前進保險 (PGR) 2003 Q3 法說會逐字稿

Welcome to the Progressive Corporation's Third 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 an audio web cast. Web cast participants can listen only throughout the duration of the call including the questions and answer session. In addition, 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 will open the call for questions. We understand that many of you have you a commitment at 9 a.m. Eastern Time, so we plan to end promptly within an hour's time. We also recognize for our listeners on the West Coast that this is 5 a.m. and we give you our apologies. I will turn things over to Glenn.

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, inflation and changes in interest rates and security prices, rate changes and other initiatives by competitors, ability to obtain regulatory approval for request of 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, trends and 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 principals 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's turn the call over to Glen.

Good morning. I am pleased to report a very good quarter. I will offer highlights in areas of interest and then get to questions.

First to profitability. Our agent personal line's business, our direct personal line's business and our commercial auto business all produced sub 90 combined ratios to the third quarter. Primary contributors of these extraordinary margins continues to be the lower than expected frequency and minimal cat losses.

On a year to date basis, six states have a personal lines combined ratio above our target goal of 96. Only one is above a 100 combined ratio and that's a small premium state that was adversely affected by hail earlier in the year. Current fundamentals in that state appear to be sound.

Agency results for the quarter are relatively consistent with agency year to date results. Similarly, select, direct results for the quarter reflect normal variation and losses in LAE and an increase in the expense ratio, in part due to our planned increase in advertising during the period.

After some 20 plus months of reporting increasing retention, we observed early signs of some slow down in increases and some give back in our estimates of policy life expectancy. As you recall that in our lexicon, we estimate the lifetime average number of months of premium we will earn from new policies sold. We use this information in combination with our estimates of new and renewal premium per policy to determine how much money we can expend on advertising and still achieve targeted profitability levels.

We are a little surprised by the data for two reasons. First, the sales conversion rate has increased over the prior quarter and not decreased. Secondly, the highest credibility data reflecting early policy life retention has not changed much in the quarter. These two facts would seem to suggest that we remain competitively priced and are not doing anything to counter the long-term retention improvements we seek and have gained.

On growth, we continue -- in general we continue to see a modest cooling of growth, as we recorded last quarter. Cooling is obviously a relative term and we remain pleased with the level of continued growth in both earned and written premium. However, the pace of growth varies in different parts of the business.

Our order of business new applications while healthy continue to slow. We attribute this to other carriers achieving rate adequacy sufficient to their needs and becoming more aggressive in the market place. Several of our auto competitors have taken rate and marketing actions that should allow them to grow. While it is difficult to estimate our short-term prospects for auto growth, as our third term quarter results reflect, we have continued to grow at a robust place. We also remain confident in our strategies of driving costs out to continue and improve our competitive position by creating the most easy to use business model for agents and customers.

We have two initiatives directed at incremental auto growth, increased advertising and new product design improvements.

On the advertising side we substantially increased advertising in the third quarter. The increased advertising is intended to increase audience reach through the use of multiple media including radio and outdoor billboards and test different combinations of media spending. As with all initiatives we are actively evaluating and reacting to results as the data becomes available.

We also have been test marketing new product designs in both agency and direct order and while early results are interesting, we plan a fair amount of data testing before we decide on expanded rollout.

Our special lines products including motorcycles, recreational vehicles and water craft, as well as our commercial auto, which account for almost 19% of our total year to date premiums continue to show very robust growth.

Some comments on general operational issues, staffing during the quarter we added a net additional 864 full time equivalents and we believe we are adequately staffed in all parts of the company. We have been helped in this regard by a declining turnover rate. In the past six months the trailing 12-month turnover rate has declined significantly.

Claims, a notable highlight is the continuation of our progress on claims quality. During the third quarter, our audit of state claims operations including several large and significant states produced some of the best audit results we have seen. While proving the direct correlation between claims quality and ultimate indemnity results may be analytically challenging, we believe the incremental results are very meaningful.

We predicated our willingness to grow at the speeds we have been operating on the basis of no slippage in claims quality. We knew we were improving against our own demanding standards even in the face of rapid growth, but have been delighted by the validation we now see.

That said, this is not to suggest we are at a new plateau, but rather seeing interim validation of the changes and process direction over the last few years. We believe claims quality is at its highest point in the last several years and have every expectation of continued improvement.

We opened five new claim service sites in the third quarter, in Tampa, Dallas, northern Virginia and two in Houston. We will likely end the year with approximately 19 open sites in total, somewhat short of opening 20 new sites in 2003 as we earlier anticipated.

We have a greater understanding of the logistics, and the real estate timing and details, and a continuously increasing understanding of the required fixed cost leverage and that's our allowable investment. We are adjusting to the knowledge and plan a slightly slower pace of rollout going forward. The process continues to be very well received by customers.

And trend and reserving, we experienced almost $42 million of favorable development for prior accident years in the third quarter bringing the total year to date to a favorable 15 million. This is very consistent with our reserving goal of having reserves that are always adequate with minimal variation. Our in the market pricing depends on our ability to get reserving as close to accurate as possible and not just at the aggregate level but at a state and segment level. We are pleased by our reserving results.

We again experienced favorable loss trends in the third quarter. Year over year frequency for the quarter is still negative. Severity trends overall continue to be slightly positive, though relatively inert. Bodily injury severity is negative and property damage trends continue to be somewhat unremarkable. Overall on a year over year basis and on a quarter basis, pure premium decreased over the prior period.

Investments and capital, our portfolio posted a total -- excuse me, a fully taxable equivalent total return of .9% for the quarter and 6.2% year to date. Both portfolio sectors posted positive returns for the quarter, contributing to this result. On the same basis, our fixed income portfolio returned .5% for the quarter and 4.7% year to date. Our equity portfolio had a total return of 2.9% for the quarter and 14.8 year to date. We increased our portfolio duration modestly during the quarter to 3.3 years in response to higher rates and remain comfortable with the short duration. Our unrealized gains in the portfolio as of September 30th of $496.4 million down 19.3 million over the end of the second quarter.

Consistent with our reported approach, we have taken all the write-downs for other than temporary impairments we think are appropriate. 10.4 million this quarter and 52.5 million for the year.

As of September 30th, our debt as a percent of our debt and equity was 24.5% down from 25.4 at June 30th and within our defined target of 20 to 30%.

Overall a really solid quarter on all operational measures. Highlighted for me and claims management, by the validation on our progress of claims quality and expansion of our new physical damage service center strategy. The company is in control in all operational areas even with the dramatic growth and well positioned for the future. While short of providing any guidance on future outcomes, we look forward to celebrating a long held internal milestone of surpassing $10 billion in annual written premium in the 4th quarter and quite frankly that's a fun thing for many of us that have been around for a while.

So, thanks. Those are my comments and I look forward to your questions.

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 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 touch tone phone. One moment, please, for our first question.

Our first question comes from Michael Lewis of UBS. You may ask your question.

Good morning, Glen. It is a related question. I guess you mentioned the retention slowing. You also mentioned that competition seems to be picking up. Do you think there is any correlation between the two of those things? And can you go into a little more detail on the competition? I mean we heard from Allstate they want to move aggressively in California now that the rate -- the pricing situation is changed there. We heard from other companies how they are willing to write business at these rates of profitability right now. Has this competition seemed to pick up dramatically and do you think it will change your growth dynamics going forward? Thanks. Despite the fact you are spending more on advertising.

Let me take the retention one and then come back to the growth one. Since I mentioned retention, first of all I want to be very clear that when I report something like retention going up to the extent that we see something of a change, I will always be hopefully forthright and tell you when I see that changing. So retention numbers are critically important to us. We are spending a lot of time focused on them. We recognize we even have some inherent flaws in our measurements. Those are internal things.

I don't see those two things as related, Michael. If we talk in January and I feel differently, I will say so then. Frankly our retention, all I'm suggesting to you is that while we have actively increased our retention over 2002 and 2003 year to date, we are starting to see some flattening of that.

When we look a little closer we can see some data that is not necessarily totally consistent with that. I mentioned our conversion ratio is up, so that doesn't suggest we are seeing necessarily the affects of competitive pricing being a major contributor to that. And the one area I look to to get highest credibility as the short-term retention is when you are measuring things over what turns out to be multiple years, you can certainly look to the front end of the distribution and see if that is changing. It is not changing too dramatically. So while I report what I report with regard to a slow down to the rate of increase, I am going to wait another several months before we start commenting on what that might mean.

But, now I move to growth. The growth environment is not dramatically different than what we reported in the second quarter. We are clearly seeing many competitors, both those that we compete with in the independent agency channel being more aggressive, you know the names of the national carriers. We see pricing -- adequate for most of them, at least by the results we see. So we assume it is adequate for their needs. We can see some marketing programs that would be by our standards aggressive relative to additional commission payments so on and so forth. The type of activity we would expect to see going into a softer market.

So we are seeing that in the market and the national carriers you heard from Allstate as to their actions. Yeah, I think you can reasonably expect we are going into a different period of market competition than we have been in for the last three -- skip the last three months, but the 12 months before that.

Is that -- as a quick follow-up, does that change internally what you feel your growth characteristics look like and assuming you haven't changed your spend characteristics for advertising, you know, haven't changed that in the last 3 months from what you planned originally, does that change the way you think the growth will work out for Progressive Corp?

Not dramatically. We will continue to monitor -- not monitor, but run both channels reflective of their characteristics. In the direct channel, right now, we think we can get some leverage from increased advertising. As we have done that over this quarter, we have a lot of data. We don't have conclusive results we are reporting publicly. We have learned from that. We may continue to spend at slightly higher levels than we have seen in the past. In the agency business, that's more of an intra-agency arbitrage on rates. We'll monitor that on a state by state basis rather than a particular national strategy.

Thank you so much.

Our next question is from Nancy Benacci of McDonald Investments. You may ask your question.

Thank you. I wanted to drill down a little more on the retention issue and what your previous comments on policy life expectancy lengthening. Could you give us a little more clarity as to retention, what you are seeing regarding whether it is agent channel, direct channel and the tiers, whether it is more the ultra preferred or the standard type of policies?

Sure. Because I think in general I have said that all of our increases have been largely broad based, both channels and all tiers and in this case, the -- what I call a slow down in any increase and in some cases flattening has really been equally as broad based. We have seen that in both channels and all tiers.

So nothing markedly different in the agent channel versus direct channel or vice versa?

No. And because this is a big point and I have made it a big point and it is huge for our future, let me characterize that.

I couldn't be more proud of the gains we have made in retention. None of those have gone away. We, of course, are greedy and want to make more and fully intend to make more, I will sort of tell you it doesn't look like that will be a totally linear function. We will just keep reporting on it. I don't see anything, and I'm being very serious here, I don't see anything that is worrying me. I will just report openly and honestly on the data we have and I think any real substantive comments about what the meaning of that will be more likely will be in the January time frame.

Okay. That's helpful. My follow-up is regarding your comment on frequency in the last conference call you indicated that you had felt frequency had bottomed. You indicated today it looks like frequency is still pretty good. Can you give us your sense of what you are expecting as you move to the rest of this year and into next year and what you have factored in for pricing?

Yeah. I try to give you the absolute best knowledge I have on anything in terms of cooling of growth. Last time, it looked like for a month or so, that wasn't accurate either. I think that is the accurate statement for growth.

With retention, I indicated clearly that I expected that will likely pick up. Quite frankly, we are doing a lot more work internally to understand what might be the macro-economic drivers of frequency. I think this really begs a clearer explanation of why we have seen, industry wide, reduction in frequency.

We now think we have some indicators of that. I am not prepared to talk about that. I don't think that's appropriate to share at this point. We like the emerging -- some of the emerging data and theories we might have and I'm going to retract sort of my ability to sort of determine exactly when the frequency might change or might not. At this stage predict -- report what we see and when we think we have a better handle on what drove this and have some ability to think what might drive a change, I would be open to that. Right now I would tell you, yes, I said that I thought frequency might pick back up. In fact, this quarter we really didn't see that at all. That's great from a results point of view, but it is interesting analytically to say, what is really going here? I'm not going to make a prediction at this point.

But just to clarify as your pricing, your policies today, have you changed your assumption from what you told us at the end of the second quarter as to where you think frequency will be?

When we do our indications we use our most recent understanding of frequency and severity to get a pure premium indication. We get data on our own frequency on a regular basis, we get industry data on a quarterly basis, and every time we get that data that reflects in the indications that we do going forward. So effectively we are always working off the most recent data points.

Okay. Thanks very much.

Our next question is from Bill Wilt from Morgan Stanley. You may ask your question.

Hi, good morning. You mention in your opening remarks that there are six states where the combined ratio was greater than the target of 96. I think -- I guess this is part of the question, is that a change from the last quarter where I thought there was perhaps just one. And if that's the case, what are some of the drivers?

Help me out.

There were five.

I thought there was more than one. Bill, I think the accurate statement on a personalized to personalized basis is 5 last quarter and 6 this quarter.

Okay. Very good.

When I say greater than 96 and then I specifically referenced over a hundred, that means the five of the six were between 96 and 100. Still profitable for us, but anytime, just culturally you are over our goal, that gets a spotlight shown on us. While I'm telling you the six are over, I will also tell you none are huge states for us, but that doesn't mean we don't focus on it and that's why we bring that point out.

That's helpful. In commercial auto I wonder if you can just comment on trends there. It seems like, you know, the more traditional carriers are growing increasingly comfortable with commercial auto, the reinsurance support for the line seems to be picking up. I wonder if any of that is on your radar screen or visible in any of the data that you have -- that you look at.

That's a fair question. I'm not sure that I have anything particularly meaningful to say other than general words around that. Our growth -- we are very conscious on what's going in the market place and the independent agency channel. And you can see from our gross growth that while we actually thought it would slow down some number of months ago, it has remained very robust. Those are all correct factors that influence things. We don't see it being realized much in the marketplace yet. And I would rather comment on that when we see some slow down and we may see the results of the slow down. But within the independent agent distribution channel we are going strong on commercial auto.

Very good. Thank you.

Anyone else have any comment on that particular issue?

No.

Our next question is from Bob Glasspiegel of Langen McAlenney.

Just clarifying your answer to Nancy, are you saying you are retracting your early warning indication of frequency picking up?

Yes. I try to give the best guidance on things that are operational. We get to see a lot of things. I will tell you, that frequency as measured on a vehicle basis or 10,000 vehicle basis is historically low.

And it is very hard to find a theory that would suggest why it would go lower. There are some and when I reference we are doing more macro-economic views I am not getting into those in great detail. But it is also an interesting phenomena right now in terms of the number of vehicles on the road relative to the number of licensed drivers. And hence the miles per vehicle that is being driven. You can start extrapolating from that what that might mean. We still might be having a lot of accidents. But frequency as measured on a vehicle basis has fallen. But because I don't know exactly where that goes, I'm -- I will do as you suggest and I will retract my directional guidance on what frequency might do. But my gut tells me it isn't going any lower.

Okay. But we analysts make predictions that are occasionally wrong. I didn't mean to tweak you. I was just trying to clarity that you are musing that at some point they are going up, but the signs you saw before may or may not be worrisome, not today. That's a fair characterization?

That's a fair characterization. But let me also be practical about this. When you see things historically low and you can't create a hypothesis of why they would go lower, we are not going to be foolish enough to price that -- either it will maintain or not reverse. So we are going to be conservative on that one because my gut, although not a theory, tells you it is going to go back up.

Okay. But I thought you also added something in Nancy's answer to suggest that there was something long-term that might be sort of positive on frequency that you are not willing to share with us. I did misunderstand that?

No. I don't think I indicated anything there. Let me be clear about what I attempted to say. It is my belief, and I'm going to use my as a -- because it is me as opposed to necessarily something that we got further.

I think there has got to be macro-economic measures out there that are leading indicators as to what we observe as frequency. I think we, Progressive, at least, need to be better at determining what those are so we can determine change in frequency before it happens.

My interest, just as it was in 2000 when we took reserving and said we are good at reserving, could we get better? I would suggest to you there are a couple areas in Progressive right now, retention is another one. Frequency determination. We are good at observing it. Could we be even better at predicting it? And what I suggested to Nancy is I think we will be doing a lot more looking at other measures to see if in fact they could be leading indicators to our knowledge. It wasn't a prediction --

I got you. One last question on the page 3, your pretext recurring yield is 4.1 for the quarter, what is your new money rate equivalent.

Tom King here. We are consistent with our approach of having a weighted average credit quality in the double A range, and our duration is about 3.3%. So just --

3.3 years?

Sorry, 3.3 years.

Right. Got it.

Interpolate a rate and add a spread for double A, and that would be a good guess.

You spoon fed me very well, Tom. Thank you.

Our next question comes from Donna Halverstaff from Goldman Sachs. You may ask your question.

You talked a lot about claims quality and how it is at the highest point of the last several years. Can you give us some color on how you define or measure claims quality?

These are clearly internal assessments, I'll take that first and foremost. What we do and I'll let Tom speak about this a little as well. We have the claims organization and we have a separate organization. It is made up of people that came through the claims organization but are now separated in an audit function that reports through the finance group of Progressive and directly through the Chief Financial Officer, Tom, and their job is to give us an independent read on claims quality.

We clearly do our own claims quality within the normal management of claims. But we want to get an independent read. Clearly we would like to see those two calibrate closely together. Independent audits on claims quality are by definition lagged because we like to look primarily at closed files, not exclusively, but primarily. So it takes some time for us to measure the quality.

My comments today were really suggesting that while I have indicated and openly said I have every belief we are getting better at claims quality, we now have some of the audits coming in that are regularly scheduled throughout the year that are starting to validate that progress. I also want to be clear to say that it is progress and not something we can't exceed. Tom do you have --

We have about 25 auditors that go out. We audit every group throughout the year, some groups more often if necessary. We have fairly objective measures and the sampling process is fairly objective, so that we think that the sampling error likelihood is fairly small around this. I actually get very happy when I see an occasional battle on it. Because it validates for me that we are keeping pretty uniform in our standards.

But we track through a -- they call it claims quality index. We have tracked that for now a three year period and the progress has really been dramatic. And it is simply focusing on outcomes that are good for consumers and that people feel good about and that it is a repeatable process and that -- I have been really pleased with the results. Although we are -- we are completely independent. All we do is explain how things occur. We don't root one way or the other.

I don't want to belabor this point, but you all know how important loss investment expense is to this income statement, that while this is a great result and we would be pleased with it, it is so much more important relative to the fact that we have been adding a lot of new people. Had we maintained claims quality, that might have been somewhat of a victory just to maintain in the face of the growth that we have had to get this kind of result. I'm just telling you on a personal level, I couldn't be more proud of the claims organization than that.

Thank you.

Our next question comes from Jake Elb from Prudential Equity Group. You may question your question.

Could you first talk about the new product initiatives as far as what you are looking at there? And then I have a couple numbers questions. If you could give us some idea of the magnitude of change in new application growth, that would be helpful, as well as paid losses for the quarter and cash flow.

All right. Product changes, first of all, not so much new product change reductions they are design changes that while explaining the details of it I probably won't go into since that's not something we do think about as more strategic for us. In our agency product, we talked about that at the investor relations meeting. We have introduced in one state a product design that allows us to separate the effective credit. We still use credit within it, but it can be able to be separated, if in fact we needed to do that and we have also introduced new segmentation variables or additional segmentation of existing variables within the product. I could reasonably accept that this would be fine-tuning of our product. We consider it to be a product design shift that requires a lot of programming and so on and so forth.

In our direct product, a somewhat similar situation, but also a move to eliminate some data that might not be quite as critical in the telephone sales or internet sales of auto insurance and perhaps simplify the process, allow the quote to be given a little faster than normal, something important in that channel. So we have really been modifying both of the products and when we modify anything now we certainly have a test period where we make sure those modifications don't ripple through in ways that are not desirable. So each of those products is in a test market situation where we are encouraged by some of the things we see already, but we will let that run out a little longer than we did back in '99 and 2000 with product design changes we did then. Next question was --?

The losses. The losses to the quarter were $1.757 billion. That's a paid ratio of 60.0%. Paid to incurred if you want it is 88.6%. Cash flow from operations --

Well, Jay this is like the statement of changes cash flow. We haven't --

Yeah, cash flow from operations for the quarter ended, 9 months is fine.

We have not fully vetted that. That will be available in the 10Q when it comes out and I would rather not wing it.

That's fine. And the trends -- you said new application growth was slowing. Can you give me an idea of the magnitude there from a percentage basis, what you have been looking at?

I don't really see new application counts. I have never done that. I will tell you in agency, new application counts are down from the pace that we started off at the beginning of the year which was pretty rapid. But in the last several months, let's say the last six -- well, no, four months, it is bounced around at not much of a variance and I would say 8 to 10 kind of range percentage increase on a period over period. And direct has fallen a little more notably than that.

So that's 8 to 10% new application growth. Are you talking percentage points?

New application growth period over period.

Thank you.

Points year over year.

Right.

Our next question comes from Charles Gates of Credit Suisse First Boston. You may ask your question.

One question was, can you -- can you speak -- I believe you said that the number of conversions has actually increased. Would you elaborate on what that means?

Yeah, it is the conversion rate and not the number of conversions. When you think about the number of chances we get to have a quote, the number of times we actually sell a policy versus the number of quotes we get has been increasing.

What do you think that means?

We would assume that means that we remain fairly competitive in the market place.

Okay. My only other question --

Charlie, that's primarily as we measure it through the direct channel because that's our best measure of conversion. That's the cleanest measure where we actually know the numerator and denominator.

My only other question, could you elaborate on, I believe, -- I believe your comment you offered up earlier and this is my only other question, we are going into a different period with regard to the auto insurance competition. Could you elaborate on that, sir?

Yeah, I think we are seeing -- I would say we are seeing the kind of predictable signs of maybe not going into the soft market, but certainly the edges of it. We see in the market place, I am not going to name names here, competitors, perhaps eager, more eager than they have been in the past to get new business. So we see rates not just similar to ours, but incentives. Whether they be commission incentives or other forms of inducement. So we see a little more of a marketing push to get business that is different than it was 12 months ago. And even a few months ago.

So we are definitely seeing that our independent agents are getting more offers from their companies. We are seeing the loss ratio in the business in general come back to acceptable terms. I think we are predicting the industry will be under a hundred this year. Homeowners loss ratio looks to be improving. I think in general you are seeing our competitors feeling a lot better about their situation and therefore turning to more aggressive marketing tactics.

Is this the entire market or is it standard and preferred?

It is the entire market. I am not seeing anything that would suggest –

No the entire market as far as we are seeing.

Thank you, sir.

Our next question is from Ira Zuckerman of Nutmeg Securities. You may ask your question.

Glen, I wanted to get a little more on the prior year's reserve release. Can you give us a little more idea of whether what the causes of the release were and what lines it was from?

Let's go with the causes, yeah, sure. Tom, why don't you take that.

When you talk about the prior year reserve releases, you mean the favorable development?

Yeah.

Or what the actuaries have done.

The favorable development. Was it case, IBNR, what lines was it from? Have you figured out what the reason for it was?

Al, we have our -

Our corporate actuary is Al Nisar and he is coming over the table. The question, Al, is this 39.5 million for the quarter.

The favorable development in the loss reserves is pretty consistent across all our products and a large portion of it is naturally the settlement of claims less than the reserve amounts. I think you heard Glen state that in trends, if you look at a calendar period paid for bodily injury it is actually decreasing from prior year. So that's come to fruition a lot stronger in the third quarter and showed very favorable reserve development.

On top of that we did see the IBNR -- we reported earlier this year that it was somewhat unfavorable and during the third quarter it was not. It was actually slightly favorable. We did experience it through all of our products. So it was a very consistent result. The timing of the better development than earlier in the year from prior years was a little different and it was a third quarter and we saw more of it in the second quarter last year.

Okay, thanks. And, Glen, just another sort of detailed question, in terms of new business, do you see any change in the distribution of the prior insureds? In other words, where you are getting the business from?

Yes, we do. And I will only point one -- I will point one, in the direct channel, it is true we saw business from -- let's just say State Farm and others going through more of this correction. And the proof of prior from that carrier and those like State Farm, Allstate, have fallen somewhat. So I think to the extent that we see some coolong, some of that is directly related to rate adequacy at, or at least what might be perceived as, more rate adequacy at State Farm and Allstate, and perhaps less shock being presented to their consumers. We did see a spike for a period of time in proof of prior from national carriers.

Thank you very much.

Our next question comes from Hugh Warren of JP Morgan. You may ask your question.

Hi. It is Meyer Shields calling. In terms of the competitive landscape you mentioned other carriers are becoming aggressive in terms of rates and commissions. Are you seeing any difference in the relative quality of rating plans or class plans?

Not sure I can give you a meaningful answer on that. I don't want to stretch it. What we do see -- we see national carriers that are clearly credible carriers, very capable of doing good class plans, good merit plans and putting it together.

What I would tell you, that things I look for in a marketplace is where someone is competing at a rate level at or about ours or more importantly below ours as a structural disadvantage on expenses and perhaps is offering incentives that are greater than we think would ultimately generate a profit. And in the early stages of soft markets, you start to see a little of those signs. I think those are the things we look for.

We are not going to lose our discipline, but it would be interesting to see how those things play out. Because we feel very good about our rate level. We know we have got a little more that we could move if we had to. We have got the frequency tailwind and we are letting that play out. We are not going to chase business with marketing incentives we think are unwise.

Okay great. Thank you.

Our next question comes from Matt Rothschild of Alliance.

You talked about policy life expectancy that was improving at a 3 to 6% sequential rate. Are you talking about something at the low end of the range now or are we below that in what we have seen in the last quarter.

Since I opened up that issue, what I really -- think about this visually as a decay curve, an area under the curve. I have drawn this a couple times in the investor relations meetings.

The area has been increasing for us. So it has increased through 2002 and continued to increase through 2003. What I'm reporting right now is no additional increase in a quarter.

Remember -- I shouldn't say remember, but consider us to be measuring here in tenths of months type of accuracy and it is a lot more difficult to measure than I think even conceptually we may be thinking now. It is not as simple as a renewal rate. It is an estimate well into the future. There is some measurement inaccuracies that undoubtedly creep in.

I also will tell you that as, I mentioned earlier in 2000, we took a shot at saying could we improve our reserving? I think there is an opportunity for us to do the same thing on retention. We have an inherent issue we are well aware of. We measure policy retention. We don't always measure customer retention. Sometimes they can be different things.

We observed just an example in Colorado where we actually had some people eliminate PIP from their policy. We couldn't do that as an endorsement to their current policy. I won't go into the details as to why. So we start a new policy. By our own measures we don't necessarily look at that as a total retaining customer, we look at it as now two policies.

There is some measurement error, there are things quite frankly I am excited that now we have things we know we can work on. I am suggesting to you we may be slowing down on the policy extensions. I am not suggesting any significant give back or [return issue] and I am going to let another 3 to 6 months develop on the data before we draw any real conclusions. I will be happy to report on them just as I was when things were looking more positive.

Okay. And then on your sales of new policies, do you have an idea of how many more thousand-dollar deductible policies you are selling today versus a year ago?

Wow, that's a good question. I don't know that answer. Actually we have from our actuary we do not -- Al does not think it is particularly significant. It is a relatively small number, but if that is really important to you I would rather give you a factual answer, but it looks like it is a major issue.

The increase in full time equivalence that, was for the overall organization or just the claims organization?

That was overall. For a claims number which I think I have given you before, I would -- they have 320.

Thank you.

Our next question comes from Nick Piros of Sandler O'Neil. You may ask your question.

Good morning. In the 6 states who's combined ratios are above target, without naming them, collectively what percentage of premiums do they represent and are they above target because the loss results or is there a scale issue of the allocation of the expenses for the expense ratio?

I think we get our allocations fine. This is almost always a loss problem when that's the case. The center premium, I don't know that off the top of my head, but, you know, given your interest in that particular issue I would tell you those are not going to drive, sort of a, you know, next month we will be reporting something because of those six states. In fact, I can tell you a couple of them are in the 96 and change combined ratios by themselves.

Great. Thank you.

Actually I think we are working on sort of a percentage estimate of total premium. We will try and get that before the end of the call.

Great. Thank you.

Our next question comes from Alain Karaoglan of Deutsche Banc. You may ask your question.

Good morning. A couple questions. On the number -- had the number of quotes you have given changed? You mentioned the conversion rate, which is based on the quotes you give, has that changed in this quarter?

Yes. In general new prospects or new quotes if you like, they are healthy, but their rate of increase is declining.

But the absolute number hasn't gone down?

We are going to get that number.

This is Tom King. The year over year, the absolute number of quotes that we have in the direct channel is up and in the agent channel it is harder to measure a quote. We can look at the number of times agents want to request a rate from our mainframe computers and that number is also up.

Okay. And I just want to make sure I understood the frequency comments in terms of pricing, Glen, basically frequency is still favorable in terms of your pricing. You are assuming that either frequency is maintained or increasing going forward in your pricing, is that correct?

That's true.

Okay. Thank you very much.

Okay.

Our final question comes from Jeff Thompson of KBW. You may ask your question.

My lucky day. I wanted to focus a little on the 42 -- 39 million of favorable reserve development and make sure I understand if we look at that between personal lines and commercial lines, is there any variation in the development factor?

One sec. Al Nisar is scribbling furiously. He will come over here -- the question is commercial versus personal lines mixed the 39 million, is it disproportionate in one line versus another?

It was very consistent across all our products and I'll take a look here.

Well, you said --

I meant commercial lines and our special lines and our automobile. It was very proportionally, very consistent.

Okay. As a follow-up, you are increasing ad spending and I want to get a better sense as to what is driving your decision to raise it. Is it the competition? Is it the loss costs? What is going on in your thinking.

Multiple things. We have an attractive product with attractive margins right now. We do know that we see some competitive increase in spending. So a share of voice obviously affected by what other does as well.

Mostly what is driving our thinking is that as we have exploited a certain market and a certain reach we have hit a class of customers very well and we have high frequency of hits. We are now looking to use our advertising dollars not to do the same things we have done before but expand our reach. We talked previously about increasing the teen reach. We continue to do that by using the different media sources to reach a different audience than we have reached before. And we will continue to measure the effectiveness of that. So it is a combination of all those factors.

Can you elaborate on which audience or is that getting too technical?

I don't think that is for this. That's for us to sort of focus on.

Okay, thank you very much.

I guess the final statement is that the six states represent 10.5% of the 2003 year to date net written premium.

Sir, we do have an additional question. We have Nancy Benacci of McDonald Investments.

We would be happy to take the call.

I have one follow-up regarding the concierge program. You indicated the numbers we have this year will be slightly less than you anticipated and you may slow that down a bit. Is the overall profitability that you anticipate to get out of that program still intact as you look out going forward, and when do we see the benefit of that coming through in the numbers?

That's fair. I think the slow down is more than I indicated. So I think we talked about we would be maybe opening 20. Nothing wrong with that. That was our expectation then and we now know, logistically, just how hard that is to do. From our perspective, that's knowledge and not necessarily a change in course.

With regard to the benefits, we clearly see some of the benefits that we had expected. Some of them are very real. Some of them are -- have got to be attained over a period of time including productivity gains and so on and so forth. And we will continue to monitor that very closely. My enthusiasm has not changed one way or another here. This is simply prudent acting on the numbers we see.

But I will tell you whenever we add fixed costs to our business we want to be very careful to make sure that we get the gains and we will go whatever pace it takes to make sure that we leverage those fixed costs appropriately and not end up with something that we live to regret.

Okay. So as you are looking out five years as to where you see Progressive, the fact that that will be an incremental benefit to your loss ratio of going while we are still intact?

That's my goal.

Thank you very much. Appreciate it.

We do have one additional follow-up question. We have Charles Gates of Credit Suisse First Boston.

I apologize. I answered my question myself. Thank you, guys.

Okay. I think we are going to call this the end just for the analysts out there, both Jeff Bash and Tom King are wrapped up in non-investor relations activities today. So it will take us a little bit of time to respond to your questions. But we will get back to you. And we thank you for joining us this morning.

That concludes the Progressive Corporation's third quarter conference call. An instant replay of the call will be available until November 7th by calling 1-800-688-2794 or can be accessed via the Investor Relations section of Progressive's website for the next year. Thank you.