Welcome to The Progressive Corporation's third quarter investor event. The company will not make detailed comments related to the quarterly results in addition to those provided in its quarterly report on Form 10-Q in the letter to shareholders, which has been posted on the company's website, and we'll use this event to respond to questions after a prepared presentation by the company. This event is available via a moderated conference call line and a live webcast with a brief delay. Webcast participants will be able to see the presentation slides live or download them from the website. Participants on the phone can access the slides from the Events page at investors.progressive.com. In the event we encounter any technical difficulties with the website transmission, webcast participants can connect through the conference call line. The dial-in information and passcode are available on the Events page at investors.progressive.com. Acting as moderator for the event will be Julia Hornack. At this time, I will turn the event over to Ms. Hornack.

Thank you, Chanel, and good afternoon to all. Today we will begin with a presentation on industry-leading segmentation. After that presentation, we will have Q&A with our CEO, Tricia Griffith; our CFO, John Sauerland; our guest speakers today, Pat Callahan and Sanjay Vyas. And Bill Cody, our Chief Investment Officer, will join us by phone for Q&A. This event is scheduled to last 90 minutes. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events to differ materially from those discussed during the event today. Additional information concerning those risks and uncertainties is available on our 2017 annual report on Form 10-K where you will find discussions of the risk factors affecting our businesses, safe harbor statements related to forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investors page on our website, progressive.com. It is now my pleasure to introduce our CEO, Tricia Griffith.

Good afternoon and welcome to Progressive's third quarter webcast. We have a terrific session for you today. Before we go into the topic on segmentation, I did want to reiterate a couple of the milestones I talked about in my letter. First and foremost, we surpassed $30 billion in net written premium on a trailing 12-month period. That is phenomenal for us. What's more phenomenal is the fact that less than 3 years ago, Glenn Renwick , John Sauerland and I toured the country celebrating $20 billion in net written premium. So to put it into perspective, it took us nearly 80 years to get to $20 billion and less than 3 to get to another $10 billion, celebrating $30 billion. Phenomenal job for everyone at Progressive, and we couldn't be happier with those results. In addition we just surpassed 20 million in overall policies in force and 13 million in auto policies in force. Why that's significant is the fact that we are growing at a very rapid pace on Robinsons in both the agency and direct channel. And part of that is you want an influx of future Robinsons. So those auto policies support, that growth, is really important because they are our future Robinsons. Having that 2-pronged point of reference to be able to grow Robinsons is important, and that's why our policy growth is important. We always talk about unit growth being a very important measure. And lastly, we had an internal goal of getting to 1 million Robinsons, and we surpassed that as well. So a couple more milestones I won't go into, but a lot of excitement around the momentum we've had over this past couple of years. And we are ready to kind of wrap up 2018 and have great plans for 2019.…

Thanks, Tricia. Let's get started by jumping back to Tricia's last slide. And if you focus on the upper right-hand corner of this slide and look at Progressive versus industry, profitability and growth, you'll notice they're growing twice as fast as the industry while simultaneously delivering profit margins 8 to 10 percentage points wider. These results don't happen by accident. They are the direct result of our deliberate investment and increasingly fine segmentation and matching rate to risk. I'm thrilled to spend a little time sharing with you our investments we are making to continue to advance this segmentation and widen this moat around our Personal Lines franchise. Our vision is to grow Progressive in pursuit of becoming consumers' #1 choice and destination for auto and other insurance. We all know that growing an insurance company is frankly not that difficult if you don't care about making money. And making money in insurance is not all that hard if you don't worry about growth. We are laser-focused on both. And as a result, it's absolutely critical that we have high operating efficiency, great claims accuracy and industry-leading segmentation. So I'll now share a little view that we've talked about previously, that breaks down the U.S. auto and home market by distribution channel in the columns and by Progressive segment across the rows. For decades, we've been heavily focused on growing share within the simpler needs auto insurance marketplace. The $90 billion row represented by the Sams and Dianes in the chart that you're looking at. And while these simpler needs customers were our bread and butter for a long time, they trained us and honed our segmentation skills, primarily because with shorter policy life expectancy, it was critical for us to get our prices right, given they weren't with us…

Thank you, Pat. My name is Sanjay Vyas. As Tricia mentioned, I've been in the product world for 15 years and just recently moved to claims. Given my experience in product, I wanted to add some additional context to what Pat just shared. Specifically, I wanted to touch on 3 points. First, states are complex. I'll discuss how that affects how the product is implemented. Second, I'll cover what does a products -- what product managers' decisions are across the 51 jurisdictions. And last, we'll see how product managers do more than just crunch numbers. So to the first point, state deployment is complex because of the legislative and regulatory diversity across the U.S. I'll impact this with a personal example. Recently, my wife was at Whole Foods here in Ohio, and she was parking and a pickup truck backed into our vehicle, a relatively new vehicle. So this could happen in any state. In most states, this is simple. The other driver was liable and her insurance company would pay for the repairs. But to highlight how things can be different across different states, in Michigan, the then neighboring state of Michigan, my insurance company would pay for the claims, not the other driver's. That's because Michigan laws emphasize first party for physical damage. You can appreciate then that our data should solve for Michigan differently than for other states. And just to round that out, in the grocery store accident, thankfully nobody was hurt. But had there been injuries to any driver, the jurisdiction would matter. In about 20 states, drivers may be able to get their medical bills paid for from personal injury protection coverage or PIP as it's known. The amount of PIP coverage varies across states. In some states, it's really small dollars. In others,…

Thanks, Sanjay. Having spent about half of my Progressive career as a product manager, general manager, I can absolutely attest to the significant benefit that the combination of local market knowledge, customizing our countrywide segmentation, brings to the company overall. So to wrap up, we talked a little bit about how we build and deploy highly complex, countrywide product models. And Sanjay shared with you how we customize those product models to the opportunities in front of our product managers in order to deliver profitable growth across the country. The combination of both our countrywide product models and local product customization, in concert with accelerating speed to market, is fueling this virtuous cycle of risk selection, which ultimately creates profitable growth for Progressive and delivers against our strategic objective of growing more preferred business and expanding into a much larger Robinson-addressable market. The combination of investments we continue to make against this target market is absolutely delivering on our vision to become consumers' #1 choice and destination for auto and other insurance. With that, if you can give us a couple of minutes, we will set up for Q&A.

[Operator Instructions]

Our first question comes from the line of Mike Zaremski of Credit Suisse.

My first question is regarding your competitive advantages relative to peers. I'm curious if you feel they're materially stronger today versus just, let's just say, a couple of years ago? And if the answer is yes, if you can kind of boil down what are likely a lot of reasons, down to maybe the 1 or 2 underlying reasons you think are having the most impact.

I would say absolutely, that we continue to try to drive a greater gap between our peers. And it's really a lot of what we talked about today. It's hard to actually talk about 2, but segmentation and what we talked about today with matching rate to risk is critically important, especially to achieve our operational goal. There's a lot of other things that go into play. So our cost structure, we think, is really important. We know that people can shop. It's easy to change. And having a competitive cost structure is very important to be able to have competitive prices. And then I think some, if I only had to do 2, I would say those. But again, our service, our local footprint, our brand, there's so many other things that come into play and it's all those things in aggregate that we believe chips away at being able to have a competitive advantage.

Okay, great. And my last -- my follow-up is regarding -- thanks for mentioning 96 Octane, which is your in-house marketing agency, and I had a quick moment to go over to its website. So just curious, a lot of advertisers are speaking openly about trying to better understand and manage their digital ad spend, given the tectonic shift towards digital consumption. It's getting a lot of press. So I'm just curious if I'm barking up the right tree or not. And is this one of the reasons Progressive has grown faster than many have expected?

Well, we, from an advertising perspective, we try to be out and about where anyone wants to shop. So a lot of that has to do with demographics. 96 Octane was really born from us understanding and being able to do a lot of the things in-house that frankly, we were paying a premium on for doing outside. So that was a little bit different. On the media side, a couple of sessions ago, we had our guests talk really about understanding efficiency of ad spend, whether it is on social media, on Instagram or on mass media. We do believe that we have an advantage here. And that's one of the reasons why we buy a majority of our advertising in-house, because we believe we have an advantage. We've talked a little bit about that. I won't share great details, but yes, we think that's a competitive advantage. So 96 Octane is a little bit different, that's more on the creative side. But our in-house media buy and understanding of making sure that we only spend to our allowable costs, I think has, is a competitive advantage.

To that I would add, the digital space is obviously highly measurable and we spend a lot in the digital space and have for quite some time. Dan Witalec, in the session that Tricia mentioned, also tried to convey the level of understanding we have now in advertising attribution in the mass media space. So increasingly, we think we are able to buy shows, dayparts and understand exactly what the cost per sale is for those purchases. That obviously allows us to buy very efficiently, but also to negotiate very effectively with the media channels.

Our next question comes from the line of Elyse Greenspan of Wells Fargo.

My first question, I just wanted to get a little bit more color, I guess, on the PLE disclosure that you guys have in your Q. The growth slowed in the agency channel and it's actually down in the direct channel for a 3-month basis this quarter. I was just wondering if you could talk to a little bit about what you're seeing there. And is that being driven by what's gone on with maybe some of your competitors taking less rate and pushing for growth?

Elyse, so yes, in terms of growth, we still feel positive. And the measure we use internally is trailing 12. We've talked about trailing 3 being an indicator. So we obviously always look into that. We have seen from a rating perspective, less aggressive rate taking. So if you go back a couple of years, there was a lot of rate. It's smoothed out a little bit, for the most part. There's some competitors still taking a little bit of rate and some actually reducing some rate. So that will put some pressure on PLE. That said, we continue to think about the nurture part in the ways of making sure that we take care of our customers, whether it's on the CRM side or the claims side. In addition, and I'm the executive sponsor for our retention team, there are times when we might make a decision for, and knowing that it might affect PLE negatively, on a process change. I won't go into the details, but we might look at a process change where we know it might cause customers to not stay as long, but we want to balance PLE with lifetime underwriting profit. So occasionally, we'll make those tradeoffs, because it's the right thing to do for the business. But again, we are very dedicated to continue on our path of retention and I don't have a crystal ball, but we look at really everything from rate to service to nurturing our customers.

Okay, great. And then my second question is on the severity trends, which also did go up, based off of the disclosure in your Q. If you could just talk to what you're seeing there? And then as you think about pricing for frequency is still negative, but if severity continues to drift up, can you talk about how that might impact the prices that you plan to take?

Yes, so as far as frequency, it's been -- we're pretty much in line now with the industry. We're a little bit -- it was a little bit lower in past quarters, it's fairly benign now. As far as severity, we do price to those trends. So the trend you saw this quarter was really, the increase was based mostly on collision and PIP. And PIP has a lot of volatility, so I'll talk more about collision. So our collision severity trend this quarter was just shy of 9%, about 8.7%. For the year, year-to-date, it's still like 6.7%. But we're seeing more frequency and severity on total loss vehicles, so newer vehicles becoming total losses. So if we continue to see that trend, of course, we'll price to it. And we don't price to overall. We'll price when we look at certain states and the channel, et cetera.

Our next question comes from the line of Amit Kumar of Buckingham Research Group.

Just going back, I guess, to the discussion on higher severity, and Allstate flagged the same thing this morning in terms of the newer vehicles showing the higher severity component. Are you surprised by this change in trend which we are seeing? And I would have intuitively assumed that with all of that ADAS, it would have actually helped the trend somewhat in terms of collision warnings and all that stuff. Maybe just talk about has anything changed over the last 3 quarters? Because if I look at the older collision trends, it was flat. And even if I go back to '14, '15, '16, it was up in the 4% range or so. So what has changed recently?

Well, very specifically, like I just talked about with Elyse, it's the total loss, both frequency and severity. And remember, even though ADAS is more and more prevalent in vehicles, there's still a large fleet out there of cars that don't have that safety equipment and there are a lot of people that have that equipment and turn it off. So it's, that's really hard to measure. From the word surprised, we just look at data. So when we look at -- when we see the data, we react to it, we watch it very closely. I try to get away from being surprised at anything I see, since we've been in this industry a long time. We always follow the data.

Yes, and I think the important thing to note is that our average premium has kept up, or actually, in this case, outpaced the pure premium growth, the frequency times the severity or average loss cost. So I think by that fact, you could assume that we don't have an exact under-the-line coverage. We can't predict the future, but in aggregate, our pricing has been keeping up or actually outpacing the loss cost trends.

And we often talk about that. And Pat hit on that when he showed the chart of the delta. It's really about staying ahead of that trend. And we've always talked about small bites of the apple. We don't want to rate shock our customers, and we do think that influences PLE as well, so we'll continue to do that.

The other question, the only other question I have -- and this 8.5 is actually very -- it's fascinating and very helpful. I don't know if this question is for you or Pat or someone else. When I look at the 8.5 deployment on slide, I think it's 14 or 15, I can't see the page number. Today versus the footprint at the end of the year, is there any method to that launch? I guess what I'm trying to understand is was there something which you noticed in those states which are being cashed up on initially and then it's being rolled out into other states? Or is that just as usual, how it sort of, how the process evolved?

I'll -- if Pat wants to come up, he can, but I don't think there's a huge amount of rhyme or reason. Obviously, we want to get it out. When we believe it works, we want to get it out in high premium states, if that makes sense. Right now, we're in 15 states, 40% of the premium. There are also, there are states where we still have to get up to the 8.4 to get to the 8.5. So it's sort of a whole map and blueprint of how we're going to do things, and frankly, how it can go through our IT department as well, and so that's -- that would be my answer.

Yes, and how the states are currently performing on the 8.4 model, the regulatory environment can also affect the schedule. So we have a schedule that's fairly dynamic. But those are the considerations that go into that.

Our next question comes from the line of Josh Shanker of Deutsche Bank.

I want to talk about the new business penalty. You have been growing very aggressively, but you've also talked about telematics and also about customers who've been customers before who are coming back. Over time, does the new business penalty diminish for you in terms of taking on new business?

Well, I think, and you can add on a little bit on this, I think from the new penalty, a lot of that comes from new business, but also from the advertising. But also, that's balanced with retention. So as our retention has grown, that has equaled out a little bit. We're going to continue to spend a lot on advertising. So that will be expensive on the direct side, but again, we only do that if we think it's efficient. You talked about telematics, that's a huge variable for us and in part, in terms of not just understanding the ultimate loss costs of those customers, and now especially, as we evolve into more distracted driving, but our preferred customer base as well. And then you talked about customers coming back. That's just us to understand both how to underwrite and understanding more about customers that have come before. So a lot of times, if it's a new customer, we don't know anything about them. We learn along the way. We've actually already known this person. It's like if you dated somebody, you broke up and you start dating again, you already knew he didn't put his shoes away. So you've got to figure that out and we know a little bit more. Not a great analogy, but it's the best I can come up with.

And along those lines, do you have a vast sort of collection of people who were customers or not -- maybe they weren't customers, they were 'try then buy' type people, who you never got around to dating? Or is that really negligible?

So customers that quoted and didn't buy?

Or initially, you were talking about -- you said people could try out Snapshot and see what their discount is, and if they like the price afterwards, then they can come and you get to see how their driving is before you've actually taken on the risk.

No, we had tested something called Test Drive a while -- years ago, and it was a little bit -- it was like that. But no, we, when you're with -- now you're with Snapshot, you are a customer, and we have other variables as well.

Our next question comes from the line of Kai Pan of Morgan Stanley.

So I just want to be more specific on the pricing versus loss cost trend. If you look at frequency up 6%, frequency down 3%, so that loss cost trend like up 3%. Your average premium per policy is up 4%. So you still have a little bit, like 1%, room to improve your margin. But my question is really, is that going forward, how quickly are you going to react to the potential rising cost trends on the pricing side? Will you try to catch up with it to maintain the margin? Or you could let it drift a little bit higher, because now you're in the 90%, away from the 96% target?

From the reaction perspective, we are a rate machine. So we can react, I think, quicker than anybody in the industry. So that to me is something that's a really big strength of ours. We will react if we continue to see trends, whether they go down or up. And it really depends on, we can look at our conversion and we might do things differently if our conversion changes. Right now, we feel really great about where we are rate-wise. And we're not going to react, to again, one line coverage code in one quarter of severity.

And I'd also highlight what Sanjay was talking about, which is our product management structure that's very local and down at a pretty low level in terms of product analysis and product action. So if the product manager believes there is benefit to using that 1 point for a certain segment where they can get more competitive, perhaps it's Robinsons, and grow more, again, subject to that 96 combined ratio, they'll make that decision. So this really comes down to very smart, very motivated local folks who are figuring out how best to deploy that margin. It could be advertising. It needn't necessarily be rate level. We can say we want to advertise more in that marketplace to, again, grow as fast as we can, subject to that 96 ceiling.

Yes, it's so important to have that balance of having a really healthy margin and growing. And if you make that decision because you think you can grow, we really want to make it about the -- you can grow and not just throw away that margin.

My follow-up question is that since you're so fixed on the 96 number, so I imagine you probably cannot wait for your segmentation model from 8.5 going up to 9.6. My question is that on the way from 8.5 to 9.6, is some -- is there a phenomenon, like, call it, diminishing marginal returns, that you get less as you move further and further? What I really am trying to get at is of your other opportunities, for example in the Robinsons, which you probably just started this progress, you could put more effort in that, making a bigger marginal impact, and with that helping accelerate the growth in Robinsons segment as well as improve the margin of that target market.

Sure, and we've shared over the years, sort of those Gini curves, where you get incrementally better, and obviously, there are big segmentation variables that kind of give you that leapfrog. Think of credit and especially for us, usage-based insurance. Where I think our biggest opportunity is, and John, feel free to weigh in, is the fact that now we own a homeowners company. And to be able to share the data of losses that happen in both home and auto and have that deep segmentation on the home front and the auto front and combine those. So to me, there's so much to do there, and that's what's so exciting about our ownership, our eventual full ownership, of Progressive Home ASI.

Yes, and we did start at product version 1.0. So there's been a lot of iterations. And they've all been far incrementally better than the prior version. We think there are a lot of other opportunities. You both hit on, in talking about the Robinsons and pricing the household more effectively over time, even beyond auto and home is an opportunity for us as well. But we absolutely, as Pat showed, have 8.6 in the R&D lab, and we'll be out soon with that. We even have 8.7. So we look at the opportunities that are in front of us, figure out which we want to deploy and which product model. And invariably, we have many more opportunities on our list than we actually roll to market and they just roll to the next product version. So we are not yet seeing any diminishing returns in terms of product model upgrades.

Our next question comes from the line of Paul Newsome of Sandler O'Neill.

You talked about the importance of, in prior companies, prior insurance, has the type of company that you get your customers for, I'm assuming it has changed. Maybe you could talk about how it has changed over time in the last year or so, in terms of where you're -- from whom, what type of competitor are you getting your typical customer today, versus before?

Yes, I mean, I think there's obviously a lot of big players. So we focus on the bigger players, as I'm sure they focus on us. A lot of it has to do with rate. So if you get behind in rate and you have to take a lot, those customers are going to shop and they will likely come to another company that has a well-known brand, like Progressive. And so I won't necessarily name competitors, but we've seen a lot from some of the major competitors, and I think that had to do with just rate. And it's easy to shop auto insurance in both the agency and the direct channel and we see that when people raise their rates.

What about cross distribution? I mean, obviously, direct is taking share in general. But could you talk a little bit about any changes in how people are -- I mean, are people going straight from agency to direct? Or are they going from agency to independent to direct? How has that process evolved in recent years?

It's hard to say. So I think for years, people thought everyone would go direct. We have a very healthy robust Agency business. We have 30,000, 40,000 independent agents and they are growing. We're really happy about that. So I think it really is an individual thing. And for us, we want to be where, when and how customers want to shop. So we've got the direct channel, we continue to grow in that across the board, but more specifically on the homeowner side. So I think years ago, people said, "I wouldn't shop for auto online, that's crazy." A lot of people do it now -- actually, obviously, a lot of people. And from a homeowner's perspective, the same thing. And we're seeing a lot of people shopping through our HomeQuote Explorer. So really for us, it's about the individual comfort level of how you shop. So it's hard for me to look at data across there, but I will tell you, we are growing in both channels, obviously as you see, substantially, but very happy with that. And we'll watch trends as they change, but so far, we really do focus on what the customers want to do.

And while we've seen, in aggregate, a trend towards more direct, what we see within channels is generally, people are shopping within the channel. So if you looked at the distribution of our customers, new customers, it would pretty fairly reflect the companies and their market share within those respective channels. The direct channel, actually, in aggregate over the past few years, has been actually taking more share from captive agent companies than from independent agent companies. Share for independent agents has actually stayed fairly constant. And we've seen captive share drop a bit and direct, increase. When we talk about prior insurance in our rating, we're talking about a lot more than just from where you came most recently. We're looking at a longer history of how many different carriers you were with, how long were you with them. It's a combination of a lot of similar attributes like that, that we're looking at that segments what was previously a fairly binary rating variable of do you have prior insurance or don't you? We've now segmented that far more finely.

Thanks for that, I wasn't catching that. And I think on the captive side, it makes sense, because you only have one choice. And so for us, that's why we've really loved working with independent agents, because they do have choices, and I think people will demand that.

Our next question comes from the line of Marcos Holanda of Raymond James.

So in the context of the achieved milestone of $30 billion in premium, I was hoping you guys could discuss the balance between capital demands and growth, and how that could potentially affect your annual variable dividend, and if you can discuss the formula for that dividend, that would be great.

Yes, so I mean, obviously, we want to grow as fast as we can. And this is a fairly capital-intensive business. We're not buying things, but we have to have regular -- regulatory capital and then contingent capital, so it has taken a demand. We obviously just went to the debt market for another $550 million. And we believe that will allow us to continue to grow throughout this year and next. The variable dividend is based on a percentage of after-tax underwriting profit. It's a formula that the board approves every year, so -- and that's changed over the years. It used to be 20%, then it was 25%. This year, it's 33.5%. We multiply that times the gain share factor within the company. So right now, our gain share factor is 1.91. It varies from a 0 to a maximum of a 2 point. So if you do that math across that multiplication, that's how we come up with the variable dividend. The only caveat to that with the variable dividend is if our after-tax comprehensive underwriting, I mean, comprehensive earnings are less than our after-tax underwriting profit, then we don't pay anything. We pay 0. That's happened once, and that was in 2008 during the financial crisis.

And that is, as we say in the Qs and the Ks, it's subject to board discretion. So the board could choose, even if that criteria that Tricia just mentioned, of comprehensive income having to be greater than after-tax underwriting income, is not met, the board could choose to pay a dividend nonetheless. And if the board chose to pay less than the formula, it's under their discretion as well. We do have a lot of capital needs, given our growth. We're on track for almost an additional $6 billion in premium this year. We think of our surplus needs as a 3 to 1 for auto and around half that for home, so a blend that's in the 2.8, 2.9-ish kind of range right now. And obviously, we want to continue to grow. And that's why we did access capital markets recently, again, to ensure that we have the capital we need to support the operating business. If you look at our financial policies, I think you'll find it is all about supporting that operating entity, because that is how we consistently drive shareholder value. So we think we're in a pretty good position going into the next year. Depending upon how much growth we have next year, we may find ourselves in need of incremental capital. That will remain to be seen. Margins obviously right now are very good. Investment returns could be better, is the way I would characterize it. So we'll see how that plays out going to the next year, but right now, we feel great about our position.

I'm actually going to take a question from the webcast now: Please discuss your ambitions. And I think that this is because multiple times in the past, we've talked a lot about the different sizes of the property and casualty market, the Personal Lines segment versus Commercial Lines segment. Please discuss your ambitions in the Commercial Lines insurance business. Do you envision in 10 years that Progressive will be a significant underwriter of such lines as worker's compensation, commercial property, commercial liability, et cetera?

So we talked a little bit, I talked a little bit about this in my letter. And we obviously just rolled out what we call BQX, BusinessQuote Explorer. So that is insurance for small business. Think of GL and business owner policy. That is something that we believe we have a lot of opportunity, just getting started there. I'm not going to venture out and talk about 10 years from now. What I'll say is this, that we're the #1 Commercial Auto writer. We have a brand and we have the availability to, I think, really -- we have a lot of runway, I should say, to really grow in that space, because of our brand, because of our knowledge of that area. And whether we write it all on our paper, or use partners, which we will be using, assume it will do -- it will be like what we did with home, with our Advantage Agency on the Personal Lines side. We see this whole destination for commercial and that's what we have been building. We started building it last year. We just rolled out, had a soft launch this quarter. So all I can say is, I'm not going to talk 10 years out, lots of opportunity, we're very excited about it. And we believe it'll be something really significant.

Yes, we've noted before, the Commercial Lines space in property and casualty is in excess of $300 billion. And we play in a slice of that Commercial Auto historically and today, really that is probably 10% of that. And we are aspiring to move into a broader offering on our own paper as well. So the BusinessQuote Explorer offering today is predominantly third-party carriers for coverages outside of Commercial Auto. We have filed with the first state a general liability and business owners policy, and we hope to be out in that state early next year.

Our next question comes from the line of Meyer Shields of KBW.

I'm trying to understand whether the increasing sophistication of the pricing that you're talking about, does that make your near-term results more or less subject to [ just ] variables like gas prices?

I'm not sure if I understood the question. I missed -- I -- you mumbled a little bit in the front or I didn't really hear the first part of it.

I'm sorry I mumbled. I'm just trying to understand, given the reliance on data, and obviously, it's working out really well, I don't mean to sound critical. But does this make your results, your underwriting results, more or less dependent on external realities? So I'm using gas prices as an example, maybe that will affect overall mileage.

Right. I mean, I think from that perspective, when you look at macroeconomic data like gas prices and unemployment, those normally end up affecting frequency. And we sort of, we don't price for frequency. We really price for severity. So I would say it's always important, so we always look at it. We follow it very closely to determine trends. I would say -- I wouldn't say it necessarily changes. Would you differ?

No, I really don't think having greater sophistication in your pricing puts you at any -- in any different position relative to loss cost trends that are driven by gas prices, other economic changes. I really don't. So based -- those other economic changes might affect segments of customers more or less than others. And to that degree, we might see changes in trends more so. Say if unemployment increases over the past, we have seen changes in claiming behavior and coverages such as Personal Injury Protection. So to the extent your segmentation drives your mix of customers to one end of the spectrum or not, you might be at greater risk in terms of economic changes. But in aggregate, I would say it's really not an issue.

And then the second question. I'm trying to understand the elasticity of pricing within homeowners compared to auto. My superficial assumption would be that there's less elasticity, because typically, a smaller dollar policy, but I don't know if that's accurate.

I think that would be accurate. I'm not -- I -- do you...

Yes, so shopping for auto insurance is a lot easier than shopping for homeowners insurance. So I think there is some greater stickiness. The fact is that for a lot of homeowners, that homeowners premium is bundled within their mortgage as well. So it's not quite as obvious when the rate changes. So I think if your hypothesis is elasticity is greater in auto than home, I think that'd be a fair assumption.

Yes.

Our next question comes from the line of Gary Ransom of Dowling & Partners.

I wanted to ask about UBI and its use in segmentation. I assume it's still an add-on at the end of the various other variables. And you can correct me if I'm wrong on that. But do you envision a time when that actually might begin to be more infused in the rating plan and become more of a primary variable, one that replaces other variables? I just would like a view of how you're looking about the UBI portion of the sophisticated segmentation.

Yes, I mean, I think for us, the UBI is obviously so powerful that we would love to have it in every single auto quote. I think the issue is, obviously, it's a voluntary -- it's at a voluntary perspective. At some point, the car could be -- the car could be the place that actually tells you how you're driving, if we have that technology and the infrastructure to be able to understand that driving behavior. So right now, it's one of many variables. We think it's -- we know it's really powerful. We want to be able to give good drivers great prices. And so we'll continue to advertise on that. I wouldn't say that -- I actually wouldn't say it's necessarily an add-on, but it's not something that everyone has. So it's not like everyone has -- we're going to have everyone's proof of where their garaging address is. So I don't know if I'd call that an add-on or not. It's a variable that we think is important. And for people that want to get great rates, they're going to actually, obviously, do UBI. And if not -- or they go and they don't get great rates, they will leave and go to another competitor, which is okay with us.

So Gary, I'm guessing you're thinking from your actuarial point of view, and in terms of solving for the efficacy in terms of increasing the accuracy of the rate, it is actually solved last. Because not all of our customers take UBI, we want the greater program to be accurate for all of those customers. Then we solve incrementally, and it has a lot of incremental power, we solve that last. Would we prefer that everyone take it? As Tricia said, absolutely yes. Will there be a day when that is the model? It very well could be. Certainly, as data comes from vehicles directly going forward, and even today, data coming from handhelds increasingly. So I think there could be a day, I wasn't -- in the very near future, where it is all solved simultaneously. And that would get us the biggest benefit from the rating information. But today, we solve that -- for that last. Does that answer the question?

Yes, that does. And maybe a follow-up to slip into homeowners, is, are you using data from any of the Internet of Things type technologies and collecting that? Is that a useful means of segmentation in homeowners?

Yes, we're working on that. We have a couple of people, both at Progressive Home and here at Progressive, working on connected home and ultimately how that -- how we can understand what people do and what people buy and how that affects loss cost. Probably too early to tell right now. Those would be my answer, but yes, we're definitely looking at that.

We have pricing segmentation based on the different perils and the different technologies that can be deployed to try and limit losses on those perils, so water, fire, theft. The take rate now is very, very low. So the deployment of such technology is really just beginning. And we have discounts for those devices. I will admit that the data behind the discounts for those devices is somewhat limited, based on the fact that we simply haven't had much history. But that is absolutely where our product is designed to go. And as Tricia said, we have a lot of people who are actively making sure we are a leader when it comes to deploying those types of things in our rating for homeowners.

And I think ultimately, what you want to get to from a home perspective, because the severity is so much higher than say in auto, is if you have a device and it alerts you, you have to stop the loss or at least lessen the loss from happening. That's really the key, is if you have something and you are on vacation and you can't stop the water leakage, that doesn't really help much. It's really about understanding and lowering loss cost.

I wonder if I can -- can I just fit it one little one, too? How important, on the different levels of segmentation, that you're going from 8.4, 8.5, 8.6, 8.7, the speed of that. How important is that replacement, that constant replacement, to your ability to develop the adverse selection that you talked about earlier?

I think it's critical.

It's very important. So as you know, most of our rating algorithms are filed and in the public domain. The minute we send them to the Departments of Insurance, as we mentioned in the presentations, we are also looking at our competitors' filings. So we are copied very quickly. This is, frankly, about running faster. And then we talked about the iterations of 8.7, 8.9. 9.6, I think, was where we were headed. It's critical we continue to get them out fast.

And it's more fun. Actually, that's the way, what Sanjay said, that's the fun part of being a product manager, is you -- some of that segmentation comes from grassroots efforts, and then we look at them countrywide. And there's a lot on the table, a lot of exciting things. So it is about running faster. It's in our DNA and we'll continue to do it.

So we are going to sneak in one last caller, even though we are past the 3:00 hour.

Our next question comes from the line of Yaron Kinar of Goldman Sachs.

I have 2 questions. One, as you continue to improve on your segmentation and pricing, I guess one thing that's quite notable is that your combined ratio is actually improving along the way as well. And I would have thought that with the target of growing as fast as you can, 96, it would kind of be the opposite way around and maybe achieve even greater growth while keeping to the 90 -- or getting as close to the 96 as possible. So I guess my question is, is the fact that 96 is -- or that you're well below 96, is that just because you're still keeping some margins of error and you're being cautious in how you're pricing? Or frequency is below what you had expected it to be? Or is there some other deliberate driver there that would keep the combined ratio as low as it is?

Remember, it's 96 or better. So 4 is sort of the, we have to have, and then it's better. Frequency is one input. Again, we talked about today when I wrote in my letter, mix is a big difference, too, having more preferred customers. We still have a small percentage of the Robinsons. We have a lot of room to grow on that. And we also highlight and put a lot of emphasis on our cost structure, both on the LAE side and what we call non-acquisition expense ratio. So it's a bunch of different things in play that goes into our widened margins.

I understand all that, but I would have thought that, that could be priced for it to begin with. And not that I'm complaining about 20% net premiums growth in any way, shape or form, but why wouldn't it be 30% with keeping margins a little bit lower?

Well, again, we said we look at state by state, channel by channel, segment by segment. And if we believe that -- one, the growth has been tremendous. But if we believe that there is an area where we think we could grow more handily, or we think that there's an opportunity to beat out the competition, we would absolutely consider whether limiting margins or reducing margins there to get that growth should happen. We go through that exercise all the time. So there's a handful of states right now where we have reduced new business rates in order to grow. We look at a lot of different data to understand that, conversion being one of them. Again, you could easily say, yes, let's -- if we can grow 40%, if you said to me right now, could we grow 10 more points and only lose 0.5 point of combined ratio, I'd say yes. But you just don't want to throw away that margin and not get the growth. So it's really surgical when you make that tradeoff.

Okay. And then my second question, I think you've often described yourself more as an -- a technology company than an insurer. And it seems like now there is another technology company entering this space, or dipping its toe in the water, Amazon. And if I understand Amazon's mission correctly, it's basically to take margin out of businesses and out of industries. So I'm just curious to hear your thoughts as to how homeowners, or maybe even auto eventually, gets impacted as Amazon tries to build an -- a presence in insurance.

Yes, I mean, I think we'll cross that bridge when we see it in terms of that, if we see it. Insurance is a complex product, having 51 jurisdictions. It's highly regulated, not an easy place to get into and do it well and make money. I think Pat said, "It's easy to make money, it's easy to grow, not easy to do both." So we have 80-plus years of experience. We've had ups and downs, way more ups than downs. That said, we've seen a lot of competition come along over our 80-plus years. And we believe we're well-positioned, with all the things that we've said, in terms of great brand, incredible segmentation, great people and culture, service like no other. So we'll take all of our advantages, our competitive advantages, and work to continue to grow and grow profitably.

So thank you everybody for your time and interest today. We've exhausted our scheduled time and then some. So Chanel, I'm going to hand over the call back to you for the closing scripts.

That concludes the Progressive Corporation's third quarter investor event. Information about a replay of the event will be available on the Investor Relations section of Progressive's website for the next year. You may now disconnect.