前進保險 (PGR) 2003 Q4 法說會逐字稿

Welcome to the Progressive Corporation's fourth 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 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 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.

Good morning and welcome to Progressive's quarterly conference call. Participating today are Glenn Renwick, Chief Executive Officer and Tom Forrester, Chief Financial Officer. Glen will begin the call with comments on quarterly results and then we will open the call for questions. The call will last about an hour. Statements in this conference call that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from our projections. These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions 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 requested rate changes.

Legislative and regulatory developments, the outcome of litigation pending against the company, weather conditions, changes in driving patterns and loss trends, acts of war and terrorist activities, court decisions, trends in litigation, healthcare 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 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.

I also have one administrative note. Please save the date for Thursday, May 27, 2004 at 9 a.m. eastern time when we plan to have our 2004 Investor Relations event in New York City. Let me turn the call over to Glen Renwick.

Thanks. Good morning. It was a good year. We're pleased with the results for both the quarter and the year. We met our financial goals of getting at least a four point underwriting profit and then maximizing growth. The over all result for the year was an increase in net premiums written of 26%, combined ratio of 87.3, and a return on average shareholders equity of 29.1%. The fourth quarter showed the reduced rate of growth in written premium we had expected with year-over-year growth of 21%. And more importantly December growth around 19%. Not much we would change about the year. I'll provide some commentary to add to the release and then address some outlook issues for 2004.

Reserving. During the year, our actaryial group strengthened reserves by 7.3 million, though we experienced favorable prior period development of 56.1 million for about 1.5% of last year's reported reserve balance. During the fourth quarter, the actuarial group reduced reserves by 4.1 million and we experienced $40.9 million of favorable development reducing the combined ratio for the fourth quarter by 1.3 points. This favorable development came evenly from private passenger auto, commercial auto and our assigned risk reserves. To give you a bit more perspective, in 2003, we experienced 3.9 million of unfavorable development in our private passenger auto reserve segments and favorable development of 12.5 million in commercial auto, 4.7 million in special lines, 38.8 million in assigned risk, and 4 million in other products. In short, reserving has been right on the money. Our many segment refinements collectively have had minimal affect on our reserve balance. Such reserving accuracy allows us to have the best pricing data possible and confidence in our rate adequacy.

Addressing questions from prior calls, the paid loss ratio for the quarter was 60.2% and the paid to incurred ratio for the quarter was 91.3%. These are not measures of primary importance to our product management. Trend. While reserving runoff had a favorable impact on our operating results the more significant factor was the continued favorable accident frequency. Before I comment further, I thought it would be useful to underscore why our trend results sometimes differ from industry results. Over the past few years we have grown significantly and our mix of business has changed. In the past year alone, for example, the share of policies in force we classify as non standard to mid market business in the direct channel is around 25% and down slightly year-over-year favoring an increase in standard to preferred business. For agency the percentage of similar business is considerably higher and stable. Because our book of business continues to shift, we have to take care to distinguish a change in business mix from a change in external frequency. Over the past four quarters, we have seen continuing declines in frequency rates.

With the exception of recent experience in personal injury protection, all coverages have experienced negative frequency trends but with variance in magnitude and sequential direction. Third-party bodily injury frequency change, though still negative, has sequentially smaller trend reductions while collision frequency reductions have sequentially widened. While these trends are similar to those in the NAI fast track data, a statistical agent that compiles results of many insurance companies, our pure premium results are notably lower, driven by our paid severity. The key unknown is whether or not these trends will continue. We believe one of the driving forces for the drop in frequency is the ratio of drivers to cars which has continued to fall despite the downturn in the economy. We have been expecting this trend to reverse for some time but it is not. However, we have seen some signs of increasing frequency. Comparing fourth quarter '03 to fourth quarter '02 we have seen PIP frequency become positive though PIP severity has dropped slightly. Similarly, we are cautiously observing the direction of BI frequency given the slope of change.

Selecting future trend is always difficult. But we would prefer to proceed as we have historically with caution. While our rates in most states are adequate we will continue to incorporation trend in our rate evaluation so that we do not become rate inadequate. Retention. In general, we have seen our retention fall modestly over the past quarter. Our measure of retention is an estimate of the number of months of earned premium we would expect from a cohort of policies issued during an inception month. We perform this exercise at five different tier levels as each tier has significant differences in retention. These calculations are simply estimates of future conditions and are by definition variable in nature. We supplement these with time series checks showing retention at different points in time. Two key measures are the 4 - 1 ratio, the percent of policies issued four months ago that are still in effect and the 7 - 6 ratio. We have generally seen flat to increasing 4 - 1 ratios but we've seen a slight falloff in the 7 - 6 and subsequent ratios. We believe the former demonstrates we've achieved some progress in making it easier for insurers to purchase a policy from us.

We have several theories on the latter including a reflection of the softening market and internal measurement concerns. Increasing retention remains a significant internal focus but we expect external factors will continue to play a significant role in determining our success. Our primary approach remains driving down the cost of auto insurance to consumers. Conversion and response. In the direct channel, we are seeing some offsetting changes. Despite increasing our advertising spend we have seen our share of voice fall which means that some competitors have increased advertising faster than we have. The result has been our quote volume has fallen, offsetting this has been an increase in the conversion rate. We have also seen a greater proportion of our business come to us via the internet an expected outcome given our advertising approach. In the agency channel our ability to measure is less precise but believe the reverse is true.

The number of quotes defined as financial responsibility polls has increased with declining conversion rates. Claims handling. The good news here is the continuation of the third quarter highlights of excellent claims quality and expectations of even greater gains. During the quarter we opened new claim service centers in Indianapolis, Detroit, Jacksonville and a second site in at Atlanta. While full validation of all the operating and cost parameters for these centers is ongoing, the benefits are unquestioned and this remains one of our most exciting strategies for cost reduction and brand distinction.. Comments on future disclosure changes. Beginning next month we will issue an expanded monthly report package. It will include some additional management commentary. Rather than wait 90 days for questions we will attempt to anticipate those questions and offer qualitative commentary on our reported numbers.

Investments in capital structure. Our portfolio posted a fully taxable equivalent total return of 2.3% for the quarter and 8.7% for the year. Our asset allocation was close to our 85/15 target. On the same basis our fixed income portfolio returned 0.7% for the quarter and 5.5% for the year. Our equity portfolio produced a total return of 12% for the quarter and 28.6 for the year. Our duration remained unchanged during the quarter at 3.3 years. Continue to feel that our short duration high quality strategy in the current low interest rate environment is prudent. The weighted average credit rating of our fixed income portfolio is AA. Our realized gain in the portfolio as of December 31st, is 643.4 million, up from 147 million over the end of the third quarter.

Consistent with our reported approach, we have taken all the write downs for other than temporary impairments that we think are appropriate. 12.7 million this quarter and 65.2 million for the year. As of year end, our debt as a percent of our debt and inequity was 22.8% down from 24.5% at September 30th. Thoughts on the outlook for 2004. We approach the 2004 year extremely well positioned. While we expect and forecast lower year-over-year percentage growth than the past two years, we could not be in a better position with strong margins and excellent operational capacity, notably claims quality. We have multiple attractive options as we anticipate working through a somewhat softer market. We will not reduce rates as a primary strategy, though some markets may be best served with selective rate reductions. However, I emphasize we will focus on rate stability and allow trend to be offset by some reduction in underwriting margin. I expect we will slowly return to more normal underwriting margins but maximize our opportunities for longer customer retention.

In addition, we will accelerate our new product enhancements, specifically in agency where we have seen encouraging lift in growth in alpha testing. Our initiatives to reduce cost will continue, notably in our technology service and claims areas. And the delta between our margins and competitors will become more important. In short, we feel well positioned to grow profitably at several multiples of the industry growth rate. I'll take your questions.

Okay, Kristine, let's open it up for questions, please.

Thank you, sir. 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 touchtone 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 followup question per request. If your telephone has a mute capability we ask that you use this function during the time your question is being answered to minimize any background noise. To the extent you have additional questions you will need to place your name back in the queue by selecting star 1 on your telephone. Once again, if you would like to ask a question please press star then 1. One moment for the first question, please. The first question comes from Mr. Charles gates with CSFB. Sir, you may ask your question.

Thank you. When you indicated that in 2004 you saw a somewhat softer market, would you elaborate on that? And in answering that question, would you speak to the comment or the illusion or offering comment that you said about possibly taking some selective rate adjustments downward?

Sure. As you all know, the terms softer and harder are used pretty widely in the industry, but no one has quite the right definition so let me describe what I see as market conditions that would allow us to say the term somewhat softer and again that is without definition. We clearly see that many of our competitors, and we're happy for them, have gotten rate adequacy during the course of last year, are stronger, we expect the industry combined ratio to be under a hundred this year. So in general the outlook from 2003 results is quite a different picture than it was 18 months prior to that. We see increased advertising spending, I think that is quite visible to almost everybody. We see even some rate reductions happening.

One of some note, I think State Farm has announced that they are going to go down about 5.9. In Arizona we certainly see some of the independent agency companies seeking out more aggressively. Business, they do that not necessarily so far through rate reductions but more aggressive on acquisition incentives, commission and the like. So those are the conditions that I would say have changed visibly for us that leads to the conclusion that it is somewhat softer market conditions and that is fine. To the extent that I made the comment that our primary strategy will not be reducing rates, clearly we have a margin far greater than we priced for and we have given you multiple reasons for that. The one that I would say is the biggest single tail wind that is very hard for us to predict exactly the magnitude of what we got and when it will change was the frequency issues. So rather than now make the declarations of when and why that might change, we are just going to report the numbers as we see it and we certainly still see a very favorable frequency environment.

But should that change, let me be very clear, that will change and it will have significant and fast effect on results. So if we keep rates in general at a level where we allow trend to be absorbed by some of the margin that we have, that provides most of our consumers with a more stable rate environment so it is difficult to talk in generalities but if we do that, that will allow us to have one more serious attack at increasing the retention of our customers which we see as a real economic gain for us. The selective rate changes. There are markets where we have outperformed our own expectations and there may be situations where it might be prudent to take a rate change to keep us very competitive. We certainly don't want to see any situation where we perhaps fall back. So anything that would preserve our market share within reason is something that we would consider. Or if there was a market where we absolutely thought our rates with a minor change may produce a significant volume offset and just on a straight net income basis it is a prudent thing to do, we would evaluate those.

The key message is it is not a wholesale rate reduction. It is the same as we do with all of our other product management. We take it down to the details. If you have, I'll be very simplistic here, if you have a price in the market that's 25 bucks above your competitors and you take it down 5 bucks you get nothing for that except some very adverse results on the rest of your book. If, on the other hand, we have got a situation where we can take rates down and we can get significant volume switches and changes we would consider that.

If I am permitted a followup question. The followup question is you had no growth in the agency platform for personal auto policy count between November and December of '03. Could you explain that?

Yeah. Two effects. One simply is the comments that we've made that we've seen reductions in new apps year-over-year, but also to the extent that December, and this is not an excuse so be clear I'm saying things have slowed but if you take a look, actually, back at '02, you'll see that sequentially December '02 to November '02 for agency was only a 0.7% increase at a time that we were doing extremely well and going into a period where we basically were on fire in the first part of '03. December for our accounting certainly had our four weeks. It also included some stranger times around Christmas. The seasonality is a very real effect that it has happened consistently through the years that December sequentially over November is not a growth month at all.

Thank you.

The next question comes from Mr. Michael Lewis with UBS. Sir, you may ask your question.

I'm still a little bit unclear on the course you're going pursue if the environment gets more competitive. Can you give us some idea on what percentage of our business is in states where you have significantly better performance than you anticipated? And again, I know you are not sticking to the 4% underwriting margin as a long-term goal or maybe you are, but you do have considerable give in your margins. I'm just wondering, as you are watching the market if loss cost trends remain benign, how aggressively will you defend turf or is it really that your long-term goal of being the largest writer of private passenger auto is really not your long-term goal any more? Maybe you can clarify this a little, Glen. On a longer term picture how you are kind of looking at where Progressive wants to be and how you kind of address competition if it gets a little more dicey.

Sure, Michael. I generally will try to be as precise on my answers as possible but you're asking an area here where I'm probably not going to give you what I consider to be competitive information that we haven't yet executed on. I think most of you now know that Progressive has very clear goals. And they have a priority to them. Profit and then grow as fast as we can with the constraints that we have put. And let me assure you that that has not changed one iota in my mind. We love growth. This has been a wild ride for quite some time and we anticipate that for a long time. We are in, and I'm going to sound a little bit sort of Pollyannish here, but we couldn't be in a better position. We have a lot of options available to us. So when I say we will take some selective rate actions, yes, we're not planning to lay down and let competitors take business that we could take at acceptable margins for us.

On the other hand, we are not planning to give up a lot of what we've gained in terms of net income. It takes an awful lot of volume to offset some of the margin gains that we have. We will move back toward our stated goals which are not being restated but we are not going to move back in one jump. If the volume of business coming in to Progressive today is fundamentally different and greater than it was just two years ago, it is huge and we are going to really protect that and continue to grow it. Our goal hasn't changed. We want to be consumers number one choice. That ultimately leads to being number one.

We will do it when the market conditions are absolutely in our favor. We have had a huge hole in the last couple of years, we positioned ourselves well and we made hay while the sun shined. We anticipate having every much as success in the next several years but the year-over-year percentage growth is unlikely to be in the same league as we have had. So, more specifically to states, no, I'm going to hold back in naming some of those states other than to point out that our entire management system is based on each and every state, each and every product, agency direct, special lines, commercial and every one of those product managers is charged with taking the right actions, the most prudent actions in their state and then there is a review of whether or not that is consistent with where we want to go as a total company.

So we will use all of the means available to us to keep growing and given where we are positioned we have the opportunity to use margin both in rate where we think it is necessary or appropriate, more importantly, in innovation. I mentioned in the script we have a new product design in our agency world and initial testing looks very good. We are much more inclined to try to use margin what we think is intelligently to innovate, invest and to create greater cost differentials that will be more sustainable than just a simple rate reduction which may or may not produce very good results at will.

Michael, this is Tom Forrester. 36 out of 48 states have a combined ratio below 90 so we have a number of options. We also have an accent calendar year match that is almost perfect. So therefore, what you're seeing it not just prior year's good news coming through, but in fact, we think we are in a pretty strong environment over all. So, I think that everything we do will be done with precision based upon each individual market.

I appreciate that. It is a very, very thorough answer. Just one quick followup. Can you discuss is the competition still disciplined and are there any outwriters who you are seeing as being distinctly more competitive in the last couple of months? Thank you.

I think there is sort of maybe two answers to that. In terms of actual rate level I'm not seeing anything that would suggest a lack of discipline in rates, i.e. rate reductions or significant rate reductions. I mentioned one, but at least in the world that we see more often perhaps in agency, not seeing that in great numbers. That will be something I think we should talk about on a regular basis because that could happen. What we are seeing, however, is the other types of things I mentioned also in the script, a little more advertising, some commissions. So I think the appetite for business amongst many of our competitors is much stronger than it was 18 months ago but I'm not seeing a lack of discipline in rating just yet.

Thanks so much, guys.

The next question comes from Ms. Allison Jacobowitz with Merrill Lynch. Ma'am, you may ask your question.

It is actually Jay Cohen, but you probably could of told by the voice that I'm not Allison. I guess the question on the frequency. I don't think anyone has come up with a really good thorough explanation for why the frequency has done what it has done. I'm wondering now that you have had four or five quarters where frequency has been so good if you have any views on that or maybe if those reasons have changed over the past year. And then I might have a followup.

I think you're absolutely on an issue that I would tell you we have room for improvement on. I'll give you a longer answer to a short question but I think that the truly successful company in the future is going to compound what Progressive is very good at and that is looking at data that has already happened and determining what too do in the future. It will be one that can combine that skill with a little bit more forward looking view and and anticipation of certain trends. To the extent that we have some theories with regard to frequency, we do. How many of them are truly ready for prime time is questionable. I will provide one that I believe and I put in my comments. As of the end of September, and this may have shifted just a little bit, but as of the end of September of last year the average U.S. household has 1.9 vehicles and it has 1.8 drivers. That condition of more drivers than vehicles is a new phenomena and I believe that has actually widened a little bit in the last quarter. I'm sure it is a small measurement. But to the extent that that has happened what you have got now is on a per vehicle basis reduced exposure.

Those drivers can only drive, even if they are driving the same amount of miles on a per vehicle basis, you have got a reduced exposure. The way that we measure frequency on accidents per 1000 vehicles, or in car years, that is going to show up as a reduced frequency. You've got to be very careful of what you count and what you understand. There may be as many accidents but on a per vehicle basis the accident frequency has gone down. And since our rating is on a vehicle basis we have benefited from that phenomena. To the extent that that changes and we see perhaps a pullback in the number of new vehicles sold, and you can clearly speculate as to why the number of vehicles sold in the last three to four years with the financing options et al, to the extent that that changes or that gas prices perhaps change dramatically the mix of vehicles in the household. Those are all factors we need to understand. But I would give you the primary theory that I believe is explanatory is there are more vehicles than drivers per household in the US today and that is a new phenomena.

Then followup, and related to this, is what is your average deductible done in the past two years? And if you have any idea what the average for the industry might be?

I don't have any average for the industry. Ours, I would say, it is up but not meaningfully. I don't believe that that is a driver. I think I understand where you are going with that in terms of reported frequency versus actual frequency but I don't think that is a valid explanation. It may be a contributing one. I would be shocked if that even comes close to explaining the magnitude of the shift that we are seeing.

Great, thanks for the answers, Glen.

Okay.

The next question comes from Mr. Mark Lane with William Blair & Company. Sir, you may ask your question.

Thanks. Good morning. Can you explain, I may have missed this, but the disparity in the changes within the direct versus the agency, how you said that quote volume within direct was down but conversion was up and in the agency quote volume was up but conversions were down.

Sure, I'll even give you a little more clarity on the statement whether it is an explanation or not. Direct, very different businesses here. In direct, obviously, you've got to get the quotes and then the level of conversion is such that the individual has brand definity with you and their likelihood to convert may or may not be entirely dependent on price, because they are not, in effect, doing a direct price arbitrage. I would tell you that our best thoughts with regard to conversion going up is the continuing strengthening of the brand, the awareness that people have of Progressive and, frankly, the reputation that we are getting in many different parts of society. The issue there is we have got to generate the quotes and that tends to be a lot more dependent upon the amount of advertising we do, sharer voice. We are not in the position or have any desire to necessarily compete on a percentage of share voice. We spend our advertising dollars in direct proportion to what we believe they will produce or yield in terms of new business and we will continue to spend only in that proportion.

The agency market is a very different market. There we are effectively being arbitraged against other carriers that an agent may have. It is very hard to define a prototype agent because they may have three markets, the one beside them might have six markets and they may be different. So at any given time there is a lot more of a true competitive arbitrage going on in the agency channel. The comment that I made suggests that the flow of volume into the agency channel is strong. We are doing fine, but the conversion rate is a little down, not something that we are overly concerned about, a little down from what we've observed during the perhaps hotter market time. In direct, it is just the opposite. We are very happy that conversion rate is down, we think we understand why the conversion is up and the quote is down. The quote volumes are a little more in our control.

And how would that have changed from earlier in the year then?

Earlier in the year, just using the agency for example, and go back a little further than earlier in the year, go back to the beginning of '03, little harder market times, the competitors in the agency channel weren't quite as aggressive in some of their offerings or incentives to agents, so we were favored with a little higher conversion rate in the agency channel. And for direct we have more recently seen activities from other carriers that are advertising more and so on and so forth which we expected, that is reducing our quote volume.

And a quite followup to Jay Cohen's question. Why would you be shocked that the average deductible or changes in reported versus paid frequency, why that wouldn't be a good explanation?

We have relatively low deductibles. There are very few accidents that happen where they fall below the deductible and someone makes a conscious decision not to report it because it is below the deductible and we just have no evidence that people are not reporting their claims because they think it is below deductible and therefore we're getting a misread on the reported frequency.

Mark, the customary deductibles in the industry are $250 or $500 and these absolute dollar amounts go back to at least the 1970s. And given repair costs and parts prices, they are sort of relics of the past. It is very difficult to have a $250 accident.

Great. Thanks.

The next question comes from Chris Winans with Lehman Brothers. You may ask your question.

Thanks. I just wondered if you could go into a little more detail on the assigned risk related reserve change. What states are you realizing that benefit, what is the driver, how much business are you picking up from assigned risk programs and then I have a couple of followups.

Okay. I may get Al to fill in here, but the big issues for assigned risk would be A, New York, I have to simplify this down. New York is the big state, smaller assigned risk plan than accepted we're being smarter on getting takeout credits than we initially had planned. Those would be the three big drivers of the 38.8 million favorable development that we had. Al, do you gave anything to add to that? Al is actually with us but not physically in the same location.

While we geat Al on the phone, Chris, I can just share that forecasting underwriting losses associated from assigned involuntary market assignments is exceptionally difficult to do. This is harder to do than form loss reserves because assignments you get today deal with market shares from two years ago. And then you have to forecast what rate adequacy is going to be. So we don't know what our volume is going to be. We don't know what our margins are going to be and it is just an inherently more difficult number and I believe we are unique in the industry in accruing for underwriting losses associated for assigned risk business. This makes Progressive a bit of an outlier.

Is there anyway to project how this is going to effect future period earnings?

That is dangerous.

Okay. On a followup, some time ago you talked about Safeco as a particularly aggressive competitor and I think you were looking into how to respond to that one in particular. Now, I'm just wondering, are you still seeing that and what is your view on them at this point?

I wouldn't change it. I think hopefully I said also we respect them as a competitor. They are aggressive, they're out there, they're doing what they should be doing. They've got some new program designs. They've got some commission deals that are favorable for agents, so good to have competition. I don't think we are doing anything particularly different because of Safeco. We kind of like our game plan and we tend to stick to our game plan and let the oscillation happen a little bit around us unless there is some very significant reason to respond. So that comment was more in the view of market conditions. I chose a fairly national carrier and suggested that it appears to us that they are more aggressive in getting new business and that is good.

Okay. Now, last question. When do you see market conditions approaching the sort of destructive price competition level that we got to in the 90s? When do you see that happening again?

That is too tough a question for me. I think we will just watch it day by day because any speculation there is somehow my trying to speculate as to what is in the minds of other companies and their motives and objectives. I think the only thing I can genuinely do is tell you and reinforce what our objectives are and tell you how I think we've positioned the company and it just couldn't be any better. I mean we don't have sort of big system problems that we are trying to fix, we don't have talent holes and if we are disciplined and do what we have been doing and take costs out to the extent that we believe we've got a margin delta over some of our competitors, we can use that margin delta in pretty intelligent ways. So when or if there is perhaps a return to softer market, perhaps lack of discipline and things we saw in the late 90s, all I can tell you is I still got some of those scars and most of the people around me know what we participated in so I don't think we are ready to go back to that. We're not going to be leading it.

Do you think the industry as a whole is a higher ROE industry now because of all the increased sophistication in underwriting?

Hard to know. I would hope so. I certainly think we are.

Thanks a lot.

The next question comes from Mr. Ron Frank with Smith Barney. Sir, you may ask your question.

Glen, some of your comments, if I put them together sound like they smack of a skepticism or a cautiousness about the the price elasticity of demand for the product. When you comment on how much volume you have to take on to compensate for a given margin sacrifice on more of an inclination except in select instances to let trend push the margin down gradually than to pursue is with price and I'm wondering if I'm reading that correctly. Has there been a shift in the price elasticity, a demand for the product in your perspective? Because clearly that elasticity has worked for you so far in terms of the wild ride you talked about.

Sure. I wouldn't call it skepticism, Ron, I would call it sort of the business just gets more complex. And to put an overview comment on elasticity between channels, first of all, would be wrong. There is a very real difference between the direct channel and the agency channel. As I answered a question earlier about the almost, this is probably stretching it, but pure arbitrage model of an independent agent where they have multiple choices and they often try to get the best price to the consumer. If we took that one, yeah, clearly price elasticity is important there. I also said that if done poorly it is all about the distribution of rates, not necessarily an absolute rate level. If you have a market segment that is shopping, there is demand, and you happen to be, let's just be simple about it, five bucks out of the clearing rate. Then a five buck or six buck change may very well mean something in terms of volume.

If on the other hand you are not then it's a wasted rate reduction. So I'm suggesting yes, there is some skepticism only in the sense that it's got to be sell by sell, it's not a macro take rates down 3 - 4% and therefore you will always get a certain reaction in the marketplace. It has got to be done state by state, segment by segment and the differences between channel are pretty dramatic so I would rather sort of have that be the tone of saying it is somewhat complicated now and those who pay attention to the details will more likely spend a dollar, if that dollar happens to be a rate reduction, wisely if they do it sell by sell versus a macro which may in fact get you nothing. So elasticity could range from zero to significant.

Okay. Glen, a followup, if I may. Putting together some other comments, the expectation of lower year-over-year premium growth although still at a multiple of the industry rate which certainly seems reasonable, and the trend in consecutive quarter policy in force during last year, it sounds like all of that would be consistent with what might be an actual falloff in policies on a consecutive period basis before we are done here. Is that a reasonable expectation consistent with your year-over-year premium expectation?

No. I think the year-over-year fall off I referenced was year-over-year percentage growth.

Right.

I mean we have really been having some huge numbers and when you think about the base that we now have, which I think in policies in force if I go back about three or four years, not too much difference, about a 92% increase in policies in force for the last three years.

Right.

But we really have a huge base. I'm just suggesting that the percentage numbers on top of that are not going to be as strong. I haven't inferred, and I actually don't have specific forecast that I'm referencing, but I haven't inferred at all that we expect policies in force growth to go anything other than north.

Okay. Thank you.

The next question comes from Mr. Bob Glasspiegel with Langen McAlenney. Sir, you may ask your question.

Good morning. Just a flushing out your '04 outlook statement which was a little bit fuzzy but I think I understand most of what you are saying. If rates are flattish and frequency and severity stay negligible, your underwriting margins really should be comparable with the current run rate ex maybe the absence of favorable reserve release in the expectation. So your pricing, assuming that the trend will increase even though hasn't been yet, or am I missing something there? Where do you get the decline in '04?

Just repeat the last piece, please, Bob.

You said that you're going to let margins soften a little bit in '04. Is embedded in that assumption the fact that trend increases in '04?

Yeah, the comment, there are two comments in there and it wasn't meant to be fuzzy, but there is a certain lack of certainty. I said that we don't know what trends will be next year.

Right.

We effectively are very cautious about continuing to extrapolate what has been a period of extremely negative trend in, depending on coverages both frequency and severity, it's certainly just not wise to continue that going down. To the extent that we make the assumptions in our rate evaluations that that is going up, we are prepared to offset some of the increase in trend by a reduction in margins as we expect to come back. We are not planning to price to and maintain over any long period of time the kinds of margins that we achieved this year. That is not a defined objective. Our objective hasn't changed so we may use, we likely will use margin to absorb some trends. The second part of that question is well what if trend is negative. Then, I reference multiple options, and I'm not trying to be vague there, I'm just trying to say that it is really pretty nice to be in a position where you have a lot of levers that you can pull and some of them will pull under different conditions and if in fact we saw, for what we believed a reasonable period of time, reduced trend in markets we probably would take rate action to reflect that reduction.

Okay, that is very helpful. If I could microscope your reserve release in agency and direct, was it evenly within the months or concentrated in any specific month and what was the most important driver there?

Let's see, the amount was relatively small, it wasn't exactly even but it is really no story to tell there of month or channel.

And the residual market which month did that hit in?

Good question. I don't know the answer to that.

I'm just trying to figure out if December or November, if any of them was distorted from it.

No, I mean it is a fair amount of money but it is not.

About $13 million of it came in December for the assigned risk reserve release. The rest came primarily in the other two months of the quarter.

What was the total again for residual.

38.8.

So it was roughly even. Okay, thank you very much.

25 and 2.

Appreciate it.

The next question comes from Ms. Nancy Benacci with McDonald Investments. Ma'am, you may ask your question.

Glen, just a little bit more on the retention, direct side, and you had given the indications when you looked at, I think, the 4 - 1 and 7 - 6. A little bit more clarity there. Is there a marked difference in profitability in those two measures?

No. I wouldn't describe profitability with those two measures. Let me go back on that a little bit. The retention, since I had been very open with telling you retention, had gone up for some period of time, I'm not going to sort of not talk about it when it is not looking as good. It is certainly not something that very similar to the comments I made in the third quarter. This is not something that is so dramatic that it is causing us any great concern. It is always unfortunate when you don't keep on the trend that you would like of increasing. Rather than explain those ratios, think about that we have early term retention which is actually going up.

We have at renewal junctions, whether they be the 7 - 6, which would be the first renewal of a 6 month policy or 13-12 or every multiple of six from there on out, those are interesting points and we are seeing some decline in those. Again, not dramatic. The question that we face is now that we are spending a lot more time looking at these numbers, whether or not we have accurately defined in our own terms whether they are counting correctly. I know that sounds kind of strange from a Progressive perspective. We have measures. We're not sure that the measures are telling us everything that we need and that in fact we may be counting in a way that is hurting us from a pure measure perspective. There is also, because the marketplace is a little bit more open, there is also very real reason to believe that retention may suffer because of competitive environments.

And we have got to get clearer in our own minds on those issues. To the extent of agency and direct, clearly the difference is significant. We want retention in both channels but when you are paying a variable commission on the earned premium then there is no great economic recovery effect in the agency channel. In the direct Channel we use the estimates of policy life as an amortization period of our acquisition expenses and should that shorten beyond the estimates that we have used which are conservative, then we have a very real problem. We are not at that point at all but those are the things that we are concerned about.

You also mentioned, if I've understood correctly, that it appears on the direct side there's more coming in through the internet in terms of actual conversion through phone, if that is correct. And secondly, is there a marked change in profitability for either one of those venues

We're not going to talk about the profitability because that is not things that we will release, so I'll beg that question off but with regard to the infinite usage I think there are two factors. First of all that is what we are encouraging people to do, that's what our advertising is really trying to get people to do and I think you all understand the reasons for that. Not only is it becoming very consistent with behavior, it is extremely consistent with the behavior of the primary age group that we target and we are seeing as clear as can be seen the change in society that is shifting towards more internet inquiry, more internet discovery, and now even more internet buying. We are seeing all three of those things emerge. So the number of quotes that has been started on the internet as a percent of total quotes in direct has gone up tremendously. But I don't view this as a internet versus phone. In many cases we have people start on the internet, do a lot of their own work and then actually call us to close. That is a perfectly valid way of getting the policy. Some people start on the internet, do everything themselves and ultimately buy and frankly we never talk to them and then they service it on the internet. Both of those groups are increasing relative to the number of people that do entirely by phone. And that shift is actually very favorable for us.

And then just one last quick followup in switching gears a bit. Talk about the commercial auto business which had very good results through all of '03. Any indication of changes you're seeing out there in the marketplace? Is it becoming more competitive as we look at '04?

No, but I think that is a valid question that we will comment on each time we get together on a conference call because certainly we could see softening market conditions. I think we actually had believed that we would see softening market conditions in '03 that just didn't materialize so I think that is one that we will just tell you what we see when we see it. Don't have any big projections on that.

Great, thank you very much.

The next question comes from Mr Nick Pirsos with Sandler O'Neill. Sir, you may ask your question.

Good morning. Just have a question with regard to how you potentially change any management focus as we enter this softer or less hard market condition. In terms of distribution channel between direct and agency and changing consumer patterns in the face of a potential changing pricing condition market?

The way we are organized is we have a President of our agency operations and they have objectives and goals and we have a President of our direct operation with objectives and goals and the market conditions don't necessarily change my view of how we allocate resources one channel to another. Each of those channels works within the market conditions. They're very different channels, they have very different situations, so in a global sense the comments I made in the outlook with regard to rate actions general for both channel. Each channel will operate differently and the direct channel is very much focused on getting a supply of quotes, and as I said, our conversion rate is strong. With agency it is often winning those quotes in the marketplace whether that be through rate or new product designs, we will continue to push on those two. I don't think there is any bigger answer to your question.

Great, thank you.

The next question comes from Hugh Warns with J.P. Morgan. Sir, you may ask your question.

Good morning, everyone. Quick question for you. Tom had mentioned earlier in the call that in 36 of the 48 states you were seeing combined ratios below 90% and I'm trying to think of 2004 from a regulatory standpoint and potential changes you see in that environment and is this the reason why you will use trend instead of rate and rate filings. We see less rate filings going in to 2004. Can you just give us some color on that from the state regulatories outlook.

Sure. Any time you have got below 90, let's just assume that that is something that was in part fortuitous and I wouldn't use any other word, the frequency changes allowed us to do that. Not being forced from a regulatory point of view but when we file our rates we clearly file with expectations of what the future will bring and trends. So we will always file those as diligently as we can and certainly at some of the markets, the ones below 90, we wouldn't be filing for rate increases but at the same time, and very clearly, I would tell any regulator that everything we file was absolutely accurate based on our assumptions of the future trends. While I wouldn't say that we are going do something from a regulatory pressure point of view, I think there our goals and regulatory goals are pretty aligned and we will let the margins be reduced as we see trend reflect in the marketplace.

So as you look in 2004, and not get specific on states, but you pick one of those states where you are kind of below a 90 and you have been very aggressive in managing that channel and from a rate perspective, would there not be filings for rate actions since rate actions would likely be increases or how would you do it? Would you just let sleeping dogs lie. I'm trying to understand the approach.

Yeah. Multiple. In some cases the length of time between filings will just extend.

Okay.

That would be a simple case.

Okay.

Frankly, that isn't a very good reflection of what we are all about. I'm going to answer the question a long way. I want to point out that we really manage, this is the only business that we are in, we really dig in to it and it is almost inconceivable that in a 6 month period we don't come up with something that is a better idea that we want to incorporate into our product and therefore some of our filings are just improving the product. The net rate change may be very minimal. So I suspect that we will do rate filings simply to reflect our best knowledge and best science we have of our rating. So, some and some. We may extend the rate period, in some cases we may very well want to shift things around and, belaboring the point, just because a product is operating with a very healthy margin, that's not good enough for us. It's are all the segments, are all the pieces. If we have something that's subsidizing another segment that has produced a lot of the good results but the subsidized segment is growing very quickly that is not an acceptable outcome to us. So we're going to correct and try to make all the measurable segments of a product work and hit our goal. We won't live with an umbrella supporting subsidy. So we will continue to file rate changes or product changes. The thing that I would suggest to you is the likelihood of those being significant increases is clearly low.

Sure. Great. Well, thank you very much for your answer. I appreciate it.

Sure.

The next question comes from Mr. Ira Zuckerman with Nutmeg Securities. Sir, you may ask your question.

Most of my questions have been answered. I've got a philosophical one for you. Given the low rate of interest rates in the current environment, have you given any thought or do you plan to give any thought to changing the long-term goal to produce a better ROE than the 96 would produce?

Ira, I don't think I'm prepared to sort of go into our thought process but to answer the question, yes, we give thought to that all the time and I will tell you the dominant thought that continues to dictate our philosophy is we are pretty good, we think, at underwriting auto insurance. We are going to make sure we always have enough capital to do that and our investment strategy flows from that. We have terrific people doing our investments as well but we are very clear about where we take the most risk in the business and it is from an underwriting perspective.

I realize that but given the current interest environment, a 96 combined ratio would not produce a very good ROE.

Ira, it is Tom King. We've abandoned a flat ROE goal, a nominal ROE goal, in 2002 and the issue is do we earn a return on equity greater than its cost. You as an investor invest money in us and we have an obligation to earn a positive spread on that and that really is the first test. Then the second test is how fast can we grow once we earn the spread. We are highly confident with the financial policies that we have in place that we can earn a spread on investors' money and we can grow.

Okay. That answers it.

We will talk a little bit more, I don't think this is the forum because we are not fully set on it, but we will talk about a couple of other things in May and I'll incorporate some in my letter to shareholders. Things that we can do even better than we have been doing in the past to get perhaps better leverage. I'll let that play out in those time frames, we can talk about it in May but I will tell you that capital management in general and how we address those types of questions I would describe it as a much healthier place than it has been for a long long time at Progressive so we talk about those issues all the time.

Can I just followup one question. Can you give us an update on what is happening with the concierge program.

Sure. We opened four locations in the fourth quarter and we've got Miami due to open right around the end of February, first part of March and those 20 sites we will, I said last time, we'r going to hold a little bit so we don't have a schedule for at least the first 6 months or so of 2004. That in and of itself shouldn't be a message about anything other than with 20 sites now we really feel that we've got the ability to bring in somewhere in the neighborhood of 8 - 10,000 damaged cars in a month and we will be evaluating this at the new scale and checking all of the assumptions that we made. There are a couple that haven't been as good as we had hoped and there are several that are every bit as good, maybe better. And I will tell you that everything about this feels very right. We are just going to make it very perfect going forward.

Okay. Thank you very much.

And this market then we would expand beyond the 20. Remember, scale matters in this particular venture, so as we go beyond the 20 we have got to make sure we have the cost measures perfect so that we are not being cost additive to our lose adjustment event.

Chris, we've used up our hour, let's take one more question, please.

Thank you, sir. The last question comes from Adams Klauber with Cochran, Caronia. Sir, you may ask your question.

Good morning. Could you discuss your advertising strategy going to 2004 given that clearly the competition is advertising more and with a more robust economy advertising costs may rise?

Those two factors are very real and clearly not something we don't take into consideration but our strategy is very much a harvest strategy in the sense that when we put out any advertising we make sure that what we get from it is such, both on a mixed basis and a volume basis, that we will yield from that a lifetime earned premium that supports the amount we spent as a targeted acquisition cost. Rather than tell you our philosophy is we're going to spend X amount per year, notwithstanding we have estimates of that, it is we pay as we go and we make sure we get the results. So that to the extent that advertising gets more expensive then that clearly has an effect on how much we can spend. And as our share of voice goes down, simply relative to others spending more, that in and of itself is not a motive for us to spend more. We will only spend more when we believe we can harvest more. It is quite possible as you see this year develop that we might have, for a period of time a smaller share of voice even though our advertising will increase. We are clearly very happy. You can see the results of the direct channel. You can see the improvement in the expense ratio. We have almost everything working perfectly there so we feel good that we will be able to increase our spending but each and every month is a separate evaluation.

Thank you.

And we do have some new advertising that will be used in the early part of 2004.

Well, that concludes our conference call. We thank you very much for your interest and support in Progressive. Have a good day.

Thanks.

That concludes the Progressive corporation's fourth quarter conference call. An instant replay will be available until February 6th by calling 1-800-328-8402 or can be accessed via the Investor Relations section of Progressive's website for the next year. Thank you for your participation on today's conference. You may now disconnect.