前進保險 (PGR) 2011 Q3 法說會逐字稿

Welcome to The Progressive Corporation's investor relations conference call. This conference call is also available via an audio webcast. Webcast participants will be able to listen only throughout the duration of the call.

In addition, this conference is being recorded at the request of Progressive. If you have any objections, you may disconnect at this time. The company will not make detailed comments in addition to those provided in its quarterly report on Form 10-Q and letter to shareholders, which have been posted to the Company's website and will use this conference call to respond to questions.

Acting as moderator for the call will be Matt Downing. At this time, I will turn the call over to Mr. Downing.

Thank you, Wendy. Good morning and welcome to Progressive's conference call. Participating on today's call are Glenn Renwick, our CEO; Brian Domeck, our CFO; and Bill Cody, our Chief Investment Officer. The call is scheduled to last about an hour.

As always, our discussions on this call may include forward-looking statements. These forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during this call. Additional information concerning those risks and uncertainties is available in our 2010 annual report on Form 10-K and our quarterly reports on Form 10-Q issued during 2011 where you will find discussions of the risk factors affecting our businesses, Safe Harbor statements relating to forward-looking statements, and other discussions of the risks, uncertainties, and other challenges we face. Each of these documents can be found via the investor's page of our website, progressive.com.

We are now ready to take your first question.

(Operator Instructions). Mike Zaremski, Credit Suisse.

Thank you, good morning. I was hoping you could talk about the pricing and competitive environments versus loss cost trends. I saw that this is the first quarter since early 2010 that severity increased.

Sure, I think that's a pretty important issue, so let me see if I can give you some color as we see it. You can combine that then with other sources you have.

If I take a look at industrywide drivers of costs -- let's just focus on loss costs, frequency and severity. We've talked for a long period of time about frequency declining and that still in a generic statement would be true, more so in the physical damage coverages than in bodily injury. In fact, bodily injury we see -- and maybe it's temporary but certainly signs that the frequency decline in bodily injury has turned and we see small increases in frequency. But overall frequency still gets one generic statement -- decline, flattening, my concern would be bodily injury. We'll watch that one very closely.

You couple that with severity, and by the way, those are the same kinds of things I think the industry is seeing and that we are seeing, so no great variance from the industry there.

On severity, take a look at some of the severity increases we are seeing and industry data has lagged a little bit from our own. We started to see in PD and collision numbers that are in the range of I will call it 2.5 to 5. They are never perfect, but those severity increases are starting to get meaningful.

I take a look at CPI for used car parts and used cars and I'm seeing that in 5 and change range, so they seem reasonable. Sometimes I can't always make sense of severity changes and other logic, but this one seems reasonable. So our assumption is that the severity changes on those coverages is definitely positive and probably in the 2.5 to 5 range. Keep watching. It could get stronger.

Bodily injury, we see the industry reporting slightly stronger severity changes than we are seeing. Certainly we could interpret it as a good thing for us, perhaps good controls, but bodily injury is one of those coverages that I think I said several times before under whatever normal might be circumstances, you should think about 4% to 5% trend. We haven't seen that for a good number of years. We're starting to see now trends in bodily injury experienced by others that certainly would be in the 3% range, as reported. We are seeing things a little less than that.

So put all that together and reduced frequency, increased severity starting to look positive. If we take a look across the industry at some more recent rate changes, I don't know that necessarily this is factored into everybody's market rates at this time. We are starting to see what had been a fairly prolonged period of rate decrease and lower average premiums for some start to turn probably in the last few months into a little bit more of a positive price environment.

I would single out before I go any further PIP, because PIP probably is one that we should take as just an individual basis because everybody has a different mix of business. Our decline in frequency in PIP has actually been very much appreciated and one of the reasons that we think we have some of the big states we have talked about, Florida, New York, New Jersey under control and also severity has decreased from what we were experiencing in at least three of the major states. Michigan is less clear at this time and may still have a little bit of an upward trend on severity.

All of these factors together should suggest that A, most players or many -- I don't want to overly generalize here -- are closer to what they might consider an acceptable underwriting margin. There's not much buffer to absorb increasing fuel premium.

I will only worry about Progressive. We will continue to manage our business the way we always have at state by state by state level and there are some states that presumably we could probably take rates down. But there are probably many that are getting to the point where we'll take rates up. So we don't make blanket statement about rate movement. We do it state by state.

But if I had to take the sum of all of this, I'd say we are probably entering into a rate-positive environment and an increase in average premium. I would be surprised if these trends don't continue, but the best we can do is continue to monitor them month by month.

If you add to that some of the things of the second quarter and perhaps even longer with the investment environment, some homeowners' losses, I suspect there are generally some vectors of pressure to take some rate in the marketplace for personal lines.

Okay, that's very helpful color. A quick follow-up. I noticed that you guys were chipping away at some of your very long-term debt during the quarter. Would you continue to chip away at that debt if it traded around par?

Bill is with us today, so why don't we let him to comment on that.

Sure, we've been opportunistic in buying a little bit back when we see it at levels we think are attractive and we have the flexibility to do that if we see them at attractive levels going forward as well.

Thank you.

Josh Stirling, Sanford Bernstein.

Good morning. Thank you for taking my call. I wanted to ask a couple of questions about Snapshot. So you're six months into the national launch and I would love to get your perspective on what you are seeing the impact is. I think it would be helpful if you could help us think in terms of both is it driving incremental demand? Are you seeing any impact in conversion rates? Are our 4/1 retentions improving or otherwise changing after you give people discounts or not?

I love the use of the 4/1 retention. That's -- you paid a lot of attention. Great.

I had to prove that I worked here once.

Josh, I will probably be less definitive than you might like but I will try to be as colorful as I can be. Six months in or thereabouts, Snapshot is actually doing well for us. The key question is are they incremental customers? That becomes very difficult to run a controlled experiment when we have done a statewide rollout. We have done statewide rollout or lastly statewide -- or countrywide, excuse me -- of 39 states and the reason for that is to support the more efficient national media.

So on a direct basis we are getting -- I'm just going to use numbers. I'm not going to continually give these out but since this is a big focus, I don't want to -- about 30% of our PIFs that are coming to us new are now what we will call Snapshot PIFs that is they have either tried or ultimately gotten a discount from Snapshot and the acceptance rate in direct is actually very strong. When we get a chance to tell people more about that, and I will use the example of a phone quote versus an Internet quote, it's even stronger.

So we know and I will allude to a comment I made in my cover letter that we know we've got something very appealing. We also have to be very careful about how we communicate it. I think we are improving on that a great deal.

Conversion rate for Snapshot is actually -- the take rate is actually very good and there's good reasons for that, because people have already said, hey, this is my base rate and all I can do is improve from here. One would expect the conversion rate to reflect that and it does.

And overall retention, I won't specifically go on 4/1 but overall retention is actually up. I would tell you it's up meaningfully and that exceeded our priority -- we obviously make some estimates ahead of time. Those estimates in this case went up based on anything other than a best guess at what would be a very acceptable outcome. We have exceeded those on a retention basis.

So I do the same thing on agency. Not much changes. The take rate from agency is actually considerably lower. We have a growing number of certified agents and on the certified agents, we actually do have a mid teen take rate or the customers that are taking Snapshot as part of their new application process is in the mid teens. We think that as we've seen in our direct channel, this again is another opportunity for us to continually communicate to agents because I think this is something they actually will enjoy. We are seeing that trend through the certified agents. So the more we educate the agents, the more they are using it.

We are running a competition as it turns out right now where our agents are getting involved by giving us sort of their best pitch. How have they sort of ultimately been able to deliver this to their customers? I don't call want to call it a pitch in a negative sense, but ultimately their own training. So we're actually running that as a competition so that agents can benefit from one another as to how they have sold it.

Short of all that is Snapshot is absolutely something we are delighted with not just from the economics and some of the rating we have shown you but it does seem to become more appealing to customers over time. I also alluded to the fact that we've got some new creative. We have tried that creative in the marketplace. It's had a couple of weeks now and we are actually seeing very good results from that creative.

So we are starting to feel that not only do we have a product, but we are starting to be able to communicate it to customers in a meaningful way and I can only conclude that some of those customers are incremental but we are not growing at such rapid rates that I could sort of say yes, absolutely and here's the percentage.

But there's nothing I would do differently and I hope that as we see to the last question a little bit of a rate-positive environment, in fact that is what happens, then Snapshot will become more important for people as a way to control their own rate level if in fact they are subject to some of those rate increases.

Glenn, thank you. That was very helpful. I guess the only follow-up I would ask is you have already sort of explained the difference between agency and direct. I would love a little bit of color on how you ultimately think it looks in the agency channel and whether the penetration rates converge to direct levels as -- over time as agents sort of grow comfortable? And if -- more broadly, whether you think most of your agents look at this as sort of a positive new device or as just something that sort of complicates their agency workflow?

Josh, keep asking that question. I will give you sort of a sense but I think it's an opinion. Just keep asking it. I'm happy to fill you in on that because I think this is very important. We see this as a great opportunity for our agents. Agents obviously have many years of their own way of selling and communicating with customers so we don't want to, A, interfere with that. My suspicion is that it will lag the direct channel just because of the nature of the shopper, the shopper that is perhaps willing to do more for themselves and be a little bit more experimental and try new things.

But I hope that that will be -- and we will share this with our agents whatever happens in the direct channel so it gives them the confidence to know that this is really something good for them. To be perfectly honest with you, if I am looking at it from the agents' perspective, over time they've seen companies introduce new things and that sounds good. If it doesn't pay out or play out over a long period of time, sometimes it can cause agents heartaches if they have to go back and re-rate the book or do something like that.

So I suspect there is a little bit of just let this take its time into the marketplace but in fact if it proves out the way I'm pretty sure it's going to prove out, agents will be more than willing to get on board.

I am happy to share with you sort of that lag function or the percentage of penetration that agents are participating in over time. I hope by the time we talk this time next year those numbers will be closer and bigger.

Josh, this is Brian. The only thing I would add to that I think as more and more consumers in the marketplace get this product or this type of product and it gets more consumer acceptance, I think it actually makes it -- consumers wanting it and it makes it easier for agents to be able to sell it to the proposition to consumers. So I think over time as it becomes more and more part of insurance pricing, underwriting, etc., I think it likely will be able to accelerate in the agency channel.

That's great. Thanks, guys. Best of luck.

Vinay Misquith, Evercore.

Good morning. The first question is on New York, in the 10-Q you sounded more positive about growth in New York. The last quarter I believe you said that GEICO was a very formidable competitor. What are you seeing that's giving you more confidence that you can grow in the future? Do you plan to be reducing price in New York?

Vinay, no. First we had to get to profitability in both our channels and that's really what we have achieved for the most part. I think I said in my letter that we sort of look forward to now getting growth. We're not going to try to grow when we don't feel that we've got the price to produce the margin that frankly is expected of all of us in every state. But now that we have that largely in the right ballpark, that's where we'll start to grow.

Brian, you take a look pretty closely at the different channels. Do you want to comment on the agency growth versus direct?

Yes, in New York we are actually seeing a little bit more of the growth come in the agency channel particularly on the new business production. In the direct channel, still a little bit hard to come by, but we have made changes in our product offering in the state of New York and since those changes, we have seen an acceleration in terms of new business growth particularly in the agency channel.

So right now that is where we are seeing it although we are optimistic that also in the direct channel over time we will be able to continue to grow in New York. But certainly in terms of rate level and rate adequacy, we have felt more comfortable in agency. That's why we are comfortable growing there now and direct we are getting there.

Okay, that's great. The second question was on frequency and I believe on the call it was mentioned that frequency is now starting to flatten. But I think year-over-year this year frequency was down to 3%. Can you give me a sense for what's happening with the frequency, please?

Yes, I think it did cover a little bit of that. It's frankly the way frequency works is you're going to get a little bounce around in numbers, so if you try to sort of take any one number literally or any one period or another period, it may or may not be telling you the full story. So as I said in PIP, we can look at the pretty big declines in frequency.

But my overall is that frequency is still declining and that's not a surprise when you think about the safety of vehicles and a lot of the safety features that have both already been done, and we are seeing now everything from blind spot detection in new cars and so on and so forth. So it will not surprise me to continually be saying frequency in general is not a driver of cost. In fact, it will be a driver of cost reduction. But severity of making up for the place that I called out is in bodily injury, we're starting to see frequency at least suggest that it could be positive.

Okay, fair enough. So with severity up in the 3% to 5% range and frequency roughly flattening out, where do you see the industry sort of taking pricing up in the next few months?

I think that all depends on where you start from. If you have either gotten behind and you're going to have to take it up a considerable amount more just the way at least most people will do their indications. It also depends on your target. Very often I'm asked on this call -- would we change our target? Certainly we understand combinations of combined ratio and growth. We are very clear about what we do and we don't change dramatically. We don't change at all, really, the different economic conditions.

I understand the argument that says, gee, if you are not getting investment income, could you change your operations? The answer is our operations will endure over any long period of time and investments will sort of be what they are at different points in time. While I might like the different outcomes, the one thing I feel very strongly about is preserving the Operating Company of Progressive the way that we know we can and do.

So for us we are not behind on our pricing. If we see this trend, then we will probably price pretty much to the trend that we see. What others will do really depends on where they are and what their current price levels are and how much they have to take up.

It has been -- now I want to be careful in my words here because this is probably where I get quoted -- it has been a while now but there have definitely been times where Progressive has consistently kept its prices at a nice clearing price in the market but also clearing for our margin goals and others sometimes have taken rates up a little more dramatically. That can often be a time where we benefit from growth. So if we can be behind others in terms of rate increase and change because of our current adequacy, that's a good position for us to be in.

I can't make that claim. I can just tell you that that has happened before and if it happens again, that's the benefit of running state-by-state at a very close level trying to keep our reserving as frequently updated as we tell you about. These are actually tougher times because margin is thinner but actually good times we think for those who really have a skill at underwriting.

This is Brian. The things I sort of add-on and Glenn mentioned it, it's important particularly internally here -- we look at it on a state-by-state basis, so it's not just macro total company, trend severity, frequency, we look at. At an individual state level and then channel levels, etc., that's what's very important in terms of pricing changes. How are those loss costs in relationships to the premiums you are charging?

So the fact that we have product managers looking at individual states, we think we are on top of it. The other thing to keep very cognizant of is particularly as it relates to frequency, how that might change relative to your mix of business. So as we have written more preferred customers and they become and stay with us longer, we might expect our frequency to go down in certain segments or certain states just due to the mix. Certainly if you write more of the nonstandards there, your coming to frequency may go up.

So it's really the frequency change relative to your mix that's very important, so we keep very close tabs on our business mix.

Then on the severity side, the only thing that I would add to Glenn's comment on severity, the one coverage that seems to have at least changed for us on the severity side is collision severity has now turned positive in the third quarter whereas it had been small negatives in the previous couple of quarters.

So the collision change did occur in the third quarter and so we keep our eyes on that and we react accordingly.

Thank you very much.

Josh Shanker, Deutsche Bank.

Thank you, good morning. I want to follow-up on the debt discussion that began a little bit in the first question. Obviously after all if you raise some debt and debt to cap had gone up, can we talk about long-term projections about what the right operating or I should say financing leverage for the firm is?

Brian, why don't you take that?

Yes, we continue to have as part of our financial policies, a debt to total capital cap ratio of about 30%. So right now we are pretty close to that, 29.6%, something like that at the end of September, but we do have $350 million maturing in January 2012 and $150 million maturing in October of 2013. We clearly were aware of those and that was part of the consideration set when we decided to issue debt in August.

Our thought there was we have those maturing and given the interest rate environment, we thought it was opportunistic to issue debt at that point in time. So the 30% debt to total cap rate, you should still consider that as part of our operating philosophy that we don't want to go above that for a long period of time. We recognize even issuing in August and some of the other things we were doing that we might go above it for a short period of time but we knew $350 million was going to mature in January.

But I continue to use that 30% sort of cap as a -- we don't want to be above that for a long period of time and until we change our thinking on that, that's what you should go on.

I appreciate that. Since I know you guys don't want to tip your hat and I guess maybe that's what I'm asking a little bit, but how does that affect your thoughts on share repurchase and the potential for special dividends?

As it relates to share repurchases, you can see we actually increased our rate of share repurchases in the third quarter repurchasing 22 million shares during the course of the quarter, about $411 million in terms of share repurchases. We felt that combination of what we felt our total capital need was. Our capital position, we felt very good about that so you can infer from our actions there that we felt comfortable with our capital position.

And on a going forward basis, we continue to believe share repurchase will be part of it. On the dividend side, I would say certainly the plan is that our variable dividend, which would be payable in January assuming we after tax underwriting profit, our comprehensive income is higher than our after-tax underwriting profit, we will pay the variable dividend in January.

And so that would be our dividend policy. At this time we're not thinking about an extraordinary dividend at this year.

Okay. Well, thank you for the clarification. So going over the debt to cap of 30 for a very brief period of time is completely within your means and comfort level?

Josh, it actually happened in 2008, but for the wrong reasons just because of asset valuations and so on and so forth. I think what you can expect from us is when that happens, we will comment on it and we do. In that case I think lastly stretching my memory a little but we said exactly where we were and that over time we expect to get back under our 30%. So a self-imposed cap.

So if that were to happen, yes we would comment on it but as Brian said, we are at 29.6 now. That's very close but we have $350 million that will come down within the next four months or so.

One of the things -- maybe this is redundant, but I do want to point this out that it is a very important discipline is how we run a Company. We recognize that we can make decisions day in day out but we have some very strong disciplines. One is to try to write as close to a 3 to 1 premium to surplus as possible. That's our operating leverage. We view that as sort of number one.

We therefore constrain ourselves in some appropriate way on debt leverage which we've given you as a relative cap and investment lever. So those three things really sort of play hand-in-hand and that's how we choose to run the Company with really a great deal of focus on making sure that we can get the highest premium to surplus leverage that we can, which for us means that we will find a matched threesome, if you like, or three couple where we feel very comfortable that one doesn't put the other at risk. That's really the way you see you Progressive operate is a high premium to surplus ratio, relatively moderate 30%, call it what you want debt to total cap and a relatively conservative investment portfolio.

That combination works for us over any long period of time we believe very well.

Thank you for the clarity and detail.

Paul Newsome, Sandler O'Neill.

Good morning, a couple of questions. What is -- I didn't quite understand the commentary in the letter in Q about the DAC change in accounting in the first quarter. And most companies are talking about some level of write down to book. Are you -- I didn't think that was mentioned but you did mention lower amortization. Maybe if you could just describe that a little bit, that would be great.

This is Brian again. I'll take that. In terms of deferred acquisition costs, it's actually in the Q in terms of our commentary on that. And our estimate of the effect for us is in the range of $20 million to $25 million, which we will expense through the first -- primarily through the first six months of next year.

You have the option of basically for this change in accounting standard to go back on a restatement effort or a prospective. We are taking the prospective approach since the amount for us is a relatively minor or immaterial amount. The reason I think our number may be quite a bit different than some of the other reported numbers, I give you a couple things.

In terms of our deferred acquisition costs, the bulk of it is commission and premium taxes, commissions in our agency business and premium taxes across all of our businesses and all of those are still deferrable. We have not -- and I think we've explained this before -- we have never deferred our advertising costs. We expense them as we incur them, so those are not part of our deferred acquisition costs.

So for us, the primary change that this standard has is there are some costs that the primary changes you can only defer costs that result in successful sales and so for us, some of the call center costs that we have deferred in the past we will no longer defer. But for us our estimate of that effect is $20 million to $25 million of our current deferred balance will be amortized or expensed in the first six months of next year.

Ours might be a little bit different than some that you might hear from other companies.

So we shouldn't expect a book value write down that runs outside of the income statement like others, but we should expect basically sort of all things being equal, $20 million to $25 million of additional expenses, lower profits in the first half as a result of the debt and accounting change?

Yes.

Okay, thank you. Completely different question, I noticed and I was hoping you could talk a little bit more about the policy life expectancy that is negative for the direct business as well as the other businesses and just kind of what's going on there? Is it mix change? Is it something else?

Again, this is Brian. As it relates to the direct policy life expectancy declining a couple percent from a year ago, I would say two primary drivers. One would be some of the rate changes that we have taken in select states to address profitability concerns. So think of it those are the states that we had mentioned in the past that we had concerns about, Florida, Massachusetts, and New York in some respects. So some of it is due to rate change.

The other contributing factor in the direct channel is our mix of payment patterns or the billing actions that consumers have taken has changed a little bit, where we are actually getting a little bit less paid in full business relative to those who might pay on installment basis.

We know that the PLEs is of those customers is a little bit less but we feel good about the change in conversion that has happened and the ultimate lifetime earned premium we feel is also a positive. So net-net whereas we don't want that PLE to be going down, at least we understand the drivers of it and we look to change things to make all of the things go in the positive direction.

But the primary drivers would be a little bit change in terms of rate level in selected states and somewhat a change in billing practices for some of our new application accounts.

Just a slight add-on to that with what we use as a proxy for future retention and that's our Net Promoter score. We discussed that on numerous occasions. For the same reasons that PLE went down, we have declines in Net Promoter score but I would say that in general, we're seeing a negative pressure on Net Promoter score in general, which is something of great concern to us. A recent data point, and it's just a data point we do for ourselves that tries to get a comparison with ourselves and other competitors on a relative basis, are we experiencing more or less than our competitors?

A very recent data point suggests that there's nothing particularly that we should take away and say it's something that Progressive is doing. But increasing our Net Promoter score, which for us is really a leading indicator of longer-term retention, is something we care a great deal about. It does seem -- seem that in general, consumers are just a little less happy with everything and that's reflecting in our scores. But our best efforts to see if it's reflecting in our scores more or less than our competitors suggests no long-term concern for us.

But having said all of that, there is always ways to improve it. We weren't at a level that we thought was our max by any stretch of the imagination, so retention and retention efforts that we've talked about probably in calls through many years still remain a very top priority for Progressive.

The other products as well is a similar kind of commentary?

Yes, actually that commentary would span across to even our special lines customers, which tend to be some of our happiest customers, if you'd like. So I think that general statement I'm saying where NPS or Net Promoter Scores in general are a little flatter are down, there is some credibility to that when you see it happening in areas where there are really no great other explanations for it.

This is Brian again. The one thing I -- in the agency business, our PLE is actually up and some of that is due to certainly some of the things we've tried to do in terms of rate stability and loyalty programs and the like. But also some of it is our ability to write some more of what you might call a preferred customer set that have by their own sort of nature a longer PLE. So on the agency side, our policy life expectancy is up on a year-to-date basis.

I think in the Q, we have it up 2% for auto overall, but that (multiple speakers)

2% in agency but down in direct current.

Those are things that frankly especially the direct business is hugely dependent on policy life expectancy, so just know those are big deals for us and while we don't see anything broken there, they are clearly things that we would like to see shift in the other direction.

Thank you.

Michel Nannizzi, Goldman Sachs.

Thanks, just one question. You talked about PIF trends in four states weighing on your results. I noticed another large direct trader saw PIF growth lift in the third quarter and it's been rising for the past year or so there. Just trying to compare that to your trajectory. Obviously growth is still positive. It has just been slowing. Is that something you find surprising? And how do you think about that, how should we think about that? Just one more follow-up, actually. Thanks.

Yes, well, PIF growth is around 5%. We certainly would like to see it more. I assume you are referring to GEICO, extraordinarily competent writer, no question about that. If we -- and it's very hard to get perfect comparisons. But let me sort of use one that I think is reasonably public information on Internet and if we take sort of the sales through the Internet, GEICO and Progressive are neck and neck on that one. I think they are about 39% of the sales from the Internet. We're about 38%.

But there are some states and already mentioned one, New York where they clearly have -- it is a higher risk premium state and they clearly have a significant lead over us in that state. There's no two questions about it. They're much more mature in that state on their direct writings.

I don't have enough color to give you sort of issues of what's going on in California but I do know that they did not get the rate that they were looking for. That's always unfortunate. I think that's an unfortunate comment for the industry and maybe writing at rates they would prefer not to be.

But overall PIF growth for us is not bad. I think if you take a look at GEICO's most recent quarter, you will see a slowing from their new app rate of about 13 for the year -- our calculation. Certainly they would be better to give you their numbers, ours would suggest it is somewhere closer to 4.5 to 5, something like that new app growth for the quarter.

Clearly a very different investing approach between the two companies. Is that something that you think is relevant in terms of the two companies' growth trajectories? Or is that just more of an operational element?

This is one where you get to all make your own cases for that. What I can comment on is how we are going to run Progressive and I sort of did that a few minutes ago. We're just not going to stretch for yield and in so doing put the operational backbone of the Company at risk. Everybody would draw out those parameters a little differently, I'm sure. We have a set of parameters that we feel have done really well for us over a very long period of time.

So we're going to play our game and we think GEICO is an incredibly competent and good competitor in the marketplace. I suspect they feel similarly about us and the fact is the two of us are still relatively combined, relatively a small player, less than 20% of the market share, quite a bit less than 20% of market share and if I had to bet, I think both of us are going to do just fine.

So we're not going to change our game plan is really the answer to your question.

Great, thank you. One question just to switch to mobile for a second. How do you think about spent on mobile and what are your metrics for success there?

I could just -- intuitively I would imagine that the research element of insurance is less well-suited to mobile. So I'm just kind of curious how you're thinking about that as a business? Thanks for answering my questions.

Not sure that I can answer your question with regard to research. No one wants to -- or least I don't with my eyesight want to read everything on a small footprint but when we start to think about iPads and so on and so forth. So let me give you a little bit of color.

Mobile is hugely important and in fact, there are services that many of you have access to that are starting to take into account quite good metrics on the Internet. But recognize that that to my knowledge doesn't include a lot of mobile. And you say, well, at first that's not really that important. It's a rounding error. I would suggest to you it's becoming slightly more than a rounding error.

And just to give you a flavor for it, we have about 800,000 visitors to us, to Progressive.com through mobile devices in any given month. And our payments, so just flavor, payments we are taking in about $8 million in payments on a monthly basis. So there are people doing things that may not be sort of what you might do, but it's an expected kind of proposition. From a quoting and sales perspective, I'm not going to give specific numbers there, but let's call it 5% to 10% of our quotes and sales are now coming from mobile devices. A little closer -- a little down on that scale closer to the 5% end. But the progress is such that I give the range 5% to 10% for any sort of meaningful guidance here.

So it's actually not just something to be played around with. Mobile for us is a very serious strategy. It's representing like I say 5% to 10% of our sales. It's a good chunk of payments. It's a meaningful way to interact with consumers and our investment internally on mobile, while we don't give out those sort of numbers, is strong and we expect this is an opportunity for us to do very similar kinds of work that we have done on the Internet. For those who care about those things, you will see that Keynote just again recognized Progressive as the leading website 17 out of 18 times now I think.

I only bring that up not to sort of endorse one thing or another, but that's a sweet spot for us, combining technology with our underwriting is great. We were using the Internet to do things such as Name Your Price and even to some extent, UBI that we wouldn't be able to do easily in another environment.

Mobile is offering up for us some very exciting propositions. I don't think now is the time to go into those, but probably by the time the investor meeting next year, I think we will have some of the indications that we gave you this year closer to reality.

Great, thank you very much.

Doug Mewhirter, RBC Capital Markets

Good morning. I just had two questions. First one is regarding your new business versus renewal. You gave some pretty good data on your 10-Q. Could you just give me an idea of the proportion of your business either on a written premiums or policies book basis, which is new business versus renewal? Is it -- and just rough numbers if you don't have exact data -- is at 60/40 or 20/80, 80/20?

Brian, do you have a feel for that? What's on top of my mind, but (inaudible)?

No, in terms of -- we actually don't, have not historically disclosed that number, but suffice it to say that renewal business for us is a vast majority of the business. New business, I suspect our new business percentage is higher than lots of other companies, particularly I'd say State Farm or Allstate and the like, but the vast, vast majority of our business is renewal business.

Thanks for that. And that is really -- that is the degree I was looking for. My follow-up question is your media campaigns; Flo has undoubtedly had an impact on the success of your branding and the success of your media campaign. Have you looked at the relative impact of your follow-up creatives, particularly like the Messenger campaign in terms of whether that kind of positive impact has met your expectations or anything around that?

The answer is we really look at those things all the time. And very hard, the Messenger campaign obviously Flo, you're correct, is sort of carrying most of the weight. We also want to make sure that it's not something that we are to the point where it's carrying all the weight and for whatever reason maybe is not as effective in the future as it might be.

So we are always going to try to bring along something else. We will do that in a measured way. The Messenger is a different kind of message in the sense that he is almost a free radical. He's a customer. He's out there delivering a different kind of message than Flo is an employee type message would be delivered. And yes, we do have a fair amount of not just clearly in the market research, we do some research before we put it in the market, research after we put it in the market.

I'm not going to get into details of it now. We think we have a way to take the Messenger campaign and reshape the campaign into a different kind of campaign, something we think is quite unique and you will see more of that as later this year, early part of next year and our expectation is that the Messenger will be focused on certain daypart and television viewing audience as more selective media plan and selective along with that selective age group. So we do know that he appeals to some stronger than others.

Okay, thanks, that's all my questions.

Meyer Shields, Stifel Nicolaus.

Thanks, good morning. I know you have been sort of beaten up on this all morning, but in the Q you talk about not wanting to be too exposed to the impact of interest rates on -- if interest rates rise, the impact on capital. From a statutory standpoint, though, the impact would be lesser and I'm wondering why there is no -- I just want to get your thoughts on why you are not looking for more yield from that perspective?

Sure, from a statutory point of view, you are absolutely right, but that's not what's really driving us. It's more of the total return on the portfolio overall. If you look at the now flatter yield curve with much lower rates, the protection against the rise in rates is pretty small with yields being below. So our view of the risk/reward there is that it's better to stay short, better to take some credit investment bets, if you will, where we think we have got a really solid risk/reward profile on businesses or other underwriting credits that we like, pick up yield there. Also to boost our total return, at least that's our focus now.

We may be stuck in this environment for awhile but if and when it does change, it will change relatively quickly. It just doesn't feel like a great risk/reward trade for us to go out the curve.

Now we are adding paper at lower yields than a book yield, but our book yield is really just a historical artifact and from a different environment. The environment we are today is kind of what we have but we are not going to try to hit phenomenal yields we had in a different environment in this current environment and take risks that we don't feel comfortable doing -- taking to get there.

Okay, that's fair. Sort of a big picture and maybe an ignorant question, but are you missing out on any business by not having some sort of captive agency channel?

Glenn answering that. I have no way of knowing that because we have never really had it, so being definitive about it would be inappropriate. But I really don't think so. Our independent agency channel obviously we do business with more independent agents than anyone else. We are very proud of that, so we have strong geographic presence. We have just numeric presence is very strong and I don't think that's the case.

This does give me if I can extend your question a little bit an opportunity to follow up on a question I think from the last call that I said I didn't know but let me check. The question really related to prior carriers. Are you seeing any significant difference in prior carrier relative to your channels of business?

So let me go through that and keep linking it back to that first question. In our direct business, the answer is not any great story to tell you. The observation there is GEICO and Progressive obviously trade customers in the direct channel, so rather than flowing from market share, GEICO is our largest source of direct business and I suspect we may be for them, but I don't know that.

And then State Farm and Allstate, and then the people that you'd expect be slightly below -- lower than that. In the agency side of things, a little bit more reflective of those that do business through agents, captive or otherwise, so State Farm and Allstate, again no -- nothing intended here other than data observation. We are certainly getting and probably only notable thing is of more recent times this year, our prior carrier of Allstate has ticked up somewhat and there is an opportunity to at least say that people who may have shopped in a captive channel may also be comfortable shopping in an independent channel and more so if they were in that channel, they may be more inclined to stay in a channel like that rather than go to direct.

So in answer to your question, I can never know what would have been had we had captive agents. At this point I certainly -- that's not even a consideration for us. Our independent agency channel serves that need and serves that customer choice very, very well. I don't think we are giving up much at all and our advertising by design is trying to build, yes, a very strong direct business but also a very nice halo for our independent agents.

And if you take a cross-section of the players in the independent agency channel, we certainly are the one that has given our agents a brand that they can leverage.

Okay, thank you very much.

Brian Meredith, UBS.

Good morning. Two questions here for you. The first one, looking at homeowners results here for this year, they have been pretty poor with all the catastrophe losses. And I imagine the same holds for some of your partners. My question is has that or do you expect that to have any impact on your new business generation or retentions here going forward as some of your partners probably put through some pretty hefty rate increases to try to recover some of that lost profitability?

Well, we certainly haven't got any specifics at this point in time. The answer to your question will be yes. Just pure physics here, right? Homesite maybe more so than Ameriprise certainly had their share of just natural issues with the losses and they will price for that. There's really no doubt in my mind or restrict some availability or do whatever is in their best interest, which frankly is always in our best interest. If you have a partnership relationship, it has to be what's in their best interest.

We would all like to believe that there's a Never Never Land where nothing bad ever happens and they never have to adjust and in this case, the potential for that to come back and reflect on Progressive, the place they bought the policy, is almost certain. So I say that just as I should.

Now would we do anything to try to mitigate those things and work hard to make sure that they are as comfortable for both our customers and our partners alike? Yes, and I think that on average -- not I think, I know on average this is still very, very much a significant move for us to offer a different class of customer that we've now shown we can attract, products to keep them with us.

We are over 11% of our entire book now has more than one product with Progressive and that's a combination of whether special lines or homeowners or renters, whatever it might be. So we're starting to change the mix of who we are and those relationships really matter.

But direct answer to your question is I think everybody's going to feel some pain as the homeowners' companies adjust for their losses.

Great. And then second question, Glenn, if I take a look at your ad spend, you mentioned that it was up in the quarter consistent with the direct earned premium, so about 7% growth in ad spend. Yet we continue to see a decline in new apps.

I guess my question is what's your thought about the current effectiveness of the ad campaign and perhaps are we coming kind of closer to an end of the kind of lifecycle of Flo and do we need kind of a big rework of the ad campaign?

A couple of questions in there. We have taken up -- I will give you sort of year-over-year or something, 6%-ish on advertising costs. We are comfortable with that. I think we've told you many times, so I won't repeat that of how we look at yield and make sure that our yield is in line with our expectations and we're not overspending for the last customer in the door. And we are comfortable.

Now is the creative working? Actually, we don't see any reason to believe that Flo or her effectiveness is coming to an end. One of the things that you will have maybe seen a little bit of and hopefully we will see more of is that we have really been able to take the campaign to I think some different places in the last 12 months or the last six months in terms of viewing for those, looking from the outside, where Flo's character and her exposure is a little greater, a little different.

So we are trying to mix it up. We are freshening the campaign up. The campaign certainly had the potential like all to get a little bit predictable, a little bit stale. We've really taken that head-on and as a result, we don't see Flo as -- or the superstore and Flo as something that is in the phases where we're starting to think about retirement, not at all.

But to the last, to a question a couple ago, are we working on other campaigns? The answer is yes, but it's not necessarily with the objective function of one having to replace the other. It's making sure that we can talk to as wide a range of audience as possible and in some cases with slightly different messages, all messages that work well for our brand in total but not necessarily all messages that can be delivered by one campaign.

Got it. So the decline in new apps, you would say there is really is nothing to do with the ad campaign, it's simply just some of the factors you mentioned in the 10-Q.

That's absolutely what I believe and that doesn't mean that I don't expect even better things if in fact we get some pricing movement in the marketplace. That may be a way to dislodge customers and as we all have, you and us, have questions about shopping behavior. Has it gone up? Has it gone down? Which way is it going? One thing we can reasonably sort of suggest is that when the market gets disturbed by prices, it's at least a catalyst for shopping and I would expect our campaign then to -- that's when the rubber will meet the road and I think it will work out fine for us.

Great, thank you.

Alison Jacobowitz, Bank of America Merrill Lynch.

Thanks, most of my questions have been answered, but I was just wondering as you look at the pieces of your strategy, how do you put it all together or do you think about earnings growth for the Company overall?

Maybe Brian, you can tack on here. Do we think about earnings growth? Absolutely. But what I described before in terms of an operating company with a clearly defined 96 grow as fast as possible, that doesn't change. That is the big driver. I understand different combinations and what 92 and a different growth, we understand all those combinations but we try to drive for long-term results that our shareholders will be very happy with. It's always terrific when we get investment results that are significantly additive to net income.

But for the most part our business model, our strategy, you do understand it and I know you understand it and I don't intend to change dramatically. It's not because we don't understand or perhaps see other choices, but on a long-term basis what we do, we feel very, very, very comfortable with and it pays off.

Now things like, as Brian mentioned, accelerated share repurchase, that's less about trying to manage earnings per share and more about trying to do exactly what we say and the guidance we've said. When we have capital, sufficient capital to run our business, perhaps excess and we see conditions and our price of our stock at a level that we feel attractive, that's one of the ways we will return capital to shareholders.

And over any reasonable period, let's just take the last five years, you will see us return capital through share repurchases, through our variable dividend, and through an extraordinary dividend. We don't forecast exactly -- certainly we are not going to forecast extraordinary dividends or they wouldn't be extraordinary. But our actions in the marketplace especially with share repurchase have been totally consistent with the guidance we give on that.

Brian, do you think there is anything to add on that?

No, I don't have much to add on that. We definitely do think about earnings but as more in context of 96 combined ratio and growing as fast as possible subject to that 96. That's how we will generate the earnings growth from the insurance operations and then we will always consistently manage the investment portfolio on a total return basis, and less about what the current period's earnings are.

We have time for one more question.

Dan Johnson, Citadel.

Maybe one quick one and then the real question. The quick one is on new money yields. You talked about what your -- where the book yield was at. Can you tell us where you are deploying capital, what sort of rates you are deploying capital at?

Sure, last quarter if you look at what we bought outside of treasuries, it was just a little under 3%. I would also note that the duration of those ads was longer than the duration of our overall portfolio as new money.

In aggregate with the treasuries, then?

About 20%, 25% of our ads were treasuries and the treasuries were in the front end and kind of in that 50 to 75 basis point range.

Okay, so a quarter at 25%, I'd call it 50 and 75% around 3-ish sort of for the all-in?

That would be fair.

Okay, great, and then the real question, I was sort of just trying to follow up on Mike Nannizzi's question around sort of relative performance. We have so few direct -- significant direct players in this market. There's really only two to look at to help us get a sense as to what's going on with that channel's growth characteristics relative to the rest of the industry.

And when we look at sort of sequential PIF growth in the direct business of yourself and the sequential PIF growth in GEICO sort of pre-2009, you were running around like a one-third or so growth rate, not growth rate but if you just looked at the number of PIFs for every 10 PIF added, you added 3 to 4.

And in '99 it came up nicely -- I'm sorry, not '99, 2009 came up nicely. 2010 almost up to par and then back this year down to sort of back to the one-third sort of ratio.

Can you help try to put a little color on that? Is there something particular about the markets? I know you talked about New York. I'm just sort of struggling to try to understand why that is or maybe the issue is really the peak in 2010 and not the sort of one-third relative of 2011. Any insights there are appreciated. Thank you.

Sure, Dan. In terms of sort of that absolute change in terms of policies in force, GEICO versus Progressive Direct, at least in any sort of given quarter over a year over year, a lot of it is due to the delta growth rates in new business. So in early 2009, early 2009, first couple of quarters -- or 2010, excuse me -- our growth rates in the direct channel and new business were in the 20% range.

So we were growing our new business quite a bit in the first half of last year, which then subsequently moderated throughout the remainder of 2010 and frankly has been down a little bit in 2011. Whereas on the flip side GEICO, their new app growth rate was negatives in the first half of last year and then has since turned positive and so far this year, as Glenn mentioned, they are up 13%. So some of that delta difference in terms of how many additional policies enforced do you add in every -- in any one quarter or a year-over-year basis is somewhat a function of your new business acquisition. And I think it's safe to say that GEICO and Progressive, we will be fighting it out.

And as Glenn mentioned, we respect as a competitor. And I suspect a lot of it is a function of rate levels in some very big states. So in 2010 when we thought we had profit concerns in Florida and New York and some other big states and we raised rates, my guess is it made GEICO's rates more competitive and they gained on new business. And so it's a juxtaposition in large part, in lots of large states in terms of your aggregate rate level and competitiveness.

I think as Glenn mentioned, based upon some external source data, we both get a very high percentage of the quoting activity particularly on the Internet and head and shoulders above most of the rest.

So I would say a lot of the delta difference is on the new business. There is some difference likely on terms of policy life expectancy and retention rates but I bet you the vast majority of that variance on a quarter-over-quarter, year-over-year is the new business production deltas.

Great. Thank you very much.

I'll turn it over to Wendy.

Thank you. This does conclude The Progressive Corporation's investor relations conference call. An instant replay of the call will be available through Friday, November 25 by calling 1-866-353-3066 or can be accessed via the investor relations section of Progressive's website for the next year.

This does conclude the presentation. Thank you for joining. You may disconnect at this time.