The Progressive Corporation (PGR) Q2 2014 Earnings Report, Transcript and Summary

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 Web site 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. 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 on our 2013 Annual Report on Form 10-K, and our quarterly reports on Form 10-Q, issued during 2014, where you will find discussions of the risk factors affecting our businesses, Safe Harbor statements relating to forward-looking statements, and other discussions of the risks, uncertainties, and other challenges we face. Each of those documents can be found via the Investors page of our Web site, 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) And our first question comes from Mark Dwelle from RBC Capital Markets. Your line is open.

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

Mark, we would agree with you there is a lot more activity on aggregator 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 we've taken 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 a 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 sort of 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 in 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) Our next questionnaire comment comes from Meyer Shields from KBW. Your line is open.

Thanks. This is sort of a nit-picky question, but when I look at the Qs, when you talk about severity trends, I'm going to focus on BI. It's 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. Well, actually we have our Chief Actuary here. So will 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, we had talked about was more of 2% to 3% range. So all we're really looking at our – the overall severity in the first half of the year compared to the first half of last year. And what you can see and looking at that, 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, I probably 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 we're probably let's say heading for a three to four kind of rate action for the year. And we see competitors – it ranges across, but we see two to three to four sort of relatively consistent there as well. I'm not sure what the outlook will be for the rest of the year. We obviously will react 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 to action. We are very comfortable with that current rates and 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 seeing anything that takes us up 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 will 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 trend, and if that changed, we'd have to react.

Okay. Fantastic. Thank you very much.

Thank you. (Operator Instructions) Our next questionnaire comment comes from Josh Stirling from Bernstein. Your line is open.

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 sort of a 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? And how – and I think one of the most interesting questions related to this is, how are you tweaking sort of the customer interface and customer facing sort of product offering, whether it's pricing or sort of 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 sort of a way we think in the way we expect to shape our product. Let me suggest you that we will bring out changes more in a product design change as opposed to leaking them out sort of individually. That will happen in a timeframe that is to be determined, I'm not getting on front of myself or some 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 sort of 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 their 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 seem go always need more servers to put into a Hadoop 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 recognized that one of the things I'd say with Snapshot is that we were very much like our agents to be able to create a level of penetration amongst consumers, much more consistent with what we think the consumers willingness to accept would be. I will derive my proxy for the consumers 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 not again – not necessarily reflective of exactly what will come about. But, they wanted to test different hypothesis. And what was interesting is 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 rates that is coded 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 that 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 direct, in fact close. 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. And, those were sorts of things that you can probably expect to see in future designs in some way shape of form along with the other R&D type of efforts that we gave you a glimpse into in our Investor Day. All the other elements that you can expect from Snapshot, our comfort with segmentation, our comfort with retention. Those things there is 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 you 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 sort of our level, is this something that ultimately leads to like 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 sort of a higher bottom line?

Good. Thanks. Throw it in there, I didn't really think people care too much about the things that are sort of behind the scene, so critical to day-to-day activities for us so expensive and so demanding of our 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 a pretty good systems but they were designed in an era where effectively batch processing was the design criteria, that doesn't mean that it is 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 Progressive would like on both the capacity perspective, real-time processing and if you had to choose one major thing, this would be sort of a complete rewrite of everything in to 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 that 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 system that said, 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 would not necessarily a design criteria, and in fact they were capped. Now we have no such need to cap them, and it's reflective of our business environment. And I'm sure if I was actually on the processing of phones, there are lot of other benefits that are presented in the 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 we're 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, we're 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, 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, cost that much, uses that many resources, at least those risk 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 futures.

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

Thank you. Our next questionnaire comment comes from Adam Klauber from William Blair. Your line is open.

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 that.

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 is more – 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 effect those changes. And 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 the short-term on the quarter primarily driven by three factors, our debt issuance, and we executed in April. Second, we modestly reduced the duration of the portfolio in the quarter and to effect that, we sold treasuries in most of those proceeds, went into short-term. And ten third, cash from operations, we’re not entirely invested in fixed income or equities, the residual float in the 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 returns 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 you had some level of 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.

It is what I would say. One, capital position is strong. So we have continued to generate capital throughout the year both from an underwriting perspective as well as investment return. So capital position is strong and we added to it by taking advantage of the interest rate environment in issuing that, so capital position is strong. We have sufficient capital to grow the business as much as we can and that's our first quarter of investment in terms of returning and 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 a variable dividend. But, even that, it subject to the constraints that comprehensive income after tax underwriting profit has to be higher than comprehensive income. But, given our position today and positive return of portfolio, we’re well on position to that. That variable dividend, just as a reminder, is one-third of after-tax underwriting profits, then multiplied by the gain share factor. And if you're 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 final gain shares where we'd influence that final dividend. That component of piece we’ve articulated and sourced that. What we do in terms of any other activities like the 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, our share repurchases would be 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 is how much we're going to buy over the year, obviously you can see each and every month in our news release. And then, if we are the vehicles of capital generation, exceed variable dividend, share repurchases and we still think we have more capital than we could consider a special dividend – as of right now we have not discussed that.

Okay. Thank you.

Thank you. Our next questionnaire comment comes from Bob Glasspiegel from Janney Capital. Your line is open.

Before we go to that next question, I want to – I should correct something, I'd said 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 plus 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 sort of 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, I just – 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 were gone everything from very rapid trend increases to deflation period or a slight deflation in periods. So I don't know, I think what you have to do is step back a little bit and ask sort of two things, what are sort of happening environmentally to the industry that's outside of our control and what are things that we would do ourselves relative to things that are inside of our control from a growth perspective. So I can take your – 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 are appropriate to be everybody’s minds. The whole vehicle technology cycle I mean do I expect frequency to come down, yeah 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 factor 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 a strategy. We want to find ways to almost be disruptive in the rating stability and not necessarily aggregate rate but ultimately lower levels of segmentation and the best address of that and I think the reason that Josh asked the question each time is that by taking data from the vehicle which is directly related to my first comment, the 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 that weren't 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've really outlined in our third era comments and lot of what we are doing now and some of it is at very different stages, so we are far from mature on these types of things. But, as we have grown and you've seen our growth through certain segments of the market we have attained some pretty healthy market shares. Now the grow, we want to grow in other parts of the market place where we weren't historically strong and we're starting now to say to be strong, we need this compliment 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 a year or 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 path of the marketplace that we haven’t been strong, we're been very clear to say we don't have strong market share, don't even have little 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 light for a group of customers that were becoming a sort of customer who can stay around for 20, 25 years. So those were our two biggest paths, 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 Robinsons.

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 is going to be generating growth numbers that are way below what, historically, the company has given. Does Progressive have the DNA to sort of continue to execute the strategy like you suggest and report mid-single digit top line growth if the environment just stays in a stable scenario?

I'm going to say – answer your question 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 where 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 – I think we've outlined that, the fact is we're going to grow in fact, 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 an almost a new entry into a 40% part of the marketplace, we're the strong brand, strong product, and starting to associate with the right kind of products that will need to really be able to play in there.

Great answer. Thank you, Glenn.

Thank you. Our next questionnaire comment comes from Michael Nannizzi from Goldman Sachs. Your line is open.

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 guys took some rate in maybe early part of 2013 to make some adjustments, and we saw new applications fall commentarily 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 kind of an inflection in pace in. I'm just wondering, am I reading that right, maybe I'm not, but if I'm not, then maybe you could help me sort of triangulate what I'm missing? Thanks.

Yeah. I think I can help there and if I don't and I walk along too long you can redirect. But to Bob's previous those discussion that was more of a longer term so let me flip a little bit to different time view. We even took some rate earlier this year in agency channel in selective states so we are 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 is my assessment. I will do current sort of environment, I will do some very short term responses, I will do some what I think are slightly longer-term responses and then to the 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 its credit reports or internet traffic or whatever it might be sometimes they are even conflicting, but they are all intending, but there is 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 are seeing, which are relatively flat. I get there based on comments that we and other have made that they are seeing reasonably favorable retention in their book. So if they are seeing reasonably favorable retention, then you could assume that there is not a increase in shopping behavior. Our sales are down, there is no secret about that and that is if you have to say tactically sort of what you are worried right this second, agency growth no question about it. It's on your mind, it's on our mind. Why 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 clearly confident and want to increase their growth so they have come with new product, new propositions to agents and that's not, that's not the first nor the last time that we'll see it or they will see it 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 are not getting the same number of sales so it's not hard to do that math. Short-term, we have 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 will 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 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 state, 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 your some insight into the fact that we are doing some degree of underwriting filtering and that I bring that out Progressive is much more of a, we find a rate for everybody, but unfortunately not everybody is buying for the purpose of insurance and we want to make sure that we can filter out those. So we've got 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 is some fine tuning that we can do that was some of the short-term actions that we are likely to be able to, did not likely, we will do and on top of that we'll 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 will do some agent incentives, where it makes sense to do so.

And I guess the competitive, Glenn you mentioned a couple of other competitors. I mean, are you seeing the impact of competitors sort of reformulating products at a lower price point? Have you seen the impact of that manifest in your, in that sort of quote to bind? Is that what you -- I guess you don’t know for sure, but I mean 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'd 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. So 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 of other players in that channel if the aggregates not going up then there is a little bit of shifting. So I think I was trying to be very clear there to say that yes we think we are losing some that we were previously getting through actions being taken my others again not the first time or the last time we will 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 are 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 we 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 this before, but the renters product that is not something that you can sort of sit and say you will see the results next week, we have rolled it out in Ohio, we're happy. We'll roll it out in Pennsylvania, our PHA will double our agents. So there is a series of both short-term and long-term actions that we will take and not to be too 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 lowest segmentation I said that before, I mean a more detail 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 that that we have an expected margin for ourselves and for our shareholders that we don't comprise. But we think we are extraordinarily well positioned on those macro factors for a long time and with the combination of the adjustments, product design. I feel pretty about the future, but there is no question we're losing something in the last quarter and we'll have to see how those sort of things go and we'll quote 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 direct with an agency and that was more on the magnitude of 6% to 7% in the 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 this year, last half of last year. This year, we've raised rate 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 212, when we raised 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 supposed to the large swings, larger swings that happened in 2012. And I think, I think we can accomplish that.

Yeah. Just, I guess yeah sorry. Go ahead.

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

Well, 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 to the other competitor rate activities in the marketplace. So it's not only what we did, but some things that other competitors have done. And as Glenn mentioned it's a competitive marketplace, but long term, we can compete in that market place very, very well.

Got it. Great. Thank you. And 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 a 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 overreacted in a couple of places relative to some part more of a smaller business auto and contracted 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 coming in the commercial sector having gone through a fairly significant adjustment period there.

All right. Actually that was my -- the only 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 kind of given the trends that you've seen recently? And thanks for all the answers; I really appreciate it.

Actually I'd give you, the answer is, I'm liking it lot more and if I told you the answer at the end of last year or even into the first quarter, I'd have been more edged on it. We were seeing a fair amount of volatility. We took fairly significant rate action over a reasonable period of time. Any time you take that much rate you've affected mix, you’ve affected all sorts of things. We've gotten into in the second quarter a little bit more of a stable sort of mix. We know what 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 and we've actually taken small decrease there and feeling actually very good as is the general manager and the product managers of the commercial group. And their intent on getting back to where we just historically have been is always a nice profitable grower in the sector. With regard to competitors, there have been good number of comments made. We always had to sort of totally reconcile them. I think we are maybe a little ahead of the pricing actions that others starting to think about taking or have recently taken.

The other thing I'd mention sort of relative to the 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 have had unfavorable loss reserve development in the commercial line so far this year, we had a small amount of favorable development, which is fine. And given that business limits profile etcetera, there is much more volatility in it, but from a reserving standpoint we feel about that and that helps the product management folks, product managers, general managers help in terms of setting the right rate level. So I think we feel good about that.

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

Thank you. Our next questionnaire coming is from Vinay Misquith from Evercore. Your line is open.

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 versus peers I think roughly around the 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 are we missing something? So that's the first part. And the second part is, we've seen a preferred auto company just report with a 2% growth and just 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 it's having a harder time in the preferred segment?

I almost have the same question as you do sometimes as why with lower expense ratio, why aren't we winning. Let me just suggest to you without overplaying things that I can't possibly no we do business with many, many thousands of agent I’m sure there are all 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 competitive 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 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 the again we are very clear about our margins requirements 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 is the macro cost of acquisition regardless of channel. 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 within the other channel and allow it to be the consumers choice of how they shop. With regard to preferred, with 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 maybe harder for many of you to think but this was not a space that we really, really played in within a great intensity. We’ve taken stock over the last several years, it's not like a one day thing, of what do we need to pull out what do we need to really play, we kind of got many other things right, we started into the specifically the agency channel with a home owners offering that didn't 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 is 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 it 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 is if the consumer was thinking about how a product might be designed. So things like single deductible for property claims that involve the auto, the 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 that are working very closely together, I don't think will be our -- 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 --

I seriously didn't catch it but I wasn't trying to avoid it.

I know.

Happy to do that. Never fun to sort of 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 the specifics where we had what I'll call three chances of performance based stock come and do it was actually two but one had a multiplier on it and that motor player 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 just give you the facts we may if you go back and look at proxies you'll see I haven't changed by cash compensation and well over 10 or 12 years don't intensive I take everything on a performance basis so I’m paid in equity. Here I got a situation that frankly 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 board all of my options that ever came due over a long period of time. So I had ex 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 or 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 were 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 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 over 10 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 told 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 am looking around to see if that's the right number, I haven't looked at 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 – I mean this really great color, so thank you very much.

That concludes the questionnaire's comment.

I didn't mean to shut things down.

Our next question comes from Ian Gutterman from Balyasny. Your line is open.

For a second there I thought I wasn't making it. I guess, first, Glenn, I guess 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 may be you have 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, it might be foretelling of the future, it makes in up profile of limits or it's 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. We see on our 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.

One thing I didn't comment on in my letter was PIP and PIP can be obviously very important so it’s not BI, but it's the same range or same medically driven issue. And in PIP we're seeing – we're eliminating sort of comparisons at four to five kind of trend in PIP and probably for those who are close followers, Florida is always a very interesting PIP state and 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 PIP 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 talked it out the sort of things that are driving PIP, overall PIP cost, it's not severity issue, but the frequency issue, so 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 PIP and as -- Gary 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 the 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 PIP starting to raise rates? Or is it -- are we a couple hundreds bps away 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 proceeds that are kind of 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 2.30 range pretty wide dispersion around that but that's on a fully taxable equivalent basis. And on kind of 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 and beginning the rate normalization process the market will begin to discount that reality fairly aggressively I think and risk premiums are 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? Or 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 sort of when the large competitors, they seem to sort of – 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 sort of wondering if there's any thoughts about that. Whether it be changing Flo or adding something new as sort of 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 sometime 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 Superstore. 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 is a leverage of brand equity in the Superstore, there is 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 show at the Investor Relations meeting what I'll call is more of a 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 Superstore, Flo, the apron as an icon. We tried to do what we call rate suckers which was really a way of demonstrating but 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 Superstore worked 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 also see us take Flo in different directions. But, when you got something that absolutely is working because I can certainly give you another company that use something for quite sometime and continue to get benefit from it. So there is a great deal to be set for a brand that has instant recognition, and in this day and age, I'm probably answering your question longer than you want me to but with so much of TV, other than live sports being watched on a delayed basis, you got to be really conscious of sort of fast forwards. And when you got sort of 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 in different consumer reactions if Flo and Superstore we're 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 kind of pondering was as you're trying to move from sort of 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 just not going to pay for them per se if that's okay.

That's okay. All right. Thank you so much guys.

Thank you. And our last question comes from Meyer Shields from KBW. Your line is open.

Thanks very much for fitting me in. I just wanted to follow-up, to get a sense of the really, really strong underwriting profits in 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. So what I mean by that is you can take rates, but if 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 flow through to average earned premium and losses have come, those that are not with this 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 this we expect good profits from commercial, let's not be bashful about that. We're probably seeing something right now that's certainly on the good side of norm.

Okay. Thanks very much.

That concludes the Progressive Corporations Investor Relations Conference Call. An instant replay of the call will be available through Friday August 15, by calling 1866-403-8766 or can be accessed via the Investor Relations section of Progressive Web sites for the next year.