前進保險 (PGR) 2012 Q2 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, and good morning. 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. This 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 2011 annual report on Form 10-K and our quarterly report on Form 10-Q issued during 2012, 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.

Wendy, we are now ready to take our first question.

(Operator Instructions). Vincent D'Agostino, Stifel Nicolaus.

Good morning and thank you for taking the question. In our own test drive of Snapshot, we had a few issues with foreign-made cars where we had to get a second device and the customer service representative that had helped us out was able to confirm that there was some communication issues with nondomestic vehicles. So I was just curious how prevalent of an issue is that really in reality?

I'm sorry I am not going to be able to give you a great deal of information on that. If it was a significant issue, I would know about it. I know there are some contingencies, but nothing that sort of hits what I would call significant level, so I can't give you any more specifics than that. But I am happy to follow up on it but really given the numbers that we are dealing with, that's a very, very small number.

Okay, that's good news. And just for the second follow-up, I am kind of asking to predict the future here, but should we expect maybe some modest retention slippage in the back half of 2012 from the rate increases on auto or at this point do you feel that enough of your competitors are taking rate that your own rate increases even though they are warranted shouldn't inhibit your competitive positioning at all?

You are on the right track and frankly I think we will just have to let the numbers do to talking and I don't mean to sidestep it in any way, shape, or form. The fact is you take rates up. Conversion likely comes down to some degree. Retention gets some pressure on it.

I think the key thing to remember, however, when we discuss rates and hopefully I've discussed that in a very open and forthright way is rate increases, it always depends from where you are coming, so we have a very competitive position in the marketplace and even a rate increase may not necessarily take us out of that competitive position in certain circumstances. And we have other tools that allow people to actually manage their rate even at renewal if they choose to. So it's really a tough thing to sort of speculate on.

Clearly we have worked so hard, as you well know on retention and we don't want to lose that but if you had to put down a bet when you take rates up, generally you are going to be fighting against conversion and retention.

We hope rate even though I have expressed disappointment -- that's the way I am. I am just -- if we have a target and we don't hit it, we call it that. We call it rate change from I would call sort of lower single-digit severity changes to mid single-digit reasonably quickly, reasonably quickly, not as quickly as I would've liked and hopefully those rate changes are not the kind of rate changes that force consumers to say what really is going on here?

While this may not be able to jog consumers' memories for a long time, they've actually had some fairly inert rate levels for quite some time now. So maybe 2%, 3%, 4% changes, whatever they might see are something that they are perfectly willing to tolerate and recognize that is the cost of doing business.

Great, thanks for the answers.

Vinay Misquith, Evercore Partners.

Good morning. The first question is on the pace of margin improvement. Severity trends I believe for the Company is about 6% right now. Frequency is about flat and I believe you are taking rates up maybe in the 5% to 6% range. So just curious how or when we should see margin expansion?

As I tried to point out in the accompanying letter, we have six-month policies. Now I say that and I will get it across the board right now, six-month policies for almost all of our auto business, 12 months for special lines, 12 months for commercial. So the answer has changed a little bit based on what we are talking about.

Your assessment of rate need and rates changes clearly accurate. We have got in the last month about 18 rates changes put through just in July. We've had another several in June even since we spoke to you. So every day matters and every day you get that opportunity to renew new customers into that rate level but you can take an expected value of three months from the level of the day of rate change to get sort of half of your renewal book at the new level and six months to get it fully at that level.

We obviously are pricing to a future forward trend date so we want to get on a trajectory where our rates and our cost of business are in sync. What you should probably look for rather than significant explanations, one advantage we have here is you get to see the monthly results. So while we have hit the last couple of months points that none of us are happy with, those actions that we have taken as I've said, these are not ones that are causing any great distress. I don't like it but we know how to fix it as a Company and start looking to see that decline.

When we talk on these calls it's always in a very aggregate level. Frankly it's all a state-by-state issue but the aggregate probably is a fair representation of the overall state. So I would say start looking for it as the months come through and monthly reporting should be able to give you some indication of that and hopefully we get back to a point where our rate level and future increases are in direct line with our costs as best as we can do it.

Brian, do you have any points that I might have missed there?

No, I think that's a fair representation. Obviously, John Sauerland in June had mentioned we taken about 2% rate change up through June and July's activity and other rates changes here soon will put it more closer to the 5% range with likely a couple percent more to go by the end of the year. And some of our historical loss costs, particularly severity were higher than we had anticipated, so we're playing a little catch up there. And then some of it will be a function of what our future loss costs and we have dialed up some of our expectations as to what future severity changes will be.

Sure, so are you expecting future severity that for the next six months ought to remain in a 6% range because it seems that with the 5% or 6% rate change and a 6% severity, there would be no margin expansion at all. So are you taking rates up slightly higher or do you expect severity to come down in the next six months?

Also as you're doing that my mental math, recognize losses are not 100% of the cost but loss adjustment expense on our expenses shouldn't necessarily go up at the same rate.

No, clearly we price to include our margin, so when we're doing what is called an indication, we had our target loss ratio and we will always take rate both at the time and while I'm not going to go into it, we have other ways of continuing to take rate, so my preference is to continue to take small bites and very seldom do you ever get rate perfectly correct on one adjustment. What is in my mind a strength of Progressive is our ability to continue to take small adjustments.

So I don't want anyone to think that this is just a one time we are taking rate. We have been taking rate for a long time. We now realize we just need to take more rate and we have made that adjustment and we're making a good number of adjustments at one time but this will not be making adjustment and sit back. We will continue to monitor. We will continue to track every cost that we have and while we can't always explain why severities are going up or changing, we certainly observe it and we have enough data to observe it in a way that we believe is credible.

Some things that we clearly watch, I get the question a lot of what's driving the severities? I would tell you that at least we observe increase in utilization of emergency room facilities. We see increased utilization at radiological procedures. We actually see increase in unit costing of both of those. Always hard to say exactly how much they contribute and almost every theory of partial contribution has probably had some weight.

I think you know the story on the used car market place. The used car market prices relative to the physical damage side of the business. But we expect to stay ahead of trend and get our margins back to exactly where we have always said, 96 or better.

Sure, fair enough. Just one follow-up on the severities. There's been some discussion around that and you guys are showing 6% severities. Others are showing rising severities but maybe not as high. Do you have a sense for what is sort of different or what you are seeing or do you think that you are ahead of the curve versus peers? Thanks.

I'm not sure that we can really make a claim about ahead of the curve. Every company that is reporting is a very credible company. They have clearly the ability to assess their own data and so I would assume that everybody in some sense is right. It's frustrating not to be able to reconcile.

Something I might just point out to you, though, there is a very different dynamic in books, books that have been growing a lot or perhaps not growing for some time. They may show different dynamics relative to the maturity of the book and the percentage of new business.

One other thing I would actually say relative to not bodily injury severity in particular, our actual paid severity is less than the 6% on the incurred basis. Some of the incurred basis increase in severity also relates to strengthening of BI reserves from previous accident years but our paid severity is actually a couple points less than that 6% incurred severity.

Fair enough, understood. Thank you very much.

I think some other companies talk about paid severities whereas we are reflecting some of our incurred severities, which includes reserve changes.

Okay, that's good. Thank you.

Michael Nannizzi, Goldman Sachs.

Just going on the severity topic, I guess one question is given your ability to segment the data so well and a lack of specificity around the drivers of severity, when it inflects, when you saw some change early in the year, why not take a bigger bite of the apple just given that you weren't exactly sure what was causing the underlying change?

That's clear and as I sort of did mea culpa in my own letter saying we may have -- now we know we were later that we should've been, let me try to get to that but also give you a sense of -- I'm talking frequency for a second and then I will get to your severity issue.

2011 was probably a lower frequency run rate than what we believe is sustainable. We come into first quarter of 2012, we have a significant dip down in physical damage share frequency. We probably really should be closer to a trend line that reflects more 2010 frequency, so here we have a little bit of the depressed frequency environment. It's real but it may not be sort of a good indicator of the future.

We are also starting to observe severities as I put it in the first-quarter letter, certainly going up not quite what we are seeing now, so there was no need right at that time to overreact and overreactions obviously we lose some momentum in the marketplace. So the key is to try to time without ever sort of going over.

Now we know that severity probably had gone a little faster on us and a little stronger and that's what we are reacting to. So fair comment, but it's a lot easier to see after the fact then it is at the time.

You have any series of data points and picking the next one is tough and that's what we've got to do and in this case, it looked like we took a couple points and thought that they were maybe a little lower than what they really were.

Understand. I understand hindsight 20-20 and I'm certainly not questioning that but I guess we don't really know what the drivers are of specifically of severity but can you tell us kind of is -- is it where the problem states were that you kind of identified last year and earlier this year that the change in whatever problems you were identifying was worse than you expected? Or is it a broader picture across a larger subsegment of the book than just the states that you had kind of focused on earlier in the year?

Bodily injury, a big part of our business obviously. I would say that's a relatively widespread, broad response, so while it will vary state to state, I think the message that we are giving that it is increasing severity and a little faster than even we though in the first quarter is a fairly general and accurate statement for the vast majority of our states. We talked about PIP previously and clearly PIP -- most of the issues that we refer to when we are talking about PIP are now Florida-specific. Brian, do you have anything to add to that?

No, that's a fair representation.

Relative to severity on the physical damage side, which quite frankly is at the upper end of the kind of numbers that we are talking about, a lot of that is being driven by total loss replacement, the pressure on certain model years as we see the demand for vehicles and parts for years where we simply didn't sell a lot of the vehicles two, three, four years ago and used car prices are actually quite high and part availability reflects that same supply and demand.

Great, thank you.

Adam Klauber, William Blair.

Good morning, thanks. In some of the more challenging states, particularly Florida, how many renewal periods do you think it will take to get your profitability back to target?

Do you want to talk about current results with some specificity?

I would say Florida, our calendar year results are not to our liking but Florida is one of the states where we have had a fair amount of unfavorable reserve development on previous asset years and that really relates to PIP and we talked a little bit about that in June.

So actually on a current rate level and adequacy in the marketplace, we actually feel pretty good about our current rates and what we are running today are at adequate rate levels. We actually took a modest rate increase in the past couple months but we actually think on a going forward basis our rate adequacy in Florida is sufficient. We still have the remaining exposure on the PIP development and we will see how that plays out.

But we actually feel pretty comfortable about our current rate level for -- and the most important thing is how is your current accident period results? We are feeling okay about that.

For those of you who are closer students of Florida, that's an important statement that we feel good about our rate level, our current rate level and we are planning and believe we can do whatever is necessary to meet the requirement of a PIP adjustment in October.

Okay, how is the profitability in California? Is that holding or has that been deteriorating slightly recently?

I would say it has deteriorated from last year but it really is more specific to the agency channel as opposed to the direct channel. We feel very comfortable with our rate level and profitability in the direct channel. The agency channel on the other hand is not meeting profit targets. A couple years ago we lowered rates a fair amount. In hindsight, we may have gone a little bit too far. We've taken a small increase. We need -- we likely need additional rate. And in the short term, we are doing other things that we can to reduce new business writings.

But direct channel, which is the bigger channel for us actually in California, we feel very good about and it's more an issue in the agency channel.

Okay, one more follow-up. As far as investment income, it seems like we are going to be in a low interest rate environment for a while. Is there any thought to changing and going out a bit longer on your maturities?

This is Bill. Not at the moment, not with the curve as flat as it is and rates where they are. The story is still the same for us as where we can find some value in some non-treasury product in the short to intermediate part of the curve, we will add. We're not trying to hit the yield bogey, as you know, management total return. Our view at the moment is that the risk maybe not near-term but eventually of having a longer duration with rates as low as they are just leaves us a bit vulnerable. So that's not a risk we will undertake at the moment.

Great, thank you very much.

Paul Newsome, Sandler O'Neill.

Good morning. Just a slight topic change here. Now that you have had the telematic out a little bit, can you judge if you have actually seen new demand from the telematic itself versus just a retention process? I'm just trying to get a sense of sort of the sensitivity of whether or not that's actually driven new customers or if it has -- if we can tell that yet or if it's really just still very much a retention tool?

Are you referring primarily to Snapshot for current customers or the test drive version of it that we've recently released?

The Snapshot.

Snapshot, I think John sort of covered that to some degree in the investor relations meeting and retention certainly is the big issue and we are going to be able give you some sense of exactly what we've got our policy, not only policy life expectancy but lifetime premium estimates were. And also that we have, yes, I believe attracted customers and the way he was able to do that is to give you sort of the best shot where we actually did a controlled experiment that allow people to sort of take it or not pay take it. However, once you move beyond the controlled experiment, I really don't have a good basis to be able to tell you that Snapshot itself net of all other market conditions is doing X or Y. I would love to be able to do that. I just don't have a way to do that. So the best information is still the information we provided at the investor relations meeting on the controlled tests.

Excellent, my follow-up is to bang a little bit on the severity. In the PIP in Florida in particular, the last time we had a PIP problem, it was very much as I understood it, a fraud issue. Not just for you but for everybody particularly in New York, but also in Florida. Is that the case again this time because sometimes it's about policy terms, sometimes it's about issues that have to do with the way the structure of the benefits are given. If we have been able to kind of home in on what really caused the PIP issue this time around?

This is a different type of issue. Brian, you are somewhat close to it. Do you want to sort of give a synopsis of what has happened in Florida substantively (inaudible)?

Yes, I won't go into a lot of detail because some of it involves litigation and so I'm not going to comment on all of that. But suffice it to say the unfavorable development which is driving sort of core PIP results and including affecting our calendar year results relates to previously closed claims, claims that we have previously closed, where some court rulings would suggest that we did not pay the right amount. Now we believe we did and we believe we paid relative to our contract and it's an issue in terms of the courts in terms of actual contract wording, which is more specifically what the issue is about.

So as a result of that, we have had to reopen some claims from previous accident years and that's causing the unfavorable development. I won't comment a lot more because it involves some litigation but that is what it is.

Now whether the question is is there fraud, etc. in Florida and has that changed over the time? I think it goes in waves, but our specific unfavorable development I wouldn't pinpoint specifically to fraud. This is more contractual wording and a litigation issue.

Is that statutory contractual wording or is it specific to how you wrote the policies?

It's more court decision and court interpretation of our contract -- not our contract.

So it's an issue for everybody as opposed to Progressive?

We believe it's widespread. It's always hard to know exactly what everybody else has in their contract. This issue gets a little bit more complex so you see we are sort of hedging a little not for lack of wanting to disclose, just because there are issues that doesn't make sense to talk a great deal about right now. But the real issue, to your question, what's the driver of severity? This one is a pretty weird one and unusual. It's claims that we believed were closed and settled appropriately are now coming back to us and in some cases getting additional payment on those claims driving an increase in severity.

Josh Sterling, Sanford Bernstein.

Good morning. Thank you for taking the call. So I would love to talk a little bit more about sort of the severity roll forward and pricing actions and maybe if we could just start with clarifying something. I think, Brian, you raised this this morning I think and it sort of helps illustrate something that I know investors are sort of confused around, which is with the headline 6% severity number, whether that's a reasonable proxy for projecting future severity or whether we ought to be using the paid severity measures or what the implied severity change was say for accident year 2011 that you guys have effectively disclosed.

And in line with that, I think the question then is what does -- if you add sort of a go forward view of severity that's reasonable and not distorted by reserve changes, what does that -- what on a pure premium basis does this look like that you guys actually need in terms of rate? Is it -- because if you simplistically do this, you would add up 6% times the larger numbers for positive frequency changes and you say that you guys rate changes are well below the rate need that actually -- the sort of simplistic loss trends that you would be seeing?

There is a lot there, Josh. I will try to at least take pieces and, Glenn, feel free or Al, feel free to chime in.

The best measure for severity I believe over time is your own assessment of accident year severity change over change -- year-over-year. Unfortunately at any given point in time, you don't know what that is because things develop over time, so that's why we report both incurred and I wanted to let people know that the paid is slightly lower.

Now paid can be influenced by a lot of things, your closure rates, are you closing more simple claims earlier or later versus previous years? So there are pitfalls in all of those.

The other thing suffice it to say that we believe severities have increased versus what we had seen particularly in the previous couple years where our severity for bodily injury coverage and some of the other coverages have been fairly modest, low single digits, and in fact last year, we would have said 2011 at the end of last year, we thought bodily injury severities were relatively flat. And we found out and as things have developed that we were a little bit short in that and that's saw the unfavorable reserve development so we've increased our severity estimate for 2011 accident year about 2% from where we thought at the end of the year.

As we project future severities, that's a select. If we had a crystal ball of what future severities are, it would be great. We have increased our select for future severities. I would not go all the way up to the 6% incurred severity that we are reporting right now.

The other thing I would just say relative to frequency, for certain we have started to see an increase in frequency in bodily injury. We've seen it for the past couple quarters. Property damage and PIP is more second-quarter related. Collision was 1% in the second quarter. Frequencies now in 2012 are comparable to what they were in 2010 or two years ago. Last year we had negative decreases in frequency.

So it's not as if frequencies are way out of control. They are now closer to what they were two years ago and some of the things last year that may have affected frequency were gas prices and the like. The reality of it is for us and the industry in the first quarter, collision frequency was down significantly. Our was down like 10% in the first quarter I think. NAII data would say something like 5% for the industry and that clearly I believe is attributable to the very mild weather Northeast, Midwest, and sort of a one-time event but nothing that would be expected long-term.

So on the frequency front, I would say our frequencies are comparable to a couple of years ago so not overly concerned about that. The one that we will continue to watch more is that BI frequency seems to be going up a little bit faster.

And then on the severity fronts, we have increased future selects but to project and say hey, we think the number is 6, I think that would be on the high end -- they're less than that.

That's really helpful, really helpful color. The other question that I would love to just clarify is relating to sort of pricing actions, it sounds like if I understood you earlier, you said that what had been sort of 5% by fall, sounds like maybe it will be a couple points more of rates by year-end, make sure I understood that correctly.

And then just generally, I would love to understand how much your recent rate filings, what rates, what average rate increase you've been asking for? And then if you can expand a little bit on as we sort of model out against future trends, how much revenues and sort of an offset to that should we be expecting from nationally your monthly trend factors which I think Glenn was referencing? Thank you.

In terms of average rate change, think of them more in the sort of mid single-digit rate changes. That's not -- they're not all there but think of them as more in that range. So as it relates to what percentage of the country have we covered to get to this 2% or 3 % that we've taken in the last couple of months, most of the rate changes are mid-single digits and that is much more our preferred approach. We don't want to get into positions where we have to take plus 10s because that will definitely adversely affect retention rates and the like.

So our preferred approach is to take consistent and moderate rate changes going into -- so think of the average rate changes in the mid single-digits for most states where we've taken rate changes.

And in terms of the monthly rate factor, it is not a significant amount of the rate change taken, but it is an increase in (inaudible) because I think some of the experience has proven that that is a good methodology of continuing to take rate over time so we've implemented it in a few more states and in some states increased that percentage.

But in terms of the overall rate change, I would not say that it is a big portion of the 5% rate change to current period or 7% at the end of the year.

Your understanding of the prior statement of how much we've taken and how much we plan to take is correct. The other point I would suggest for those who are somewhat close to it, most of the changes we are taking now, most are based rate changes. The reason I point that out is that sometimes you can take rate changes and if it is factors and so on and so forth, that may or may not flow through in market based on the mix that you attain. Perhaps the more definitive way to get rate is to take it at a base rate level. We're quite comfortable with the design of that product, so most of these changes are base rate changes and we would expect them to flow through somewhat close to the amount that we are taking.

Okay, that's great. Thanks for the color and I look forward to talking about Snapshot again next quarter. Thank you.

Greg Locraft, Morgan Stanley.

Thanks, just wanted to shift gears and maybe get a quick tutorial on the gain sharing matrix. And I guess specifically, how does it react to a combined ratio above the target like you are currently producing?

Then also are you -- are there any tweaks that need to be made? Are you effectively getting the right behavior but the wrong profitability? So was it over rewarding top line at the expense of profitability or anything like that?

Well, the master designer is Brian, so I think he can talk a little bit about the trade-offs and I think he will comment sort of on individual month changes and also the aggregate for the year, which while we are not happy with the last several points of trajectory, still is within target.

Yes, as it relates to the first question about how does it react to combined ratios over target and keep in mind, I've mentioned this before, the gain share that you see is actually an aggregate of five component pieces, so there is two for direct auto and one for each of the agency auto, specialized and commercial auto.

As they are constructed, they are constructed relative to growth and profit trade-offs and all of the matrices have a pretty big penalty function for being over targets and the penalty function gets greater as you get further and further over targets. So being slightly over targets, there is a penalty function, not as steep, but as you get further and further away from targets, the penalty function is pretty severe.

So I think those in particular who have the responsibility of setting prices, ensuring rate adequacy, are very cognizant of that and it's one of the drivers of why you saw in June the number come down fairly significantly from I believe it was 1.42 at the end of May and moved down to 1.29 at the end of June. And that combined ratio of 101 doesn't sit well in any matrix. So that was the primary driver of it going down.

And yes, there are penalty functions of being over targets and are pretty severe particularly as you go further and further over targets. We do try to reward and incent growth, too, which we do want to grow but we only want to grow at or better than targets.

And it doesn't sound like there is any change to the matrix or anything as part of what's happening. It is what it is and the organization will respond.

We set these matrices actually before -- right at the beginning of the year. We don't change the matrices during the course of the year and obviously over time and over the years, we do tweak them and amend them for the next year. But the matrices that we set at the beginning of the year, they stay in force for the full year.

Okay, then again as it relates to this so if I was sitting in a theoretical state that was earning 100 combined, what would prevent me from just shutting off my advertising spend for the rest of the year and bringing my combined immediately down?

What would prevent you is some degree of management oversight that's anything. But we try to entrust our product managers with a great deal of responsibility, recognize a large portion of our advertising is not done on a local basis. Now I would actually expect in some certain cases that we actually temper our local advertising. That would be an action I would expect of a product manager if they were running at 100.

You know the story of how we match advertising to yield. So frankly I would expect that on a local level. But again, a big chunk of our advertising is done on a national level and while we will likely temper that to some degree, we are not so driven to do an action today that will mortgage the Company going forward.

We are currently operating -- back to your gain share issue -- the score of 7% at a 95.9 produces the score that you know about. It's the directory that's not meeting our expectations and we will do everything to adjust that but also try to make sure that we are continuing to get to that rate level in a responsible way so that we can continue our growth and push for a very healthy 2013, which we may very well enter with a stronger average written premium largely across the board, both channels and in many states.

So the short answer to your question is as a product manager, you could do that technically. There would be management oversight. We are not looking to do those kind of actions. That's not what we do and more importantly, a lot of it is done on an national level.

Okay, that's great. Thank you so much.

Brian Meredith, UBS.

Good morning. A couple ones here quickly for you. I think you just answered my one with respect to ad spend and whether this is going to -- the rate increases will have any kind of impact on ad spend going forward. I guess if yield is going to potentially decline, is that the way you're going to manage it and look at it?

Exactly, but don't expect if I had to give you a general piece of guidance and you know we don't sort of do this, I think our ad spend will be roughly the same this year as it was last year. And under different conditions, it might've been up.

Got you. And then looking at some of the severity kind of pushing up here, is there any difference potentially between maybe some of the high risk and the more preferred or is it pretty uniform across the whole book? Then also, any difference between what you're seeing in the direct and agency? I know agency is where most of the reserve increases are coming from.

Actually, I was just looking at an interesting spreadsheet the other day and I will tell you it's fairly uniform. Al, you look at even different data but essentially the same as us. Would that be your call?

All right, the answer to your first question is really quite uniform across what we would now call sort of our customer tiers. Was there a second piece to it?

Just agency versus direct.

We are strengthening rates more in agency than in direct. There is no big, big story there, but it does look -- just two books of business running. We try to treat them with separate indications. We're big enough in both channels and in most state to be able to do that and there are no particular reason other than just the way the data comes out, we're strengthening rates a little more in agency than direct at this time.

Thank you.

James Engle, John W. Bristol.

Hi, Glenn. I have one question which is regarding new applications and why is the growth faster in agency versus direct?

Actually it has been good, but unfortunately my last statement might be a little bit of a telling statement that we need to strengthen rates a little more in agency than direct. So you should take from that agents are very responsive to us. They like our product and they like our rates a great deal. We're going to have to take that up and as we have said on many occasions, agents are facilitated by software that give them very good market comparisons from lots of different companies. So while we have been very attractive, we are going to take our rates up, it's even hard for me to answer the question. I just have to wait and see what that means in an individual situation; every agency has different levels of carriers, different numbers of carriers, different combinations of carriers. I would expect our competitiveness to go down just because that's sort of a pretty clear statement.

You take rates up, your competitiveness goes down. What I can't really know is how to calibrate that even in a constant situation if no one takes rate changes. And secondarily if others take rate changes.

So really I would say just track on the numbers there for the rest of the year. We are very, very happy with our year to date with our agents and production and we hope that certainly stays. I don't think it will stay at the current level.

Could you give us some color on the new applications on the direct side?

Brian, do you want to -- you follow that fairly closely.

On the direct side, I would say the application count certainly through the first six months of the year relatively small growth. It's not certainly as pronounced as in agency and more of it is related to conversion gains as opposed to prospect gains. And generally the change in rates will likely have some effect on conversion.

So going forward, we will see how that plays out but I would say in direct channel most of the gains that we have had so far this year are more conversion-related as opposed to more generation of prospects.

Thank you.

Just one other thought on the agency piece and it's still a small piece so I don't overplay this, but we did tell you at the investor relations meeting that we were putting a push on getting more of our message, more of our agents to understand what Snapshot might be able to do for them. That work continues. There are some favorable results from that. We want them to be even more favorable and the reason I bring it up is it's a very interesting way to be able to also accommodate customers' desire for lower rates in a rate rising environment. It may actually give people a little bit more incentive to say maybe I will try this because this gives me an opportunity to tell you I'm a good driver and get a lower rate.

So hopefully Snapshot is a nice time to have or it's a nice time to have Snapshot into a rate rising environment.

Great, thank you.

Bob Glasspiegel, Langen McAlenney.

Good morning. I wanted to follow up on Greg's question on additional tools to adjust to the elevated combined ratios. Most of the conference call has been focused on rate as your one, two, and three strategy to deal with it.

Gregg, your answer to Greg, you suggested advertising might be another tool. I was wondering if slowing down Snapshot because of the elevated first-year combined ratios of that business might be another strategy or there would be other things that you would highlight as just beyond price.

You got a couple of them. Brian also mentioned indirectly in California in agency, which is not the only place we would do this but bill plans. So we can certainly control sometimes the flow of new business just by the attractiveness of bill plans. It matters in different classes of business a little more than others, something we will do.

And within Snapshot, clearly we have a discount structure that we are very comfortable with but if that proved, if it proved to be a little more aggressive, we have an opportunity to adjust the discount structure there and we might be talking a point, half a point, not a move away in any way shape or form from our excitement around Snapshot. Snapshot is something that we think actually offers consumers a way to really manage their price and this is a good time to do that.

So no, we're not planning on pulling back on Snapshot at all. But at $1 billion, which is a number that we put out in the investor relations meeting, we expect Snapshot to perform and when we say perform -- sorry for the long explanation here -- it does mean that we understand new business can still meet our target but numerically be above 96. If that were the driver of the only reason we're above 96 today, I would be telling you more about it. That's not the big issue but we are not afraid of bringing on new business at greater than 96. It is the blend that we are looking for and we see no reason to slow down any attempts to incent new people to come to Progressive.

Okay, just a great answer. Thank you. Just to follow up, you are 100% sure that it's the problem center around being wrong on severity as opposed to adverse selection or any other sort of problem with the book.

Yes, 100% is always a great certainty, but I've seen this a few times in my career, as has Brian, as has John Sauerland and so on and so forth. We are not -- you never want to come across cocky but I think we know how to handle this one. And while we give answers here that are meant to be full disclosure, the detail that goes into a rate revision is far more intense than we can get into in this type of a setting, whether that be some of our commercial segments or whether it be individual states or product designs, we do have more aggressive look on pre-binding verification in certain states where we realize there are some opportunities to be presented with individuals who are not buying the product for the intended purpose. It is a fancy way of saying what you might've said.

And I think we're on top of all of those things but those are not new. Those are things that we do all the time and we are continuing to refine them. What we see as the instantaneous sort of action I would tell you, we are very highly confident that we can fix that with the rate changes that in many cases we've already taken.

Thank you, Glenn.

Meyer Shields, Stifel Nicolaus.

Thank you and good morning. Glenn, in the past you've talked about how when there is a sort of turmoil in the insurance marketplace, it ultimately benefits Progressive because you get your rates to where they need to be faster than the competition. Do you have that sort of expectation this time around as well?

I'm always an optimist to some degree. You might not get that from my writings at times, but here's the one thing I have learned in this business is get your rate right first and then attack the marketplace. And when you don't have your rate correct, you own up to it right away and get it correct.

So yes, in general you can sort of take any sort of time series and you will see that when the market is a little disrupted and rate increases our disruption to the marketplace, and go back almost close to five years, you really haven't seen a rate rising environment in auto insurance for a while.

So I don't look at this instantaneously. We have a job to do. We know how to do it. I'm confident we will get that done. We will come out of this with higher average premiums which is something we haven't had for a good long time and I think there will be some market disruption and we go into that with more tools than we've ever had before, whether it's Name Your Price, whether it's Snapshot.

And so actually feel very good about looking forward to 2013 and 2014.

Thank you. When we look at sort of the monthly reserve development numbers, I guess they have been consistent I believe over the past few months. Does the schedule of reserve reviews imply that that will continue for a few more months or do you think that you are done now?

Was the question regarding the actuarial reserve changes or the reserve development or both?

It is about the prior year development, not the actuarial adjustment.

Prior-year development, actually the last couple of months has actually been pretty modest. So certainly in the quarter we had about $23 million of unfavorable developments. Most of that was in April. May and June have been pretty modest. What to expect for the rest of the year, can't forecast or predict but generally speaking, we have generally historically seen more development in the first half of the year versus the second half, which just makes sense because as you get further and further away from the previous years, more of them have settled, etc.

But I don't want to suggest that we won't see any more unfavorable development. There may be, but you see it each month and the last two months has been much more modest than what we saw the first four months.

The actuarial changes actually from a reserve actuarial perspective which we look at by segment by segment, state by state and we have a schedule for that where almost all the large segments are reviewed at least quarterly. We have at least last month in June took more significant increase than we have recently and we will continue to do our actuarial reviews and make adjustments as we are see them or need them.

Okay, thank you very much.

Ian Gutterman, Adage Capital.

I just wanted to explore the so-called adverse selection concept again. Is there anything -- I don't want to really call it adverse selection but just far as -- as you've been growing in the last year or two, the types of customers you are growing with, have you found anything to suggest that those sales were a little hotter than maybe you expected? Or just say at a different buying patterns than you expected?

Nothing notable. New business carries with it an elevated frequency, but that's not new. That's not unexpected. There really isn't anything -- that's not to say we don't get some adverse selection and we don't get some customers that perhaps are not looking for exactly what we are offering, but that's not the issue. That's not our big issue. So I don't feel any less comfortable on that than I have for some period of time.

Okay, has there been anything going on as far as a mix shift that may mean you would feel severity more than others? And the example I thought of possibly as you have moved to more preferred, preferred drivers buy higher limits, you have maybe a higher limit base than you used to.

I don't think that's the big driver. Brian, do you have any sense that it might be? Other than in commercial, where --?

You are right that the more preferred have the higher limits. I wouldn't say that our limit exposure in aggregate on average has changed dramatically. I don't believe that's a driver, no.

Okay, great. Then if I can ask one Snapshot question. What happens -- so just this idea that obviously you have the trial and after that your discount is locked in. How do you account for things like lifestyle changes, right? Maybe when someone does the trial they are taking the train to work and they are driving on the weekends and a year from now they get a new job where they are driving 45 minutes in rush-hour traffic each way every day and their profile has changed, but you don't know it because the device isn't in the car anymore.

There is no question those types of risks are in the design. Just period, they are. We also reserve the right and will likely use the right to resample, so even though Snapshot is a discrete measurement period, we are actively looking for our programs as to when and how to be alerted to remeasuring and resampling. So it is no question that there's a lot of design positives to being able to do the discrete measurement period, lots of positives there.

There are some negatives and there's no question that you might capture somebody at a point where their behavior is not particularly representative of their ongoing behavior. We are very cognizant of that. We don't think that that is a large enough percentage to be overly concerned with, but we will be concerned to the extent of resampling. Obviously people bring vehicles onto their policy during a point in time and that's certainly something we will likely resample for.

Okay, great. Thank you.

Keith Walsh, Citi.

Good morning, everybody. A couple quick questions. How much of the 6% projection for severity would be related to what you are seeing in Florida PIP?

That's mostly the BI. Do you want to talk about Florida?

The severity that we were referring to was on the 6% was more on the BI side. PIP severity has increased as well. I don't have that. But I guess the PIP severity also, it is actually about 6% so far through the first six months. But PIP in particular you have to look at on a state-by-state basis where Florida is actually a higher than average PIP severity. Some of that obviously driven by the unfavorable development, so PIP severity on an incurred basis is higher than 6% so far this year.

Any other states that are causing issues besides Florida?

Relative to PIP, I would say Florida is the main driver. Michigan, which has historically been problematic for us is getting better. I wouldn't say we are necessarily all the way there but we are certainly in a much better position there than we have been in a long time.

Okay, then I guess just for Glenn, you mentioned you were I guess maybe disappointed at the timing it took to recognize the loss costs. I guess in hindsight, is there anything you could've done or any other information you had that should have maybe caused you to react more quickly, recognizing this is in hindsight of course?

We find hundreds of ways to beat ourselves up on things like this. But on the severity side, that was pretty tricky. Unfortunately we have to get the data and see it and whether we like it or not, we kind of drive looking out the rear vision mirror. It has to have happened and that's -- we just don't have a way to sort of take a great index of healthcare costs and say this will be directly reflective.

The one that I think that maybe in retrospect we could have, should have, all the other words that would go along with that is that while frequency had been declining almost monotonically for the entire decade, 2011 declining didn't look aberrant, but now it looks somewhat aberrant. And maybe there's a bit more of a frequency plateau around the levels of 2010. And that one we will have to see.

Next year we might be talking about it having gone down again. The safety kind of influences in cars, you know sort of things that are happening to the technology of vehicles, they are all inroads. They are all driving that frequency, so frequency as a long-term monotonic reduction is a fairly good bet but we probably overreacted or trusted the 2011 numbers more than we might have, should have.

Just one quick follow-up on Florida PIP. So if I am just simplistically, you don't think you made a mistake growing there or it was just more bad court decisions? Is that the just I should take away?

Florida is a terrific state for us. Florida PIP and I share -- I am sure I share this sentiment with many others in the business, PIP is just an awfully difficult coverage there. Sometimes you don't know if you are coming or going. We have paid claims that we believe were paid and when I say we believe we've paid, I am not sort of beating an insurance company here. I think the reasonable person would believe they were paid fair and accurately. Now we are having to reopen them.

That's a very, very unusual circumstance and pay more so that doesn't reflect on our feelings about Florida in any way, shape, or form. We'll get this one behind us. PIP reform has taken place in Florida. None of us know exactly what that's going to mean but at least we have a little more clarity going forward but we definitely have a period of ambiguity that we are working through right now.

But no, Florida is a great state for us and for the most part not a problem. PIP can be problematic.

Thank you.

Josh Shanker, Deutsche Bank.

Thank you. Keith kind of got my question a little bit, but I'm wondering if there's any commentary if you could disaggregate Florida's severity from the national numbers and see if there's any relative difference that can help us understand what's going on with the numbers or maybe it's just not possible to do that.

Actually, Al, can you do sort of ex Florida BI? I'm not sure it's going to be that much difference.

Really it's not. The change is BI countrywide has been consistent going up and to say a state would vary between say, 3 and 5 or 6, that's a pretty tight range. And Florida fits right in that range with what we are seeing in BI.

That's a great answer and thank you for taking the question at the end.

Thank you. That concludes The Progressive Corporation's investor relations conference call. An instant replay of the call be available through Friday, August 17 by calling 1-800-947-6592 or can be accessed via the investor relations section of Progressive's website for the next year.

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