前進保險 (PGR) 2016 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.

(Operator Instructions)

In addition this conference is being recorded at that request of Progressive. If you have any objections you may disconnect at this time.

The Company will not make detailed comments in addition to those provided in its quarterly report on Form 10-Q and the letter to shareholders, which have been posted to the Company's website, and only use this conference call to respond to questions. Acting as moderator for the call will be Julia Hornack. At this time I will turn the call over to Ms. Hornack.

Good afternoon. Welcome to Progressive's conference call. Answering your questions will be Tricia Griffith, our CEO; John Sauerland, our CFO; and Bill Cody, our Chief Investment Officer. Additionally, Glenn Renwick, our CEO through the second quarter, now our Executive Chairman, has joined us for today's call. The call is scheduled to last about an hour.

As always, our discussions on this call may include forward-looking statements. These forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during this call.

Additional information concerning those risks and uncertainties is available in our 2015 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. These documents can be found via the investors page of our website, Progressive.com.

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

(Operator Instructions)

Our first question is coming from the line of Ryan Tunis, Credit Suisse.

My question is just on the willingness in the short term to push through the 96 in terms of trying to grow some of the new business. Is there a willingness to do that or should we think about 96 as the limit, even if it's at the expense of some short-term growth?

Thanks, Ryan. Good question. We're not going to change our motive around 96. We want to continue to have it be 96 every calendar year. Clearly we're pushing closer to that based on our results, but we're quite happy with the growth. But we'll continue to try to get a 96 aggregate calendar year.

So, should we think about, as you approach that, as maybe a leading indicator of how we should think about new business growth, looking out over, call it, the next six months?

I think we can take other actions to keep that 96. I really am pleased with our new business growth when we look at from a target perspective. I want to look at the long-term growth of Progressive. I think there's other actions we can take to not necessarily take more rate, because we feel like we have a good rate position until the end of the year.

Thanks, guys.

Thank you very much. Our next question comes from the line of Elyse Greenspan of Wells Fargo. You may now ask your question.

Picking up on something you said in the letter, you saw a pick up in growth with bundled customers toward the ends of the quarter, I believe. Could you quantify the policies that you are seeing bundling or put some numbers around that? I'm assuming that was in reference to the Platinum product that you now have in the market.

A couple of things. We have growth on both the Platinum product and on our direct side. I'm not going to put a lot of numbers around it right now. I'm going to give you a little bit more color, or actually Pat Callahan will give you more color on that during our October Investor Relations conference.

I believe what Glenn was saying, and he can add in, was really that we're seeing the growth start to happen, the momentum start to happen. First quarter -- and I talked about this a couple of calls ago -- we really spent time integrating the ASI and the Progressive sales force, and now we're rolling out more Platinum states and more PHA states where ASI writes business.

So, we feel like there's a really good momentum on both the direct and agency side for the bundled growth. A lot of it has to do with our product model, which we believe is doing well, both on unbundled and bundled business. Glenn, did you want to add anything?

I think you covered it.

And then just as a follow-up to the prior question on the 96 combined ratio target, what about if you get above that level just driven by cat as opposed to new business penalty. Cat and weather are probably more unpredictable. Would you still pull back on growth if you keep coming in above that 96?

That's a good question. I think I will take that month to month. We put a cat load in, clearly, first couple of quarters. It's been a lot higher in the whole industry so we'll have to see how the rest of the year plays out.

And I think I'll take actions appropriate to get as close to that 96 if something happens dramatic with cat. I can't predict those. Our goal doesn't change. It's still going to be 96 aggregate calendar year. That said, as the months play out, if cats continue we'll have to make adjustments.

Okay, thank you.

Thank you very much. Our next question comes from the line of Kai Pan of Morgan Stanley.

Thank you. And, Tricia, congratulations on new role. The first question is, one of your competitors established a new business unit to deal with the connected cars. I just wanted your thoughts on the industry trends, what the potential impact from autonomous car [sheer] mobility, and your own initiatives.

Thank you. First of all, we have obviously been thinking through the impact of autonomous cars for quite some time. And clearly from our ability to be first and be a leader in the UVI space, just understand what's going on.

We don't have a specific unit. We have several areas of the Company that think deeply about this. As we continue to learn more about the changing technology, whether it's connected cars or just a sharing economy, we will continue to put the right amount of resources on to make sure we think it through as a long-term strategy.

Okay. My follow-up question is on the PLE improvement. What's driving that? And also, for the new business you are adding, are they coming from the area where you see most of the PLE improvements?

I'll start with the new business. The new business that we're adding, we look at everything as far as targets. We look at targets, new renewals by channel, by segment, and we feel really good about our new business coming in the door.

Our PLE is really based on how long we expect that business to stay. We've been working really hard on a couple of things, both on the nature and nurture side.

Our PLE improvement is really coming from the mix of business that is coming in the door, having a competitive product and competitive rate. You don't want to crank up rates. So, getting ahead of that rate is really important because then people don't feel the need to shop.

And we're seeing even some, as we look at our service, we're seeing some on the nurture side. So, we've been doing a lot in our customer service area to make sure we give people the products they need when they need them, and the services they expect.

Thank you very much and best wishes.

Thank you very much. And our next question comes from the line of Paul Newsome of Sandler O'Neill.

Good afternoon. Thanks for the call. Congratulations on the new position. I wanted to ask actually a ride share question, and whether or not you think that's having any impact on frequency or severity losses.

And as a follow-up to that, I would like to know how you guys are approaching it. My understanding is, when the app is on, there's a possible rider you can get. When there's a passenger in the car, there's no coverage from private passenger. I'm wondering whether or not you're successfully, or you think you're successfully catching those instances where people are trying to use Progressive insurance instead of a commercial auto policy.

That's a good question. I think we were able to, through a series of questions, when someone first reports a loss, we're able to identify some of those. I'm sure there's some getting through.

On the personal auto side, we have an endorsement that fills part of the gap between personal auto and commercial. And then in quarter two, we rolled out in Texas a partnership with Uber for a commercial product. So, don't have a lot of results. The results I do have are meeting our expectations. So we're pretty enthusiastic about working with ride sharing companies overall.

I can tell you more about that probably in October, I will have more data. But we're excited about our relationship right now with Uber in Texas on the commercial side.

Is there an easy way to catch these folks if they get into an accident with a passenger? Do you just have to ask, or is there some process that allows you and others to catch, essentially when they're trying to get the coverage under private passenger (inaudible)?

There's not an easy way. I think that it is really about having a well-trained claims organization from the first notice of loss all the way through the file owner who is quarterbacking the file. This is top of mind with everyone now because there are so many Uber and Lyft drivers. We have put processes into place to ask the right questions and try to get at when they're in an Uber vehicle versus a personal auto.

Great. Thank you.

Thank you very much. Our next question comes from the line of Adam Klauber, William Blair.

I have two quick questions. On direct, we've seen PIF really accelerate in the last 18 months. Would you attribute that more to dislocation in the market or more to more consumers buying digitally?

A couple different things. We got out ahead of trend, so I think we had a really good rate and took advantage of that.

We also last year, towards the second half of last year, saw some opportunity to invest more on the media side, specifically in digital auctions. We were able to buy some really efficient spend on that, so we got some growth from that, as well. So, I think it was partly that. And what was the second part of your question?

Is the growth being driven by just consumers being more comfortable buying and shopping digitally versus calling an agent?

Yes, we're also seeing that, as well. In answer to your question, both of those things -- a little dislocation, some actions on our part, and people being very comfortable buying online.

Okay. Then a second question, you've been building up short-term cash. It's up over $5 billion, or short-term investments over $5 billion. I'm guessing, assume that's because of the low rates. If rates stay relatively low, what are you going to do with all that cash?

I would love to be able to redeploy that to some spread product at reasonable levels. The reason for the cash buildup is somewhat a categorization change. We had a fair bit of treasury securities, close to $1.5 billion at the end of 2015, that were classified as treasuries, and they matured in the first half of this year, and those wound up in the short-term portfolio. So that's one of the reasons why our cash and treasuries are up -- or cash is up.

If you look at cash and treasuries together it's not up nearly as much as cash on its own is. But, yes, I would love to be able to deploy that into some reasonable spread product. We had some opportunities to do that early in the year but now it's gotten a little bit harder.

If those opportunities don't come around, if rates stay low or go lower, using that cash towards buybacks or dividends, does that become an option?

As far as the portfolio, if rates go lower, we're only going to take risk if we get paid to take risk. We're going to take either duration risk or spread risk if we'll get paid. If we're not being paid appropriately to take that risk we're not going to do that. With regard to the capital, which is very different than the portfolio, John will answer that.

Sure. Our decisions around buybacks or dividends are independent of the mix of our portfolio. It's obviously more a function of the total level of capital we hold. We described that to you in a number of different venues, but, briefly, we have a regulatory layer, we have a layer above that which we call our extreme contingency, and above that we are in position to deploy that capital again through dividends, buybacks, or otherwise.

As we report we have been above that extreme contingency layer, so we have enough capital to take actions that we see fit. You may have seen we did some buybacks in the second quarter.

We were out of the market for a little bit of time due to some information that's obviously now public, with Patricia in the role. The decisions around capital return, if you will, are independent of the portfolio mix.

Okay, thanks a lot.

Thank you very much. Our next question comes from the line of Bob Glasspiegel of Janney.

Good morning and congratulations, Tricia and Glenn, on your new assignments. In Glenn's closing letter, he said that the fast growth, coupled with acceptable margins, is adding significantly to the intrinsic value of the enterprise. I was wondering, what math do you have behind that statement that you would be willing to share with us? Warren Buffett at Berkshire meetings has said that each new GEICO policy is worth $1,500 in lifetime economics. What's the math between growth and enterprise value that you use?

Hey, Bob, I wasn't supposed to be answering questions, so that's unfair. (laughter) I have done that math before on numerous occasions. I don't have any specific numbers for you. Maybe John can think about that for the October meeting because it's quite simple, all other estimates.

I'm not sure in this case whether it would be that much dramatically different than GEICO. The bottom line and the implication there is a very serious one. Not only are we adding to the portfolio with a lot of new PIFs, but we're adding a mix that is taking us into longer PLE-type customers. And, while we're not prepared to lay out every detail of that, the intrinsic value to that, the long-term earnings for the Company is very significant.

Bob, I would add to that. That's a great question. At a previous investor meeting we talked about the invisible balance sheet. We won't quantify that completely for you, but naturally an in-force direct policy has a future NPV, if you will, that is greater than an agency policy because of the acquisition economics.

We continue to grow that direct book far faster. We would like to grow across all segments, all channels. But if you're thinking about the longer-term intrinsic value, I think that's an important consideration, is the growth of the direct book with, as Glenn was pointing out, extending PLEs.

Our direct auto business is actually now at a peak in terms of historic PLEs, and in the right direction, as Tricia was pointing out. We think we are building on that invisible balance sheet.

We do have, and Tricia can give it to you, a slightly updated number that I had given to you several years back in terms of would the implication of one month of PLE extension is worth to us.

I actually just was doing that math a few days ago. And one month of extended PLE has a lifetime earned premium value of about $1.5 billion.

Thank you. Glenn, I enjoyed your letter -- and did notice who won the basketball this year. If I could just squeeze in one more question. Your growth is fantastic across the Company. The one area that's been disappointing to me is homeowners. I hate to pick on the one negative. Maybe it's in line with the growth that you expected, but where is that acquisition as far as top-line contribution relative to where you thought it would be?

It continues to evolve. I'll have John add in some stuff. It continues to evolve. We've had some -- a few things happened that we weren't prepared for, but we are very positive and bullish about the bundled offering on the agency side.

Again, when I spoke earlier, it's really about getting that momentum and getting more Platinum states, more Platinum agents. We have slightly less than 1,000 Platinum agents, and I think as we gain more, as we enter into more states, that momentum will continue.

Would I like it to be faster? Absolutely. Do I think we have the momentum to really start moving on more and more bundled business? Absolutely. So, while I would love it to be better, I think you will see that we're putting a lot of resources on making sure that we get that bundled product in both our agency and direct business.

The only things I would add to that, as we noted, there was a significant customer that ASI lost in the course of our taking a majority position. That is as it is. The new business impact of that is well behind us. The renewal business impact of that I would characterize as a little more than half behind us. These are all annual policies or predominantly annual policies, I will remind you. So we don't see that drag continuing for long.

The efforts that Tricia mentioned we're confident are going to grow ASI materially, and, again, along the lines of the intent of the acquisition, which was with the bundled product. And while it's not unit growth, if you're working on your model, recognize, as well, that we terminated a quota share agreement at the beginning of June. It was a 10% quota share. So in terms of premium growth, at least over the next 12 months, or 11 more month, we'll see the benefit of that, as well.

Thank you.

Thank you very much. Our next question comes from the line of Meyer Shields of KBW.

In terms of the short-term modeling that we have to do, do Platinum customers have a bigger new business penalty than the legacy Progressive customers?

No.

The new business penalty, if you will, varies by channel. Obviously Platinum is an agency so there's less expense ratio differential between new and renewal for Platinum customers.

But the other important thing we see is the difference between new and renewal varies by customer segment. So, when our product managers are working to price business to the lifetime 96, as well as hitting the calendar year 96, that's all baked in so that we're confident, by segment, that when we're putting on new business we're putting it on at the lifetime 96 or less.

Okay, that's helpful. And then I don't know if this is for Glenn or Tricia, but I had a hard time understanding Glenn's comments about commercial lines in the second quarter. Is the expectation that you will get back to the really strong outperformance? Will we get back to a 96? And maybe some color on what questions were answered.

I will start and then if Glenn wants to add in, since he wrote it. I think he was just talking about commercial lines came in. There's some seasonality in June. We expect to see in that June and July.

But if you read the Q, we know that we've put on a lot of new business in the commercial lines organization, and that put some pressure on calendar year combined ratio. So, we're addressing it with some rate adjustments.

We saw some unfavorable development compared to 2015 on loss in LAE. And we have a little bit of a mix shift intentionally to for-hire transportation, for-hire specialty. So, with that we want to make rate adjustments to make sure we are ahead of the curve because we want to obviously bake in how those might play out and how those might develop.

In addition, on the commercial side, we've made a lot of investments that also put pressure on the expense ratio. So, we've made some investments in the direct channel, in our brand, and more importantly, hiring in advance of need, specifically in our CRM organization. So some of those things we're feeling a little bit more pressure but we feel good where we're at with taking a rate adjustment around 4% to 5% in the aggregate. Do you want to add anything, Glenn?

No, I think you got all of the primary details. I hope that when Tricia writes to you -- and I certainly have hoped -- that we provide some degree of color as opposed to just quoting the numbers. In this case, here was a data point that if you looked at the time series it clearly jumped off the page. That's going to happen from time to time in a monthly time series.

But I just want you to know what we already are doing, and looking at whether there's really systemic reasons, that was something we missed in the past. That did not appear to be the case. And just know there's a lot of attention to it. If I were an analyst in your position and I saw a sudden jump like that I would have questions. So, we were just calling out the fact that we have those questions and we're looking at them and comfortable.

If you look at the history of June, July-ish, the last five out of six you'll were a little bit higher combined ratios. I think Glenn said something in his letter about there's going to be a lot of eyes watching this fast-growing area.

And, clearly, we're really proud that we are now number one for commercial auto. But the numbers that I will care about and that John will care about will really be profit and growth, in that order.

Fantastic. Thank you.

Thank you very much. Our next question comes from the line of Brian Meredith, UBS. You may ask your question.

I was hoping, could you help us quantify the year-over-year increase we're seeing in the loss ratios on the direct side, ex the cat? How much of that is attributable to the new business penalty? Then I have a quick follow-up.

I think there's definitely, you are going to see that new business. There's a little bit of uptick in frequency and a little bit in severity. So, I would say those three things. Just more losses happen with new business, and a little bit of an uptick in both frequency and severity.

Additionally, we do have some very modest unfavorable development for the year, and you're comparing that to last year when we had a little less than 2 points of favorable development. So, some of that is what you are seeing, as well.

Yes. I'm not too concerned. I think in the favorable year to date, 0.3 points on the CR, so about $30 million in that I would consider adequate, within a little variation, which is our goal.

Great. Could you just remind us, the new business you're willing to accept on the direct side versus the agency side, just give the economics of the business. Where are you willing to let your combined ratio slow up to on your agency business? That's gross.

Yes, I think I understand your question. The way we bring in new business is so different in both the channels. The new business target in direct is much higher because we front load all of our acquisition costs. So, that's a big difference on that, versus a variable cost model on the agency side with commissions each time a policy renews. Does that answer your question?

That's it. Thank you.

I'm hearing an overriding tone of understanding how we think about new business growth versus that 96 calendar year target. That 96 calendar year target is a ceiling. And as Glenn, especially, has pointed out previously, we have multiple segments of the business. We have different combined ratio targets for those segments.

So, when we do our pricing indications, we are dialing in different margins by segment. And we're also cognizant of the lifetime combined ratios for business we're putting on the books.

There are times when you're growing really fast in a segment that you could be putting business on at a life time 96, but that will cause your calendar year to go above the 96. We balance that across our various segments and look at the market opportunity across those segments and say where do we want to grow, given the scenarios we're looking at to again ensure we're below that 96 calendar year.

So, it's bringing together a bunch of different segments, different geographies, as well. And it's not that we're always targeting the exact same combined ratio by segment. We look at it before the year starts and target where we're going to have the growth and, again, ensure that calendar 96.

Thank you.

Thank you very much. Our next question comes from the line of Amit Kumar of Macquarie.

Maybe just going back to the broader theme. It seems all of us are discussing on the growth on the personal auto side. How soon does the new business translate into renewal business and then translate into a discernible lower AYLR?

On the direct side, because I said before we front load all the acquisition is costs, the first term renewal is much different to get to that 96 ongoing. And depending, obviously, what we think, depending on the mix of the business and the PLE of each of the segments. So, it's different. But on the direct side, it's very different from first term to second term.

You're trying to get beyond, I think, the expense ratio component of it and you're trying to get to the loss ratio component. And that is different by segment. So, there's some segments that, once you get to the first renewal -- which, by the way, for the vast majority, think 95 or greater of our policies in force, are six-month policies in personal auto. We do have some annual policies. That's one of the benefits that we allow our agents with the Platinum program. But, still, by far and away our policies are six-month policies.

So, when we say renewal you can generally think for personal auto the six-month term. For commercial lines and for homeowners, they're predominantly annual terms. But when we look across segments we see different levels of disparity between the new business loss ratio and the renewal business loss ratio. And, again, we're trying to lifetime price to that 96 or less, so we're considering that when we are making those select with the product structure by segment.

What I was trying to ask is, maybe there's too much of a focus on the short term and 96, and maybe the bigger story is how this actually will add to the consensus estimates in the medium term. That's what I was trying to get to. Everyone is talking about look at the growth, look at the new business penalty. But perhaps as this business is renewed for a few cycles, maybe all of us need to go back and actually rethink our numbers. That's what I was trying to ask.

Our goal is to continue to grow at the targets we've been able to grow at, because we think that adds long-term intrinsic value to the Company. And if we aren't writing at, again, the state level, the channel level, the segment level, at our targets or below our targets, then we take action to make sure we do. As you think about your models I would think that we're happy with the new business growth coming on the books, and we'll try to continue.

Got it. I'll make this very quick. The only other question I had was, on your website there are offerings for the small businesses, including professional liability, workers' comp, et cetera. Is that more experimental? Or did you talk about that previously and I missed it? I'm just trying to get a better sense on that piece.

Those products are being sold by third parties technically. So, in the commercial business right now, for direct customers, similar to what we've set up on the personal lines side, originally with Progressive Home Advantage and now with many other products, we are working with third-party carriers to offer direct commercial lines to customers other products that they may have a need for. So, that's not first party. We're not their insurer in those cases.

Yes, we do offer in some circumstances business owner policies, GL. And on the Progressive Advantage side we offer a lot of things, whether it's life or a mechanical breakdown or travel, a lot of Progressive Advantage offerings. We'll continue to do that because if our customers want it we don't necessarily feel we have to manufacture every product.

Okay, that's very helpful. I just want to be sure that you're not getting onto the long tail side of things.

(Operator Instructions)

And our next question comes from the line of [Yuzik Mueller] of NYCM.

I just noticed one of your priorities this year was retention. I was curious what your goal was in terms of retention.

Continue to lengthen PLE. We have specific goals for each of our segments. And its improvement we haven't shared them in the past, nor will we. We will show you the percentage improvement.

But for me is you get the right mix of business in, and you have competitive and stable rates, and the services people need. That's how you do it. So, we're focused on continuing to get that preferred mix of business. But we target improvement, retention in every one of our segments.

Okay, thank you. And then to follow along with that, I noticed one of the improvements you mentioned was enhancement to Snapshot. Does that include mobile app? Or what kind of enhancements were you thinking about there?

We have a plan to roll out our mobile app in two states in December. We will monitor that, make sure that the data that we're getting meets our success criteria. And if that's case we'll roll out the rest of the 3.0 Snapshot states, think of it second quarter.

And then I think we announced a partnership with GM and their Smart Driver program. We rolled that out in mid-May. So, we will start to see some possible quotes in August because we need 90 days worth of data.

Hopefully we'll have a little bit of data by the October Investor Relations conference. And I've asked John Sauerland to do a thorough update on Snapshot and some of our other data and analytics.

Thank you very much. And our next question comes from the line of Ian Gutterman of Balyasny. You may now ask your question.

Hi, thank you. First, can I get to clarify, I think it was the first question about, Tricia, you talked about aggregate 96. Was that aggregate including homeowners and commercial, or was that just a personal auto comment?

That aggregate 96 was personal auto. Actually, I shouldn't say that. The Progressive business. So special lines, auto, and commercial.

Okay, so excluding homeowners, you're saying.

Correct.

Okay, that's what I wanted to make sure. Okay, great. And then just to follow up on the income question from earlier, obviously, as you said, you're building some of the short-term positions. You've been doing that for a little while and investment income held up pretty well until this quarter. It flipped sequentially. Is Q2 a better run rate than Q1 at this point then?

On a deal basis?

Just dollars investment. Usually investment grows throughout the year, because you're building cash, or at least flat, and it went down several million.

I would say the new securities that we put on the books in the second quarter were pretty much right on top of our book yield or the portfolio as a whole. As I've said before we don't manage to book yield. We try to manage to a total return.

One of the nice things about the rate rise at the end of the year is we're now getting paid a little bit more on our cash than we were. I would like to get paid more than that, as well. But from a sequential basis going forward, we disclose as much as we can about the portfolio and what we own. And we try to maximize the total return but we're not trying to focus on our book yield.

Got it, okay. And then just one more on the relationship between PIF growth and premium growth is always a little confounding for me. It's obviously been very strong recently and sustainably. And I know part of that is pricing but I assume there's a lot of other factors, some of which we've talked about in the past. Obviously PLE extending helps that relationship, mix changes, whether it be more [Robinsons] or growth in high versus low premium states. I don't know if there's any short story you can give us to help us think about that better. Or maybe that's a topic for October if it's a longer answer. But just any help you can give on how to better understand the relationship between those two would be helpful.

I think you hit a lot of the topics. PIF growth, there's a lot of retention. So it's new business as well as renewal -- so, are we able to retain that business. It's the mix, so it's the amount of average written premium for the customers. That goes into premium.

But I think you hit it. They all go together. When we think of growth we really think of it in terms of new businesses, extensions of PLE, and average written premium.

Okay. What would be helpful to me is being able to separate the parts better -- don't have an impact on the loss ratio versus those that do. What I'm trying to say is, PLE extension, obviously, or pricing is obviously helpful -- neutral to helpful -- to a loss ratios, where, if it's mixed to higher growth states, let's say, there's more losses that come with that, so I shouldn't really drop that all down the same way, right? It's just hard to know, when I see premium growth accelerating faster than PIF, how much of it is good guys versus more neutral or little bad guys.

One way to normalize for that is if you look at the increase in loss cost, the pure premium, as we call it. The great news is, over the past couple, few years now, we have been in an environment where we've been able to raise rates, the industry has been raising rates to cover increasing loss costs. There's been other periods where there was less inflation loss cost and consequently we didn't have the luxury of built-in inflation in premium simply due to the underlying loss costs.

So, you're right, those mix changes play a lot into what we see in terms of coverages, states, et cetera. You hit on a number of the ones that we look at. But you can take out at least the effect of loss cost trends to understand what portion is the mix that we don't give you all the background around and actual loss cost trends.

We obviously report our frequency severity. You can get that for the industry, you can get that for our competitors. That's a way to understand structurally if average premiums are growing or if it's a mix change.

Got it. Helpful, thank you.

A couple of things. Our goal is always to keep up with trend. And we base our growth, really, our best unit of measurement is our units. So, how many new policies. I think that's an important piece of it.

When I first answered your question about the aggregate 96, I think of it in terms of the typical Progressive policies. I think long term the 96 will be all of our products in aggregate.

The reason I ask that up-front was, I think of homes should be lower than a 96 just because of the volatility. So, I didn't know if that was -- if home, to make up a number, should be a 92, then that's allowing auto to go to 96.5, or whatever the math is. That's why I was asking.

You're correct in that in terms of, when we say aggregate, there may be differences in different pieces but they will go up to be the 96 calendar year.

Got it. Okay, thank you.

Thank you very much.

(Operator Instructions)

Our next question comes from the line of Sarah DeWitt of JPMP. You may ask your question.

Good afternoon and congrats on the new role, Tricia and Glenn. Tricia, I would be interested in getting your perspective as CEO now on what you think is going well at Progressive, what areas you think need improvement, and what if anything do you plan to do differently as CEO.

Thank you. I couldn't be more excited about where Progressive is headed. Clearly Glenn and our whole executive team really focused on the strategy that we're in now. So, for me, the people that we've hired, our culture, are things that are really important to really capitalize on this pivotal part of where we see the Company going. So I'm very excited about that.

And I think we need to continue to execute. I have absolutely zero concerns with that. I think our team is one of the best teams I've ever worked with and I've worked here for almost 29 years. We all have a very clear strategy of where we want to go and how we want to make sure our investment in ASI and other investments that we've made come to fruition and more.

I've got to tell you, from being here a long time and seeing a lot of different things go on at the Company, this is the most exciting time at Progressive I've ever been a part of. I was a part of that strategy developing what we talked about in terms of the destination era, and we've got to keep the pedal to the metal, and I'm thrilled. I don't know if you want to add anything John, from your perspective.

You said is it well.

Nope, he's good. Thank you.

(Operator Instructions)

And our next question comes from the line of Ryan Tunis of Credit Suisse. You may now ask your question.

Thanks. I just had one follow-up, thinking about the new business drag on the expense ratio. I think Tricia was indicating it, that's probably a little bit more pronounced and direct. That's the type of thing that I would think would normally be pretty easy to see. But the expense ratio, actually I think in both segments, hasn't really come up that much over the last couple of quarters, if at all. So, just order of magnitude, how do we think about where the expense ratio would be if you weren't going through this investment phase? Thanks.

We try to keep our expenses as low as we possibly can while still growing the business. So, I don't think we necessarily look at it differently from that perspective. We want to take advantage of times where we have the right rates at the right time. And we know that it's really important, in order to be competitive in the rates, to have a competitive cost structure.

A lot of it comes with what you get out of things like advertising and other things. From a spend perspective, we have a goal, but really our goal is to grow as fast as we can at a 96. And if we see the ability to spend more on advertising, we have an advertising expense that we get for our targeted advertising expense, that's what we'll do.

Just to add to that, if you are going year over year for direct, as an example, obviously new business was pretty good last year, as well. And I will point out that many of our competitors, or several at least of our competitors, were largely out of the marketplace earlier in the year in terms of advertising.

So, the effectiveness of the same advertising dollar this year in the first half of the year I think was far higher. So, we had that little wind behind our sales in terms of bringing prospects in with similar advertising spend. I think if you're going year over year, you're not seeing as much drift up, to some degree, as Tricia noted, because advertise has been really effective (inaudible).

That's helpful. Thanks.

All right. It would appear there are no other questions at this time. Dexter, I will turn it back over to you for closing.

That concludes the Progressive Corporation's investor relations conference call. An instant replay of the call will be available through Friday, August 19, by calling 1-888-566-0614, or can be accessed via the Investor Relations section of Progressive's website, for the next year.