Progressive Corporation (The)

Welcome to the Progressive Corporation's Third Quarter Investor Event. The company will not make detailed comments related to quarterly results in addition to those provided in its quarterly report on Form 10Q and the Letter to Shareholders, which have been posted to the company's website and will use this event to respond to questions. Acting as moderator for the event will be Progressive's Director of Investor Relations, Doug Constantine. At this time, I'll turn the event over to Mr. Constantine.

Thank you, James, and good morning. Although our quarterly investor relations event typically includes a presentation on a specific portion of our business, we will instead use the 60 minutes scheduled for today's event for introductory comments by our CEO and a question and answer session with members of our leadership team. Questions can only be asked by telephone dial-in participants. The dial-in instructions may be found at investors.progressive.com forward slash events. 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 today's event. Additional information concerning those risks and uncertainties is available in our 2019 Annual Report on Form 10-K and our first, second, and third quarters quarterly report on Form 10-Q, where you'll 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. In particular, note that our quarterly report on Form 10-Q for the first quarter includes discussions of the risks and uncertainties that we face, including specific risk factors arising directly and indirectly from the COVID-19 pandemic, and these risks are further referenced in our third quarter 10-Q. Before going to our first question from the conference call line, our CEO, Tricia Griffiths, will make some introductory comments. Tricia.

Thanks, Doug, and good morning, everyone. With an extremely close and not yet decided election, I thought I'd open with a few words before we get to your questions. I know that the election's been on everyone's mind, including those at Progressive. I think it's important that our shareholders know that we live our core values, specifically the golden rule, regardless of the candidate we support. I'm very proud that in the end, we're all united in our commitment to caring for our customers, our communities, our shareholders, and most importantly, for each other. As you know, we feel strongly that our people and our culture are a significant competitive advantage for us. They are one of our four strategic pillars, and we rely on our incredible culture to get us through challenging times and come out more focused and united than ever. This year has been no different as we move forward together. I thought I'd share a note that I received on Monday from an IT group manager, Scott, regarding a video I did on Unity last week. This really exemplifies who we are as a company and why we win in the marketplace. He said, Tricia, I have so much to be thankful for in this year and month, and there's a literal pile of things for which I'm deeply appreciative for you and your team. Truly, and I know I speak for so many others, I am grateful. Then he went on to share the communication that he sent to his team, and these are words that are echoed by so many leaders at Progressive. His note said, it's the last Tuesday in October, which means that next week marks the national election and another end to political yard sign season. Here's the sign we placed in our own yard, and the sign started with love your neighbor, and it talked about loving your neighbor regardless of race, who you love, etc., conveying what we hope for our neighborhood, that regardless of next week's outcome, we hope that our common bond as neighbors can prevail over the differences, really an extension of the golden rule. That's not to say that it's not easy or that we're not strong in our political convictions, but it's also to say that we strive to respect, care for, and even love our neighbors regardless of their vote or other differences. The same applies here at work with progressive culture rooted in our core values. My DRG is committed, that's direct reporting group, is committed to support the diversity of our people. Please work to grow and sustain that spirit of collegiality and friendship with each other through and beyond the election. And his words really truly reflect who we are as a company. And, you know, being up late and in the middle of the night and this morning, I will end up after this call shooting another video today to ensure that progressive people who may feel stressed remain calm and focused, even though there'll be delayed results. Also, tomorrow marks our eighth annual Keys to Progress, where we give away cars to deserving veterans. Due to restrictions on business operations for the program participants and social distancing requirements, our giveaway events will be small but still very meaningful. All in all, this is another great example of giving back to our communities where we've donated over 750 vehicles in the past eight years. Being a successful business starts with our people, and this quarter continues to exemplify what you can do with the right team and the right culture. As I stated in my letter, we're extremely pleased with our Q3 results. We're also acutely aware that these times are tumultuous and that we have to remain nimble as events unfold. That's really always been our strong suit. Thank you. And with that, James, we'll take the first question.

To be added to the question queue, press star 1 on your phone. In order to get as many questions as possible, please limit yourself to one question and one follow-up. Our first question comes from the line of Mike Zuramski from Credit Suisse. Go ahead, please. Your line is open.

Hey, thanks. Good morning. I guess the first question, I'd love to learn more about the automobile severity trends. You know, they seem to kind of be kind of staying higher for longer. I know there's a lot of – there's been some noise and distortions during COVID. You called some out. in the queue and Alaska where you called some out too about subrogation. I'm trying to just learn more so we can kind of understand whether the underlying trend might be a little bit lower or if this is kind of the new normal, especially in the bodily injury and hip sides.

Thanks, Mike. Let me give you some insight. It's a little bit difficult to compare with PCI because they haven't reported Q2 yet. They're not as volatile as Q2, but let me go through a couple. When you think of PD, it's sort of the opposite of what happened in Q2 in terms of inbound subrogation. Our supplement payments, which is inbound sub, are coming from a period of lower volume applied to a period of increased incurred volume. So we report 3.9% PD incurred. It's a little bit higher if you remove that inbound sub, about four points higher, so right around 8.5 points. So it's a little bit higher, but clearly less than Q2 when we were at 12.7%. On collision, again, the outbound submix is no longer driving trends, and that's, of course, the money we receive in. And if you remove that subpercentage, this 6.2 goes up a little bit. That was negative in Q2, so that was very different. And it's all really about the numerator and denominator when you're having frequency changes quarter to quarter. You talked about BI. Our incurred severity is similar to Q2. So we have some aging, which we believe accounts for about two points. And then we have another one to two points that relate to facts of loss shifts. So what we did was we took a look at quarter two of 2019 facts of loss. And then we compared that to quarter two of 2020 facts of loss. And what we're seeing, we think this is likely because of less morning congestion commute, that there are less rear end accidents. So think of kind of a fender bender that wouldn't cause much damage from a severity perspective or an injury perspective. There are more intersection accidents, which are always more severe. So our estimate, taking into account the aging inflation and the facts of loss mixed shift, we believe is around 7% to 8%. So while we are reporting the 11.6%, we believe it's a little bit lower based on those two issues. PIP's so difficult because there's so many different state mix changes and the higher severity states account for about two points with those mixtures. We think that, aside from New York, most of the PIP states are around six to seven percent severity. It's not as volatile. It's still different just because of the situation with COVID and vehicle miles traveled and different loss patterns. But hopefully that'll give you some insight into our severity trends.

Okay, yeah, that's very helpful. I guess lastly, I'll move just more broadly to the direct-to-consumer segment of auto. You know, it feels like there's been an acceleration of PIF, and I think the main question we get is whether this is kind of the new normal or if there's kind of been a temporary bump during COVID. I'm trying to, you know, I know it's a high-level question, just trying to better understand it. Do you feel that, you know, there's something helping you guys that's kind of one-off that, you know, that could kind of – you know, kind of taper off a little bit? Or is there, you know, is there third-party marketing technologies you guys are using and just, you know, will continue to help you? You know, anything to kind of get us better? I think, you know, we understand from your letter, Trisha, you guys feel great about growth. Just trying to get a sense of whether the double-digit growth in direct consumers is sustainable.

yeah i mean you know on the auto side in the private passenger auto side you know when we market we're marketing for the direct side but we believe that our agents are recipient to that so when the uh stay-at-home orders happened you know a lot of our agents weren't able to actually you know work or open their branches some of them obviously were able to do it from their home but we saw applications go down and now we're seeing them increase a little bit as things start to open. So that could be volatile for a while depending on what happens with rates of infection. What I will say is that the direct-to-consumer side really has increased on the commercial side. So our commercial business has always been the majority from the agents. It's a more complicated product. and we're seeing more direct-to-consumer on the commercial side. That trend likely would have been happening over time if people felt comfortable with the products they're buying. It really depends on complexity. But I will say that in our for-hire transportation, It's the strongest in our direct channel where those new ventures are coming in directly to progressives. So, you know, it's hard to say if it will continue. It could be what's happening with the pandemic. It could be what's happening with younger truckers, for example, starting new ventures and they're more comfortable going direct. But what I would say is we're glad that we've invested in the direct side of the business. We continue to feel like we want to have broad coverage for where, when, and how. customers want to buy, and just be available for everyone depending on that need.

Thank you. Let me just try to add, Mike, you used the term new normal in both the severity and the direct questions, and we aren't thinking there's any new normal to point out right now. It's a very dynamic environment, obviously, but we think we're playing it well. So, you know, in the direct space, as you noted in the queue, advertising is up. you know, 29% for the quarter. So when you see us spending more in advertising, you should know that we are seeing opportunities to spend efficiently to bring in business. That is what we call the prospects side of the equation. And prospects are up, as we noted in the queue, about 8% for the quarter. But conversion is up as well. And that was a quarter where some of our competitors had lower pricing in effect because of, their approach to COVID rebates or credits, and some of those have come off now. So from a competitiveness standpoint, all else equal, we think we're in a pretty good place. Conversion is up 5% to the quarter. We may even be getting more competitive. So, you know, again, all else equal, our advertising spend should be even more effective.

Thank you. Our next question comes from the line of Elise Greenspan with Wells Fargo. Go ahead, please. Your line is open.

Hi, thank you. Good morning. My first question was just in the queue. You guys had pointed out that miles driven went up in the first half of the third quarter. but then back down in the second half. So I was just wondering if we could get some color on what you think might have driven that. I'm not sure if it was, you know, pickup in COVID cases or partial lockdowns in certain states or anything, any other color that you think would have led to that dynamics within the third quarter.

Yeah, good morning, Elise. We do think that's what happened. We think that is reflected pretty quickly when something changes in a given state. We look at this from state to state, and there's really a variety of vehicle miles traveled and ranges. It's still now, you know, much obviously higher than the top of 40%-ish, right around 10-ish, 10 to 15% across the country. We're really digging in to kind of understand it. We do see the congestion is still very different in the morning commute where there's less congestion. We're starting to dig into how we look at the types of jobs you have so we can try to understand people that, might work from home for a longer period of time versus people that have jobs where you need to be out and about. And in fact, we're really looking through our UBI data that our Robinsons are people that are 65 and older. Their features fell in line with their vehicle miles traveled, and we just think they're driving less during rush hour. They're working from home more. They have roles that can work from home. They might be retired. And the younger demographics, what we would call the Sam's and Diane's and Wright's, their features fell more than the VMT, although the gap is narrowing. And they had a small drop in mileage. We believe that these are jobs that can't be done from home. So we're watching that closely. I think a lot depends on what happens in the next... several weeks with infection rates and what specific states do. So again, what we'll do is we continue through our product group watching those states and those areas very closely to understand those frequency trends and using data both on the snapshot side and the smart hall side in commercial where we're not seeing that change. So the truck drivers are on the road more because of moving goods back and forth. So we see a little bit different on the commercial side. And even though the congestion has decreased, we know that they're on the road more. So hopefully that gives you a little bit of color. It's sort of changing always, and we're... We're thankful that we have a lot of data in our usage-based insurance across many of our products, and we'll keep watching that and react as necessary.

That's helpful. And then my second question is on Snapshot. So I was hoping that you could give us an update on Snapshot. kind of the take-up rates within both the agency and the direct side, just where we sit today. And then have you guys noticed a greater take-up rate for your snapshot devices during this kind of COVID slowdown? I guess it's, you know, folks, you know, potentially, you know, driving less, right, would potentially want to use a device that could, you know, potentially lead to some savings for them.

Yes, so immediately, we've always had a pretty good high take rate on the direct side. So immediately when we had the shutdown, we saw an uptick in that, and that sort of leveled off. On the agency side, where we haven't had historically a great of a take rate, we saw that go up and it's continued. So I think, you know, agents, and I've probably talked, you know, one of the great things about COVID is that I've been able to get out and talk to literally thousands of agents in the last couple of months, virtually, of course, And they understand that they need to be competitive. And they've been talking and selling Snapshot to their clients, to our mutual clients. And so that has increased and that has continued to kind of maybe level out. But it's increased much more than before COVID. On the commercial side, September was the biggest. smart hall enrollment ever, and the monthly take rate climbed to about 24%. So we're seeing that definitely on the commercial side. John, do you want to add anything?

That's I'm definitely seeing that take rate go higher, especially in the for higher transportation segment that Tricia was noting earlier. So that is, you can think of sort of delivery trucks as well as interstate trucking. And we're very excited to see, especially the take rate on what we call new ventures. So a lot of truckers are going out on their own these days. And, you know, truck insurance premiums are pretty high, so they're very open to offers that might lower that premium. And the strength of the take right there is even higher than the overall. And we feel that segment is very well priced, especially when we have the smart haul insights that we have, you know, really from day one. So the other thing I would mention on Snapshot more generally is that we are – well, we haven't marketed it a lot. We have something called Snapshot Road Test in market now, and the take rate there is encouraging. And this is via mobile devices whereby – You can do what we used to call test drives. So if you drive for a while, we get your driving behavior. We deploy that at your initial quote. Today in Snapshot, we give you a discount for participating and then give you the fully developed discount at the renewal with road test. You get that up front. So we're excited by the early take rates there. Again, we have a market added. But we think when we're ready to do so, consumers will be very interested.

That's helpful. And will Rotest – sorry, just to quickly follow up – will Rotest be available in all states where you have the traditional snapshot product?

Yes. So, it's available today. We just haven't marketed it.

Okay. That's helpful. Thank you for the callers.

Our next question comes from the line of Jimmy Buehler with JP Morgan. Go ahead, please. Your line is open.

Hi, good morning. I just had a question on the competitive environment. Can you just discuss sort of pricing conditions in the personal auto business and your outlook for margin? Because it does seem like more and more companies are trying to be more proactive and trying to either gain share or recover the share that they've lost over the last few years.

yeah i mean we we feel really great we've added 2.4 million policies uh compared to last september so we feel like we were well positioned coming into the pandemic and then we reacted very quickly so we knew that vehicle miles traveled went down we immediately gave 20 credits for two months to our auto customers uh we feel that that you know it could change but that that helped us with retention because those customers We're able to stay. Obviously, there are some moratoriums as well, and that will have to play out depending on what happens, if there's a stimulus, et cetera. And then we started to do what we do best and surgically look at state-by-state, channel-by-channel, product-by-product, because we want to balance that growth and profitability. And we've really enjoyed gaining share across the board, and we want to continue that. So what we're doing now is what we call taking small bites of the apple in terms of rate decreases. If we see conversions going down or we're less competitive and we get a lot of intel from other companies and our agents, we will take rates down slightly. So we talked about taking it down about a percentage for the quarter and 3% April through September. We did that in about 37 states. And when I say 37 states, there might have been two rate decreases, maybe a half percent, maybe one percent. We really watched this, and we're able to react so quickly, which keeps us really competitive when people are shopping. And then April through December, we'll have taken some form of rate decrease in about 42 states, and that is about 84 percent of our countrywide net written premiums. So, again, surgically being able to react to rates, be competitive, and we do that going both ways depending on the product. But we feel like we're positioned well, like John said, and everybody had, whether they took credits or discounts, everyone's trying to make sure that we are competitive. This is a very competitive industry, and we feel like we're in a really good position, which is why I started the letter off the way I did. I'm very pleased with our results and our reaction to COVID and what we've been able to do for our customers when they need us most.

And when you think about just balancing growth and profitability, is there a level on either the loss ratio or the combined ratio to where you're comfortable taking it up and continuing to push for growth? Like I think in the past you've talked about mid-90s would be a level where you sort of slow down your growth and focus more on margins instead.

Yeah, so we've had the same objective in the company since we went public in 1971, that's grow as fast as we can and make at least four cents of underwriting profit. And so we always try to balance that. That said, we have five core values and one of them is profit. So if we don't believe we can be profitable, then we'll stop growing. Profit comes first. So here's the deal. We don't want to give away margins. So if we believe that we can grow and still grow at that 96 or less on a combined ratio, we'll do so. If we don't, we'll keep the margin and understand that, again, that is at such... We do it at such a surgical level. You know, that's the 96th growth as fast as you can is our job objective for the overall company. But we look at it very different across our portfolio. So, yeah, we're going to continue to try to aggressively grow, gain market share, all while making sure that we achieve our profitability goal.

Thank you.

Thank you.

Our next question comes from the line of Greg Peters with Raymond James. Go ahead, please. Your line is open.

Good morning. So the first question will be around retention. As you know, there was another insure tech company that went public. It's also an Ohio-based company. They've disclosed their retention rates. Allstate discloses their retention rates. And I'm just curious if you could give us some color about how your retention is

has been this year relative to last year yes so you know retention for us is really the holy grail you you want you to send the money to acquire customers they come in you want to make sure we give great service and they and they reward us with their retention so um you know we look at retention from what we call policy life expectancy uh on the trailing 12 months it's up nine percent um up ten percent in agency seven percent indirect Now, the caveat is we're getting a benefit of the billing leniencies and moratoriums, and so we would say that those are the numbers, but they may be conservative depending on what happens with people and jobs and unemployment, et cetera. Our trailing three is a little bit lower and a little bit more volatile. Trailing three is 7% up, 6% in agency, 8% in direct. and on the commercial line side of course we look at a 12-month basis because those are annual policies uh ple is up about four percent so we're very pleased with that but we also know that there's a lot of volatility going on right now and you know we'll do our best to keep our customers and to work with them our crm our customer relationship management group on both the direct side auto and the commercial lines auto work very closely with customers if they need to make changes to their policy in order to keep their coverage available. So I would say the PLE numbers that we state in the queue are very positive, but we also know a part of that is because of the leniency and moratorium based on COVID.

Got it. The second question is around the expense ratio. A number of your competitors, you know, are laser focused on reducing their expense ratios to bring them down close to your level. And I'm curious about the initiatives that you have ongoing within your company to keep your expense ratios low and possibly to get them lower.

Yeah, we talk about expense ratios all the time, and we're pretty proud of our results. And it's a balance, of course, of making sure that we're investing in things like digital that our customers need. I think one of the silver linings of the pandemic is that we learned that we can write really good estimates from photos and videos. And we were working on that prior to the pandemic, but obviously it was exacerbated based on the fact that We all, you know, kind of went into our homes to do the work. So we continue to experiment and see what type of vehicles that we can look at and not be side of car and understand, you know, is it a quality estimate? Because you don't want to have, as an example, such a low loss expense ratio or loss expense adjustment ratio if your accuracy is not good because that indemnity is the biggest part of what we pay out. and we continue to work in our CRM organization to understand how customers can get things they need without human intervention. John Sarlon's group is working on some RPA processing. So we have a lot of things going around the company. We're actually – we had completed a five-year plan for our board of directors last year, and obviously we're redoing it this year because of a lot of the changes, and that's actually been a topic of – what we try to achieve. We have internal goals that we work on together and we balance that with investments of, like John said, advertising, digital, but we constantly try to look at how can we do more with less and not affect our customers and And we know that this is a competitive industry and that competitive prices are really important. So that expense ratio is a big part of it, whether it's on the overall side or the claim side. John, you're the purse string holder. You want to add any color?

Yeah. I'm certain many competitors are aspiring to our level of cost structure, but there are some competitors who have better cost structures than Progressive. So we've been focused on continuing to get more competitive in terms of cost structure for years, as Tricia noted. We think of it in two buckets. So we think of what we call non-acquisition expense ratio and acquisition expense ratio. In the acquisition, we put advertising as well as agent's commission. So I just mentioned earlier advertising for the quarter was up 29%. It was up 20% year-to-date. We think that's good growth in expenses because we're acquiring customers we're going to have for a long time. Similarly, on the agent side, we have to pay competitive commission in order to continue to grow there. So we think growth in expenses in that portion of the expense ratio is good. We focus on the non-acquisition expense ratio where we are trying to drive what we think of as our infrastructure costs lower. And if you go back around five years, as Tricia noted, I think we've taken out maybe close to three or four points on our non-acquisition expense ratio, and our sights set on reducing that further. As Tricia noted, price competitiveness is not the only thing that matters in the marketplace, but it is a very big part of the consideration set for auto and home insurance, as well as commercial lines especially.

Thank you for the answer.

Our next question comes from the line of Michael Phillips from Morgan Stanley. Go ahead, please. Your line is open.

Thank you. Good morning. So we've all heard Elon at a past talk about, you know, being aggressive with hiring actuaries and starting his own insurance company, you know, to use his proprietary real-time data. And, you know, while maybe that's only for his captive fleet, I guess, just your thoughts on how you view the competition from connected card companies like that that do have really access to rich data. from their own fleets to offer insurance to their own fleets?

Yeah, I mean, I think that, you know, we, you know, from a talent perspective, we feel really positive where we're at. We do, we have been investing in understanding how to have functionality to gather data from third parties, whether it be OEs, and we call it express data quotes, so that'll be something that we're working on now. I mean, I think the question is, or the answer is that, yeah, the talent is important. We believe that at some point we'll have to answer who owns the data, but we've been working on this with a lot of partners over time to understand how to get quotes our way and understand that data to better understand trends. Did that answer your question?

Kind of. You know, I guess I was looking more towards your view of just a competitive landscape from companies like that that, you know, have access to their own data from fleets and, you know, are trying to offer insurance and even there aggressively offer their own insurance. I know how he speaks, but that was really what I was trying to get at.

Got it. Yeah, I wasn't sure if I answered that. Yeah, it's great competition. We have had snapshot and data for a long, long time, and so we feel very comfortable. The fact that I could be able to tell you today, I think when Elise answered the question, that our Robinson cohort, you know, the features fell in line with vehicle miles traveled, etc., we were able to watch that real time. And especially now, I'm very excited about what we're doing now on the commercial side, and I talked about that with the four higher transportation, to be able to give deep discounts to those delivery trucks, those truck drivers, interstate, and understand the best drivers are really important. That will help with retention, it'll help with lost costs. The competition is great because it allows us to never stop evolving. So, you know, years ago we only had the dongle and you had to plug it in and then you could do it wireless. Now we have the mobile device. John talked about our road test. We have snapshot pro views. So it forces us in a really good way to continue to invest in data and collecting data on our 24-plus million policyholders. So we feel like we're in a really great position, and competition only makes us better.

Okay, thanks. You know, I guess part two then is you kind of alluded to it here, and we talk a lot about UBI and telematics now. I guess what's the lifeline of it? of credit score specifically as a rating variable on personal auto are we looking at a couple years do you think that thing dries up or decades or how long does that thing have left and then run their lesson that's a pricing variable

You know what? I'm glad you brought that up because we've been thinking about that a lot, and I know there will be challenges because of the pandemic on regulatory issues. So, Michael, this will be a lot longer answer than you probably want, but I think it's really important for me to make a couple of points basically on risk-based pricing and then kind of what's happening in the world. First and foremost, we've been getting questions on the usage of credit specifically. Does it affect race? Race is never used in pricing insurance projects. In fact, it's illegal. If two people have the exact same risk profile, if there's a person that's just like me, same driving, same credit, and we happen to be different races, we get the same rate. Basically, we are risk-based and race-blind. And I also want to make sure that it's clear that Progressive supports legislative and regulation that enables insurers to leverage all the available data, technology, and advanced analytics to price insurance risks when it reflects the insurance cost. And that's really key. We want to have, you know, a rate for the specific risk. And for us, it's about accuracy, and it allows people and consumers and small business owners to fulfill their American dream and achieve their economic opportunities that they desire. We've talked a lot in the past about the virtuous cycle. If you've got rating accuracy, it leads to broader consumer availability and affordability, which leads to growth. growth and financial success, not just for our shareholders, but for the company and for job creation. We've been able to create so many jobs in the last several years. That leads to innovation and segmentation and then goes back to rating accuracy. So we've had that virtuous cycle that we've been very proud of. And in the past, we've talked about it's a regulator's role to work with us closely in the industry to ensure solvency, ensure compliance, and facilitate healthy and competitive markets that provide a wide variety of options for consumers. So key elements that I've mentioned before to focus on is ensuring that prices for insurance are not inadequate, excessive, or on fairly discriminatory so we're staunch advocates for healthy competitive voluntary insurance and broad distribution and you know for the u.s insurance industry we want to be able to continue to facilitate the risk-taking and transfer that drive economic growth through delivering products that are both available and affordable so for us we and the industry we believe we want to preserve the sanctity of contracts and the continued support for risk-based pricing All that said, we do recognize that for some individuals, mandatory insurance protection can be a significant financial burden. We're very open to collaborating with regulators and other industry leaders on solutions for those individuals versus creating massive and unnecessary market disruption that will likely have negative outcome for certain segments. That's sort of my spiel on why we continue to support risk-based pricing, which credit is one variable of many. I think how we think about affordability challenges, we just have to think about where we're at in this time of history. and decisions that we make that affect the future for consumers. So if you go back to our roots in 1937, I'm very proud of Progressive. We started out as a non-standard insurer, allowing people in Cleveland, Ohio who couldn't get insurance to be able to do that. And then, of course, you know the rest, eventually countrywide, and we're able to have access to affordable protection across many segments. We have a critical role, I believe, in inviting innovation, segmentation, and the use of technology and data to provide greater access to competitively priced insurance for all. We shouldn't confuse affordability challenges that many face during this unprecedented pandemic with our longstanding and solvent model of providing affordable and widely available protection. I think the issues that have arisen regarding social injustice didn't stem from the insurance industry. They've been looming for decades, and the events of this year brought them to the surface. And now I think we need to really get together and ultimately solve the root problem of opportunity and equality for all, not just during the pandemic, but ongoing. From my perspective, and this list could go on and I'll shut up, but very short term after the elections decided we need some form of stimulus to get us through this next wave of infections. My hope is that we're able to distribute it more surgically this time to those that need it most. I believe that we need to raise the minimum wage over time to $15 per hour. I will note that all active, progressive employees already make over $15 an hour and we're proud of that. And as a country, our focus should really be on additional funding so that schools can safely reopen and deliver effective online communication. You can't get ahead if you don't have the ability to learn online, which requires infrastructure investments like access to broadband coverage. So I could go on and on, but the message here is that we as a country are facing a really great opportunity to make substantive changes And as an insurance company, we'll continue to play a role in focusing on rational and risk-based solutions so that everyone is able to achieve the economic opportunities they desire. I've been obviously thinking about that a lot, Michael, so I'm glad you brought it up. I think that credit is a powerful variable. It is not race-related. We do not believe it's race-related, and we'll continue to hold firm on that.

Okay. Thank you very much, Joyce. Appreciate it.

Our next question comes from the line of Gary Ransom with Dowling and Partners. Go ahead, please. Your line is open.

Yes, good morning. Tricia, you mentioned in your letter the creative ways of reaching customers, and we also saw how ad spend is up and direct quotes were up. And I just wondered, in looking at the success of all that's going in and getting customers into the funnel and successfully getting a new customer, What are the actual key elements of success in attracting those customers, either today in this COVID environment or what you're seeing over the longer term?

Well, I think ultimate success, Gary, is to be able to acquire customers at or below our target acquisition cost. But more importantly, as we look at and expand our product line, we're able to do so with our creatives. So for years, we had flow inside the superstore. The whole message was saving, saving, savings. And now we have, obviously, an entire network of characters that talk about savings, but also talk about protection, protection for your home. And we're seeing that work. An example is, I don't know if you've seen it or not, we have had this campaign for a few years and we settled in on a character called Dr. Rick. which is parentamorphosis, you become your parents when you buy your first home. I think that a lot of people can relate to that. We're seeing the results of that do really well. We've done a couple good campaigns with the Cleveland Browns quarterback and Mark and Marcus, two guys that do the 10-yard line chains, that we were able to play during, you know, Live sports, which is what everyone's watching now until we go back to regular television. So we look at what we call new prospects that haven't shopped since the last six months, and then from that we look at do they convert and at what cost. And all those things lead us to understand when the creative works, when it doesn't. When it does, we double down and get deeper in the campaign. When it doesn't, we move on and get more creative. So during COVID, I'm really proud of our marketing department because everything shut down. And initially, we did some nice campaign stories that were softer because everyone was sort of just nervous about what was happening because it was so new. And now we're really doing... a lot that we're kind of moving forward. But even in the meantime, we did really creative opportunities where we had Flo and her whole squad that we call it on a Zoom call, et cetera. We really got creative to make sure that we didn't miss a step. We know this is a competitive environment and we wanted to continue to be on consumer short list out and available, thinking and progressive when they go to shop.

Maybe extending that into the agency channel also where I think your conversion rates were up as well. Usually that just means your price is lowest on the comparative raters there, but is there more to it than that as well? Are you seeing more coming into the agents? Are there agents incentives or other things going on there?

Yeah, we occasionally do agent incentives. It may be based on things like UBI and if we see something that we want them to do more. We, over the years, have changed some of the agency commission structures depending on if you're selling preferred Robinsons, auto, home bundled. Those agents, the platinum agents, get more commission. They're allowed to have 12-month policies on the auto side, so we're giving them that. And we've done a lot in our platinum agency to have incentives based on loss ratio and other things. So we didn't always do those in the past. Our relationship with our agents has really changed in a very positive way. Like I said at the beginning, I've been able to talk to a lot of agency agents. Just not long ago, I had our top 25 platinum agents. Usually we do something with them. We obviously couldn't this year. So while we'll keep our overall commission level about the same rate, we have bifurcated and we'll give you a different commission based on the incoming type of customer, which we believe is a long-term value of that customer. So obviously cost matters a lot. Brand matters a lot. Commission matters a lot. And probably the last thing I would say, and coming from the claims organization, agents are always so happy to not have to deal with any complaints because our claims organization is so stellar. So there's a lot that goes into it. Clearly, cost is one of them. They benefit from our brand. But, yeah, we do incentives, and we have different commissions based on the type of customer that we get in, namely preferred.

I just elaborate on Trish's last point, Gary, to say ease of use. So price competitiveness is extremely important. Ease of use is critical. almost as important in my perspective. So as Tricia noted, not having to deal with hassles on the back end with a claim, for sure, but front end as well. So we've invested heavily in technology to make quoting and now quoting the household in our agents easier. And that will definitely help drive business to progressive as well.

Yeah, I think this month or last month we finished a full rollout of portfolio quoting, so the agency's feedback is extraordinary. You've got to make it easy. Thanks, Gary.

Thank you. Our next question comes from Yaron Kinar with Goldman Sachs. Go ahead, please. Your line is open.

Hi, good morning. I actually want to continue on this last line of questions. With regards to the creative ways to reach out to consumers, Beyond the ease of use and in quotes and the innovative ad spend in the traditional channels, are there any new ways to get to market? Any ways that you're exploring maybe Internet, social media, and the like to get at customers?

Yes. You know, when I usually speak about marketing, I go to sort of the mass media, and that's one portion of how we market to customers. We're on streaming, so we advertise on Hulu. We advertise on most of the social network channels and affiliates on the Internet, and we have generic search. So we have a variety of ways. to make sure we get our message to you and do everything we can to get our message to you the right number of times, not too much, not too little, because we don't want to bog you down. So yeah, besides the creative, there's also many different ways. And there's sometimes on a digital platform that we'll have characters that we don't even have on mass media. And it usually serves the specific demographic that we're looking for in that channel. So, yeah, we have a variety of ways. And as things change, you know, with how people watch TV or watch streaming, we'll continue to play a part of that. And the great part is, you know, we have access to so much data to understand pretty quickly if it's working so we can remove it or double down.

Are there any metrics you can share on that in terms of are you increasing your spending in those non-NAS media channels? Is the take-up rate greater or improving there?

I think John wanted to say something too, but yes, we're increasing the spend in those channels for sure because many people have cut the cord and don't watch any TV, so we need to have access to them through those different channels. Did you want to add something?

Yeah, the growth in spend in nontraditional media has outpaced traditional for years now. And we're constantly testing into new media where we can. We have a group that entirely focuses on new ways to reach people. The overarching philosophy is where, when, and how consumers want to buy. So we are definitely investing. And normally, I think, relatively speaking, on the forefront of trying new channels is and ensuring that we can actually measure the success of those new channels. So we are very disciplined that when we're out spending new money, that we find ways to measure its effectiveness. And I think that differentiates us relative to a lot of other marketers.

Okay. And then my second question, it goes to one of the arguments that we hear from InsurTechs, which is that traditional insurers, even innovative and successful ones like Progressive, ultimately face an innovator's dilemma in the form of how much you push telematics-based scoring and pricing because of the legacy blocks, and that these insurtechs as a result could have an advantage over the incumbents over time because they're not encumbered by legacy blocks. So I'd love to maybe hear a little more about how Progressive looks at the innovator's dilemma and how it handles the right balance between pushing these creative and innovative ways to price and score versus maintaining the legacy block.

And I talked a little bit about that when I talked about the virtuous cycle in terms of, you know, when you have a segment, you innovate, et cetera, and you do that. I think that insurtechs, you know, are serving a great purpose in terms of ease of use, and it would be, I think, you know, easy to be able to, or nice to be able to, I should say, start without having legacy systems. That said, we have them, we work around them, but we don't say, okay, we're just going to be here in time and try to work around it. We're constantly innovating from a technology perspective, an easy-use perspective, and we believe that part of our DNA is really innovation we've been first in a lot I won't go into naming that and we don't intend to change that and the great benefit that we have that the insured techs don't is the cost of acquisition and for us we're going to continue to hone in on that and that's why we were able to increase our policies two and a half million in one year that's the reason we're able to do so and make our target profit margins which are also very important we have you know shareholders that are that you know own us because they know we're committed to our 96 gross as she can we don't have the the you know the availability to say we're going to test things regardless if we make money or not so we're very innovative we're always going to do everything we can to make a profit it's one of our core values and we're able to leverage our size to have lower acquisition costs got it thanks and congrats on a good quarter thank you

Our next question comes from the line of David Mopron with Evercore ISI. Go ahead, please. Your line is open.

Hi. Good morning. Just sort of following along the lines of the unique ways or new ways to apply our customers, I was hoping maybe you could expand a bit on any distribution partnerships for the personal auto business that you may have with the the OEMs or online car sites like Vroom.com that you have or that you might be exploring. I know that Ford has just entered an agreement with Varis Data Exchange to, you know, help offer insurance. So I'm wondering, you know, do you have any of these relationships? Is this something that you're exploring as a new way to acquire customers? And just sort of how you view that, I guess, subchannel of the BTC market? Yeah.

Thanks, David. Yeah, we've worked with many different OEs over the years, and I talked a little bit about that express data quote that will give us the functionality to work with OEs and other aggregators. We have many relationships, and we have some in the works that I'm not at liberty to talk about right now. Do you want to?

Yes. So we've worked directly with OEs over the years. We started a relationship with GM, I can't remember how many years ago now, probably four years ago, as you know, to get the data directly from vehicles and offer rates that are reflective of driving behavior at the point of quote and the point of sale. We have also worked with aggregators of that data or third-party gatherers of that data. So there are apps on your phone that are tracking, you know, where you're going and how you're driving, and we've worked with those entities as well. You know, it is a funnel as we think of it. When we talk about funnel economics, you know, the number of people that come in the top there versus the number that come out of the bottom, meaning actually by a policy, has been challenging. That is not to say we won't continue and are continuing to test in that space. And in any media, we normally see funnel challenges at the outset, and we work through the experience to continue to refine it and continue to make it better and to get to the point where the funnel economics work for us. So we've been testing into the data direct from OEs in numerous manners for a number of years now and have shown some success, but not to the point that it will be a considerable portion of our media spend anytime soon, frankly.

Got it. And so it sounds like those are interesting, but the conversion rates are still below your other direct channels. Is that correct characterization? Yes.

That's a fair way to think about it. And think of conversion not only as you got a quote and you then bought the policy, but getting folks from interested in the whole process even to get to the quote process. So it's a longer funnel than just got the quote, bought the policy. When we talk about a conversion percentage, that's what we're talking about there. This is, we think, of the entire funnel efficiency.

Got it. Okay. That's helpful. That makes sense. And then just switching gears, just more broadly, it's obviously been a profitable year for you guys, notwithstanding the credit and other actions that you've taken. Just wondering how we should think about the variable dividend and I guess how you guys are thinking about that as we approach the end of the year.

Yeah, so we meet with the investment committee, John and I and John Bauer, our head of progressive capital management, throughout the year understanding our capital strength, which is very strong, and always thinking about leaving some dry powder for anything that might come up. So we've had a couple sessions that we have arranged that we're thinking about. Obviously, the board will be the one that decides that. We meet with them at the beginning of December, and we'll talk through something and get more in line with what we believe the dividend will be payable next year. So obviously, that's an unknown because it will be a board decision. We feel really great about our capital position. We feel great about our growth and our profit. And, you know, in the past we've been able to share that with our shareholders. You know, again, we don't have any specific amount I can share with you, but we feel really great about our year. Anything can happen. There's still a few months left, but we feel good.

Okay, great.

Thanks.

We have approximately five minutes left in the call and still have a handful of people in the queue. We will go through the last handful here and go a little bit long. However, we will limit everybody to a single question. If you have additional questions, you may contact the Investor Relations Group at the contact information on the website. With that, I'll hand it back over to James.

Our next question comes from the line of Meyer Shields with KBW. Go ahead, please. Your line is open.

Great, Anne. Thanks so much for accommodating us. I was hoping that either Trisha or John could talk us through sort of the monthly volatility in the commercial lines expense ratio and what's been going on there.

So, you know, whenever we're looking at results monthly, you should expect volatility. Let me start there in terms of the loss ratio as well as the expense ratio. In our commercialized business, we talked about non-acquisition expense ratio previously. We have actually been growing our expense ratio in our commercial business, and that's been intentional and planful because we're investing for future growth. Specifically, our business owners program. We're now in 13 states and are feeling great about our progress there so far. We would like to get basically to the entire country with that program because we think it effectively triples our addressable market in our commercialized business. We've also invested heavily in what we call our small business insurance initiative, which is essentially the direct platform for our commercialized business. in our Business Quote Explorer, which, similar to our Home Quote Explorer, makes it very easy to get quotes from a variety of carriers through our direct platform there. So we have long-term plans to bring that expense ratio on our commercial lines business back down, but in the near term, it's going to be slightly elevated from where we've been. That said, you know, on a relative basis, relative to our competitors, meaning we have a very competitive cost structure in our commercialized business. But if you're looking for commentary specifically on an expense ratio, loss ratio for the month, we encourage you to look a little longer term, at least to the quarter.

And what I would say, Myra, is that this was very specifically planned several years ago when we set forth the three horizon concepts. We saw some opportunities in horizon two mostly around commercial auto and BOP and TNC and small business and fleet. And so we knew that in order to invest there, that we had to have some money you know put some money into it and now we're seeing the fruition of that investment so we believe it'll come down over time as we have more broad coverage with with these products but we feel very good about that spend because we felt like there was an opportunity in that addressable market for us to do many and new and different things uh to solidify again our commercial auto customer with even more products and The pandemic's been a little bit odd for small businesses, but we feel positive about that going forward and our ability to win with that BOP product on both the agency and direct side.

Excellent. Thanks so much. Our next question comes from the line of Brian Meredith with UBS. Go ahead, please. Your line is open.

My question is, Trish, if I look at average written premium per policy for your personal auto business, you know, went from plus 1 and 2Q to minus 2 and 3Q. Just curious, is that all due to the rate actions you've been taking, or are you seeing any changes in customer buying habits, i.e., higher deductibles, lower limits, those types of things that may be having an impact on that as well?

I would say the majority of that is our reduction in premiums. I haven't seen too much of a change in our business mix profiles. Great.

Thank you. Our next question comes from the line of Josh Shanker with Bank of America. Go ahead, please. Your line is open.

Thank you for taking my question so late in the call. I'm just wondering if we can compare shopping behavior right now compared to where it was three years ago. I've tended to believe that when prices are going up, progressing season, we're shopping because people are unsatisfied. But, you know, now that prices are going down, maybe people widely know that there's bargains to be had in auto insurance, and so it might stimulate a decent amount of buying. And if you can add, is there a difference between the shocking behavior of people seeking just an auto policy and people seeking an auto and home policy?

Yeah, that's so hard, Josh, to look at and compare it three years ago. I do think that even when prices are going down in this environment, it might be different. And this is, I hate to use the word, but so unprecedented. It really depends on the situation with the consumer and what they're looking for in terms of did somebody get furloughed or laid off, etc., So I think it's hard to know. What we really focus on is making sure that we have the message out there, that we have that broad coverage, that we have the ability to measure our acquisition costs and know that they're under our targeted to get the customer in there. So it's really hard for me to say. I think what we've tried to do is just when they are shopping, regardless of the reason, we're available, we're easy, and we're competitively priced.

Do you want to add anything? Yeah. So I agree with Tricia. There are many different metrics around shopping behavior, and they don't always agree. As Trisha noted, we're most concerned with is that we are spending efficiently to get the prospects we're getting. As we know, prospects are up. In terms of prospects we are getting and their behavior in terms of auto or auto home, you know, we are increasingly being positioned as the bundle provider for certain. And we do measure consumers' perception on that. And certainly our quotes for bundles, both in the direct channel as well as the agency channel, have been growing faster than in the model I know. Thank you very much.

Our next question comes from the line of Sunit Kamath with Citi Research. Go ahead, please. Your line is open.

Great. Thank you. I wanted to circle back to road tests. It sounds like you have had the technology for a while but maybe haven't focused on it or marketed it. So just curious why the decision to make a push now, and are you planning on rolling that out to existing policyholders as well as new customers or just new customers? Thanks.

Yeah, we had something called Test Drive years ago. I want to say five or six years ago, maybe. And at the time, there were some complications because the way it was set up, they needed to put in some data. So we think that that was probably one of the reasons we did a little bit of advertising, not a lot. So we've been working on road tests just to give people the ability to still have their own coverage and test what it would be with Progressive. And, again, we've been working on this for a while. We wanted to make it very worthy of our customers. So I'd say we've been working on this for over a year. Rolled it out a couple months ago. Data is really early because we want to continue to learn as we spread it, as we grow. broaden that coverage but you know yeah so you wouldn't do if you're a customer for us you'd probably have snapshot already these are for customers that have other coverage again we're going to work through the funnel economics on that and then likely roll it out more broadly in the very near future next

That appears to have been our final question, so that concludes our event. James, I'll hand the call back over to you for the closing description.

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.