The Progressive Corporation 2010 Annual Investor Relations Meeting Transcript

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The Progressive Corporation (NYSE:PGR) 2010 Annual Investor Relations Meeting Transcript June 17, 2010 9:00 AM ET


Glenn Renwick – President & CEO

Brian Domeck – CFO

Jim Haas – Director of R&D for Passenger Auto

John Sauerland – Personal Lines Group President

John Barbagallo – Commercial Lines Group President


Jay Gelb – Barclays Capital

Vinay Misquith – Credit Suisse

Ian Gutterman – Adage Capital

Brian Meredith – UBS

Matt Heimermann – JP Morgan

Keith Walsh – Citi

Josh Shanker – Deutsche Bank

Paul Newsome – Sandler O'Neill & Partners

Harry Fong – Soleil Securities

Glenn Renwick

Good morning. So, it’s good to have a chance to tell the Progressive story. So, thank you for coming. Each year, at this time, we try to give you some sense of what’s on our mind, what we think is important. We’ll also try to from time-to-time bring other members of the Progressive management team to introduce, so we’ve done that again today. And ultimately, there is the opportunity to appropriately introduce some new ideas into the marketplace, I think we did that a couple of years ago with Name Your Price and we have a couple of things today.

Over the years, and I recognize there are some new faces in the audience, I think we’ve had the opportunity to cover a fair amount of territory and hopefully what we say we will continue to come back and reinforce how we’ve done on those things. Sometimes it’s exactly as we intended, sometimes not quite as we intended, but ultimately what we get is a sense of real intensity around followup on the issues. So as I think back over 10 years or so we’ve covered concierge claims service, we’ve covered sort of our first reserving, our targeting combined ratios, we’ve certainly done a fair amount of work on retention science and our activities around that, how we’ve started to target our customers a little differently, some work on Net Promoter Score, and how we use this as a diagnostic inside of our business. Certainly in recent times a little bit more work on our branding activities.

So, while not complete, that’s a fairly representative area of things that we have covered over a decade or so. Today, we’ll do a lot of that. We are going to try a slightly different format and hopefully that will give you a sense of just maybe how all these pieces come together. So, in your packages you all have a blue document, recognizing that readership on the screen is always a challenge, you’ll have this to take away for words. So this is something we call Progressive on a Plate. Right now it just looks like words. I hope after a couple of hours you have a sense that those words are really words that define Progressive uniquely and govern our actions.

It was actually a fairly objective comment that was passed along to me that suggested may be this will be a good format for a meeting like this, regroup a little with regard to the activities we’ve been working on, but please don’t feel slighted by this comment, but this wasn’t put together for this meeting at all. In fact, this was put together so we could present it and the senior leadership of Progressive could present it to every employee in the Company. So, the senior leaders are with me today and I want to introduce them in just a moment, and many other have actually used this to talk to every single person in the Company about what we are doing, and why, so they have a sense of what’s expected of them, and what their role does and how it contributes to the overall Company. So, hopefully at the end of the day, this will just a little bit more than it does right now.

Consistent with our prior practices, we don’t intend to sort of reformulate any numbers that we’ve already shared with you. Hopefully, you get those in a timely fashion, so we are not going to reorder them and do anything with them. So, we’ll talk more about our activities in the Company, what we are doing, how we are thinking.

When I think about strategy, and I guess that’s a word that we use, all of us, probably pretty commonly, question is whether it’s the same thing. I think this way. Being abundantly clear about what we are doing, and why. And almost by virtue of being very clear about what we are doing we are equally as clear about what we are not doing. And then for us it’s very much about making sure that every who is involved in executing understands it and understands their role and that’s what we have used this for. It’s actually been a very, very, very insightful exercise to go through Company and very rewarding, I think, for those that has taken this probably a year to get that done, and clearly it’s not quite in the same format as you will get today.

So, hopefully, by the end of the day while it appears to be words right now, and words that could arguably be used for other companies in the same industry, will have a little bit more meaning, and, again, as I said earlier, sort of uniquely define what Progressive is all about.

So, we shall enjoy that and the way we’ll do that is to some extent I will try to narrate some of the story at least around the key activities and my colleagues will sort of explode the bullets if you like and some, not all of them, we won't get time to cover all of them, but a good number that we think are relevant and important to what we are up to today. So, let me just quickly introduce so your right to left, Brian Domeck, Chief Financial Officer is with us. By the way, in the back of your book there are bios on each of us. Jim Haas, who – to his right – our Director of Research and Development for Passenger Auto; John Sauerland, you’ve met, our President of Personal Lines; and John Barbagallo, our President of Commercial Lines, and also responsible for our agent distribution sales efforts. So, this will all become relevant as they have different striking points later on today.

So, that will be our approach. Let me first start, if I might, by just a couple of comments that set a few of the things we’ve done over the last year in perspective where I think we’ve tried to say we have aspirations and intensity around our activities, just how they have come about. So, let me start with that for about five or 10 minutes and then we’ll get into exploding Progressive on a Page.

Just quickly, you all realize before this slide there was the Safe Harbor statement, we all know what that means, so, we’ll respect that during the course of the day. The purpose of this slide is not to be very convenient array data that just is sort of puts us in a good position, but just a quick snapshot of the first quarter and the real point I want to make here is while Progressive Direct and GEICO have been fairly long term resident of the more desired upper right quartile, it’s great to see our Progressive Agency business coming into that zone and starting to find some growth. We have said consistently we wanted to be very nimble. We wanted to respond to the market conditions. We didn’t approach this position by going above our targeted combined ratios. We think of that as an (inaudible) from below, but we’ve actually positioned ourselves very well. We have rate adequacy, we have the service of the business right now. And I recognize you have to take my word for this. Just a lot of things feel right at Progressive in terms of how things are coming together both on a pricing and a servicing basis. And that’s really allowed our agency business to also prosper.

Demand for our product is up. Great. It’s somewhat evident from the first graph, but it’s very true, the exercise and intensity around branding has worked quite well for us in Direct. We can never actually measure the direct strength of that. Name Your Price has been something that we’ve shared with you for some prior periods. That seems to be contributing to growth. You know the numbers on Direct, very pleasing, so far so good. We are never ever comfortable. Growth, profitable growth is what we are all about and always looking for ways to accelerate that.

In the Agency environment we’ll talk more about this today. We have accepted that the environment has changed. We’ve talked to you in I think it was 2006 about comparative rating and how the environment inside of the independent agency channel has really changed. We have accepted that. And we’ve adapted to that and we’ve retailed our product into that in different ways, in ways that we think are actually putting us at a slight advantage and we’ll continue to find ways to work within what we now see as an channel acting differently and play to our strengths.

All of the things that we’ve talked about and I know there is a good number of people in the audience that have seen us talk about retention, retention, retention, we’ve given you actions that we’ve done, we’ve given you the way we think about it, diagnostics, we’ve given you a little bit about the science of policy life expectancy, we’ve talked about nature and nurture, all those sorts of things. I am not going to talk too much about those today. But I actually hope here we get to the point where I would have a really boring story about retention and that the graph would just be year over year over year better. Because the economic impact of extending policy life is incredibly strong.

And the good news is so far I am becoming really boring. And happy to be so because these are graphs year-over-year our policy life expectancy as a book. Now we write that down to a lot finer detail in terms of different customer segments so on and so forth. But for right now a macro view and a fair takeaway is the policy life expectancy of Progressive customers on average are longer and continuing to get longer as we create reasons for our customers to stay, and we eliminate and we continually work hard to eliminate reasons that might cause them to leave. So it’s as simple as that, eliminate the reasons that leave – that they may leave and create reasons for them to stay, whether it’s loyalty programs or the like.

And I would suggest to you that the percentage of our income now being derived from renewal business and the future life expectancy in the book is starting to make Progressive a very different company and in my opinion the earnings stream is considerably more valuable and likely to be sustained over a longer period of time. So, something we are very pleased about. A simple line graph, but I think there is a lot of power behind that.

So, demand for our product is up, retention is extending. Good things; clearly not end game, but on the right track.

Our capital is strong. Certainly we’ve had a session in this room a couple of year ago where – that was a little bit a different picture, so actually just pulled out the same picture, hopefully a couple of you will relate to it, recognize the zero line here is the capital above our statutory capital. So at a three-to one level, so think of that as close to a five billion and then on the orange I use the same labels that I used at that time, we suggest that we are in our contingency, our self-imposed contingency layer for capital. And that would give us some concern to be in our contingency.

At the time that perhaps we were talking about this a little bit more intently about exactly where we were, I used the term several hundred million above our concern level. And that always was true. So you can see the low point there back in 2008. And you can see now that clearly we are in a very strong position having had a very nice run and a consistent run of underwriting profitability, being able to put that back into the capital mode and clearly some recovery in the investment marketplace.

You all presumably know that just last week we lost a tender for $350 million of our hybrid debt and that’s conditioned on getting a removal of a replacement capital covenant. We don’t know anymore about that at this point in time as to the success that will be next week. So we are not avoiding questions on it, we just don’t know any more. That’s out in the marketplace right now. So, about the 23rd, we’ll know a little bit more.

Bottom line, a nicer picture for us on a capital basis. We’ll continue to manage our capital in a way that we have consistently communicated that when we have more capital than we can effectively use in the business, we’ll find ways to return it to shareholders. We’ll put it to a very practical use and I think the opportunity to retire some of our hybrid debt at this point in the market cycle is a very, very effective use of capital. So, we are on track for that and we’ll know more next week.

Also, our dividend and certainly I don’t want to start projecting or any guidance, so all sorts of whatever caveats would be needed, but if the year continued on the same course and speed as we see ourselves at this point, we will be looking at the largest regular dividend ever paid from Progressive. So the dividend that most of you know, how it’s calculated, you see the gains we have scored and the monthly results, it’s actually on a course for being a significant number. The year clearly hasn’t ended [ph] so we are a long way from that and things could happen. But it’s interesting to note that our return of capital now, we actually have multiple methods. We clearly have our share repurchase, we have a meaningful dividend. We have used the special dividend in the past. And here we’ve got an opportunity to repurchase stock.

So three big takeaways. Now, just a couple of points that are a little bit more macro strategy of a many years and I would say things that matter in this business, be on price. I mean price is clearly important. Cost structure. Everything goes into price. And a few things that we really, really wanted to do. I am just going to give you a sort of health check on those. First is sort of positioning. In our Direct channel, we said starting in 2000, I know I said many times we wanted to become the leader in the Internet space. When I say the leader, clearly other people want that position as well.

I think we have been very credible in positioning ourselves as company that really is a significant player in the Internet space for auto insurance. We are recognized, I am glad to have the opportunity to say that Forrester Research had recognized or website as the best website in all financial services, not just insurance. We – just a couple of weeks ago won another recognition from Keynote as the Insurance space winner for our website. That’s our 15 out of 16 consecutive wins in that category. In and of itself, that’s not important, but it does give you a feel for it’s not just luck.

And ultimately what matters is that the dog hunts and we are starting to see the Progressive production on quote initiation be in a position with GEICO to really say a significant position in the Internet space and we are very, very happy with that and so far so good. Clearly, this is going to sort of get exploded into the mobile space. We are going to be looking at very different opportunities. So, this is a place for the talent and progressive and the resources available are something that take a special place and we want to make sure that we are really set up to succeed.

The agent retailing, actual John Barbagallo is going to talk us through some of that, but really this is the issue of the environment changed somewhat, we changed with it. We think we became a better retailer. And frankly, our brand is not hurting us in anyway with our agents thereby it’s helping with our agents. So, now agents – our independent agents actually have a nationally recognized brand to sell in their agency. Certainly, while that’s a hard one put it absolute value the contribution to it is meaningful.

Our reach is expanding. I hope that at least some of you remember, I think it was two years ago that we used the format of this meeting to talk about sort of profiles of customers. And they are not quite the profiles that we use internally in Progressive, but they are certainly good enough for this kind of a descriptive. We have a little bit more complexity to the customer tiers that we use. But we defined four tiers

Sam may be is a little bit more of the classical nonstandard we try to move away from a lot of those terms. And if I remember correctly some one in the audience felt that Sam was a very strong profile to at least have brother-in-law or some other family member, so hopefully that recognition is still there.

The Diane’s of the world, more upwardly mobile, a little bit more consistency in their insurance behaviors. These profiles, by the way, are also in your appendix. The Wright family certainly moving into a home, not necessarily a bundled family, a place that we are very strong.

But the real interesting thing here is the Robinson family and that’s a much more complex need family, not a target that we for the most in the career – of the history of Progressive have really said our products have targeted that group. We’ve done a lot of work. You’ve heard about our entry into home, Home Advantage, which is depicted a little bit by sales on the – of the side of the graph there. It’s given us an opportunity to really speak to that audience. And we are starting to grow the audience. Clearly, the numbers of 200% are a little silly. Because that has to mean we had very little to start with. That’s not the point here. The point is we now have a product that we can start bring into that space. And even if that doesn’t attract a lot of switches to people at that stage in their life, it gives us an opportunity to make sure that we create our own as they start moving through and their needs develop over time.

That may be the more powerful point. So our reach is expanding. We’ve changed Progressive in many ways from a company that was extremely successful at a target group of customers. We’ve expanded that because it was consistent with our skill set and not our strategy.

I want to make the point very, very clearly, the Sam’s, even though the percentages, in this case this is policy in force growth for the last three years, while the percentage of our business might shift a little away form nonstandard, we don’t want to give up and ounce on nonstandard. That’s a very good business for us, we know it, we absolutely do not intend to be moving away from anything. It’s more we are moving to something else in addition. So, our reach is expanding and it’s starting to work. We feel very good about the opportunities to do that, but the potential just seems so great when we realize – and we are not as good. We are not as good at the Robinsons. But we’ll get better.

Our brand, bran health, and we’ll talk a little bit about our brand today. But brand health measures are always awkward for me because they are survey based. Sometimes they are glaciers and they don’t really move and then may be you infer more than it’s really there. So what I look for when I see any of these measures is sort of meaningful deltas over any reasonable period of time and seeing if you could relate them to market actions. So, here – and I am really just going to focus on Progressive because any other measures we give you are just as a relative measure. Progressive is all we want to talk about.

I think we have really sustained a fairly significant delta in the last year. So, our brand health measures have started to actually be certainly more than just noise. I think we’ve got some real signal there. And consumers are relating to Progressive and the Progressive brand in ways that we certainly didn’t see only a few years ago. So our brand – I think I can actually conclude that the consumer perception is becoming more positive to Progressive and more well-understood.

I happen to like the consideration one. Clearly, I ultimately want to see that show up in preference. The consideration now is actually a fairly strong measure and a nice delta year-over-year.

Let me just quickly finish on these comments but – I am going to get a chance to talk about this as part of our strategy a little later, but it really is about the culture at Progressive. And we’ve talked a lot about our actions and I think we are very good at the math; we are very good at sort of the continuous improvement, the Deming type model. But the culture of Progressive has changed and here is just a slide just sort of at least give you a touch of that, that really it’s the people. Yes, there has been a set of actions and I think here in terms of retention, we’ve talked about rate stability, Net Promoter Score, you can read the list, but it’s that combination of culture and actions that really has allowed us to become what I would call a true customer care culture.

That’s showing up a little bit and again measures always have their degrees of accuracy, but this is a combination of value for money, where we’ve always done very well, and cares about the customer. But you can do a combination of those two. We are now actually getting real recognition as in the combination of those two, caring and value that is meaningful.

But what’s exciting to me is to observe the culture of the Company really sort of making this a reinforcing prospect. Just a minor example of this. Literally this is just one that sort of came me is that few weeks ago we had significant flooding in Tennessee. Now, apparently we extended billing leniency to people that might have otherwise had their vehicle flooded and perhaps have other things to do to get on with their life. We actually ended up buying radio advertisements to tell people, look, we understand you had a significant upset in your life. If your bill is due and you’ve got other issues, just let us know, we can handle it, just let us know, you are our customer. We can work with you.

The only way I even knew we did that was getting an email from a customer in Tennessee that was thanking me – which frankly I didn’t do anything in this case – hey, thanks. I didn’t need it, but I really appreciate knowing the kind of company I am with. The point is, this just happened from the people who know what’s expected of them and what the customers want. And that’s the kind of culture that’s starting to build on ourselves at Progressive, and I expect this combination of value and caring to something that we care a great deal about and hopefully we can keep those in balance for a good long time to come.

Let me move on now and see if we can make the Progressive on a Page sort of come to life in a sense of – yes, it’s words, but what do they mean and what’s the context for us. I am not going to go in order from top to left. Actually I am going to come back and summarize some of the more foundation statements a little bit later. But perhaps one of the things in the middle panel or close to the middle panel you will see that we want to be distinctive and competitive; you can read the words around that. So, think as we go through today, is this a company that truly is trying to make itself distinctive and competitive, because ultimately we don’t want to be just another player in this space. We want to be a recognized player and when you think Progressive, you think I’ve got a brand perception of that company and it’s not the same as X, Y, Z. I am not talking about better or worse, I am talking about a clear understanding of who we are, what the character of the company is.

Let’s start with our financial goals. And you know most of those, so I won't cover the ones that I think are pretty well understood, but take a quick read of those and think about this as a top line strategy and again clear communication of (inaudible). Manage to a 96 combined ratio. If you actually read our Annual Report, you will see that the 96 is really a balanced blend of states, products, different maturities, new, renewal, it’s actually not sort of just one number, it’s a roll up of a lot of different pieces. In fact in your appendix, because we like to be very open at these things, I’ve given you a sense of how states are performing. That changes sort of monthly, but not all states are making their goals. When they are making their goals, we act. When they are making their goal, great, we try to grow. If they are not, we don’t grow, we get it right.

But the 96 that we report is really a – very much a balanced blend of all things, all channels. So, in the Annual Report letter this year, I wrote that under certain scenarios, we’d be happy in our Direct channel to report a calendar year 97. I somewhat predicted then in the first conference call we might get a question on that. And we did. And we said we’ll talk more about that today. So, I am going to ask Brian Domeck to come up and sort of suggest why that isn’t being consistent with the long standing 96 goal that we have.

Brian Domeck

Thank you, Glenn. Good morning. Managing to a 96 combined ratio. It’s been part of our financial objectives for many, many years. But what do we really mean by it? Glenn, in the shareholders’ letter this year provided a little bit color and hopefully this morning I will just add a little bit more color to those statements.

Included here are excerpts from the shareholders’ letter and I am not going to read the complete statements, but I would like to provide a few of the key messages. First, our goal of an aggregate 96 calendar year is unchanged. We’ve talked about a 96 combined ratio for many, many years, and certainly for me it was ingrained in my early years in product management and controller roles. So I’ve heard it for a number of years. It’s simply we seek to achieve at least a four point underwriting profit in any calendar year. That goal is unchanged. It has served us well and it is unchanged.

Second, for our variable cost businesses, commission based businesses. And think of those as personal auto in the agency channel, our special lines products, and our commercial auto products. For each of them, a calendar year combined ratio is an accurate and appropriate measurement scheme. And for each of those businesses, we have a calendar year combined ratio objective as at or below a 96. And I am pleased to report that so far this year, each of those businesses are meeting or beating their calendar year combined ratio objective functions.

Finally, for our Direct business, particularly Direct auto business, under a high – certain high new business growth scenarios, we’d actually be happy to report combined ratio over 96 as long as we are meeting or beating predetermined new and renewal combined ratios. That will ensure that we achieve a lifetime combined ratio of 96 or less. As Glenn mentioned, we’ve had a few questions and comments regarding that statement in particular, so today I am going to focus most of my time on trying to explain that statement a little bit more.

But keep I mind, we mange all to an aggregate 96 combined ratio. So why do we think of the Direct business a little bit differently. I’ll try to explain this a little bit more, let’s say, what I will call a very simplified example. It’s really dependent upon the cash flow differences between the Direct based business and our variable cost businesses.

Consider the following

This is two policies, one in personal auto policies, one in the agency channel and the other in the Direct channel. For both of these policies, consider that they have – are in force for four six-month terms, two years in total. For both of these policies the life time premium is the same, $1000 each term, $4000 life time premium.

Also for this example, consider that for loss and loss adjustment expenses are the same as well as other expenses associated with these policies are exactly the same. What differs is in terms of the acquisition cost, and in particular the timing of the acquisition cost.

For the agency channel policy, we pay, in this example, a 10% commission each and every policy term, $100 for each of the policy terms, in aggregate $400.

On the other hand, for the Direct channel policy, the acquisition cost in this example is also $400, but that is all paid upfront to acquire the policy. Keep in mind, we’ve expressed this before, we expense our advertising cost as they are incurred, we don’t defer our advertising cost. And actually for our own cost accounting purposes, we allocate it all to new business.

Now one could argue that you could allocate some to renewable business versus new business, but for years we have consistently applied it all to new business. I will talk a little bit about the pricing implications of that a little bit later. But the real differences is in terms of the timing and cash flow of the acquisition cost.

You will see, in both of these examples, they both achieve a life time combined ratio of 96. But, what is different is their timing of the cash flows, and how that translate is in terms of the differences between new and renewal combined ratios. So in the agency channel, and this is again a simplified example, the new and renewal combined ratios are much closer. There is a variance, but much more narrow. That’s why we believe a calendar year combined ratio is an appropriate measure for that business.

On the other hand, in the Direct Business, you can see that the new and renewal combined ratios are very, very different. Renewals with no additional acquisition cost, the margins are much higher. That’s why we have talked for several years about the value of increasing retention. But the difference between new and renewal combined ratios is the reason why and the fact that we spend the advertising upfront is why under certain high, new business growth scenarios, we’d actually be pleased to report a calendar combined ratio over 96 as long as we are confident that will ensure a life time combined ratio of 96.

So, you might ask given the cash flow differences how you really figure out how much you are going to advertise for our Direct businesses. We’ve talked about this before in the past that we do not have an advertising budget per se. We certainly have plans to say how much we’ll spend in any given period, but we will adjust that according to what I will call our economic yield. Let me explain that a little bit more.

First, we have what we call targeted acquisition cost. And you can think of that as what is the amount of acquisition cost that we have incorporated into the pricing of the policies. And that cost on a per term basis is really a function of policy life expectancy. For those policies that will stay with us and we think will stay with us for a much longer period of time, that per term cost is going to be much smaller.

For policies that stay with us for a shorter period of time, then we may refer to them as Sam or nonstandard, the per term acquisition costs are going to be much higher per term acquisition cost. We compare that targeted acquisition cost to our actual cost per sale. And cost per sale is really how much did we spend on in terms of acquiring policies that would be immediate cost as well as quoting cost and compare it to the yield of policies sold.

Now we calculate the cost per sale in an aggregate measure so we look at total cost per sale, average cost per sale, but we actually try to do it at much finer and finer levels of details. We try to do it at media types for example. A little bit later on in the program, John Sauerland is going to talk about pay and search advertising. That is immediate type or attributional sales, attributional costs can be very, very fine and so we can more readily determine actual cost per sale for pay and search advertising. Other immediate types are not as kind and not as easy, but we try to do it the best we can in terms of trying to measure cost per sale at finer levels.

And I should mention in terms of cost per sale, we also do look at the incremental cost per sale. So what is the efficiency of our last dollar spent? We want to ensure that our last dollars spent of advertising are as efficient as they possibly can be.

So, key question that we always have to answer, is our cost per sale less than our targeted acquisition cost? Is our actual experience better than what we had anticipated in pricing? The simple answer is if they – answer to that question is yes, that we feel confident that we can continue to spend more. The answer to that question is no, we would likely reduce our spending activities.

And all of this is subject to the two constraints that Glenn articulated in the shareholders’ letter. First, that the Direct auto lifetime combined ratio has to be at or below 96 and that we will measure the aggregate companywide combined ratio to be at or below 96. And that goal and objective function has not changed.

Let me try and provide a couple of different illustrations, provide further evidence of how we think about these things. Consider this as a Direct auto policy again. Again, it’s simplified. And here I have indicated what we’ll call target combined ratios and I’ve used the same target combined ratios for new and renewal business that were in the previous example. They are illustrative and that exactly are the ones that we actually use in terms of our pricing, but in this situation our target combined ratio for new business is 129. And you notice that the renewal combined ratio target is 85 and if the 25% of the premium is new business in that four term policy, 25% was the new business, that will equate to a calendar and lifetime combined ratio of 96.

You will also notice that we actually have targets at much finer levels of detail than just new and renewal business. We have targets at loss ratios levels, we have targets at loss adjustment expense levels, we have targets at expense ratio levels, et cetera. And I should point out that we also have targets at state levels and tier levels. So think of it we have hundreds of targets that we measure ourselves against each and every month. But then the situation, we are shooting for 129 new business combined ration and 85 renewal combined ratio for an aggregate 96.

Let’s consider case number one. This is a situation where we are actually missing new business combined ratios. New business has 135 and we have missed our loss ratio target by six points. Now the good thing and something that we would see through revenue. But let’s consider that this is a scenario where new business growth is at little bit lesser levels than expected. And let’s say for this example only 22% of new business premium, earned premium is in new business. This actually equates to a calendar year 96, we are not meeting our targets, but it equates to a calendar year96.

Case number two. This is a situation where we are meeting our targets exactly, both for new business and renewal. And we are actually meeting our targets along each of the subcomponents, a great outcome. Let’s consider this as a higher new business growth environment and 30% of our total earned premium is in new business. On a calendar year basis, this will equate to a 98.2 combined ratio, over the 96 combined ratio you’ve heard for many years.

Which scenario would we prefer? Actually, case number two. In this case, if we normalize and earned premium earns out over a period of time the expected 25%, case number two will equate to a 96 combined ratio for the lifetime. Certainly case number one is actually not good. We missed our targets. Even though that current period calendar said 96, we believe over the life time, it will equate to a more equivalent combined ratio of 97.2. That is why the case we continue to say we measure against targets and under certain high growth scenarios, we will be comfortable reporting a calendar year combined ratio or a calendar reporting period combined ratio over 96.

So, just so you don’t think this is just hypothetical, I am going to share with you first quarter results. Now, the actual results are not in you book. You are going to have to pencil them in. I don’t want you to go to punch line too quick. So, I want to share with you sort of the first quarter results. And remember, these are not exactly relative to the targets of 129 to 85 but to our true pricing targets. What happened in the first quarter?

In the first quarter, we beat both new business and renewal aggregate targets. And in particular, we beat loss ratio and loss adjustment expense targets in both new and renewal business and for that we are very, very pleased. We actually, on renewal business, we are slightly over our targets on expenses, on other expenses. But in aggregate we still beat the renewal targets. And in fact, in the new business, we actually were a little bit higher than our targets in terms of acquisition cost, but again that was a conscious decision.

You’ve heard me say before we adjust our spend accordingly and in fact we spend more in first and third quarter, in terms of advertising dollars than in other quarters. That’s because there is little bit seasonality to the shopping season, so we actually consciously chose to spend more in the first quarter. We believe over time as this turns out, it will meet that acquisition target. But for the first quarter it was slightly over.

In aggregate, this generated for our Direct auto business a 97.2 combined ratio for the first quarter. I am certain this is news to you because it’s not separately disclosed in our monthly releases, but it was a 97.2 in the first quarter, but we were actually very pleased with this. Why? It was a high new business growth scenario. We reported in our first quarter the growth in new business and was very, very strong, and because we are meeting and beating both the new and renewal targets, we feel and are comfortable that we expect it to return a lifetime combined ratio of less than 96. And that is how we measure the Direct auto business.

So I mentioned the aggregate 96 combined ratio. Objective function hasn’t changed. What has changed? Well certainly for us, our advertising spend has increased. And you can see from this chart it has increased for the last several years. A little bit later in the program, John Sauerland is going to give a little bit more detail on that. And not only has it changed for us but it has also changed for the industry as a whole, advertising costs are up. We have actually coupled our increase in terms of advertising cost with what we believe in approve and creative [ph]. Then I am certain you have seen and are very knowledgeable of our superstore campaign with Flo as the main character and we feel very good about how that expresses our products and services to consumers.

Both the increased advertising spend and improved communications has led to demand generation and demand increase, and by that I mean our quotes for auto insurance in the Direct channel are up, and they are up on a year-over-year basis than they have been for the last couple of years.

At the same time, our conversion is increasing. Not only are we generating more quotes we are converting more of those to sales. Some of that is a function of some segmentation and product improvements from the marketing side, and Jim Haas is going to talk a little bit about that a little bit later. Certainly, we have continued to improve our retailing on the website of our prices. And in a few cases, we have actually lowered rates in a few select states, but all of those combinations have generated a higher conversion rate of quotes to sales.

Glenn mentioned our customer mix is changing a little bit to what we would call higher retaining; higher policy life expectancy policies and we believe that – we see that as a very good thing. All of this, the increased advertising, the increased demand, increased conversion, and increased policy life expectancy is leading us to growth that you see in our Direct auto business. And I am pleased to say that while we are achieving that, we are also achieving efficiency gains. And included in your book is one of the key measures that we report on regularly, internally and we have expressed before, policies in force per employee. And so far this year it is up 11%.

And that is on top of a 9% growth that we reported last year. So I am very, very pleased by that. I mean we continue to try to – continue to improve our efficiency, but we are making gains. So that helps keep the circle going. Increased ad spend, increased demand, conversion, life expectancy, scale helps us to enable us to continue to spend more, which we are very comfortable doing subject to the two constraints I want to leave you with and hopefully are ingrained. First, the Direct auto lifetime combined ration has to be at or below 96, and finally that the aggregate companywide combined ratio has to be 96 or below and that goal is unchanged.

Thank you. I will turn it back to Glenn.

Glenn Renwick

For me, it’s sort of not all 96s or 97s for that matter are created equal and it is an important part of the strategy. It’s not just a set of words there to be consistently at or below 96 for any long period of time is actually quite difficult and requires a great deal of controls inside the Company. It is certainly – I am not going to contrast to anyone else but it is easy to sort of below for a while and above for a while. Our intent isn’t to be on average at 96 over a 10-year period, it is to consistently be at 96 or below, and that balance plan requires a lot of controls to make it happen. So, thank you, Brian, I think that reinforces a very, very significant part of our strategy.

It’s almost strange to sort of not have claims to be front and center for a session like this, but we had Tricia Griffith last year to basically take the stage and give us a – given an overall overview of exactly what she is working on to extend the claim strategy, so what I am going to do is just comment on a couple of quick things as we are going to explode the bullets that we think are more important for this year. But claims is actually a real highlight story for us. If you remember, she talked a great deal about sort of how to preserve the local presence, the fourth bullet point there, but a lot around matching employee skills with the claims severity and making sure that we don’t over skill or under skill. All of that work has going on. I am not actually going to report on that today. If there are questions, I will be happy to take them later, but I want to give you some sort of sense of the output and has this worked.

If you recall, and if you didn’t I will repeat them, she focused around four guiding principles and that being longstanding guiding principles for us in claims: the accuracy of the settlement, accuracy and fairness of the settlement; the efficiency by which we get the settlement; the customer satisfaction; and the work environment that we create in doing it. Very simple. Everybody would write those down. It is really hard to get a great balanced blend of all of those things together. And I would suggest to you that while we had some great results, Great Results, through the decade, we have mostly had one or tow or at times three out of four working really well. I think we can actually conclude and be – and we are pretty excited about that we actually got the best balance now of four out of four than we’ve ever had.

Let me just quickly take you through the small graphs, I know they are different timeframes, but I want to make the point, which I think is – has been – point is integrity, the claims quality, that’s a graph that you’ve seen many times. The only thing that’s relevant there is it’s sort of upward sloping to the right, but the slope of that orange line, I don’t know how to measure the economic value of that, but I assure you that’s a significant value. The fact that we’ve been improving the quality of our claims settlement against the standard that no one else in the industry would measure themselves; this is just a self constructed standard, so we know what we expect in a claim file when we see it. So, just because a file doesn’t have 100% quality may not mean that it was paid incorrectly. It just wasn’t the process by which we think it’s reproducible and sustainable over a long period of time. So, our claims quality has done just exceptionally well and I though I would probably be running out of the opportunity to say it’s higher this year than it was last year, but so far that’s continued. At some point that will flatten out. And hopefully it will flatten out to the very acceptable place.

What’s perhaps the most pleasing is the loss adjustment expense and you see that coming down fairly dramatically. A point of loss adjustment expense, we don’t publish that in the monthlies, but it’s a point of loss adjustment expense in aggregate year-over-year. That’s huge in pricing advantage, so we are now carrying no degradation, in fact improvement in claim quality at a lower cost. Can you really have those two things working? We think so.

But, the other two are every bit as important, may be it should really be on the south. The overall claims work environment, you can see there a somewhat dramatic, you may say, well, jees, there is no continuity with the data there, but if you remember, Tricia last year was talking right after we had made a very significant restructuring of our claims organization the management, was a fairly significant reduction in force to better meet the needs of what we see as the process going forward. So, unfortunately required [ph], we have a new process that’s taken a decade – almost a decade to get there, but we had to adjust for it. So, clearly the internal environment took a hit right after that, and that’s the dip that’s down.

I would suggest to you, and I am more than prepared to provide additional data points as (inaudible) develops, but the fact that we came right back on this claims work environment, again, an internal measure, came right back to the all time high, is really a great reflection of the leadership in claims and the comfort with which everything has been communicated and what’s going on in the claims organization today. So, I believe that the work environment now is may be as good as it has ever been and on its way up. That means that these other things are very sustainable. The customer environment and customer satisfaction, I think the orange line there might be a little liberal, but hopefully that will be one that we are more on track with, but as we measure Net Promoter Score, we are very aware and I am actually very aware, and I am actually very aware from other industries that in the last coupe of years it’s been a little interesting to calibrate Net Promoter Score. It seems to be the economic cloud over our economy. It is not necessarily making people sort of that comfortable. That seems to be reflected in some of those types of measures. That’s not an excuse. But it’s just a level of suggesting that in our claims environment we are still going up. It may even be more favorable for the future as we continue to do the sorts of things that we think have already showing some nice improvements, but perhaps as the economy recovers we may even see a calibration change there as well.

So, point here is four out of four feels very good. I have included something that for some you will seem familiar. We first used this and put it in the Annual Report for 2003. I think I may have introduced it in 2000. But for me it’s important. It’s just the way we think of Progressive. This graph, think of the darker line there, the vertical axis is total costs, what we pay in a claim plus what it costs us to adjudicate that claim as a function of loss adjustment expense or what it costs to determine how much to pay. Very simple calibration. If we don’t – we don’t put any effort into the claim, we are likely to over pay the claim. If we put too much effort into the claim and do an accident reconstruction for a letter box claim, it’s probably going to get awfully expensive.

So, what’s the optimal place to evaluate a claim and ultimately pay it? Where is the derivative zero, how do we drive down that curve? Everything we do at Progressive, we are trying to drive to that minimum point. But we are also trying to reshape the curve. We are trying to move the curve as you see on the dotted line and Tricia used that last year. I will suggest to you that I think while we can't calibrate this perfectly, we’ve shifted the curve and we are going to keep shifting the curve and those marginal changes in that curve become real competitive advantages because the marginal changes get harder and harder and harder. But they ultimately also give us advantages we believe in the marketplace that may be harder to replicate.

So, as you saw with our financial part of the strategy, we have great intensity around something that really is dear to us. This is equally as important to us in terms of execution and what makes us just that little bit more focused, a little bit more intent, and that’s how we get the competitive advantage along with the distinction that we are trying to achieve as the foundation statement suggested and our concierge claim services definitely give us a great deal of these types of gains, but we’ve been able to lift those gains and apply them into areas where we can’t actually offer the concierge service because of scale. So all things are working well, and I hope and in fact I am sure we’ll come back and probably share with you these four guiding principles and the measures that match up to that, but if we can keep getting four out of four and keep pushing that curve slightly to the lower and left, I think we are creating real competitive advantage to our claims organization. Claims to Progressive is not just the back end of the process, it is very much a part of what we stand for.

Let’s move on now to sort of industry-leading product and offering. And I said I will try to give some sense for why these words may be a little bit more meaningful to us and perhaps just not words that would otherwise fall out for someone else. Let’s just take the first one for second. Open and priced for all driver. As I think about it, all of us have been product managers at Progressive at one point in time and in the mid-to-late 80s, I would say my product was open and priced for all drivers. Now, you might have to be a little crazy to buy it if you were otherwise a very clean driver and had no issues because that really wasn’t our focus in the late 80s. Though we had a price for you, but it wasn’t the target. It wasn’t that reach that I was talking about before – now started to target our audience and act with purpose.

Now, we are extending our reach. We really do have a price. All of who are insures with Progressive, and not because we work for the company, I mean probably yes, probably no, but it works. I wasn’t when I was the product manager of my own product, because it wasn’t really open and priced to me. So that’s a change. But what’s even bigger change now is design for those who intend to maintain coverage. And again, you’ve heard me go on about this, and you’ve seen this – the comments about rate stability, loyalty programs, NPS, creating reasons to stay, eliminating reasons to go, it becomes sort of really self fulfilling.

John Sauerland coined the term and said the company, we want to be a destination insurer. I love the term because I think at times when in the past which clearly we wouldn’t be here today without the past; sometimes we were the training wheels for insurance. And that’s not what we are today. We’ve changed greatly as a company. Now we are a destination insurer and we are building on that concept.

Consumer segment focused features and coverages. That was what we dedicated a session a couple of times ago and that was the first introduction to the Sam, and Diane, and Robinsons, et cetera. Let’s take the second and third points, industry-leading price segmentation. I think for those who know Progressive well, and perhaps for those who don’t know quite as well, I think it’s fair to say that we are generally associated with being a fairly good segment, statistically a strong company, we get the math. I also hear from time to time commentary that maybe segmentation is not quite as powerful as it used to be.

I think may be you might think just a little differently after you hear from Jim. Jim is our Director of R&D. And he spends a lot of time thinking about segmentation and even marginal gains in segmentation again to give us the kind of competitive advantage we seek. Jim?

Jim Haas

Thank you, Glenn. Good morning. Thank you all for joining us today. As Glenn mentioned, one of the most longstanding elements of our strategy has been to have industry-leading price segmentation. I am here to talk to you little bit about what we mean by that and why we think it’s so important and what we’ve been up to on that front over the last couple of years. So first, what do we mean? We will have industry-leading price segmentation that covers the cost of each of the risk that insure. We want to price the expected lifetime cost of insuring a risk, including the losses cost, estimated loss adjustment expenses, the operation cost of servicing this policy, and the acquisition cost that Brian talked a bit about before, and I will talk a bit about later.

We also want to tailor that to the channel in which that person bought that insurance, whether it’s agency or Direct. As we see certainly acquisition differences and also some loss cost are consistent. We will talk a little bit about that. So, at this point some of you are probably thinking, wait a minute, in many, many industries, in sort of heard, pricing the cost I have a bad idea, I should price the market. I want to give you a little bit of an example here why I think that’s a little bit different, our industry, some other financial services industries, that pricing the cost really is probably your best choice. I apologize to some of you who find this as a pretty common and known topic that you are familiar with. but it’s pretty important and it’s our industry and I think there is a few new cases, so I’ll spend a couple of minutes I’ll go quickly through this to explain a concept called adverse selection and why we think it’s so important in insurance.

Imagine a world if you will where there are only two insurance carriers, creatively named Carrier A and Carrier B in this example. And they are insuring some pool of risks represented here by the blue vehicles. Let’s say both carriers have figured out that to price those insureds correctly to earn their – to cover their cost and earn the necessary profit. They need to charge about $1000 each. And in a world where price is the only thing that matter, of course it isn’t you know a brand and claims and all those things, but in this well let’s just assume just price is the only thing that matters. What happens is that each is charged a 1000, well you just get some fair share of those risks. And it works out just fine for them. They need to charge a 1000 each, they do charge a 1000 each, so you earn the required return. Let’s split the market, it’s a pretty happy world for both.

But now let’s say Carrier B figures out that these risks aren’t all the same. That some of them are somewhat different. That let’s – by here in terms of the orange and the blue cars, they feel the orange cars, they need to actually price at $1200 a year to make the required profit to cover the cost. But the blue cars only need to price at $800. So it’s about same number of each. The average is still $1000. That was right, still is right. But the pricing they charge for each different group is different. So also Carrier B prices that way, orange cars $1200, blue cars $800.

Carrier A still hasn’t figured this out. They are still going to charge $1000 each and it always work for them. So again if price is the only thing, what happens, price is the only thing that matters, what happens? Well the orange cars go shopping and they say well Carrier B wants to charge me $1200 a year, and Carrier A wants to charge me $1000, I am going to Carrier A. Meanwhile the blue car is looking, Carrier B is going to charge them $800, Carrier A is charging them $1000, they are going to go to Carrier B. Pretty simple.

For Carrier B this works out just fine. They need to charge them $800, they are charging them $800, they are going to earn the profit they need to earn on those policies. For Carrier A, however, this is very bad (inaudible). Suddenly [ph] you are insuring policies and vehicles that they need to charge $1200 to but they are only charging $1000 to, so they are going to lose $200 each per year.

The trick here is to – is a carrier may not know this. All they know is their loss costs have gone up by 20%. If they hadn’t figured out that the orange are actually different than the blue, all they know is lost costs have come up. And the only recourse they may have is to raise their prices. They have to raise them by 20% in this example. And now, Carrier B is going to competitive on the orange cars at 1200 each. And on the blue they’ve got a price for them. So Carrier B will gain more and more market share in that example.

Obviously, life is not this simple, right. There aren’t only two carriers in the world. There are scores of carriers. And there aren’t only two segments, they are not just orange and blue cars. And they are not 20% of cars, a pretty big difference. There are lots and lots of segments. In fact, we have millions and million of different segments that we are pricing to, different prices that we can share [ph]. Our competitors also have millions and millions of different combinations of risk factors. And by the way they don’t all line up. We don’t – all use the same thing. So I can't just say, well, here are the segments, let me line up the prices for us and all of our competitors and see which one works the best. They’ve got to use different information, different formulas. It’s very complicated and it’s shifting all the time. Everyone is changing their prices and their pricing structures constantly.

The key thing to take away from that is segmentation is always happening either by you or to you. And the trick is to stay ahead of that and to continually make your segmentation better. So how do you stay on top of that? The first thing of course you do is you look at what your competitors are doing. You try to find out when they launch a new product or new segmentation variable you take a look at them and say, will that work in my own product? In some cases the answer is no, it’s tailored for theirs, and it really won't work in yours, so you are picking it up some other way.

In other cases, the answer is yes and you try to incorporate that. More importantly perhaps and the thing that you can control a little bit better is to continually try to make your own segmentation better. I will talk a little bit how you can do that.

Admittedly, there are three ways you can do it at a very high simple level. You can add new variables of information, you can interact the information you have a little bit better or you can essentially apply better math, figure out what the underlying patterns are a little bit better using different techniques. Let me give you quick examples of each of those and you are probably familiar with. So, for instance, the biggest change to come along the last 15 or 20 years is the introduction of information from consumer credit reports. It was introduced in the mid 90s and it was probably the single biggest segmentation innovation in the last 15 or 20 years. Some of these are not that early. That was worth hundreds of millions of dollars. This was new information. We just didn’t ever have it before. It provided an incremental value over the way we used to write policies.

(Inaudible) interactions, let me give you an example of that. This is combined data you already use; we already rate on the ages of people. So we know that a 17-year old, all else equal, is riskier than a 15-year old. We also rate on the type of vehicle they drive. We know sports cars are riskier than family sedan. It may be the case, however, that a 17-year old with a sports car is not just a product of those two things, but even worse. Is that what we call it interaction. The fact that the 17-year old with a sports car is different than just the average sport car. That will be the example of an interaction.

And then finally there is just better science. This is just running the math a little bit differently and potentially better. That could mean saying, oh, instead of having all these things multiply together, I will add them together. Or instead of trying to predict my expected loss costs, I will predict how likely it is someone has an accident and how bad that accident is going to be where they have it. It’s an empirical question. You run the math; you see which version of that, which formula works better.

That’s on the math, but the reality of this stuff, when you try to put it in, is just not just about the math. You are subject to a series of constraints. You try to work this within, (inaudible) move some of the segmentation, we hope to gain. (inaudible) legal and regulatory constraints. While we were insuring in the United States, it’s not one market, it’s 51 different markets that we operate in. The law and the regulations are different in each of them. Things that one state finds perfectly acceptable is not in another. So we will always comply with all the laws and the regulations that are in the industry, but we have to tailor what the math answer might be to fit that in some cases.

Second is the theme of consumer acceptance. It’s another constraint. I can have all the data in the world that said blue-eyed are safer drivers than brown-eyed people. I don’t know how many consumers would really accept that, I don’t how many regulators will really accept that regardless of what the math happen to say.

Last example I will give you is of what I will call illogical rates around just customer experience. Most carriers give you a discount if you insure multiple vehicles with them. If that data, we happen to say that (inaudible) very large if you had two vehicles rather than one, that might make sense in the math part of the world. But think about the customer who has two cars and says I wan to sell one. Now he only needs to insure one with you. It probably is a pretty low-priced vehicle relative to the other one. He may take it off and they lose that multi-car discount, the price could actually go up. I don’t know about you, but most people I think believe that when they are insured less with you their price should go down. So (inaudible) the math might say that discount should be that big, we can't really do that. We have to actually consider how the customer is going to interact with them.

Just continue the flavor. Some of the constraints we have to work within and we introduce new segmentation. So, how have we been doing? I am going to borrow a concept here form social scientists and then I will relate it back to insurance. Then will spend a little time setting it up because I am going to use this throughout for quite a bit. Well social science (inaudible) income (inaudible) quality and they basically (inaudible) this way. On the vertical axis, they look at the cumulative share of wealth in dollars, so it’s a percentage of cumulative wealth dollars. And in the horizontal axis they sort the population from highest wealth on the far left to lowest wealth out there on the far right. Dollars, people, they used the way to think about that. If the wealth was completely evenly distributed amongst the people, then you get a line like this, a diagonal line, where top 50% of the population would have 50% of the wealth. 80% of the population have 80% of the wealth. It’s straightforward. That will be perfectly evenly distributed.

The other end of the spectrum could have a distribution look something like that, a very uneven distribution, in this case about 15% of the people, they are on the horizontal axis, control all the wealth, and the other 85% have none of it. So this is sort of you feudal monarchy sort of view of the world where a very small part of the population controls all the money.

So what about our role? How we translate this into insurance? Let’s change the axis around. Still people and dollars but on the vertical axis now it’s the cumulative percent of actual loss dollars. On the horizontal axis, it’s the population in this case sorted by predicted risk from the highest risk drivers on the left to lowest risk drivers on the right. If everybody had the same risk of loss or you model was really terrible, what you see is that half the people would account for half the losses. They are evenly – have the same shares of loss. I am going to loss and pricing here interchangeably, so remember we price towards our expected loss cost, so in this example you can use them interchangeably.

So perfectly even 50% of the people have 50% of the losses, 80% have 80%, all works out the same. What we observe in a single year doesn’t look anything like that though. What we observed in a single year looks something like that. 10% to 20% of the people have an accident and account for all of you losses. The other people don’t have any. This makes sense, right? Most people don’t have an accident in a given year. Only about 10% to 20% do. Does this mean we should charge the other people nothing? Of course not. There is some risk there and we are pricing for the expected risk, not what we actually do [ph] in any given period.

But you can use this to (inaudible) about what does it really look like? What’s the perfect curve? This diagonal is – I don’t anything which charges everybody the same price. This is the blue cars, everybody is the $1000 example. What will the real curve look like, the perfect curve? No one really knows. But from that data, we can begin to estimate it. OUR best guess makes it look something like that. There are always differentiation in risk of drivers. I think we would all accept that. A smaller share of the population will account for a disproportionate share of the losses. And you get a curve that looks like that. So then you start to put on your actual pricing models and compare it from diagonal of completely awful model, I don’t know anything after that perfect curve and see really in that range. So how have we done?

About 1994, we had a product which we creatively called 2.0, which was essentially the second generation of the product. That contained most of your traditional raging variables to driving metrics, how old you were, what kind of car you drove, where you lived, the basics, the classics, right. We did pretty well. You know it gained all that space. Those are traditional rating variables for a reason. They do predict loss pretty well.

By 2000 we had a model which we called 4.0 and the big change between those two lines was the introduction of credit. Now a couple of slides ago I said wow, credit was a really big deal. It’s a big innovation in the industry, and it’s tons of millions of dollars of the people who got there early. You look at this chart and say wow, that’s not really – the line really didn’t move that far when we did that. Those are not in congress. Small improvements here are worth a lot of money from a business impact point of view. There is still a lot of room to go. We didn’t have that much segmentation in the grand scheme of things, but it’s worth a lot of money in the industry to get there early.

So where are we today? This line represents the segmentation power of our most recent model that we call 8.0. This we launched last year in 2009. You can see again some improvements since where we were in 2000, made some good progress there, but still a long way to go to get to that perfect model. I will talk to you a little bit about that 8.0 model and what it was designed to do and how we got to that point.

So if you remember, back in 2000 we had a reorganization where we created separate Direct and agency business units and the goal of that was to really bring a lot of focus to each of those channels and the differences between them, so we can optimize the direct business for its dynamics and really learn about that business when still relatively young and really optimize the agency business. We did that. We created in that process completely different Direct products and the product in this case I mean sort of rating algorithm. We created very different Direct products and agency products. We had different quoting experiences. The way an agent will get a rate was different from the way a consumer will get a rate. And because of that that generated different servicing and followup procedures in our call centers and internally. So what I mean as servicing are followup procedure when a consumer called in and wanted to make a change to the policy, there are rules dictated by the product, but how that has to happen? Because the products are different, all these procedures were different. These were also different systems and different everything else.

Fast forward to 2007. We did another reorganization. This time we bought those lines all back together because what we had found was we had optimized those things really well, but that had led to increase in differences and we started to pay something too high – duplication tax on our lines. So we bought those back together to gain some efficiencies and prove our speed to market, simplify things, so that we didn’t have different sets of procedures, we could get closer to one, and that’s what we will be able to see in our product.

We took the best of the agency and the Direct product and we created sort of an integrated product here in the middle. We still had – observed though differences in the loss behavior between those two channels, differences in the experiences, differences in the acquisition economics. So we have some Direct specifics still and some agency specifics. We are only different now, what we think that’s materially – material and important. Because we have a similar product though, we are now going to have much more integrated followup and servicing procedures. This is helpful to our cost, simply things in the call centers, and because these are all in the same system now, it makes it easier for us to roll them out.

We have maintained, however, different quoting platforms. We find that the experience of an agent and a consumer are still very different and we are treating them differently since that is a material difference that is worth keeping. So this is what we’ve done to create the integrated product. We brought these things back together. And that’s led to some of that segmentation game you’ve seen and we use the Direct product here as an example.

The blue bars here represent policies. We basically said, what was the rate in the old product, what’s the rate in the new product, let’s take the difference and see how different they are and we saw people on the far right here policies in the far will be seeing rate increases. Policies in the far left will be seeing rate decrease. Now when you do that, well simple thing to do is that let me check up the loss ratio of the people in each of those bars, I would hope the people I am raising rates on have higher loss ratios, that’s the simple check you ought to do. The orange line is that loss ratio. It’s also the indicated rate change. So people on the right fortunately have higher loss ratios, they need rate increases; people in the left had lower loss ratios. They deserved a rate decrease.

So then we throw up what – how much do we actually change the rates? That’s the blue line. Lines up pretty well. Let me check the research guy, when you see that you feel pretty good that I am moving rates in the right directions. I am actually improving my segmentation over what I had before. So some of you are probably trying to do that mental math of you need to raise rates to 10 and you increased to 12, what’s your new loss ratio look like? And if you think back we want to price to our costs. So we are going to price everybody so they are priced about the same loss ratio. We would like the new loss ratio line to be very flat. It pretty much is very flat. It’s a lot flatter than the orange line, it’s not perfectly flat because I am not out of that perfect model yet but moving in that direction. We made significant progress in improving the segmentation here.

To get done with that however, is not that agency rates and Direct rates are not identical. That is still not true, but I will tell you now that the loss cost estimates have gotten a lot closer. So this is where it looked like before 8.0. We took a group of policies, we rate them in Direct, we rated them in the agency. And this is the difference. People on the far right here, Direct have much higher prices. People on the far left agency at higher prices and people in the middle are pretty close. This is what our loss cost estimates looks like before 8.0.

After 8.0 they tighten up quite a bit, they look more like this, these orange bars, much tighter distribution. So there aren’t as many people where the rates are quite as different. So our loss cost has tightened up considerably now we’ve added 8.0, which makes sense. We bought the products back together.

This is the same chart. I just took out the other bars to make it a little clear. The final – these are not final prices though, this is just the loss cost. It doesn’t include the acquisition expenses. And Brian has already hinted at we treat those somewhat differently between the two channels. We layer on the indemnity – these loss cost estimates we layer on the acquisition on top of it, we get final rates that look like this. The difference in price between agency and Direct these policies on the final price looks more like this. Tighter than it was before, but certainly not identical and certainly broader than just the loss cost. Implies that the acquisition differences, the way we price for that contribute to a lot of the differences in final rates between agency customers and Direct customers.

Let me explain to you a little bit about how we do price agency and Direct and why some of these big differences. As Brian mentioned, we have chosen to expense all of our Direct acquisition cost in the first term. The choice doesn’t really affect how we price, but it is what we do. And in agency we have a variable commission. It’s a function of premium. So let me take two example policies. One in the left to be a low premium policy with a relatively short life policy expectancy and the one on the right is a high premium long life expectancy policy.

So in the Direct side, which is represented by the blue bar here, the cost of acquisition is identical. We don’t really what the premium is, the cost is the same to get them in the door. In agency, however, the expenses are very different. It’s a function of premium and for how long you are going to be paying it. So for the short life expectancy policy at low premium, we are going to pay a fixed percentage across a lot small premium, there is only two terms in this case. Whereas in the far right, it’s a high premium policy, so the commission dollar expenses is going to be larger, and in this case it’s for eight policy terms, so it’s for a long time.

When we go to price that, what we do in Direct is we take that fixed expense and we divide it over the expected life of the policy. So in the far left case, we just divide it in half because there are only two expected terms. On the right hand side, we divide it by eight because there are eight expected terms. The output of that is for these low premium, shorter life expectancy policies agency is going to be much more competitive because we are paying a relatively low commission relative to a high Direct acquisition cost.

Meanwhile in high premium, long life expectancy policy, Direct is going to tend to be more competitive because again the variable commission is going to go up. Direct expense we spread it out over a longer period of time.

This will generally be true. Direct will be more competitive with high premium and longer life expectancy policies. Directionally, that’s consistent with the renewal economics that Brian shared because renewal terms in Direct are very profitable. This makes us more competitive on longer period [ph] policies in Direct that’s your only success strategy pretty well.

So how is this new product doing? We have it out in 10 states today. And we’ll have it out in states representing 60% to 70% of our net written premium by yearend. Now when you take two products that had seven years to get different, so it’s a drift apart, the rates are going to be pretty different, we put them back together, there is going to be a lot of rate change for individual customers. We’ve invested in the last several years in rate stability initiatives and we’ve talked about that at fire meetings. That will help to mitigate that rate change for those customers and ease them on to the new product. That’s good for retention. So we think that will help us retain more customers. We will, however, swell the speed of the average selection towards our competitors that our new segmentation is generating because our customers, the customers we think we need to increase rates, won't be seeing those this quickly; it won't be likely to go to a competitor.

All in all we think that’s a good trade-off. We think we’ll get the retention benefit. We need that. We will have segmentation new business for us plus this is the highest, we think it’s most important there. But we think that’s the right balance on those. The early results of this new product are encouraging. The loss ratio looks okay so far. The data is very thin so far though. But so far it’s hitting the target that Brian is trying. And we are seeing a probably more preferred mix of business in terms of potentials like multi-car policies, homeowner policies, full coverage policies that we had in the past. We are encouraged by that as well.

So, where are we going from here? This is chart we had up earlier where we had seen the progression from older products to the most recent product. We don’t stop working on these things. We don’t just wait for reorg to try to come up with a new product. We are always working on those new products. And we already have things identifies as sort of back in the lab, that we think will add even more segmentation. We are beginning to start to implement those. So proven out with the math, now we are starting to actually do the implementation.

When we look at the segmentation that will provide, we get a curve that looks something like that, which I’ve creatively called 9.0, which shows a pretty nice segmentation again. So I am encouraged by that. I will tell you now; I don’t think we’ll get all of that. Remember all those constraints I showed you, we are just starting to get [ph] all those, these segmentation is against that. And we’ll have to make some modifications to really – to make it a usable, marketable product. But we saw that there are some segmentation (inaudible) than that. This shows good improvement over where we’ve been. We are still a long way to go before we hit that perfect model.

This however does not include what I think of as the most exciting segmentation we will have in the next few years, which is usage based insurance, which I know we’ve talked to you about for some time now and John Sauerland is going to talk more about it.

We already have a model we are using in the market that we think provides great additional segmentation. I am here to tell you I think there is a lot more yet to go on that that we are really just the beginning stages. And I say that for two reasons. I think usage based insurance move is so much better than the traditional rating variables for two reasons. One, it’s less of a proxy for driving behavior and more of just a measure of it. So that’s a good – a very interesting quarterly deduction measures of driving behavior that we are interested in. And second, it is a much richer source of data to any other variable we’ve had in the past. Tell you a little bit more about that.

Our traditional rating variables, as we think about those, they tend to be single piece of information. How old are you? You are 45, great. There is one piece of information. What kind of car do you drive? I drive 2005 Honda Accord. Great. There is one more piece of information. Just individual pieces and we put them all together, may be we come up with 50 different data points. One of the reasons I think credit was a big step forward was it added so much more data. In a typical credit report there are about 2000 individual transactions that make up that report. It is very complete and very dense.

Think about your driving record. How many of you have ever driven unsafely or exceeded the speed limit and not gotten caught. Nobody here I know. But may be on the way to work you saw somebody else doing that. How many times do you think people have not paid their credit card bill and it didn’t show up in a credit report? Almost never. Those guys – it’s there. So you really get to distinguish between safer risk and less safe for us.

So credit has a – 2008 was lots of information there that we were able to parse through them really add a lot of segmentation to. Now think about usage based insurance. In a single trip that someone takes we got about 1000 data points. So in 2000 today, on a current model, one trip, we have 1000 new data points. Over a single term of driving that equates to about 750,000 data points. That’s a vast rich source of data that instead of being sort of closer to proxies for how old are you; it’s actually measuring the driving behavior we are interested in. That’s a great new source of data. (Inaudible) to you, we like that, we’ve done good things with that in the past. I am confident we are going to find new segmentation in that. And so when I look at the whole – our progress in hitting this goal, having industry-leading segmentation, I feel that we’ve made good progress over time. We’ve got some things in the lab that will help us maintain that position and about the usage based insurance and I feel like there is a lot of potential out on the horizon.

Glenn Renwick

It’s always a challenge to take on a topic like segmentation because our factory doesn’t sort of blend itself to twos, it’s a statistical factory. So hopefully that gives you a sense and for me the takeaway was Jim’s comment, segmentation is either happening to you or by you. But there is no standing still. And you better know which are the blue cars and the red cars, whatever analogy that works for you. And that’s a huge part of our strategy. So hope that gets you some insight there.

We are going to quickly roll into John Sauerland now. Almost all of you at some point in time have heard me perhaps say that I always felt the substance of Progressive was better than our representation, meaning our brand and our communications to consumers. I hope I don’t have to say that too much longer, because I think we are catching up. I think our presentation of ourselves is getting just a little bit better. So, the leadership brand element of our strategy is clearly a very important and perhaps one that has taken on even more life. We’ve always been pretty good at the math. We have been pretty good at the claims, been pretty good at technology. But this is sort of that next leg in our very stable (inaudible) so we are going to ask John Sauerland to take us through sort of the work that’s been going in leadership brand and it’s not totally just skill set, in some cases from our segmentation skills.

John Sauerland

Thanks, Glenn. Good morning. So you can clearly see our aspiration is to be widely recognized as an industry leader with broad presence and powerful awareness. As Brian pointed out, Glenn pointed out, we now have a fantastic vehicle with our superstore campaigns on Flo to deliver messages about Progressive to consumers. To-date I think we have done a really good job delivering messages broadly, especially around acquisition and service and focused messages, and in case you are not completely familiar with our campaign and frankly because we are –we are kind of proud of it and we like to show it off. I am going to show it to you now real clips that again I think show that we do a great job with broad based acquisition and service messages.


Hope you like those as much as we do. As Brian pointed out, we are able, given the great response we’ve gotten from our campaign in concert with the increase in conversion, the increase in policy life holder expectancy, we are able t spend a lot more. So we don’t spend to a budget so to speak. We are sharing with you here a plan number for 2010, so we are forward-looking here a bit, but know that if circumstances change, response change, conversion, et cetera, our spend will change as a result as well.

You can see from that graph, we are at about $0.5 billion spend this year. That’s up about 30% over last year. Call it more than 50% over two years ago, so that’s great. That said, it’s a challenging continuing. You can see our share of voice there on the right and we calculate that using Nielsen data so what Nielsen says we spend relative to what the industry spends and you can see that now we’ve been spending a lot. The industry growth in spend has been outpacing our spend until recently. So in 2009 and year-to-date for 2010, we have grown our share of voice and we are now in a strong number two share of voice position, ahead of State Farm and Allstate. And again, our plan on spend is to spend to what is allowable, so understanding what is going on with our business across those three attributes and trends are good, so my expectation is that we are going to continue to be able to grow our share of voice.

The spend and creative is working not only from driving prospects to Progressive, it is also working in terms of building brand equity, if you will. And you can see the graph there around unaided awareness, so this is the percent of people who when asked, name an insurance company, say Progressive. You can see this is up, and it’s up to historically high levels.

We are also doing well positioning Progressive in consumers’ minds. Glenn shared with you the graph on the left here already. That’s value relative to caring. The graph on the right, on the bottom right I like a lot. Because if you think about our foundation summary, again, competitive prices, with distinctive products and services, I think this says that’s working. So this is personable, and easy as a summary. And we are distancing ourselves from the competition nicely in this space.

If you think about what drives that, you think immediate response claims, you think about 24/7 service, concierge claims, comparison prices, Name Your Price, are all great examples delivered by Flo as well, helps us get a lot of distance from our competition around personable and easy to use.

So I think we are doing pretty well on the mass marketing of – mass delivery of acquisition and service messages, an often that we are starting to get better at targeted messages. And I am going to share with you a real here of some of our more recent examples of targeting and then I will come back and talk a little bit about each of those segments we are talking to.


Alright, so hopefully you got those segments there. First we are talking directly to what we call multi-product households. As Flo told you, we are number one in motorcycle, we are a leader in boat, we are a leader in RV, obviously a leader in auto as well. We do okay penetrating multi-product households, meaning selling that household more than one product, but we think the potential there – we know the potential there is big, so we are talking directly to those consumers to try and increase our penetration there.

Second segment we are talking to were pet owners. I think we’ve done a great job with our pet injury coverage, really talking to a segment that cares about that and if you look at our brand metrics you will see we significantly over index with pet owner households relative to non pet owner households. So we are doing great with that segment.

The third you saw there were bundlers, and as Glenn shared with you the Robinsons, in this case representative of the bundling crowd were still small, but were growing significantly and that segment is about 40% of U.S. households and a larger portion of the U.S. auto market in terms of premium available. So we are going to continue to go after that segment because we believe the potential for growth there is huge.

The final segment if you will, though it wasn’t a segment, but it was a spot around our loyalty rewards program. We actually don’t have that spot in market yet. So we are just finishing that ad. We’ll start playing that in about a month or so and I think we are now starting to get on to new ground where we are able to talk to our consumers more direct or in a broad sense about reasons to stay with Progressive. So exciting to see how that plays. The great news there as well is that in test at least, those spots do very well with non-Progressive consumers in terms of increase in propensity to consider Progressive. So I think we are doing a great job in getting better at the targeted marketing.

There is one more spot I want to show you, but unfortunately we haven’t shot it yet. So the topic of this spot or spots we will shoot in about a month or two is our usage-based rate. We are going to begin to call this our Snapshot discount. Last year when I was on this stage I talked to you about our MyRate program, which is currently what we refer to our usage-based rating system as, and I told you we had made nice advances in our ability to deploy the wireless device broadly. That means it works in virtually all newer model year cars now. And that delivers data to us real time. I told you that we were a lot better in improving the consumer experience, so the onboarding of a consumer into our usage-based rating program. And I told you that we are really focused on a target for MyRate.

Affluent, urban dwellers, we thought that was really the right target to shoot for with MyRate. If you were at our annual, you saw that we have more than 100,000 units in place today, which is okay, but my big news for you here today is that we now think we can go after the broad market with usage-based rating and we don’t have to target marketing. The main reason behind that is because we redesigned our products. So we studied product attributes that really drew people to the product and studied similar or different facets of the product that attracted from the propensity considerate and we’ve now created what we call the Snapshot discount.

The Snapshot discount works as follows. Within 30 days of plugging the device in you care, you get a significant discount and the discount up to 30%. After six months of having the device in you vehicle, you return it to us, the device, no the vehicle, the device, and you lock in your discount. And that’s it. So, up to 30% discount within 30 days of plugging the device in. After six months you return it and you lock in the discount. We have tested this with a lot of consumers and we think it has a broad appeal.

We have that product design in place today in two states. So we don’t have the marketing out yet, but we have that design out in two states today. We will introduce that same design in six more states in July. We expect to have about half the country rolled out by year-end and we will continue to roll it out obviously into 2011. We, as I said, will be making the ads here in a month or two. We will test those ads in one or two cities between now and year-end. And if things go well across the product and the marketing, we expect to be broadly advertising usage-based rating in the form of Snapshot discount with Progressive in 2011.

So, Jim told you the math works really well here. I’d say that – I think we are getting close to having the marketing work as well as the math, if you will. And to what Jim said I have to add that – so he said the math is really good and the math can get even better. We have over a billion miles of driving date now in our system. Obviously with the associated loss cost. We have some patent protection in this space. We have worked with the regulators in which we have – where we have MyRate today so in those states, it’s about 20 states, we work with the regulators to provide them the information they need to be comfortable with our usage-based rating program, but we have filed the algorithms actually under trade secret protection. So the algorithms aren’t public. The math is not public.

I think you get where I am going with my positioning statements here. Again, it will be exciting to see if we can get the marketing as good as the math and we’ll know that pretty soon here. So look forward to that.

All right. I am going to shift gears now a talk a little bit about our media spend. We shared with you the actual media spend over the years. We’ve done that for at least for several years now. And while we don’t give you the numbers across the – within the Internet segment here, Internet is growing, I think you know that. Paid search is a significant portion of that. Display advertising is significant as well. And I talked to you last year about display advertising and the amazingly rich data environment we are operating with there. We are doing more and more of that. It’s going really well. Paid search is going well as well. It also presents a nice little case study around the power of brand.

So just to ground everyone and at least the terminology we use around search, this is a Google search for car insurance. Car insurance is the most popular, what we call generic term that people search for when they are looking for auto or car insurance. And we call that a generic term. And when you click on that, for Progressive, for everyone, on average think of it as about $20 per click.

We also bid on what we call brand term. So Progressive Insurance, Progressive agent, et cetera, and those terms cost us around $0.50 a little less than that. You might wonder why we have to bid on our own brand term. There are players who bid on brand terms. We don’t bid on other competitors’ brand terms but nevertheless we have to ensure we are number one on the listing there, we bid a small amount.

The final item there you see is organic or some people call that natural search and so that is below the paid listings. But prominently on the first page of listings. So, with that as the base, I am sure you’ve already figured out that well you are much better off with the brand click, right, than a generic click. $0.50 versus $20 that’s sort of 40X. The point of this slide is to tell you it’s really more like 60X. So people who shop for a brand are more likely to go buy that brand than people who shop for car insurance.

And I have all the pieces of the funnel here for you, but suffice it to say 60X relative to 40X, it’s big. Now surprisingly, I am also going to tell you that our brand mix relative to generic is up nicely. You can see the graph over time. Obviously we think that’s to a large degree a function of our spend and our creative, which is great. We are also beginning to understand – we think there might be a fundamental shift in the way consumers shop for auto insurance. That on the right in those charts is Google total category data. So for auto insurance category, all Google data, so brand terms would include State Farm, Allstate, et cetera. And you can see people are increasingly shopping more for brands relative to for car insurance. And my point here is clearly if you are an established brand in this space, this plays really well for you and if you are not, it makes the going a lot tougher in getting it, right.

Okay, just to round out the search terms I just talked about, organic search, we are doing well there as well. The graph on the left shares with you our average search ranking, so when you are at the top, you are number one, which is at the bottom of the graph. And you can see on Google, we’ve continued to improve, which is great. We’ve also done really well on Bing. Yahoo! you can see we’ve been somewhat up and down. The good news there is that we think at least by year-end Bing and Yahoo! are entering into – I think they refer to it as a co-marketing agreement where they are joining forces for search marketing and we think Bing will be the engine that they migrate to, so that that will work well for us. Next here, organic quote starts are up about 30% per year, which is fantastic.

Before I round out sort of the search discussion, I also want to make sure you are aware of the power of online marketing and our ability to manage it proactively when we are having profitability issues as well as we want to grow up. So obviously we always want to be priced adequately in all areas, but in this example, we recognize that PIP trends, personal injury protection loss trends were outpacing our prices, so we are not price adequate in Downstate and in Buffalo. And you can see that over night, literally or even inter-day we can change that and decrease our marketing spend in those areas and maintain it where we are making money. So it’s a powerful, powerful stuff and I think we are playing this game pretty darn well. It’s a highly dynamic game. It changes everyday even by the hour, but I think our team here is doing a great job.

Okay. Glenn has told you our strategy involves online leadership for sure. And we pointed to – as evidence that we are succeeding with that over the years has been quote initiations online. He already showed you the graph over here on the left. Neck and neck if you will over time with GEICO in terms of quotes initiated online. Yes, we have one data point above them at the end of the last quarter, which we are certainly happy to see, but not the point of the slide.

The point of the slide is on the right, which is policies initiated, so think of purchases and what I would offer to you there is that we are much more close to the leadership role there in purchases than we’ve been historically. So, over the past year we have significantly closed the gap on policies initiated.

Why? Well, I just talked to you about a shift in mix of the quotes the brand, and that certainly helped us. But if you think about other things we’ve introduced recently, you should also recall, Name Your Price. With Name Your Price I told you last year we increased our conversion around 5% and we were also able to deploy Name Your Price messaging in our creative increased response to our awards. We also saw a small decrease in average premium, call it less than 1% when we rolled out Name Your Price.

We continue to evolve Name Your Price. We are going to continue to enhance it and make it part of other portions of our experience, so we think Name Your Price will be a very valuable part of our offerings for quite some time.

We have also done some deep dives around the shopping experience. What you are seeing here is the result of a study of around 3000 to 4000 consumers who shopped at both and and fairly approximately in the neighborhood of each other. And first just (inaudible) this is a study, I don’t contend that it’s perfectly repurchase of the country. So I recognize that but at a minimum I think you’ll find it instructive.

The graph on the left shows our presented rate relative to GEICO’s, so you go online, you enter your information, you see a price. You go to the other website, you see a price. This is the ratio of those plotted against the percentage of people who go on to initiate purchasing a policy. There is a lot of things you can infer from these graphs.

But the key point I want to actually make here is on the right hand side. And that is to say well the rates presented at Progressive and GEICO were significantly different in this sample, again, 3000 or 4000. When you dissect the difference the difference of $185, only about $21 of it was due to apples-to-apples. So same coverage is offered, difference in pricing.

The other were simply a function of the rate – the package presented, so the coverages presented. Our strategy or our foundations summaries you have there is competitive prices with distinctive products and services. We will not chase the market down to the lowest quoted premium. That is not part of our strategy or our foundation. That said, understanding this is important for us, and we need to understand where our competitors sit in concert with what we think we should recommend to consumers and that’s a subjective thing but we have taken action around these understandings and I am going to share with you some actions we’ve taken here in a second.

Before I jump into this slide though, let me make sure you aren’t swayed too far in thinking around changes in average premium. If you have watched our results for a while, our average premiums have been going down, especially more recently in our Direct business. Two key points I am going to talk about changes in coverages here. Those matter to average premium for sure. Our state mix matters a lot as well. So as we’ve had pricing adequacy issues in some of our PIP states, larger personal injury protection states, those states have higher average premiums. And as we’ve grown more in other states that shifts the mix and so when you are looking at a countrywide average premium number that drives that down. So recognize this – what we are going to talk about here is not the sole driver of all of average premium.

The other caveat I would offer going into this is to say we’ve been raising prices. I think we gave you numbers around that. But last year we raised prices. This year to-date our rates are up as well. So, from an apples-to-apples risk, in aggregate on average for Progressive, our prices are up. Okay, given all those caveats, you probably already read this slide, liability – bodily injury liability limits, a significant portion of premium, and you can see the distribution of what we recommend in a quote are significantly different than our competitors we have taken some actions as a result of this. If you look at the new business mix slide on the bottom – graph on the bottom left here you will see as an example, the 100/300 line. So that’s a relatively speaking higher priced coverage. If you look across those bodily injury limits, think of it sort of around 10% difference per bar if you will. 100/300 has gone down. So we are recommending it less frequently, but if you look at the percent of times that we are selling it, call it 20-ish percent, that is still almost 2X what our competitor recommends.

The minimum allowable limits, so less than 25/50 we are at sort of 18-ish percent if you will and our competitor is recommending that more than 30% of the time. Big point. We will change again relative to what we are seeing competitively and what we think is right thing to recommend and this has helped conversion.

As an example, on the right is our vehicle coverage. So, this is coverage for the vehicle and this is the set of older vehicles, so if you have a loan on your car, you have to have full coverage or physical damage coverage. If you don’t in your older vehicle it’s up to you, lot of people decide not to. Understanding our competitive offering here, we used to offer – recommend that coverage to 69% of shoppers. We now recommend it to 50% of shoppers. And as you can see, conversion has gone up, average premium has gone down, but the net total new premium is up.

A sort of more holistic example if you will from our special lines business is as you are seeing on the screen. So historically, we used the presentation on the left and you can see or you may not be able to read that, but we are offering 50/100 limits there in addition to other coverages. The premium call it $100 or it is $100 I should say specifically, the paid in full premium. And today, we offer that same exact package as a recommendation, but then we offer a plus and a basic, a lower and a higher option.

Net, we’ve seen conversion go up, as you can see on the slide, 17%. Average premium has gone down 8%, but net total new premium is up 7%. So the point here again is simply understanding where we sit competitively and making sure we are doing all we can online and in our call centers to take a quote into a sale and do it with the recommendations that we think are right for our customers.

I hope you’ve gained an appreciation that I think our presentation as well as our content – closer to our content recently the Superstore campaign is absolutely helping to drive prospects to Progressive. I think we are starting to get a lot better at target marketing and you are going to see a lot more of that going forward from us. We look forward very much to seeing how we can market Snapshot discount, our usage-based rating broadly, and you shall see ads in targeted markets before the end of the year and hopefully again we are rolling that out big time next year.

Hope you’ve also gained an increasing appreciation of how we deploy our skill sets of analytics and segmentation skills online and really maximizing our spend. Hope you gained appreciation that we are getting better at retailing, so doing smart things online, and getting our call centers to get to the sale. In aggregate, you can see on the graph here, prospects or quotes are up, conversion is up a lot. Yes, average premium is down. This is for our Direct business. And I think you can see the trajectory on our new premium, new total premium is looking pretty good.

Turn it back now to Glenn.

Glenn Renwick

Great. Thank you. The – to me I hope the long term carry away is that the concept that John said marketing is starting to catch up with our math, and if we can get those sort of in sync, I think we’ve really got something that’s a very dimension of Progressive. I want to be conscious of leaving enough time for Q&A, so we’ll make sure that we get to that. Let me just say a couple of words on service that is critically important for us and this strengthens the relationship with our customers. Couple of points here.

The first one is really something that might seem a little different than strengthening relationships, but online transactions, it’s very clear to us, that’s what consumers want to do when the transaction is something that they feel comfortable doing. We’ve got to provide a great website for them to do that. Anything less than great gets customers annoyed. We are now actually at a point – that we’ve chosen not to put percentages on here, but I assure you that the – the lines represented there in terms of the number of transactions that consumers are doing for themselves online is a very high percentage of our transactions. And we see that going only in one direction.

So ultimately it gives us some opportunity to create leverage on our expenses. Clearly the mobile platform is you know steadily emerging, but they are going to be a big piece. This is not like we think that it will happen. What I find intriguing and this obviously very small numbers, but on the mobile application – with the iPhone application, it’s just the number of payments that people made on the iPhone in the first three months that we had the application available. We never told anybody you could. It’s just expected that you would have that sort of thing. So this is not even something today that you really have to market it all. When we make these things available, people will use them. That gives us a great deal of opportunity to be able to affect our policies in force per full time equivalent.

Just this earlier this week, we had a business review on a lot of these issues and we start to see not only the kinds of things that Jim talked about in terms of reducing that duplication taxes, we’ve moved our products together and have either servicing parameters for our folks, that’s an effective reduction in terms of the number of people we need. We are starting to talk about and already have implemented a fairly large standard, but we think we are getting even larger. The technology that is allowing our people to work from home, there is a lot of things that we can do. It’s not the subject of this discussion, but there is a lot of things that we can do to get those non-acquisition costs headed in the right direction.

The graph that we’ve actually shown you for a couple of years now on the right there cumulatively over three years that’s about, 27%-28% improvement in policies in force per FTE. And that for us is the fundamental measure of efficiency.

I include here something that I think has to be done in balance and that is sort of the service and cost slide. This is a derivative of some publicly available information. I think we have shared with you at different times in the past JD Power surveys about service and where Progressive was and a very strong intention for us to change that picture. And we have consistently move up and moved up more than any other single carrier, the middle [ph] is easiest to move up from where we were in the last five years than anyone. And now if we sort of plot service with cost, we come up – I am looking obviously at only the blue segment there for Progressive. We’ve actually been able to reduce cost slightly, but not with any trade-off at all in service. So that combination, that vector, that’s what we just want to see go even higher, and we have no reason to believe that the things we’ve got in store won't continue that trajectory. So lots of things happening there that are important.

Now if you read the wording on the last bullet point, it says reasonable integration. That might seem like a very weak word to use in your strategy. Let me give you some insight into exactly what that means. With multi-product households, John already talked about it, it wasn’t a big push. Now it’s becoming a bigger push as got more of the Wrights and the Robinsons in our book of business. We are starting to see something close to 10% of our policy holders actually have multiple products in the household, whether we are the original equipment manufacturer or not, in the case of homeowners we are not.

But we didn’t design Progressive around the household. We designed Progressive around the policy. Nothing wrong with that, but now we’ve got to start to take a household view. A household can have many policies. But that’s not the way our system work. So at first we say we’ll have reasonable integration with product within a household. We’ll make it work to test the use case, to test the business case; will people buy multiple products from us? Will the bundling of homeowners work?

Really good news. We think that use case is now being tested. The next iteration of this strategy will remove reasonable and put something closer to seamless integration, so when customers buy multiple products from us we will know all of their household products and be able to service them as a true household. We do a proxy for that today. We will have a version of household view in place later this year. But I think the important point is we didn’t necessarily test the systems before we tested whether consumers would expect Progressive as a multi-product offering. We believe they’ve accepted us a multi-product offering. Now we will build the systems to respond to that.

So on sales and in service it really strengths both relationships. There is a lot of things that give us the opportunity to continue on our cost curve. Just as we showed you in claims, we can reduce those costs, we can reduce them in the non-acquisition expense, but at the same time having those service vectors and from my perspective that’s the only combination that is acceptable to us is to make sure service is stronger, the branding kind of metrics that we are showing you clearly are important to use. We don’t ever want to see the spiral on that get reversed. It has to be a compounding. So it is a big part of our strategy, not necessary something that we’ll talk a great deal about, but it’s a very important part and continues to give us competitive advantage. And we think there is gas in the tank.

Let’s quickly go to the one more bullet point that we want to explode and push through that, broad distribution. Some things here haven’t changed for a long, long time with Progressive. The last bullet point, direct to consumer I think we’ve covered that a fair amount today. So, we are not going to talk more about that. But I have asked John Barbagallo who talked to the group in 2006 specifically around broad distribution and our agent distribution specifically to sort of give us an update on that and more importantly some of the things he is thinking about with preferred agency distributors.

John Barbagallo

Thank you, Glenn. When you talk about broad distribution as an element of strategy, certainly broad distribution through independent agents has been a key element of Progressive’s strategy for a long time and continues to be. We chose to work with more than 38,000 independent agents around the country. Now we recognize many of our competitors chose to work with fewer agents. In some cases substantially fewer agents. But we like the broad distribution reach this gives us. In fact, it gives us more local distribution outlets for our insurance products than State Farm and Allstate have combined.

Through that broad distribution reach we have been able to garner significant share within the channel across a number of lines of business from monocline personal auto to motorcycle on our special lines products, and our commercial auto products as well. Now, these lines of business are important to our agents and their customers, but they are not necessarily core lines of business in many of these agencies. Nor is Progressive necessarily a lead market in many of those 38,000 agencies. Nonetheless, through broad distribution we’ve been able to garner a not insignificant share of packaged personal auto, which is a key line of business for many of these agencies. Now when I say packaged auto, I am talking about auto insurance customers that own homes and typically require other personal lines coverages. So think of the Wrights and the Robinsons from Glenn’s earlier slide.

We are talk a little bit more about packaged auto in a minute. Now, I had the opportunity to address this audience or a similar audience a few years ago. And at that time I shared some of the key elements I believe are necessary to effectively support broad distribution. Things like technology that works for agents, great customer service, and a respected company brand. And at that time I shared Progressive’s relative strength on these attributes versus some of our key competitors in the channel. Today, I can tell you that in all cases we’ve either maintained that strength or in a few cases built upon it, which is the case with respect to consumer brand.

Now a couple of things have grown more important in the channel over the last few years. One of those things is brand. Strong consumer brands are now more valuable than ever to independent agents. In my role I get to talk to agents all the time. In fact I am going to be meeting with a group of them after this meeting this morning. And one of the recurrent themes in those conversation, particularly for personal lines of business is that the old methods of generating new business prospects simply aren’t working nearly as well as they once did. And increasingly agents are looking to their companies to help them market their agencies and provide them with strong brands that attract and retain customers. I think Progressive has a distinct position in the channel as a company with proven consumer marketing skills and the most recognizable consumer brand in the channel.

Another thing that’s changed in the channel and we’ve touched on this a few times already is the influence of technology in the placement of business. And what we are talking about here are real time comparative raters. When I spoke to this group a few years ago, I talked about the accelerating adoption of this technology in the channel, what the implications for that would be. Well that adoption is largely happening. Today, comparative raters are the primary source of personal auto quotes in the channel. That’s certainly true for Progressive.

I also talked at that time about the importance in this kind of a rating environment of having accurate rates and really good price segmentation. So you don’t get clobbered by the kind of adverse selection, Jim Haas described earlier in his example. Hopefully, Jim this morning gave you some sense of the level of intensity we bring to that activity everyday because it is very, very important.

But beyond all that, comparative raters have created opportunity for Progressive. Opportunity in the form of many more quotes per agency. And it’s particularly true of preferred auto quotes, which is depicted by the orange line in the graph in the lower left. Today, when I talk about preferred auto, you can apply the following general definition.

Preferred auto customer is a customer who owns a home, has maintained continuous insurance, and has a generally clean driving record. So, no major violations and no individual drive on the policy with multiple minor violations. So comparative rating is creating lots of opportunity for Progressive. And to fully capitalize on that opportunity, we have had to adapt. We’ve had to adapt this new agent technology. And the way we’ve adapted by applying the online retailing skills, we have learned and developed in our direct business through this agent application. Now, we don’t own this application, we don’t necessarily control this application.

So what this has taken is a fairly intense level of relationship management, working with the providers of comparative rating to ensure that their quote flows capture all of our relevant rating information and identify and apply all applicable discounts that we present our most competitive rate every time. By working with the providers in this way, we have been able to consistently drive up our relative conversion on comparative raters over time. So, more quoting opportunities, higher conversion means more business.

Here you see our growth in preferred auto applications over time. And the dark line, you see steady sustained growth in preferred auto policies in force. That last point is particularly significant to Progressive when you consider the much longer policy retention and the lower associated cost of this preferred business. Sustained growth and preferred auto can materially change Progressive’s competitive position in the channel. And in fact, preferred auto represents Progressive’s greatest opportunity to grow with independent agents.

All right. This is kind of a busy chart, but what I want to do here is share with you the auto premium distribution by channel that’s on the left and Progressive’s estimate of how that premium breaks out between package customers and monoline customers. And I’ll call your attention to the middle box, which is the independent agent channel.

Now, what I’m doing here is I’m using packaged auto, those customers that own homes and typically require other coverages at a reasonable proxy for preferred auto. Now you have to apply the additional filters of driving records and continuous insurance. So the numbers would change a little bit, but the point remains the same. The independent agent channel is relatively rich in preferred auto, and our share of that is relatively modest at a little bit over 5%. We compare that to a greater than 20% share on the monoline auto. So our opportunity – our headroom here is significant. We can grow.

The last point on this chart is on the right. And that’s the fact that this auto premium in the channel is not necessarily evenly distributed across all agents. And in fact, a lot of this auto premium today is controlled by agents where Progressive has not historically been well penetrated. So that’s our challenge. How do we grow preferred auto with the right agents? What’s that going to take?

Let’s kind of take these two things. One, we’re going to need to fill out our product suite so that we can meet the needs of preferred customers. I think we are doing that. Secondly, we are going to need to deliver more value to those agents that can and will partner with Progressive on preferred auto.

Let’s talk about filling up the product suite first. So, Glenn and John have already touched on our activities around Progressive Home Advantage. I’m happy to tell you today that Progressive Home Advantage is gaining real traction with independent agents. Here I share with you growth in weekly homeowner sales with our agents. Now, admittedly, this growth is on a relatively small base of business. But we are converting more agents every week.

Agents that are presenting Progressive Home Advantage and Progressive Auto have a lead market for their preferred customers. To use (inaudible) we’ve proven the use case. We’re on our way to proving the use case within the channel. Now it’s time for us to make the investment and improving the agent experience – experience of quoting, selling and servicing homeowners with Progressive and achieving that reasonable product integration.

We are comfortable making that investment because Progressive Home Advantage in the agent channel is starting to deliver the desired business outcomes. First, we are creating true bundled customers. We’ve only been at this for a very short while, already about 7% of our preferred auto customers in the agent channel having associated homeowners’ policy, and that number will grow. Those agents are early adopter agents that have really engaged with Progressive Home Advantage actually have a higher percentage of true bundled policies. So we’re getting the bundled customer.

Second objective of Progressive Home Advantage was to stimulate auto growth overall and preferred auto growth in the channel. And there too, we are making progress. Agents that have engaged with Progressive Home Advantage, and by that I mean agents that sell two or more homeowner policies a month, have substantially higher preferred auto growth. Even though as I’ve already told you, preferred auto growth in the channel is up across the broad distribution.

Specifically, those agents that have engaged are producing substantially more preferred auto policies per agency. Now, the number of engaged agents at this point is relatively low. A little less than 2% of our agents in space of Progressive Home Advantage fit that definition. But the leverage with those agents is substantial. The key for us is how do we engage more agents.

One important way we are going to engage them is through our Signature Agent Program. Signature Agent is a program design to those agents that can and will partner with us on preferred auto. Signature Agent is a program we piloted in 2009 and are rolling out countrywide right now. The basis of Signature Agent is to provide those agents with more value and more benefits.

Signature Agents will have access to the full product portfolio, including Home and Umbrella. Signature Agents will receive marketing support from Progressive, financial support, and support in terms of access to Progressive experts in the areas of advertising, media buying, online marketing, and public relations management. And Signature Agents will be paid higher commission on preferred auto business.

Now, paying these agents more commission on preferred auto, will that materially change Progressive’s agent commission expense line? In the short-term, the answer is no. We do not anticipate a material change in commission expense. Over time, as more agents choose to partner with us and make Progressive a lead market for preferred customers and this program grows, yes, we will see upward pressure on commission. I would also anticipate we will see some offsetting cost reductions, including lost costs as we assume the position of a lead market with more and more agencies.

Anyway, we will monitor our results and we will adjust our pricing accordingly to ensure we make our targets. To ensure that our Signature Agents are successful, we are committed to focus account development planning. This means taking our high touch, high involvement sales resources, working side-by-side with our Signature Agents to build marketing plans and budgets; marketing plans that utilize proven Progressive brand assets in print, radio, and particularly online; marketing plans that will be coordinated with Progressive’s media plans, national media plans and local plans, to ensure we maximize the impact of these agents’ investment.

In summary, Progressive remains committed to broad distribution through independent agents. We will continue to deliver value with products that are competitive and easy to use with great agent technology and excellent agent customer services. Beyond that, we are now committed to developing a core group of agency partners, preferred auto partners, partners that will be supported by more products, better compensation, and much stronger brand ties.

Glenn Renwick

Good. We just put that out of way from turning it over to you for Q&A. Let’s – I'm just going to make two very quick points here. I sometimes put on restriction that I’m not supposed to talk too much about technology because I kind of like it. But there are two points that I want to make. First of all, we are actually able to get some scale leverage.

I think we’ve perhaps maybe even gotten to a place that we needed to be correct, but our intent here, just as it has been in claims and servicing, just to get scale leverage on our technology costs. The most products that’s less about cutting back, it’s just working on the right things. That’s the third bullet point at making sure we have a government system that we are working on the right things all the time. There are lots of things we can do in technology, sure you know that. The question is, pick them wisely.

The second, really intellectual architecture is one that doesn’t sort of lend itself to a discussion too much here. But we want to have an architecture that allows us in the future not to be necessarily dependent on developing every application that we need. I think in the history we’ve generally developed what we needed ourselves.

We will continue to do that, but we are going to have to make sure that we have an architecture that allows us to take into account anything, perhaps develop elsewhere, cloud computing, ASI, whatever might make sense to us because architecture is all about speed to market. And we’ve got to be able to make sure our technology speed to market matches our ideas and innovation within the company. So things are good on technology.

I think there are opportunities in pricing, and the architecture will be a long-term and consistent commitment. There is never one architecture that we can say at certain time for any period of time, but it’s all about speed to market and we’re redirecting our IT resources there. And I’d just tell you, so far, so good. No real issues.

Let me sort of bring this to a close, but frankly on the one topic, I think it’s the most important. We even tell a little differently on your handout. It seems simple really, doesn’t it? We charge premiums and pay some claims. How difficult can this business be? It’s all in the details. We have money, and we have people. Well, money is not that pretty fungible, but people are.

And the culture that we try very hard to create Progressive is really what makes everything else work and possible. That didn’t add up. But I think it’s a 100 years of experience here and we are all really young people. So we tend to want to stay at the company. I think that’s also true of a lot of other people. So these statements here, while sort of nice, they really are important. I wish I had a better way of describing what the culture really is and can be at Progressive. But the foundation of our core values, which clearly is also not only on your handout but will be on almost everything, is incredibly important to us.

The one thing that’s very interesting, and this is tough for sort of a math engineer to sit talking about brand implications is the first bullet point. The core values combined with people who are becoming brand ambassadors. I talked a little bit in the annual report about what I believe to be the congruence of our external brand and our internal brand.

I think for us, the breakthrough in our branding efforts that we started to actually just display ourselves, Flo is just an idealized Progressive employee. She is a Progressive employee. Don’t worry about the hairdo, don’t worry about the lipstick. It’s what she represents. And Progressive people really get that – really get that. I have the opportunity to spend a lot of time with different groups, and they can spin off the brand characteristics that you might expect an advertising agency to come up with, but they are natural because we’ve got a great role model for who we are and what we represent to the public.

I can actually prove that point because I’ve done enough survey to know that I don’t know the specific answer, but I bet you with I’m close. We have about 20,000 people that are customer-facing that will talk to customers today. I will estimate 10,000 to 15,000 of them will be us, at least once today, do you know Flo? Which in some sense is a really powerful notion because the consumer is recognizing that Flo is just one of us. We, of course, have to turn that around. We have to be Flo without the hairdo and lipstick. And that’s a hugely important notion and has added to be constructed, our culture built on values to really make us brand ambassadors. It’s a little story just because I’m proud of it.

We obviously named the stadium in Cleveland, Progressive Field, and as a result, we get to do something special for opening day in place and hold the flag and do some things at the stadium. Well, to do that, the – let's say we got a few more employees that could reasonably hold the flag in the stadium. So they actually apply for that privilege by writing a small essay as to why they feel that they are brand ambassadors for Progressive. No obligation to do that.

I think this year something like 7,000 people just submitted a small essay just to sort of do something like that. So for me, it’s really about can you have this culture that is sort of building momentum all the time, but doing the right things. I would tell you that maybe from all the things we have talked about today, even though that’s the least able to be described, it may be the most powerful thing that’s happening at Progressive.

This is where I think we are. I hope that the little handout, which I didn’t cover the first couple of panels even though they are most important, I think you know those very well, our aspiration to be a company that really does provide a distinctive service to consumers at competitive prices. Our brand is supporting that. All of the key activities on that page, that’s what we do. If it’s not on that page, we are probably not working on it. But those words have some real depth to them.

And maybe more importantly than all of that, I think I can be very basic at times, and I read recently. I figure exactly where I read it. But I think what that does for us, and I hope maybe to communicate to you today, the statement I read was, “The main thing is that the main thing is the main thing.” What you’ve got there is the main thing for Progressive, and we’ve told a lot of stories over a decade. I think we’ve got a lot of intensity around execution.

The strategy doesn’t change year-over-year. It just molds and modifies through our towns where we are. The intensity of execution on different pieces becomes a real powerful notion. And obviously I’m very proud of Progressive, but I think it’s showing up on the results. And ultimately that’s where we have to make the dollar counts and it seems good so far. So hopefully, we will see you again next year, but we will take an arrow of Q&A now. And give us just a second while we move some chairs.

In your package, you have a white card at the end with some that you will see in with a Q on it. We don’t see you as well as you see us with the lights. So if you would hold them up, someone will come with a microphone. It is important that we get the mike there because there are people listening on the webcast. So let’s try to wait till microphone comes. We’ll be able to hear you a lot better as well.

Question-and-Answer Session

Jay Gelb – Barclays Capital

Thank you. Jay Gelb from Barclays Capital. I have two questions. First, can you talk about what potential issues there could be from a customer perspective on issues of privacy and trust when it comes to usage based pricing. How do you get more comfortable with doing that? And then also looking at some of the data in the appendix, it looks like personal injury protection, lost cost trends are deteriorating. Maybe you could talk a bit about that? And perhaps overall, with a nationalized healthcare system now, does that mean that healthcare costs are going to get pushed into the non-managed aspects of healthcare like auto insurance?

Glenn Renwick

Could you just say the last sentence?

Jay Gelb – Barclays Capital

With nationalized healthcare, is there a potential for overall healthcare cost to get pushed more into the non-nationalized healthcare aspects of – like auto insurance or workers’ compensation? I know you are not involved there.

Glenn Renwick

Right. Let me take a shot at the usage base, and John I think can add to it. The design that John – and clearly he promised that by saying this is our thinking, so we’ve given you something that’s a little bit forward-looking. We’re excited about that, but the real notion there was, we know usage base is good. We’ve got the map. That’s not a surprise. We’ve been on that for a long, long time. The marketing was a sense of how do you make meaningful trade-offs, meaningful to the consumer and more than acceptable from a data integrity perspective. So the snapshot that John outlined was that the data collection period would be finite. That goes directly to one of the detractors of the service, and we don’t have to go far to imagine that people don’t necessarily like being continuously monitored.

You can always come up with some scheme of why someone else would be doing that, right, wrong, or indifferent. And of course, we have no interest in anything else other than auto insurance. But the fact that we can – I'm going to be a little careful with my words here. We can extract a great deal, and I mean, great deal of the knowledge that we need to create pure premium determinations within the time period that was selected. We are also, just assume, quite knowledgeable that many of you right now are thinking, gee, I could behave for that long. We are also quite good at discerning true behavior from behavior that may not be reproduced. So you can’t do these things unless you really have a lot of data and some good theories on what might be going on.

So perhaps the first 10 days of driving may not be very indicative, but nonetheless those are some trade-offs that we make. And that trade-off directly speaks to those, and it was a fairly number of people who said, “I reject the notion because I don’t want to be monitored.” Couple that with the factor the cost of this device. So now, instead of having a permanent device in the vehicle, we actually get multiple turns on that piece of inventory. So that changes the cost – the fixed cost and actually reduces it because we will literally get to use that same device. So the question is, are there true curves here of marginal return for information against marginal cost? So the design that John has outlined and I suspect quite frankly we will probably have tweaks for that for some time to come. It’s really designed to address consumer needs that we know people want.

They want to feel like, hey, we know you and you are driving better than maybe a current insurer and we reward you for it. That’s not a problem for the consumer. They are willing to take that. And here, if we structure it as a discount, and normally a discount can be given at the time of purchase, so this is a little bit strange. Now it is a – it will be an observed discount into the term. But it also has given you the opportunity to do no work than you would have done in the initial quote. So it was actually very directly at taking there is more to it than that, I’m just hitting the high ones. Here are the things that were attractive, here are the things that were detractive, here are the acceptable data integrity trade-offs that we can make, here are the economics on the turn on the technology. And we try to put that in a way consumers understand discounts.

John Sauerland

So Glenn clearly said, we’ve done the starting around the product design and tried to encapsulate preferences and detractions into that design for sure. We also watch and do our own surveying around consumer attitudes towards usage base or pay-as-you-drive. And what we see is that more and more consumers are aware of that as an option, and more and more consumers are willing to consider that as an option. So those trends have been pretty market lately. So we feel great about that. Another key factor that I want to make sure everyone understands is that location is not part of our rating algorithm here. And if you ask consumers about usage based rating and you talk about how they drive and how much, they are all good with that. The one point where you lose a lot of them is if you then start talking about locations. So we have explicitly not concluded location in the design.

Glenn Renwick

To your second question – there are two questions, so I’ll hit the second. I think it was last year that – maybe it was I, it could have been anyone else, commented that we were starting to see and clearly we were concerned that there would be a shift of medical costs from medical insurers to auto insurers. Simple example for those who didn’t hear that. You go to the emergency room, perhaps it’s a $4,000 bill and just make out the numbers. Are you insured? Yes, I’m insured. And you give the name of your health insurer, Aetna, United Health, whatever it might be. Then they suffocate us because they ultimately determine some auto claim, perfectly valid to do so. We pay them $4,000. Cost shifting occurs when you go to the same emergency room and they say, was this an auto accident? Yes. Who is your auto insurer? And now the bill is something other than $4,000 because we simply don’t have those negotiated rates at that level.

So there is a very clear sort of (inaudible) and that doesn’t work in this case. There is actually a premium created. So – and we will pay those costs, and that’s very important for us to make sure that we are very, very nimble and responding to those cost shifts. And that’s same as the driver of all PIP. And in fact, there are many other drivers of PIP. But a year later, I can tell you, we are absolutely seeing that and that we will have to be very much on top of that trend. I gave you the appendix there on frequency and severity. That clearly is a severity trend. It could relate to almost all coverages, BI, UMBI, and PIP. We’ll have to be right on top of that because I think that is a very important severity trend. I think there are other trends that will likely affect.

This is to extend your question a little bit. I think there could be very significant frequency trends as well. We’re seeing changes in the licensing behavior of youthfuls [ph]. In fact, youthful is now at the age of 16, 17, 18, 19, about 20% less being licensed at the same age than they were only a few years ago. So we think that’s reflective of taxing environment or whatever it is. It’s actually a lower licensing rate of youthfuls. That could have an effect on frequency. I can speak to my household. I don’t go to shops very often. My shop is a big brown truck that comes down the drive with things that I need, and that changes your frequency. And I talked about work from home. So there will be some very clear frequency drivers and severity drivers that on most occasions, I tell you, I ask frank that’s really making sure that we are not trying to necessarily predict the trend, but be able to capture it in our analysis as quickly as possible. But I do think we are going to see cost drivers, and PIP will probably be the most obvious coverage for that to come through quickly.

Vinay Misquith – Credit Suisse

Hi. Vinay Misquith, Credit Suisse. Two questions. One is a follow-up on the uses job based on – if you could clarity whether the purpose is to collect data or to increase sales? And also associated with that, if you actually realize that a driver is a worse driver than you thought, you’ve already locked in the discount and the discount remains at six months off of the policy. So how do you sort of walk around that to just maintain profitability? The second question is more for trade-off between short-term and the long-term. What incentives do the managers at Progressive have to keep the combined ratio below 96? You’ve had lower than 96 combined ratio for a long, long time. And the trade-off I guess between growth – long-term growth and exactly maximum profitability. So how do you balance those two?

Glenn Renwick

So on a usage base, I can make it very clear. We like data a lot. We like premium more. So it’s actually about sales. We have done a lot of data collection over the years. And as we’ve said, we think we have the math really, really well outlined and in a form again that we can use in a broad manner. So your second part of that question was around what do we do with the people who don’t drive well. And those folks will pay our normal rate. So when we say an up to 30% discount, your discount is derived from the driving behavior first within the 30 days and then for the duration of the six months term. And as we just discussed in the previous question, we don’t believe you can behave well for six months. We think six months for sure is highly representative of your driving behavior. We wouldn’t rollout potentially the prospects of re-sampling, if you will, sometime down the road, if we think situations have changed materially, but we’re pretty confident we’re working out the price right after the six months.

Vinay Misquith – Credit Suisse

I’m sorry. The pricing always be lower than the pricing you had before. So –

Glenn Renwick

No, it could be the same. So – it's up to 30% discount. You will get a discount based on your driving behavior or you will get no discount. And so if you are a poor driver, you will not get a discount –

Jim Haas

As it relates to the incentive question, well, certainly same objectives, personal objectives that most folks in the private management roles, control roles et cetera. It would be part and parcel of that. But for all of Progressive employees, it is in the construct of our variable compensation program, the gain share program that is a measure of growth and profitability. And certainly, if we were to go over our objectives of 96 combined ratio and it’s even done at each individual business units, there are functions constructed in gain share programs to discourage that.

Vinay Misquith – Credit Suisse

My view was more towards – I mean, you could do 91, closer to 96. And what incentive do you have maybe to a 91 and make a lot of money for the company? Was it – first quarter, 94 and then – maybe 1% more growth, probably you’d be making much more money in 91. So what incentive short-term versus long-term?

Jim Haas

Feel free to tell – I'll go back to the gain share program that’s also designed. It’s a profitable growth. And remember, last year, we had pretty good profit margins where our gain share score wasn’t high – super high. It was 0.71. That’s because we weren’t achieving the growth that we expect of ourselves. And so the gain share program tries to put a balance plan between growth and profitability. And obviously this year we are much more pleased with the growth we’ve achieved this year. Combined ratio is actually a little bit higher than last year. But we’re pleased with that growth of the trade-off.

Glenn Renwick

No. We understand the question. I mean, we understand the question very well. What’s really important is to know what your objective function is. If it’s sort of all over the place, very high in large corporations like that. So we have essentially a series of indifference curves in our gain share. So I will take 91. But it depends on growth rate. 91 at a low growth rate versus a 94 at a higher growth rate. Then that’s where we expressed – and no, we’re not going to give it to you if that’s a follow-up question. That’s where we expressed our management preferences in the ordered pair of profit and growth. And it doesn’t have to be too magical. We’re not going to share that. But it comes directly from the annual report. First, 96 or below, and then grow as fast as possible. It’s important to get that order right. So yes, we will – as long as live below 96, we’re going to favor growth.

John Sauerland

Just to make sure you’re aware, if you read our releases and sort of the filings, we also have a long-term incentive plan. So the annual gain shares (inaudible) the dividend from, but then there is also for senior managers at the company long-term incentives for growing faster than one.

Vinay Misquith – Credit Suisse

Thank you.

Ian Gutterman – Adage Capital

Hi. Ian Gutterman, Adage Capital. I want to go back to the segmentation that A, B charts. I guess it seems to me like it’s a big percentage to making them. Isn’t it? I mean, if you only have A and B, and B can under-price – can lower the price and still make the same profit or greater profit, obviously (inaudible) they should do so, you’ve brought down the profitability of the system, right? Before the average revenue was $1,000 per customer, now it’s $500. You have half the market under-priced at a $1,000, half fairly priced to $800. So it’s lower profitability of the system although the individual company makes us to do it.

And I guess my question is – things aren’t that simple, right? I mean, historically so far we’ve seen it play out that way where there is this ability of cherry-pick, and it’s been good to go that route. But I guess over time, as more and more companies do segmentation, and not everyone is going to do it as well, some are going to make mistakes. And maybe they take that $800 customer and think the pricing at rate of $700. Right? And then the company B gets no customers. We have an entire market that’s under-priced, half at a $1,000 that should be $1,200, half at $700 that should be $800, and all I’ve done is getting away industry profits. So why is segmentation in the long-term not going to be winners first?

John Sauerland

Make sure you first agree that the lost costs of the system are constant. Right?

Ian Gutterman – Adage Capital


John Sauerland

So just because somebody went to $800 doesn’t mean those people – that the system in aggregate has lower cost. So we have cost we have to – as a set off companies have to cover. That’s the marketplace. Right? So the point we’re trying to make is if you can get the competitor to go to $700, yes, we won’t write that risk. But they are going to choke on that in a pretty short period because they are going to be losing money. And if they don’t know they are choking on that, they then have to increase their overall rate level because they don’t understand the segmentation that needs to happen in order to be priced adequately by segment. So yes, there could be short-term dislocation – maybe not the right word. But in the long-term, as long as we think our prices are more accurately aligned with lost costs, we are okay with that happening because that puts the competitors in a worse position.

Ian Gutterman – Adage Capital

True. But doesn’t that make your hardship growing (inaudible) of an environment where industry profit is coming down over time because of what we described, doesn’t that imply that the smarter people are actually going to lose market share because there is always going to be someone who is – again, the winners is going to be someone who comes along with a lower price if it isn’t a good price where last five or eight years we’ve had the lower price has actually been the right price.

John Sauerland

If you again assume the lost cost of the systems are the same and you assume that the industry pricing target remains the same, then there will be winners and losers for sure. But in aggregate, I don’t think we will describe it happens. So – there are timing differences there though and that could be challenging. We have seen companies knowingly or unknowingly pricing segments below cost at a time – given time, that shows through, and then those prices end up.

Glenn Renwick

The other thing I’d add is a lot of the segmentations talk about lost costs. So even if we all have the same lost costs and price is exactly same, one of the reasons we believe a low-cost strategy works is so that the end price to consumer is lower. So that’s why we focus on the efficiency of our own internal cost. We all have the same lost cost and do at the same, but we have a lower cost pressure. We will get those risks, accurately priced, and we have profit objectives. So that’s why I also want to share – there is lots of focus on expense structure as well that gets incorporated in that pricing.

Ian Gutterman – Adage Capital

Okay, fair enough.

Glenn Renwick

We like our position that way.

Ian Gutterman – Adage Capital

That makes sense. And then just one quick follow-up for you, Brian, is – the slide where you showed the 97% in direct for Q1, how does that compare to what you should report in the financials in the monthly releases of like 94, 95?

Brian Domeck

Right. In our monthly release, we report agency and direct personalized, which would include both personal auto as well as our special lines products like motorcycle, RVs et cetera. And so that would also be included in those numbers.

Ian Gutterman – Adage Capital

Okay. So you’re sure that 97 was just auto?

Brian Domeck

That was just auto.

Ian Gutterman – Adage Capital

Got it. Thank you.

Glenn Renwick

Just one build on that. Let’s just assume for right now, I think you get this, (inaudible) made a big deal out of it, like make sure there is no ambiguity. Brian and I are otherwise indistinguishable, got the same characteristics, we’re in the same neighborhood, same age, whatever it might be. Uses based product might very well determine that there is a distinction between our guiding behavior, one that a company is willing to recognize. Jim made the point. They may not even know that there is a difference in red versus blue.

So the costs of the company (inaudible) Brian, I’ll make them the better driver at this point in time. It will be just fine. In fact, they now are able to offer him a product that actually is to his best advantage, but they are making good profit margin. I, on the other hand, just lost a company – a customer that was providing you a subsidy. So I have to work my prices up, but I don’t really know why I’m doing it. What happened to it? And yes, you’re right. The profit never works out perfectively at all points in time. From a pure gain theory point of view, if we have a profit margin that we’re targeting, we can attract more customers and meet that. That’s what our commitment is –

Unidentified Company Speaker

We have a clarifying question from the web. If I get a new vehicle, does my snapshot data roll over to my new vehicle?

John Sauerland

You are – that's a good question. So we are deriving the data based on a vehicle, and if you change out a vehicle in the near-term, we will allow that similar discount to apply.

Brian Meredith – UBS

Thanks. Brian Meredith, UBS. Two questions for you. First, could you talk a little bit about the economics of the homeowners business? The bundling package discounts, is it the third-party homeowners provider that’s leading that or are you leading it in the auto rate? Also, are you getting any commissions or fees right now in the homeowners business? And then going forward, as you advertise this homeowners business, are you anticipating you may actually try to get a commission fee from the third-party provider?

Glenn Renwick

Let’s reinforce the reasons that we’re in that business –

John Sauerland

Sure. You asked a lot of questions in there. But in short, I’ll tell you our ultimate intention in providing the home, whatever we provided is to continue to grow and retain product. And to date, growth has happened a lot in that segment. I point out – it is important to note that the majority of people to whom we sell Progressive Home Advantage are current customers. So we are starting to try to attract the bundled households, but today it has been a tool predominantly that has allowed us to not lose it. So Glenn talked about being the training mills, if you will, for a consumer.

Historically, that’s been our positioning. We were there at the start. And once people got married and maybe bought a home, they had been historically sought other insurance needs and the auto ultimately fell. So today, instead of that happening, we can have that conversation to say, we can meet that need as well. Beyond price, where we survey people who leave Progressive consumer and beyond price, the second biggest reason is because I want a bundle. But we are trying to eliminate that as a reason. And in terms of structurally how we accomplished that, we mentioned getting a commission around Home Advantage, if we sell the Home Advantage program to a direct customer, there is a commission involved. So there is a revenue stream there. If our agents sell the Home Advantage program, they receive that commission. But – and those are becoming somewhat significant numbers.

But again, I want to stress, that is not why we are in that business and that’s not why we deployed this approach. And I’d also say we’re going to invest significantly in, what Glenn told you was, sort of the household view. So our customer service reps and, to some degree, our agents as well today don’t have the household perspective going to talking to a consumer. So we can have sold them multiple products, but our systems today aren’t set up well enough so that the rep can have a meaningful discussion about real household needs as opposed to just the policy. And then some pilots where we have systems in place now where we can provide that view, and when you give the customer service rep that view, cross-sell rate goes up markedly. When you can provide that rep the ability to sell immediately the other products, cross-sell rates go up even more. So we think we’ve got a lot of opportunity to again sell a lot more auto, but also retain a lot more.

Brian Meredith – UBS

And then my second question is, could you talk about the relationship between ADC and the direct business from a profitability standpoint? And for instance, you’re willing to take your direct distribution combined ratios above 96 obviously if there are some great growth opportunities, that obviously means that your agency and other products have to be below 96 combined ratio. So how do you kind of think about that if you have that great growth opportunities in direct distribution segment? Are you going to start raising prices on the agency and try to improve profitability to get better combined ratios there?

Brian Domeck

As it relates to the agency channel, we are continuing to price that at a 96 combined ratio. So, four points or so in terms of profit margin. So we are not intending to sort of have a greater margin there that (inaudible) growth in the direct channel. And in fact, our other products, commercial, auto, and special lines, actually do have slightly lower calendar year combined ratios than that 96. So that factors into the equation. But the intent is not to have agencies subsidized (inaudible). We want to grow agency as much as possible relative to a 96 calendar year combined ratio than the agency can.

Glenn Renwick

I think the big point we are trying to make there is there is the lifetime combined ratio and calendar. And we saw, even though we are running direct auto at a 97 calendar, we’re telling you we’re below 96.

Brian Meredith – UBS

But would you have to cut back on potentially growth in the direct distribution of also in the commercial auto, seeing lost cost inflation sort of pick up there something and profitability starts coming less so. I mean –

John Barbagallo

There is always a combination of math that we outgrow that you could say, yes. I mean, Brian said it very clearly. There is a couple of constraints. And the one that’s not moving is our common shareholders. It’s calendar year, 96 for the entire company. But we also wanted to be very clear about – that could create. We talked about this in 1999. It was just a little early. It wasn’t ready for primetime then, that in direct, it’s just a slightly different animal and we’ll try to make sure that we’ve got it exactly what that means. But the commercial and the special lines products, we absolutely run those at targets that we think are appropriate. They give us enough room for the subsidy effect that you are trying to sentimentally [ph] get through. It’s – the math actually works out without big swings.

And just to answer that special areas – special lines, it’s quite variable through the course of the year in terms of its combined ratio. And so you need to watch that from a calendar perspective. For those that join us on the conference call, it’s absolutely fair game to ask, could you tell us more about that number, and because as I said earlier, not all 96s or 97s are created equal. So we’re more than happy to do that. We wanted to try and provide the first introduction in the annual report letter. This is a bit more of a briefing. In this case, all quickly answer those questions unless we are all coming from a simple point of view.

Unidentified Analyst

Pardon me. If I can quickly follow up on Brian’s question, has there ever been a case when the overall 96% calendar year combined ratio has constrained growth in direct?

Glenn Renwick

Where it’s constrained growth in direct?

Unidentified Analyst


Glenn Renwick

Not recently, no.

Unidentified Analyst

Okay. And I guess my second question, Jim did a good job of describing the increased convexity of the segmentation curve, if you will. Has the gap between Progressive’s convexity and whatever the external market is, has that been increasing or shrinking in recent years?

Glenn Renwick

It’s been increasing there a lot. I don’t know. Unfortunately – we don’t know. I mean, that’s a very hard thing on – I think what Jim was really giving you is a construct that would allow you to sort of understand what we’re really trying to do. And that’s very reflective of our internal process. But to suggest that we know somebody else’s curve and could measure the deltas, probably the best we could do is it would take a lot of work to reengineer sort of their formulas and then there is some sort of adverse square – delta between the premium and what we actually charge. But that’s probably not something that any of us are actually going to spend a lot of time doing. We have to be relative to our costs, not relative to somebody else’s costs.

Matt Heimermann – JP Morgan

Hi. Matt Heimermann, JP Morgan. Two questions. First, on the usage rating, is there a particular customer segment that you think this will appeal to? And secondly, when you look at the increments in retention over the last several years, can you maybe speak to what factors are driving that? How much of that might be mix? How much of that might be relative price stability? How much of that might be – I had a bunch of things written down, but I can’t find on the page now. Product changes, discounts, et cetera?

John Sauerland

So we think such a discount product design is actually appealing to a broad set of consumers. In the MyRate product design that we’ve been deploying for quite some time and know that we took a lot of 2009 to test a lot of those different product attributes that we’ve been adjusting across all consumers to understand what was the – what were the detractors and the attributes that increase propensity. So we think the snapshot can be broadly appealing to virtually all customers. I did target that from MyRate, so when you do add the two new studies around who is interested in usage base rating, the segment that we were focused on was urban folks. So for those consumers, they are a little more (inaudible) willing to understand what you are talking about and the financial gains for taking part in such program because they pay higher insurance rates is great.

Glenn Renwick

On a retention basis, we understand the question. We have a very clear view of mix versus other actions. I’m not going to share that. We do understand the sort of the nature of some extra kind of issues. With regard to the actions, (inaudible) actions, unfortunately while each of them we tend to test sort of a single variate model and get some degree of response. Once you put them together, and of course we clearly want to put them together, we really got a multi-variate environment where it’s very hard to know exactly what contributes to what. So things like rate stabilization, yes, we think it works, so we wouldn’t do it.

Some of the things that we used in an example of the net promoter score as a diagnostic where we actually recognize some electronic funds transfer issues in terms of our payment schemes and how that detected retention we’re going to put those in. But ultimately, it’s the sort of things we want to do all of them. But the absolute contribution of any of them gets a little harder to determine. The – perhaps even more pleasing but complicating factor is that I would tell you that brand has a level of stickiness to it, as there are effects in conversion and retention that probably don’t relate directly to some of our actions, but are strengthening simply because the brand is strengthening.

Unidentified Analyst

Thanks. Just a question on MyRate, is it an agency or direct product primarily? And if your customer – do you have to change all of your cards at the same time if you have several cards? And then just to pick up on a previous point, if you’re a really bad driver during this test period and you don’t raise the rate like you said it would be a discount, but you’re not going to give somebody an additional premium, would you note that information as a renewal period or would you reflect that next time? Thanks.

John Sauerland

Good question. We are offering the MyRate program today in direct and agency channels. It isn’t in both channels and necessarily the state in which it’s offered, but it is in both channels. So you can opt into MyRate or in future snapshot, this kind of a vehicle level. So you need not have all your vehicles on the policy participating. And if you know you are a significantly worse driver, you will pay our normal rate even at renewal.

Unidentified Analyst

And then on the discount, if you are a homeowner and you take a discount as part of MyRate, does that interact with the bundled discount on the advantage side?

John Sauerland

We have a lot of different rating variables. Homeownership would be one. And if you bundle, you get additional discounts with Progressive. And in terms of interactions with our MyRate or snapshot discount rating methodology, today there are interactions – Jim Haas, correct me if I’m wrong – by customer segment, if you will. Let’s generalize and say youthfuls versus more mature drivers. So if you are better or worse than average as a youthful, your driving behavior looks significantly different than better or worse than average if you are an insured adult. So we are interacting with some of those variables. I don’t believe specifically we’re interacting with homeowner. But you clearly get a homeowner’s discount if you’re a homeowner. If you bundle with Progressive, you get an incremental discount. But I don’t believe we are interacting there with youthful.

Unidentified Analyst

Thank you.

Glenn Renwick

Just a minor follow-up to your question, we are very aware of sort of the idea (inaudible) for others. Most of the people who come to shop for us obviously currently have somebody else’s insurance, which is good from our perspective. And ultimately the number of people that we give discounts to, being offset by those that are at current rates, probably not going to start swing the balance of any quick or immediate time period. But there will be a re-normalization over time, just as it was with credit. But the prior question – or maybe the first question, the idea of saying to a consumer, could we really have a neat tool? Let us take a look at your driving and we might give you discount or we might increase your rate. That doesn’t fly.

I mean, we can see here and say, academically as pure, so what we have to do and that was the point we are making forward, is find acceptable trade-offs so that the math in the marketing are at sync. And the only thing I know for sure is we won’t have it perfectly, we don’t have anything perfect, this would be very exciting. And John talked about the reasonable intellectual property protections that we have, as we can sort of get this into the marketplace and move from a target to a more broad base. Frankly, I would say unbiased, but I think it’s a very, very exciting proposition. And I think we’ll be talking about this for some years to come as we continue to refine the model.

Keith Walsh – Citi

Thanks. Keith Walsh, Citi. Glenn, I’ll save the LeBron questions for after the conference. But first off, just want to focus on retention. When I think about the slide you put up on page 14 about claims qualities, is there a strong correlation between these drivers and how you retain customers? Or should we just be focusing on purely price driven? I know you talked to this a little bit earlier. And then do people – do your customers shop every year? Are they going out there year after year looking for lower, lower cost? Or is it more of a service factor that’s going to keep them there? And then finally, within the direct versus independent agent space, are there differences over magnitude of retention factors within those spaces we should be thinking about? Thanks.

Glenn Renwick

Maybe we’ll split them. I’ll go with the claims question. The observation in claims is actually very powerful. I think we’ve shown maybe a couple of years ago that our retention rates for people who have had a claim with us are some of our highest retention rates. Unfortunately, I really don’t want to sort of extrapolate that to the entire population of 12.5 million people. So that could get expensive. But it is a testament to the claims service that we offer. It’s also true, although I think that we still have a lot of things that we could do better than we are currently doing to actually attract the claimants that we serve in the claims environment. So obviously we serve our own customers, but we serve customers that our customers have created a problem for. And those customers rate us very highly as well. So claims very definitely is another contribution to retention.

John Sauerland

I got a point I’d love sharing. If a non-customer experiences a concierge claims service, so we had somebody and they go to concierge, they are 50% more likely to show up within six months as a Progressive customer than the average consumer in the same area. So claims service can absolutely drive sales. That’s what we have our brand, right? And it also absolutely drives retention.

Keith Walsh – Citi

(inaudible) differences in retention factors, independent agency versus direct?

John Sauerland

So in aggregate, our retention policy life expectancy across our agency business than our direct business is different. But what you really need to get down to is this is different by segments. So for the same set of consumers, it’s materially different in agency and direct. And when you get down to that level, they are, I’d say, more similar than they are physically.

Keith Walsh – Citi

Thank you.

Josh Shanker – Deutsche Bank

Josh Shanker, Deutsche Bank. I was wondering if you could give us some industry background a little bit, where is Internet progressing right now, as the share of the industry, the way people buy their auto insurance and what’s happening generally in the industry in terms of retention compared to what you are seeing at your company right now. My second question is, how you prioritize hybrid debt, retiring debt, giving us special dividend and share repurchases before you’re into with excess capital? And the third question is, the future expansion with the audience in the United States in targeting that market?

John Sauerland

Online shopping, we have our internal trends. Obviously, what we do in terms of marketing online and offline does influence how consumers shop with Progressive. I presume a lot of you read industry data. Comp store is an example. And I think you see there that the trend is – generally speaking, there is a little ups and downs. But over time, it continues to grow in terms of online quoting for sure and online purchasing. That said – and I want to go back to the fact that if you look at the business available to Progressive today in terms of where consumers are across independent agents and direct, independent agents have about 50% more business than direct companies in aggregate have today. So while a lot of trends show online shopping growing, it is for sure our potential to grow with our independent agents is still huge and it’s predominantly in the preferred segment, as John Barbagallo was telling.

Brian Domeck

As it relates to the sort of prioritization of capital management activities, certainly in the past you’d say share repurchases has probably been the biggest component of that. And then in 2007, we did the extraordinary dividend. And surely after that, we came with the variable dividend component, which Glenn has articulated, could be the largest regular dividend at the end of this year. And share repurchases will be still part of the plan. Just in this instance of trying to retire some of the hybrid security, we put that as part of – basically there are some things that we can do in terms of capital management.

It’s not to say that we won’t do share repurchases. We’ve had some share repurchases throughout the year so far, maybe increased the activity a little bit. And that will continue to be part of it. I think the variable dividend is our dividend vehicle. We haven’t thought about like an extraordinary dividend. We did four years ago in extra ordinaries, do it every year. So I think the variable dividend is our dividend component at least for now, and you’ve seen what we’ve tried to do in terms of retiring a portion of the hybrid security.

Glenn Renwick

And the last question was around –?

Josh Shanker – Deutsche Bank

Spanish language advertising.

Glenn Renwick

I’m sorry –

Josh Shanker – Deutsche Bank

Spanish language advertising.

Glenn Renwick

Spanish language advertising. We’ve done that over time, and frankly I think that’s one of the things that we haven’t necessarily done well in the sense of – we haven’t – with the objective of that. One of the – as many of you know, we’re actively looking for (inaudible) now and I’ve got a great opportunity to talk to some very talented people. But that’s not on the list to see how we might go about making even greater penetration in the Hispanic population. So, it’s something we’re very aware of. We’ve done multiple times in the last 10, 12 years. But I couldn’t say that was one where we could put a nice slide up and say we’re really making a breakthrough. We’ve got a lot of segments. We talked about pets. We’ve got several other segments. We’re making great breakthroughs. We certainly attract the Hispanic population mostly through our agents. And we like to give them a more valid option through a direct channel that’s higher (inaudible).

Paul Newsome – Sandler O'Neill & Partners

Paul Newsome from Sandler O'Neill & Partners. If you could go into a little bit more detail off of Josh’s question about the capital management prioritization that you currently have and the changing with that as well. But you’re at your desired – you’re above your desired capital level. This change in your hybrid security is a pretty small number of the great profitable. And the question I (inaudible) is, are you going to actually do something and win? But in lieu of that, give us a little bit more detail as to how you think about it.

Glenn Renwick

Well, as I said before, it’s a good position to be in that we have and the capital that we do have. We’re very pleased that we’ve actually created lots of capital since a year ago or two years ago. In terms of how we think about it obviously with the tender, we did something different than we’ve done in the past. We haven’t retired debt in the past before sort of maturing. In terms of share repurchases, that’s just an outgoing practice for us and we don’t sort of forecast how much we’re going to do in the future. It’s just part and parcel of our practice, and we’re sort of seeing as we report it monthly. And I think what we have tried to do at least with the variable dividend component to actually make it a little bit more meaningful component of our capital going to practices. If you look back four or five years ago, our dividend was relatively small component of any capital return – relatively small.

Extraordinary dividend was obviously a very big event. But now the variable dividend is a pretty significant return of capital in that form when and if it’s prudent. And we’re actually very pleased with that activity and the structure of that plan, because in 2008, it wasn’t part of the program because of the constraints we’ve put in place. So in terms of prioritization, it’s hard for me to say this is one, two and three. We have a full suite that we can participate, and obviously, as I’ve said, share repurchases has been the biggest in the past and you see our actions of this going on with the debt repurchase in the variable dividend component. And the magnitude of how much it will, certainly we are very pleased that we have more capital and we are very pleased with that capitalization. And I think certainly the activities in the investable marketplace in 2008 and 2009, if nothing else, gave us a little bit of cause and caution for how much capital do we retain and at what pace do we return it. So I think, if nothing else, that at least gave us a pause to think about how fast and at what pace our actions are.

Paul Newsome – Sandler O'Neill & Partners

Just to be clear, your – as versus a couple of years ago, you’re going to be more cautious and more careful, most probably slower in returning capital than you were in the past, given obviously the cards. Past performance does not necessarily predict the future.

Glenn Renwick

I think we try to learn from the past. Let’s just say that and it influences. And the extraordinary dividend in 2007, right now we’re not thinking of that. It’s part of the next plan. But we will continue to reevaluate as time goes on, and I hope what really happens is we generate more and more capital, and it continues to be a topic of discussion of how we return it.

John Sauerland

Just to put a slight caveat on your – to be a characterization that wouldn’t be a lot. Our tender is up 350. It could go high. We also have very clearly signaled by then that we would have removed a restricted covenant, assuming that that happens. It’s absolutely critical from our point of view that we are very transparent about everything we’re doing. But that gives us an opportunity to maybe buy debt beyond the tender too. So if you take what the potential could be for the variable dividends, the exact reflect [ph] is significant amount of tender. I don’t know that any of those necessarily will happen that way. I think we’re talking about a substantial amount of money. I know it would be great from your perspective to have greater certainty. That’s not how it worked. I know you know that. But take a set of work [ph], when we say, when we feel we have excess capital, we return it to shareholders. We do what we say.

Glenn Renwick

We’re running a little bit long. So, understand that folks need to leave, but I thought maybe we could take another question.

Unidentified Analyst

Yes. I was wondering if you could give us an update on your Australian venture and how that’s going.

Glenn Renwick

Sure. This is probably one of the updates that’s a little hard to give. We have something in the less than 1,000 customers category. So I don’t generally use. There is a primary talking point. What we did say – let me be very clear, we’ve taken a relatively small amount of resource and capital and asked ourselves the question, can we build a model of insurance distribution for the future. So it’s an Internet-only model. All of the – everything is served on the Internet. We run the Internet out of Mayfield Village, Ohio. So maybe we should make more of the fact that we are outsourcing to the United States. And it’s going to be quite a challenge to develop a brand from scratch in a new country. There are pieces of the infrastructure claims specifically where we’re not going to overrun our ability. We want to make sure that we can get the claims done.

So I would tell you, think about Australia as an option for the company in the future as a process option. Don’t be putting it in your model as a line item. It’s just – it's not going to work, I mean, for the revenue or profit, which I don’t think we’ll see for some time. But having said all that, I actually had a of personal visit, as we can’t afford as an expense on that P&L, to go to Australia and had a chance to sort of do some press there and the press were very, very welcoming of us. I think we’re very welcomed in that environment. It is an alternative option for consumers. And I spent a fair amount time with the regulators there who are certainly proud that we didn’t step down a well during the financial meltdown. So they were very picky on who they like to come into the country, and I think we had a very constructive dialog. So all of those things cosmetically are working well in Australia, and we’re just going to – we're going to find out what it’s like to be a small guy again, because we’re going to act and think like an entrepreneur. Ask the question in a couple of years, I think the answer will be a little more insightful.

Unidentified Company Speaker

I think we have one more question over here.

Harry Fong – Soleil Securities

It’s Harry Fong from Soleil Securities. In the illustrations regarding lifetime combined ratio, could you interject how retention affects those numbers? Is the four-year calculation period – how did you arrive at the four-year timeframe for calculating lifetime combined ratios? And I suspect you have different retention ratios of different products. And how all of that might come into play?

Brian Domeck

Great. Just so everybody is clear, that was just an illustrative example. It wasn’t true policy life expectancies. But to your question, if the retention improves, which is why we continue to say that continue to improve, increase our retention, assuming the margins on renewals are such that they are, either – let's just do one or two things. One, increase the amount that we would be willing to spend for new business acquisition, which can drive future growth. So we could increase our target combined ratio for new business if our policies extend longer, or we could price our renewals to a higher combined ratio. We could do either of them. And so far, one of the things that we have really done is more focused on trying to generate more new business. So policy life expectancy enables us to increase the new business combined ratio target. Therefore spend more. And you’re right. We do at a segment level or product level, et cetera. And the policy life expectancies do vary quite a bit by segment.

Glenn Renwick

I’m being told that’s it. I simply thank you for allowing us to share a little bit of the company. The gentleman standing in the back there that many of you know by mobile voice than by sight, Patrick Brennan. Patrick has answered a lot of the questions that probably I managed to confuse you well at some point on a conference call and you’ve had to call back Patrick for clarification. Patrick will be moving on to a product management role in Progressive, so that just fairs well in that responsibility. And right behind him is Clad Clarke [ph] who will take over your follow-up calls on a going forward basis. So just a quick note to recognize there is a changing (inaudible) there, as Patrick goes on with his new responsibilities in commercial vehicle arena as a product manager. Again, thank you for your time and attention this morning.

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