前進保險 (PGR) 2002 Q1 法說會逐字稿

Welcome to the Progressive Corporation’s First Quarter Conference Call. All participants will be able to listen only until the question and answer session. This conference is being recording at the request of Progressive, if you have any objections you may disconnect at this time. Acting as moderator for the call will be Tom King. At this time, I will turn the call over to Mr. King.

Welcome to Progressive’s Quarterly Conference Call. Participating today are Glenn Renwick, Chief Executive Officer and Tom Forrester, Chief Financial Officer. Glenn will begin the call with comments about quarterly results and then we open up the call for questions. The call will last about an hour. Before I begin, I remind you that certain of our statements today may be forward-looking statements. For example, our statements that are not historical in nature, that concern our future earnings, results or estimates or that reflect our expectations or beliefs are forward-looking statements. Although we believe such statements are based upon reasonable assumptions, you should understand that those statements are subject to risks and uncertainties and that actual results may differ materially from the forward-looking statements. Additional information about such factors and uncertainties could cause actual results to differ may be found in our most recent form 10K filing with the Securities and Exchange Commission. Thank you. Let me turn the call over to Glenn.

Good Morning. It was a good quarter for Progressive, results exceeded our profit targets and showed significant growth in both the agent and direct businesses. My comments this morning, I’ll talk in some detail about what’s driving growth and some of the top states, walk through the details of the new reporting on loss reserves and announce the next three sites for expansion of our claims model. First, a few comments on overall profitability. All three months this quarter produced wider margins than last year and better than our targets. As I commented in New York, we do not price for this level of profit, we don’t project future profitability at this level and we will not use this quarter’s results to subsidize or influence our pricing discipline for the rest of the year. What’s driving the lower loss ratio? To the extent we can explain it, the answers lie in the details at the state level. Across most of the country, loss frequency was generally lower this quarter, when compared to prior quarter in the same quarter last year. For the most part this is true on both new business and renewal business. In some states, like Ohio, the frequency difference is quite dramatic. More than one would attribute to just a mild winter. In other states, like Texas, the drop in frequency is more moderate but still significant. Consistent with our discussion at the New York meeting, aggregates and averages can be misleading. This is equally true for frequency. As such, comparisons with other companies or with industry data must be made carefully. But we do note that our most frequency transfer all coverages are lower than comparable NAI lag’s numbers. Severity trend for the quarter was moderate with the exception of bodily injury severity, which was up almost 14 percent of the same quarter last year for all tiers combined. Indiscernible) severity is still slightly negative. I expect our aggregate bodily injury severity be somewhat volatile for some considerable time. Fluctuation’s result from loss payments reflecting our changing limits profile and the variability in age of paid claims during different points in the growth cycle. Normalized for age of claim and limits of liability, severity is comparable to industry reported experience. With moderate or declining frequency and no widespread increasing severity we are meeting or exceeding our targets by tier and cell in most areas.

There are a number of interesting developments in some key states this month. Some quick comments. New York, as you know was slowed new business considerably year over year as the result of rate increases in New York and focused on returning to profitability with some excellent results. Adding some help to the overall situation the New York Department of Insurance recently approved a 19.5 percent rate increase for the plant, which will make our rates somewhat more competitive and should help to lower our cost of assignments. We’re also pleased to report that the stay on REG-68 was just lifted. This regulation calls for faster submission of claims and medical bills in an effort to help reduce fraud associated with these claims. At this point, we are waiting for the department to provide guidelines to ensure us for implementation. We also recognize that will be likely be further appeal but hope the regulation will be upheld. We have a long-term optimistic view of our prospects in New York. In Florida, we’re experiencing a surge in new nonstandard auto business accompanied by an increase in loss frequency, unlike what we’re seeing in other top 10 states. The competitive situation for nonstandard is particularly tight right now. Some companies are limiting the amount of new business they’ll accept from some agents. Several leading companies have double-digit rate increases just starting to hit the market. And one company imposed a moratorium on new business until it can get rates approved. While the standard and preferred business is still growing at a strong pace, growth and nonstandard surpassed our expectations. We are ready for growth and when it comes in the part of the business we understand profoundly nonstandard and middle market, it’s a very good thing. The increase in frequency we see in Florida is not cause for alarm but a reason to stay clearly focused on the numbers. In California, foreign dependent agency companies with a declared insolvent with combined written premium of a $125 million. All (indiscernible) that we non-renewing this business sending more than 100,000 consumers into the marketplace. Agents are scrambling to replace these carriers. At the same time, double-digit rate increases continue to be approved. Our growth rate is strong in California, we’ll watch it carefully week by week and we’re waiting approval of a rate increase in one of our companies there.

On to loss reserves. As announced, we’ve included more detailed information about changes in loss reserving in this quarter’s release. Let me take a moment to walk through the portion of the supplemental information. If you didn’t print it it’s at the investor relation section of our website as a link from the financial release issued last night. The total prior accident year development was a favorable $3.1 million. Asking price of $13.9 million favorable adjustments based on regularly scheduled actuarial reviews and $10.8 million unfavorable other development including the necessary adjustments for the Georgia diminution of value settlement discussed last month. Minimal actuarial adjustments for the current accident year resulted from reviews performed this month. That would be the point 2. On the expense side, our direct business is showing gradual improvement, as reflected in the 3.2 drop in expense ratio. This comes as a result of more targeted media buying, business mix changes, and more efficient call center operations. The expense ratio for agent is up 1.5 points, due in part to increased commission payments for incremental new business. In most states we paid more commission for a new policy than a renewal. When it comes to growth, I’m very satisfied with the growth rate we’re seeing both in earned premium and policies in force. At the same time we’re watching it carefully state by state to make sure we stay ahead of the curve on claims capacity. We currently have open positions for almost 400 claims reps in about 45 states and are finding good candidates. Growth rates by state are widely varied due to competitive situations and are current rate level. Among other top 10 states, Texas, Pennsylvania, California and Virginia are growing rapidly, while growth is much slower in Ohio and Georgia where the market is less volatile and rate changes have been more moderate. Current growth rates are leading indicators of our future claims need and careful management of current growth in future capacity is one of my top priorities. In the West we had moved into the caution or yellow status for future claims capacity at current growth rates. We’ve taken some actions to moderate extreme growth in a few states but have no significant constraints in place. We will continue to be opportunistic in seeking market share as we balance our willingness to grow profitability while maintaining our service and quality. Another element of growth is customer attention. We are seeing some very encouraging progress in both channels. In almost every state and in all tiers except ultra prefer for our early projections of policy life expectancy we’re based on clearly thin data. One measure of improvement in customer attention is a year over year comparison of the change in policy life expectancy. The relative improvement of a prior year has increased for the past two quarters. Early retention measures, such as 4:1 ratio, continue to improve and renewal rates continue to be up of a prior year, although no longer increasing of a prior month. The improvement in policy expectancy of the last year is a function of internal process improvements, smaller progressive rate changes and the external hard market. It is difficult to pinpoint the exact split of those collective forces but we believe that a significant portion of the improvement is come from chances in our business profits. Increases in electronic payments, increases in quote accuracy, and target rate messages at renewal are clearly having an impact.

In claims, we have identified the next three pilot cities for our claims vehicle repair initiative. In addition to our current sites in Cleveland, Orlando, Philadelphia, and Virginia Beach, we will open (indiscernible) sites in New Orleans, Phoenix, and Pittsburgh during the second quarter. This expansion will help us to continue to build the business case for managing the vehicle repair process against some very tough objectives for cost, productivity, and customer satisfaction. As I’ve indicated before this is still in the test phase and clearly not ready for widespread expansion, but what we’ve learned in the first four states will help us refine the process this year.

All in all this quarter gives us a very good start to the year. As always, we have a list of concerns and priorities. 1) We will continue to vigil in about rate and loss reserve adequacy with particular emphasis on estimating trends in high growth rate environments. 2) we’re activity working with regulators, legislators, agents, and consumer reporting organizations on the use of finance and responsibility for insurance underwriting. And (3) as I previously stated, we are managing staffing closely, particularly in claims for it is a high priority. Thanks; I’ll turn the call back to the operator for your questions.

Nancy Benacci of McDonald Investments.

If you could talk a little bit more about retention. You’ve indicated in general pleased with what you were seeing in all the channels and I know you tend not to want to break down the difference on the direct side between phone and Internet, but if you could give any sort of flavor for whether you’re seeing better retention from the Internet or direct if that’s possible and I have a follow-up connector with that.

Specifically on breaking it down, that would -- as I was giving you the best color I could, I wouldn’t draw a lot of attention to inter-channel or inter-means. Right now we’re seeing retention fairly broad-based increase. The comments I made really were sort of the root cause, it’s hard to pinpoint, but where we have been able to increase the percentage of those customers that are paying on an electronic basis that’s something we believe has been a direct relationship to improve retention. Of our direct customers, a higher percentage are paying on an electronic basis. So that’s one improvement that we like and we’ve been able to get that implemented more consistently in the direct-channel and the agency channel. But I would say for right now, I would take my comments, which have been changed in tone here a little bit in the last four to five months. We were seeing some decline or at least in a preferred and ultra-channel a little bit of a decline and relatively stable through last year when we were addressing these type of questions. I think the key message now is, you know, how the marketplace we’re starting to see the effect of our internal processes kick in. We’ve got quite a few, can’t tell you necessarily the contribution value of each of them and combined with that a hard marketplace where people are starting to see a lot more rate increase or perhaps in our case a little more stability relative to some others taking rate up and across the board we’re seeing some tailwind on retention. We continue to try to have better internal estimates of exactly what’s driving it, but right now I’d say across the board electronic payments, a little bit more prevalent in direct-channels and that’s a good thing for retention.

Okay and then roughly connected with that, in terms of your comment on nonstandard increasing pretty significantly in markets such as Florida, as you price that nonstandard business, I’m assuming you’re pricing it for the general ’96 combined ratio and then secondly with that, are you seeing more of that nonstandard coming into the agent channel or direct or is there a way that you can give us that indication?

Yeah that’s -- consider that to be mostly being driven by the agency channel at this point and time. The nonstandard growth, in fact, a lot of the growth we’re seeing, yes we’re seeing continued good growth numbers in our direct-channel but I think a review of the results this quarter would really show you pretty dramatic uptake in the agency business. So the Florida situation is no different than that good growth, nonstandard, a lot of it in the agency channel.

Okay, thank you.

Relative to pricing target on that, Nancy, as I pointed out in New York, it’s not good enough to say each and every sale is at a ’96 but you can consume that anything we do in the agency channel for nonstandard will meet our profitability targets.

Thank you very much for the clarification.

Indiscernible) of Morgan Stanley.

Just a quick question on the cells that you had talked about at your analyst meeting. I guess if we look back on the last three quarters, each of the quarters that you’ve exceeded your expectations on the calendar year combined ratio. Just in general how long do you guys look at this calendar-combined ratio and think about the cells in making adjustments? Is it an ongoing process? When do you start to think that some of these, the ratios that you gotten, are starting to reflect lower cost trends of your pricing might be a bit high? When does that actually occur?

It might seem like a strange answer, but that’s kind of all we do. And I mean that very seriously, that the whole concept of the product management structure is that somebody somewhere is caring about some individual cell every day and that’s the focus. Several, like Tom and myself, look at this on a continuous and routine basis with a lot of emphasis obviously after the close of any given month when we have those results available in consolidated ways. So it’s really a very ongoing process. Your second question would be with regard to trends, when you start to believe that perhaps things more permanent. This is perhaps a variation from what you might otherwise of planned. But that’s a very tricky thing. Remember, the thing that I worry about most is not so much that are today’s numbers but the rates that we have in the marketplace that will ultimately go into contracts and become unearned premium and you got to make sure that rate’s good for the claims your going to play several months, several years in some cases, out. So estimating trends is something we do a lot of, you have to be very careful of it, as I mentioned in my formal comments. In high growth rate environments, you can get very, very disguised data if you rely on certain things like averages and don’t do good normalized. So a lot of what we’re trying to do is to make sure that we understand the trends that go on when you’ve got rapid growth or a significant shift in mix business from one tier to another or from one channel to another and that’s really what we do all the time.

Are you -- are you seeing any drastic shifts in the mix of business from direct to agency or vice versa that you had not planned for initially?

Not that we had not planned for. There are some differences between the mix of business in agency and direct not necessarily so profound that there’s things that we haven’t talked about. A little bit more of a preferred bent to the business that comes in on a direct basis and we benefit from, specifically now due to the previously questions, some nonstandard surges when we see nonstandard players in the agency channel get into trouble. We see that business come back to us fairly quickly in the agent marketplace. You also mentioned or at least inferred that it may be the rates might be too low, I think I heard that in your question. Multiple speakers) our current growth rates, that’s not something that I’m spending a lot of time worrying about the rates being too low or that we would take them down, excuse me. Yeah, we would obviously be very happy with the current growth rate.

The other piece that’s important there is remember that we priced for new and renewals separately and that as the retention increases, as a rule our renewal business is slightly better than our new business. So if retention increases at a rate faster than we anticipate, that will also give us quite a tailwind in terms of margin.

Great, thank you very much.

Charles Gates of Credit Suisse First Boston.

Good Morning. Given the change in your policy terms in the last year, what do you think is the best way for the analyst or the observer to compute average premium per policy?

Well, actually, Charlie, it’s even worse than that. And the reason it is, is that while we give you policies in force, the exposures per policy differ substantially. And so at the ultra preferred tier we have many more multi-car policies, so that you might make an inference about what’s happening with rate per policy that may not be precise because of the movement that we have through the tiers. We’ve talked a lot about written exposures as perhaps a better measure for you to use and for us to give out publicly and we’re trying to consider what measure might be more indicative of our business what we have right now. In terms of the new renewal piece, that, with the exception of January, has worked its way -- I’m sorry the 6 month/12 month, with the exception of January, that’s worked its way through and it will become relatively consistent within a current year. But relative to prior year, now they’ll be very difficult to assess right now.

Charlie this is Glenn. To the extent that that’s -- I understand what I think why you’re asking us to be able to forecast for the future premium. If we were to sort of lay it out, even taking state into account, the differences in average premium, even in equivalent policy from state to state is so dramatically different. If you took Texas versus New Hampshire you would really have very different and skewed outcomes, so we haven’t tried necessarily to give you that information because we really think that taken out of context it would be incredibly misleading.

So it’s very, very difficult for the outsider at this point to assess premium per policy. Is that a correct comment?

Yes.

At a macro level. I mean if we took Texas, multi-car policies compared to a (indiscernible) PD policy in Florida and averaged them and told you a number and then saw a dramatic mix shift such say to (indiscernible) PD policies in Florida that average could move dramatically but actually mean very little, other than we’re taking on more business in Florida.

Thank you.

Ron Frank of Salomon Smith Barney.

Yes, Glenn, I want to explore your comments about not using current results to, subsidize I think was the word the used, pricing. The long-term goal, as you articulated, is to grow as fast as you can consistent with the ’96 combined target and maintenance of service levels. So does that comment imply that you don’t quite trust the ’90 yet or does it imply that the market is so hard that you can have your cake and eat it too right now, so why not take it? I’m trying to understand what you meant by not using it to subsidize.

Most of those comments would be acceptable answers but really it was even more simplistic than that. It’s just that if we start to get that kind of result and if we were so inclined to say that my objective, for example, was to achieve a ’96 calendar year for year 2002, then I have ways of doing that. And I have an incredible head start. I’m interested in ’96 for every period ongoing starting today. So anything we got, yes, great, terrific, we believe the numbers because they’re real but we don’t necessarily understand fully why they reflect a better target, better margins than we expected. The frequency is always a tough thing to know in advance. So it was really just the issue of not pulling into the trap of saying well we can bring in 2002 and at a ’96, an outcome of having a ’90 in the first quarter and a ’99 in the last quarter is not an acceptable outcome from my perspective on how we want to run the business. You should -- you should expect that either a ’96 consistently is a good outcome and when we get better than that we take it and everybody’s happy. The other issue is that to the extent that that gives us any buffer right now, our growth rates are at a point where they are approximating about a level that I would be very surprised if they go much higher. And the reason for that is we may have to constrain them based on our ability to manage claims.

Following up on that, Glenn, could I ask you to drill down on the frequency issue? You did mention that it seems to be better than the industry right now. Do you have any insight for us as to why that might be?

We have some but I don’t think I’m going to speculate on them in this call. I don’t mean to sort of say, “Well, we’ve got some ideas and I’m not just telling you.” The fact is frequency is just truly an observed number and we did not expect the frequencies to be as low in the first quarter as we observed them to be. Some of the data that we compare them against would be lagged data so we don’t always have a direct current period to current period comparison with other industry data. And while you could certainly suggest that some of it is a function of good weather, at least in some of the northern states, we’re seeing it really across the board in places that we wouldn’t expect to see major frequency variation in the first quarter. So I don’t know that other than perhaps the market conditions of us being priced a little higher, some of our competitors being priced a little lower that attracted what might be higher frequency business. Those would be speculations. I think the bigger issue I would leave with you is it’s something that you really, really have to watch and we know the second quarter’s a lot more prone to some catastrophes in some of the Midwest states. We’re starting to get into hail season here now. So a lot of things are going to change. Your frequency is more a number that I would say I’m hoping to reporting it and talking about it on an every -- on an every call. I just can’t always tell you I’m going to be able to explain why it did what it did.

Okay, thanks very much.

I have one or two questions, Glenn, just following up on Ron’s question. I don’t understand this growing as fast as you can grow. If you X out rates, just look at policies in force so unit growth, what are you growing at and why is that so fast? That’s my first question. And number two, if you had more normal weather in the quarter, what do you think that would have done to your overall results in the first quarter? How do you normalize for weather? And it looks like March was a lot worse than January and February, or am I missing something there? Thanks.

Yeah, in terms of growth, first of all when we talk about growth we talk about new applications coming in the door, when I talk about growth. You may not see it in (indiscernible) right away and our new application growth is definitely driving very rapidly and you’ll see that, at least from your perspective, in the written premium. And while today’s new app is great on written premium, it is tomorrow’s claim. So what I talked about with regard to the cautionary state of growth is that we’ll take on much new business and estimate our retention of current business such that we make estimates of future feature counts in claims capacity. And we’re seeing our claims features grow and expect them to grow significantly over the next six months. So that’s what I mean by a sort of claims capacity and growth rate. Normal as for weather I don’t think I can do that for you, Mike, I just can’t. All we can do is sort of give you clean reads on frequency when we see them. We can plot this but I don’t know that you can explain specifically X amount based on weather conditions.

And was March -- it looked like March underwriting results were, you know, not that it was bad but it was distinctly less favorable than the first two months. Was there anything in there just as a third quarter, you know, as a quarter kind of round up, was something that you take care of in there that wouldn’t show up in the first two months.

Wow, you’re killing me. You know, I -- I think you’d have to say that’s kind of some reasonable variations but frankly when we see something in the range of a ’92, ’93 that’s -- that’s definitely well within our expected outcomes and I’m delighted with it. I wish I -- I don’t mean to be vague on this. I can’t tell you precisely why we get a ’90 or an ’89 or a ’91 but I can tell you over any sustained period of time we can keep the process of combined ratio within a reasonably tight range and this quarter was a terrific quarter and better than our expectations, and I would say that we will likely gravitate closer to the targets that we priced for. When we don’t we try to explain those trends and to the extent that we see a few months it’s not always enough to make conclusive determinations on. So we’re not going to do anything dramatically different based on the first quarter and we still believe our pricing targets are the right targets to be there. But certainly nothing dramatic that if I were signaling to you as an analyst, gee what happened in the third month of the quarter, actually I’d say that was a great month and the first two were just unbelievably great.

Thanks very much, Glenn.

Thanks, I have two questions. First, I was hoping for some clarification on your comments on bodily injury severity. You had said it was up 14 percent, but that was due to loss payments, I think from higher limits of liability. I just wondered is that a reflection of your growth of preferred business or am I missing something?

No, let me take a little bit of time to explain that one. I reported to you and also suggest to you that in and of itself it’s not a particularly meaningful number. And what I mean by that is that we are going to always give you a trend based on the paved data that we see and incurs in our book of business. There’s the book of business changes and let’s just take a very simple example here. I was rolling along at a steady state and I was paying $5,000 average on BI, and I wasn’t growing very much as an insurance company and my payments became relatively predictable. Generally, I paid a bodily injury claim at about nine months after it was reported to me and was $5,000, and it stayed that way forever. My trend may be very, very low on that number, and that reflects the business condition that I’m in. If, on the other hand, I start to grow very rapidly, I may get a lot of bodily injuries reported, some of which will be really quite easy to dispose of and they may get paid within 90 days but they typically are $2,000. And yet I get the same number that would be disposed of in perhaps two years, and they’re going to be at $8,000. So my average really won’t change over a long period of time but my instantaneous average will change as I blend more of the $2,000 payments in. So that would be a reduction in -- in average payment and would appear to be a negative trend, and I would suggest that the negative trend is not real. Same thing happens when you’ve been through a period perhaps of slower growth. You may be paying claims that have been in inventory for a longer period of time. That’s the comment I mean with regards to the age of the paid claim. If we’re paying more claims now that will give us a higher payment, our average might go up and reflect a positive upward trend. That is also -- a second factor will be as our mix of business has changed, and you’ve observed it change both by channel and tier, the limits of liability that we have been offering and the exposed limits in the book have changed also. Nothing wrong with that, we’re pricing for it but that will also be a driver of the average payment. So in a situation where a company like Progressive is changing its business mix, (indiscernible) dramatically and growing the average payment may move around quite a lot. And that’s my comment on volatility. What I suggested to you at the close of that is that if we normalize our data so that we take only claims that have equivalent age of payments at the same exposed limit of liability the real trend is relatively light, about three to five consistent with industry averages.

That was a great answer. Thank you. As a -- as a follow up totally unrelated, can you talk a little more about nonstandard auto growth in Florida? Maybe what changed and could that expand to other states?

I think what changed really was market conditions. We’ve got some situations in our -- we’ve been well positioned in our independent agency channel in Florida, have always had that as our, I would say, our number one state. We’ve got good agent relationships but probably in the last few years we’ve been a little bit more volatile on rate. We’ve had our problems there. I think we’ve got the right rate level now. We took the pain and we saw it; I think now many of our competitors in the agency channel have seen the pain. I think I reported in New York where we’ve seen situations where people -- other companies have just laid off their sales reps on a fairly short notice basis. I mentioned the moratorium. Some double-digit rate increases. I think if you’re an independent agent in Florida today in most areas of the state you’re seeing a fairly dramatic competitive action and that’s positioning Progressive just that much better in each of the agencies we do business, which is a large number in Florida and hence the growth. And with new growth, we ought to look at all the things that come with it, which in this case is sort of high frequency and so on and so forth but we’re pretty good at that. Do I think it’s going to happen in other states? Yes. I think we’ve really got a very -- tried to signal in New York -- I think we’ve got a very, very disruptive market right now. And more especially so at the nonstandard marketplace in mostly we will see the effects in the agency channel.

Great, thank you.

Ira Zuckerman of Nutmeg Securities.

Going on a little bit of a technical question. You mentioned that part of the reason for the rising expense ratio and particularly notable in March was higher commissions on new business in the agency channel. The other thing is I’m wondering was there a significant change in gain sharing allocations between quarters?

Not from its allocation but yes the gain-sharing factor would be another (multiple speakers) absolutely.

Can you quantify that for us?

Let me consult here.

We won’t quantify what happened last year, is that the first quarter we didn’t reserve from -- we basically do gain share by taking what the actual for the current quarter is and then take plans for the rest of the quarter and then accrue against that. Since the year developed so dramatically well last year, in the first quarter of 2001 we were -- we didn’t reserve sufficiently for what the ultimate gain share payment turned out to be for a hind side basis. This quarter has been pretty good and we’ve sort of extrapolated that, so relative this year to last year the amount we’ve accrued for gain share is more -- more an affluent basis and also more on a relative basis to what it turned out to be for all four quarters.

Yeah, that’s why -- that’s why what I assumed was in there. But I’m just wondering if you could quantify for us so we can sort of try and, I don’t know, quite normalize it but get an idea of how much of the impact was.

It was -- I don’t want to give you a number -- just say that it’s -- it’s a pretty material in terms of gain share, as you would expect with its performance. It’s fairly robust.

And I assume you’re to be out accruing it somewhere close to first quarter levels as we get on the balance of the year unless things change for the worse.

We’ll accrue for whatever the results suggest against the targeted matrix and then for the rest of the year, yes.

All right, can I just pick up on a word that sort of went there and maybe just in the editorializing, so you’ll have to bear with me for a second. But it was just sort if things change for the worse. I’d just like to sort of say to the audience that if we gravitate to a close to our target, I will be very happy. I don’t want to feel as if, you know, we got a ’90 and the only way we could ever get rewarded is getting better than a ’90. Our best mix of long-term, sustained, profitable growth and the best thing we can do for the consumer and our shareholders and employees is hit our targets all the time. So we will ultimately gravitate back to targets or outcomes that are a little bit more what we have targeted and what we expect long term.

I was not being critical.

No, I understand.

It’s just that when earnings are -- when earnings for you guys are not only plus or minus a dollar but plus or minus a dollar per quarter, it starts getting a little tough on us.

Eric Cole (phonetic) of Eaton Vance.

Thank you very much. For Mr. Renwick, I’m just trying to understand some of your comments a little better. You mentioned earlier that growth rates, I presume in terms of new policies added, you might need to constrain the rate of growth in the near future because you’re reaching a claims limits within the company. What I’m trying to understand is given the combined ratios pleasantly so much lower than you would like to what degree do you actually have the ability to reinvest the excess or bountiful profits into faster growth if you’re already kind of reaching the limits of the growth at which you’re comfortable maintaining going forward. My conclusion from that is it would suggest that the combined ratio would stay lower than your ’96 targets for a period of time while your claims infrastructure has them built up even more.

Yeah, I think your conclusion is somewhat correct. If, and I think I stated in New York, sort of claims capacity is just not infinite and there’s really nothing that I can do today or tomorrow to make it that way. And in our future and in our continued combined ratio results depend on not going back with unclaims quality. Nothing that I say should infer that we are not sort of a growth oriented company going to take as much as we can get. But there may be -- there may be a point at which we have to say the rate of new applications coming in is at a level that fully will absorb all of the claims capacity that we could have in some future months. If that would be the case, then you’re right; the margin is a place that we would likely see stay very healthy. In terms of sort of reinvestment, some of the things that we will do, we’re not just carrying on business as usual. We’re being more creative in thinking about how to increase our claims capacity in constructive ways that will help us take on as much growth as the market will give us. But I am signaling and I know it seems strange but I am signaling that there is some limit to that and when we recognize that limit we will not consciously go beyond it. And if it means continued wide margins for a while, then that’s what it will mean.

Okay, and then the last question is Allstate yesterday just saw indicated that their estimate for how much of their combined ratio benefited from weather was about 260 basis points. You know, clearly one simplistically assumed it was the same for Progressive. There’s a far amount here of combined ratio that has not explained by weather and I’m trying to give you the chance to maybe to toot your horn and say to what degree have you structurally maybe lowered your combined ratio to a lower level that’s not explained by weather through new better practices that you’re competitors are not pursuing or implementing.

Well, you know, we do a lot of things, I think, correctly here but we have not, and I don’t mean this with any smart overtones, we have not been able to sort of separate the effect of weather and so on and so forth. But we run the company is forecast continuously try to think about how to improve our processes at every level. When we get into some troubles in ’99 and through 2000 we really put a lot of pressure on the claims organization to bring the quality of every claim file up. And we have an intensive, intensive sort of review process that continues to go on and I would say, but cannot prove or quantify to you, that claims handling today is significantly better than it was two years ago. And my hope is that it’s going to get significantly better yet. And those kinds of structural things you can’t bet on ahead of time and we don’t tend to bet on things until we see them develop in our data. So your implication and I could give you examples in policy services, you’ve seen some of the pressure we’ve brought our own expense ratios. I think that’s a pretty attractive story for the last several years. All of those things, as they become real, we bet on them for price and we’ll get market share of return for that. The ones that are in progress, including some of the retention issues we’ve talked about, we don’t bet on until we actually see them. So I think a combination of claims concentration and improvement in quality, an improvement -- an improvement in process, retention. Even our expertise in marketing and using our resources in the call centers, both the servicing. Everything is really improving and I think Progressive is on a nice trajectory to continue to improve in almost everything we do. Now, technology sort of continues to play a role there. But separating it all out, a lot of it has to flow into the data. Maybe we’re seeing some of that flow and we’ll stay on top of trends. I would tell you that I think our future’s pretty bright based on what we’ve been doing and what we’re seeing, and I think some of it very much is reflective of this wider margin.

Good, well thank you and best in luck.

Good morning, Glenn. I’m kind of following up on the previous question. With the expense ratio improving dramatically on the direct relative to the agent over the past year and due to the front end loaded expense structure inherent in the direct channel, do you believe you have developed a sustainable cost advantage in the direct channel? And then I have a follow up.

Yes a short answer on that. Remember, when you look at the direct channel that even the information we’re giving you, which we’re trying to break out as much as possible, you look at the direct expense ratio you really need to have a new and renewal mix to fully understand the impact of that. But I think it’s -- it’s more than true to say that we have brought the appropriate amount of pressure on that expense ratio through some actions. But some of it also benefits from a building renewal book and that really is the last sustainable strategic benefit as we have developed over the last nine, eight, nine, ten years. A direct expertise, we’re now starting to get a very significant renewal book in the -- in the direct business and that obviously reflects in the expense ratio as well. So I think we now know how hard, in retrospect, it was to get a direct business built. We are critical almost daily of some of the things that we’re doing and measuring and know ways that we can continue to improve. I think that’s more likely to be where I think the sustainable advantage will be. Is that we just really critique and pull that business apart, measure the right things, keep the right pressure, don’t do things that aren’t leading us in the right direction. And it’s the expertise in direct that I would say is more the sustainable advantage rather than specifically a number but obviously they all lead to better expense ratios if we do it right.

And the follow up question would be would that then permit the direct channel to have a long-term combined ratio below your ’96 target?

Well, permit is a -- is an interesting word. We could price for other than a ’96. We’re very clear about our goal as a company to be at a ’96 because we think that’s the right mix of price for the consumer in a regulated environment and strong return to our shareholders. So I think the question, if I could just turn it around a little bit, is do I believe that what we’ve done in direct now builds the business that can absolutely meet the kind of targets that were put forth for Progressive on a predictable sustainable basis going forward? And I think what we’ve been able to show in the last couple of years is the answer to that is a solid yes.

Now, John, one thing remember to -- should we go back to Glenn’s question about not subsidizing anything, every single month we reassess what we think the policy life expectancy is on direct, how much we can afford to pay for that new business, and then we recast it and sort of redefine our targets every month. It’s a very dynamic process. We refund them always back to the ’96 goal. So that it’s -- as these policy lives lengthen, we have two choices. We could either harvest more profit or we could lower rates. And we’ve elected, in most cases, to simply lower rates, presuming that the elasticity trade off is there for us. So it’s just -- if it’s not then we’re probably consider some other action. But this is literally a monthly review, a redefinition to make sure we understand continually what’s occurring in that marketplace.

Thank you very much.

Yes, thank you. Glenn, not to pile on on top of John’s question but just another thought on that sort of permanence of the advantage you’re gaining here. Given what you’ve with respect to the mix shift toward direct and with the specific cost reductions you’ve implemented there and when you’ve talked most about is on the claims side and I know that’s still a work in progress. But it seems to me that you’re entering a period where targeting the ’96 combined over the long term, I still understand that’s the practice that you’re employing, but if your cost structure is going down and going down permanently, you’re going to either be pricing for a ’96 and get much more growth than you expect or than perhaps that certainly your competitors are getting and would apply your market share capture. Or you’re going to have this more permanent below ’96 combined that you report. Obviously, both of those things are good for shareholders, but I was just curious on how you see that tradeoff occurring overtime? Should we expect a more permanently high growth rate and/or a more permanently lower combined?

You’ve analyzed the situation absolutely correctly. I think right now you might expect, falling off of Tom’s comments just a second ago, you might expect wider margins simply because we don’t have as much headroom on growth as we might otherwise have. So given current conditions you might expect that to be a wider margin option. But the thing I would throw into the mix of that question because you really defined it very well and I think the conditions of the answer will be it depends on other conditions. We will take growth rate when we think we can take it and can service it. If we don’t think we can take it one of the constraints is slightly higher prices and increase in margins. The other thing to put in that mix, however, is we’re a regulated business. And we have found what we believe is a good mix of price point that works well with regulators, consumers, and certainly the return equity that we shoot for within the company. So I don’t think you should necessarily jump to conclusion that just because things can be done, the margin will stay wide and permanent wide. We are a regulated business and we find that that margin is one that’s satisfactory to regulators, consumers, and ourselves.

Glen, this is Tom King just one comment I want to add is we have 200 competitors who many of them watch us very closely. When we come up with an innovation that works we find that it gets copied. So there is a natural erosion to any advantage that we develop.

On that particular point I agree with that entirely. The infrastructure required to do direct, so the individual that gave me the chance to toot our own horn maybe I’ll take it now. The infrastructure and knowledge required to do direct well, I believe is a permanent strategic advantage to Progressive. And I think we’ve seen a good number of companies try direct with the others thought well this can’t be too difficult and renewals will really always pay handsomely. And I think we all know now that the establishment of a direct business and all that’s entailed in that and getting to a scale that really works is quite difficult indeed. And I think you can see that the landscape only has really a few players in the direct arena that have been able to get to that scale and have the expertise in that. I’m pleased to say I am certain now Progressive is in that group.

And (indiscernible) I think it’s a tremendous quarter and we’re certainly optimistic about what’s going forward with your efforts on the cost sides. So keep up the good work.

Tom Chanolki (phonetic) from Goldman Sachs.

I just wanted to pursue the weather issue a little bit. I guess I’m just a little bit confused. Are you basically saying that you do not benefit from good weather or that you just simply haven’t looked at the impact of that historically? I would have assumed that in a very tough winter environment that, you know, there are typically more accidents and you would see higher frequency of loss. And I was just wondering if you kind of give us a little bit more about the impact of weather on your results.

Yeah, I don't want to come across as if we're not sort of totally attuned to this sort of stuff. What I’m really saying is that I cannot separate for you with any degree of accuracy. If I gave you a number and it satisfies you, unfortunately I’m not sure that I would believe it. So has the weather contributed? Undoubtedly, I mean it’s been no question but I’m going to give you a longer answer because one of the things that happened even with weather condition is you have a lot of low severity accidents. So even if you have high frequency, the severity of those might be small. So translating it directly to the margin is a difficult, difficult issue. But there's no question that we benefited from very good weather in many of the Northern states. The bigger point that I don't think I made well enough is that the impact we saw in frequency was more than I felt we could accept at face value of being just weather related. And the reason for that is we have a lot of states that really don't have that kind of seasonality, and we saw the same kind of frequency drop. I expect the frequency will turn back. I don't think there is anything permanent that I can point to for frequency reductions. Certainly in the Northeast states there's no question a contributing factor was weather. But I think it was more than just weather. We're happy to have it, not a way to explain it. So I'm not sure if I'm answering your question anymore. There's no question it was weather. I'm just not going to say it was worth three points on the combined ratio for that quarter and sort of self rationalize that that's an okay answer. It's much more complicated than that. And I don't think we have it pinpointed.

Elaine Kuragin (phonetic) from Deutsche Bank.

Congratulations on these results, they’re just tremendous. Question and I know it’s difficult to generalize but when you look at the prices that you’re charging for the customers that you want, how do they compare to the major players? And related to that, Glenn you made the comment that you will be surprised if growth rate goes much higher constrained by your ability to manage claims. What growth rate were you referring to? Was that premiums earned, premiums written, unit growth?

That would be unit growth in new applications. That’s the one I sort of -- it’s a more day-to-day issue. So for you, perhaps look at the written premium as sort of the best measure of that. Price relative to competitors, you know, that -- that really is a changing issue too. I did know that I think in New York that we have the ticker on our website. So that actually sort of gives you an answer to that question and the thing you would find if you looked at is that it sort of -- it depends. In many cases we are very attractive with other -- with State Farm, Allstate, so on and so forth. And other times you’ll find us to be mid-pack or even higher. The bigger issue is how does the market place really perform, and I would say that in general we get about our market -- about the market share of other players as the prior insurance carrier in our books. So we will I believe see a little bit of an impact. State Farm is putting on some fairly significant restrictions around the country, also taking a fair amount of rates. So we know kind of what they’re responding to. We may see that go up. So I suspect our competitiveness against State Farm may very well go up. That, however, is not the whole question. The question is only when you’re compared with State Farm does that become relevant. So that will happen on some occasions, some people will get an increase perhaps even a non-renewal from State Farm, I don’t know. And that case it sends them to the market place shopping. Of those that call us on a direct basis where we give out other people’s rates or they have obtained them previously from the Internet on our site. We still have many people that are buying Progressive’s policy even after they have been told that there may be a slightly better rate somewhere else. So rate competitiveness is clearly, clearly relevant. We spend a lot of time looking at that. The only way to make meaningful statements is really at the state level. But I think that you can reasonably assume, based on our growth rate, we’re a pretty competitive price point in the market place today in really both channels.

Well, that concludes our conference call and we thank you for your time.

That concludes the Progressive Corporation’s First Quarter Conference Call. An instant replay of the call will be available until May 3rd by calling 1-800-947-6519. Thank you.