redeeming multiple series of preferred stock and issued two new series at lower rates, which will reduce preferred dividends by 17 million annually. Let's move to Slide 12 and discuss our long-term return on equity goal. Starting this year, we will no longer provide annual property liability underlying combined ratio guidance, but instead discuss returns on equity. As we've discussed over the past two quarters, this is a better measure of our performance for multiple reasons. It is a broader long-term measure of performance than the underlying combined ratio, which focuses on just one part of one of our businesses and excludes significant items such as investment income, catastrophes and other protection businesses income. It factors in capital management and is more correlated with stock price and it fosters a better comparison with our peers. On a long-term basis, our adjusted net income return on equity goal is 14% to 17%. This range also aligns with executive compensation as discussed in our annual proxy statement. Now we'll open up the line for questions.

So my first question is on your ROE target, the 14% to 17%. Just a couple of questions there, if we can get a sense of what you define as the long-term? And then how you see kind of 2020 coming in relative to that 14% to 17%? And then my last question on that thought would be, are you going to go into any particular details on the returns that you're charging within that within property liability versus your life-related businesses or services?

First, let me deal with the second question first. We're not going to give out a number for 2020, which goes to your first question. When you look at this kind of like on a rolling three-year basis, things go up and down, and we should be able to earn 14% to 17% return. We got there by really looking at a couple of things versus what level of economic rent we can capture based on how good we are in the markets we operate in. In the property liability business, we run a substantially more favorable combined ratio than the industry, which provides a substantial amount of economic return. We also look at the appropriate risks and the appropriate return for the risks that our shareholders take, and we feel like 14% to 17% is a good goal for us to have over that three-year basis. I don't think you should try to use this to decide what 2020 forecasts are. There are better ways to do a forecast. We're not going to break it out by component because our goal here was to get up to the corporate level and say what are we doing in total because with the underlying combined ratio, we basically zoomed ourselves in including you all into how well auto insurance was doing that we’ve neglected to focus on the other opportunities. Obviously, the 14% to 17% includes a variety of components. The annuities, as we’ve talked about before, are a large drag on that. If you were to intuit between the 300% plus drag that has on ROE compared to the other businesses, you could say the other businesses are higher return. Most of that is property liability, but that will change over time. Obviously, the acquisitions, like the purchase of Allstate protection plans, is doing extremely well from our standpoint, well above its acquisition targets, but it does put a drag on ROE. Interest rates could go the other way, particularly in the Property-Liability portfolio. What we did was stand back and say, what do we think is right over time on kind of a rolling three-year basis.

And then my second question, you guys rolled out your new growth-related optimization efforts in December. I just want to get a sense, as you change your commission structure a little bit, how you envision that playing out in terms of both picking up new business growth and any kind of drag you see that having on the underlying loss ratio, specifically concerning the auto book?

Well, let me ask Glenn to talk about the commission changes for 2020. The transformative growth plan is a multiyear effort. We expect it to expand customer access, improve customer value and invest in technology and marketing to help us grow market share. The improving value will be done in two ways: reducing expenses across the board and redesigning the property liability projects.

Elyse, we've got a few things going to stimulate growth in a very competitive environment right now. So we're pleased that we're able to keep growing and deliver returns. So I'll answer that part first. Do we expect it to deteriorate returns as we grow? I would say no, because we have been pretty disciplined about that. We expect to grow, but we've kept our eye on the returns. The specific actions are the commission changes that you referred to. We have moved some of the compensation variable comp from agent renewals to new business to incentivize growth. We want to pay folks for growing their business. We're also putting more into advertising and managing our lead management platform.

My first question will be around the expense ratio improvement that you guys generated in 2019. I think that's probably the biggest surprise, at least from an outside observer perspective. In some of your previous comments, you said there was some benefit for incentive comp. I guess my question is, around how much of that 90 basis points was sustainable considering the strong results that you posted last year? Is that going to boost up the incentive comp for 2020? And then dovetail the expense ratio improvement with what kind of anticipation, or expectation should we have about continuing improvements? So should we factor in some modest improvement every year? I know you guys are rolling out the integrated services platform, et cetera.

Greg, let me take the incentive piece. Mario can talk about expenses. We set incentive compensation targets every year. And we have two measures, one is the annual incentive plan, which is management's compensation program based on how well we did the year before. We also have obviously a longer-term plan, which is our performance stock rewards, tied to return on equity. So you shouldn't expect fall over from one year to another. If we exceed the targets established by the board then we put it into the P&L, but presumably that's because we're making more money than everybody thought.

I would add a couple things. So first, we're pleased with the progress we're making on expenses. As Tom talked about, it’s a core part of our transformative growth strategy. We're going to keep focusing on expenses and look to drive down the expense ratio. One thing I'll add with the fourth quarter specifically, the impairment charge related to the Esurance brand was worth about six tenths of a point on the expense ratio. If you look year-over-year, you see some real meaningful improvement in the expense ratio in the quarter that gets a little bit masked by that non-recurring charge.

Mario, is that where the Esurance expense ratios? I think, was up 27.5% in the fourth quarter. Is that what you're talking about?

Yes, it’s in the expense ratio, so worth about six tenths to the overall property liability number, obviously, it has more of an impact on Esurance specifically.

The second question, I guess, just pivot to the performance-based investments. Obviously, it's generated a strong result for you over a long period of time, but there's volatility. And for outside observers, can you provide any guidance for us on how we should think about that volatility as we consider the 2020 outlook?

Let me make an overall comment about investments, and John can provide more color on performance-based, recognizing we don't like to give next year's projections. We proactively managed our portfolio and we've created and used a really comprehensive capital allocation framework that helps the investment team decide what and when to invest and keeps track of the decisions we made. So we can track those and avoid any losses. So we watch our money well and it's on all aspects of the portfolio.

When you think about the whole portfolio, it helps put performance-based in context. The portfolio is about 88 billion in size, the majority is invested in high-quality fixed income instruments, and about 18% of that is equity, with roughly half of that being performance-based. We like performance-based because it focuses on private markets and really expands our opportunity set in investments that we can play with. That comes with increased volatility on income. In this particular quarter, that volatility, especially if you look at it year-over-year on a quarterly basis, the difference was 97 million and about 74 of that was tied to two investments. This was disappointing, but we've gone back and we recognize to look at the underlying investments. They range from timber and agriculture to real estate, private equity, and many different investments in there. It's hard to pin down with precision in any given quarter how that will play out, so I expect continued volatility.

Thank you.

I was hoping you could give us a little bit of an update on how you see the current pricing and competitive trend in auto. Obviously, last year was a pretty competitive year, but do you think that things are stabilizing industry-wide or not? Love to hear your thoughts?

This is Tom, let me make a couple of overall comments and then Glenn can talk about what he's seeing in the market by competitor. Our philosophy has been to focus on profitable growth and long-term profitable growth. We raise prices when we think we need to when the trends show we should do it and so we don't fall behind. We're not big on reducing price to try to grow; anyone can lose their way to increase market share, and that's not our plan. The other thing I would emphasize is to be cautious of percentages, because it always depends on where you start. Some competitors are higher-priced than us and they're reducing their prices, and others are lower than us for certain risks and they're raising prices.

As Tom said, one set of numbers tells the story. Our average premium in auto was up 3% year-over-year and our average loss and expense was up 2.5%. So we were disciplined in managing to a positive return and while making some progress during this very competitive time. We've seen some competitors take sort of broad-based rate reductions, which is why the overall CPI is negative. As Tom mentioned, that's not a trend we’ll follow. We're seeing less price reductions or really no price reductions in the recent past and you see some increases out there, so I’ll call it more stable.

Second question, obviously, on the commercial line side, there's a lot of conversation about casualty-related inflation trends. I recognize that's on a huge part of what you do as an auto and home insurer, but could you talk to whether or not you’re seeing that in the fairly modest pieces that are casualty parts of your business?

Paul, are you talking about bodily injury costs?

Well, actually I'm thinking more pure liability and home insurance business, for example, slips and falls, and lawsuits, and things of that nature?

We're not seeing much of a trend on the home side; our trend sets are more meaningful for us on the home side are really the mix between frequency and severity of our property, first-party losses. So we're not seeing anything on home.

First question is around net premiums written growth. I think it's slowed down a little bit, and I guess in particular you see a little bit of a slowdown in the renewal ratios and then new applications, especially in auto. Can we maybe talk about that and maybe how that ties to the transformative growth plan?

First, as I said earlier, it's all about profit growth for us. The transformative growth plan should bring our expense ratio down and enable us to improve our competitive position, which should drive higher growth. In 2019 throughout other different stories in the Allstate branded business than Esurance business. So Glenn, maybe you can talk about the Allstate branded business. And Esurance for 2019 was still under Steve, now of course under Glenn as part of our transformative growth.

At a high level, I’d tell you we feel good about the fact we were able to grow in a really competitive market. As it’s been pointed out before on the call here, negative CPI has contributed to premiums up 5.5% and policies in force grew across all major lines. It’s challenging work to do that in this environment. To your point, we moved down a little bit in the fourth quarter, but we’re still in the upper bounds of our long-term trend on both retention and new business. We’re making short-term actions as we build out transformative growth, including the changes in agency comp where we shift more towards new business and put more into marketing.

So in 2019, insurance had about an 8.5% increase in net return premium. For the year, it feels good, but that trend declined throughout the year, and the fourth quarter was only 2.6%. We had some fairly significant rates increases in the second half of the year that slowed down our growth as we went into the third and fourth quarter; overall, we feel good about the growth we had, and we feel good with where the business is positioned going forward.

My second question just goes back to the ROE guidance range for the next three years. I guess what would be the largest components that would drive ROE to the upper end of that range or the lower end of that range? And does that range also contemplate the possibility of this disposition of the annuity business?

I would say there are a number of components here. Obviously, the combined ratio and underwriting income is impacted by what catastrophes are, which as you know bounce around. There’s what happens to investment income and we’ve talked about that today. There’s also the amount of equity you have at play. We’ve been building equity, but we’re still buying back shares, so that has an impact. For the future, this is kind of a business model approach. We didn’t assume anything was going to change; things will change in the future, but we still feel like 14% to 17% is the right range.

Just a follow-up on the transformative growth plan and just trying to get some sense for when you think we should start to see the benefits of those changes roll through in terms of more competitive product, and then an uptick in new applications, better retention and higher PIF growth after we've seen a bit of a deceleration in all those metrics?

David, first, it's a long-term plan. This is going to take us multiple years to do, but there's obviously components of it where some parts will have a bigger impact early and other parts will have a larger impact later. So we expect early in the plan that expense reductions will play a significant role in improving our affordability for customers and getting to that second part of improving the value proposition. As you go forward, we would expect that redesigning our technology—our property liability products will drive more differentiation. We were first to market with declining deductibles, first to market with new car replacement; there are other ideas and things we have in place that we think can drive more value, but it's going to take time to put those into the marketplace. Those in terms of improving the customer value proposition, expenses first; redesign of products later. The redesign of products is later because it requires a new technology platform, which is the third piece. We have to invest more in the new technology platforms, particularly our product management platform and customer experience layer.

And just with the customer value proposition and some of the increases in bodily injury severity that popped above CPI, medical CPI this quarter, which is the first time I think in a bit it has. Have you, I mean, is that already embedded in your pricing? Or is that something that would I guess go the other way against some of these expense saves that may be able to pass through more competitive rates?

Yes, we’ve seen some of the trends come through that you've heard about from others on bodily injury. It is embedded in our reserve position that we have, where we think through these things, as we set our reserves, as we set our pricing strategy. As you’ve seen over the last couple of years where we've run hot on physical damage severity, it hasn't flowed through to the margins because we’re pretty quick at adapting from a pricing standpoint.

And then if I could just slip one last question in, just in terms of the high-end of the ROE guidance, and I guess just thinking about potentially there have been a few transactions in the fourth quarter on the life side, and it seems like there's a fairly vibrant interest in some of these run-off books of annuities or life insurance. Just wondering if you see any opportunities there to potentially reinsure or digest that book and maybe get to a more sustainable high-end of that ROE given it has like a 300 bp drag on the ROE?

We've been trying to work on annuities for a long time to get them better. We’ve made a lot of progress, and to the extent there is something else we can do where we utilize the division statute to get a better solution reinsured, if we can do it in a way that’s economic for our shareholders and has a good risk-adjusted return, we'll do that. If we do that, I don't think anybody would be unhappy if we were above the upper end of the guidance.

Actually, two quick follow-up questions. The first, in response to the previous question on the shift in the plan, can you give us any early feedback from agents? Number one, on the integrated services platform, and number two, what is the feedback on shifting the bonus and/or the commission structure from existing and new businesses?

I think Glenn can talk about the integrated service and commissions. Maybe let me go back to transformative growth and make a comment really on behalf of the customer. So the agents are part of our team, and we want them to be successful. There's a range of opinions as to what people think about what you're doing, but let me come back to the customer. What we are trying to do with transformative growth is stick with our customer philosophies.

We've been talking to our agency force all the time and talking to agents every week. We have a national advisory council and regional boards, and we spend a lot of time with our agency force. I’ll give you the range of reactions. Overall, the facing out of transformative growth, we're going to pull the marketing in from Esurance as the Allstate brand. As you might imagine, that’s wildly popular. Everybody feels really good about the fact that there’s going to be more marketing in the pipeline, focusing on the Allstate brand. On the commission change, you got folks that were growing fast and built to grow; they liked it a lot, because that leads right into their strength. You have folks that really weren't growing or weren't built to grow; you have a range of folks excited about making that transition or ones that say I wasn’t really ready to retool my business.

If you go back to the customer, when you ask customers where does an agent add the most value, it's almost always on the purchase of the product or doing an insurance review. Very little of it is on changing address. That’s what Glenn's working on.

Very quickly on the lost cost trend. I know you briefly talked about it. But net-net, can you talk about whether, when you look at the frequency and severity trends, is the expectation that this is how it sort of remains for the foreseeable future, or what’s your outlook on the cost trends here?

If you look at the whole system and say there's premiums that come in and how we may changes to those overtime to these expenses that are going out the door, then split your loss costs by frequency and severity. Over the past year, three out of those four have been doing well for us. Our premium, as mentioned, autos up 3% and home is up 5%. It’s hard for me to predict, but I can tell you we're really disciplined about managing it quickly into each market on a market-by-market basis.

A couple for Glenn. So Tom mentioned over half of Allstate branded customers want an agent, which I thought was interesting. In terms of the pathway of becoming an Allstate brand customer, what percentage of people I guess start on the Internet, Google insurance or something like that? And is that the lead generation mechanism, I guess just digital or the Internet versus an Allstate agent as a little league coach or something like that?

Glenn can give you some percentages, but this isn’t an either or conversation. It’s an and. We’ll sell to people anyway they want, whether they want to start online, buy from an agent or call an agent to buy online.

It’s a challenging question because there are a lot of stops in the process. For example, people go online, start to get a quote, and the agency nearest to them pops up with that quote, and they decide to drop off, making the phone call. The vast majority of our business is written by a local agent. That said, all the data and research tells you that most people start their process online and at least get some understanding before talking to somebody about it.

I was hoping if you could give us a bit of a peek into some of these new product initiatives. I guess in particular I'm trying to understand the price sensitivity or whatever. I mean, obviously, your captive agent. Are you thinking new business pricing down 10% or something like that? I'm just trying to understand how significant that would be on potential new issued applications?

I'm not sure we understood the question. We’re not lowering prices to grow; it’s about product improvements in multiple products. For example, we rewrote the renter's policy in one state and took its size down by 40%. We also have products in the circle of protection that we’re trying to get to. We don't sell identity protection today through Allstate agents, but it makes sense to protect customers through agents. We want to sell more of what we sell, already in more places. That’s part of transformative growth.

First question regarding the P&C investment portfolio, the duration has increased significantly over the last few years and is now over five years. I'm curious as you continue to see this trend. Are you at the upper limit of your comfort range with the duration of liabilities?

Mike, it’s John. You never know what the future holds, so we’re always going to respond to market conditions, the risk environment of our firm, and the portfolio structure. I would say that the duration extension we’ve seen recently was more of a reaction back to strategic norms as interest rates had been rising prior to that. We thought it was prudent to stay a little bit short and look to recapture higher yields when the opportunity arises. We coupled that with the better economic situation in the U.S. and the world, so we thought it prudent to extend duration. If the economy falls off, it tends to help your portfolio with balance.

Okay, that's helpful. And yes, definitely it's been a great call. Lastly, clearly, there are a lot of questions about the new commission structure. Could you give us an idea if policy growth is weighted more towards a smaller percentage of agencies? Is that changing over the years?

What our strategy is to have all of our agents growing and all of them productive. Not all of them get there every year. Some of that’s what we do in local markets, and some of that’s what they do or don’t do. This commission change wasn't to address a problem; it was to seize an opportunity. We move commissions around frequently. Our goal is to make sure their objectives are aligned with our objectives.