前進保險 (PGR) 2014 Q3 法說會逐字稿

Welcome to the Progressive Corporation's Investor Relations conference call. This conference call is also available via an audio webcast. Webcast participants will be able to listen only throughout the duration of the call. In addition, this conference is being recorded at the request of Progressive. If you have any objections, you may disconnect at this time.

The Company will not make detailed comments in addition to those provided in its quarterly report on Form 10-Q, quarterly report 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. Acting as moderator for the call will be Matt Downing. At this time, I will turn the call over to Mr. Downing.

Thank you, Carolyn. And, good morning, everyone. Welcome to Progressive's conference call. Participating on today's call are Glenn Renwick, our CEO, Brian Domeck, our CFO, and Bill Cody, our Chief Investment Officer. The call is scheduled to last about an hour.

As always, our discussions on this call may include forward-looking statements. These forward-looking statements are based on Management 's current expectations, and 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 annual report on Form 10-K 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. That document can be found via the investors page of our website, www.Progressive.com. Carolyn, we are now ready to take our first question.

At this time, we are ready to begin the formal question-and-answer session.

(Operator Instructions)

To allow the Company to respond to as many callers as possible, you will be limited to one question one follow-up question per request.

(Operator Instructions)

Michael Nannizzi, Goldman Sachs.

Thank you. Just one question, Glenn, to start out. You talked about the personal book outside of auto, and that was running at a comfortable margin -- implied that it was running at a comfortable margin. Can you go into a little more detail in terms of what you're seeing out of the non-personal auto book? And, what we should expect from that as you continue to likely grow that business? Thanks.

Michael, you're referring to the special lines business?

Correct.

Yes, okay there's two outside of auto.

Not commercial, yes. (multiple speakers)

The special lines business, as you know, is just a great business for us. And, this year -- every year has always got a story with it. This year was just a little bit surprising in the sense that the loss ratios ran a little softer, more favorably to margins. Pretty much through the entire seasonality of the line. So, it's really hard to put a single issue -- sometimes weather makes a really easy explanation. But, I would just say there we actually had some nice favorable margin results.

We don't necessarily think those will be reproduced. We feel good about our pricing, but it certainly also gives us the opportunity to be more stable with those rates going into next season. And, as I indicated in my letter, while we're very, very happy with the Business, we still think we can actually grow its a little faster than we've been growing the last couple of years. We've got the right rates to do that so overall it's a really good story there. I'm not sure if I'm addressing your question.

Commercial is a different story, and I think this is one where perhaps a little bit more what I'll call the classic play -- at least we try to make it a classic play from Progressive. We get ahead of rate at least as early as anyone in the market place, we think, and commercial clearly started to see some trends. John Barbagallo gave you some insight to that the Investor Relations meeting. Some of which, frankly, we did some misses on so we got a lot of that cleaned up in late 2012 mostly in 2013 with some rates. Better understanding of some underwriting requirements, and it was, for that period in time, mostly all hands on deck to get the profitability back to where we needed to so that we didn't get out of control there. That's really happened, and to some extent, as you can see in the results that profitability has come back very nicely. We're very comfortable with that. There is probably a very few places we're not interested in pricing away the margins that we have unless there's some very good reasons to do it, but there's probably some areas in our traditional sweet spot of commercial auto, which would be business auto and contractors, where we've actually got some results that we think there is room for movement there to be able to get a little bit more growth into the season coming up as we start to get into the new year. We're making adjustments as necessary, but they're pretty much fine-tuning type of adjustments.

The bigger issue on the competitive outlook there is that at least our view what we see is the market is starting to harden so the price actions that we took in anticipation of many of the real trends -- yes, we made a couple mistakes as well. But, many of the real trends that we priced for seem to be emerging for others, and for us that has resulted in a stronger third quarter, and we hope that will continue into the fourth and first with regard to unit growth. So, the outlook on commercial really is to fix the problems, and now it's actually nice tuning and getting ready for some growth, and frankly, it is a good part of our business. An exciting one. Special lines is under great control. We'd just like to grow it a little bit more. We think we've got the rate level to enter next season set very well.

Great, thanks. And then, I guess talking about the agency channel a little bit. I know you made a few comments in your letter. What about Snapshot there? You've got one state at least where you are making some headway, but is it possible to offer like a reward or something to the agent specifically for integrating Snapshot? I would think that from their perspective that price is going to be very competitive for the drivers that select that product. I'm just curious, what efforts have you made, or what changes have you made this year? Do you anticipate to try and address either via Snapshot or outside that you haven't already undertaken, or you had to undertaken in the past? Thanks.

Good, we appreciate that question. Yes, I did make some comments. There shouldn't be any ambiguities to how I feel about the reductions that we have seen in new business applications in the agency field. And, while words are just words, the most important ones is we should never be underestimated there. We have a lot of changes that we're planning to make, and I did state they won't change overnight.

Let me focus on your Snapshot one to make sure I answer your question. And, I'm going to tell you ahead of time I'm going to be a little more obtuse than I'd like to be simply because we're hitting at a time where we're just starting to come to market and explain to others. So, this is not the format to do that about the change, but I've indicated, I think, in at least maybe the last call and in my letter that we took some changes into the Massachusetts marketplace with Snapshot. I'm referring specifically to agents here, and they impact were very favorable to us. We will release a new version of Snapshot that will be released into the marketplace late this year. December 5 is the first entry, and then, into next year. Let me just spend a little time on that because I think it's important.

With the amount of data that we've been able to get now approaching 12 billion miles, we're able to do something that I consider very, very important. We're able to clearly confirm that it is an explanatory variable that can't have a proxy from three or four other variables. However, we can start to create a reasonable estimate of certain groups that we would expect to get a discount. And, to the extent that we can approximate groups that we would expect -- in this case, the expected value of the discount to be within a range, we are prepared statistically to move that forward in the point of sale process. And, that is largely a big part of the design that will help agents ultimately have an even more attractive price at point-of-sale for those people that we think will benefit from the specific driving experience as we relate that. Again, it's an independent variable, and it explains things on its own. But, we can do those true-ups, but we will be able to make intelligent estimates based on the data that we've got to date of trying to move that further forward in the process.

I'm not going to say a lot more about that until we've had a chance to roll that out and talk with agents and others that are effective in that process, but it's pretty exciting. So, while we always knew the discount was there, it's even more exciting to be able to say I think within some reasonable certainty I can actually give you part of it now and part of it later. And, that sort of hedges your bet. There's a true-up process that can happen if it's not perfect out of the gate, and we're not suggesting that it will be perfect out of the gate. But, that's the purpose of having the six-month monitoring period.

That will, in my opinion, change a great deal of receptivity for the agent so it's a little different than your suggestion of perhaps incenting the agent. Ultimately, we think long-term the better price to the consumer is what ultimately wins in this environment. It is what the agents want, what we want. It's what the consumer wants. We'll work primarily from that perspective although from time to time, we will do things that create a little incentive program. We've actually just come off one in the summer for our agents, and those are not out of the question, but it's not what I'll call a primary play.

Great, thank you.

Cliff Gallant, Nomura.

Thank you for taking the call. I wanted to ask about the jump you saw in PIP that you noted in your 10-Q. I think it was a 17% jump. Do you have any insight as to what might be driving that?

Yes, let's maybe, Gary and Brian will provide more detailed insight into that. It's absolutely correct to see that jump off the page in the Q. It was put there to give you certainly a first indication of the volatility of this type of a coverage. I think we've discussed that on many occasions. I will say that this one is going to be just a little tricky to totally explain because as you know Florida only a year or so ago was implementing house Bill 119. There are some changes there as the market evolves, as our procedures evolve relative to what is an emergent medical care. Obviously, the real obvious ones of broken bones, lacerations, emergency room and so on and so forth are fine, but there are some others where it is not as clear.

So, those things are settling down in the marketplace and it may be that the denominator last year was a little different than what the real run rate would be so again percentages can be misleading. Michigan had a rough third quarter from a weather respective and probably had a slight difference in trend in that quarter than it had for the year-to-date. All I'm doing here is just giving you a sense of we'll always tell you what we see. But, in this case, it's a convoluted picture, and it very much commands our attention. But, maybe Gary and Brian collectively can give you a little bit more insight into the actual trends.

This is Brian. I'll try to give a little bit more color, and then Gary can fill in if necessary. I think there's -- I will try to break it down into various component pieces. Certainly as Glenn mentioned, on a quarter-over-quarter basis last year we actually had reported that PIP severity was down 4% which is served -- not necessarily the norm for the PIP coverage to see severities going down. But, some of that was driven certainly by the regulatory changes in Florida. But, last third quarter was a lower than norm severity.

Another component piece is some of the aggregate PIP severity is explained by geographic mix differences, and the PIP coverage varies greatly by individual states. The limits are not the same, et cetera. So, geographic mix composition makes up some of it, and for example, we are growing more and faster in downstate New York area, southern Florida, and also in Michigan. All of which those geographies tend to have higher severities within their -- Michigan just in general. And then, those geographies within those states. Some of it is explained by geographic mix changes and where we are growing, and then what you might call the underlying severity trends. And, it varies actually again a little bit by jurisdictions. In some jurisdictions, we are seeing more billing per feature. And, in a few of those jurisdictions, we are actually seeing the charge per billing going up.

We think the aggregate of those underlying severity changes is more in the 7% range. So, higher single-digit ranges. That certainly has our attention. It is higher than have been recent trends, but that is how I would describe the various components. Some of it is the low denominator. Some of it is geographic mix, and then some is the base underlying what we would call base underlying severity trends.

It differs a little bit by jurisdiction, but certainly anything going up of that magnitude has our attention. We continue to dissect it. Product managers for the individual states as well as claims organizations in those states are paying great attention to it, and we're ready to react if we were to see these trends continue. But, I wouldn't say 17% is the underlying severity cost. I would say the underlying severity costs are more in that 7% range, high single digits. Even that is high so it certainly has our attention. I think the 7% more closely probably approximates more our [severity trends] that we're seeing in PIP that is how I would characterize it. Gary, if there's anything you want to add?

This is Gary Traicoff, Chief Actuary. I think Brian gave a nice summary so nothing to add to that other than we think probably in that 7% range is what our true underlying cost is.

For those long-term followers of Progressive, the one thing that certainly has been a consistent statement we've always made is that PIP can truly be volatile, and while the run rate might be considerably less than the 17% and it's all a matter of your starting point -- all that sort of stuff. This certainly was not so much a wake-up call because we're always watching it, but it is certainly one that we'll be watching a great deal because PIP can get volatile quickly.

And, just since we are on the topic of PIP, I would say the other thing to note is that while PIP frequency in aggregate is down, there are some jurisdictions, principally Florida, where we are starting to see an increase in PIP frequency, and that covers all the geographies throughout the state for the most part. PIP is very much a state-by-state view and different outcomes in each of those states. But, Florida, from both the frequency going up as well as seeing severity going up as well as the changes that are in the marketplace as a result of hospital 119. Florida very much has our attention these days.

Thank you very much. That was a thorough answer.

Josh Stirling, Sanford Bernstein.

Good morning. Hi, Glenn, thanks for taking the call. I think you did a great job of being accurate but obtuse on the first question about your Massachusetts product. But, I wanted ask you a couple of follow-ups if I may on that. So, it sounds like we're going to get a new version of Snapshot, starts going in December 5. When do you think we should -- when should we expect this to be rolled out nationally? Is it -- are these going to be agency-only changes, or do they go into direct? And, I'm wondering -- I recognize you are going to be circumspect about this. But, what can you tell us about what you'll be looking for? For this to do to quote, volume and close rates for making the switch to the product?

Yes. Let me see if I can hit most of those. Both channels, so the changes will reflect both channels. Some of the changes are the sorts of things, and you certainly have had at least as much interest in this as anyone so you'll appreciate it. The algorithms are always, always maturing.

In fact, I will be obtuse here in terms of what we're looking at, but I get -- it just feels really cool to me that we're now able to look at things that would have seemed totally ridiculous to think about a few years ago. The kinds of things that we can see in the data. The regularity of certain behaviors. Certain behaviors that we wouldn't necessarily have even dreamed about a few years ago. We now actually can see and test those hypotheses. So, the algorithm is just getting richer. That will be consistent in both channels.

To the extent that we have already experienced a very different take rate in direct than agency what I'm hoping for is that moving the -- some part of the discount further forward will have a more dramatic effect in agency than it will in direct. I may be wrong on that. It may have equal effect in both channels, but for me, the biggest thing is that it does have some effect in the agency channel. That is what we'd be looking for.

So, from your continuous study of this, you should be thinking about this as how are we maturing the product based on data. Because some of the things we could have done a long time ago but you wouldn't have nearly the certainty that you were headed in the right direction based on the data that we have today. And then, just the continuous evolution of our algorithm, which will only continue to get richer as we put in even more features, including GPS into the Snapshot device which we've had previous experience with. But, we'll actually use that more aggressively in the next several years.

That's helpful, Glenn. Separately, I'm wondering (multiple speakers) if you can give us an update of how you are thinking about your -- I'm sorry, go ahead?

I'm sorry, I missed your first -- the rollout will be starting in December. But, first quarter we'll pick up momentum for many states, and then we'll just keep the rollout going.

Great, thank you. I thought I was going to have to ask that one offline. If -- just a quick one. Give us your thoughts on your mobile strategy as it relates to Snapshot? Obviously, there is a major competitor of yours who is now making a bit more noise about their 16 states they have a mobile product UBI app launched. We all know you have had a beta test of the Snapshot iPhone app. But, I don't think we've seen anything -- seen you launch anything widespread. I guess I'm curious, if you could help me understand -- is this a sign of you making different technology bet? Are others getting ahead in the arms race here. Or, should we just stay tuned?

No, I can comment a little bit on that. Obviously, the chip is a great way to be sure that it is that vehicle and so on and so forth, and we're much more comfortable with that as a reliable data set. I think I've said on numerous [occasions], I would be just as happy to get out of the business of plugging things into cars. That's not really an integral part of our business, and as cars become moving IP addresses, that will happen. And, we are very much, as you could reasonably assume, very much in sync with the manufacturers that are making those kinds of changes so that we will be there when that's available. But, being out of the dongle business, that's okay by me.

The interim, of an iPhone or Android device -- yes, you're right. We have had that, we obviously therefore match it against other data that we feel is reliable, and we continually try to find something that we would be as comfortable that the proxy data from a device that may or may not be in the car at the time. If the same device is in your pocket when you're landing on an aircraft, you're going to get data. But, it won't relate to the driving experience. So, it's not quite as simple as it would seem, and now we also have other vendors that we've invited to actually participate in -- how would we say -- a bake-off a little bit to see who can actually do even better than we may have done.

So, we're very interested in mobile devices. We are not folding the tent on that one, but we're also not going to go with something where we think the approximation to data isn't as good as what we can get [barring] another source. When that threshold is crossed at some reasonable point, that would be another arrow in our quiver, so to speak.

Very helpful. Thanks, Glenn.

James Ingle, John W. Bristol and Company.

Hi, Glenn and Brian. My question is on policy life expectancy. It looks like for 12 months, agent was flat and direct was up 6%. And, for three months, agent was down 6% whereas direct was up 1%. Could you give us some color on that? And also, could you weave in what's going on with Progressive home advantage?

I'll first give some color on the PLEs, and then, I will turn it over to Glenn to describe what is going on in the PHA program. You're right in terms of the numbers and the changes. We're seeing PLE growth continue in the direct channel and starting to see some degradation in the agency channel. It used to be that direct and agency PLEs were roughly about the same, and now the direct channel has a few months higher average PLE then the agency channel is. And, some of the degradation we'd see in the agency channel relates to a decrease in some of our renewal rates.

Some of that has been more recent so that's why it's showing up more in the trailing 3-month measure than the trailing 12-month measure. I had indicated in May that the three-month uses more recent data, and I would say a lot of the change -- or a fair amount of the change in the agency PLE is due to actually a little bit decreasing our renewal retention rates. Whereas we have -- we've seen some in the direct channel but not nearly as much.

Part of why -- one of the things that is helping with the direct channel PLE is we continue to get more of our policies to have more than one product. And, in fact, that's a lot of the strategy of the PHA program and the bundling there, and we're continuing to grow the percentage of policies in both channels that have that. But, obviously, we're growing more in the direct channel. Glenn, if you want to share some more details about what's going on in PHA?

Sure, I think there is maybe five points to touch on since most of you know the broad details there. It's all about getting multi-year policy households, and that is effectively continuing to go up. These are not massive increases on a quarter-by-quarter basis, but it's a great trend and we're very happy with that.

We did add our 12th carrier to our PHA program in the last quarter. And, probably more important than any of those things is ultimately the issue of are we really bundling? So, it's one thing to sell a product, but the real question is we were trying to sell bundles of home and auto, and the best measure of that -- probably we get the cleanest measure from our direct channel. And, you should think about 75% for the home and auto are bundled together of those customers. So, while we will sell a home policy or a renter's policy, and it may not be with the auto at the same time or vice versa. About 75% of those policyholders, or households, ultimately end up bundling.

Another development that will just continue to take on more and more strength would be our in-house agency where we have relationships with some of the carriers that we offer a homeowner's product to our customers. Most -- I'll touch renters in a second because that's a little bit different. We have historically been able to do that in an online mode, or perhaps we will actually refer in some cases a customer back to our partner and their call center.

We are now adopting more and more holding the quoting relationship inside Progressive and being able to make sure that we use the breadth of Companies that we represent. If it's not possible on an online mode, then we will have an in-house agency that will be able to provide the best product. It may not be as one-to-one. It may be that we have the whole resource of the 12 carriers available or some number of those 12 so the in-house agency is proceeding and growing.

And, the fifth point I would make in that arena is the renter's product that we have just taken to marketplace -- I think I've said, if I haven't -- I'll say now. Our aspirations on renters are not about significant premiums, but really getting people stickier with us and having that second product be a very valuable product at an earlier part of their insurance cycle that ultimately leads to the PHA. Though we were happy, not a lot to report on the renters at this point in time. I think we'll have a lot more to say when we get together in our IR meeting in midyear next year.

Good stuff across the board, and it's still -- I probably should say it's certainly a place where growth rates for our PHA-type program which typically is highly aligned with more preferred growth rates far in excess of anything you see printed as the aggregates. So, this is a significant growth part of our business.

Is ASI still the only carrier with agents?

Correct. Yes, with agents it gets considerably trickier to have more than one. But, more importantly than that, we have just a terrific relationship with ASI and are very happy with them and will continue to work with them. And, there are probably things that, again, we can talk about this time -- or IR meeting next year. But, there are opportunities for us to do some things with ASI that I think could be quite exciting.

Thank you.

Paul Newsome, Sandler O'Neill.

Thank you. Thank you for the call. A year ago, we were talking a lot about medical cost inflation and the effects of the reforms there. Now, it's a ways out. Are there any lessons learned? Have we seen anything that affected -- in your medical cost trends that were affected by those reforms. Or, did it become a non-issue?

Paul, I'm going to throw this to a couple folks in the room so I don't see anybody with a hand in the air with something important to say. So, I think that -- and I don't mean that in a light way. I think there is nothing that we can pull out that says, hey, here is the one thing you can take away from the Accountable Care Act and how it has trickled through to our costs. If you look at the very macro level, while I'm sure on a couple of calls maybe earlier this year, I've talked about [VI] trend which is one that I tend to watch a lot more. Maybe [three to five] -- I think you might strengthen that [four to six]. I don't know that we can relate that to the Accountable Care Act or any form of reform.

The bigger issue that Brian went into in some detail in PIP, I don't think you can relate that to the medical costs. That's much more specific to the individual state issues. I would say nothing dramatic, and any small effects are never going to be noticeable or detectable.

Fair enough, thank you.

Vinay Misquith, Evercore.

Good morning. Just wanted to follow-up on homeowners on the agency side. Glenn, why in Europe and in do you think the traction is not as strong bundling products on the agency side? And, so is that branding of the homeowners needs to be better? Do customers prefer a joint highly branded product for the homeowners and the auto together? Or, is it something else?

No, I think we've just got some opportunities to really make our bundle work even better than it does today so the acceptance with some agents is actually very strong. There is no question this is a place where, unlike most things, we're the ones that are coming into the market a little bit later than some established carriers. But, we've got to break in, and we've got to make our presence meaningful. I think we've got every ability to do that, but that's not going to be one that we turn around instantaneously. But, I would say actually we're gaining with agents on a regular basis, and I of alluded -- and that's all I'm going to do at this point. I think there's a lot more that we can do with ASI to really make our products very attractive as an even more integrated bundle.

I like to think of this is not so much two products but starting to present at least to the consumer that this is just the insurance you need. It's sort of our problem to figure out which part of it falls into which line of insurance, and the more we can do that and make this a more viable consumer proposition, I think that's going to be our strength to market and strength with the agents. Being a little bit circuitous on your answer, I don't see any major roadblock there. In fact, agents have accepted this. Consumers have accepted it. We need agents to accept it even more willingly, and I think the biggest issue there is they have options. And, many of those options are good options. So, let's just be realistic about that. We'll need to come to market with continuously better ones.

Sure. And, do you think that the commission rate for the agents is maybe a stumbling block? And, would you consider raising the commission rate for the agents?

Yes, it's a little bit of a stumbling block only in the sense that others will pay more. Not so much that we think we're wrong. There are two parties to pay the commission. While I'm not going to get out over my skis too much, where we consider other options, everything can be on the table as we think about a bundle that comes to market where we really, really want to play in this marketplace. But, assume that that will be part of something more comprehensive as opposed to just a tactical reaction to market conditions.

Sure, thanks. The last thing, just to follow up. On the order side, you're doing pretty well in terms of margins. Curious as to whether you see the [bifclaude] issue as a margin issue whereby you can maybe grow price a little bit? Or, do think it's more to do outside of margins, and therefore you would rather just keep your margins where they are?

We have our target margins. We're very clear about that. You know what those are, and when we do better than that -- that's good. We acknowledge it. The thing that is always tricky and very easy to see from a macro level is why don't you turn the switch and put it a little bit here. Increased growth, it is not quite that simple. I will just tell you, you should assume that I, for one, am not willing to give away margin unless there is a more than proportionate growth to be had. But, in general as we've said all along, we want to grow as fast as possible at or better than our target margins.

So, while we're reporting [92 and change] year-to-date and for the quarter, we've also given you some indication that there are some trends in severity that are starting to outstrip the frequency declines. So, for me, my general outlook, and this is very general -- states are specific. We have a rate level that can stay in place for a while longer without dramatic change, and that's always a good thing for our consumer versus up and down. I think we're well positioned as we go into the remaining part of this year. Most importantly, well positioned for the bigger season in the first quarter next year.

Okay, thank you.

Kai Pan, Morgan Stanley.

Thanks so much for taking my call. You mentioned that your biggest business opportunity is in the [Robinsons] consumer segment's respond to products. I just wonder given the development in the reinsurance market with alternative capital coming in, have you considered that actually putting homeowners' basis on your own balance sheet that you can effectively [transfer] some of the volatility, basically growing your customer base?

Kai, not directly, and while, if we were to ever do something like that, you could reasonably assume there would be a fair amount of reinsurance. I also don't overly pick the strategy based on markets that are available today but may or may not be at a different point in time. We will always consider our long-term strategy of being that destination insurer that will almost unquestionably be things that we will do over the next several years. But, I'd much rather tell you what those are when we do them, but I wouldn't be jumping to any conclusions about writing homeowners on our paper.

Okay, that's great. Then, on capital Management. If you consider you have operating earnings about $900 million, $1 billion each year. And then, how much of that would you say you need to retain for your future business growth? Versus then what's priority for the variable annual dividends or special dividends this year?

I'll let Brian take that one.

In terms of how much do we need for growth, we try to target our insurance underwriting Companies at a three to one premium -- premium-to-surplus ratio. In most jurisdictions, we have that ability. We also have some additional capital at some non-insurance Companies. But, for the premium growth that we're talking about, let's call it $1 billion a year -- or slightly more than $1 billion a year. You might need $400 million of capital for the growth. $350 million to $400 million for the growth at that three to one ratio.

And then, obviously in terms of our capital Management structure, we have the variable annual dividend, which is certainly formulaic, and it's 1/3 of the after-tax on our earning profit times our gain share. So, that amount for the variable dividend, obviously, can change each and ever year based upon both the underwriting margin as well as the gain share factor.

I can just let people know as of September, month-end, if you were to try to calculate with the variable dividend through three quarters is -- based upon our underwriting profit and our gain share factor, it would be about $0.49 per share based upon --through three quarters of activity. Obviously, we have the fourth quarter underwriting profit to go, and the gain share factor will be finalized in December. But, you can calculate the magnitude of the variable dividend based upon that.

But, those two components, the growth -- $350 million to $400 million plus the variable dividend which can change every year. After that, then we have the opportunities for both share repurchases, and so far this year, we have repurchased around $235 million worth of shares. And then, we still believe our current capital position is strong, and we feel good about that. It gives us opportunities if we choose to in terms of continuing share repurchases and then consider other alternatives.

Finally, what's your cash Holding Company capitalization at quarter-end?

Bill, the PICI assets at the end of the third quarter were $1.3 billion?

Yes.

That's not necessarily cash, but the assets held at our -- at PICI are $1.3 billion.

Great. Thanks so much for all the answers.

Thank you. Mike Zaremski, Balyasny.

Hi. My first question is on the expense ratio. If I look, it has been slowly but surely trending down over the years. I'm aware if we go back many years, the ratio has been at 20% before. But, can you elaborate on what has been driving this reduction so we can better understand if it can continue, or potentially reverse?

Sure, Brian, jump in on this one as well. I think as we talk about the expense ratio, let's break it -- at lease for direct -- for both, I think, is fine into two pieces. Acquisition and non-acquisition expense ratios. I think that's an important distinction to make. Acquisition, as you know, for agency is primarily commissions, and we've been stable there for some period of time. Don't expect any major changes there so that's a function really of earned. And, on the direct side, we will spend, and we've gone through this discussion several times. We will spend what makes most sense relative to the yield that we see. So yes, that could go up faster than earned premium under certain circumstances, but that would be based on good business judgment.

The non-acquisition expense ratio you should reasonably assume has a great deal of Management oversight that says we would need a really good reason to grow any expense faster than earned premium. So, we should be able to continue to keep our expense ratio very much in the levels that you are seeing at least on a non-acquisition expense ratio.

Something like benefits not quite as controllable and may not necessarily be a direct function of earned premium, but we can control things like salaries, headcount, certainly premium taxes, those sorts of things. So, why you've seen that go down over time, that's been a very deliberate action for us to get to something closer to the run rate expense ratios that you're now seeing on a pretty consistent basis and the trend being a favorable trend.

The biggest change that we will likely be able to bring about in our expense ratio will be continuing to increase policy life expectancy and having more and more of our customers with multiple products. That denominator effect, if you like, or scale effect is the one that will give us the next quantum, but the active Management which has been going on for some time to control non-acquisition expense ratio has frankly been extremely positive and got us to a level that we feel very comfortable is sustainable. But, for some really exogenous event like benefits cost or something like that which is not likely to move the needle significantly anyway. Brian, anything in that to -- ?

No, I think it's just a conscious focus internally to try to keep what we call the non-acquisition cost growing at less than earned premium growth. I don't think we're going to change that view or philosophy any time soon. I think it's going to continue to be a focus. We know it has an influence on the competitiveness of our rates in the marketplace which ultimately is how we win so I think we've done a nice job in recent years. And, I don't think there's going to be any let up in that.

As Glenn mentioned, the advertising and how much we spend on advertising is a function of how much we think we can spend relative to the yield. And, on that front, if we see greater and increased opportunities, we'd be more than willing to spend more money on the advertising side. That requires us to keep the focus on all those other costs, which we are, and we will continue to do that.

On the ad spend, are there any [secar] trends there in terms of ad spend getting more or less expensive on an absolute basis when you -- if you buy on the Internet -- or Internet spend with Facebook and Google versus the TV networks? Is there anything at play there?

Well, certainly in terms of our media mix, it certainly is changing in terms of more of the increase in advertising spend would be more web-based, social media, et cetera versus maybe TV per se. Although TV still is a very, very large component of our media mix. And, I would just say that, in general, we continue to see cost per impressions, CPMs, that media outlets charge us continuing to going up a little bit. I don't see that necessarily going down, but that's more of a function of supply and demand in the marketplace. But, currently, certainly CPMs are going up -- still going up a little bit.

Okay, great. And, lastly, as a follow-up, Glenn, to your commentary about -- if I understood it correctly -- offering certain agency customers a discount based on data you've learned from Snapshot. What percentage of the population of drivers could the discount you're speaking of pertain to? I know you want to be reserved. But, just hoping to get a sense of whether that could impact the large or small population of your agency quotes? Thank you.

Yes, actually the discount will apply both direct and agency. I just indicated that I think it will have a little bit more of a marketable effect in the agency environment. So, just to clarify that. Call it large because it just won't be the same discount for every customer. So, there's that notion I went through earlier of expected value. There will be a large percentage of customers be able to get some form of discount advanced through the point-of-sale, and in some cases, it might be a larger discount. In some cases, a smaller, but the number that will likely get some part of the expected discount advanced will actually be significant. We see numbers far in excess, and you've seen this. We're not giving out the exact numbers, but our indications are far in excess of 50%, 60% individuals are deserving of the discount that only Snapshot and driving behavior can identify. So, those haven't changed.

Thank you.

Bob Glasspiegel, Janney Capital.

Good morning, Progressive. How are you dealing in a low interest-rate world from an investment perspective? If look at your 10-Q, this may be totally unrelated. But, it looks like you sold governments and munis in the quarter and re-risked in the corporate RMBSs. In particular, AMBSs which is consistent with the opposite direction of how they moved in the second quarter, third quarter, so it make some sense. But, is this strategy to re-risk to get more yield? Do you think rates are going to stay low for longer than maybe you would articulate at the last couple of meetings in public? Where are you on the investment portfolio overall?

Sure. Bill, why don't you take that.

Sure. The strategy stays the same as far as trying to protect our capital and focus on total return, and as you pointed out, during the quarter we do make moves in the portfolio that are better based on value. So, we added some ABS, some short ABS, which used some cash and some short treasuries for us because they offered us a little bit better yield and a lot of safety. So, not high-yielding assets but better than cash and short treasuries.

Munis -- we sold a little bit because they had run really far, and for us, as a corporate taxpayer in some instances, we were able to sell them at relatively flat yields to treasuries. So, if you can sell a credit product at almost Treasury yields, you should do that. And, in the corporate market where we sold earlier in the year is the same sort of situation where spreads had tightened pretty sharply to the point where in some cases, they didn't represent good value to us. We reversed that a little bit in the third quarter as spreads widened, particularly in the high-yield market where we were able to add some paper at what we thought were attractive spreads.

So, unfortunately we have to operate in the market that we're operating in. What we're trying to do is keep it in the fairway and maintain flexibility. Where we find some opportunities, we'll put some money to work and where we find some opportunities to sell because pricing has gotten, from our point of view, way too aggressive, we'll sell.

On the duration front, we do think that rates will rise. I think the US economy is doing well, and the Fed just announced yesterday that they will end their two-week program now -- or, at the end of the month. And, there's a lot of speculation as to whether or not they raise rates in the third quarter or fourth quarter next year. And, that -- whether it's one quarter or another is less relevant to us than the overall direction. Our view is that rates will go up as the economy does better, and we'll have a better opportunity to extend duration and take some duration risk and get paid a little bit more for doing that.

How long have you had that view that rates were going to go higher, Bill?

It has been a long time. It [didn't] pay off for us last year, but it has been a while.

It seems like your tactical moves have been really good, particularly in the equity side, but the view -- you are with the consensus that rates are going higher. And, that hasn't seemed to work, but you are going to stick with that position from here.

And, the last question is to what extent does your view on interest rate layer into the actuaries' view on lost cost severity? Is there an integrated strategy on the asset and liability side of the balance sheet? What inflation is going to be? Or, do you operate more independently which is the case for most insurance Companies?

This is Gary, Chief Actuary. We operate more independently. We're really looking at the medical and the inflation cost that would come in. Obviously, everybody knows what interest rates are, but we're really independent of that.

So, on the liability side, you could have a view that inflation won't be that bad that isn't consistent with the investment side. It's possible. I know you're looking at a more micro level than Bill is, but they do interact to some extent.

We're going to look at country-wide, obviously, medical costs, CPI costs, things like that. That does come into play somewhat but not necessarily what the interest rates are doing.

Thank you.

(Operator Instructions)

This is Brian. I just want to clarify at least maybe some of my earlier statements relating to capital and how much capital is required. I had referenced $1 billion of premium growth. That's approximately what our premium growth has been in the last year. So, I used that as an example as opposed to saying that is absolutely what are premium growth will always be. I used that as an example. I just want to clarify that one.

[Arash Salamani], KBW.

Thank you. Just a follow-up question on the Florida PIP comments earlier. Just curious if you have any thoughts on how the outcome of the upcoming governor's election could impact your PIP severity, if at all, going forward?

I don't. I'm sorry I'd like to be as helpful -- but I simply don't. I don't think that is going to change most of what House Bill 119 was all about, and how that is being interpreted and reinterpreted through the court systems. That would be -- that's beyond my pay grade.

Okay, that's fair. Just thought I would ask. Thank you.

I would echo Glenn's comments.

Thank you.

David Small, JPMorgan.

Yes, thank you. Could you just give us some more color about the growth challenges that you're seeing in the agency channel? Maybe just talk about competitive behavior, and why you think you been struggling to grow? Thank you.

We do a lot of decomposition, and I'll try to give some color to be responsive to the question without absolute specifics. But, if we de-comp that we know some or part of it is rate. Some part of it is actually some underwriting actions that we've taken, and that will stabilize over time. And, frankly, we're okay with that. But, that's a small piece of it.

There is clearly some changes in receptivity to some of the more aggregators that we talked about last time on the call. That's a piece of it, but let's not suggest that it's not partly and significantly the competitive environment. We've seen some results from competitors -- I'm sure you've seen them -- that suggest that they're getting some significant pickup in new business in some cases after a period of not doing quite as well.

So, it's a competitive environment. One that we've played in for lots of years, and we will respond. We will respond, however, without breaking our discipline around what we've always said. We'll grow as fast as possible at our target margins.

Frankly, I sit here, I was comfortable making the statements that I make. This is not what I like. We've got so much of the Business working really well. We've got some new things that we are not ripe to talk about yet, but our agency production and new business is probably the one place that prevented this quarter being an even better quarter because it was pretty good. We're on it, and there's no question this is in-the-trenches competition in the agency channel, and we've got to come at that with our best tools.

New product, new Snapshot design, some [multi-productness] with our homeowners partner. All of those things are absolutely happening, and as I did indicate in my letter, those are not things to Tuesday next week it will be turnaround. But, as we go into 2015, I think we'll be even better positioned.

Just a follow-up. Do you think that your competitive position within the average agency has changed given the moves that your competitors have made? Just in terms of where you price relative to peers, or other metrics that you look at?

Yes, I think that would be the conclusion I drew because frankly we've changed less, and in the very early part of the year, we were clucking along at some very different rates. So, the only way that really happens is that someone comes and introduces some variable, i.e., a price point that is lower. We may or may not be prepared to match that price point, but it's not quite that simple. It's more complex. But, yes, I'd say the competitive environment is absolutely try to change our position, our conversion rate in individual agents.

Okay, thank you.

I'd like to thank everyone for joining the call. Look forward to speaking to you again in 2015. I'll turn it back over to you, Carolyn.

That concludes The Progressive Corporation's Investor Relations conference call. An instant replay of the call will be available through Friday, November 14, by calling 1-888-562-2794 or can be accessed via the Investor Relations section of Progressive's website for the next year. That concludes today's conference call. Thank you for your participation. You may disconnect at this time.