前進保險 (PGR) 2014 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, quarterly reports to shareholders, and letter to shareholders, which have been posted to the Company's website and will use this conference call to respond to questions. Today's moderator for the call will be Matt Downing. At this time I will turn the call over to Mr. Downing.

Thank you, Carolyn. Good morning. Thank you for joining us on what I imagine is a busy morning for many of you.

Participating on today's call are Glenn Renwick, our CEO, and Brian Domeck, our CFO. Also on the line is Dave Benson, who will be sitting in for 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. They 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 2013 a

nnual report on form 10K and our quarterly reports on form 10-Q issued during 2014. There you'll 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 by the investors page of our website, www.progressive.com.

Carolyn, we're now ready to take our first question.

Thank you. At this time we are ready to begin the formal question and answer session.

(Operator Instructions)

One moment please. Mark Dwelle, RBC capital markets.

Good morning. I was kind of surprised to be first. The question that I had was, we're seeing a lot of the aggregators increase their ad spend. Are you seeing an increase in lead submission coming from that channel?

Mark, we would agree with you that there's a lot more activity in aggregated space. I'm not going to comment directly on our leads there. In some cases, to be quite frank with you, we have reduced our leads from some aggregators.

There's not a clear answer to one across the board, but in some cases we have not had the results that we would find consistent with our price point for other independent agency distribution product, so were taking a range of actions in some cases, less production with some aggregators. In some cases, we have a strong relationship with some aggregators.

So, the point, I think, that you're getting at is, is this becoming a bigger part of the landscape production? Yes, I think that's a very fair assessment. Recognize that for, I would say, let me just go with say two-thirds -- Two-thirds of all new business production you can throw two or three carriers that track that. So we're not talking necessarily about the largest production of new business, but it is a function for some who do not necessarily, and this is my opinion, do not necessarily have quite the same brand strength to be able to promote themselves in the way that we do.

Okay, thanks. I guess that's my question. I'll get back in the queue.

Thank you.

(Operator Instructions).

Meyer Shields, KBW.

Thanks. This is sort of a nit-picky question, but when I look at the queue, when you talk about severity trends, I'm going to focus on BI. It is 3% to 4% for the second quarter and the first six months, but the first three months were higher like 6%, so I'm trying to understand how the math works for that?

Yes. We actually have our chief actuary here, so we'll try to give you as much insight to that as we have. Gary, would like to take that over?

Sure. Hi, this is Gary Traicoff Chief Actuary. So on the year-to-date basis, our overall BI severity is running around 4% or so, and on the quarterly basis, what we had talked about was more of a 2% to 3% range. So all we're really looking at are the overall severity in the first half of the year compared to the first half of last year, and what you can see in looking at that is that in the second quarter, our severity was up a little bit more than what we experienced in the first quarter.

You mean the other way around, right?

Yes. I'm sorry. The other way around.

Okay. That's helpful. Thank you very much. Bigger picture, I guess, Glenn, you made reference to competitors rate actions. On a month-to-month basis is that getting better or worse?

I'm not sure quite what better or worse means there? Let me answer it in a different way. In the early part of the year, focusing on our own rate actions, we took in several states and rates that were probably let's say heading 3 to 4 kind of rate action for the year, and we see competitors -- it ranges across, well we see 2 to 3 to 4, relatively consistent there as well. I'm not sure what the outlook will be for the rest of the year. We obviously will react to how we see things.

But it is reasonably possible based on what I'm seeing now -- netting aside sort of hail and all that sort of stuff -- that we might be in for a period of several months of reasonably stable rate action. We are very comfortable with our current rates, at least relative to our outlook and relative to the trends -- that some of which we just discussed -- we feel that's consistent with the way we're priced for the future.

We're always pricing to a point in the future, so we're not seen anything that takes us off our pricing estimates. I can't comment on others. We've seen some rate actions from others that are in about the same league as ours, and if I had to go out on a limb, I would say that probably there'll be a relatively stable rate environment for the next quarter or two.

But, that could change if we see trends change. You just commented on the difference in trade, and if that changed we'd have to react.

Okay. Fantastic. Thank you very much.

Thank you.

(Operator Instructions).

Josh Stirling, Bernstein.

Hi. Good morning. Thank you for taking the call. So, Glenn, I have to ask a question on snapshot. At your investor day, I think you showed us the real-time image of your GPS enabled devices floating around Northeast Ohio, and I was curious. It's been a couple of months since then, since you started shipping, and I'm wondering if you get a sense of how it's going?

How many units have you shipped with the new chip? What are you finding about customer opt-in rates with this new feature and greater monitoring? I think what of the most interesting questions related to this is: how are you tweaking the customer interface and customer facing product offering, whether it's pricing or what data you share with them based on this new information you're collecting?

A lot in there. Josh, I think what we showed you was a look into the way we think and the way we expect to shape our product. Let me suggest to you that we will bring out changes more in a product design change, as opposed to leaking them out individually, and that will happen in a timeframe that is to be determined. I'm not getting out in front of myself or from a competitive perspective here, but you can be sure that we will let you know when that happens. What have we done since then?

The whole idea of that big data analysis and what we showed there was not necessarily the types of things that will absolutely find their way into the product, but hopefully a good indication of the way we can apply things and match external data sets along with our internal data sets and just totally enrich the whole environment. And that is continuing to go very well, very well except for the fact that we always seem to always need more servers to put into our cluster and so on and so forth, but I guess that's good news.

One thing I did comment on, and I want to be very careful not to suggest that these are the leading indicators of product change, but recognize that one of the things I said with snapshot is that we would very much like our agents to be able to create a level of penetration amongst consumers much more consistent with what we think the consumer's willingness to accept would be. I will derive my proxy for the consumer's willingness to accept based on our penetration and direct.

So as we had a chance, which is a very rare opportunity for us, to enter an agent distribution state where we had not been, Massachusetts in this case. We actually tried some things, and the product designers tried some things that, again, not necessarily reflective of what exactly will come about. But they wanted to test different hypotheses. And what was interesting was that as one of the problems with snapshot is that the rate, and this sort of goes a little bit to the whole field of comparative rating how things are changing in a way that the rate that is quoted may not necessarily be reflective of the rate that the customer actually realizes only a short time thereafter based on driving behaviors.

So this pre-and post-rating variable issue is a very important one, I think, in our field, but we gave the agents the opportunity to be able to give some part of a discount. Let's just go with me here because I'm trying to give you information but not play our hand. Let's assume the expected value of a discount is known. We gave some portion of that expected value of the discount as an upfront discount.

We all know statistics. That means some people are going to get that, some people are going to get more, some people are going to get less. So, we actually tried that as a way to see if ultimately the same end result might occur, but by shifting part of the discount to the shopping process whether agents ability to match the penetration of snapshot consistent with the direct, in fact, closed.

And while we have early reads, and I reported on that in my letter, that's something we're very intrigued because we would love to see our agents be able to offer this more consistently with what we think the consumer demand is for it. Those are the sorts of things that you can probably expect to see in future designs in some way, shape, or form, along with the other R&D type efforts that we give you a glimpse into in our investor day.

All the other elements that you can expect from snapshot, our are comfort with segmentation, our comfort with retention, those things -- there's nothing dramatic to report since investor day, but those things are still exactly where we would like to have them.

That's really helpful, Glenn. Thank you. If I could, I'd ask another question, not on the snapshot, but maybe go behind the curtain a little bit. You took an opportunity in your letter to talk about your systems upgrade. That you're 80% done. And, I think you talked about this last time really a couple of years ago maybe when you started.

I'm wondering if you could remind us, what exactly the systems upgrade was intending to accomplish, what sort of functionality or new data you could get or flexibility to manage the business? And I think, taking it up to our level, is this something that ultimately leads to greater capacity for growth? Or should we think about this as an initiative for you guys to reduce your processing or data costs and ultimately drive a higher bottom line?

Good, thanks. I threw it in there; I didn't really think people cared too much about the things that are sort of behind the scenes, so critical to day-to-day activities for us, so expensive, and so demanding of a lot of resources. So I'm happy to talk about it a little bit. Bottom line is we are -- we, like so many companies, had pretty good systems, but they were designed in an era where effectively batch processing was the design criteria. That doesn't mean that it was entirely batch; it's been changed and modified over years, and everybody has words for that. I'll stay away from them, but for the most part we really wanted to take a look at what the future of Progressive would look like from both a capacity perspective, real-time processing. And, if you had to choose one major thing, this would be sort of a complete rewrite of everything into real-time processing, as opposed to a combination of things that had been a little bit.

The core was never designed that way, and all the art houses around it have been changed to be modern but not necessarily totally consistent. This does provide us some functionality that we never had before, but I think for your purposes that would be pretty boring, in terms of date organization, of endorsements and so on and so forth.

It certainly also brought us into a mode where Progressive where we might have designed, and did in fact, design systems that said, you know, most of what we see are relatively small family units, two, three car units, so things with more than five cars or more than five drivers were not necessarily a design criteria. In fact they were capped. Now we have no such need to cap them, and it's more reflective of our business environment. I'm sure if I was actually on the processing the phones, there are lot of other benefits that are presented in this system.

But if I were you, I would tell you, it is one of those things that allows Progressive not to be constrained in the types of things that were talking about, whether it's mobile, Internet, total real-time consumer interactions, and allowing the consumer to be much more a user of our systems, where the systems that were designed well over 30 years ago were designed with a user that was an employee in mind.

And a lot of that has been put into this, and I don't think I'm overstating it. We're really happy with the outcome. It took longer than we expected; it cost more than we expected. I guess that's not new news for systems.

The point that I would emphasize is that the risks that are so inherent in a project that takes that long, costs that much, uses that many resources, at least those risks now seem to be largely behind us and the benefits are starting to be accrued, both by our customers, our own people, and by the ability to design products that are able to take advantage of the features.

Great. Well, thank you, Glenn, and we'll stay tuned.

Adam Klauber, William Blair.

Thanks. I've noticed that you've got a greater level of short-term securities than usual. I think the number at June 30 was over $3 billion. As we think about dividends and potential capital return whether share buyback or dividends for the end of the year, will that have an impact on capital return?

Brian, why don't you take that and maybe have Dave comment on the --

Sure. I wouldn't link up our investment portfolio composition with our capital return and timing of those things. I think more of the -- we always want to have our portfolios be liquid and diversified. And, obviously, being liquid helps facilitate things like debt repayments and share repurchases and dividends and the like. But in terms of keeping that much, in terms of our short-term investment, it is more of an investment portfolio decision, as opposed to keeping it for capital management activities.

We still have lots of flexibility on the capital management activities, and we don't direct Bill and Dave necessarily to what their investment portfolio composition should be to affect those changes. Dave, if you want to add any color as to what we are holding in short-term investments and why?

Sure. We had increase in short-term on the quarter, primarily driven by three factors. Our debt issuance that we executed in April. Secondly, modestly reduced the duration of the portfolio in the quarter into effect that we sold treasuries and most of those proceeds went into short-term, and then third, cash from operations were not entirely invested in fixed income or equities. The residual flowed into short term, and that's a function of our view on risk and risk premium. Risk premiums are awfully tight, and we're exercising patience, essentially waiting for a better set of risk return opportunities to develop. Thanks.

Okay. Thanks. And actually, then, could you just comment on how we should think about capital return for the end of the year? Obviously, did a lot of dividends at the end of the year and, well, beginning of this year, and had some level buybacks. As we think about this year, it's reasonable to assume that you could be at the current level or how should we think about it? Thanks.

Here's what I would say. One, capital decision is strong. So, we have continued to generate capital throughout the year, both from an underlying perspective, as well as investment returns. So, capital position is strong, and we added to it by taking advantage of the interest rate environment and issuing debts, so capital position is strong. We have sufficient capital to grow the business as much as we can, and that's our first order of investment is, in terms of returning and it growing the business.

What you can count on, at least for the end of the year, is one component of our capital management and that's the variable dividends. But even that is subject to the constraints that comprehensive income after tax underwriting profit has to be higher than comprehensive income. But, given our position today on positive return on the portfolio, we're well in position to that. Now, that variable dividend, just as a reminder, is one-third of after-tax underwriting profit then multiplied by the gain share factor.

And if you're to actually calculate where we are through the end of June, that dividend through the end of June is about $0.31 and that's purely calculable. But, obviously, the second half of the year would factor in, both in terms of underwriting profit, as well as the final gain share score, would influence that final dividend. The component pieces we've articulated as sort of set.

What we do in terms of any other activities, whether it be share repurchases or, in the past on occasion, we have used special dividends. It's a function of both our aggregate capital position, needs in the business, share repurchases would our assessment of the market value of our stock versus our own internal assessment of intrinsic value. And, if we think it is a good buy, we will make share repurchases. You see those.

We don't forecast. We don't say, here's how much were going to buy over the next year. Obviously, you can see it each and every month in our news release. And then, if via the vehicles of capital generation exceed variable dividend share repurchases and we still think we have more capital, then we could consider special dividend again, but, as of right now, we have not discussed that.

Okay. Thank you.

Bob Glasspiegel, Janney capital.

Before we go to that next question, I want to -- I should correct something I said. It's -- comprehensive income has to be higher than after-tax underwriting income. I think I, inadvertently, reversed the order, so I want to correct that before we leave the call.

Thank you. Glenn, you're talking -- good morning. You're talking in terms of stable pricing over the near-term environment and stable results. The personal ends auto cycle has just been a lot more stable than I've seen in my 30+ year career, where you and Geico and Allstate are earning attractive returns and attractive margins.

And, it's sort of an orderly competitive environment, where market share swings aren't that dramatic, and your direct business is growing; your agent business is struggling. And you're, in total, growing slower than you have over your history. Why is this going to change?

Do you agree with my characterization of the environment that this is just a lot more stable business than it's been? Are we possibly in an environment where what we see over the next couple months is what we're going to see over the next couple of years?

I think I would largely agree with your characterization except for the last part. Not that I disagree with it, I just don't know. You've seen this business as long as I have, and there are times where, frankly, you think you're in a stable environment. We've gone everything from very rapid trend increases to deflation periods or slight deflation in periods, so I don't know.

I think what you have to do is step back a little bit and ask two things. What are happening environmentally to the industry that's outside of our control, and what are things we would do ourselves relative to things that are inside of our control from a growth perspective. I generally agree with your premise and then do that.

External, I think we addressed that, at least some of the things that have to be on everybody's minds and they're appropriate to be on everybody's minds, the whole vehicle technology cycle. I mean, do I expect frequency to come down? Yes, I do, but I also expect that we will see opportunities to ensure things and act differently than probably we can even predict today. So, I think there is a strong vector of change that would suggest certain aspects of vehicle technology are going to produce lower accidents.

Fine. That doesn't scare me as much as I think it scares some other people. I think that will have some consolidating effect on the industry, but that's to be determined. What we have to do is think about our strategy, and I think our IR meeting was at least a significant portion of that. So, our strategy: we want to find ways to almost be disruptive in the rating stability. And not necessarily any aggregate rate, but ultimately lower levels of segmentation.

And the best address of that, and I think the reason that [Josh] asks the question each time is that by taking data from the vehicle, which is directly related to my first comment of vehicle technology, we think we see Progressive being a leader. We think we're geared up for it. We think it's in our DNA to find ways to segment driving behavior very differently than we've done before. And, ultimately, in a way that is smaller segmentation, more accurate segmentation, and, quite possibly, disruptive, and that we believe will play to our advantage.

The second major thing that we do that is for growth, we really outlined in our third era comments and a lot of what were doing now. And some of it is at very different stages, so we're far from mature on these types of things, but as we've grown, and you've seen our growth, through certain segments of the market, we've attained some pretty healthy market shares. Now to grow, we want to grow in other parts of the marketplace where we weren't historically strong, and we're starting now to say, to be strong, we need to complement our product offerings. And you know what we're doing there.

But, that's not a little once in a while, we'll do it for year two -- this is a major repositioning of the Company without leaving behind the things that we're already strong on. But there the growth will no doubt get slower. But when we enter a part of the marketplace that we haven't been strong, we've been very clear to say, we don't have strong market share, don't even have low market share in some cases.

We think we will be a very credible offering when we come and are starting to come to market with strong PHA partners. There are opportunities for us to get even stronger in that bundling. We announced the renters product, which is certainly not a premium play. That is a play to primarily get consumers, and start to get that attachment point that we believe will be right for a group of customers that will be coming. The sort of customer who can stay around for 20, 25 years.

So, those are our two biggest parts. We could go into more detail, but we see our growth opportunities by continuing not to float along as it was yesterday, but to challenge the opportunity to segment a much more aggressively. And, at the same time, be able to provide the products that allow us to go deeper into that insurance journey of our customers that are more likely to go into that insurance journey and ultimately become a significant part of the market for the customers that we call the Robinson's.

Well, very thoughtful answer. Glenn, if you -- and, Progressive's competitive position is strong and the returns are great. The one, sort of, missing piece when you roll it all up is the growth angle. And you're growing where you want it, and stable where you want it, but when you roll it all up, Progressive's going to be generating growth numbers that are way below what, historically, the company has given.

Does Progressive have the DNA to continue to execute the strategy like you suggest and report in mid-single digit top line growth if you're environment just stays in a stable scenario?

I'm going to answer your question a little bit differently. At least as long as I'm in this role. We have the DNA to keep thinking about what the hell it is that's going to drive us to higher growth in the future.

I don't panic when the situation is the way it is, but I sure need answers as to why we will proactively be able to drive and be a catalyst for different numbers in the future, and I think we've outlined that. The fact is we're going to grow in -- we don't have to extract more out of the sectors that we're already strong in.

We, of course, want to keep that at the current or better pace, but I feel terrific that we're really being a almost a new entry into a 40% part of the marketplace. We've a strong brand, strong product and starting to associate with the right kind of products that we'll be able to play in there.

Great answer. Thank you, Glenn.

Michael Nannizzi, Goldman Sachs.

Thank you very much. So one question I had if I could. We've talked a bit about growth broadly, maybe drilling down into the agency business. If I recall you took some rate in maybe early part of 2013 to make some adjustments, and we saw new applications fall (inaudible), which makes sense. And, I think you've talked about that rate activity moderating recently.

We haven't really seen the new apps reverse or an inflection in [PIF]. I'm just wondering, am I reading that right, maybe I'm not, but if I'm not, then maybe you could help me triangulate what I'm missing? Thanks.

Yes. I think I can help there, and if I don't, and if I waffle on too long, you can redirect. But to Bob's previous discussion, that was more of a longer-term so let me flip a little bit to a different timeframe. We even took some rate earlier this year, in agency channel in selective states. So we're always taking rates, so it's very hard to characterize Progressive nationwide versus specific states, but we'll try to do it in a meaningful way.

Here's my assessment: I'll do current environment. I'll do some very short-term responses. I'll do some what I think are slightly longer-term responses, and then sort of overall positioning if I can think about it that way.

My assessment, I wish, one of the things I wish I had all through my career is the real ability to know what same store sales were like. I don't know, with any real precision, exactly what shopping behavior is going on. We have seen, I think, extraordinarily well intending proxies and different groups coming out, whether it's credit reports or Internet traffic or whatever it might be. Sometimes they're even conflicting, but they're all well intending, but there's no perfect proxy for shopping behavior.

My assessment right now is it's relatively flat in the agency channel. I get there based on the quotes that we're seeing, which are relatively flat. I get there based on comments that we and others have made that they're seeing reasonably favorable retention in their book. So, if they're seeing reasonably favorable retention, then you could assume that there's not an increase in shopping behavior.

Our sales are down. There's no secret about that, and that is if you have to say, tactically, what are you worried about right this second, agency growth. No question about it. It's on your mind, it's on our mind. Why is that?

We are the largest player in that channel. It's well known. And two or so of the other large players in that channel are clearly confident and want to increase their growth, so they have come with new product, new propositions to agents, and that's not the first nor the last time that we will see it or they will see if from us. So, that's the spirit of competition, and we know there are things out there.

I'm not going to comment on others, but yes. It's very clear that we are getting the same number of quotes and we're not getting the same number of sales, so it's not hard to do that math.

Short term. We've got some responses. There are some product responses that we'll do. Not going to go into the little nitty-gritty detail, but there are sorts of things that probably will have some affect. I don't think you'll see a dramatic change, but shopping discounts relative to the timing of when someone shops with us.

A few situations with age of vehicle. There are things that we can do in a very short period of time. There are also some bill plan restrictions that we put on when we saw the market conditions in a couple of states, a little differently in the early part of the year than what we see now, so we can adjust those.

John Saurland has probably more at the prior meeting, by giving you some insight into the fact that we are doing some degree of underwriting filtering. I bring that out because Progressive is much more of a, we find a rate for everybody, but unfortunately not everybody is buying insurance for the purpose of insurance, and we want to make sure that we can filter out those.

We've underwriting filters in, and we would say we are relatively pleased with the use of those underwriting filters, but also be assured, like everything else, they have a sense of evolution. We have to fine tune them, and there's some fine tuning that we can do.

Those are some of the short-term actions that we are likely to be able to do -- not likely, we will do -- and on top of that, we will do the one that never seems to fail to work either against us and sometimes even for us. We will provide agents with some degree of incentive to reconsider their positioning with Progressive. So we'll do some agent incentives where it makes sense to do so.

And I guess, the competitive [answer]. You mentioned a couple of other competitors. Are seeing the impact of competitors reformulating products at a lower price point? Have you seen the impact of that manifest in that quote to bind? Is that what you -- I guess you don't know for sure, but is that a supposition at least here recently?

No. We don't know for sure. We can track, at least -- well, if not for sure, awfully close -- so we will take -- and let me be very clear here I like to talk about Progressive, not other companies. We will take a sampling of our distribution of agents with a certain competitor and without a certain competitor, and we'll see the growth rates with and without. And, we will look at their results, and we will see what their new business production is and recognize with, at least the size of ourselves and a couple other players in that channel, if the aggregate's not going up, then there's a little bit of shifting.

So, I think I was trying to be very clear there to say that, yes, we think we're losing some that we were previously getting through actions being taken by others. Again, not the first time or the last time we'll see that. Don't expect us not to fight back.

Gave you some short-term stuff, some long-term stuff. And, we always talk about this, but we're not as -- perhaps we don't name them as much as some other companies. Our R&D efforts are always ongoing. We are currently doing things that will have a new product release as we continually have product releases that are addressing more of the preferred customer or the Robinsons as we're calling them.

We're also doing some things in our customer service environment to make sure that we have customer service that relates well to the, let's say, Robinson customers, and I already touched on these before, but the renters product, that is not something you can sit and say, you'll see the results next week. We've rolled it out in Ohio. We're happy. We'll roll it out in Pennsylvania; our PHA will double our agents.

So there's a series of both short-term and long-term actions that we'll take. And, not to be to Pollyannaish about it, but we tried to show you at the IR meeting that we have effectively, in that channel, the lowest expense ratio. We believe the lowest loss-adjustment expense. We believe segmentation -- and when I say lower segmentation, I said that before, I mean more detailed segmentation, more granular. We, in our own assessment, don't feel like we give up anything to anybody there.

So it's an awfully hard combination to beat with the one caveat on top of all of that that we have an expected margin for ourselves and for our shareholders that we don't compromise. But, we think we're extraordinarily well-positioned on those macro factors for a long time, and with a combination of the adjustments, product design, I feel pretty good about the future.

But there's no question were losing something in the last quarter, and we'll have to see how those sort of things go. And we'll talk very openly and honestly in the third quarter, but don't assume we're not conscious of it and trying to do something about it.

The only other thing I'd add, just to give some context, the time period you referenced. We raised rates a fair amount in the second half of 2012, and that was in agency channel. We also did it in some in directly in agency, and that was more on the magnitude of 6% to 7% in terms of aggregate rate change, and that, obviously, slowed growth in the last half of 2012.

We started to rebound, particularly in the agency channel, at least on a year-over-year basis in terms of new business growth towards the last half of last year. This year we've raised rates in agency between 2% and 3%, so it's not nearly the magnitude that we did in 2012. It's keeping up with loss trends, severity trends, et cetera. But, in 2012 when we raised rates that much, we, also, not only saw a decrease in the new business, but we also absolutely hurt our retention.

And the 2% to 3% is much more manageable in terms of effect on the retention. And while PLEs are growing more so in the direct channel than the agency channel, the 2% to 3%, we want to keep rates much more stable as opposed to the large swings or larger swings that happened in 2012. I think we can accomplish that.

Yes, I just, I guess -- sorry.

No, go ahead.

No, I was just thinking the new [app] being you flipped negative again in the second quarter, despite what would look like easy comps in the second quarter of 2013, so that's a piece I was just trying to turn -- because it sounds like all that makes sense, but it just sounds like you didn't see that, maybe, the response that you might have expected from more moderate rate activity --

I think what we did see is we saw a drop in our conversion. But, I think we also saw a drop in conversion, more than we might expect just due to other competitor rate activities in the marketplace. So, it's not only what we did, but something things that other competitors have done. And, as Glenn mentioned it's a competitive marketplace, but long-term we can compete in that marketplace very well.

Got it. Great. Thank you. And it -- I'm sorry, Glenn.

I was just going to throw in something, since we're talking about the agency channel, not to forget our commercial presence there, which really is a big help in lots of different ways, even if it's not the biggest chunk of the premium. And there, I think I tried to comment in my letter that we really have had to take some pricing actions specifically in the -- for higher segments specialty and so on and so forth.

We really have a good outlook on our current price levels. We may have even over reacted in a couple of places relative to some part, more of a smaller business auto and contractor segments. We think we've got those all adjusted now.

So that's also an opportunity to make sure agents are feeling more comfortable with another product from us that has a good rate level. And we're looking towards seeing a little bit more growth come in in the commercial sector, having gone through a fairly significant adjustment period there.

Actually -- the last question I wanted to ask was on the commercial markets. So, it sounds like you've taken rate action there.

How are you feeling about the action you've taken, and whether competitively others are following suit? And, are you liking that market in terms of positioning for further growth at this point? Or are you a bit more cautious just given the trends that you've seen recently? And thanks for all the answers; really appreciate it.

Actually I'd give you -- the answer is I'm liking it a more, and if I told you the answer at the end of last year or even into the first quarter, I would have been more hedged on it. We were seeing a fair amount of volatility.

We took fairly significant rate action over a reasonable period of time. Anytime you take that much rate, you have affected mix, you've affected all sorts of things. We've gotten into, in the second quarter, a little bit more of a stable mix. We know what's coming in.

We realized, as I said, we possibly over reacted a little bit in some of the sectors we've been historically very strong in. We've actually taken small decreases there and feeling actually very good as is the general manager and the product managers of the commercial group. And they're intent on getting back to where we just historically have been, as always a nice profitable grower in that sector.

With regard to competitors, there have been a good number of comments made. It's always hard to totally reconcile them. I think we're maybe a little ahead of the pricing actions that others are starting to think about taking or have recently taken.

The other thing I would mention relative to commercial lines. Reserving has been a challenge, but I think we feel much better about our reserve accuracy and levels now. In the last -- prior to 2014 -- in the last couple of years we had had unfavorable loss reserve development in commercial lines.

So far this year, we've had a small amount of favorable development, which is fine. And, given that business limits profile, et cetera, there is much more volatility in it, but from a reserving standpoint, we feel good about that, and that helps the product management folks, product managers, general managers help in terms of setting the right rate levels. So I think we feel good about that.

Great. Thank you so much. Sorry for taking so much time. Thank you.

Vinay Misquith, Evercore.

Hi. Good morning. I have two questions. The first is a two-part question. In thinking philosophically about the agency channel and [PIF] growth there, looking at your expense ratio of 20% and what [appears] roughly around the [23, 24] mark.

Trying to figure out why Progressive would not be winning more business in an environment of competitive raters because I believe all the business then gets more evenly [shopped]. So I'll be missing something. So that's the first part.

In the second part is, we've seen a preferred auto company just report with a 2% growth, so they're getting 2% growth, curious as to why Progressive can't move the dial on the agency side a little bit more? Wondering if you're having a harder time in the preferred segment? Thanks.

Okay. You know what, I almost have the same question as you do sometimes, as why with the lower expense ratio, why aren't we winning.

Let me just suggest to you without overplaying things that I can't possibly know, we do business with many, many thousands of agents. I'm sure they all have different issues but there are commission issues that sometimes help with the placement of business. There are other products that sometimes are influential, so while they have access to the comparative raters, I'm not necessarily saying that they are always going to -- and certainly they would tell me -- they don't always place at the lowest possible price.

What we've got to make sure is that we're not only the lowest possible price, which we're not all the time, so let's not assume that even though the expense ratio at the macro level gives us that opportunity and over a long time, I'd bet on that. But certainly, when you take segmentation and you take individual price, you're going to see a wide range of prices from carriers in the marketplaces.

And then, again, we are very clear about our margin requirement, and I can't speak to others. So the comparative rater is certainly an issue, and those with ultimately long-term low prices will work. I don't know that necessarily means, necessarily, that we or anyone else has to be the lowest. We have to provide product that sells, and we believe -- and we talked about this to some degree -- we believe that now we have a commission level that is highly reflective of what we see as the macro cost of acquisition regardless of channels.

So we have tried to keep our acquisition cost, at least at the macro channel level, roughly equal between direct and agency, and we think that that's actually, long-term, the best possible thing we could do to allow the agency channel to continually be, not only relevant, but competitive with any other channel and allow it to be the consumers' choice of how they shop.

With regard to preferred, you know, that's just, do we think we can move the needle? Absolutely. I mean I said it before in the answer to Bob's question. This is an area where it may be harder for many of you to think, but this was not a space that we really, really played in with any great intensity.

We have taken stock over the last several years -- it's not like a one-day thing -- of what do we need to really play? We got many of the things right. We started into, specifically, the agency channel with a homeowners offering, but it wasn't the right match and that doesn't necessarily mean anything bad. It just wasn't the right match, so we regrouped on that, and now we feel after some significant period of evaluation, not only do we have the right match, we may have just the best possible match that we could find.

So, our outlook for the preferred in the agency channel: A: there's a lot there; B: it's hard to get; C: we didn't really have all the tools; now we think we have. And, just because we have all the tools, doesn't mean we're going to displace others overnight, but I think we're going to give agents a really viable alternative.

And one of the things you may or may not have heard me talk about is I don't want to go with just the same product that others have. I want to feel like the product is designed to -- almost as if the consumer was thinking about how a product might be designed, so things like single deductible for property claims that involve the auto, things like that. If we can make a better product and give that to the agent, the idea of the fact that it comes from two different distributors but working very closely together, I don't think will be an Achilles' heel at all.

That's helpful. Just a second question. Was wondering if you could comment on recent share sales by top management? Thanks.

I think that involved me, but I didn't quite catch the question.

Yes. So, there was a significant amount of share sales -- (multiple speakers).

I seriously didn't catch it; I wasn't trying to avoid it. Happy to do that. Never fun to talk about yourself, so let me try and give you what I think is the operative issues.

We had a situation here mid-year -- and someone else can give you specifics -- where we had, what I'll call, three tranches of performance-based stock coming due. It was actually two, but one had a multiplier on it and that multiplier was at the max.

So, here I have an event that actually all happened, essentially, at exactly the same time. I'm not going to be defensive here; I'm just giving you the facts. You may, if you go back and look at proxies, you'll see I haven't changed my cash compensation in well over 10 or 12 years, don't intend to. I take everything on a performance basis, so I'm paid in equity.

Here I got a situation that, frankly, it precipitated with a short note that told me how much I had to pay in taxes, and I have consistently kept an extraordinarily high amount of Progressive equity, in fact, to the point that most people think I am making a big mistake just because it's so concentrated. I am extraordinarily happy with that.

I bought all of my options that ever came due over a long period of time, so I had X amount of shares. I was forced to meet tax obligations to sell something. That was the precipitating event. What I decided to do, with a little bit more discussion than I had planned, was to keep my holdings in Progressive, which are over 4 million shares and another 1 million outside are in a unvested situation about level. And, I think you'll find that what happened with this transaction pre and post, my holdings in Progressive are about the same.

I want to make one other point just from the issue that this would come up with regard to confidence. By far, the majority of that, over 3 million shares, 3.2 million, I think, are in a deferred account, so that is my commitment that Progressive is going to go strong for a long time after I'm not here, and that's paid out over a ten-year period and is not changeable for any other investment instrument.

So, I would tell you not to read too much into that. Frankly I had to sell something to do something. I sold a little more than necessary. I decided just to stay stable.

I have a requirement from the Board to be at about five times my salary. I'm looking round to see if that's the right number. I haven't looked in a long time. In equity, I hold somewhere between 100% and 200% of my salary in stock. Hopefully that's all I need to say about that.

You know, I didn't mean to be disrespectful, but this is really great color, so thank you very much.

That concludes the question or comments?

I didn't mean to shut things down. (laughter)

Ian Gutterman, Balyasny.

For a second there I thought I wasn't making it. I guess, first, Glenn, a couple of follow-ups. The earlier question on BI severity. I was just -- since I looked at your report today comparing your comments about 3% to 4% versus there's and they're about 1% for the half. And I'm certainly not asking you to explain their results, but just curious if you feel that your BI severity is running either higher than you had anticipated or higher than industry? Or is there anything that makes you feel that that should be coming down going forward or that you're struggling with anything?

No. Actually I would actually be happy that someone else is seeing something a little lower; might be foretelling of the future. Our mix in our profile of limits are always going to be a little bit of a factor there. That's a moderately significant difference. Gary, do you have any insight as why that -- ?

Yes. What we see on industry data, we see BI severity in the 2.5% to 3% range, so we feel that we're fairly consistent with what we're seeing with respect to the industry.

Got it. Got it.

The one thing I didn't comment on in my letter was PIF, and PIF it can be, obviously, very important, so it's not BI, but it's the same range or same medically driven issue. And in PIF were seeing, with eliminating comparisons, a [4] to [5] trend in PIF. And, probably, for those who are close followers, Florida is always a very interesting PIF state. We're starting to see in Florida some of the actions that John Saurland had outlined with regard to underwriting.

We're starting to see the frequency of PIF claims that are submitted within the first 60 days actually come to a level that we would think is more normal. So we may have actually filtered out the sort of things that are driving overall PIF costs, it's not a severity issue but a frequency issue, so that we're able to keep the price right for everybody who intends to keep the coverage. So, generally, we're seeing good things in our PIF, and I'm (technical difficulties) nothing extraordinary as we look at our claims auditing process, we're not seeing anything in BI that is overly concerning.

Got it. Helpful color, thank you. On the question on the investment changes, can you tell us what your new money rates are right now? And also to the comment that part of high cash is, essentially, sounded like waiting for rates to go up -- sort of what you would need to see in the environment to make the deploy?

Is it just the fifth starting to raise rates? Or is it -- are we a couple hundreds [bips] from you guys wanting to deploy that? Just some sort of sense of what make that come down over time. Other than, like you said, the debt (inaudible) that are a temporary factor.

David, why don't you take a shot at that.

Sure. New money investments on the quarter -- this would include treasuries and non-treasuries -- we're in the [$2.3 million] range, pretty wide dispersion around that. But, that's on the fully taxable equivalent basis. And on getting more aggressive in investments, we're absolute in relative value investors.

I don't want to prejudge the ultimate destination for rates, but it feels good to take less rate risk here. Economic data and balance has been strong since the first quarter, as we get closer to the end of the fed taper in beginning of the rate normalization process. The market will begin to discount that reality fairly aggressively, I think.

And risk premiums on non-treasuries are awfully tight, and so we're just being patient waiting for a better set of opportunities.

That makes perfect sense. And then, Glenn, if I could throw one more in about marketing ad campaign. I'm just curious; any new thoughts on direction? Does Flo feel tired at all to you? I know you've, obviously, experimented with a couple of things over the past two, three years that haven't necessarily taken off.

When I think of the large competitors, they get something really popular or push it hard for a few years, and they get off it, and come up with a new thing. You guys haven't really taken that strategy. I'm just wondering if there's any thoughts about that?

Yes.

Whether it be changing Flo or adding something new as a second program, either way.

Somewhat both. Flo, we measure, you can reasonably imagine -- and we've shown you some statistics from time to time. But we measure a lot of them. We show you a few. We have no reason, statistically, to think that Flo is wearing or wearing in a way that is negative, so expect to see Flo for some time to come.

That doesn't mean that you should also expect to see some ads that don't involve Flo, and you may see them that are in the same general setting as the super store. Think of that as the white background store, which sometimes we take a great deal of liberty on, and it might show up as a changing airport or a living room, so there's leverage of brand equity in the super store. There's, clearly, brand equity in the character of Flo.

You'll see both of them developed individually and together, and you will see some things that are quite different. We did share with the investor relations meaning what I'll call is much more of an overlay. It's not a scream out and say, come by our product right away. And that's what we call the thread campaign. The feature is the apron.

And, again, keep seeing all the brand linkage between super store, Flo, the apron as an icon. We tried to do what we called rate suckers, which was really a way of demonstrating that in snapshot, you may very well be paying for other drivers and that unless you try snapshot, you don't know that. That campaign was actually okay. It wasn't necessarily break out, but it was okay. And it gives us greater confidence as to the type of things we want to move to.

The bottom line is Flo and super store work really well. We do not want to make it so one trick pony that we don't have a balance, and you will see a balance in our commercials. You'll also see us take Flo in different directions. But, when you've got something that absolutely is working -- because I can certainly give you another company that's used something for quite some time and continue to get benefit from it -- so, there's a great deal to be said for a brand that has instant recognition, and in this day and age -- I'm probably answer the question longer than you want me to -- but with so much of TV other than live sports being watched on a delayed basis, you've got to be really conscious of fast-forwards, and when you've got iconography, color, those sorts of things absolutely matter. And we want to make sure that people know that we're out there advertising and wanting their business. So, we're actually quite happy.

Expect to see Flo; expect to see other things as well, as we will never want to get to a point where we are not well-prepared should something show some different consumer reactions. If Flo and super store were not to resonate as well, we, clearly, will not be waiting for that time to develop new ideas.

This may be a suggestion, Glenn, as much a question, but I guess what I was pondering was as you're trying to move from the Diane's to the Robinson's, Flo, maybe, is more of a Diane-type campaign, and I wondered if there needed to be something new, whether it be new characters. Or, if I can be cheeky, Flo gets married and becomes a Robinson. Or whatever it might be. But something that's sure to signal that second track of the company you're trying to launch.

We'll take all ideas. We're just not going to pay for them per se if that's okay. (laughter)

That's okay. Alright; thank you so much guys.

Meyer Shields, KBW.

Thanks very much for fitting me in. I just wanted to follow-up, to get a sense of the really strong underwriting profits and commercial lines over the past few months and how that's likely to play out in near-term?

Yes, they have. In fact, I think the easiest statement there is the rate increases that we took really did stick. And what I mean by that is you can take rates, but if it doesn't ultimately flow through to your average earned premium, then it hasn't really stuck and you've driven away customers and so on and so forth. So, we've been lucky enough to actually see those rate changes flows through to average earned premium and losses have come -- those that are not with us and those that we didn't think we had the right price for, they're not with us.

And the losses are much more in line with what we expected, and, as I said earlier, we may be at the top end of what price we need for that sector. And we expect good profits from commercial. Let's not be bashful about that. We're probably see something right now that's certainly on the good side of normal.

Okay. Thanks very much.

That concludes the Progressive Corporation investor relation's conference call. An instant replay of the call will be available through Friday, August 15 by calling 1-866-403-8766 or can be accessed via the Investor Relations section of Progressive websites for the next year.