Progressive Corporation Q4 2009 Earnings Call Transcript

 |  About: Progressive Corporation (PGR)
by: SA Transcripts


Welcome to the Progressive Corporation’s Investor Relations Conference Call. This conference call is also available via an audio webcast. Webcast participants will be able to listen only throughout the duration of the call. In addition, this conference is being recorded at the request of Progressive. If you have any objections you may disconnect at this time.

The company will not make detailed comments in addition to those provided in its Annual Report on Form 10-K, Shareholders Report and 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

Good morning everyone. Welcome to Progressive’s conference call. Participating on today’s call are Glenn Renwick our CEO; and Brian Domeck our CFO. The call is scheduled for an hour.

Certain 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 security 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 counter parties 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 competitors; legislative and regulatory developments; disputes related to intellectual property rights; the outcome of litigation pending or that may 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 litigations in healthcare costs and auto repair costs; and other matters described from time to time by us in other releases and publications.

In addition, investor should be aware that Generally Accepted Accounting Principles 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 as 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 for our first question.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Meyer Shields - Stifel Nicolaus

Meyer Shields - Stifel Nicolaus

I was hoping you could sort of break down the comment you made with regard to allowing the direct channels business to go above 96% into the combined ratio, how much of that is mix shift, how much of that is actually changing your pricing strategy from where it has been.

Glenn Renwick

Sure, let me take that in pieces because we’re going, I introduced that in the letter, frankly I’m not signaling any real change. I want to signal a different level of understanding not from us, we have the same understanding but make sure that I communicate an understanding of how we’re running the business as well. So I’ll recap what I wrote and give you a little bit more insight to that and also tell you that at least at this point I’m thinking of making that a little bit more of a feature of our June meeting where we can actually give some real color to what we’re talking about.

Here’s what I want to achieve with that comment and I want to stress there is no change being signaled by it, I’m explaining something I hope a little better. Three of our businesses calendar year while there are differences between new and renewal we call it targets. We’ve introduced those targets to you at prior meetings in New York and how we manage our business to targets.

In fact there are lots of targets for this purpose I’ll just talk about new and renewal, you really should think about those as segments and states, and we meet those new and renewal targets and any combination of new and renewal targets will ultimately be required to make our overall 96. On the calendar year businesses that I describe really as our agency orders, special lines and commercial the difference between new and renewal targets is, there is a difference but its not dramatic.

By the way that we account for our media charges, in our direct business, the delta between new, and renewal targets is dramatic. There’s no news there, that’s absolutely been the way it is. However there are certain combinations of our direct results that might produce and I’m just going to make a number up here so please don’t read more into this than the explanation I’m giving, let’s just say we have a 97 in direct on aggregate.

There are some outcomes that that 97 would, I would not be happy with. That’s driven by increasing loss costs, that may not be a 97 that I’m happy with. If on the other hand and this is what I meant by under certain scenarios we are finding that market conditions are such that we have held our pricing, we’ve got good pricing and we’re getting demand for our product that we’re very comfortable with we want to be able to take that opportunity to take as much of that new business as possible. Frankly we’re pretty happy with our demand currently.

If we take on a significant amount of new business it is possible that we would produce a 97 that I would be delighted with. All of that will be in concert with our other parts of the business to keep a 96 as the total aggregate combined. That hasn’t changed, but some of the component pieces operate differently. I know that about a decade ago we were talking about cohort and the like, the concepts were right, they weren’t really right for the management of the business at that time. I don’t want to go back to that era, I do want to be very clear about we run our business with new business targets, with renewal targets and we must meet them.

Given that those targets are quite dramatically different by the way we account for our acquisition costs in direct then there are some combinations of growth in direct that may produce a result for that segment and that segment alone, greater than 96 that I’d be happy with. We want to get you comfortable with that so that when we first have a 97 we say yes, that’s fine, that’s not new news to you. On some occasions 97 may not be fine and I’m just choosing one number slightly higher than 96.

But that was what was meant by that and frankly I’d be delighted if this year were a year that we would see significant increase in new business. It will take a fairly significant increase before that moves but we are very dedicated to running our business with discipline around a new business target and a renewal target. That new business target if out of the effectiveness of our advertising works well, we’re prepared to spend into that demand function.

Brian Domeck

What I’d add to that in terms of the new and renewal combined ratio target we actually have it as targets for loss ratio, for LAE and expense ratio. So we do have controlling, monitoring of if loss ratio were not being target, that would be a signal to us and something that we would all be very uncomfortable with so we monitor that.

And particularly on the direct business as it relates to acquisition costs, we have and we look at what is our yield on advertising and we reference it cost per sale relative to what we might target as an allowable acquisition cost and that is another monitoring measuring stick against how we feel about the yield of our advertising spend. So when you look at what the combined ratio might be for the direct business, it might be an expense ratio, you may have seen that in the January results where the expense ratio was higher due to advertising spend, that’s one component piece.

The other thing for us internally look at and we will obviously measure is variance versus loss ratio targets and that is very, very critical. We will not spend if we don’t believe our prices are adequate on a loss ratio basis.


Your next question comes from the line of Vinay Misquith - Credit Suisse

Vinay Misquith - Credit Suisse

Just wanted to clarify once again about this 96% target, so it seems to me that its more of a shift towards new business versus renewal business that is causing maybe the combined ratio to maybe pick up in the short-term as you are trying to spend more in marketing expenses to drive new business is that correct.

Glenn Renwick

That is largely correct, just answer that with a yes but I can see that this is causing some degree and its good, its good that we have these conversations. If we were and please don’t ask the follow-up because I’m not going to, if we published our combined ratio on new direct business it wouldn’t look anything like a 96. When that is published in concert with our renewal and by the way we make certain assumptions that we are comfortable with, we expense all of our advertising costs, we allocate them all through the first period. That’s just a convention, not how we price it, but its how we account for it.

If I gave you the renewal combined ratio, consistent with those conventions for direct it also wouldn’t look like 96, in concert they’re 96. You can do weighted averages, all I’m saying is when we have the opportunity to grow and we think we’re priced appropriately to grow, and there is demand for our product, we will try to increase the proportion of new business if and when that’s available to us. If that is done and done as Brian said in concert with our loss ratio and our LAE targets and our expense targets, then we would be very happy to see the aggregate result of just that segment reflect a little bit higher because of the proportion of new business.

Vinay Misquith - Credit Suisse

So does it mean that you would likely spend more money on marketing in the near-term because you feel that you have a better opportunity to grow your market share.

Glenn Renwick

Yes, absolutely. That is very fair. Let me sort of put the asterisk on that. We’re only going to spend more as long as its working. We absolutely take our cost per sale measures critically and not just cost per sale but our best determination of what the marginal cost is for the next sale into consideration and only when we’re getting the yield that we want will we continue to spend more. The question comes up quite regularly on this call sort of what’s the budget for advertising and that’s a fair question, its not the way we think about it.

We think about spending to the degree that we can support and get the yield that we’re looking for and if market conditions are such that we feel that we can get more, we’ll spend more. Certainly in the first quarter and maybe to some degree in the third quarter a little bit higher. So you’re not going to necessarily see a consistent spend level throughout the year but you’ll see us take advantage of those two times which tend to be the spikier times for acquisition.

As the year has started out now and Brian referenced in his comments we certainly spent more in January than the prior January, very pleased with that, and the results are consistent with the measures that I’ve just talked about and as long as that’s the case we’ll continue to adjust our spending to reflect.


Your next question comes from the line of Paul Newsome – Sandler O’Neill

Paul Newsome – Sandler O’Neill

I’d like to maybe have you touch upon auto claims frequency again in a little bit more detail and I think the last time we spoke, correct me if I’m wrong that we’re essentially assuming that we return to a higher level in 2009 and perhaps in 2010 and I guess as a corollary to that do you think that some of the forces that created the unusual drop like the oil price changes are creating a situation where some of those macros that have more of an impact than they did in the past. I remember a time when most auto insurers claimed that there wasn’t a correlation at all.

Glenn Renwick

You may have to push us a little bit on the last part of that question but why don’t we take this opportunity to maybe recap what we see frequency and severity trends, we’ll try to recap 2009 and then give you a little bit of insight as to what we’re seeing in the January results since clearly January indicated a little bit more of a kick up and some losses. Maybe we need to give a little bit more explanation on that. Why don’t we start with just a recap of frequency trends, severity trends, 2009, sort of the macro story and then what we’re seeing early in 2010.

Brian Domeck

In aggregate let’s talk about personal auto in particular in 2009 in frequency we continued to see a decrease in frequency in the collision coverage and that was on top of decreases that we saw certainly in 2008 and previously and that continued throughout 2009, whereas for us both bodily injury and personal injury protection coverages we did see increases in frequency.

Now some of it got us much closer to levels that we saw in 2007 particularly on the bodily injury side, and in 2008 it was down for the various reasons that you described, higher gas prices, etc., and then as Glenn certainly mentioned in his letter, personal injury protection the frequency there has changed pretty markedly. Its something that we’re continuing to monitor very closely. The severity story in 2009, there was, we continued to see a decrease in our severity for collision coverage and to a little lesser extent also in the property damage coverage, whereas bodily injury severity remains relatively flat and PIP severity is up.

And so on the PIP coverage we have both the frequency and severity going up which is cause for concern and vigilance. Glenn mentioned in January I’ll give you a snapshot of January, in January we saw frequency up across most coverage, a little bit of decrease on collision but across most coverages including bodily injury and personal injury protection we saw increases in frequency, severity for the most part in January when you compare relative to last January, changes were pretty modest with some, we’re starting to see some increase in accident period severity for bodily injury and a little bit of a continuation of the personal injury protection.

So net net frequency severity collision down, bodily injury frequency has been flat, was up in January and personal injury protection continues to be both a frequency and severity concern.

Glenn Renwick

One additional point I might suggest to you is individuals who fall in multiply companies, the one number perhaps is a little different than some of our competitors and therefore just I point it out, is our severity in our physical damage coverage tends to be a little bit flatter than what some are reporting. We’re very happy with that. Clearly I’m not going to make a lot of correlation to anything but certainly as we’ve taken a long hard look at our claims organization we are very very happy with some of the results and loss adjustment expense and frankly I’m even more happy that the quality, by our internal quality measures continues to be extremely high.

And the best measure of that ultimately flows through into our accuracy of claims settlement in the marketplace so happy with that. We’re also very cognizant and the question sort of had some issues around macro trends, we’re also very cognizant that the average age of the vehicle in our fleet continues to go up so that has an effect on severities and different claim settlements. I want to be very careful to make sure that we recognize when that starts to turn around and in some of my writings I have said we need to be very vigilant and nimble and stuff, that was not meant to be just sort of fancy words, it’s a very critical time because we’ve seen such dramatic changes in the shape of trend curves that picking future trends just gets much more complicated then when generally things are clustered in a similar direction.

So this is a very awkward time to sort of figure out exactly how we recover from those macro trends, the oil crisis, and some of the aging of the fleet and the reduction in new car sales, unemployment, those are things that frankly are very, very hard to factor in in any analytical way but they are there and I want to be very careful not to miss the change in trends which almost certainly will come with some or some combination of those.

Paul Newsome – Sandler O’Neill

The second part of the question was really to go to some of those macro trends that you mentioned and to ask if your views of those macro trends having a more profound impact, are they having a more profound impact then they have had in the past. Certainly oil for example we had a spike, it seemed to have a material impact for the first time ever and I was wondering if as we have gone out of that, past the spike, if some of these macro trends are having a more, a larger influence you think on claim treatment.

Glenn Renwick

Let’s answer that with great precision, I just really can’t. I would tell you that now I’m talking probably inappropriately with a little bit of experience but my suspicion with high unemployment, with some of the trends we’re starting to see in first party claims, it just feels like a time that we’ve got to really watch some claim escalation both on frequency and severity and what we’re seeing in not just one PIP state but largely almost all the states that have PIP very similar characteristics. I think we have to really watch to see if that carries over into a bodily injury type environment and under insured motorist type claims.

Yes, I think these macro trends have to be observed. I don’t know that we can every pinpoint exactly what’s driving it but it does feel like a time that things are changing and changing to a little bit more of a positive trend than we’ve been experiencing for the last several years.


Your next question comes from the line of Michael Nannizzi – Oppenheimer

Michael Nannizzi – Oppenheimer

Just a question on the portfolio, so what are you looking for today in investment characteristics for new dollars, I saw you invested in some auto asset backs, if you could just talk about that and more broadly if short yields stay where they are to hit your corporate targets would you look to reduce target combines, raise operating leverage, or is that, about that as well.

Glenn Renwick

Bill, why don’t you talk about the new money investments.

Bill Cody

What we’re looking for is what we always look for which is securities that will provide us with reasonable total return for the risk that we’re taking. The short auto asset backs fit that nicely particularly in the second half of last year where they had pretty short durations so there wasn’t a whole lot of interest rate risk and their spreads or the additional income that we picked up over owning treasuries was pretty substantial for what is in our view very limited risk.

We added those in the 100 to 150 basis point over treasuries range to start, those have come in pretty sharply to say 20 to 40 or 50 basis points over treasury so we’ve slowed down our add there. But more generally in this environment with rates below in the front end we’re not looking to stretch to add yield or stretch for yield. And with spreads generally compressing to those low treasury yields its leaving us with pretty low all in returns or all in yields on that paper which makes it more difficult for us to find value.

What we have done is add non-treasury paper primarily in those asset backs that you mentioned so non-financial corporates and as well also in some of the older vintage senior CMBS paper where we pick up what in our estimate is enough incremental income for the additional risk there. The low yields do provide us or do leave us with less of a cushion in the event of a rate rise against the negative total returns so that’s something we’re mindful of and we’re keeping our duration short.

As far as how that changes the operating side, Glenn do you want—

Glenn Renwick

Very reasonable question but the answer is no we won’t change our underwriting target, 96, I understand the issue of income and earnings and how we could do it but I would tell you from my perspective and it’s a long held philosophy and one I am very, very supportive of is this company as an operating company needs to have a benchmark around which everything else operates and bringing the company in at a 4% underwriting margin and growing as fast as we can is something that’s a constant.

And you should think of Progressive as having a very constant mantra in that regard so no, we don’t change that and under certain circumstances we’ll benefit from greater investment income and some less but we’re not going to change the fundamental operating parameters of the company and we want to maximize that and at this time, again its not guidance, but it does appear that the demand for our product is actually picking up.

We think we’ve been able to create that with some part of our messaging in the environment and we want to take full advantage of that so this is not a time that I would necessarily try to stretch for additional margin, I’m very happy to pick up the demand at the margin targets that we’ve established and grow as many customers as we can and over a long haul, I believe that will be the strongest company we can build.

Michael Nannizzi – Oppenheimer

You talk about your agent and direct channels have you looked at or do you monitor interaction between those channels, for example as insured’s have more complicated risks maybe do they migrate towards the services agents provide or if you’re direct do you stay direct and if you’re agent do you stay agent.

Glenn Renwick

I’m not going to be as specific I think as you might like, but let me add some color to that. Its very clear that agents do a lot of business in what we’ll call sort of the combined risk. I need homeowners, I need a auto, perhaps I need a small business and agents are very suited to doing that. So in some sense I could say without factual background, yes, I think those that have more complicated needs often go to an agent.

Now the question of what’s complicated needs is changing in the consumers’ mind over time, many of us used to think tax returns were complicated. Federal tax has made that somewhat less complicated. And the direct channel is able to do that in ways so what perhaps is available for customers who are willing to do a little bit more work, on our direct channel is a little more complex than it might have been a few years ago including the involvement of the consumer with name your price.

But we would very much like and I referenced this in my letter where we have actually relatively small penetration in that market sector of customers who put their auto, a motorcycle, and a homeowners together, our agents are actually very well suited to doing that and we want to make the product available to them. We are doing that. We’re also seeing in the direct channel that people are perfectly capable of doing that for themselves as well.

I don't think there is a bright line test on complexity of the product. I think its more a preference of the consumer and that’s why I mentioned very clearly and I mean it, we’re delighted to have a really strong footprint in both the online world and the agency world and our commitment to both is really unwavering because consumers are absolutely showing they want to use both channels.


Your next question comes from the line of Alison Jacobowitz - BofA Merrill Lynch Research

Alison Jacobowitz - BofA Merrill Lynch Research

We’ve been hearing from some companies about getting on the margin more aggressive and there are other companies that are printing unflattering returns, I was wondering if you could talk a little bit about the competitive landscape and what you’re seeing and how that might be feeding into the incremental improvement in the demand for your product and then my other question, I was wondering if you could just talk a little bit about non standard auto in general. Maybe just give your views on that market and what you’re seeing there.

Glenn Renwick

Certainly on the margin issue without, you get to see as many as I would, maybe more, but I see that more in terms of rate increases in the marketplace. I’ll focus on it from that dimension. In my letter I talked specifically with regard to the agency channel where okay with some bias, I actually think we’ve paid the last few years quite well. We haven’t lost our discipline on pricing and we’ve seen cases where we didn’t always think that we could match that price in the marketplace, right, wrong, or indifferent.

But we all know and we know very well that our pricing decisions today tend to be the results of some six, 12 month, 18 month out and we have seen some companies taking their rates up a little more in the agency channel, a little more than our trend estimates would suggest. And that’s all it is. That’s just a fact. So there we’ve been able to capitalize on having our product priced at a level that we feel comfortable with and the ranking if you like of winning risk to second, think of it as sort of a Google search, you move up in the Google search and the competitiveness for agents and I think that’s actually been a nice generator of some additional demand for us in the agency channel.

In the direct channel likely having our prices and not having to change them dramatically is a good thing but there you’ve got to really get the demand so if you’re not getting someone to actually look at your product or look at your price, then you’re not much further ahead so I’d say in the direct channel, its more a function of our ability to create interest in Progressive through our advertising and through our online work, and we’ve done a substantial amount of that. And we’re very pleased with it.

In the agency channel it’s a little bit more of a function of our relative competitiveness. Hopefully that sort of gets at the issue rather than talk about others margins or return expectations. The non-standard marketplace frankly I would say the non-standard marketplace is a little bit tough sledding right now. Its always easy and I think its accurate, to suggest that the marketplace ebbs and flows a little bit more with employment and the economy.

I think that’s fair. We’ve seen that multiple times. Hard to pinpoint exactly the relationship but our efforts in non-standard while we’re totally committed to that, and comfortable with everything we’re doing its not the place that we’re generating the most growth right now and quite frankly I’m hopeful that at some point its not going to be tomorrow, but at some point as the economy recovers that we’ll be extremely well positioned to take advantage of that.

Those companies that may be a little bit more non-standard centric will have just a tougher time because perhaps they don’t have the portfolio balanced both channel and product that we have, but the non-standard marketplace is actually quite stressed right now from a demand perspective and is starting to show the trends that we’ve talked about specifically in PIP in those states that have PIP, its definitely, those trends are showing up in non-standard just as much as anywhere else, if not more.


Your next question comes from the line of Dan Johnson – Citadel

Dan Johnson – Citadel

I’ve been on these calls for the last two years, there’s been a reasonable amount of questions on the agency channel and probably without a whole lot to talk about in terms of tangible results that’s probably not the same to be said at this point in time. So as usual its always interesting to talk about how sustainable some of these trends are likely to be, would you mind pointing out a couple of the key drivers you think that have at least tilted the direction of the agency PIP growth and within those can you talk about the visibility you have on the sustainability of those trends.

Glenn Renwick

I’ll give you [inaudible] things, those two being the most significant. Really just covered it in the last question with regard to rate, our relative rate effectiveness or conversion capability in the agents has gone up mainly as a function I would suggest of others taking their rates up. So ultimately we’ve become more competitive. That’s a position we love to be in. We like to have our rates stable, not changing and if in fact the market sort of changes a little bit we don’t have to change it quite the same speed as others.

And that’s a position we like to be in, we [can’t] guarantee it. I think we’ve done that quite well in the agency channel and time will prove that out. We started to see in the second half of last year a little bit more life in the new applications even though we only ended with really slight increase in the agency channel. That has carried through into January and keep observing because those could be interesting observations throughout the course of the year.

The second would be presentation. We’ve been able to present our rates to agents and this is not just haphazard, this is a very key strategy that in so many situations we have perhaps a different product combination or a different coverage combination and don’t always get the chance to present that in the form of a comparative rater which we don’t control as directly as we did when we presented our own rates.

So we’ve worked closely with the comparative raters in many states to actually find ways to present not just one option but perhaps two options so that the agent really has an opportunity to see where Progressive might be the right product for their customer. And that has actually made a material difference. The third area is that we continue to provide agents with more product up to an including some products that we don’t manufacture and that being our homeowners product, that is not necessarily a major success or a major change at this point in time.

But it certainly starting to signal to a large number of agents, Progressive is the company that I can actually have in my agency to start to service a great deal more needs than maybe they did previously. And the fourth which is literally has no effect at this point in time, at least at the macro level, but is a renewed commitment from our agency management force to start segmenting agents in ways and treating them much more consistently with the kind of business that they give us so that those that are more committed to us or have that needs that are going to give us a different class of customers, we’re going to work with them a little differently so that we can actually make sure that those agents who are looking for us to fulfill a good part of the needs in their agency that we’ve got a different relationship with them.

That is new, that is not something that I can say is contributing to any success today, but is likely sort of starting to become appreciated by agents realizing Progressive’s commitment to that channel is more perhaps than it was even in past years.

Dan Johnson – Citadel

If I could follow-up on item number one on the rates, the spread if I sort of change your words around it sounds like you are beginning to compare more favorably as others take or maybe even need to take rate actions that are greater than yours which is bringing either pricing further together or making them even more expensive than your own, is that roughly the right takeaway of what you were saying.

Glenn Renwick

Its perfectly the right takeaway. And sometimes getting, you don’t necessarily have to win all the time but if you’re within $20 or whatever it might be all of those deltas have changed with others taking rate changes.

Dan Johnson – Citadel

And do you feel comfortable that you’re actually able to have the granularity of data to feel like in a particular geography where you’re pricing is for some sort of hypothetical set of customers relative to the top three or four competitors in that geography.

Glenn Renwick

Well the agency channel, we have more data than anyone else so not necessarily for every customer segment, but I’d add to that question saying comfortable, then I’m going to put a big asterisk on what is comfortable in our business. We never know, we just keep working at it all the time and when I use words like being nimble, being fast, we don’t really know everything that’s about to happen but we can react faster than others. That’s where my comfort level goes up.

Its less about being absolutely confident at every cell that we’re accurate. I’ll tell you right now, we’re not. No one has been, no one ever will be. But are we reacting fast enough to keep that in a balance, that we feel good about, yes. That’s really the game here and I don’t say game lightly, that’s sort of the game theory is to make sure that your accurate as long and as often as possible and even when and this is what I referred to in the last few years, even when there are perhaps competitive forces that are forcing you to maybe not win risks, to have the discipline to say I’m still not going to chase that because I don’t necessarily think I can make a profit at that price.

We’ve stuck with our price points. But we do feel confident. Having said that a commentary that I would make even on the January results and Brian went through in some detail one of the key factors the frequency shift, and yes we’re all well aware that January has snow and so on and so forth, and some part of it is a little bit weather but I’m really not going to use that even though it may be a little bit more marked this January than perhaps others, we have a couple of states that are simply what I would call underperforming relative to their targets.

So again confidence at the granular level yes, but not in all states at all times and specifically as I referenced in my letter in the PIP states we’re seeing some underperformance relative to our expectations and that also is a driver of some January results. Actions have already been taken so this isn’t a first recognition. Actions have already been taken but there’s a time delay between the action and starting to see that come through in the earned premium.

Brian Domeck

A couple of things I’d add on about the growth in agency policies in force, Glenn touched on a lot of the things that drive it. I’d also say we continue to evolve our own product offering and we’ve talked about different models and different versions and in 2009 we rolled out what we call our 7-0 version and we’re on to our next model version and a lot of those changes were directed to what I would call more of the, you might call it the more preferred customer, those that would tend to stay with a company longer.

And we are making penetration in that and certainly some of our new application growth in the agency channel is in that segment and as that plays out over time with increased policy life expectancy of that group of customers that should play out in policy in force growth over time. But I think we have made very much traction and we continue to evolve our models and we’ll always continue to try to stay ahead on product development efforts but certainly in 2009 and going into 2010 that has been another major shift of emphasis.


Your next question comes from the line of Josh Shanker – Deutsche Bank

Josh Shanker – Deutsche Bank

When you were talking about your concerns about frequency and severity rising, are you reserving right now to a higher frequency and severity trend that you’re seeing, anticipating the future and two, given we’re now through the credit crisis what is your view on the share repurchase. I know you’ve been [inaudible] the last six months given where the stock is, given where you’re seeing your opportunities, what are you thinking right now.

Al Neese

On the reserving side we have incorporated in the change in severity but it tends to trail a short period. We had favorable severity changes in our injury coverages in the last half of last year. On the other side we do have coverages that Glenn and Brian have mentioned such as the PIP, where we’ve had frequency impacts and severity impacts and we look at each of these in each individual state or even region to try to incorporate that into the reserving output and predict the future.

Now in a time of change which we have experienced I think the industry has seen quite a bit of change in the bodily injury severity in the last half of the year and again the PIP, using that historic data to predict the future is what we spend a lot of time to perfect and sometimes we miss but we are always updating that model and those changes.

What would be out outlook in the future, as Glenn said, it would be hard to speculate. We have some ideas from what’s recently happened but again the history has changed a little so that prediction becomes a little harder.

Glenn Renwick

On the capital question no new news there. I understand your question quite well, believe me we think about that a lot right now I’m very comfortable that hopefully use a little bit of that as we grow but I recognize the potential for any analyst to suggest that’s more capital than we might need. Frankly I feel quite comfortable at this point in time. We’ve indicated that our capital policy hasn’t changed, stock repurchases are something that we absolutely consider.

I know its relatively small dollars but we’ve also signaled that we’ll increase the dividend or at least the 20% to 25% target. So capital management is an issue. We’re not going to start dealing with it on a month-by-month type of basis but if and when we have anything different to suggest we’ll suggest it but for now consider our capital management to be fairly in line with what you’ve seen for the last couple of years taking out the credit crisis period.


Your next question comes from the line of David Small - JPMorgan

David Small - JPMorgan

It seems like you’ve made some changes in your leadership in the marketing area is this signaling any change in your marketing activities.

Glenn Renwick

No not at all, you’re right Larry Bloomenkranz my selection for CMO, I did make a change there. Larry is a terrific person and this particular case wasn’t quite what I was looking for, I think that’s probably all I need to say but I think it’s a good very fair question to sort of separate that from results. This was not a results issue. We’re delighted with a lot of what we’re doing. The campaign actually existed prior to Larry.

It’s a campaign that we’re absolutely excited about. We do have some very real ideas of how to extend that campaign so internally and sort of our external presentation of our brand and marketing is absolutely in a place that we’re very excited about. Larry’s departure is not related to the strategy in any way. It was simply my assessment that it didn’t work out quite as well as I had hoped and we’ll get there.

We have a terrific management team here, that one just didn’t work out as well as I had hoped.

David Small - JPMorgan

When you discussed packaging home and auto, are you giving a greater discount now on the auto when its bundled then you were previously. My understanding is you’ve always given a discount if someone had told you that they owned a home.

Glenn Renwick

That’s true. That is true. I don’t I think that’s a question that deserves a factual answer that I think I know the answer but I’m not certain. I will say that we haven’t increased the discount. We always provided a discount in our auto if the person was a homeowner. That’s more a reflection of the stability of risk. I know that we have plans to do some other things with our homeowners partners that may ultimately result in a greater package discount.

But at this stage I would tell you that we’re doing essentially what we’re doing, its more a reflection of the stability of the risk and to the extent that there are other advantages we have plans for those but they’re not in the market at this stage.

David Small - JPMorgan

So when you talk about the benefits of the homeowners its simply the benefit of you having the product available for the customer now.

Glenn Renwick

I could say yes to that but I’d like to say a little bit of a follow on, the reason that we’re doing that, (a) yes to meet customer needs and therefore attract a different customer segment to us. But the real reason we decided to do this is we want to retain our customers longer. This is all about retention for us and having a multi product customer, that’s not new news to anybody that they retain better. The fact is they do retain a lot better. And we’re even seeing that just the nature of having a companion product whether it be one of our own companion products in motor home, motorcycle, or a renter or a homeowner also has some very interesting perspectives on loss costs as well.

So the benefit to us is a customer segment that we may not have had product in before and customers who will retain longer. An important point there to try to put a little bit of an exclamation, many if not most of the people we’ve sold homeowners and renters policies to have been people who were already in our book. So they’re actually our customers that are now reaching out and adding to their portfolio of insurance products.

That to me is terrific because I have to assume there’s some probability that if we couldn’t meet that need they would go somewhere else to meet that need. So when I write about giving reasons for people not to leave, this is in line with those. Its also in line with giving people reasons to stay longer and we’re just seeing a very, its actually an insightful look into a different part of the marketplace that historically has not been Progressive.

So a lot of positives there. The fact that we don’t underwrite the product is really not concerning me at this point in time. And we’re certainly not doing it for any commission income, that’s not the big motive here.

David Small - JPMorgan

Is it too early to comment on any impact that the severe weather in February had.

Glenn Renwick

I think the answer is too early. We know that at some point right at the end of January I think there were reports of snow on the ground in every state, someone said but Hawaii, but I think there are volcanoes there that probably did have snow on them. So there’s no question we actually have I wouldn’t normally go into this, we have pretty sophisticated weather reporting, 300 weather reporting stations that actually we’re able to normalize month to month based on weather effects.

And I’ve only seen the January results and I would say that January was worse than a normal January. Clearly January at least in the northeast, we don’t notice it much in Cleveland because its cold and snowy and grey here all the time. But apparently there was some other places that had some things that were a little bit more exceptional and we do have pretty sophisticated ways of knowing that.

I tend not to fall back on the excuse that a winter month has bad weather but it does look like January was a little bit out of the norm and probably deserves some adjustment. I’m not so sure that February won’t be in the same league but I haven’t seen that data.


Your final question is a follow-up from the line of Meyer Shields - Stifel Nicolaus

Meyer Shields - Stifel Nicolaus

Just a couple of follow-ups if I can, the first would be whether you would be willing to go above the 96% in the agency business if the same opportunity for growth presented itself.

Glenn Renwick

I don’t think that is a mathematical possibility. It probably is a mathematical possibility, its not a practical possibility. The delta between new and renewal given our size of renewal book it would require and the small delta between the targets of new and renewal require a dramatic and I mean dramatic new business. I’m going to hedge the bet and say no to that question because it’s a safer answer then yes because I don't think yes can happen.

Meyer Shields - Stifel Nicolaus

And can you give us an update in terms of how much of the data being collected by the My Rate is actually being incorporated into pricing now.

Glenn Renwick

Specifically in the My Rate products, a lot. That’s really the basis of our My Rate products and we have some plans that will, that would probably be a better plan to discuss maybe in June as to how we think we can take some of the observations from My Rate and maybe make them in a much more simplified way and a marketable way to people who might not otherwise have shown an interest in our products.

So we have some derivatives from that that could be exciting but the My Rate data is really just used in the My Rate product. If your question is does it flow into other pricing that doesn’t rely on the collection device, that would be limited.

Patrick Brennan

Thank you everyone for participating and we’ll talk to you in a few months.

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