前進保險 (PGR) 2003 Q2 法說會逐字稿

Welcome to the Progressive Corporation's second quarter conference call. All dial in participants will be able to listen only until the question and answer session. This conference is also available via audio webcast. Webcast participants will be able to listen only throughout the duration of the call, including the question and answer session. In addition, this conference is being recorded under request of Progressive, if you have any objections, you may disconnect at this time. Acting as moderator for the call, will be Mr. King. Participants should be aware that Tom King and Tom Forrester, Progressive's CFOs are participating ing the conference call today from a separate location than Glenn Renwick, Progressive's CEO and primary spokesperson for this call. While we do not anticipate any technical difficulties due to these logistics, should any arise, we ask all participants to be patient while they are being resolved. At this time, I will turn the call over to Mr. King.

Good Morning. Welcome to Progressive's quarterly conference call. Glenn is participating in the call while travelling on the road in California, and this is a busy morning for everyone, so we'll try to end this on time. Glenn will begin the call with comments on quarterly results, and then we will open it up for questions.

Statements in this conference call that are not historical fact are forward looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from our projections. These risks and uncertainties include, without limitation uncertainties related to estimates, assumptions, and projections generally. Inflations in interest rates and securities prices, rate changes and other initiatives by competitors, ability to obtain regulatory approval for requested rate changes, legislative and regulatory developments, the outcomes of litigations pending against the company, weather conditions, changes in driving patterns and loss trends, acts of war and terrorist activities, court decisions, trends in litigation, health care, and auto repair costs. And other matters described from time to time by the company in other releases and publications.

In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods. Let me turn the call over to Glenn.

Good Morning. Our second quarter was an excellent continuation of the first, top line characterization would be excellent profitability, strong growth, along with signs of increasing competition, and solid performance on staffing execution measures. I'll highlight key points in the areas of profitability, growth, trend, reserving, and investments, and take questions.

Profitability. Our personal lines of business produced very consistent profitability for each month of the quarter, and within personal lines, both the agency and direct business had similar results, between 88 and 90 combined ratio, with variation well within expected monthly norms. Generally favorable frequency, relative to pricing assumptions, continues to be the big contributor to wider than planned margins.

All states but one are profitable for the year, and that state is one of our five smallest markets. Our top ten states representing about 58% of personal lines earned premiums individually have year to date profitability consistent with our overall results. On the first quarter call, I noted very adverse weather in Texas, Missouri, and Mississippi in April. While monthly profitability for each of these states reflected a significant number of hail claims, Texas and Missouri were profitable for the quarter, and Mississippi broke even. Weather catastrophes did not dramatically affect the results for the rest of the quarter.

Expenses were well in line for the quarter, technology and sales and service are providing measurable scale economies. We continue to experience favorable trends in our policy life expectancy. Most tiers of business in both channels are operating at all time highs on policy life expectancy, and the others are approximately level with previous bests.

In general, we'er seeing a continuation of the quarter over quarter lengthening reported in the first quarter. We've raised our attention to this measure significantly in the last several years, and we will be monitoring it with great interest under future market conditions.

Our special lines products, primarily motorcycle, motorhome, personal watercraft, and boat, which generally experienced increased frequency, corresponding to use patterns during the summer months, are also performing better than expectations. These products are distributed in both out agency and direct businesses.

On growth, last call I reported we were running about as fast as we can and think prudent. We've seen some modest cooling of the pace in the second quarter, although the growth rates in many markets remain unchanged. Generally, we observe strong quoting demand in the agency channel, with a slight falloff in conversion. An effect we believe reflects a general improvement in industry results and resulting wider availability. We currently see no strong signs of price reductions.

In the direct channel, we observed some slowing of new prospects. Overall the rate of new application growth is down slightly on a same month year-over-year basis.

The calling, all the way to the mid 20% range of written premium growth is somewhat welcome and will insure continued consolidation of the operational gains in all areas, notably claims quality. We make no forecast about future growth and remain influenced by competitor actions as well as the quality of our own products, services and brand awareness. As you may recall, we have had a self-imposed growth constraint of about 30% in Texas since early 2003, due to our view of claims capacity. The actions we have taken have been sufficient to now relax our red list list constraint.

During the constraint period the local claims organization increased head count from 860 to over a thousand, including the relocation of approximately 30 managers from across the country while reducing turnover, improving quality scores and responding to a significant catastrophe. Now, with adequate staffing, increased supervision and solid quality, coupled with year to date frequency running about 1% below 2002 levels, we can allow for an increase in growth. However, the new growth ceiling is conditional on continued performance and staffing goals. While no one wants to miss a market opportunity, our decision to slow down, if 30% growth is slow, and not overextend while reinforcing the system for future growth is a decision we would make again tomorrow under the same circumstances.

Fortunately, we now have no state at or precipitously close to its projected maximum growth rate based on claims capacity. An increase in frequency above our estimates would result in a reevaluation. During the quarter we had net additions to our claims staff of approximately 630 and continue to see excellent quality and availability of talent. Overall measures of companywide quality continue to show improvement, and new model of physical damage handling and rollout of claims service centers continues, but is tempered by our insistence on finding sites that optimize the model. New sites in Columbus, Atlanta, and Richmond opened during the quarter. Our existing Tempe site, one of the original seven test sites, reopened after remodeling to our now standard design, and Tampa opened to a fast start last week.

On the last call I briefly discussed that some policy service measured were not within our specification, and an action plan was being implemented. We can now report that in general we are back within our expected performance range. I also noted the groundbreaking for our new Colorado Springs location. This quarter we started an expansion to one of our Cleveland campuses, which will expand capacity by a little over 25% of that location. In addition, we are researching the options to expands our facilities in Tampa.

In the third quarter we plan to ramp up our advertising, including use of new creative and structured testing of different media mixes. Our commercial order business continues with extraordinary growth. A notable observation is that while some of the previous growth was due to a trend to higher limits business, entirely consistent with market conditions and their expectations, our recent mix and growth suggests the percent of the book at our highest limit has been reduced a few points to about 29%.

Trend in reserving. Second quarter loss trends were not particularly remarkable relative to recent quarters. For all coverages combined, the pure premium trend was low to slightly negative driven by declining frequency offsetting severity. We observed claim frequency very closely and are observing some early indications of frequency increases. Bodily injury severity is highly variable, but changes in severity seem reasonable.

As noted previously, our physical damage trends are slightly higher than reported industry data. We believe three factors explain the difference. Two of these are seasonality in our changing vehicle mix, the third a handling of total loss settlements is an area of opportunity on which we have our attention. During the quarter we saw favorable prior period -- excuse me -- favorable prior accident year reserve development driven by the favorable 21.4 million non-actuarial adjustments, largely closing claims below their reserve and the fact that the IB&R development we commented on last quarter has not continued. Year to date prior accident year development is unfavorable by some 26.6 million, or half a point. Our analysis of IB&R reserving continues, and we're focused on greater allocation and diagnosis of the component parts. We have not yet made any changes to our IB&R reserving methodology outlined for you in the appendix to this year's reserving report. If we do, we'll comment on it in the future.

Contributing to a favorable development experienced during the second quarter was a change in our estimate of our future operating losses due to business assigned from the New York automobile insurance plan for 2003. Starting in the fourth quarter of 2002 Progressive has been participating in the expanded takeout program as designed by the governing committee of the plan, plus we have managed our writings to reduce the assigned risk credits. The realization of these changes combined with a lower than expected overall plan size has resulted in a lower than expected number of assignments from the plan. We'll continue to study the environment in New York and take advantage of opportunities that limit our exposure in this area.

Although early, we will be closely monitoring the outcomes of the significant reform measures to PIP coverage in Florida signed just last week and the elimination of PIP in Colorado effective since July 1. We view these changes as generally positive for our business.

Legislative battles over credit are reaching closure in many states. No states have banned the use of credit. Many have adopted a variation of a model bill we can work with.

Investments in capital structure. On a fully taxable equivalent basis, our portfolio posted a total return of 4.3% for the quarter and 5.2 year to date. On the same basis our fixed income portfolio returned 2.6 for the quarter and 4.1 year to date, and our equity portfolio had a total return of 15.1% for the quarter and 11.6 year to date. These results are now provided in our earnings release.

We continue to be comfortable with our short duration and into the quarter at 3.1 years. Our realized gains in the portfolio as of June 30th are 515.7 million, up 309.4 million over the end of the first quarter. Consistent with our reported approach, we have taken all the write downs for other than temporary impairments that we think are appropriate, 4.2 million this quarter and 42.1 million for the year.

Our investment portfolio now contains a trading security. Progressive has sold default protection on single credit using a credit default swap. We have matched this position with a Treasury security of the same maturity to replicate the cash bond on an unleveraged basis. An unleveraged position is the only acceptable basis to us for this activity. This derivative position replaces cash bonds we held from the issuer and is expected to produce a higher total return.

A quick summary, I think we're being appropriately balanced in our efforts to build on and continuously improve our business. Some calling in the new business growth rate will not be the worst thing for us and I remain very optimistic about our ability to both respond to market conditions, and strategically push for long-term meaningful advances in our distribution channels, supporting technology, and most of all, the consumer claims experience. These initiatives and current results are fun to be a part of and Progressive's people and the execution continues to be the differentiator. We'll take questions now.

At this time we are 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 one on your touch-tone phone. You may press star two 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 one on your telephone. Nancy Benacci from McDonald Investments, you may ask your question.

Thank you. Glenn, could you clarify a little bit more what you're seeing out there in the competitive environment as we look at the end of the second quarter into the second half of the year and again looking at both the agent channel and the direct channel, and the month of June numbers certainly look like it slowed down a bit, do you think that's what we'll continue to see here going forward?

Yes, it's always a little bit difficult to give those forecasts, but if I had to give direction I would say that my comments in there, using the words calling are appropriate, we're seeing some falloff in new business applications, obviously extraordinarily healthy, and when I say that, I say it in terms of percentage over the same period prior year type of thing. Our absolute numbers of new applications remains strong, but the rate of increase is slowing.

Is that in line with what you had been looking for, or, when you looked at the final numbers, were they markedly different than you had anticipated?

No, I think it's a little bit difficult to time the change in market conditions, but we've been seeing, if you take a look at market results in general, you'll see loss ratios coming down, the general return to health in the industry, that's obviously good across the board for a lot of people, that will mean, and I think what I meant when I said we're not seeing a lot of rate decrease activity. I would characterize it more as an increase in availability, you may recall previous conference calls where we've talked more about, perhaps carriers withdrawing from markets, putting on restrictions, underwriting restrictions, I think some of those are lifting. It's spotty. There's not one clear message I could give that characterizes all states, but I think we're seeing an opening up of the marketplace, and at this stage certainly responsible pricing, which is good. But the availability is just making more choices out there for consumer. I think our choice clearly is superior and we're still getting great growth. But I predict it will cool a little.

Okay. And then just my follow-up regarding the commercial auto line. On a consistent quarter basis we've seen some good, solid premium volume growth and a corresponding combined ratio results with it. Do you see anything unusual as that book develops here going forward that should lead us to think those numbers change much?

No. I think because of the growth there, and again consistent with some of the things we've said before, we've really put a lot of internal scrutiny on that. So, in terms of any blow-ups in our own book or our reserving, no, I don't expect any of those types of things. And we're closely focused to it. If I ever saw anything like that, I would report it.

The turn in the commercial market obviously doesn't always happen in the same time as the private passenger. I thought we were going to see some calling in that market a little bit earlier, and we've continued to remain very strong. So, any prediction that I have about when that may cool, also, really, I just don't have one. But I think we're going to see some solid growth there for some time to come.

Thank you very much.

Nancy, this is actually Tom Forrester. On your first question, part of the issue is, as you think about growth, we do have three elements at work here. One is new apps, which we're seeing increasing at a declining rate. But we're also seeing retention lengthening. Whether or not that continues, we have no idea. But that will actually have a pretty significant impact on our written and earned over time.

The third piece, which is slightly less important at the moment, is that as we moved into different -- longer life tiers, that's been earning out over time and that sort of continues to give us a little bit of an extra boost in terms of renewal persistency. So, you've got three factors, one going in one direction, two in the other. And we really can't predict the slope of all those and how they'll play out. But I would suggest you think in terms of what the both profitability implications are of all those factors as well as the growth implications.

Okay. And Tom, just to clarify, and I think Glenn said, retention is still lengthening, is that correct, in both channels?

That's correct.

Thank you very much.

Michael Lewis from UBS, you may ask your question.

Yeah, I have two quick questions, and maybe you've answered this from Nancy's question. But I guess I was interested in the hit ratio. Did you really -- is that really what you addressed, the hit ratio, not whether your number of applications growth rate there is declining, but of the apps you're seeing, are you basically getting the same hit ratio on those? That's one question.

And Glenn, I think you did mention something about claims frequency trend starting to pick up a little bit. Are you seeing early signs of that? Some more details on that. Thank you.

Sure. Michael, before you go, what do you mean by "hit ratio"?

Excuse me?

What do you mean by "hit ratio"?

In other words, the hit ratio is if you get an application, in other words, if you have someone apply for coverage, how many of those actually -- how many you actually get of those that apply? Is there a change there? In other words, are a lot of people looking at you for a bid and then don't come back and take the offer, so to speak?

Sure. We commonly refer to that as our conversion ratio. That will work. Two dynamics. And I think you have to put this in the context of still a company that is growing very rapidly. So, I'm going to give you some directional comments. I think you should make sure you temper those with the results we've just shown you, which are extraordinary.

The agency channel, I think were seeing, I commented in my notes, that we're still seeing plenty of demand, application requests or quoting requests. And our conversion rate of those in the agency channel, as best we can measure it, and that's an imperfect measure for us, we've got some pretty good ways to measure it, we would say directionally our conversion rate is being reduced there just a little bit. That would be a consistent comment that I made with increased availability.

On the direct side, we have actually seen a minor falloff in new prospects, but the conversion rate hasn't changed. So, we're still very happy with the conversion rate. And I mentioned, also, that we would actually be increasing our advertising somewhat in the third quarter. So, we may very well see some response on new prospects, and we would certainly hope to keep the same conversion rate. So, two different dynamics. Still seeing the request for demand in the agency channel, a little bit lighter on conversion, and the direct channel a little bit lighter on demands, holding on the conversion.

With regard to frequency, I point this out, and I want to be very clear here. I will be the first to say when we see something that is really solid and definitive, but given that, we have continuously said how sensitive we are from a staffing perspective and a total capacity perspective to claims frequency. It's something we really have to be on all the time it has been a long run of low frequency. It is still low frequency. And we're not gonna get six months' worth of data, but we have to watch every month. It does suggest in the last three months there is a minor tick back to increasing frequency. It is not a rapid return, but it is something that's absolutely got our attention. And I'll keep reporting on it, but I'd say that in general you should expect frequency is probably not going to go any lower.

Just as a very, very fast follow-up, what I don't seem to really have and understanding here, you say it's very disciplined competition right now. Yet we are just seeing numbers, whether it's the Travelers, whether it's the Allstate that reported already, just numbers on the latest quarter that is so much better than it was even a quarter before that the margins seem to be outstanding. Why would you expect the discipline to continue without, you know, a little bit of a push in some of the better states to get some more market share. I just would like a clarification on your read why this thing should remain disciplined.

I don't think I made a -- I hope I didn't make a projection there. What I said is we see no current signs of price reductions. So, I would hope we don't see a lot of price reductions as we saw back in '99 type of time frame, especially if in fact there might be a change in frequency. I can't predict that. I have no idea what others might do. I'm just reporting that currently we don't see that.

Okay. Thank you.

Mark Lane from William Blair company, you may ask your question.

Just a quick follow-up on the previous question regarding claims frequency. If the frequency's been running so much more favorable than your expectations, why haven't we seen as much favorable loss reserve development? Why hasn't that been more broad and why -- or could we anticipate seeing that? What sort of position are you taking there with reserves regarding their frequency?

Tom, do you want to take a shot at that? I think the issue is more of a severity one from a reserving prospective, but why don't you take a shot at that?

Yeah, the frequency issue, I'm not sure how you'd want to necessarily link frequency and reserve development. I could certainly see future losses. I guess I struggle to understand personally the link between the two. Al, do you have any thoughts for the contrary on why a frequency change would affect your reserves as it exists, other than IB&R?

Yeah, well, that's where it would be.

This is Al Nisar, corporate actuary.

Correct. It would be in the IB&R, but the IB&R is a very small portion of the coverages where most of your reserves are, injury-based reserves. The IB&R that's most affected would be your property damages makes up less than 7 -- 6 or 7% of the total reserves. So, even though we may have a change in that piece of the IB&R, it doesn't affect the total piece enough to make a major impact on it.

So, the injury cases of severity that we watch affects mostly the reserve runoff.

Good enough. Thank you.

Chris Winans from Lehman Brothers, you may ask your question.

Yeah, two questions. One is the -- if you could get into a little bit more detail about what you're seeing in the agency channel. You're seeing -- I think you said you saw -- were seeing a lower conversion rate there. Can you talk about the competition in terms of getting shelf space in the agency channel, and whether that's coming from the smaller players or the larger players? And my second question is just on the ad strategy. If you could take the first question?

Yeah. I'm not sure I can give you a lot more color on that because it is the sort of thing that you start to see emerge. And I wouldn't put it down to any one company or a national phenomenon. So, certainly you mentioned some regional players. That's true. There is comparative rating software that's used by agents. And our positioning in the agency is tremendous. We wouldn't want to suggest that it's anything other than that.

So, where there is increased availability, just as it worked in the reverse when others pulled in, we saw the very real effects of the growth. I think we're just seeing a more general return to acceptance of business with rate and price adequacy. And there are certainly some regional players. It's also somewhat state-specific. We're not seeing any cooldown in certain states. I don't think there's much of a cooldown in New York, not very much in Florida.

Recognize, also, that in our own results some of the cooldown is in Texas because we've restricted our growth there. So, I think it's really a regional phenomena. We're watching it. And I feel comfortable that we would report more on that in the third quarter as we see and quantify or perhaps even identify specific trends and specific carriers. But right now it's one of those things that's emerging and we're watching.

And on the ad spend question --

Yes.

You alluded that you might try some different ad spending strategy. Can you elaborate on that?

Yeah. It's not so much different. It's build on what we already have. We feel very good about current results. We feel very good about our ability to buy media. We feel very good about our acquisition costs per customer in every channel of business. So, we've really been very, very happy with that.

And we're at a position now, all things considered, including some of the capacity issues we've talked about, that we can ramp that up a little bit more. The reason I mention it is it won't be a dramatic ramp up, it's not a 50% gain, but it is material. It's north of 10%. And we're going to do that in the second half of the year. That will combine a couple of things.

First, just additional waiting on some things that we're already doing. It will introduce some of the new creative that we have. I think that will introduce maybe next week. And we are going to do some structured testing of different media mixes to increase our reach. We clearly have a fairly well-defined pattern of advertising, we're reaching the same individuals. We're giving them high frequency.

We're also looking now to increase reach and reach a different audience. We will try some different combinations of media mixes, whether it be radio, TV, some outdoor and we'll see what combinations work relative to new audience reach. We'll also try to direct some of that advertising to college-age and college-type candidates and continue with some of our teen advertising.

Does this include direct mail?

There will be some direct mail in that, yes.

Okay. Thanks very much.

Ron Frank from Smith Barney, you may ask your question.

Yes, Glenn, I know it's a very early indication, but one more beat it to death question on this frequency indication. Do you have any inkling at this point whether, if it's really telling you something that is a Progressive-specific or more industry-type phenomenon?

Ron, I really can't do it on an industry basis because it's sort of lag data that we get from industry. It's lagged one quarter. And what we're seeing is -- I'm not capturing my words here to sort of say, hey, it's minor. I just want to make it clear that when we said that we expect that frequencies probably bottomed out, we watch it. It looks like it is. I don't have a lot more color around that. I think the accident period frequency is starting to go up. And if I had to answer the multiple choice question, level, down or up, I'm going to answer it on an up basis. I can't compare that much to [inaudible] data at this point. I'm going to ask Al Nisar if he can comment on anything more colorful or more accurate from data that he's looking at ,that he can add to what I just said? Al?

This is Al Nisar again, the corporate actuary. I really can't add to Glenn's comments. All we can say is that it's slightly a little bit more frequency in the second than the first quarter. But the first quarter was extremely low compared to the four quarters of 2002. So, even though it's up, it's just a slight movement at this point.

And Ron, one of the things that I wish I had right in front of me, but I don't, I keep track of sort of the last four or five years' frequency. When we're talking frequency now, we are talking a line that is lower than anything comparable in recent history and still staying low, just turning up a little bit.

Okay. Thanks.

Charles Gates from SFSB, you may ask your question.

Hey, good morning. I didn't understand your commentary concerning the New York plan and the implications of that for your business.

Yeah, I think I may have may have stumbled on the reading. The bottom line is that we get an opportunity to create credits against future assignments by the type of writings that we take into the voluntary book. Several things have happened with the New York plan. First of all, they revised that scheme, and we work to effectively optimize the number of credits that we can make available. Those credits are offsets to future assignments.

So, that is the thing that we really have maximized. And the plan itself has, I believe, considerably smaller than at once we thought it would be. And of note there has been a recent significant rate increase for the plan in New York, which we would view as an opportunity for continued strong growth in New York. So, Charlie, it's really a combination of maximizing the credits that we have available. And remember, this is one of the things that may be somewhat unique to Progressive. We make a reserve for losses that we expect based on assignments that we will receive two years hence. So, what we had done is made estimates. Those estimates probably -- well, now we believe were higher than necessary based on our ability to optimize the credits.

Have those estimates been flowed into earnings?

Yes.

Okay. So, therefore, arguably some portion of the earnings of the company have resulted from drawing down the situation?

Yeah, absolutely. We had a reserve posted. And in this last -- Tom, correct me if I'm incorrect. I think in just the last month we were able to reduce the reserve for the New York assigned risk plan by some significant amount of money. And that is in both earnings releases, previous and post.

Thank you.

Charlie, this is Tom Forrester again. All of those will run through the combination out of the actuarial adjustments and the prior period development. So, you know, year to date we have seen a 26, 27 million dollar unfavorable development. But what you're seeing is reflective of the favorable developments that we saw in the second quarter of $12.4 million. And part of that is the New York adjustment.

Robert Glasspiegel, from Langen McAlenney, you may ask your question.

Good morning. Glenn, I don't know if you're the investment guru to drill on the call, but you've increased your short term investments another 300 million this quarter and now of a billion one position your durations are short. We've had a backup in yields here. Are you lengthening or reducing your short term position into this, or what level of interest rates would induce you to come back in to a greater extent?

Well, I would handle that, but as it happens we've got Bill Cody on the line at the other end.

Great.

So, why don't I let Bill just comment on that.

Sure. We have maintained our portfolio duration right around three years, so it's been steady there. We don't have a target yield that we're looking to hit to raise our duration back to where it was, say, a year ago, around three and three quarters. When you look at the cash position, that is obviously a portion of our duration management, but it's only one portion of the duration management. We target the overall portfolio duration, as well. So, from that point of view we're happy with that position and we're again managed the portfolio on a total return basis. And yield is a very important part of that. And we will change our duration, increase it back when we think that that's the right thing to do, and also within the context of other opportunities in the business. If you might recall, we reduced our duration from the point of view of taking more interest rate risk with not the best opportunity we had to use our capital.

You've been right this week, the last two weeks. You've not made any adjustments in July, you're saying, the duration?

That's correct.

Okay. Thank you.

Hugh Warns from J. P. Morgan, you may ask your question.

Yes. First I have just one overall macro question. What is the impact of the zero percent sales auto sales kinds of going up and cost of used cars coming down? How does that impact your business?

The primary impact there is when we have a total loss situation, and I did actually refer to some opportunities that we believe we have in dealing with total losses, it makes the decision point between repairing a vehicle and a total loss somewhat variable with what the market conditions are for used cars. And there has been an increase in the availability of used cars and a drop in prices in general in the used car marketplace. So, that's where we see it.

Would that would benefit you on the severity side?

Correct, as long as you are totally focused on making sure you stay dynamic with those changes.

Okay. And then, just one other quick question. You talked about back in your offices in Cleveland with the investor day. Kind of something in the 5% kind of pricing range was a reasonable target for what you had talked about for national rate increases. And obviously we know this is done on a zip code basis. Has anything changed your thought process? Does that still seem like a reasonable bogey? Can you update that?

No, I wouldn't change that. If I looked at the end premium for PD earned car year by channel, I'd be -- on a year to date basis I would not have any retraction of those statements. It's a little bit under that in the agency business, a little bit over that in the direct business, but with any rounding, it's right on it.

Okay. Great. Thanks.

Thanks.

Ken Zuckerberg from Stadia Capital. You may ask your question.

Good morning, Glenn, and I guess, colleagues. Two questions: first, if you could just clarify what underwriting cash flow was this quarter and then versus 1 Q '03, and also another housekeeping, if you could just remind us how much is left under your current share authorization, and whether or not you've done anything since the quarter close?

Okay. Fair question. Those are simple facts, and I don't think I have -- I could get awfully close to the cash flow, but I'm sure Tom, hopefully someone there would have that, if you're able to release that.

What I don't have is quarter versus -- I mean six-month versus six-month. I will tell you that through -- for 2002, cash from operating activities was 1.45 billion. Total cash from operating activities, including investment income was 1.9 billion. Through six months year to date cash from operating activities is 1 billion, And from operating including investment income, 1.23 billion.

Great. So, the run rate is clearly quite a bit higher year to date?

Yes.

Okay. And is there any reason we shouldn't think that ought to continue going into the second half?

On the investment -- I mean, just the fact that yields are down slightly, it might have just a very minor impact. But in general, I'd say no.

Chuck, do you have off the top of your head where we are with the authorization on share reports?

I think we're in real good shape, but I don't remember the specifics.

This is Chuck Jarrett, our Chief Legal Officer.

We have approximately 13 and a half million shares still authorized by the board.

Okay. I wouldn't view that as an imminent problem.

Thank you.

Paul Newsome from AG Edwards, you may ask your question.

Actually, my question has been answered. Thank you.

Adam Klauber, from Cochran, Correnia, you may ask your question.

Good morning. Have you seen any noticeable changes in severity trends over the last couple of months?

Not over the last couple of months. The ones that are notable for us, you've got -- I might as well take the big ones. You've got bodily injury. And severity there has actually been negative. I don't think there's anything, as I said in my comments, really particularly remarkable to severity in general. But probably the one that jumps out for us is a little bit of the collision coverage. I think that's more of a reflection of our book and the comments that I've made. But nothing dramatic. Al, do you have anything that jumps out for you?

No. It's really been pretty consistent at this point in time. So, nothing stands out.

Thank you.

David Merkel from Hove Capital, you may ask your question.

Sorry. Insurance is a mature business, and you get great ROEs quarter after quarter. What would you say are the two or three main components of your sustainable competitive advantage?

Yeah, I think the -- I guess purely in the sense of answering your question, I'm going to suggest that maybe insurance is not -- auto insurance is not a mature business. I take no exception to it, but a lot of what we're doing I think is starting to really change a business that was mature. There was a certain level of expectation. There was a fairly simple flow. You called, you got a rate, you had a claims adjuster, got adjusted in some period of time.

I think we're trying to fundamentally change not only the way you buy auto insurance with greater transparency, other people's rates, ease of use, clarity of community, and then the claims experience that we have been working on continuously for many, many years we're taking to a whole new level. And I think the physical damage claims experience that we now have a substantial amount of experience with and remain extremely excited about is going to change the product of auto insurance, not just a better way for Progressive to do it, but it's going to exchange the whole product. And along the way we're changing, we believe, consumer expectations about a product and the level of execution inside of a business, the level of technology to support that execution is gone that change dramatically. And I would say that we're differentiating ourselves from a lot of the rest of the industry in the way that we handle our claims, the way that we make our product available and in the packaging that we're trying to put around our product.

So, if I had to summarize, marketing, underwriting, claims?

Yep.

Why can't competitors do it as well as you?

You would have to ask that question on a different conference call?

Okay. Thank you.

No, you mean, I just -- we love what we're doing. We're passionate about it. And I can speak for every one of the 24,000 people at Progressive. We're excited about it. I think that the general person that joins Progressive is interested in being part of a change agent. So, we enjoy doing this. We obviously hope we're on the right track. We believe we are.

Thanks.

Jeff Thompson from KBW, Inc., you may ask your question.

Thanks. You talked about a little more competition today. I was wondering is the personal auto market getting a little smarter? And by that I mean are you seeing better pricing models from your competition and is that starting to impact your hit ratios?

I wouldn't -- I don't know that I'm gonna say a definitive yes to that, but that would be -- that would be sort of the one where I would nod my head to. Yeah, I think that there is a good number of players. There is also a consolidation. I've talked about that before. And the markets share is sort of moving towards the bigger, more responsible -- the bigger players. And I think that everybody's had their hat handed to them in recent history. And that always is a memory that you don't forget. So, I think there's a great deal more responsibility, and I think in general you're seeing more sophistication in pricing, and that's good for the industry.

As a follow-up, on your change in marketing, it sounds like from your comments that you're probably gonna move toward growing your product that, I guess, is the premier claims service product. Is that the case? And are you really bullish on that area of growth?

I'm very bullish on what our claims experience will do. Let me take a couple minutes because I think this may be much more important long-term than sort of any single month's results. Our claims approach is a way that we now have very clear indications is a way that we cannot only create a better customer experience, but we can extract costs from the system. And if we can do those two things, yeah, I'm extremely bullish on it. If we can create a better claims experience and extract cost, which by the way, doesn't have to be sort of a bet on the future because that's really been the premise by which Progressive has been working for many, many years. We're just seeing this as another continuation of that philosophy and one that we think has a nice quantum to it.

Okay. Good. Thank you.

Cliff Anthony from News Herald, you may ask your question.

Just a follow up question on zero percent financing of a car. Now because of zero percent financing, more new cars are being sold. So, how much that has helped your business? I'm sure there will be some impact.

I'm sure there is, also. I mentioned the secondary effect that that has on the used car marketplace. And I don't have, unfortunately -- it's a fair question, but I could not answer right now accurately what the percent of new business applications are relative to model year. So, if anyone else on the call has that, I'd be surprised, but that's -- I am sure it's part of the driver, but I don't know that it's that significant.

Not significant. Okay. Thank you.

Nancy Benacci from McDonald investments, you may ask your question.

Just a follow-up question. Is there anything out there on the litigation side that you can update us that we need to be concerned about?

No. I think it's nice to have an absence of comments on that. And I don't think there's anything that is new or significant that we should comment on. Excuse me for doing this, but Chuck, do you have a different view on that?

I agree. Nothing new, as I commented at the meeting here in Cleveland.

Okay. And just a follow-up to one of the earlier questions on the new claims approach. At this point, based on the fact that you're rolling it out more aggressively, we can assume that you're seeing specific improvements in your loss ratio from that initiative. Is that a fair statement?

I'm going to say that's a fair statement, then I'll qualify it a little bit. I hesitate to sort of look directly to loss ratios, since that's such a large number in any given state or jurisdiction. What we look for are much more responsive measures, such as the quality of the estimate and the average size of the claim. And while that seems like a simple thing to do, you're never exactly sure you get the same mix of business in one than the other. But a long story short, we look at a lot of measures, and we have seen on all of those measures enough to have the continued confidence.

I would like to see us get more of the measures consistently in all locations, but yes, I think there is no doubt in my mind that what we're seeing are better ways to adjust claims that will have very direct and relatively immediate for those customers' affect on the cost of claims. And the biggest cost of the claim, just to be clear here, is in the reduction of cycle time where we're taking out maybe a day of rental coverage or minimizing storage costs or minimizing the time of an adjuster, so some of these savings come in loss adjustment expense of re-doing the estimate after further damage has been found. We're changing the process such that those types of events are minimized and that cycle times are as short as possible and our first time accuracy is as high as possible.

Along your comment, and you may have talked about this at the investor day, as you roll out those claim centers, are there markets where it's not feasible to have that offer, just based on, you know, the size of the market, whatever, and are you proposing that in all the markets where you operate you'll be having this service?

No, the former. This is a scale play. It simply doesn't work, or at least our current model is not intended to work in rural or low penetration areas.

So, we will continue to roll out and have plans to roll out well into 2005, and they will be focused on the higher priority, high scale, high density areas of doing business. I won't say no, it will never get to rural areas, but I don't see this model being attractive to rural areas. It does lends itself very well, of course, to the high concentration urban marketplaces where we have significant market share.

It also tends to be an area where we get a higher concentration of our direct customers from. We will, I believe, and I will report on this as it becomes relevant, so I'm giving you a directional comment here, I believe that by the end of 2004 or, say, into 2005 we'll be able to offer this type of service to something like 50 to 60% of our customers. That would be very significant compared to today, which is still relatively small. So, we hope that our rollout will take us into that range.

Thanks for the clarification.

John Taylor from First Capital, you may ask your question.

Yeah, I was curious what drove your expense ratios down so much, both on the agency and the direct side this quarter relative to, say, the first quarter or even last year?

When you do a comparison to last year, especially on the agency side, remember that we had some additional expenses last year with a lawsuit adjustment which flowed right into that expense ratio. So, I would caution year-over-year comparisons there.

Other than that, I think you're seeing really a set of expense ratios that -- I'll use 20 as kind of a number. It's gonna vary from month to month, even quarter to quarter somewhat. But I mentioned two contributors, IT. Our expenses in IT, which have not curbed at all, but as a function of earned premium we're getting continuous improvements there, and I'm very happy with our spending as a function of earned premium. The scale economies are kicking in there. Once seemed elusive. Now we're starting to see them.

And the same thing is true on sales and service. There I think it's a combination not just of scale economies, but of process improvements where specifically in the agency channel we've been able to favorably, favorably to the agent, allow them through technology to do more of the transactions that we used to once have to do for them. That is actually a measurable change and showing up in our expenses for policy services, all of which flow into the variable part of the expense ratio.

John, this is Tom Forrester. Glenn is exactly right. The litigation number is actually $35 million. It's embedded in the second quarter of '02 versus '03. But in addition to the things he mentioned, because of the fact we have more renewal business now, we're seeing things like [inaudible] acquisition costs to percent drop. So, it's a reflection of the changing book that we have, the better usage of scale and just sort of generally there are some sort of lower expenses. But the biggest issue really is that $35 million betterment case and [inaudible] gain.

Okay. That's very helpful.

Matt Rothschild from Alliance Capital, you may ask your question.

My question's been answered. Thank you.

Well, that's it. That's all the questions we had. We want to thank you for joining us this morning, and we'll talk to you soon.

That concludes the Progressive Corporation's second quarter conference call. A instant replay of the call will be available until August 1st by calling 1-800-839-4844. Or it could be accessed via the end server relations section of Progressive's website for the next year.