Welcome to The Progressive Corporation's Fourth Quarter Investor Event. The company will not make detailed comments related to the quarterly results, in addition to those provided in its annual report of Form 10-K and the letter of shareholders, which have been posted to 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 view the presentation slides live or download them for their webcast site. Participants on their phone can access the slides from the Events pages at investors.progressive.com. In the event we encounter any technical difficulty with the webcast 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, Carmen, and good afternoon to all. Today we will begin with a brief presentation by our Chief Human Resources Officer, Lori Niederst, about our culture and people being a competitive advantage. This presentation will include 2 videos, so we recommend joining our live webcast through the Events page on investors.progressive.com. Our presentation will be followed by Q&A session with our CEO, Tricia Griffith; and our CFO, John Sauerland. Our Chief Investment Officer, Bill Cody; and our General Manager of Progressive's Home business, Dave Pratt, will also 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 and results to differ materially from those discussed during the event. Additional information concerning those risks and uncertainties is available on our 2018 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 of our website, progressive.com. It's now my pleasure to introduce our CEO, Tricia Griffith.

Good afternoon, and welcome to Progressive's fourth quarter webcast. We have a great session for you today. I'm going to quickly recap 2018. Hopefully you've had a chance to read the Annual Report and my letter to shareholders. But in a nutshell, an incredible year. 20% net written premium growth at a 90.6 combined ratio, so a lot of margin, way more than our actual goal of hitting at least $0.04. We grew the topline over $5.4 billion in net written premium. And that was on top of 2017 when we grew $3.8 billion on top of 2016 when we grew $2.8 billion. So $2.8 billion, $3.8 million, $5.4 billion, incredible growth. That momentum has really sustained us as we head into 2019. All of this compiled into a comprehensive return on equity with our investment returns of just around 24%. So great results. We also had a lot of celebrations and milestones that we were able to accomplish this year. I wrote about them in my annual letter to shareholders, but it's been a really wonderful year internally to Progressive to make sure that we celebrated both internal and external goals that we reached. I will let you know though, specifically for this audience, we don't rest on our laurels. We are hitting the ground running in 2019, and again, always trying to grow as fast as we can, make at least $0.04 of underwriting profit and take good care of our customers. So from then, I wanted to just take a second and thank all the Progressive employees for all they've done this year and how we've succeeded in such an incredible year, and we've done it together, which is the theme of this year's Annual Report. This slide should be very familiar with you, it's our 4…

So I hope you enjoyed that and all of the artwork is also on our Investor Relations webpage, so please feel free to view that. It's funny how much we've grown because in that video that was only a couple of months ago I said 36,000 people and now we have over 38,000 people, which has been pretty incredible. But because our people and our culture are such an important management, I've asked Lori Niederst, our Chief Human Resource Officer, to come up and talk about that today. Following her will be John Sauerland, and he's going to talk about our dividend policy change. And of course, we did some QA in our November's earnings release and I wrote about it in my annual letter to shareholders, so hopefully there's a lot of clarity around why we made the change, but he'll come up and talk about that as well. So let me give you a little background on Lori. So Lori started her career in public accounting as a CPA. She came to Progressive about 21 years ago as an analyst in the finance group. She quickly moved to our call centers, which now we refer to as CRM, customer relationship management centers and did a variety jobs with increasing responsibility. I first met Lori when I was in her role and was hiring a Comp and Benefits Director. And when she first interviewed, we had a couple of different interviews, I loved the fact that she cared deeply about our people and our culture, really has always been a steward of our culture, then she had this balance of great business acumen. And I love the fact that she could bring both to that job as Comp and Benefits Manager. That's where she really learned the business of…

Thank you, Tricia. So as I was preparing for today, I assumed that I'd have to make the case for why culture is a relevant topic for this audience. But then about a month ago, in a letter to board members, State Street CEO made that case for me. He described corporate culture as one of the many growing intangibles that affects a company's ability to execute its long-term strategy. He also cited a recent EY study that concluded intangible assets, such as culture, drive more than half of an organization's market value. We not only think culture is a relevant topic. We believe our people and our Progressive culture are our greatest source of competitive advantage. So my objective today is to describe why we believe that to be true. Our culture is the foundation upon which we've designed people strategies and together, they generate our business outcomes. If there are any cracks in this foundation, our results will suffer. If our people strategies aren't aligned with our business objectives, our results will suffer. However, it's the strength of our culture and our successful people strategies that have allowed us to achieve exceptional results and sustain truly competitive advantage. Our culture, as Tricia said, is deeply rooted in our core values that Peter Lewis introduced over 30 years ago. These 5 values aren't just words on paper. We take them to heart. We introduce our core values in new hire training and we reinforce them on a daily basis. Our core values guide our business decisions and define how we treat each other, our customers and our investors. Although they've been in place for decades, our core values continue to be closely aligned with our company strategy. As an insurance company, our product is a promise. It's a promise…

Tricia said it so well. Whatever part of the company I worked in, whatever job title I was in, to me, it always just felt like Progressive. But how do we know that our culture is strong? How do we know that it's creating competitive advantage? First, our people tell us. Just last week, I received an e-mail from Tim, an analyst in our IT control group, and Tim described our core values as the anchor of our culture. And he compared his time at Progressive to his service in the Coast Guard. And Tim shared that even when he is working with someone new, he always just feels immediately like they are on the same team. In addition to the anecdotes, we've got data to support our conclusion. For decades, we've been conducting an annual employee survey, and we recently started using Gallup's Engagement Index. As we expected, engagement at Progressive is significantly higher than the U.S. workforce. 68% of Progressive people are engaged compared to 33% of U.S. workers. And only 4% of Progressive people are actively disengaged compared to 16% of U.S. workers. Our 2018 results place us in the 96th percentile of all companies who use Gallup survey and only 2% of Progressive people disagree with this statement, "Our core values guide our business decisions and define how we treat each other." For years, we have also conducted an annual compliance and ethics survey and here too, we learn the strength of Progressive's culture. Our results last year were the best of all 32 companies using Ethisphere survey and 99% of Progressive people said they are familiar with our core values. And we don't have any easy jobs at Progressive. We work really hard and we have very high expectations, but we are unapologetic about this.…

Thank you, Lori. Good afternoon, everyone. So I am sure you all know culture is not your typical topic for an Investor Relations meeting. And frankly, I think Lori nailed it. Our culture and our people are absolutely at the core of our success. I believe we have the best people in the industry. I believe we have some of the best people in all of industry. I am continually in awe of the caliber of people we are able to attract and retain, while at the same time maintaining a collaborative and a driven environment. I am very confident we will continue to foster this culture moving forward and I look forward to that journey. Now we're on to a far more typical topic for this environment, our new dividend program. In December of last year, we announced -- or our board declared the 2018 variable dividend. We also reiterated at that time that, that dividend would not be paid unless comprehensive income was in excess of after-tax underwriting income. In our upcoming Q&A, we expect and welcome questions from you all around our dividend program, so we thought a little more of our rationale around that program would be good lead-in to the Q&A. As a reminder, and Tricia mentioned this as well, there are prepared Q&A in the November news release as well as the associated 8-K that was filed on December 12. On February 11, we paid the 2018 variable dividend in the amount of $2.51 a share or around $1.5 billion in aggregate. Comprehensive income for the year was $2.52 billion. After-tax underwriting income for the year was $2,303,000,000. So based on our stated hurdle around comprehensive income and after-tax underwriting income, we were $217 million from not paying any variable dividend for 2018. Subject,…

[Operator Instructions] And with that, Carmen, can you please introduce our first participant from the conference call line, please?

And the question comes from the line of Elyse Greenspan at Wells Fargo.

My first question, going back to some of, I guess, your closing comments, John. You spoke about your efforts to expand into general liability and business owners policies. I know you guys mentioned that briefly on your last quarter's call. I guess I am just trying to get a little bit of an update in some numbers how big do you think that, that opportunity can be, and you said in some of your comments today that you guys would think more about potentially it seemed like some other lines as well. Do you envision Progressive's continued expansion in Commercial Lines, assuming it all goes well? Could this all be done organically or do you see inorganic potential M&A helping to expand your initiative there at some point?

Let me start, Elyse, let me start with that. So we believe the addressable market is really big, and we are doing it not unlike we did our Progressive Advantage Agency over on the Personal Lines side. So we are starting with partners that we work with third-party unaffiliated partners and then, of course, we'll write on our own paper this year with BOP. So it will go a little bit slower this year. We've, obviously, been investing in this for a while, but we believe that there is such a good synergy with having the #1 commercial auto position and then really at some point having the whole household. And I really think about the business owner that has business in their home or nearby their house and they have their vehicles with us, maybe a toy, their home and kind of taking care of the entire customer. So I would say a lot of opportunity. We will use both written on our own paper as well as partners to make sure we can cover as many small business people as possible.

Just to elaborate a little bit. We are the #1 commercial auto writer in the country by a wide margin. We are having great results in that space right now. You saw the 2018, I think 28% growth, a tremendous combined ratio. We've got to continue to have a runway there and GL and BOP probably is a marketplace 3x the size of commercial auto. As Tricia said, we have started to -- our foray into other products, predominantly through third parties, Personal Lines side as well as commercial side, on predominantly the Direct side of the business. And that affords us a lot of experience and opportunity into what works with our customer set. And GL and BOP are products that we do offer through third parties today in our Direct business for Commercial Lines. Similarly, to how we started with auto in -- I'm sorry, with home in the Personal Lines group, we expect to offer our own product up alongside third-party products, it's worked really well in the homeowners space. We think it will work really well in the Commercial Lines space as well to ensure we've got the product that will keep that core household, as Tricia was saying, and ensure that if the product that is right for them is the Progressive product, we have that for them as well.

And we refer to that as BusinessQuote Explorer so we have HomeQuote Explorer, BusinessQuote Explorer. You'll be hearing a lot more about that and likely we'll have John Barbagallo or -- and someone on his team at a webcast later this year.

Okay, that's helpful. And then in terms of -- you guys brought up your commercial auto results. You've been pretty exceptional compared to what we've seen across the industry as some others really deal with both adverse frequency and severity issues. Can you just talk about what you are seeing within your book, the price that you have been taking as well as the loss cost trends and how you kind of see the margin profile of that business running in 2019?

So if you go back to 2016, we were really challenged from a profitability perspective and John Barbagallo who runs that organization took a step back and these are 12-month policies so we know when we need rate it's going to take some time to earn in. So we really got ahead of that in 2016 and said, "Okay here is what we think we need." In addition, just like we do on our Personal Lines side, we use segmentation for all of our BMTs. And for us, this is really important to understand and match rate to risk. And so we got out ahead of that. We feel great about our rate. We took about 5.5% in commercial last year. And we feel great about our ability to pull back, if we need to, segment. And, as you know, in a couple of states, we had some restrictions for quite some time until we felt like we were in a really good position, and we've lifted most of those but, obviously, you saw the numbers. We are doing incredibly well from a margin perspective as well as a growth perspective. And we think that will really help to spearhead like you talked about, at least, our small business insurer.

I'd take one more moment to tout our successful positioning right now in commercial. The other area we're really excited about is in electronic logging devices. So, we think we've been at the forefront of employing usage-based insurance rating in the commercial side similar to what we have done for well over a decade on the personal side with Snapshot. Here, we are providing pretty significant discounts to interstate truckers who are now required to have electronic logging devices on their vehicles, provides a great insight into the driving behavior and allows us to apply that to the insurance premium. So we think, Tricia was talking about matching rate to risk, that is a huge step forward in the commercial business in doing so.

Carmen, can we take our next...

Yes, and our next question comes from Yaron Kinar with Goldman Sachs.

I wanted to start with the expense ratio, if I could. And it's a 2-part question. So first, I noticed that the January expense ratio was up quite a bit relative to 2018 and was hoping that maybe you could talk about the drivers for that. And also within the expense ratio, I think you had talked in the past about achieving a target of a non-acquisition expense ratio of about 9% by year end '19. I think you're already essentially there now in Personal Lines. So is there another leg there? And similarly for LAE, I think you had targeted a 9% there as well for '19, by the end of '19 and looks like you're at about 10% at the end of '18. So do you think that you are -- are you still on track to get that 9%?

Again, that was -- you know, it's an internal target that we look to and a lot of it depends in a good way on where gain share flows in from that perspective, from an expense perspective. We look at that at a 1.0 gain share, kind of our target gain share, if it's higher, obviously, it's tougher to control expenses. I would say from an overall expense ratio, we've been doing a lot of advertising, which flows into our expense ratio and that's why we bifurcate the non-acquisition expense ratio with all others. So that's -- so advertising has been a big part of our expenses, and we only advertise when we feel like it's an efficient use of our funds and that we can get in customers at a cost lower than our target acquisition cost or cost per sale, so we feel good about that. And again, it's 1 month into it and things flow there but part of it right now in January is internal gain share and advertising.

Okay. And then my second question is around PIP in Florida. Where are we there? How many reopened claims do you expect to still flow through into '19 and beyond? Have you kind of capped this at this point? And also, do you think that there's any risk that PIP will become an issue in other states?

Yes, the actual number, there is a lot of variables that go into it, the type of claims some would be pre-suit demands, some are out there, some are already in lawsuit. Here is how we treated this. So we watch that litigation really closely, and it was the industry watching it, because we all felt like the deductible, we were doing it in the correct way. The Fourth District Court of Appeals affirmed that. Went to the Fifth District Court of Appeals and they overruled that. And then, of course, you know the results from the Florida Supreme Court. We treated this -- so we knew the files that were at risk, and we had the inventory. We, obviously, reopened a bunch immediately and treated this almost like a cat, where we got people down there and resolved those claims, and we have a big portion of them resolved and all of them reserved to the best of our knowledge, obviously. So we feel really good about our position here. From an overall, does this go to other states, PIP is really different in each state. So PIP isn't in every state, it's only in about 15 states and it's very different. And different states have a very different litigious atmosphere. Florida happens to be 1 that is always ripe for litigation. So I don't feel -- I'm not nervous about it going to other areas of the country because it's just different. This was very specific about how a deductible was treated and so I'm not concerned about that particular litigation going to other states.

Carmen, can we take the next question from the conference call line, please?

Our next question comes from Amit Kumar with Buckingham Research.

1 comment and 2 questions. First of all, I do want to applaud you on these presentations. These are actually very helpful and I do hope that other companies follow your lead and give us these additional insights. So I know you made a comment regarding the investment community, but we all look forward to these presentations.

Thank you.

That's that. The questions I have, the first question I have is going back to the comment you made in the 10-K regarding PLE. And there's a comment that it's declined due to targeted underwriting changes introduced in our new model. Can you just talk about that a bit more?

It was really just a process change in terms of when we determined you would renew with a lapse in coverage. And we used to do it at a certain time frame, and we reduced that timeframe because we found those customers, we weren't reaching our target margin. And so when we looked at that, we modeled out what we thought -- what the effect we thought would be on PLE and that's just flowing through to what you're seeing now.

Got it. The second question I have is I guess is a bit more broader question. In the 10-K, you talk about pricing of 1.2%. You talk about premium per policy growth of 5% in Agency, 4% in direct. And I think a lot of it is due to the shift in business mix. How are we thinking about, I guess, the trends as we head further into 2019? Should we expect the Robinsons, this whole thing to continue? Or anything which could lead to a different outcome?

We are enthusiastic about 2019, specifically as you talk about with the Robinsons. So as you know, we have more platinum agents than ever. We are continuing to add in that. We are continuing to expand across the country. So for us, both on the agency and the direct side, we have a lot of runway. In fact, we're less than 2% of the Robinson market. I used to stand up here probably several years ago, and John, I think you did, too, and forever, we were about 1%. We were 0.7 forever. We've built the infrastructure now so that Progressive Advantage Agency that at one point had 25 people now has hundreds of people for those direct callers to come in, and we have a broad array of home products for them, whether it's Progressive Home or others. Then we've built an online version of the HomeQuote Explorer. We are building buy buttons. So we feel like we have a lot of runway in that bundle as point of sale and as we graduate. So even when you think about our increase in our renter's policy, that's a prelude to the people that are going to buy our home. So we think that's really important. On the Agency side, I was just with a platinum blue agent this morning who had become the #1 in his shop and it's a big shop. And we're talking about how we're going to continue to work with him to grow our business and take care of our mutual customers. So from my perspective, and John you can weigh in, I feel very bullish on our ability to continue to grow in that preferred market.

Yes, we have tremendous opportunity on the preferred and, as Tricia said, our share there is very low. Our share, however, on the other segments is actually -- affords us plenty of growth opportunity as well, and we have grown very nicely across all segments, certainly more with what we call the Robinsons and others, but we've been growing across all segments and all channels. In terms of loss cost trend premium trend, if that was part of your question, we can't perfectly predict loss trends going into 2019. Obviously our product managers and pricing team attempts to do that when we set the prices. We can't know for sure. Clearly, claims frequency has been coming down, that's been a fairly consistent trend. Claim severity, going the other way in a fairly robust way. We think that will probably continue for a lot of reasons as well. We continue to take rates up in our commercial business, in our Property business. In our core auto business, our rate increases have slowed. You've probably seen that. It's becoming a bit more competitive in the marketplace. But, obviously, our margins remain very robust.

I'm actually going to take a question now from the webcast. So you talk about preserving culture but as you get bigger, and you just noted that you hired over 2,000 people or you've added 2,000 headcount to the employee base in the last few months. How do you really preserve this when senior management is unlikely to personally ever get to meet many of these people? The company's change in size alone would strongly suggest that the culture today isn't the same as it was 10 years ago. So how do you deal with this?

That's a great question and couldn't disagree more because we make it such a passion to talk about our culture. So we will hire 10,000 people this year. I go to and speak at every new hire class as does my senior leadership team. So believe me, that has been almost on a weekly basis. I go to the claims new hire, I go to the corporate new hire, which includes commercial, I go to CRM new hire and I spend an hour oftentimes right in this area that we are sitting in and I talk about our culture, our values, what I need from them. So I do get to one-on-one, either in-person or via webcast, meet nearly every new hire. There might be an occasion when I'm gone. Think that is hugely important. And my whole team does that. In addition, I think it's important for me as a leader to travel out extensively as does my team. We are out and about all the time. And oftentimes, it's sitting in rooms of 20 people saying, tell me what you don't like. Tell me what you may talk about that we wouldn't know about. Lori in particular, who you just met, our head of HR, constantly goes out and just does town halls to see what's on our minds and tell us what we can change. Many of our changes we've made over the years were from the employee base saying have you thought about this, can you make this change? Would you consider this? And that's our passion. And for us, cultures evolve and it will continue to evolve because we have different demographics and different needs, but we are very in tune to that and this is something that is so critical to our success that…

Carmen, can we take the next question from the conference call line, please?

And our next question comes from Michael Phillips with Morgan Stanley.

I want to follow back on one of the earlier questions on the small commercial. You're getting into that at the same time that we've seen some recent announcements from some pretty formidable competitors on the same thing. And so I'm -- I guess I'm, given those were pretty recent announcements I'm wondering how that factors into your thoughts about how competitive that landscape is in the small commercial, especially direct. And then I think John said, GL, BOP is 3x the size of the commercial. John, did you mean both the overall market? Or do you mean specifically in the space that you play in the small commercial for that 3x size?

I meant that GL, BOP, I'm going to round, a little over $100 billion in the U.S.; commercial Auto, around a little over 30 billion. So 3x the commercial auto marketplace. We don't compete specifically in every niche of that market of course, but it gives you perspective on the breadth of market we are opening up by being able to offer those products. The other thing, similar to the personal lines side that offer, it's not only about writing incremental GL, BOP, it's about keeping the commercial auto longer. So to the extent a business evolves and grows and buys a location, et cetera, they have broader needs. Today, we can't meet that broader need, especially within our Agency channel those incremental products will afford us the ability to retain our current customer set longer. Again, same path we took with personal auto and home in order to increase PLE.

And Michael, I would say that competition is great. It makes us all better, it makes us all think about the customer differently. I like where we are positioned because we've invested in this in the last 18 months or so knowing it would take some time to get it right and own it. But we also have the advantage like we try to do with broadened coverage where, when and how customers want to shop. So we have our Agency customers who want to sit knee to knee and kind of understand the coverages for their small business and then we'll have Direct both, just like we did in Personal Lines, on the phone or online. So having a variety of ways with which to buy as a small business consumer depending on your tenure and kind of your knowledge of what products need to protect you. So I think to me, competition makes all of us better. I'm excited about what the future will bring.

Carmen, can we take the next question from the conference call line, please?

The next question comes from Ryan Tunis from Autonomous Research.

Just a few questions. The first one is the advertising expense disclosed in the 10-K I think it was up about $0.5 billion year-over-year. What are the type or range of outcomes we can expect in terms of thinking about that? I mean, is it -- could that be $700 million less next year? Could it be $700 million more? I mean, just trying to get a feel for how that might flex in any given year for these levels?

Yes, we look at advertising and look at it from an efficiency perspective. And we look at that from everywhere we advertise, so whether it's radio, mass media, digital, and what we really look at is a target acquisition cost. And that can be different for customers, and we've also started to look at sort of a lifetime customer value and we look at the home. So there's a lot of different things that go into that. But when we have a targeted acquisition cost and our cost per sale is less than that or less than or equal to that, we believe that's efficient use of our dollars. So we will use those dollars and flex them, depending on what's going on in the other part of the company as needed. So this last couple of years, it's been great because we've been able to really put on the gas in terms of advertising, and we've had a lot of different advertising campaigns that have brought in new prospects and ultimately conversion. As you know in 2016, we reduced advertising cost a little bit when we got close to our 96 target combined ratio. So those things happen. And 96 takes priority over everything, but we believe if we play it right, and we have efficient marketing and great segmentation and a great brand and a low-cost structure, we can have it all. Some years, we have to flex.

To that, I would add, we are hugely data-driven. We've gotten really good at measuring our advertising, not only in the digital space, but now in the mass media space. We buy virtually all of our advertising in-house. So we use that information, we know day part, television show, how our cost per sale performs on that buy, and then we know where we can buy it for the next show. So we have tremendous negotiating ability because of the knowledge we've gained, that we've used historically in the digital space, but we've now expanded it to mass media, which has had us making a lot different decisions and way more productive decisions in the mass media space. So that is how we manage it, and I think we are in a way better position now to manage it broadly across our spend than we were even just a year ago. It's pretty impressive stuff.

And a shout-out to our marketing department who continues to evolve this campaign so you know we had kind of Flo in the superstore and then we had Jamie and now we have a whole squad of Flo. We have our campaign of Parentamorphosis that says when you buy your first home, you become your parents. We've got a couple of really great ads coming out pretty soon. And you are going to see some different, a couple of different campaigns, I won't give a spoiler alert, coming out in the next few months, one for our Special Lines, our motorcycle. And we're delving into some things like podcasts that I think you're going to be really interested in, but we continue to evolve our cast of characters, and that to me is a big thing. We're not using the same old commercials over and over. We continue to expand.

Got it. And then I had a question on the frequency statistic, down 3% for 2018 and it sounded like in the annual report somehow it was attributable to mix. If you had been able to hold mix constant, what do you think the frequency would've been?

That is a hard question to answer because you'd have to go back and see. There's a lot of things that are going on in terms of frequency. So some of it is mix. We have more of a preferred mix, but it also has to do with macroeconomic factors, people driving -- driving behavior, climate in terms of how the roads are, there's a lot of things that go into it. I would be hard-pressed to give you an answer that I felt comfortable with. I don't know if you can do any better?

I agree completely.

Got it. And then just quickly. The one other one I have was just on the January adverse development that wasn't related to Florida. It seems like for whatever reason over the past few years, there's been that going from December to January. Just curious what the explanation might be for it? Seems like consistently there might not be enough IBNR at year end.

You know a lot of it, it depends on the year, but almost always, you have late reports from December from the holidays that go into January. Sometimes you can have a late report and it's also weather-related. So it could be double. Like this year, some of the adverse development was Florida PIP and some was late reporting. But if you look over the last 3 years, I would not use January as looking at the whole year out. So if you look at the last 3 years, January was at least 1 point upwards in 1 year of like 3.2 points I think in 2018. Throughout the year, the most that we have come to in the last 3 years at the end of the year had been 0.4 points, so less than half a point. So January is just kind of bumpy because of timing and we kind of stop it there and start a new year, but a lot of it is late reporting, weather or some circumstance. But don't put a lot of thought into January because if you see over the last 3 years, it really does smooth out and we try to be exact as we can for our reserving and we have been pretty close to that.

Thanks for the question, Ryan. Carmen, can we go to the next caller, please.

The next question comes from Mike Zaremski from Crédit Suisse.

So my question's on the severity trends. I was going to ask specifically on bodily injury, which looks like if I do the math, it ended the year at 4%. So that means 4Q had to be around 8%. But then John, you also made a number of comments earlier I'm hoping you could shed some more light on, about the severity continuing for a number of reasons. So maybe you can kind of talk about those trends you are seeing and why you think that will continue?

I'll start, and you, John, you can add. So on trailing -- on a trailing 12, it's more benign. But the fourth quarter overall, severity was up about 6.8%, and we attribute that to medical expenses for injuries and cars are more expensive to fix because of the technology in those vehicles. And I believe that's why you were saying -- I mean, as you look at the cars and what components are in there, they've become expensive and, obviously, healthcare costs continue to be expensive. So those are a couple of the things that go into both the collision as well as BI.

Yes, I think Tricia nailed it. BI is pretty consistently plus 4 lately. Collision, as you saw, was plus 8 for the year. Tricia mentioned that as well. Technology in vehicles is making crashes more expensive and it is making the frequency with which we total a vehicle when it's in a crash go up as well. So we think those trends are going to continue. And if you look back, they've been pretty consistent for quite some time. So the frequency side of the equation is much harder to predict, the severity side we're pretty confident is going to continue at a pace it's been at for a while now.

Okay. My follow-up is on the personal auto underlying loss ratio in January. It improved very measurably, kind of more volatile than it has been in the previous year. Is there any color on what made it improve so much? Was there any anomaly in there? Curious if any color there.

John, you can add anything you want. For us, it's really about the mix of the business. And as we have more and more of our preferred market come in, you are going to have loss ratios change again. We feel like we have a lot more runway to add more of those customers. There's a lot that goes into that, but that would be my main take.

Yes, that obviously is the positive side of why was the development from the prior year 4.8 points. The accident year loss ratio for January was exceptional. We don't report severity and frequency on a monthly basis. That would get us into some very interesting territory. So I won't really explain further there, but my previous comments around severity and frequency, I think you could bring forward to January. Weather makes a lot of difference as well. In winter months, how much precipitation that's freezing, et cetera and in the Northern part of the country, it matters a lot. So we are happy with the loss ratio for January, and we are not going to get into specific frequency and severity for months.

Can I sneak one last in, just you mentioned mass media versus digital spend, what's the really high-level breakdown of percent mass versus digital?

I don't know that we actually share that, but I think it's really dependent on a time of year, buying -- to buying time, so there's times where there is more shopping for home or shopping for auto. And increasingly, though, I will say our digital is becoming much more a part of our spend.

Carmen, can we take the next question from the conference call line, please?

The next question comes from Brian Meredith from UBS.

A couple of quick ones here. The first, I'm just curious, your renewal retention rates look like they improved nicely given the renewal apps that are up in your personal auto business. Wondering if you can give us some sense of how much of a benefit that was to growth this year? And also perhaps maybe loss ratio because obviously renewal book has a better loss ratio?

From an overall PIP growth, it was substantial. I mean, I think anytime you can keep the customers you have, you already had the acquisition cost of them coming in, I think it's substantial. I don't have the actual percentage with me right now, but it's substantial. That's why we put such a focus on retention and making sure that we -- the customers we bring in we satisfy, give them a reason to stay. They add more policies as their needs evolve, so it has been significant.

Got you. The reason I'm asking is a couple of years ago everybody was worried about the total 10-year impact rate with the growth and we just didn't see it this last year, and I figured that was probably due to the good renewal retention improvement?

Yes, I mean, I think you -- I think if you're talking about, I think a couple of years ago, we were talking about sort of the new business tax and that coming in, I think...

Yes, exactly. Yes.

Yes, as you see that flow through, I think it's really important. I think a part of that as well is the type of new business that we bring in. So we really do a lot more underwriting now to make sure that we bring in customers where we believe we can make at or below our target margins. So the inflow is changing. We're keeping people longer, so those 2 things together, I think, has been a good story.

Great. And then my second, just curious. As you continue to shift a little bit here more towards some commercial, you've got the homeowners, and granted it's going to continue to shift, should we expect your premium to surplus ratios to decline here going forward just because those are generally more capital-intensive businesses? And also as a result, is your target combined ratio going to have to be different in those businesses?

So I'll take the last part first. Our combined ratio, that 96 is an aggregate number. So they are -- we have different targets in every different part of our business, sometimes in different states, definitely new and renewal, and in different products. So that 96 is really an aggregate. So we already have different targets, depending on the volatility of the business. From a premium to surplus perspective, so I think John used the 1 to 3, which is auto. It's about half of that for home, so those do change as we have different types of products.

And commercial I'm assuming is 1, 1.5 also, you think?

Commercial will be lower than auto, for sure. But recognize, if you think about total return on the business, we try to target underwriting margin in concert with investment return to reach similar ROEs across our business lines. So commercial is a great example where a much longer tail in terms of the claims, much greater investment return as a result. We blend that with our underwriting expectations. So yes, the surplus requirements for those other lines outside of auto are more robust than our auto lines, but at the same time we're targeting returns similar across those lines.

And like homeowners, we have for our higher limits, we have reinsurance on the commercial side.

Carmen, can you take the next question from the conference call line, please?

And the question comes from Adam Klauber from William Blair.

You're showing some very good early signs as far as your digital effort on homeowners and bundling. How are you going to accelerate that in 2019? And then the second part of the same question is as you think about rolling out more and more commercial, is there -- is part of that strategy also more of a digital effort?

Absolutely, yes. So we are going to continue to have the ability on our HomeQuote Explorer, which is what we call our digital capacity, to not only quote, but bind online, to have that buy button so we will continue to invest in doing and rolling out that to more and more states because normally when people go online, they want to be able to seal the deal, so we'll do that. And that's the great thing about having your own home plus partners is you have the ability to service almost every customer. The same thing on the commercial side. We will have the BusinessQuote Explorer. We did a soft launch last year. We'll continue to invest in that. And almost follow suit with what we did on the Personal Lines side, which we found very successful. So we are putting a lot of investment in technology on in both of those platforms.

And then the HomeQuote Explorer, if I remember you had just a couple of states up and running this year, should that expand pretty aggressively -- I mean, last year, should that expand pretty aggressively this year?

Yes, we'll do everything we can to get more and more states and the buy button as we can.

So the buy button right now for Progressive Home is in a limited number of states. HomeQuote Explorer is broadly rolled out. I don't know about 50 states, but the predominance of the country for sure. The piece that Tricia was talking about that helps conversion a lot is if you present the potential customer with the ability to just click a button to buy. We don't have that for Progressive Home across the country, that's what we are rolling out.

Carmen, we'll take another caller from the conference call line, please.

And the question comes from Gary Ransom with Dowling & Partners.

I saw that you mentioned in your letter, Tricia, that you have a new algorithm for distracted driving in your telematics product? Could you talk a little bit more about that? About how effective that is qualitatively? Or what that -- will that spread out to more states?

Yes, it is from our handhelds, so our mobile as a device. So as you know, we have 2 different ways you can have our usage-based insurance, with a dongle and with a handheld. With a handheld, we're able to tell when you are using the phone hands-free or holding it, which we have found is very correlated to losses. I can't give you all the data because it's private to -- confidential to Progressive, but we find that people that use their phones either an app or a phone call, X amount of time, it's more correlated to losses. So it's sort of the next wave of how we think about our usage-based insurance. And I think for years, people said we knew if someone is in the left lane and they are using their phone or on their phone, they have to be worse drivers. That was our premise as well but we like data, and so we took a long time to understand this and then we developed an algorithm and are using it now with the people that choose our mobile device for UBI.

Is it fair to say something like it is as just as powerful as either the braking factor you use or the time of day factor?

I don't know if I have that data. I think we believe it's powerful and we'd probably be able to tell you that when we have more development, more time.

We are confident it is quite additive, and we haven't rolled it out everywhere yet, but we are working to do so expeditiously.

All right. Just one other thing. You also mentioned in your letter about savings in loss adjustment expenses. That's a piece of the expenses we usually don't get to look at carefully, but it sounds like you have a number of initiatives to bring those costs down. Are there some that might be the main components of helping that LAE piece move downward in the future?

Yes, there's a couple of things. The main one that -- we are working on a lot of technology, but the main one that we have been working on, we continue to roll out in the last couple of years, we call photo method of inspection. So customers being able to take photos or video and we are able to be very, very efficient in writing those estimates because you don't have to be side of car by the sheet metal. And we have been doing really well, but rolling it out slowly because if you -- you can do that and reduce LAE, but if you increase indemnity, that doesn't make any sense, so we are trying to be really exact with that. And we believe that, that will ultimately, and we are testing it right now, lead to the machine being able to write a portion of the estimates that are pretty minor. And so we'll be testing that this year. Those 2 things are going to be really big in claims. And we continue to always chip away at different processes in the claims organization to figure out how to get more efficient. What are we doing that doesn't add value? So we chip away at that and have a whole spectrum of process type of things we are working on as well as obviously being accurate, making sure we pay the right amount every time for our customer. But I would say those are the big things really with our estimatics.

Well, unfortunately, we have exhausted our scheduled time. And so that concludes our event today. Carmen, I'm going to turn it back to you for the closing scripts.

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