The Progressive Corporation Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript

Nov.12.08 | About: Progressive Corporation (PGR)

The Progressive Corporation (NYSE:CI)

Q3 2008 Earnings Call

November 12, 2008 9:00 am ET

Executives

Patrick Brennan – Investor Relations

Glenn Renwick – CEO

Brian Domeck – CFO

Bill Cody - Chief Investment Officer

Analysts

Jay Gelb – Barclays Capital

Josh Shanker – Citigroup

Brian Meredith – UBS

Meyer Shields – Stifel Nicolaus

James Engel – Unidentified Company

Alain Karaoglan – Bank of America

Beth Malone – Keybanc Capital Markets

Ian Gutterman - Adage Capital

Jay Cohen – Merrill Lynch

Bob Glasspiegel - Langen McAlenney

Operator

(Operator Instructions) Welcome to the Progressive Corporation's Investor Relations conference call. The company will not make detailed comments in addition to those provided in its quarterly report on Form 10-Q, Shareholders Report or Letter to Shareholders, which have been posted to the company's website and will use this conference call to respond to questions.

Acting as moderator for the call will be Patrick Brennan. At this time, I will turn the call over to Mr. Brennan.

Patrick Brennan - IR

Welcome to Progressive's Third Quarter 2008 Conference Call. Participating on today's call are Glenn Renwick our CEO, and Brian Domeck our CFO and Bill Cody our Chief Investment Officer. We expect the call to last about an hour.

Statements in this conference call that are not historical fact are forward looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein.

These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections generally, inflation and changes in interest rates and securities prices, the financial condition of and other issues relating to the strength of and liquidity available to issuers of securities held in our investment portfolios and other companies with which we have ongoing business relationships including counterparties to certain financial transactions.

The accuracy and adequacy of our pricing and loss reserving methodologies, the competitiveness of our pricing and the effectiveness of our initiatives to retain more customers, initiatives by competitors and the effectiveness of our response, our ability to obtain regulatory approval for requested rate changes and the timing thereof, the effectiveness of our brand strategy and advertising campaigns relative to those of our competitors.

Legislative and regulatory developments, disputes related to intellectual property rights, the outcome of litigation pending or that may be filed against us, weather conditions, changes in driving patterns and loss trends, acts of war and terrorist activities, our ability to maintain the uninterrupted operation of our facilities, systems and business functions, court decisions and trends and litigation in healthcare, and auto repair costs and other matters described from time to time by us in other releases and publications.

In addition, investors should be aware that generally accepted accounting principals prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for one or more contingencies. Also, our regular reserve reviews may result in adjustments of varying magnitude of additional information regarding pending loss and loss adjustment expense reserves become known.

Reported results, therefore, may be volatile in certain accounting periods. With that, we are ready to take our first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jay Gelb – Barclays Capital

Jay Gelb – Barclays Capital

Progressive’s financial leverage is above its long-term target and excess capital appears to have been eroded as the result of investment marks. Under what scenarios might Progressive need to raise fresh equity capital?

Glenn Renwick

Very fair, that’s certainly a topic that’s been on all of our minds for some time. In the letter I tried to give you a fairly straightforward view of how we think about capital so I won’t recap those issues unless we need to. The conclusion, anybody wants to be overly concluding that you can be safe in this environment the concern and the pace at which we see changes through the third quarter and into October are clearly disturbing.

Having said that, having a very good understanding of our capital is the most important issue and I think we’ve done that to our satisfaction to the extent we’ve shared our thinking with rating agencies. We’re comfortable that what I outline in that letter is a fair and representative view of our capital. That doesn’t mean that we’re not thinking about plans E, F, and G.

You can reasonably assume that we’ve gone through all of the types of capital raised that you might need even though at this point that is not a plan that we have any need or intent to act upon but we have plans in place and at this stage to give you a probability of exercising any of those I would say its very low. It’s not something we’re being cavalier about. We simply don’t know what’s going to happen in November and December.

The two things that we can control, the most important parts when you step aside we have enough capital, I think I demonstrated that in the letter, our discipline to write at a 96 is absolutely paramount. In parallel to that to the extent we can we are taking risk out of the portfolio for the time being in these relatively volatile times. We’ve seen that with the increase in relatively lower risk holdings, cash and treasuries.

Those are the two things that you can assume will continue to go on. We’ll be extremely disciplined about them to the extent that we have anything that brings us closer to a threshold which we do have. Please don’t ask because we’re not going to go into the details of our planning, how far into contingency or whereabouts we would trigger that. We’re acutely aware of the fact we don’t want to be at a point where we have to do it before we do it.

Those kinds of things there is active planning going on and quite frankly I hope we never have to execute them. I don’t feel that we will based on what I see currently but are conscious of all the issues.

Jay Gelb – Barclays Capital

From a technical perspective to what extent do unrealized investment losses, are those taken into account in terms of capital erosion as opposed to OTTI?

Glenn Renwick

Frankly we just treat everything that’s a mark to market loss, I’m pretty simple in my accounting I just add up what’s in the bank at any given time and we take it as a mark to market and you’ll see even in my reference the statutory capital I called it $5 billion so just know that I’m working on GAAP numbers not statutory numbers. We published that on page five of the release.

Brian Domeck

We always look at what our GAAP capital is which would include the unrealized mark to market valuation changes that flow through the shareholders equity in the balance sheet. That’s what we always look at as a frame of reference relative to what we feel we need in terms of capital to support the business.

Jay Gelb – Barclays Capital

Even though some other companies focus on the stat capital which isn’t really impacted by the unrealized gains or losses at least in fixed income you’re focusing on GAAP?

Glenn Renwick

Yes, consistently. We understand that we could maybe make things look a little better. Our greatest concern of course is allowing us to continue to do what we do well. We try to look on the basis of economics not necessarily favored accounting. I will point out one other thing that should be relevant. I didn’t dwell on this in the letter because I didn’t want to suggest that all is okay. Part of our contingency low or extreme contingencies relates to hurricane activity.

While we got a head fake here recently with Paloma it doesn’t seem that now that we’re sort of where we are in November we’re almost where the fat lady will sing for ending the hurricane season. Some part of that contingent load we don’t actually do it this way but is realistically seasonal. That’s a significant amount so over the next five, six or seven months we have every reason to believe that we can put some operating results together that will bring us back to a place that we’ll feel very comfortable even in the excess layer.

The contingency is actually somewhat seasonal in that aspect of hurricane losses and certainly have come to a better place than we would have been two or three months ago.

Operator

Your next question comes from Josh Shanker – Citigroup

Josh Shanker – Citigroup

I’m wondering if you can discuss a bit what you’re seeing among your competitors and yourself in terms of rate filings across the nation and trends at this point.

Glenn Renwick

Yes we can, we actually graph rate filings pretty clearly for most of our competitors and I would say that you could reasonably assume more up than down. An upward trend line as we track competitive filings is now an upward trend line. For the year is certainly in the same direction. Over the year would be slightly ahead of two and for the quarter we have about 35 rate filings and the net of that is essentially flat. You are well aware, I’m sure we don’t need to go into the issues of frequency, we’ve reported on that, as most of the rest of the industry.

There are a lot of things moving right now but generally we’re seeing rates increase. An observation on third quarter results were a lot of companies, certainly those that have growth might need to take some rate in general, that’s a general statement, not a specific one. We actually feel pretty well positioned right now. We work very hard at getting our rates; we’ve talked about that a lot. I think we’re now in a position where we’re starting to see a little bit of growth. You saw the personal lines show a little bit healthier number in growth and pretty nice targets.

We’re okay, I generally see upward trends. It will be very interesting to observe what we’ll see over the next five to six months as we look at different severity conditions. I don’t think anybody is good enough to peg all these so my comment about being agile is still the operative comment but we see carpooling, that creates different issues, possibly more people in vehicles is a different trend. We see the fleet changing to some degree. All of these things will flow through and the best way for us to estimate those is just to observe the data very quickly.

We worry about things like uninsured motorists; I’ve talked about that before that would be one of the few coverage’s that we’re not seeing frequency changed in the downward directions. One might suggest that it’s staying constant when other things are going down. You can draw the conclusion there. Bad debt hasn’t surfaced as a significant issue for us yet. All those things will bring pressure on not only us but our competitors. I think there will be a mixed bag of rate changes but generally up.

Josh Shanker – Citigroup

Given the erosion in credit nationwide and a number of individuals who might have been looked at as typically standard credit so might fall into the non-standard basket or might be credit risk since the reliance of so many of your competitors on using credit as a way of evaluating driving habits in some ways. Is there an opportunity here for Progressive in a wider pool of credit risky drivers for Progressive to be able to better select risks at this point compared to competitors?

Glenn Renwick

I’m not being too coy on that one. We see the current market conditions having some degree of opportunity for us. I’d much rather just report results to you in the future but yes I think there’s some opportunity for us to do that. There are certain competitors that have the ability to underwrite very well, some maybe not as well. Hopefully we can do one of the ones that are on the extremely well list.

Operator

Your next question comes from Brian Meredith - UBS

Brian Meredith - UBS

Back on the capital situation, I’m wondering, you’ve got your own financial thresholds that you’ve put out as far premium surplus and financial leverage but I’m wondering how would you view it if a rating agency came up and decided that they were looking to downgrade you. Are your ratings at current levels are you willing to take a little bit of a downgrade in the rating at this point? Do you think it would have much of an effect on your business?

Glenn Renwick

I’m going to ask Brian to contribute there as well. I’ll link it a little bit to Jay’s question. The real issue is to the defer downgrade. One could answer that in saying that if were a notch lower perhaps even two would it materially affect our day to day operations? You might be able to say no to that given where we are. I’ll be perfectly frank I don’t want a delta change in rating because I think some times that’s not viewed as where did you come from and where did you go to but just the fact that it’s a change.

I think we’re being very forthright with the rating agencies, they’re being very forthright with us and at this stage we would prefer not to have a downgrade. Quite frankly in the past we’ve also preferred not to have an upgrade. We just don’t want the delta. I think the delta is one issue, just one, maybe it’s small at this level that could be a perception signal and during this market there are an awful lot of companies and consumers concerned about the financial stability of companies.

Brand is something that you know we’ve been working on very, very hard and to link the two it is important. We would be concerned about anything that would be an external media message that would cause any consumers to have less confidence in us then they should. Yes, we worry about the downgrade. Operationally, no, one downgrade I don’t think quite frankly would make a great deal of difference to us. I’m not saying we couldn’t sustain a downgrade it’s just something we’re not looking to entertain, certainly avoid that.

Brian Domeck

The only thing I’d add to that is both in September prior to our August news release as well as in October prior to our September news release we had conversations with all the rating agencies, let them know what was happening in terms of both our insurance operations and our portfolios had constructive discussions with all of them. You’ve seen how they’ve come out in terms of their affirmation of ratings, changing a little bit of outlook. I think we have continual constructive discussion with the rating agencies. Let them know exactly as we see it in our open and transparent way.

Brian Meredith - UBS

You also mentioned in your shareholders letter that the three to one premium surplus ratio is actually a regulatory constraint in certain states. How are you managing that situation? I know you’re right at that threshold right now as of October it looks like.

Glenn Renwick

We hope to always be there. In January we put about $80 million down into different insurance companies and I think in October, someone correct me if I’m wrong, we took about $41 million up. We’re never looking to put a lot more of our surplus there. You’ll see that we have capital at the holding company which if necessary we can downstream but in general we’re looking to take upstream dividends. We will always be roughly at that 3 to 1 by our own design.

Brian Meredith - UBS

How much capital is at the holding company?

Glenn Renwick

About $1.1 billion. I’m looking at someone else’s eyes here to make sure I didn’t just say something.

Brian Domeck

Invested assets are about $1 billion.

Operator

Your next question comes from Meyer Shields – Stifel Nicolaus

Meyer Shields – Stifel Nicolaus

Can you talk a little bit about the change in your competitive position in agency business; I’m seeking here outside of California and New York over the course of 2008?

Glenn Renwick

You broke up a little bit on the last part of the question could you just repeat the question?

Meyer Shields – Stifel Nicolaus

Has your competitive position in the agency business changed materially outside of New York and California over the course of the year?

Glenn Renwick

Yes, materially let’s take that in the spirit it’s meant. We have seen a wide spread reduction in new apps in the agency channel in general. I think that’s fair to say and it’s troublesome. We’ve reported on that before. There are maybe a couple of reasons that are worth noting. One, we talked about; I think you’ll recall is the quoting methodology’s now in agencies is much more comparative rate availability. It’s been there but it’s much better and it has rates from many companies.

We call that sort of the more auction rate type environment where you’ll see in our own reporting we talk about getting more quotes but lower conversion on those that are compared with multiple companies. That’s one dynamic and frankly I think that has to some degree hurt us.

Another dynamic is the increasing penetration of agencies by some competitors. Both of those are real. On the other hand we’re starting to and we’ve always been very disciplined about making sure we get the right rate level and we think of recent times our rate level is starting to become more favorable. I can suggest that by the Q we put 15 states had positive application growth in our agency channel that was a little up from prior numbers.

October is up from that as well. Not dramatically about four states added to that and I expect there will be some others in the future but that’s a best estimate. The other things that we’re doing which are helpful we’re rolling out a new product which we call “70”, it’s really not important what the title is. That’s currently in six states and we expect 15 by year-end. That product is allowing us to address some of the issues that we’ve seen as we’ve been exposed to better and more competitors and we’re responding to that.

So we have that product and that will roll out for the rest of the nation during the course of ’09. We feel quite well prepared to start to deal with the challenges. In general we have seen degradation in our new apps from the agent distribution. It’s also fair to say that by most estimates there has been a fairly significant reduction in shopping behavior and that has been across all channels. I showed some of that in June but certainly our agency channel in general probably is also getting less shots at new customers.

Meyer Shields – Stifel Nicolaus

There was a lot of discussion on third quarter conference calls about a potential turn in commercial insurance pricing because of lost capital from investments and I guess hurricane losses. Are you seeing any signs of that in your commercial book?

Glenn Renwick

We just had a meeting on that yesterday. Unfortunately the answer to that is no. At least in the segments that; remember we’re looking at the segment of commercial auto, light local and some specialty fields so I can’t say its not happening in other products that we’re not involved with. We’re not seeing that. One could suggest that we might start to see it but we’re not seeing it. We’ll report on that into the future.

Operator

Your next question comes from James Engel – Unidentified Company

James Engel – Unidentified Company

I had a question regarding acquisitions, in this current environment are there acquisition opportunities for you and would you be interested and do you have the wherewithal.

Glenn Renwick

Yes there are acquisition opportunities without bridging any appropriate confidentiality agreements and so on and so forth. Yes we will look. When we look I think we have an appetite for customers and not always some of the infrastructure, based on what we have. We’re not looking to acquire in the sector for skills or infrastructure or systems. That may make that match not quite as comfortable as the other party might want. Just know that yes we will look. There’s no secret, this is not something that Progressive’s had a high appetite for but under the right circumstances I would love to take on customers.

Do we have the wherewithal to do that? We pretty much outlined our capital position and relative to current business operations said okay. I also indicated that we were doing some work and more than just in passing to make sure that we had the opportunities should we need capital. I would like to think the greater reason to need capital would be to do something constructive in growing the business. We have no plans. We are making sure we cover the bases thoroughly.

Operator

Your next question comes from Alain Karaoglan – Bank of America

Alain Karaoglan – Bank of America

From a capital position you have your statutory surplus, you have $1 billion at the holding company. My guess is in terms of the contingencies what you’re probably concerned about is movement in the asset side of the balance sheet as opposed to the reserve side in terms of unrealized losses additional. Are you giving any additional thoughts to overhaul the investment strategy or portfolio to have it even more conservative having a lot less in equities or preferred equities and more conservative investments if that’s the area that’s bothering you or that could bother you going forward.

In terms of the personal auto environment could you speak to the impact, what you’re seeing on the regulatory from the impact of a slowing economy on car sales and what that could mean? On the commercial auto the command ratio has around 97%, 98% now for four months in a row. Why aren’t you able to get it back to 96% or below or there an issue there or you think it will get back there soon?

Glenn Renwick

Vis-à-vis the construction of the portfolio I put a note, I’m having to do this from memory, I put a note in my letter that yes with loans through banks through the process here and rather than declare what we’ll do with portfolio construction just know that those kinds of things are very much on our mind.

Bill Cody

I can tell you what we have done which was we also disclosed which was in late September we did reduce our common equity portfolio holdings primarily to reduce the volatility on the asset side investment where we sold just under $1 billion of our common equity holding and moved that to treasuries and cash. In addition, new cash that’s come in we’ve held in shorter maturities, safe securities that’s cash and treasuries.

During the quarter we’ve also done some liquidation where appropriate from riskier assets as well. Right now our posture is more defensive in being respectful the volatility that we’re seeing in the market and looking to try to stabilize to the extent we can the portfolio volatility. Two of the things that will help us with that is the short duration of the portfolio which should help a fair amount and generally high credit quality of the portfolio as well.

The short duration helps in that we see reasonable amount of run off in the portfolio from risky assets. If you think about over the next year we should have about $1 billion of non-treasury cash securities that should roll which helps de-risk that going forward. Over the next two years that number is more in the range of $2.5 billion.

Glenn Renwick

I would point out that the sale of common equity and the current percentage holding don’t read too much into that. That was clearly a situation if we were doing as we said we would do, take some risk out of the portfolio. That was one available method for us to do that. That doesn’t mean that we necessarily wouldn’t come back to a 15 or anywhere between 0 and 25 sort of a guideline that we have. We’ll be sure to let you know those kind of actions but don’t over read right now other than recognizing that we took the actions that were available to us.

Your second question was on regulatory issues and other macro economic issues. We’ve seen car sales come down pretty dramatically this year. We have internally so now pretty healthy measures on different macro economic issues help us. Unfortunately we can’t put them all together in a nice equation and predict anything with certainty. Our best information up to and including the third quarter are new shoppers are down about 10% in the marketplace from what we can see. That varies across the different channels that we operate in.

We’re obviously very happy to see direct channel actually increasing which is hopefully a reflection of our penetration into the shoppers that are available. Hopefully most of you have seen that we’ve been working pretty hard on our brand and advertising. While we’re seeing general degradation in the available customers our share of them is going up at least in the direct channel. I already commented on the agency channel.

From a regulatory point of view we’re really not seeing anything particularly noteworthy for those of you that track New York you’ll remember Secular 17 which was a very formal approach to sort of say make sure we’re including some of the frequency issues and gas price issues in your filings. I’ve said on this call and other occasions we try to be very respectful to the regulators and file well. I’m happy to be able to report in the Q that we in fact did get a rate approval in New York. There are an awful lot of rate approvals pending we understand so we were happy to be able to get one of those.

We also have had a multi-state regulatory review just as the normal course of business happens to be at this time. We’ve had a chance to talk with regulators from multiple states and I would say that while we’ve been forthright in telling them all the issues associated with the business their particular radar is not unreasonably high on any issue, nothing dramatic to report on the regulatory front. California and New York remain sort of very interesting environments across the board.

Your third was with regard to the commercial auto combined ratio of the last several months. I would tell you there that is wisely reflecting large losses and the occurrence of large losses. We think in our own settlement of large losses we’re on top of that. I don’t think anyone says with certainty exactly what will happen but yes we do expect to be back at our run rate target for combined ratio that won’t happen over night but you should start to see in the monthly results.

Bill Cody

Relative to commercial auto similar to personal auto we have been raising rates in the first half of the year. One thing to keep in mind is that for most of our commercial auto policies they’re annual in terms of term so they earn end period of the rate increases takes a little bit longer. We have, based upon current indications feel pretty good about our rate accuracy in commercial auto going forward.

Operator

Your next question comes from Beth Malone – Keybanc Capital Markets

Beth Malone – Keybanc Capital Markets

I was wondering in the last couple of conference calls the discussion has been included talk about the fewer miles driven as a result of higher gas prices in particular. Now that gas prices have come down have you all been able to track or see any evidence of how that’s affected miles driven?

Glenn Renwick

Not at this point. Anything we say I think would be speculative. We certainly don’t have it in our data. When I started to write the letter I hadn’t actually included the fact that we might need to use ones. If you know the area it’s actually true that there are two gas states across the road and as I drove in this morning one is at $1.99. We recognize that how quickly it comes back we don’t know. Certainly been a little lag in our recognition of frequency and any measure of miles driven from government statistics we’ll get those just as soon as they’re published.

Beth Malone – Keybanc Capital Markets

On the new initiatives that you’ve been putting in place, the pick your own policy and monitoring of the drivers with the systems in the car. How is that progressing, are you seeing good acceptance for that and are you planning either to change how quickly you distribute that or has that changed at all?

Glenn Renwick

The first of the two that you mentioned there we’ll call it name your rate. That is now currently in four states. I am pleased to report that consumer acceptance is actually very good and favorable conversion and perhaps even continuing the positives the average premium is not materially different than we would have expected from people that were buying in the more traditional mode, so far so good on that one.

Where we’ve actually been able to put some advertising out you likely will not have seen this because it’s local only to those marketplaces. It’s done the job on attracting some new customers at rates higher than we were previously doing. Our expectation is that we will get this out during the first half of ’09 and the best part of getting it out into a significant number of states and that would have to be something like about 80% of our premium base we then would consider national advertising.

The short is the test states work fine, giving us the confidence to roll out. A roll out will be in the first half of ’09. Hopefully we’ll convert that into some advertising on a national basis because we actually already have the advertising and have tested that on the local market.

With regard to the My Rate which is the devise that we talked about several times we have increased that since we talked, to you in June, that’s in five more states, in some cases being offered by agents as well. That covers currently about 18% of our countrywide premium. We expect to be increasing the number of states that can offer that product in one form or another during the first half of next year.

The acceptance rate is actually pretty good on that product. About a third of the people that are coming to at least the internet site are electing to show interest in that particular product. It’s actually got a strong appeal. We are making sure that we are directing that product to the people that we think are going to be best served by it. This is clearly a product that distinguishes certain premium attributes from others that are otherwise undistinguishable in our rating criteria.

We want to try and make sure that people who truly have the behaviors either low usage or several other, maybe commuting and public transportation or something like that a car away from current location they really will benefit from it because we like to see them get a significant discount because that is clearly the recognition that this is designed to uncover. So far so good on both of those and more action in the first half.

Beth Malone – Keybanc Capital Markets

Do you see competitors duplicating those two efforts?

Glenn Renwick

I’ll say no to that. I don’t see anything that comes remotely close to the application. Clearly we’re aware of GMAC’s use of OnStar and that’s a mileage-based issue. If you’re tracking in California there’s been some hearings recently on allowing verified mileage as a way to perhaps modify to some degree Prop 103 it won’t allow other variables at this point but verified mileage is something that could be quite useful in California. I don’t see anybody else with devices or a name your rate offering.

Operator

Your next question comes from Ian Gutterman - Adage Capital

Ian Gutterman - Adage Capital

First just clarify the $1 billion investments at the holding company was that the September or October number?

Brian Domeck

It’s both, both at the end of September and also at the end of October. Net invested assets are about $1 billion.

Ian Gutterman - Adage Capital

The $600 million of pre-tax unrealized losses in October were at the operating companies then? I’m wondering why that didn’t go down with the investment losses.

Brian Domeck

A significant portion of the unrealized losses were in the insurance companies, yes.

Ian Gutterman - Adage Capital

A question about concierge, given the decline in frequency results in less claims and then just lower automobile sales decreasing growth for the industry can you talk about how those issues affect concierge given that as less volume comes into the centers how do you handle the fixed costs and make that economically viable for you guys?

Glenn Renwick

Definitely real, the frequency declines definitely do what you would expect. We’re also getting some activity on being able to present the proposition to consumers in a way that’s more favorable to them. We hope to increase the acceptance rate but that is not changing dramatically.

One other thing that we are doing, which is changing is we’re encouraging people who perhaps may not even plan on getting their vehicle fixed to come in and, sort of a little bit of the old drive in estimate, we’re encouraging to drive in if they’re in the area to our concierge center and get an estimate even if they don’t plan to get the vehicle fixed and that’s actually increasing the traffic flow a fair amount.

Some percentage of those people are then becoming concierge customers and saying maybe I will get it fixed if it will be this easy to do. We’re actually keeping the traffic through those centers reasonable constant and we would quite frankly like it to be higher, there’s no question about that. To the extent that we’re not getting leverage on the fixed cars, anything like that, that is not one of the top 10 issues facing our company.

Ian Gutterman - Adage Capital

Are there any plans to slow your build out of new centers for next year as a result?

Glenn Renwick

Yes, but not for those reasons. We basically got to the number that we’re at 54 or thereabout because those are the environment that we have enough enforced policies to support a center. Our growth in enforced policies while we hope it to be stronger going forward hasn’t been that strong that too many others of the list that are next threshold group have really met the threshold to build centers. We have a couple replacement centers and one on Long Island, if I’m not mistaken that will go into effect for 2009.

Operator

Your next question comes from Jay Cohen – Merrill Lynch

Jay Cohen – Merrill Lynch

As the economy deteriorates are you getting a sense that consumers are increasingly price sensitive? If so, how does that show itself in their behavior?

Glenn Renwick

That’s one that’s hard to get a handle on. The easy answer would be say they’ve got to be because almost everybody is today. The things that we would look for are increasing deductibles and maybe changes in coverage that don’t quite mirror the costs. So far we haven’t seen that. I mentioned earlier bad debt. My gut on this one is it’s got to be there.

The question is just the speed of recognition and speed of into the book. At book levels these can be hard to detect. That just means we’ve got to look harder for them. I think they’re going to be there.

Jay Cohen – Merrill Lynch

Is it possible too that that price sensitivity increases shopping behavior at some point?

Glenn Renwick

We hope so. I think I’ve offered a couple of theories on shopping behavior that may not have worked out exactly as I’d hoped before. Take this as my best estimate as opposed to anything other. There may be several things, going back to New York for example those who may be aware there’s a flex-rating rule that comes into effect in the early part of January which allows companies, I said there were a lot of rate filings in New York, very few approvals.

I assume, although I’m not certain, that the flex rating will allow them to take a plus five rate change. That will likely have quite an effect on shopping behavior because it will be the first for a while a lot of people have been exposed to a rate increase. Whether or not it’s a good rate or not it may be the catalyst to shop. We also know in California starting the year we’ll see the auto rating factors having to be applied to almost all companies, those that don’t have those in place will be putting them in place, it could be another catalyst for shopping behavior.

Basically I don’t know anybody that doesn’t have some thoughts of their own household budget at this point in time in thinking about what they could do differently. I’m guessing that that’s going to promote more shopping over time, that might be very hard to measure, I already said the second quarter, third quarter we estimate down 10%. Maybe it’s a retraction of the continuing fall ware but hopefully it plays to our advantage.

Bill Cody

I have one follow up answer on the investment losses in the insurance companies. During October primarily what we saw was less credit specific issues in the portfolio then in the markets generally and more widespread supply demand balance winding of credit spreads on high quality assets as well. In many cases on the shorter maturity, highest quality assets where those who were forced to sell who kept the highest dollar prices that they could for the securities that were selling.

A fair amount of that deterioration in market value on the mark to market basis came from very short, one, two, three year high quality securities marked down in price to 3%, 4%, 5%.

Operator

Your last question comes from Bob Glasspiegel - Langen McAlenney

Bob Glasspiegel - Langen McAlenney

You’re now competing against the government with AIG in addition to being regulated by them, my editorial comment is that it doesn’t seem like the government is trying to de-game it towards AIG’s advantage but I guess the question is; has their behavior changed being a government run company do you have an updated view on TARP and whether that’s a good or bad thing? Do you have a rooting interest in Federal, State regulation trends? I’m not sure whether you can change all this or just have to deal with it but I suspect you have a rooting interest.

Glenn Renwick

Let me start with the last one. The other two may be just too big for me. Certainly state regulation has served us well. We frankly know how to deliver in that environment. To some extent I’m hard pressed to find the big gain in Federal regulation. I can put a list of pros and cons together the same as anyone else. If it truly was in the consumers best interest and there would be a material cost taken out I would be willing to favor Federal regulation. I’ve not been able to get myself to that point.

I haven’t seen certainly the optional chart it doesn’t excite me, I’ve never seen how we would totally handle guarantee associations and things like that. Frankly I think that the state regulation is probably working okay and I can’t think of a big enough reason to jump and be proactive person in supporting a change. I think there are opportunities for us to change state regulation and to try to make it more consumer favorable. We will continue to do that. Nothing big there, don’t look for Progressive to be leading the charge on Federal, State issues we’re okay with what’s there.

With regard to TARP, I really just don’t have, I have plenty of views, but as expressed by Progressive I don’t see that as being a relevant issue for Progressive.

Bob Glasspiegel - Langen McAlenney

In the disaster scenario that you were saying is low probability you would not want to take the money and get Federal structures.

Glenn Renwick

I’m not going to foreclose anything but that just doesn’t seem to me as a highly likely avenue and we would explore a lot of other avenues before that. Frankly, beyond that is really speculative. With regard to AIG you’ve seen the results. I don’t know that you can associate that with even the specifics of the most recent situation. Some of the agency actions had been taken prior to that, pretty significant restrictions on single car business. I think I saw 41% down on written premium. Clearly they’ve put on some restrictions in that part of their business.

I mentioned before in terms of a rating decrease or the change in rating just a perception from consumers is real. The question is real and how big I can only really comment on the first one. We track the number of customers who have previously been with AIG that are coming to us and we do that by both channels. I will say that that has increased. The people with AIG policies are showing a higher propensity to change their carrier at least as measured by Progressive. I suspect that that’s a reputation issue that may or may not be warranted but perception is perception.

Bob Glasspiegel - Langen McAlenney

Were you suggesting that down premiums is more a market reaction as opposed to management operating the company differently?

Glenn Renwick

I think management was operating the company differently when they put the restrictions on certainly the agency area but that was actually done before the announcement of AIG’s problems.

Patrick Brennan

Thank you everyone, this concludes our call.

Operator

That concludes the Progressive Corporation Investor Relations Conference Call. (Operator Instructions)

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