前進保險 (PGR) 2002 Q4 法說會逐字稿

Welcome to the Progressive corporation's fourth quarter conference calm. All participants will be able to listen only until the question and answer session. This conference is being recorded 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 on quarterly results, and then we'll open the call for questions. The call will last about an hour. Statements in this conference call that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from our projections. These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions, projections generally, inflation and changes in interest rates and security prices, rate changes and other initiatives by competitors, ability to obtain regulatory approval for requested rate changes, legislative and regulatory developments, the outcome of litigation pending against the company, weather conditions, changes in driving patterns and loss trends, acts of war and terrorist activities, court decisions, litigation, healthcare and auto repair costs and other matters described from time to time by the company. In addition, investors should be aware that Generally Accepted Accounting Principles prescribe when a company may reserve for particular risks. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods.

Good morning. In short the fourth quarter was a strong finish to the year with 32% net written premium growth versus 30 for the Greer. Maintaining excellent profitability. A digic of our growth for the year shows several contributions. First, rate. The aggregate rate change in 2002 was approximately 5% for personal lines. We currently expect our rate need to be at that level or slightly higher in '03. Second is policy life extension. We experienced about 20% increase in policy life with most tears in both chance contributing. We see some flattening in the rate of increase in retention, but expect to sustain the new levels. Our agency ultra-business is the only outlier to this trend where required rate mid-year put downward pressure on the policy life expectancy of about one month for this otherwise high retention tier. Third, new business. Glet rates in new business have been very strong. Our acquisition of new business policies outpaced our replacement rate due to attrition in every tier of both chance.

A few highlights of each business: first, agency. Written premium growth accelerated during the quarter for an increase of 29% for the quarter and 26% for the year. Market conditions remained favorable in this channel. Lots and lots of adjustment expense for the quarter, end year met expectations at 91. -- 71.9 and 72%. We saw continued strong unit growth through the fourth quarter, new applications and solid renewals kind for a 22% increase in policies in force year-over-year. The direct, our advertising continues on a national basis supported by additional local market spending to maximize yield within our profit parameters. We currently have no significant constraints on local marketing efforts. Based on favorable advertising rates, our spending in 2002 was approximately the same as 2001 with greater efficiency and yield. We believe we can effectively increase our advertising spend while optimizing our yield in a plan for increased advertising in 2003. 2002 direct business net written premium grew 39% for the quarter and 36% for the full year with a decline in both loss and expense ratios.

We are seeing that the consumer acceptance of on-line sales supported by phone service when needed continues to grow. On commercial order, this business concluded a year with over 50% growth at a 9 point profit margin, almost a point lower than last year. The fourth quarter was no exception with 47% growth and a 93.4 combined ratio. The story for us on commercial auto has been the adoption of credit underwriting based on knowledge gained from personal auto. This has opened up a more preferred and standard business. Within the scope of vehicle acceptance we target. This business typically requires higher liability limits, over 500,000 combined single limits. As this business grew, we increased our scrutiny of rate level and loss reserves. As expected, the growth prout mixed shifts and increased the available data for segment analysis. While this is good bris, the development of higher limit losses is significantly different from lower limits. We expanded our segmentation of reserves and will continue to do so as this business grows.

In the fourth quarter commercial ordinary serves were increased $18.5 million. Our November release captured most of the changes for this quarter. Our '03 plans for this business are consistent with current scope of vehicle acceptance and limit exposure. A few comments on our top five states. Those states company wide account for almost 40% of personal lines net written premium. Florida remains our largest state with about 8% market share on private passenger auto and over 25% growth in net written premium for 2002. It has been a very active environment all year. Most recently the area's insolvency has placed more business in the marketplace, somewhere in the neighborhood of $150 million. We accrued $7.8 million for our estimated exposures that guarantee funds from this.

We're keeping pace with our rate need and have all the claims staff on board to handle more growth in Florida. Texas ranks number 2 with roughly 5% market share and a growth rate of over 50% this year. This was one of the key states for us in terms of claims hiring, and we have kept pace with the need. In our key competitive challenge is that our preferred new business production may be affected by the lack of companies still writing stand alone homes versus requiring a package policy. New York is the third largest state. Even after a year of constrained growth downstate. Market share is about 6%. Told growth for the state was about 17%, but it's more like 23% upstate and just starting to grow again in downstate.

Competitors are still taking rate increases in the 5 to 15% range, while we've recovered profitability, the New York order market remains unhealthy due to high levels of no fault fraud, which has caused the assigned risk plan to repopulate at Hawaii and combined ratios. The insurance department has kept the market working by granting companies rate relief. Industry continues to push for no fault reforms but so far has been unsuccessful. Progressive remains committed to New York and has plans for further controlled growth in 2003 while reforms play out in the legislator. Ohio, our fourth largest state, has over 11% market share and a growth rate of 7%. Ohio is one of the more favorable insurance environments with a lot of competition and less volatility in rates, so we didn't see the market upheaval that drove some of the growth in Florida and Texas. Fifth is California with about 2% market share and over 40% growth. California seems to present unique challenges. Wage an hour rules relating to the classification of claims adjusters are different from the rest of the country.

Regulatory issues on rate level and how we can structure our business in the state often impede our grow in California in accordance with the business model successfully deployed in other states. Similarly, the California legal environment presents additional challenges. Mercury insurance recently lost an unfair trade practices lawsuit that allegation brokers were acting as agents and therefore shouldn't have charged broker fees. All of our contract producers in cattle interact with us as brokers underwritten broker agreements, so we're obviously very interested in the outcome of that case. While not without challenges, California represents a significant opportunity for future growth and fourth quarter growth was some of the strongest yet. We have excellent resources in place to manage the challenges and grow this business. Loss trends for the fourth quarter were in line with the first three quarters of the year with severity increases in part offset by falling frequency. When comparing fourth quarter 2002 to fourth quarter 2001, loss frequency declined in every coverage. However, we believe the frequency trend maybe bottomed out. Severity trends increased on all coverages except personal injury protection where our trend was a gain close to zero.

The is vart increase in collision is in double digits. NAII data shows smaller increases in frequency and severity. All in all there are no shifts occurring that cause great concern, but we will be watching the frequency trends closely and pricing appropriately. The fourth quarter of winter weather produced some increased activities for us with increases in frequency of loss in December in the northeast and mid-Atlantic states, but nothing particularly notable at the countrywide level. The accident accident year and calendar year is also basically the same this quarter and for the year. If I can report that to you every year, I'll be very happy. More importantly, minimizing reserve error allows us to have the best pricing data and continuously accurate prices. November commercial order results highlighted a need to comment on, or provide data to support any significant actuarial adjustments made in a particular month. Actuarial reviews, while continuous throughout the year, are rotational by specific segments. By high frequency of review we expect to reduce the overall impact of any one review. However, a segment review in any given month is the most likely reason for a significant change in reserves.

Individual case development will exist but is less volatile to the overall reserves on a month by month basis. Thus, we will begin including the amounts of any actuarial adjustment made in each month's underwriting release starting with the January results. We will continue to provide the full accident year/calendar year reconciliation on a quarterly basis. Hiring claims representatives was a top priority for the year. For the quarter we hired 791 new claims representatives. While we will continue to hire some fairly big numbers of Republicans nationally, we're right about where we want to be now. I've mentioned this topic in every call this year because it was the most immediate threat to sustained growth. And we were very disciplined about placing temporary moratoriums on advertising in cities where we were behind on hiring. Every new external claims person we hired we reviewed 60 resumes, then followed a process of phone interviews our claims simulation test and in person interviews with the hiring manager.

Our claims people across the board did a terrific job and are up for more of the same this year. Expansion plans for our ends to end claims service mod 'em are taking shape after almost two years of development. In addition to our current seven sites, we will add three new sites this first quarter, Atlanta, Georgia, Columbus, Ohio and Richmond, Virginia. We are working on 17 additional sites for 2003. Assuming responsibility for the repair process is clearly more efficient and more positive for all steak holders, claimants, repair shops and Progressive, and I'm very pleased with our direction leer.

On the litigation front, we reported in November that the company stand a $10 million reserve for our best estimate of the total cost to settle our exposure arising from a California class action relating to the classification of claims employees based on state wage an hour laws. We have reached a settlement in this case that must still be approved by the court. We are also in the process of determining how best to manage our California claims operation in this new environment. It's important to understand that this case was based on California-specific law. At the federal level our classification of claims employees as exempt workers has been repeatedly affirmed, although we still have a pending challenges in Federal Court. This change in classification in California is not the best outcome for Progressive or for our customers, but I'm confident we will make the necessary adjustments and this development will not impede our ability to grow there. Some comments on investments. On a fully taxable equivalent bases, our fixed income portfolio with a totals return of 1.2% for the quarter and 10.07% for the year. On the same basis our equity portfolio posted a total return of 7.35% for the quarter and a negative 20.73% for the year, a combined 122.1 percent for the quarter and 5.48% for the year.

As of December 31st, the duration of our fixed income portfolio was 3.2 years, down from 3.5 years at September 30th with a double A weighted average credit quality. At December 31st, the fixed income portfolio had $328 of net unrealized gains while the equity portfolio had $78 million of net unrealized losses in common equities for a total of $250 million of unrealized gains on the entire portfolio. This is an increase of $113 million from the end of last quarter. We have taken all the write-downs that we think are appropriate at this time. For the fourth quarter our review process for other than temporary impairments you will resulted in a write-down of $85.4 million. We realized a $48.3 million gain on sales of securities for a net $37.1 million of pretax realized losses. November 18th we issued $400 million of senior year debt at a coupon of 6.25 and an all in yield of 6.31%. The proceeds will be used to provide statutory capital for future growth and fund a $200 million debt maturity in January 2004.

The issue of stock options and expense treatment was covered in a prior call, and I indicated that I would be taking a more comprehensive look at the issue of long-term incentives. That review is done, and I've decided that we will no longer use stock options, but rather, restricted stock as the vehicle for long-term management incentive compensation. This decision was based less on the accounting and expensing issues and more on what I believe is the best alignment with shareholder interests. This change is possible under the currently approved incentive plan which had a 10-year life-span expiring in 2005. Given that limitation, we have decided to make some modest changes to our new plan. Our commitment to neutralizing dilution will remain and new awards will be neutralized in the year of grant. We will describe in greater detail the ongoing neutralization of outstanding options force the runoff of the option-based program in supplemental reporting. This exchange to restricted stock will also be posed to shareholders for our director compensation in the form of a new director stock plan to replace the exist being director and QSO plan. Further information will be in this year's annual report and proxy.

On the topic of compensation, our 2002 gain share year closed with expected payment of approximately $169 million, up about $41 million from last year. The program is demanding by its design and an important part of our compensation philosophy, and it's great to see all Progressive people benefit from an excellent year. This was the year we had opened and planned for, a year with solid rate levels, strong service levels and outstanding response from consumers and agents. The business model is solid, and I'm very happy with our execution. We had exciting initiatives in every area of the company, all focused on getting more business and improving our products and services. We've set tough objectives for ourselves and we're excited by our opportunities. I'll open up for questions.

Thank you. At this time we're ready to begin the formal question and answer session. Anyone previously in the queue has been purged. If you would like to ask a question, you may press star 1 on your touch tone phone. If you'd like to ask a question, please press star 1 on your touch tone phone. You may press star 2 to withdraw your question. To allow the company to respond to as many callers as possible, you will be limited to one initial question and one follow-up question per request. If your telephone has a mute capability, we ask that you use this function during the time your question is being answered to minimize any background noise. To the extent you have additional questions, you will need to place your name back in the queue by selecting star 1 on your telephone. Our first question comes from Miss Nancy Benacci from McDonald Investments.

Good morning, Glenn. Congratulation on a very good year. I wanted to ask a few they are question on retention. I think you indicated policy extension life was up about 20%. If you look at where retention was at the third quarter and then where we saw it in the fourth quarter, particularly in the direct channel, did you see a major change there and, you know, just again more clarification as to what you're looking for going forward.

Sure. Yeah, I tried to get some color there, and it really isn't a very across the board retention gain that we've seen. Most of the retention, I gave you the 20% number. And I want to stress that is sort of the year in total number. The flattening comment was obviously very serious. It does not mean it's declining or we expect to see those gains lost, but we've come to a whole new level, which is real exciting for us. If I took just the third quarter -- fourth quarter over third quarter, I'm probably looking at something in the range of about a 6% trend in increasing retention. So, if I've got 20 for the year and 6 for a that period, clearly on the flattening part of the curve. I would love to give you projections of exactly what will happen going forward. That is difficult to do. I am prepared to say I don't see any reason for a decline in the gains that we've won this year. This was something -- your questions have always focused on retention. That's great. This is something that really is critically important to Progressive. If you take a look at the books of business in general, getting a policy life of that magnitude across the entire book is just fabulous. It's setting us up for great runs going forward.

Good. Thank you for that clarification. And then my follow-up is really focused more on the investment income number. And just to make sure I understand correctly, as we looked at the numbers that came out in the fourth quarter, we definitely saw an increase in invested assets in the fourth quarter over the third. But certainly even with slightly lower yields it still looked like the investment income number was a lot lower than what would be expected. Is there something else there in the number I'm missing? And could you give us an indication of what you would expect in general going forward for '03?

Okay. Let me do the second piece of that and ask Tom to comment on the first piece. I think in terms of going forward, the advice I would give you, two or three points. First of all, we are always going to have the capital we need to run the insurance operations. That's where we focus all of our time and attention. Our capital allocation strategy is not likely to change at all, the 85% fixed income, 15% equity is a mix that we feel gives us the diversification and risk return we're looking for. Not a lot of change there. You will note that we shortened our duration to 3.2. Again, we're not interested in market timing of interest rates or in sort of equity environments, but we're shortening, believing long-term interest rates will rise. If you were to look for sort of a yield on new money coming in, you might want to take a sort of a 3.2 interpolated treasury rate and put a spread for double A on top of that, which is essentially the quality that's reflected in our portfolio in general. So, that would be the going forward view. And again, the cit cam thing, and please understand we are going to be very serious with about this. We are not going to chase yield. We're gone going to run the insurance company. We look at things on a total return basis. Tom, do you want to comment agents on the fourth quarter?

Sure. Nancy, in general if we were going to manage the yield, we probably would have increased retention, we probably would have rotated out of tax preferred securities, we probably would have seen the average credit quality decline a bit. I'm sorry. We would increase duration. We always try to increase retention. We would increase duration. This unfortunately could lead to substantial negative total return. And we always manage the portfolio to support all the insurance we can profitably write. We don't chase yield to supplement the underwriting results. We manage really to maximize total return. During the fourth quarter, therefore, we did a couple of things, as you might expect, to do that. The first thing was we lowered duration from 3.5 at 9/30 to 3.2 at 12/30. And that was done primarily by 10/31. And we -- that's up from 17.1% at 9 fhsh 30. So, we've done all these things, really, to position ourselves, we think, to make sure we don't impair our capital and that we have the potential to maximize total return going forward.

Okay. Thank you for that explanation. That's very helpful.

Bill Wilt from Morgan Stanley, you may ask your question.

Hi, good morning. Wonder if you could give an update on trends and the regulation of credit scoring, hitting some of the major states across the country where that's currently a hot issue?

You're right, it's a hot issue. We're being very forthright in our actions. Maybe I'll get a few comments from others in the room, but I don't think there's anything on the horizon in the fourth quarter that was particularly awkward for us to deal with. So, we see continued movement on credit use in rate being, but nothing that is being particularly restrictive for us and don't really see any major events on the horizon. The one that actually comes to mind is a positive one that we'll be able to start using credit in Georgia, a state that for a long time we were not able to use it. So, as a material sort of short-term issue, no major things to report. Credit is still an issue at regulatory and legislative who are zojs. A couple of things, if I can. Like I say, Georgia is a positive. We have been very active in our own use of credit to try and make sure that our credit models are more open and viable to regulators and in fact we've created a credit report for consumers should they wish it that is very, very easy to read and it tells them exactly how we used the credit and what the implication was to their own rating. And we've made that available for those that want it in Michigan and we intend to continue to roll that out across the country. But we've changed our own credit scoring and Allegheny rixss and are willing to filing those where regulators want them.

Looking ahead longer term, whether that's one or two years, are you concerned that its use will begin to be diminished as regulators -- if they start to chip away at the margin on the way credit is used in underwriting rate making?

I actually believe that's a fair assessment. There are issues that begin to weaken some of the credit, but I think those are also probably the right things to do from a consumer perspective. So, let's assume that your premise is correct. I should answer what we're doing about it. We are actively, as you might imagine, developing sort of a plan B. So, we are looking at new rate as a calculation all the time that incorporate credit either differently, perhaps make it less central to the rating algorithm and looking for new raters that will explain at least as much variance or greater variance. That's continued research that we're doing. We could respond to market conditions if credit went away reasonably quickly and don't think we'd be jaundiced by some part of that.

And the last question, then and the last one on this topic, you mentioned the use of credit in commercial auto, underwriting rate making. Would you anticipate difference there at the state level personal versus commercial if there are changes on the use of credit? And do you know or expect that other -- your competitors in the commercial auto area are using credit the same way that you are? Those are great questions, and I'm not sure I can anxious the second one as well as I would like to be able to. So, I cannot tell you about competitors. I'll be perfectly willing to do a little more research on that, and if you want to ask that next time we're together, that would be great. With regard to credit in commercial, effectively we learned so much in commercial lines. We applied it to commercial. I think there's a lower sensitivity to commercial clients having credit exposed for different purposes than there are consumers. So, I know of no situation where sort of the sensitivity is as high on the commercial front. And I think from a regulatory point of view credit is primarily in their sights of of a -- just personal auto as opposed to commercial auto.

That's great. Thank you very much.

Mr. Charles Gate from Credit Suisse. You may ask your question.

Hi. Good morning. Two questions. My first question, both your October results and your November results were impacted by lawsuits and, I guess, other contingency assessments which you laid out in those news releases. Was there anything similar to that in December?

December was very clean from that perspective. I think the real -- the big one was obviously November where we had several issues and we tried in notly release to give you as much detail. I can recap that a little bit. But to answer your question with a yes/no, December was very straightforward. We had a combined ratio, 92 and change, under 93, solid results, solid growth. And in fact, if you take the basic underwriting of the company, October, November and December were truly excellent months. We had actually accelerating growth. We had strong margins in every month. November clearly threw a contingent situation with several different events happening, which we outlined in our results. The $7.8 millionaire's reserve, it is what it is. We take it when we see it. In fact, we try to be ahead auto that. The $150 million in calorie serve, that input case was able to take some developments that we thought were favorable relative to our tooblt negotiate a settlement. It just happened to be in that month. We did some other -- we also took $3.1 million relative to our alternative commission program. And that's one where quite frankly we tripped up a couple of times. We thought we had that reserve nailed. It grew on us based on some of the things that -- we'd just never seen those kind of claim end rates before on that particular type of issue. So, it was not something we had a lot of experience with. We thought we made best estimates each step of the way. It ultimately took three estimates to get it right. We got that squared away in November, and that is the end of that one. So, these events were -- they are what they are: we had some opportunity to take a look at commercial. I've made some comments about are what they are: we had some opportunity to take a look at commercial. I've made some comments about commercial. Were I an analyst, I would be looking at commercial pretty intently, and you can reasonably believe we're doing that. And in fact, we pushed a lot of emphasis on to our November reserve review on commercial and felt that with the data available, and it was growing at a fairly rapid place, we wanted to make sure we were right. So, we took those reserves in November. And it turned out also in November we did some fairly aggressive reserving for Florida. I'm not going to go into the detailed strategy that we're pursuing there, but we feel in Florida to get the ultimate loss control we need and the best economic outcome for the company, we're going to be spending a little more money than normal in loss adjustment expense, particularly on defense of pit claims that we are have outstanding, and we're accrued for that particular expense.

November was a very interesting month for us. As we released numbers, we realized that CV in particular, which is a group that's growing very fast, had a surprising result. What actually happened in the month of November is that our actuaries decided to relook at reserves on a limits basis. It dramatically changed the way we looked at reserves there. We actually increased reserves in CV by $30 million and increased reserves company wide by 20 million. That was a pretty big blip and people were wondering, gosh, what's really happened? Our conclusion based on that was to allow analysts to better understand what is transpiring, we may as well just go ahead and give you all the reserves changes we make every sings El month. So, beginning with the month of January we've decided just to go ahead and give you all the reserves changes each month so you can conclude for yourself what the implication is.

My follow-up question, I believe Glenn made the comment that if I was an analyst, I would be following the commercial business, your commercial business, intensely. Is that a reference in part to the high rate of growth afternoon a reference in part to what occurred in the mid-eighties, or is there something else?

No, mid-eighties, not a reference to that at all. No, I think when you've got anything that's growing 50%, you can reasonably assume that the base and what we have now can be two different things. Even though we have not changed, and I want to stress this relative to the eighties comment, we haven't changed the kind of vehicles that we're insuring. We have been able to attract through the use of introducing credit a more standard and preferred commercial auto customer. And we're excited about that. But any time you've got that kind of growth, you've got to make sure we're on top of reserving. If we fall behind on that, our pricing is not accurate. So, we're doubling our efforts at that kind of place and that's really the reason we've broken that out in the last few months to be more transparently reporting to you and not disguised by our other commercial businesses.

Thank you. Mr. Ron Frank from Salomon, Smith, Barney.

Good morning. I have a question and a follow-up. Quickly on the investment income, the consecutive quarter decline, despite the proceeds from the debt offering, was that entirely attribute tubal the duration shortening in the portfolio, or was there anything else at work there that we should know about?

I'm going to try to break down a couple of things for you and answer that. First of all, when we're talking about decline, you are talking about specifically decline in yield?

Well, actual will you, I was talking about a decline in dollar net investment income versus the third quarter which was, you know especially surprising in light of the likelihood that you had some proceeds from the dents offering coming in there into the portfolio in the quarter.

Right. No, it's strictly a couple things. First of all, as Tom and Glenn talked about earlier, we shortened our duration down to about 3.2%. I think we began the year around 3.7, ended the third quarter at about a 3.5 duration. But first of all, as we're turning over our portfolio, because of the decline in duration, we're obviously buying in newer, lower-yielding securities. The second things as you've pointed out, we have increased cash flow, a total of about $680 million in the quarter because of the debt offering, because of cash from operation and because of returns on the port folio. So, the size of the portfolio is up quite a bit, but of course, again we're buying in newer, lower-yielding securities. d other thing we did during this quarter is we bought in and we increased the holding of our tax preference Muni portfolio: it was about 17% at the end of the third quarter. What that has done is also contributes today a lower yielding rate. What we're doing, though, of course, is these dollars getting invested in securities that we believe over the long haul and over the next period will increase our total return, but also because the base of the portfolio is coming up, investment income will continue to be strong. Hopefully that kind of addresses --

It does. I was just wondering if there was anything beyond the duration and the munis and it seems like it was really the ports folio shifts that did it.

The time of the turnover and of course the lower-yielding environment.

Right. Thanks for that. Glenn, a broader question on the competitive environment. You've been able to address rate need. You seem very comfortable that you'll continue to be able to do so, which sort of implies that you don't anticipate a significant heating up of the competitive environments. If that inference on my part is correct, the question is are we in a situation -- I mine, bird's eye view is that your auto results, GEICO's, Allstate's, they're getting reasonably healthy right now. Is State Farm just providing a nice umbrella for all of you, and is that what you think is likely to persist? I think that's probably true, but I don't think that we should overstate the impact of our new business that comes directly from State Farm. State Farm clearly influences a lot of the marketplace in terms of their pricing, but it really is an awful lot of other independent agency-based companies that have east take a lot of rate, put moratoriums on or otherwise changed their business practices. And a lot of that growth is out there. Texas the kind of growth rates we've talked about, 50%, we see a lot of that. So, I would say yes to the State Farm, but I don't want to be misleading and say because State Farm is in a lot of trouble, all that business is coming our way. It is kind of a barometer for a lot of others in the marketplace, as well. So, I think we're going to see a lot more rate increases from smaller players yet. I think we'll see most of that activity in the independent agency channel. But we'll just have to report it as we see it. And we don't see it stopping any time in the very immediate future.

Ron, as we look at the prior insurance -- as we get new insureds and see where they were previously insureds, State Farm actually is the company that gives us the greatest amount of business. I won't comment on who does. But among the top five, they're not the one we're getting the most business from, although we're getting certainly a lot of business from them.

Oh, go ahead. We won't tell. Very quickly, then, it almost sounds like a market consolidation story is one of the cyclical competitive environments.

Well, I would be more than happy to talk on that topic. I talk openly about market consolidation. I believe firmly that is exactly the story that's going on, driven in part not only by sort of current market conditions and reinsurance availability, capital, so on and so forth, but some really fundamental issues that I'm going to take this opportunity to stress. It's all about for the future technology, whether or not you've stayed the course on technology and have the right things in place, it's all about claims superiority, pricing and brands. And if hi to put those four, I'd put them up as top issues. I think the companies that are going to survive will have strong initiatives on all of those. Those that don't, they won't have much to offer. And I don't say that out of total optimism, but our expense ratios now are such that it's very hard to compete against Progressive. It used to be that we were disadvantaged in expense ratio. That's no longer true. And I think if you're a smaller player and don't have significant strengths in at least one of those four, it's going to be very hard to create a proposition for consumers at a price level that allows you to compete. So, I think you'll continue to see some consolidation. We're looking at somewhere be in the range of 70% of the marketplace now contained within the top 15 writers. Only 20 writers in the entire field have 1% market share or better. And I suspect that those trends are going to continue and you might see that even consolidate more.

Okay. Thanks very much.

Mr. Robert Glasspiegel with Langen McAlenney. You may ask your question.

Good morning. Glenn, you were fading away on your characterization of woo price increases were in '02. I was wondering if you could repeat that number, and put maybe a pyramid that between nonstandard and preferred lines and also just give your outlook for rate increases for nonstandard and other lines going forward.

Sure. What I gave, Robert, was 5% as an aggregate number for 2002. And recognize we're talking about sort of filed rate here to give you -- and I'm trying to give you in all honesty a fair assessment of whether this is really small, mid or large, because every state is different. Filed is not necessarily what ultimately gets achieved. But I think 5% is a good working number for the kind of new that rate has had on our results this year. So, if you take a look at the policies in fort and the network and premium, you just get a contribution value. How is that distributed nonstandard to mother standard preferred? I really don't think that's an about speculation to break that out any further. But I will tell you that we're being more challenged on our rate in the higher level business, our ultrapreferred business. So, we've been taking a little more rate there than in the nonstandard where we have traditionally had the experience and not needed to take two or three bites of the apple to get the trends exactly right. So, a little more aggressive on the ultra-ends than the nonstandard. My spec facial is that will actually still be true in '03. And based on my projection, which hopefully I if I caned up on, is I don't believe, and I can't always give you good causation, that frequency is going to continue to decline. I think that if you take a look at even NAI numbers and certainly our own, you would start to come to a conclusion that frequency has either bottomed out or perhaps started to turn back. That is an additional trends that we didn't experience this year, and I think that will be additive to probably a point, point and a half on rate level next year.

My follow-up, I guess, is just looking for more amplification on what's going on, on the nonstandard marketplace, as far as new players in and out on the capacity side and, you know, would you characterize the nonstandard markets still as a hard market?

Yes, I would. I go through these competitive reviews from our general managers on a fairly rigorous basis, and I don't know that there's any major trends I'd come up with. There aren't that many sort of significant national players. There are a lot of regional and local players in the nonstandard marketplace and you continue to see exits and moratoriums and other restrictions going on. So, I'm not going to make any projections because it's been hard for a while now. You would think things will start to change eventually, but the nonstandard market doesn't show any real signs of --

You don't think all state being near targeted pricing levels changes the dynamic of that market materially?

Not materially with us. And the independent agency channel is one where we're competing with ditch sets of customers and our growth comes a lot from their issues, not necessarily directly from all state. I think there are a couple of states where Deerbrook has gotten a little more aggressive. I would say in general most competitors are still struggling. We see signs of companies being aggressive and I might put Safeco in that category. They're looking like they're becoming a little more aggressive in certain marketplaces.

Appreciate it.

Mr. Ira Zuckerman. You may ask your question.

Glenn, most of the questions have been answered, but looking at policy counts on both direct and agent on a month-to-month basis in November and December, it looked like there was a significant slowdown, not year to year, but as we go through November and December. Is that a seasonal trend, or are you seeing something else?

No, I think you will see that fourth quarter over third quarter any given year. We had good growth on a fourth quarter over fourth quarter basis. Don't read anything into that. Third quarter is strong. You've got Thanksgiving, Christmas and those sorts of things in the fourth quarter. So, our actual net written premium is down from third quarter. But that's not the right comparison.

Then what we're seeing is a seasonal pattern and not anything else?

Yes.

Okay. Thank you.

Mr. Larry Patowski. You may ask your question.

Glenn, could you expand on your comments about California, touching on the court case that a competitor of yours lost and what you think it might mean for you and also discussing the return of the commissioner and any thoughts about that regarding pricing?

Yeah, I'll do that. You'll have to let me go to just a constrained point because this is clearly not an issue against Progressive at this point in time. The issue is really about brokers and agents. It's not an issue of returned commission. This is about a broker fee, which is a fee charged simply by the individual directly to the consumer. And that's the issue in mercury's case. We at a previous time had agents, we had our producers producing for us as agents. When we changed the contract to make them brokers, there was a material change in that contract. So, we didn't just say one day, you were agents. Now you're brokers. There is a change in the contract level. So, we don't necessarily have any opinion right now that suggests that we have concerns or troubles. It is, however, important for us to know that Merck prelost its case. I make no judgment on what Mercury will do or how things will ultimately play out there, but it is an interesting development that we have to stay attuned to, and depending on the outcomes, react to it.

And on the environment in general?

The environment in general is just tricky. California doesn't allow us to have the same model for our insurance and our rating as most of our other states. Credit obviously is an issue that is not available for us in California the same way it is in other states, and there are issues in California with regard to different companies, different rate levels, all of which we have to work through. And we are working through. But just note that it's not the same as taking our ratings mod 'em and our practices and taking it from an Ohio and being able to put it in California. Most of the things we do in California are quite unique to that environment and just make it a little bit more tricky for us. They're things we're also to work through because the market in California is so huge. We would love to be back. There was a time when that represented 23% of all of Progressive's revenue. It's far from that today. So, we'd love to be back in California. I'm really just trying to allude to the fact that it's a very different set of market conditions, rating is different, what's availability for underwriting is different, use of company structure is different, and we have to respond differently.

All right. Great. Thank you.

Operate Mr. Paul Newsome from A. G. Edwards. You may ask your question.

Good morning. Just a quick request to the severity trends. One of your competitors last quarter was mentioning medical cost in the nation was a real issue for auto insurance. And I was wondering if you could comment on how medical cost inflation works into your severity are trends as well as whether or not you also feel that we're going to see an uptake in medical cost in the nation?

The answer is yes, it does play a role, more specifically in bodily injury trends, but other immediate coverage, as well. But bodily injury is where we can see most of it. We have tried on several occasions to sort of try to track our medical index and see how our trend relates to thats those relationships aren't always as strong as you might intuitively think about them. But they're definitely positive. I've reported positive numbers throughout the year. So, I would -- I'm not sure who the competitor tore was, but I would agree that those are positive trends. And my belief in general is that you're always going to see something in the range of about a 5% trends on fixing people. And it's at least that this year. So, I would agree that there is a trebdz there. The trend that I think you're asking this question if, as well, the one that's a little more notable right now, less dollars involved, is collision seems to be jumping up around double digits, which is something we have to keep our eye on. And I'll route R report to you next time how I see that developing. Good. That was my question.

Mr. Mark Lane from William Blair and company. You may ask your question.

Good morning. I wanted to ask if you could clarify your comments on the claims hiring. The way I interpreted it is that you said you'd hired 791 new people this year and felt you were right where you needed to be and you'd hire people this year, with you maybe at a much lower level. Is that how we should interpret that?

No. Let me clarify. What I was getting at is that quite frankly most of the year we've been in a little bit of a catchup mode on claims hiring. With the kinds of premium growth that we've put on and unit growth that we've put on this year, that's a major issue to keep up on claims and one where we're prepared to constrain. So, on most situations I think I reported we were doing well, we were on target, but that always meant that we had a little bit more to do. When we ended the year, it was probably the first real point where we could quite genuinely say we're about where we need to be. Now, we are trying to hire ahead of need. So, what I mean when I say "need to be," is not a perfects matching with current capacity needs, but a little bit more into the future. The second point I was trying to make -- so, in other words, the hiring's good, we're about where we want to be, but based on our outlook of growth, we're going to have to keep that hiring engine going at about the same pace, if not more. Two other points I'd like to make there, one is specifically with regard to the quality of hires. We have no intention of losing the quality of claims service or loss control, and we are very picky. And that would be another constraint to our growth if we didn't feel we could get the claims adjusted at the quality query looking for. So, I gave some insight that in fact the filter is probably about 60 resumes to one hire. Just to give you an idea. Those are factual numbers. Not just putting a sign out and having people walk in off the street. We would absolutely constrain if we felt that quality was going down.

In preparation for almost this continuous resizing of the company you may or may not have seen a press release, I think it went out yesterday, where we have opened just in recent times three new training centers for claims. Two of them are replacements, one in Cleveland, one in Tampa, Florida. And the capacity of those two alone would be 7,000 training claims Republicans per year, a significant increase in our current capacity. And that would be additive to our capacity in Tempe, Arizona where we have a claims facilities . And in addition to those two replacements, we opened a new special lines only training center where motorcycle, recreational vehicle and watercraft training will go on. So, we have really taken a step in our internal infrastructure to make sure we have the training capacity not only near current needs, but well-suited for significant future growth. And we'll keep at it. But that is a big challenge for us. It will be a challenge going forward. The report really comes down to so far so good.

So, versus 12 months ago if you feel like you're more caught up right now and the quality of applicants is still relatively good, are you more comfortable today with your capacity for growth than you were 12 months ago?

Yes.

Okay. And then just as a follow-up on the rate level, the 5% in '02 and then an expected at least 5% in '03, you mentioned that some of the source of that was maybe a turn around in frequency, a point, point and a half. I would have thought that when you were coming into '02 that you were still in need of more rate than you would be now. So, I was a little bit surprised that your rate level -- your rate need this year would be at the same level or a little bit higher. Is there something else other than frequency or is that also driven by competitive conditions where you can take a little bit more rate now than you would otherwise? Can you flush that out a little bit?

Yeah. I think the point that I'd pick up in your question is coming into '02 we needed more rate. You probably can't remember quite as vividly as we do, especially when there are mistakes, but the fourth quarter of '01 was actually quite decent and we had gotten back essentially to rate adequacy. We did end '01 with relatively little in the rate of unit increase. In fact, in our agency business we were down 1% on unit counts at the end of '01 but felt like we entered '02 with relatively very good rate levels. If you're thinking about that little acceleration of still trying to catch up, I don't think that was there. We were adequate at the start of '0it. I think we're adequate at the starts of '03. And my projection of slightly faster rate is really just related to the frequency.

Great. Thanks so much.

Mr. Michael Smith from Bear Sterns, you may ask your question.

Good morning, Glenn. In the past the long-term goals for Progressive have centered around a number of 96% on the combined ratio, which of course you're much lower than that now. Given the drop in investment yields, are you considering lowering that long-term targets, or would you be settling for a lower return on equity targets?

No, I'm not considering lowering that goal. I've just finished writing the shareholders' letter this year and reconfirming our goals. I won't go into all the details. It will change a little bit on the return on equity because we feel it's more of an outcome of the first two goals, but the primary goals are the '96 combined ratio is our first and foremost and highest priority goal. Second will be to gre as fast as possible while preserving the service and quality of service and brand. And there will be no change on those goals. When market opportunities allow us to do better than that, clearly you know what we attempt to do. But in terms of a long-term goal, you should think of Progressive as an underwriting company with those two as dominant goals.

Just as a follow-up, your last comment before the Q & A was that this was the year that you planned for. That sounds like somebody who's arrived at the summit of the mountain. And I'm wondering if there's an implication here that this is as good as it gets. No, but it feels pretty good to have had this one. No, I think perhaps a bit more operative comment is internally -- let me be very serious here. Yeah, it was a great year. You gotta feel good. It's great for our culture. Everybody in Progressive feels good about it. But they feel like they deserve it. We won. We worked hard. If you were here today you'd find that people aren't running around sort of gloating about a good year but are right back at thinking about the next year. And I would tell you that the most excite being thing is in every area of the company, whether it's pricing, claims, technology, any area, we have exciting initiatives and they're all taking us to the NFL level. You're like Lucy in the Peanuts comic strip. You only want peaks and more peaks. That will work.

It's our last call, please.

Our last question comes from Mr. Michael Goldberg from Desjardins Securities. You may ask your question.

As a follow-up to the previous question, looking back now over the year, can you identify the key factors that allow you to do so much better than that 96% combined that you target for? Thanks.

Yeah. If I had to really do just a quick summary of the year, the good, the bad and the ugly, we absolutely had price adequacy. No question about that. But we got some tail wind. Tail wind was on reducing frequency, which actually helped us not get into a claims stopping bind, as well. Obviously we get the benefit of reduced claims frequently just in the loss cost, but it also gave us a little bit of wiggle room on infrastructure. That was nice and clearly reflects in the results. The second was really to the first question on retention. We got some tail winds on retention more than we had planned for, which I hope hope is always the case because we don't overplan for Texas, especially in our direct pricing. Those would be two absolute positives. Other than that, the underwriting and claims adjustment and I'm -- reserving, I'm not suggesting to you that it's always going to be exactly equal, but you can see that we didn't really make too many big mistakes in the underwriting issues for the year. The two big negatives for the year, clearly we ended up settling some lawsuits. Those settlements were a significant amount of money. And that's the way it is. I don't like it, but that was a big use of funds. The other issue which clearly dominates the year is the equity market and our returns. However, without some of those external market factors, maybe our competition wouldn't have been hurting as much, as well. So, it really is a complete picture to take a look at to see why market conditions are what they are. I think the things I care most about are the things I can control. And that is the quality of our underwriting business, our pricing, our reserving, our claims adjustment, because over any long periods of time that's what's going to be the success story for us. And I feel just terrific about that right now.

Well, thank you. That concludes our call. And we appreciate your interest in Progressive.

That concludes the Progressive corporation's fourth quarter conference call. A instant replay of the call will be available until February 7th by calling 1-888-566-8594. Thank you.