Progressive Corporation Investor Relations Call Transcript

Feb.29.08 | About: Progressive Corporation (PGR)

Progressive Corporation (NYSE:PGR)

Investor Relations Conference Call

February 29, 2008 9:30 am ET

Executives

Patrick Brennan - IR

Glenn Renwick - CEO, President

Brian C. Domeck - CFO

Al Neis - Corporate Actuary

Analysts

Meyer Shields - Stifel Nicolaus

Brian Meredith - UBS

David Small - Bear Stearns

David Hill - Bank of America

William Wilt - Morgan Stanley

Matt Heimermann - J.P. Morgan

Tom Hazlehurst - FPR

Beth Malone - Keybanc Capital Markets

Operator

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 10K, shareholders report or letter to shareholders, which have been posted to the company's web site, 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

Thank you. Good morning, everyone. Welcome to Progressive's conference call.

Today participating on today's call are Glenn Renwick, our CEO, and Brian Domeck, our CFO. The call will 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 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, 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 a particular risk, including litigation exposure. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for one or more contingencies. Reported results, therefore, may appear to be volatile in certain accounting periods.

And with that, we are ready for our first question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Meyer Shields.

Meyer Shields - Stifel Nicolaus

Thanks. Good morning. When we talk to agents, I guess, it's not uncommon for them to say that they look at Progressive primarily for non-standard auto placements. I was hoping you could tell us how representative that is.

Glenn Renwick - CEO, President

I accept the statement. I think that, for a lot of agents, we have traditionally been that accommodation market. Certainly that was our history with them.

I would like to suggest that it's not a generalization you can use across the board. There are a lot of agents that are seeing us very differently in the last 10 years, even more so in the last four or five, and many use us for a good cross section of all of their risks.

It is very true that our direct book has a different distribution - policyholders, as we define them, on the spectrum from non-standard to preferred or ultra preferred. And our direct book skews a little more or very closely to what we would expect the shopping population to be. Our agency book does skew towards the nonstandard, mid-market end, so there's some data to support the issue.

I think perhaps an insightful point that might be useful here and we've commented on it in our reports to you, is the changing environment of agent quoting. And we're seeing now a significant number - for those of you who attended the New York presentation two years ago, we talked about the concept of comparative raters moving to a very real time and accurate rate based on the company supplying it themselves - and we're seeing a significant percentage of our agency based quotes coming in from a format that would be a comparative format.

That somewhat auction environment is interesting for two reasons. One, in the nonstandard world where there are clearly more people offering rates today, the intensity of getting that segmentation and pricing right is critical because I think we all understand the winner's curse environment there.

On the other side of it, it actually presents some interesting opportunities for us. Where we perhaps have not always been presented in the standard, preferred and ultra preferred quoting mode, we are actually finding ourselves being presented more frequently from that environment.

And of our agency new applications, which are under pressure - I think you've seen that in our numbers  the one bright spot is there are actually - new applications year-over-year for our more preferred and ultra preferred are actually up.

So we're seeing some benefit from the comparative rating environment. It is also an environment which is going to require all participants to be extremely skilled at segmentation and pricing. But some of our agents are definitely starting to see Progressive as a more preferred and standard carrier, and we hope that that will also increase with the availability, as we're starting to roll it out and I fully acknowledge it's still relatively small and slow, but our offering to our agents of a homeowners product where they can start to bundle a prospect that wants Progressive auto. Now we can actually provide them with the homeowner and in some states the umbrella.

So we're starting to be able to address some of the needs that agents would perhaps say - if in fact they were to say, I use you primarily for nonstandard, we're starting to provide them a better solution where they can look at us for a bigger range of their customers.

Meyer Shields - Stifel Nicolaus

Okay. Thank you. That was very thorough. If I could follow up, is there any pattern that we should look for in terms of monthly share repurchases?

Glenn Renwick - CEO, President

Could you just say the last few words again?

Meyer Shields - Stifel Nicolaus

I'm sorry. When we look at the share repurchase on a month-to-month basis, it seems to vary a lot and not in connection with the share price, and I'm wondering if there are other factors driving that activity on a monthly basis?

Glenn Renwick - CEO, President

Yeah, let me have Brian address that, and certainly the January issue, some other cash implications that we have in January. So why don't, Brian, why don't you go through that thought.

Brian C. Domeck - CFO

Sure. In terms of determining share repurchases, I don't think you should look for any sort of pattern in terms of the share repurchases.

Obviously, we look and want to ensure first and foremost that we have the funds necessary for operations and growth of our operations, investment in operations. Then we also look at things like our operating leverage, our financial leverage, and based upon all those, as well as sort of the marketplace, market conditions, then we make a determination as to the amount of share repurchases that we think is prudent for us.

And as you can see, each month we let you know what that activity is, but I wouldn't try to say hey, there's going to be a distinct pattern to it.

Obviously in January, our share repurchases were a little bit less than what we had done throughout the end of 2007, but in addition in January we did have the close to $100 million in terms of the annual variable dividend.

Meyer Shields - Stifel Nicolaus

Okay. Thank you very much.

Operator

Thank you. Our next question is from Brian Meredith.

Brian Meredith - UBS

Yeah, good morning, everybody.

First question would be when you talked about a normalized environment in your annual report, I'm wondering when you talk about a normalized environment, what kind of lost cost inflation do you assume in a normalized environment?

Glenn Renwick - CEO, President

Yeah, thanks.

My reference - I guess sometimes you use terms like that and maybe we need to define them a little better, but for me a normalized environment is where most competitors that are fighting either in one channel or another are starting to produce results that are more consistent with, let's say, the mid-90s that most companies seem to indicate are their combined ratio targets.

So that's what I'd call more normal. Top that off with the likelihood of rates increasing from a positive inflation versus the deflation that we've seen. That I'd consider more normal. And if I was to go through trends that I might consider normal, rather than do that let me give you an idea of what I think the trends are as we're seeing them right now in at least the three main coverages.

So I'll take bodily injury and talk about severity trend. I would say that we're looking at 4 to 7. Now, all of these numbers are going to be based on everybody's view of their data, so on and so forth. That's a number slightly stronger than I've indicated before. I've indicated a five-ish. We're starting to see that come in a little stronger, so rate trend here, we believe, is getting very real.

I would also add to that a commentary that may be truly specific to Progressive, but I'd say that that is almost a bimodal situation where we're seeing smaller severity claims - and I will define smaller severity claims to be well under $100,000. We think the trend on those is actually on the light side of that range, and claims over $100,000, the trend is on the high, perhaps even higher than that range I indicated.

So it's a very interesting situation, and one to watch on those high severity BI claims. It's perhaps useful at times and not useful at other times to generalize a trend. I think we may very well have a couple of different trend picks here for different size losses, so I'm signalling, purely from what we see, bodily injury is very top of mind for us right now.

On the frequency side for that coverage, we're not seeing a whole lot. We've indicated before some continuous negative trends. That seems to be flattening out. And for purposes of picking a number, I would say flat or zero is probably about as good as any right now based on what we see.

Same kind of analysis on the [break in audio] for the liability coverage. Probably 2.5, 3.5 on PD coverage from a severity perspective looks like it would cover most of the data points that we look at - obviously we're looking at incurred, paid, calendar, accident. So 2.5, 3.5 feels right there. And again, frequency, I would say zero is not a bad pick from a macro perspective.

Both of those, if you combine the zero frequency and the positive severities suggest need for pure premium increases, so rate increases would seem to be dictated from those two data points if they continue to hold up.

Looking at collision - and it's always been a mystery as to why collision doesn't sort of track more directly with PD - but for the most part I would say there we're looking at a severity that is still somewhat negative. So maybe even 2, 3 points negative is something that we're happy with, but we keep a close eye on it.

On the other hand, the frequency is probably wiping out the severity decline, and our need for rate there is probably closer to zero; not much change offset by the frequency.

Brian Meredith - UBS

Great.

Glenn Renwick - CEO, President

That's the outlook that we're seeing.

If I did the same thing in commercial, most of the same directions are right. I would say that there's a chance in some of our commercial bodily injury that the trend on BI is even stronger.

Brian Meredith - UBS

Thanks. Very helpful. And then can you also talk about how the rate increases that you've been taking, they're flowing into earned premium, are we getting to a point where we should start to see your combined ratios stabilize in your agency business and maybe your direct business?

Glenn Renwick - CEO, President

Brian, you look at the earned premium and the earning of that. Do you want to comment on that one?

Brian C. Domeck - CFO

In terms of the earned premium per exposure, again, for last year it was down about 4% as our rate decreases activity of 2007 continued to earn, in particularly in the direct channel; less so in the agency channel.

The earned premium per exposure will still be depressed, but we have started, in terms of - more activity in terms of the rate increases and positive rate changes. So over time, over the next several months, those will start to earn in.

I'd say we've started the process and more to come. And as we've said in past calls, we believe the vast majority of rate changes going forward are going to be positive, and we started that process and it will continue.

But it will take - because our premiums lag from the rate changes, it'll take some time for that earned premium per exposure to go up.

Brian Meredith - UBS

Great, great. And can I just follow up quickly on the lost cost things? Do you see any difference between agency and direct?

Glenn Renwick - CEO, President

The answer to that is yes, but not something that is a big, material story that would give you sort of something that you would act on differently.

Whenever you get any books of business, there's always differences, so perhaps the  I'd like to add on that, because I think from an analyst's perspective, if I can sort of do my little two-second here - one of the things that's very important is to understand the differences in new business and renewal business. So we've often talked about pricing to our targets, and that segregation of the book is very important.

So if you've got a renewal book and it's running at a 97 or a 98, that's a big problem. On the other hand, if you've got a lot of weighting to new, that may not be as big a problem as we earn it in. So one of the key things that we see is the need to price to new agency, new renewal, new direct and renewal direct, and we try to keep all those things in balance.

Your question is: Is there anything really substantive between the different distribution channels? Nothing that I would point to that is at the level for this call, but recognize that each of those products are priced to each of those products, and even at a lower level within the product itself.

Brian Meredith - UBS

Thank you.

Operator

Thank you. Our next question is from David Small.

David Small - Bear Stearns

Yeah, good morning.

In your 10K you indicated that your price cutting strategy that you started in 2006 didn't result in the growth you had expected. I guess when you look back at the growth plan that you initially laid out, what were the underlying assumptions that didn't come through?

Glenn Renwick - CEO, President

Well, I think probably the biggest one - and again, let me state that while I just try to be very forthright with our views, I don't generally use words like hope very often  but clearly, we have elasticity assumptions that we use and we've understood in different market conditions what the elasticity is to a rate increase or a rate decrease and what we might expect from it.

Had we stayed with our rates in mid-2006, clearly no one knows exactly what that would have resulted in and we may have actually lost considerable more business than we would have been happy with.

But the bottom line to your question is really our elasticity assumptions that hold under certain market conditions did not necessarily hold when others were also acting to perhaps match price.

David Small - Bear Stearns

Okay. And then just following up on a comment to Brian's question a moment ago, if it takes time for earned premium per exposure to go through the income statement and the lost cost trends do seem to be becoming less favorable, given where your combined ratio is now, it seems like - is it fair to assume that there's a good likelihood you'll go above the 96 combined ratio at some period of time?

Glenn Renwick - CEO, President

I don't think that's fair to assume. That's certainly something that I assume. One of the things that we do - and you're very well familiar with it - is obviously reporting monthly. And I promised myself never to use excuses like weather and hurricanes and so on and so forth, but other than sort of event-related, we're not trying to sort of go above and then react. We try to react as quickly as we see the trends and price them in. We have some degree of indexing on pricing,

But no, our intent is to price such that we have a run rate and a consistent run rate over any period of time to be 96 or below. That doesn't mean that there won't be a month or two that it goes above, but that is not our intent to go above and then correct.

David Small - Bear Stearns

Okay, great. Thank you.

Operator

Thank you. Our next question is from David Hill.

David Hill - Bank of America

Hi, this is David, calling on behalf of Alain.

Could you give your expectations on your recent entry into the Massachusetts personal auto market.

Glenn Renwick - CEO, President

Yeah. I'm actually delighted, after many years of saying I didn't think we would get into Massachusetts during my tenure, to be in there, in our last state. And I mean that. It's great. That's what we do. We insure automobiles, and to open up a whole new marketplace is fun. I have very strong recall of North Carolina, Michigan, New Jersey, the Dakotas, Tennessee, so it's actually really quite a fun thing for us to be able to go into a new state. Unfortunately, this will be the last of them in the United States.

So we hope that we will be a meaningful entry in Massachusetts. We are clearly also signalling my belief that we're nimble, we're innovative, we're going in as quickly as we possibly can, but at the same time we're also going in with a great deal of caution.

We would certainly like within a reasonable period of time to have this as a product similar to other states, offered by an agent distribution channel as well as our direct distribution channel. But we can enter with an Internet only product, which we will do, and we will establish a data set.

We've done a lot of pricing. Some of the price issues in Massachusetts are quite well understood.

The rate level from last year, which we've indicated in our press release we will come under by quite an amount, that rate level for 2008 will be down 7 to 11 points, so a lot of that 18 that we indicated is actually an 18 compared to 2007, so 2008 for the competitor rates will also be down.

And we feel very good about our segmentation. I'm not going to speculate. Yes, we have plans, but sometimes new market entries are very tricky to predict exactly what the volume will be, so let's not do that.

And I think it's a fair question at subsequent calls to ask how do we feel about the volume, because it's got some interest, but you might - for those who've been following the company for awhile - might sort of go back, not so long ago, to our entry into New Jersey. And New Jersey has actually been a very nice growth state for us. We're up over 50% in our policies in force last year, and now that is profitable for the company.

And that would certainly be the kind of story I would expect to be able to tell in two or three years. We are not interest necessarily in trying to take growth. We're interested in trying to take profitable growth.

David Hill - Bank of America

Great. And as a follow up, have you assumed any changes in assumptions regarding, you know, the potential for more of a stronger, kind of a recessionary market on purchase behavior or in claims, and have you built those into your loss estimates for '08 and maybe '09?

Glenn Renwick - CEO, President

Maybe two or three points there, to be useful. I think to the recessionary environment, from a volume perspective we will - and we've signalled this a little  but we expect to see that show up more in our commercial business, especially those contractors that are associated with home construction, even our dirt, sand and gravel haulers and so on and so forth. We expect some volume pressure there.

With regard to the demand function on the personal lines side, we have some ongoing surveys where we're always trying to understand as best we can  and I will admit to some frustration here that it never quite tells the full story - but we're always interested in surveying customers as to their likely future shopping behavior and shopping behavior that they claim to have done.

I don't think we're ready to draw too many conclusions from that yet, but if we start to see the same kind of early trend, there may be an indication that shopping is falling back a little bit, but that's a little early to tell. I'll be happy to comment in the future.

There is one concern that we have our finger on. I won't go into any great details on it, but as we look at the shopping market, we look at results from competitors, there's a lot of new business pressure that seem to be reported across the board. There's not necessarily a parallel reporting of great gains in retention. We certainly are reporting some, which is nice.

That would suggest that there is a possibility - please use my words correctly here - that there may be an increase in uninsured motorists. And that would certainly be a trend that we would want to spot, and we've put some diagnostics in place to see if we can actually determine that as early as we would need to determine it to start pricing for any future lost costs that might come from that.

Brian C. Domeck - CFO

The other thing I'd add as it relates to the shopping population, as Glenn mentioned, we do track that and provide surveys to get our own estimates of how that's changing over time.

I think going forward you have these economic pressures, but the other reality that exists is that the margins of the industry are less and getting less - and particularly in the agency channel - so that, as companies are starting to raise rates, that maybe accounts for more shopping activity.

So that's one of the things we continue to track over time. We'll see how that plays out over the next several months but if you were to envision more rate changes being positive over the next period of time, that could be a catalyst for shopping activity. We'll see how it plays out.

David Hill - Bank of America

Thank you.

Operator

Thank you. Our next question is from William Wilt.

William Wilt - Morgan Stanley

Hey, good morning. I had a couple of questions I'll ask, and requeue if necessary.

First, the gain share factor was about 0.74 for most of or all of 2007. It ticked down to 0.53 for the month of January. Results for the month were not meaningfully dissimilar from prior periods, so I was hoping you could just add some color into what the gain share factor is and what might explain that variance for the last month?

Brian C. Domeck - CFO

Sure, Bill. In terms of the gain share factor, I know you understand the framework of our gain share program, which last year, in 2007, particularly for our direct business, we went to two matrices, one reflecting what I would call our growth in terms of new business production and then a separate matrix for retaining of existing policyholders. For 2008, we've provided that framework for all of our business units.

The one thing I'd say relative to the gain share score in January relative to last year, one, my ratio in January was certainly higher than what our full year combined ratio was, particularly as of January of last year. It was 5 points higher as of January over January, so that's a function of it.

And then the matrices try to reflect what we're seeing in terms of both new business growth and the retention of policies. I'd say the biggest driver right now is we're trying to - would be on the new business growth function.

William Wilt - Morgan Stanley

Okay, thanks for that. And just to follow up on that last point or one of the points, Glenn, I believe you mentioned that retention was improving. You talk quite a bit about the importance of it for obvious reasons. Is it trending favorably or at least in the direction that you'd like to see?

Glenn Renwick - CEO, President

Yes. I think I can just answer that question with a yes. It absolutely is.

And I think you know that that's hugely important to us as a company, and not just as a trend but we actually now know that - we believe it's a good reflection of a lot of the actions that we have taken.

We've taken some on the rate side, not necessarily absolute rate level but we've talked very briefly - I'm not going to go into great detail, because we think we've actually got something interesting  but an ability to sort of stabilize the rates at the renewal event in a fairly intelligent way that doesn't get us in a situation where we don't feel like we're getting the right rate, but we're also able to try to stabilize it a little bit for the consumer. So we've done some work there. It's still very early and not rolled out all the way.

But we've done an awful lot of knocking off what I call - and some people don't like me saying this - but some of the rough edges on our product and how we interact with our customers. And we've really worked at that, so the concept of the net promoter score - I won't go into that in great detail; I tried to write a little bit about it in my shareholders' letter - but there are now multiple points. I mentioned NPS going up, I mentioned the J.D. Powers survey recognizing the improvement.

And for those who perhaps noticed last week or so, the University of Michigan study, that Progressive fared pretty well in that study as well, not only in our category but actually having the single largest gain of anybody measured by the University of Michigan in all industries. And I point that out not to sort of do any chest beating but just to suggest that there's been a lot of action now that seems to be leading through to the retention gains, and those trends are very positive for us.

William Wilt - Morgan Stanley

Excellent.

Glenn Renwick - CEO, President

Also, just to the extent that there's an attempt to try to reconcile the gain share, I think it's absolutely right to ask those questions, and our best answer is we just keep publishing it. Just know that our expectations go up every year, so, in fact, the retention gain, we have an expectation that it's a gain, not the same - we will not get credit for the same results from last year. We have to gain on those results.

William Wilt - Morgan Stanley

That's great. Thanks for that. One other, if I may.

New York and California, I guess you talked about second half '07 placing restrictions on new business there. Any updates you can share?

Glenn Renwick - CEO, President

Yes. New York - and don't look for any dramatic change - but New York, we've been able to get some rate through in New York. We've actually lifted some of the restrictions that we had in New York. We do have some what we would call fairly restrictive bill plan selections for New York still, but definitely we've been able to address some of the underwriting concerns and absolute rate level concerns, so New York is just a little bit more open for us than it was at the time that we wrote that, consistent with our expectation, and it's very recent vintage.

California, the story is somewhat similar. We don't have the rate through, but we do have some of the underwriting verifications that we needed to put in place to be more comfortable with things like excluded drivers, and those are in place now and we're starting to open that up a little bit as well.

William Wilt - Morgan Stanley

Thanks for that.

Operator

Thank you. Our next question is from Matthew Heimermann.

Matt Heimermann - J.P. Morgan

Hi. Good morning. First, on the net promoter score, I was wondering if you could just share, given the increase in that promoter score, what kind of the average customer looks like that is driving that gain or who is most likely to promote the brand, and how that compares and contrasts with your book on average?

Glenn Renwick - CEO, President

Could you say more in your question as to what you're looking for?

Matt Heimermann - J.P. Morgan

I guess really, you've talked about an increase in net promoter score, and so what I'm really curious about is if you look at your book, what type of customer really is driving that increase? Has there been a real change in your book of business in terms of the type of customer that's driving that, and is that new customer different than customers you've had in the past?

Glenn Renwick - CEO, President

Tell me if I'm not responsive here.

One of the things I also wrote in my letter and mean very sincerely is that the NPS score in and of itself, the score is interesting but relatively meaningless in terms of just a number, but as a diagnostic tool it really is extraordinarily valuable. So I'll try to give you some examples of that.

We have people who go through certain claims experiences with us and the net promoter score for that combination of experiences - and I'll just use one, a windshield claim that requires no other involvement. We actually get some very high NPS scores, one of the highest we get because we've got and we've worked on a process that makes it very simple, very easy for the customer.

We absolutely have some situations, and I'll at our own peril use one, but we previously had some adverse action notices that we needed to provide and we absolutely got to do what we needed to do, but in some ways we perhaps didn't provide that in the best way for the consumer. And people who referenced that had a very negative NPS score.

And I could probably go through a good number of examples of where people that have had certain experiences relate very differently to the NPS. So I would say it's more important to break out by the experience the customer has had versus a particular class of customers.

Yes, we have NPS scores by our nonstandard, mid-market, so on and so forth. Those are likely less relevant than the differentiation we get by the experiences we provide.

Purely in an interest only category so that I don't get categorized as thinking this is the biggest thing that we've done, but interestingly enough, we introduced a coverage for those who care about their pets in their car. Where people have mentioned pet, our NPS score is one of the highest we've ever received.

So it's not so much about the class as we might typically think about it in insurance. It's more about the experience and what relates to those consumers. The diagnostic work we're doing is what gives us a great score, and we have very distinct differences between the scores between states - very similar products, very similar class of customers - so sometimes there are state procedures that cause us to create friction with our customers. We're working much more to eliminate those friction points, why did we get a low score, dig into it. I gave some very brief examples of that in our analyst meeting in New York.

So that, I would say, is the diagnostics that we're using more than the specific classes. Yes, customers who have been with us longer tend to also give us better NPS scores.

Matt Heimermann - J.P. Morgan

And just following up on that and related to the first question that you were asked with respect to agents, I mean, is there a similar - would you expect as you roll out more products and other things that kind of the equivalent agents for  I'm kind of inventing a concept - but would increase as well over time?

Glenn Renwick - CEO, President

I certainly hope so. Actually, we have the scores so we do use an NPS score from their agents - our agents' perspective as well. So we use it sort of internally for employees, clearly customers, but also agents.

And absolutely linked to my first answer, which I won't repeat, but as we give more product and allow agents to perhaps use the preferred and ultra preferred end of our product because we give them some bundling or some renters, whatever it might be, yes, I would like to see that reflected in the NPS scores.

Matt Heimermann - J.P. Morgan

Okay, and then hopefully a quick one. I was just curious if you could remind us how much capital or what the liquidity of the holding company looks like as of year end?

Glenn Renwick - CEO, President

Shall we get an answer on that? So right at $2.1 billion.

Matt Heimermann - J.P. Morgan

Okay, perfect. And that's before receipt of any dividend you can take this year, correct?

Brian C. Domeck - CFO

That's before receipt of any dividends we can and likely will take this year.

Matt Heimermann - J.P. Morgan

Okay. Perfect. Thank you.

Operator

Thank you. Our next question is from Tom Hazlehurst.

Tom Hazlehurst - FPR

Hi. Good morning. Thanks for taking my question.

For quite some time you guys have had a stated target, combined ratio target, of 96, and I'm curious how you guys think about what makes 96 the optimal number for your company, especially given that over time your competitors have gotten better and less of your business is now nonstandard? And if you guys have thought about it - I imagine you certainly have - if whether or not moving, you know, your combined ratio up from, say, 96 to 98 would really give you that kind of added pricing advantage where you'd be able to grow a lot more, and perhaps that's the optimal level now as compared to what your business was, you know, two decades ago when you had the original 96.

Glenn Renwick - CEO, President

Yes. A very fair question. We certainly talk about that a great deal, so let me do two things, one, reflect targets again just very briefly, and then come back and talk about more of the philosophical value of 96.

For our targets, again, we don't use 96 for every element of our business. New business, written and direct, is not going to come in at a 96. We've gone through that before with investors and tried to show how those blends come about. We do have one or two products that we target at other than 96 because we think that's an appropriate thing to do relative to the risk in the marketplace. That includes our commercial [inaudible] product.

But for the most part, the word optimal, I'm not sure that I would use in terms of saying 96 is the optimal point if you could balance all the math of what the market will do, so on and so forth. It is extraordinarily important to us as almost a cultural element and also our clearest communication to our shareholders.

So that's what we expect of ourselves, and that's what we think is a fair profit margin. We believe that we can continue to earn that profit margin by being creative, innovative, priced correctly in the marketplace, and there is - if there were ever to be a change in that, I assure you, as long as I'm here, we will be communicating that change. We won't just be going to it. Ninety-six is sort of what drives our company.

Tom Hazlehurst - FPR

Okay. And so the - I mean, is it, in your estimation, is it fair to say that the 96 now isn't going to give you the same pricing advantage it once did? And, I mean, I understand the cultural aspect, but, I mean, I guess I'm just curious on your thoughts on whether or not you think that 96 is indeed the right number.

I mean, from a cultural standpoint it makes sense, and I understand you need to communicate something to your shareholders, but from an optimal standpoint, is there any data behind, you know, whether or not you think that 96 will still give you enough of a pricing advantage now as compared to historically?

Brian C. Domeck - CFO

I'd echo Glenn's comments about the word optimal because that's hard to determine.

What I would say is that for us, we continue to be a low-cost provider so when we're at a 96 with our expense ratio and [LE] ratios, we believe other companies  many of our competitors - would not be operating at those same margins, and in fact would be in many cases operating above potentially 100 combined ratios.

So in that scenario, in that world, other companies would be forced to make decisions in terms of their rate changes, rate levels, and so when we get to a place where the industry is more at normal environment, normal margins, we believe that our expense ratio advantage as well as our segmentation skills will play out well for us and fuel additional growth.

Glenn Renwick - CEO, President

And Tom, just one more point on that because you clearly make a point that is something, yes, we consider, and I understand it entirely, but the relevance of keeping a 96 is, as I've said, very important.

One of the things that we're trying to do is sort of hold that constant and move other pieces of our business that we think we can do. We took some pretty hard moves in the latter part of 2007 and communicated those to you as intentionally moves that we believe will reduce some redundancy that we'd built in - not terrible, but clearly things that we could do - and we've taken some adjustments to our staffing to really get even great pressure on expense ratio. And I've signalled in my letter that I think - more than I think, that we will absolutely be able to get some downward pressure on our expenses. And if the ratio follows with premium trends, then that will be an even added advantage.

We have some pretty exciting things, even in our claims environments, we were very happy with, segmenting different types of claims and maybe being able to have a different cost structure on some significant portion of our claims. So we've got some actions that we believe we can take that are on our turf. We can move those rather than move the objective.

Tom Hazlehurst - FPR

Got you. Okay, great. Thanks.

Operator

Thank you. Our next question is from Beth Malone.

Beth Malone - Keybanc Capital Markets

Okay, thank you. Good morning. Yes, I just wanted to get an update on the reorganization of the personal lines, the agency and direct business, how you feel that that is progressing, and have you gotten some indication as to whether that brand development program is working?

Glenn Renwick - CEO, President

Yeah. Clearly, I'm not going to take any joy in the fact that we make some changes and we have some reductions in staff and so on and so forth, but those being behind us, how do I feel about it? I think we absolutely made the right move.

That's not a statement to sort of justify my own actions, but what I've seen so far I think is giving us the same kind of intensity that we hoped in terms of product management and [state] focus.

We see great synergies between many of the things that had developed in our agency group and our direct group. We see opportunities to get the redundancies out, and each of - I don't want to overplay those, they're not huge or overly concerning - but taking them out sometimes makes us a little crisper, a little more focused on the right issues and one solution.

So so far, so good. And for the most part, that is effectively done. That reorganization really has taken place. People are in place and focused on back to work.

The IT organization, we also took a very hard look at. There's almost no organization, I imagine, that doesn't feel like they could use more IT. We took a different approach. We tried to size that to what we believed would give us very competitive cost structures in the marketplace, and then did the harder question and say how do we really prioritize the work that goes through?

Now obviously everybody would say they prioritize their work and use their resources in the optimal way. I think that's one that deserves a really good hard look and Ray Voelker, our CIO, is absolutely leading that charge and doing a very nice job of making sure that we use our resources to get the highest contributing projects through.

And in many cases we've got things that we all felt good about, but we're just not doing anymore. We're going to become even more focused on getting marginal return for everything we do.

There are still some issues - I don't know so much issues, but opportunities - as the sales and service organizations have come together. And they're continuing to work through that organization, and that'll probably take the rest of - always ongoing; there are no major issues to be done there, but there's probably some opportunities for greater synergy on bits and pieces of those two organizations as they start to work more closely together.

So net-net, I suspect that all told - and these numbers won't reconcile necessarily  we're probably 400 people down as an organization. We have no expectations of any other significant announcements there. And for the most part, we're organized the way we want to be for 2008 and beyond.

Beth Malone - Keybanc Capital Markets

Okay, thank you. And then one last question. As we hear about the softening pricing environment, there's a lot of discussion among the regional carriers that are focused on agency and agency serving - agent servicing - and I just wondered has that changed your strategies at all, to respond to that greater competitive pressure in the market?

Glenn Renwick - CEO, President

Could you say more in your question?

Beth Malone - Keybanc Capital Markets

The strategy that you're using to try and manage through this softer pricing environment, we're hearing a lot more support of the agents from your competitors, and I just wondered is that causing you to rethink or look at differently how you're addressing the market or your agent relationships?

Glenn Renwick - CEO, President

I think the answer to that is yes, and probably just one of those things that's a bit of a gut check on our intensity around agent relationships. And certainly we're doing, with the roll out of our new product in the agency environment - we call it 7-O, not very creative titling but it works - and as we roll that out, we're trying to communicate to agents in more creative ways and more insightful ways.

So those relationships are things that yes, we will continue to work on, and we're very aware that others during the period where almost everybody could make some money - the game is changing. I would say the softer market is definitely changing.

And we're seeing and I'm sure you're seeing results being reported now that would tend to suggest that, okay, maybe some of it's conditions, [winter] conditions, whatever, but some of it's probably a little bit more systemic. And those agency relationships, I think, will be formed even stronger in the tougher times than they are in the easier times. And we're going to make sure that we do everything we need to do.

Beth Malone - Keybanc Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question is from William Wilt.

William Wilt - Morgan Stanley

Thanks for taking the follow up. You focused on bodily injury claims, and hopefully just looking for high level numbers - no exact precision - but bodily injury claims as a percentage of your total claims would be about what level roughly on an annual basis?

Brian C. Domeck - CFO

In terms of claim count, Bill?

William Wilt - Morgan Stanley

No, in terms of total dollars paid, total dollar outflow per year.

Glenn Renwick - CEO, President

Bill, I'm more than happy - I like to answer questions that can be answered with accurate and definitive numbers with that, so we'll follow up and maybe - I don't know if we can post it somewhere, but right about 40% would probably be a good number on a dollar basis.

William Wilt - Morgan Stanley

That's helpful. And then within that, my focus or real interest is on bodily injury severity and the uptick that you've seen, so I'm interested in any observations you have on what might be causing it.

But Part 2 of my question, again, just round numbers or ideas, what are the major cost drivers within bodily injury - emergency room, you know, physician visits, you know, lost wages, that sort of thing, just at a high level. I don't have a great sense for that.

Glenn Renwick - CEO, President

I'd say the highest level is really not so much the medicals themselves but just the settlement above and beyond specials, so the pain and suffering and so on and so forth, because there's an awful lot of tools and mechanisms out there to start to get a better handle on what might be considered fair, usual, customary, whatever, in terms of the procedures.

I would say there's a concern in certain marketplaces as to the frequency of procedures being used to - I'm trying to choose my words carefully here  so the underlying specials can be a function of how much treatment goes in, and there are at least some markets where the amount of treatment is of note, so that's a potential driver.

I've got to look around the room here - not to avoid your question - to see if there's anything more substantive that one or two other people might know. Al, do you have a view on that?

William Wilt - Morgan Stanley

Could I ask, could you just define specials?

Glenn Renwick - CEO, President

It's a poor choice of words. It's used well in the industry. Think of that as the underlying medical costs.

William Wilt - Morgan Stanley

Okay, great. Got it. Thank you.

Al Neis - Corporate Actuary

There is - this is Al Neis, Corporate Actuary - there is some speculation in the marketplace that there are costs that are being pushed out of the medical insurance care arena into the automobile losses.

In addition to that, there have been some situations across the country where some jury awards have put pressure on the settlements to increase over what we were seeing, say, a year ago.

But those are very general, and again, they're somewhat anecdotal. But those are the comments we're getting from much of our field.

William Wilt - Morgan Stanley

I appreciate that, and I take them in that spirit.

Al, I didn't understand the first source that you commented on, pushing out of  costs being pushed out of medical into auto. I didn't -

Al Neis - Corporate Actuary

Right. In many of the costs going through your medical providers - as you know, they have pressure from health insurers, et cetera, to hold down costs - sometimes they push costs through to other avenues. That would be bodily injury cases that go into the hospital where they can get, you know, increase their costs or paybacks.

William Wilt - Morgan Stanley

I see. That's great. Thanks very much.

Operator

(Operator Instructions) Our next question is from Meyer Shields.

Meyer Shields - Stifel Nicolaus

Thank you. Could you tell us, is there a difference between your competitors' commitment to adequate pricing in personal lines versus commercial lines?

Glenn Renwick - CEO, President

One more time?

Meyer Shields - Stifel Nicolaus

In general, I guess, the responses you talked about, with your competitors moving rates up as lost cost trends revert to positive inflation, are you seeing that same sort of commitment to adequate pricing in commercial lines by your competitors as you are in personal?

Glenn Renwick - CEO, President

I'm going to be a little general on this. I think with regard to significant and key players, I don't think there's a lot of difference. But in the commercial environment, there are a lot of smaller players that perhaps are not as well known or don't even participate in the auto environment, and they may not necessarily have that same view. But I don't want to speak for them.

Meyer Shields - Stifel Nicolaus

Okay. That's fine. Thank you very much.

Operator

Thank you. Our next is from David Small.

David Small - Bear Stearns

Yeah, just two quick follow ups. You know, after years of price cutting, are you getting pushback from regulators when you now go to them to raise price?

Glenn Renwick - CEO, President

I'm not - and I think I would be aware - I'm not aware of any significant pushback from regulators. The issue isn't much up/down. The issue is what is the data, how is it presented, and I think we've got a reputation, frankly, of being very diligent in our filings. We're not looking for rate for the sake of rate. We're looking for rates so that we can make our profitability target. We don't want more rate than we need because that takes us out of the competitive marketplace, and I think regulators have dealt with us consistently in both up and down market times. More generally it's up, and I don't think too many regulators will be surprised to start to see the trends become positive after quite a long time of frequency driven negatives.

David Small - Bear Stearns

Okay, and just my second follow up was at the beginning of the call you mentioned that the agency channel leans more heavily towards nonstandard. How much of that do you think is due to the fact that the commission level you pay agents is lower than some of your competitors, and have you rethought that commission strategy?

Glenn Renwick - CEO, President

I said our mix of business in the independent agents' channel is more nonstandard, not necessarily that was - that was not meant to be a characterization of the whole channel.

David Small - Bear Stearns

Right, right. Right.

Glenn Renwick - CEO, President

With regard to commission, we're very well aware - I suspect there's hardly a week goes by that that topic doesn't come up, and we have consistently come out at a place that we don't say is necessarily is right for anyone else. We say it is our commitment to that channel to give the channel a fair commission. Yes, it is lower than some. Clearly, we want to have a very competitive price and commission is a part of that.

But also, I think there's an awful lot of agents that, while they might like higher commission, would certainly acknowledge that our claims processes, our policy processing, our ability to have access to our customer service environment, is absolutely something that is valued and frankly, worth something. Now, that may be more difficult to value, so our package to our agents is really to give them a great price, a fair commission, and really great service so they're not expending a lot of their time and energy on doing things that should be in our backyard, and that's especially true in the claims environment.

So it's all a question of balance, and we've handled a couple of times in this format and we think that the balance of around about 10.5% aggregate commission works when you take the consumer, the agent, and Progressive sort of all into effect.

David Small - Bear Stearns

Okay. Thank you.

Patrick Brennan - IR

Okay. That was our last question. Thank you, everyone.

Operator

And that concludes the Progressive Corporation's Investor Relations conference call. An instant replay of the call will be available through March 14th by calling 1800-884-1524 or can be accessed via the Investor Relations section of Progressive's web site for the next year.

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