Welcome to The Progressive Corporation's Investor Relations Conference Call. This conference call is also available via an audio webcast. Webcast participants will be able to listen only throughout the duration of the call. In addition, this conference is being recorded at the request of Progressive. If you have any objections, you may disconnect at this time. The company will not make detailed comments in addition to those provided in its annual report on Form 10-K, annual report to shareholders, and letter to shareholders, which has been posted to the company's website, and will use this conference call to respond to questions. Acting as moderator for the call will be Matt Downing . At this time, I will turn the call over to Mr. Downing.
Thank you, Julie. Good morning. Welcome to Progressive's conference call. Participating on today's call are Glenn Renwick, our CEO, Brian Domeck, our CFO, and Bill Cody, our Chief Investment Officer. The call is scheduled to last about an hour. As always, our discussions on this call may include forward-looking statements. These forward-looking statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during this call. Additional information concerning those risks and uncertainties is available on our 2013 annual report on Form 10-K, where you will find discussions of the risk factors affecting our businesses, safe harbor statements relating to forward-looking statements, and other discussions of the risks, uncertainties, and other challenges we face. Each of those documents can be found via the investors page of our website, progressive.com.
Julie, we're now ready to take our first question.
At this time, we are ready to begin the formal question and answer session. If you would like to ask a question, you may press star one on your touch-tone phone. You may press star two to withdraw your question. After pressing star one to ask a question, you will be prompted to state your name and company to help with pronunciation. Please be advised that during this process, you will be momentarily blocked from hearing the live call. To allow the company to respond to as many callers as possible, you will be limited to one initial question and one follow-up question per request. If your telephone has a mute capability, we ask that you use this function during the time your question is being answered to minimize any background noise.
To the extent you have additional questions, you will need to place your name back in the queue by selecting star one on your telephone. The first question is from Vinay Misquith from Evercore.
Hi, good morning. The second half of last year, you saw a nice pickup in your policies in force growth. My question is, are you satisfied with the 3%-4% PIF growth recently? Are you happy with your 93.4% combined ratio, or are you seeking to maybe ramp up the rate of PIF growth by reducing pricing?
Vinay, to go back to our relatively core principle of 96 and grow as fast as we can. Both of those raise questions there. Very happy when we grow at 93 and change. The modus operandi of the company is really to price as close as possible to a 96. We're more than happy when we get better than that, for sure. PIF growth, and I tried to express that in my letter, that our preferred form of growth is really PIFs. Bringing in PIFs at a reasonably higher rate. Now recognize we're very conscious, as you would be, of any trade-offs. You're not going to trade off a point of CR for relatively poor PIF growth.
There are combinations of PIF growth that we would see as attractive and be more than willing to have a slightly higher CR than what we achieved last year. Relative to how we achieve that PIF growth, there's really two big drivers there. You know that. There's new business applications and there's renewals. I more than foreshadowed in my letter that we took a hit on the renewals after taking rates that we've discussed many times in 2012. Those renewal rates now are actually becoming quite healthy. We share with you a PLE measure, which is actually a slow-moving measure, and we have actually several other measures, and I think maybe in our IR meeting this year, we will give you a little bit more of a way of looking at a scorecard of measures that might allow you more insight into renewal behavior.
Rather than try to do that on just a conference call, we'll do that in a much more formal way. The acceleration vector, if you like, to the PLE, which is a little bit more of a slower moving measure, is actually working quite well, and for the most part, the deficit that we've been in previously with renewals is really not the drag that we have now. We expect to see that being in our favor. New business application counts, don't want to get into overly specifics, but I'll give you some indication more of just recent times. We're sitting here not that many days before we release February results, so both Brian and I will be cautious not to go into that territory.
It's fair to say that based on observing the business day in and day out as we do, our new business applications in our agency channel, and I'll just go the second half of February. The first half of February had some strange weather conditions, which caused presumably businesses to be not exactly on the regular schedule. Second half of February, we're seeing high single-digit rate of growth in new business applications in our agency channels. We're pretty happy with that. On the direct side, we're actually seeing very strong growth and high double-digit growth of new applications. The outlook for us from PIFs could be healthy, and I say could because we never know what rate we might need to take to balance that.
We would be looking for increasing PIF rate, given that we feel our pricing points will allow us to achieve our 96 combined ratio goal. The trade-offs are important. We don't want to trade off small PIF growth for big give ups in margin, but we think there are appropriate trade-offs, and we feel we're well positioned for that.
That's helpful. Just in terms of the improvement in the new applications and also the PLE, do you think it's more a function of you keeping rates flat versus the competitors having low single-digit rate increases? How do you look at the trade-off right now from a competitive perspective? Are competitors being more rational and are raising prices right now?
Let me take that in two parts. The change in retention behavior that I said is certainly, and predictably, favorable and continuing to be so is much more, in my opinion, a function of our own rate stability. Our customers are not seeing a dramatically different rate. If I bought a policy for, and I'll just use a round term here, $100, and next time I come to renew, my renewal rate is not dramatically different than that, then I'm not incented to perhaps be looking elsewhere. For renewals, much more a function of our own ability to keep rates stable for our customers. In the new business marketplace, you're well aware that is a highly competitive, almost auction-like environment. Certainly in the agency channel, it is close to an auction rate environment.
Our new app there are always going to be a function of our relative competitiveness in the marketplace. You ask about other competitors, how they're acting, you're better off to assess that yourself. I'll just give you a little bit of the data set that I try to work from. We are very closely monitoring the rate changes brought about by other competitors and recognize we talk about in so many states, there are lots of data points here, and there's no one single answer. If I were to take a look at my scatter plots that I have for a few major competitors, I would probably say up through the end of last year or maybe even through January, we're looking at what I would say for State Farm and GEICO to be something in the plus two.
We're definitely in the plus territory as we observe it, and that's not inconsistent with the way we would view the world. Maybe Allstate a little stronger than that, and Three, and our best records for Travelers, and I think that is not including the Quantum 2.0, so more of the business in place. We look at that, and if I eyeballed it, I'd probably say maybe a plus four. Yes, we see in general, the marketplace taking rates up, but nothing in what I would call dramatic steps. There is a fairly good variance around any of those numbers I give you. There may be states that have a plus six, and there may be ones that have a minus two, but that gives you a feel. I'd say on average, competitors are taking rates up at a slow, low single digit rate.
As we look out and think about primarily the driver of severity trend, I would tell you, I put that in the 3 to 4 category. That's never a perfect number, but obviously, we're making estimates of that all the time. If I look out and see a three to four severity, I'm not surprised to see that kind of rate. It all depends on your trend point, how far you're taking your rates out or expect to take them out. Your question was, is the market acting rationally? That's always a really bad thing to be quoted on, so I really want to avoid that. It seems like there's an awful lot of actions that seem consistent with the data that we see.
That's helpful. Thank you.
Vinay, the only thing I'd add to Glenn's comments, particularly in terms of retention rates, certainly rate is a very big factor and influenced 2012, 2013, and now into 2014. We're also doing other things to try to extend each individual policy's life with us. We've talked a fair amount about our Progressive Home Advantage program, and we certainly are continuing to make inroads in that. That's continuing to grow nicely. We know if we can get more of our policyholders to have more than one product with us, whether it be auto and a property product or auto and a specialized product, our propensity to have them stay with us longer increases dramatically. We're continuing to do things in that environment. We also know our Snapshot program, where those who receive discounts via the Snapshot program, the PLEs of those are better.
We have other initiatives other than just individual rate level changes that have the ability to and are showing to show increases in our PLEs.
That's helpful. Thank you.
The next question is from Josh Stirling from Sanford Bernstein.
Hey. Good morning. Thanks for taking the call and appreciate, as always, the letter. I had a couple of questions on Snapshot, unsurprisingly. You guys didn't do a Super Bowl ad this year, but you do say in your letter that we should be looking for new product changes and maybe some new advertising in 2014. I'm wondering what you can give us as a preview, both on the product side and messaging. More generally, do you think 2014 is finally going to be a big year for growth with Snapshot?
Let me start with the backwards. I was quite happy with $2 billion on the books for 2013. Yeah, we would expect to see that. I probably shouldn't, but I can tell you that January, we're already looking at very strong growth rates in our Snapshot numbers. The continuum there feels more likely than some plateauing, for sure. I don't quite know the Super Bowl ad. I lived that experience once. I'm not sure that I've got any great keen desire to go back to that one. We will sort of get our message from the rooftops as much as possible with regard to Snapshot. I appreciate your comment on with regards to the letter.
I did try to say in there that we're going to use a lot of different tools in our arsenal to make sure that we get the Snapshot message out. You talk about previews of things to come, I certainly reference that we continually work on this. The answer is no. I think the time to do that would be much better at a more formal time when we really have some packaging. Hopefully I've never been someone who would say something and not back it up. Let's just take a couple of elements of Snapshot that you're starting to see, or I'm starting to see some comments one way or another in the marketplace, whether it be GPS or whether it be continuous monitoring or things like that.
One of the things that I would like you to sort of put in the back of your mind is that as we went through the first 10 years or so of R&D, we in fact did more extended monitoring periods. We clearly had GPS in the chip. We never came out and said, "Gee, we don't like those things" or that I'm just choosing two elements right now. We came out and said is, we need to find a packaging that allows us to extract a fair amount of information that is relevant and provides us enough information to pass that on in true cost to the consumer, and not absorb all of the monitoring with the cost of monitoring.
Snapshot was a time where we took a lot of information that we had and said, what is something that we can take to market where, and excuse my liberty here, we didn't need to compete against ourselves, where we could actually have a package that was marketable and meaningful in terms of pure premium reduction that wasn't absorbed by the cost of getting that additional data. As I indicated, we will continually refine Snapshot type offering, and it will reflect a lot of the consumer trends that we see as well. I will not rule out, in fact, I would say I rule in that we will consider more GPS type monitoring and the like as consumers are willing to accept that as a viable option. I think that the answer to that is different today than it was in the past.
Just as we do with almost everything else, there is not one solution that necessarily works for all. Monitoring periods, while we've chosen right now to be very discreet and believe that the cost of obtaining that incremental information is a nice trade-off, it doesn't mean that everybody will be equal. It might mean that customer X is monitored for a short period of time, and that's sufficient. Customer Y may actually be monitored longer. It may be that certain conditions that you encountered during your tenure with us cause re-monitoring.
None of those things, and you shouldn't infer that that is the direction per se of changes, but just know that we've got a lot of information about those sorts of things, and it's quite likely that Snapshot and the product will get a little bit more segmented to different customer audiences over time, and that we will use things like GPS. Just this week, I saw in our internal R&D, a research level view where overlaying trip data, we could overlay things, and this one comes as any great surprise to you, but we're doing it as opposed to talking about it. We overlay the speed limits on any particular trip. We overlay the speed of the car and the delta to the speed limit. We overlay the frequency of accidents in all of United States on that very thing.
There's a lot of external data overlays that we can do. My point here is that Snapshot in the market, relevant, producing results that are meaningful for the consumer, but we're scratching the surface of what its potential can be. As we are aware of some of those potentials, we'll try to build it into the product at a pace that doesn't have the costs absorb all of the pure premium advantages, and also at a pace that we believe the consumers are willing to accept and that we can market it. It's actually, for me, a hugely fun journey.
Thanks, Glenn. That's really helpful color and obviously a lot of exciting stuff. I guess the big follow-up question I'd ask is, when you put all of that in the context of an environment where technology's pretty rapidly accelerating, much faster than you guys started on the journey 15 years ago working on this stuff, how should we think about strategically how you guys are going to play to try to maintain the leads you have today? I think obviously you mentioned competitors are starting to talk about it. Those are in some ways easier to put a box around different channels and so on and so forth. The big question that I think a lot of people sometimes struggle with when they get excited about telematics is just simply how you guys sort of maintain your lead against potential inroads from a new tech kind of approach.
I'll leave it there.
Yeah, no, that's a very fair question. Surprisingly, at least to my knowledge, I've been very publicly consistent on this. Love the fact that we had some patent protection and gave us an opportunity to get into the marketplace. For me, this has always been an issue of get and win in the marketplace. Everything else is extra. Progressive strength, historically, has been using data and segmenting that data to its advantage. We had no proprietary rights to something like credit. Everybody can use credit. We like to think we used it very well. I would tell you that the homogeneity of actually being able to get the data will increase. I'm totally with you on that.
Frankly, I'd like to get out of the business of having people plug chips into their car and so on and so forth, because that's not an absolutely natural thing for them to do. The cars will be more than equipped. This will be a silly conversation 15 years from now because cars will just be providing that information. Progressive strength's always been about what you do with the information as opposed to whether we're the only ones to have it or the only ones to be able to extract it from the vehicle. What I foreshadowed in my prior comments was just a field that is far greater than, is it just hard brakes, hard acceleration factors that we use today?
It is demonstrably more and arguably a very different field of data analysis, data collection, and data use that is very, very different than when I was a practicing product manager. It's a very different skill set. I think that the winners and losers in this one will be the companies that adapt to the technology and have the talent to be able to use that kind of data and convert it into truly marketable products. That's where I've always seen our advantage anyway. The fact that we have had for some time a little bit of a proprietary opportunity in the marketplace, that's great, that just allowed us to get a huge head start, and that head start will be tough to pull back.
Thanks, Glenn. We'll have to get our Snapshots so we can grandfather ourselves in before you add all those new variables.
I got mine.
Thank you.
The next question is from Meyer Shields from KBW.
Thank you. Good morning. I'm sure this question will be more specific than any answer you choose to give. You talked about Travelers raising rates at around a 4% clip, excluding Quantum 2.0. They've been talking pretty optimistically about changing their own PIF trends as a result of Quantum 2.0. Are you seeing any signs that you may have to respond to competitive pressures differently in the agency channel, specifically in response to 2.0?
No. Let me comment on that sphere. The 4% was definitely not including Quantum. They're rolling that out in a separate company and keeping it apparently pretty clean. Travelers is a great company. I expect them to have a great product, and I have no doubt that they haven't been entirely comfortable with some of the trends they've had before. That's what we've lived within the agency channel all along. To ask whether there'll be any competitive response, we're always going to price our product based on our data. We don't price it necessarily based on what a competitor is doing or not doing. That's the only way we can possibly be true to our combined ratio of 96 goal. We must live with our own cost-based pricing.
We clearly are responsive to what competitors are doing in other areas and making sure that our story is well told to agents, positioning ourselves appropriately on comparative rates, that sort of thing. I just recently went to an internal colloquium on Quantum 2.0 so that all of our people are very briefed on what the product is and positioning. I gave you an indication that even the last part of February, our results for agency sales are strong by our standards. Haven't seen anything there particularly. We track proof of prior from other carriers. Travelers is not a particularly high, not the top 5 type of carrier. We will watch to see if that moves any. This is all data to tell us what's happening, not necessarily things that would provoke a particular response.
Our expectation is that companies will always be refining their product as we are all the time, and that Quantum 2.0 for Travelers is their next best issue. My gut from what I've seen is that this feels, at least to the extent that we look at win rates between ourselves and Travelers and what actions have been taken, it seems like it's going to be a very appropriate product offering for agents, and that's always good for the channel as well.
Okay. Thank you. That was very helpful. Can you talk a little bit about how competition in the commercial auto segment is evolving?
A little less so. Let me break the commercial segment down to two. This is the light local type business. For the most part, I wouldn't say the competitive nature there has changed a great deal. We're reevaluating our own pricing in that space and may have put ourselves just a little bit on the high side for our light local business. Those are tweaks that we'll continue to review. In the, what I'll call the more trucking for hire, trucking and specialty type business, I made a couple of very brief comments in my letter about that. That segment really has been very difficult to price. We've taken a lot of rate over the last two years. We actually feel that we're at a good rate point now, and we have seen some competitive actions there that are a little pullback from the marketplace.
If I was going to describe the higher end, not necessarily higher end in terms of number of units, but the higher end trucks, more trucks than light local artisan type vehicles, I would describe that marketplace as showing signs of a hardening marketplace, and that a rate level, I mean significant rate level changes that we've taken over the last 2 years, feel like they will start to become a little bit more competitive, and we would see the opportunity to grow. We have seen some competitors who obviously have assessed their rate level to be less and have pulled back from that marketplace. I would say hardening in the top end of the market and not much change that I'm aware of in the light local. Brian, do you have any-
I think that's a fair assessment. I think the one place we've seen a little bit more hardening in the market with competitor actions, either via rate or underwriting, is more in the truck segment.
Good.
Fantastic. Thank you so much.
The next question is from Paul Newsome from Sandler O'Neill.
Good morning. I wanted to ask a follow-up on the sort of competitive environment in the independent agent channel, particularly as it has to do with commissions. Progressive obviously was one of the, if not the leader in taking commissions down, but trying to be extremely price competitive as well as extremely user-friendly through the agents' computer systems. Do you think that the market has begun to follow you down in that strategy? It does seem that Quant2, for example, is basically kind of a mimic of Progressive systems. I'd love your thought, not so much necessarily on Quant2, but just on the broader question, if we're looking at an independent agent channel, at least within auto-
Yeah
is more of a low commission, more price sensitive kind of market.
Paul, let me expand a little bit on that and try to be direct with answering your question. You're right. Progressive clearly would be seen by agents as the company that took commissions down. That doesn't always get said with a massive smile because no one wants their compensation to be taken down. Let me give you the background, and there's at least two really relevant data points here, and I'd like to couch this, and I do this for agents as well. I'd like to couch this, that this wasn't some sort of arbitrary, let's just find a different level. Two data points, and they span a good number of years. Many years ago, and some on the call may remember, we offered three levels of commission to our agency channel. For reasons that really aren't pertinent now, we were not allowed to continue to do that.
In doing so, it was very interesting to note that the lower level of commission was by far the largest selected commission level. There was clearly a marketplace for agents and agencies to be able to sell a product that had the lower commission, and of course, the lower commission reflected in the price. That was data point one, and that wasn't arbitrary. That was across the entire nation, and we saw the distribution being similar in almost every state. The second thing, and this is where I would argue that Progressive perhaps has a point of view that is certainly relevant, and we think important, is that we've been able to determine what, let's just say, the true cost of distribution of an auto insurance product is, almost independent of channel.
If on the direct side, I'm not going to get into the numbers directly. We have now a pretty good feel for what our cost of distribution is through our direct channel. We are clearly, we'll state it 100 times, very agnostic relative to how we get our customers. We are happy to get a customer on a variable cost basis. We are happy to get a customer on a direct basis. One of the things we didn't want to do is create an arbitrage between those channels simply on the cost of distribution. I would tell you today that we have more of an informed way of deriving a commission rate because it is more reflective of the cost of distribution that we've been able to measure and observe more directly through the direct channel.
Previously, commission was a little bit, well, X plays 15. I'll pay 15. It didn't bear a lot of resemblance to what the true underlying cost structure was for an agency, and of course, that could be very different between agencies. Our way of looking at it is to try to find a cost that seems to be representative of either channel. Both channels can be effective with a cost, and no one is particularly arbitraged. Let's just put a number around that, 10 to 12. You know our position in the independent agency channel is clearly a market leader, by far the market leader in the agency channel. To suggest that others might follow Progressive, that's a fair assumption.
I actually don't know what their decision criteria is of why they're doing it, whether it's Progressive can do it. Therefore we can do it. I don't know. That's for you to ask them. We know why we've set. We've been very clear with agents why we've set our level of commission to be at what we think is a true market clearing rate for personal auto, independent of channel. At that 10 to 12, or even 10 to 11, I would say, is kind of closer for our numbers. We feel very good about it and actually have much less conversations today with agents about why, because we have a stronger rationale. That's some background for you. Does that ultimately mean that the market leader has a fair amount of say in what happens in the channel? To be determined.
You'll be able to observe that at the same pace that we will. Thank you. Thank you very much.
Just a reminder, if you would like to ask a question, you may press *1 on your touchtone phone. The next question is from Michael Nannizzi from Goldman Sachs.
Thank you. Just one question, Glenn. I think in the third quarter, you kind of mentioned where you were on expectation of loss cost compared to future pricing. I think you talked about that gap being about 100 basis points. Just curious, did that get already reflected in results either in 2013 or so far in January, or are we still working through that? How should we think about where you are on that spectrum now? Thanks.
I'm sure I said the 100 basis points, just not coming to me right away. Third quarter of last year, yeah, I suspect that we were feeling that our rates were probably either at or just slightly above what they might have needed to be. Fourth quarter, I think I've shown a diagram or a schematic of how rate revisions sort of come in through time. I would say that the fourth quarter was probably a period where we feel our rates are about close to where they need to be. If I were a betting man, I would say that in general, we will be looking to move away from what was a very flat year in rating in 2013 and probably start to see some, just what I would call, natural state adjustments made by our product managers to reflect the trends that are going forward.
Certainly, this winter, there's no question this winter has put some frequency stress on PD and collision specifically. We internally take a fairly disciplined approach and a quite remarkably detailed approach to determining what the possible range of seasonality might be around our combined ratios. Obviously a good winter and a bad winter, we're going to see some different results. One of the things you want to be able to separate out is sort of noise and signal. Is my overall price level okay, and will it be varied a little bit by some weather conditions? Those are really important issues because you don't want to sort of justify or use weather as an excuse to perhaps lull you into thinking that your prices are right when they're not. I would say that we're comfortable that we're in the right band.
Going forward, we would think that these rate revisions, for the most part, and again, there is no way to overly generalize that, but for the most part, they've been in the marketplace about the time that we would expect them to be in the marketplace. Going forward, hopefully we will see similar increases, as I mentioned, for some of our competitors going forward. Just severity is severity, and unless that goes away, you can assume that we will be pricing to it.
Great. Thanks.
Just a little bit more in terms of the loss trends. Certainly for the year, our frequency was pretty moderate, about 2%, primarily driven by property damage and collision. Fourth quarter frequencies were actually up higher than the four-year average. Fourth quarter frequencies were up. As Glenn mentioned, some of it could be weather related, but they were up, and the severities were pretty much in line with sort of the low single digit severities we saw for most of the rest of the year. The fourth quarter frequency was definitely up. You can reasonably assume just by looking outside that the first quarter, or at least the first two months of the first quarter, not going to be any different.
Great, thanks. Just one quick follow-up on the PHA. It seems like the American Strategic Insurance relationship, that's mostly through the agency channels. Does that imply that the other partners that you have are mostly on the direct side? Where is that relative to kind of where your expectation was, that million customers at this point?
You're right with your assumption. I think it's not 100% perfect. We do some ASI on the direct side, but think ASI agent. That is the good way to think about the PHA and for 99% of the time, that's exactly the way to think about it. All others are on the direct side. We only have one in the agency channel. That's the proposition we're carrying two agents and why it's so very important to us and why the ASI relationship's so very important. On the other side, obviously, we have multiple carriers. We've not been shy about saying that Homesite, Ameriprise are important pieces of that piece, a little bit more so than some of the other 11. Some of them are there for very specific niche type roles. You had a secondary piece there I don't think I touched.
Actually, that's what I was saying is, where are you on 1 million customers? Where are you on that? A year ago, is that ahead of your expectations? I guess, on that front, what is PLE for this kind of cohort? Thanks. I'm done. Thank you.
Okay. Yeah, actually, the 1 million is great. We didn't set a specific goal, so I'm not going to do revisionist history and say we should have been at 900,000, so we're ahead. We're very happy with the 1 million. I think because we're best when we're perennially slightly unhappy with ourselves. We would like to see the agency contribution to that ramp up some, and certainly that would be a goal for 2014 as ASI has been able to work with us and expand the number of states. That can get exciting for us. Keep the momentum that we're seeing, in fact, increase it on the direct side, but I'd say increase it even more so on the agency side. Did I miss anything? Oh, PLE. How do I say this? I'm not going to tell you the PLE because it's going to be lots of different CMTs.
When I say CMTs, if you were at the presentation, think Robinson, think Diane, so on and so forth. It is a variety. Here's what you clearly need to know. We've said it many times that we're doing this, Brian mentioned it earlier, we're doing PHA from Progressive's perspective, primarily to do two things, extend the policy life expectancy of the customers that we write, and we write a lot of new customers, so we want to make them extraordinarily sticky to Progressive, and most importantly, we don't want them leaving us as happy customers, but finding a need to have additional products for that point and on in their life. That's a big part of the motivation to have PHA, and of course, to be able to speak to different customers, even at new.
Our policy life expectancy, especially if someone starts with us, perhaps as a non-homeowner and becomes a homeowner, that's the policy life expectancy that is very exciting, and it is meeting all expectations, and I say that with some quotes because we didn't know what to put as an expectation for PLE extension. We do it and measure it, but we're very happy with the measures and the extensions that we're seeing.
Great. Thank you very much.
Just a reminder, if you would like to ask a question, you may press star one on your touch-tone phone. The next question is from Ian Gutterman from BAM.
Hi. Good morning, Glenn. I wanted to follow up on the [claim] frequency a couple of minutes ago. In the K, I think you said frequency was up 2% for the year, and I understand you said a little bit of that's weather in the quarter, but we're used to, I think, frequency being down somewhat. It seems maybe there's a little bit of core pressure. Can you just talk about any trends you might have seen and whether weather aside, you think those persist into 2014?
Yes, that's a fair comment. I'm not trying to hedge here a lot. Frequency is really touchy. The frequency for the fourth quarter, as Brian already said, is actually on a couple of coverages up. If that were the case, and we believe that was going to stay the case, we'd be reacting to it. Yes, weather is a very real phenomena, but it's not an excuse. It's just an interpretation of the data. Here's the one piece of signal that I would say is coming through that we might find to be a little counterintuitive to some of the negative frequencies of the past few years, is we're actually seeing gas consumption go up and mileage go up. Those are indicators that we follow.
I'm not, maybe we have people who are a lot smarter, but I can't necessarily give you a straight causation model there, but they are certainly factors that we will keep our eye on. As we look forward to the year, and whatever number I give you now, I guarantee won't be right, but we always have to have estimates at any point in time. We're actually looking to a year where we think frequency will probably be maybe +1. Very hard, and the +1 is not as relevant as it's not zero and it's not negative. We may see frequency go up. You're probably well aware that new car sales have started to actually show some real life in 2013, and presumably, the auto manufacturers are looking to see that continue in 2014.
Gas consumption and mileage is another way of getting at some of that. Are we seeing more cars per family? Those things move so slowly, but we don't see indications of negative or flat, which is a change.
Interesting. Thank you. My other question is, can you talk a little bit more, there was some language in the K, I think you alluded to a little bit earlier, on losing a couple of these patents in the Liberty cases, and I believe there's a third one that's to be decided pretty shortly. You obviously addressed your data advantage by getting the head start, but just what does it mean competitively if you were to lose the next case? What can your competitors do that they haven't been able to do so far, and how does that change the competitive dynamics if usage-based?
If we want to get into the technicalities of that, actually, we have our chief counsel here, and we can do that. I think your question is more general, and again, I want to be very careful not to sort of give an answer that feels right for the time. Those things are going on. A couple of adverse decisions. No question about that. I will tell you, and this is no exaggeration, I spend most of my time thinking about how we win in the marketplace. We are a regulated business. We came out 2 years ago and said, we're even going to let other people use the technology, and that was obviously for a fee. We were not going to get super rich off the fee per se, but there was some method to our views on that.
I would tell you that if one of the primary objectives of a patent, and I believe this to be true, I have some experience in this, is to give you time to bring things to marketplace. I think we've at least established for ourselves that we've had a fair amount of time, and I would just tell you, I'm quite delighted. That doesn't mean we're not going to continue to press our rights because we think we have rights. We think we were awarded these patents, and we're going to continue to do what makes sense for us to do. For the most part My answer to Josh earlier is all about how do we use this incredible data opportunity and data source to our long-term advantage.
When history is written 25 years from now, it won't be about the patents as much as about what we did with the data and how we won in the marketplace. I'm not sitting here putting that on my top 10 list of things to worry about. That doesn't mean my general counsel has not got it on his top 10 list of things to worry about, because I think it is.
Understanding that. I agree you obviously have a big head start. As you answered, I'm more curious about you guys obviously have had such a head start and others have sort of seems like they've dabbled, if you want to call it that. Is your impression that we're close to seeing a lot more aggressive launches of usage-based among your competitors, just A, given your success, and B, that the patent issue might be less of a hindrance for them?
I certainly am not going to comment on dabbling because that will only create a quote that I won't want to live with.
Okay.
I think we're seeing that anyway.
Okay.
I think we're seeing it. Whether or not we agree whether it should be done by some without our licensing, I think the fact is we're seeing it. I'll make one point to you that recognize that UBI, for the most part, is most effective for companies who write a lot of new business.
Interesting. Okay.
Very few companies that have a very large book of business that's relatively inert are going to want to throw a new rating variable on it that either reduces the margins on the customers they keep or throws other customers into the marketplace. Keep in mind that those who will have the most advantage from a segmentation variable that is most effective at point of sale will be those who write the most business. It's a very important point in my mind to keep top of mind.
That's a very good point. I appreciate it. Thank you.
That was our last question. Julie, I'll turn it back over to you for closing scripts.
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