Welcome to The Progressive Corporation Investor Relations conference call. This conference call is also available via an audio webcast. Webcast participants will be able to listen only throughout the duration of the call. In addition, this conference is being recorded at the request of Progressive. If you have any objections, you may disconnect at this time. The company will not make detailed comments in addition to those provided in its quarterly report on Form 10-Q, annual report to shareholders, and letter to shareholders, which have 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 Jeff Basch. At this time, I'll turn the call over to Mr. Basch.
Good morning. Welcome to Progressive's conference call. Participating on today's call are Glenn Renwick, our CEO, and Brian Domeck, our CFO. Also on the line is 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 in our 2012 annual report on Form 10-K and our quarterly reports on Form 10-Q issued during 2013, 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 these documents can be found via the investors page of our website, progressive.com. We are 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 an additional question, you will need to place your name back in the queue by selecting star one on your telephone. Our first question today comes from Vinay Misquith of Evercore. Your line is open.
Hi, good morning. Per your shareholder letter, it seems that management is now in the second half, more focused on growth than PIF. Curious as to whether that's based on rate reductions that you're taking right now, or is it focused more on the competitor rate actions?
Good, Vinay. That might be one of the comments that's deserving of some additional color. Good use of our time. Let me see if I can get to a lot of the points in there. Let's start with that. Aggregate this year, we've actually got rates up very slightly. Our aggregate rate change is single digit basis points positive. As best as we can determine, the marketplace is also relatively low but still positive, and I'm doing this off of some graphical interpretations here. I'd say 25 to 50 basis points. Let's set that as a backdrop that, in fact, rates are still going up, but relatively minor as having taken them up last year even less so, but still positive overall.
Last year we used, I think I've talked about this a lot, but I'd like to get the context and then go on to some of the comments with rate reduction, which I think is probably on your mind. Last year we used what I'll call for this discussion, a relatively blunt instrument, and we took rates up. We call that base rate changes. When we take base rate changes, it's actually uncommon for us to do that. Normally, we're a little more surgical. What we're moving to now, and we have been doing since the end of the first quarter. This is not actually a new thing. It started in the end of the first quarter and through the second quarter. Our product managers, this is essentially what they do, is always looking at their product to see different combinations of opportunity for growth at acceptable margins.
In many cases, after using a blunt instrument, we're going to go back and continuously refine at the segmentation level that isn't so obvious in the reporting that we provide to you. When I talk about an ordered pair, let's just think of 93, close enough, seven as an ordered pair for the year-to-date. That's our combined ratio and growth. We're looking, or product managers are looking deep into their product to see where they can get ordered pairs that actually feel better to them, and if the opportunity or the elasticity for growth is available to them and perhaps able to be exploited or capitalized by taking a rate decrease, they may do that. An irony of rate decreases when you're at the surgical level is you can actually take a rate decrease on a segment, get a higher average premium and a lower margin.
I'm not saying that's what we're going to do or achieve, but recognize that that's the difference between the surgical instrument and the blunt instrument that we used last year for a reason. I'll come back to sort of the reason. Where our product managers are taking a look at their product, they're looking for opportunities to see where there is some elasticity, and if they'd be willing to exploit that, and that is if, and only if, that sell would achieve our acceptable margins. Hopefully that makes sense to you. Let's assume that we've got one segment. Doesn't really matter whether it's geographic, customer-profiled, vehicle-profiled. One segment where we're not growing very well. In fact, we now believe that that actually produces a very nice margin. We would be willing to take more of that business.
In fact, given that we currently don't have as much of it as we might like, it may actually improve our aggregate margin. Recognize when we say fine-tuning rate changes, it doesn't mean the same thing as we implied last year, where we said consistently we were going to take base rate changes. A second issue is that last year at this time, we were probably talking, and we gave you some pretty good detail on frequency and severity trends, and I suspect you're hearing much the same from others in the industry. If we have to sort of look at aggregate, you're probably talking this time last year, we were looking at severity 4-6. This year we're looking at 2-3.
I think we all understand we're in a business that we don't actually know what our cost of goods sold are at the time that we make our prices. We're pricing for a future cost of goods sold. The severity trend has probably come in 1-2 points lower than what we estimated. That is even accentuated in a coverage like PIP. Thus, Florida is one of the states that was actually, in my letter, the reference state, where in Florida we've actually seen PIP change, and there's a lot of moving parts there, so I'm not going to get overly complicated with it. The product manager has done a very nice job of not getting trapped when the trends certainly could have been very positive and being stuck with the wrong rate level, taking proactive measures.
As we get data, and in Florida and some of our larger states, we get a fair amount of data relatively quickly, they will respond to that. That is effectively the job, and one of the strategic advantages that I've always tried to present for Progressive is our ability to change rates at a surgical level in different states. We have over 50 people doing this in individual states with individual products, and that is our modus operandi. While I called it out at this particular time, you should interpret that somewhat as a fine-tuning after using a relatively blunt instrument. In aggregate, rates are still up for Progressive, but I would call it flat. I'm very excited about the changes that have happened. It's great that some of the trends have mitigated. We're always comfortable with that because that means something for our customers.
It means we don't have to keep taking rate for our customers. Where we have trends that have or we overestimated in our prior pricing, we will adjust for those, and we will do that continuously. All I can tell you is we're almost always wrong to some degree in rates. It's a continuous process of matching margin and growth opportunities, but it's at a much more micro level than we see and report on in the audited peers that you get to see. I know that was a lot, but hopefully I got to some of your points there.
Yes, that's very helpful. Just to follow up on that, curious about what the elasticity is. Historically, I've thought about when peers are raising rates and if your rates are flat to maybe modestly down, that the elasticity is more and people would shop and you would gain share. Given this environment of roughly flattish pricing, even by peers maybe modestly up, what elasticity are you seeing, at least in the early phases, for your modest rate reductions on a surgical basis?
Yep. Fair question. Again, if we try to do that at the aggregate level, it's not going to be very meaningful. Four basis points here, five basis points there, not going to shift the needle. These rate revisions that we're talking about now are more surgical and can be at levels where the elasticity is significant. In fact, there's no point in doing them unless there is some degree of belief that you're going to get a disproportionate growth for the adjustment that you made. There may be sells where we're simply not getting anything, and that's a pretty simple one to do. There are ones where we might want to increase the growth, and certainly you're not willing to do a rate reduction where you get nothing for it. Otherwise, it's just a experiment in margin reduction.
While I haven't answered your question specifically with elasticity, there are sales where the elasticity is actually very extreme. Specifically in the agency channel where we have comparative rating, that elasticity becomes immediately apparent in terms of, think Google search, where you're positioned in the results return. For our direct channel, it is much more observable in the conversion rate by that individual sector of individuals. We wouldn't be doing it unless we felt there was a real return.
This is Brian. Just to add on to Glenn's comments about the drivers of unit growth. Certainly the question, most of the response relates to rate levels. This would be more so for the direct channel. One of the things that not only did we raise rates in the second half of last year, we also did decrease our ad spend in the second half of last year over that which we had planned. Certainly given where we are today
Anticipation in terms of ad spend. On a year-over-year ad spend level, the rest of the year should be fairly robust. That will also be, hopefully, a generation of increased demand. In fact, so far in the first six months of the year, the demand and quoting activity in the direct channel has been very good, and we are hopeful that with a little bit of an increase in ad spend over year-over-year, that will also show quote growth year-over-year.
That's helpful. Thank you.
Next, we have Michael Nannizzi of Goldman Sachs.
Thank you. Just picking up on that point, I guess it sounds like in the direct channel you synchronize the advertising or somewhat synchronize advertising and your rate activity. Just trying to understand that a little bit more. Is that what you did last year? Given that you're advertising more now, are you adjusting or do you plan to adjust your rate activity accordingly to maximize the value proposition to customers?
Let me take it slightly differently than that. First, for us, it's grow as fast as possible at a 96. Always keep that in your back of your mind that we will do that. Last year, approximately this time, the 96 was under pressure. At that point, we had to get rates at a level that we felt comfortable forward rate, that we felt comfortable we'd want to sell policies at. There is really no great reason to go out and sell a lot of business at a rate level you're not comfortable with.
That was the comment that Brian was making, that not only at about mid-year last year did we do a unusually wholesale review of rates and take up base rates, we also reduced our advertising because those base rates need time to sort of work their way in through the different states that we take them in. We reduced our advertising until such time as we felt, and I say reduced, it was certainly not a let's drop it off completely, so you saw plenty of advertising. Now we're at a rate level we're very comfortable with, and what I've really just said in the last five minutes or so is that we are back to doing what we do all the time. This is the kind of fine-tuning product management, looking for segmentation that can produce a little bit more.
How do I get a little bit more out of this piece of the business? Given that we're comfortable in the aggregate and we'll continuously fine-tune at the micro level, there's no reason for us to be backing off our advertising levels that we had previously planned. What you will see for the second half of the year is advertising at approximately the same level as you've seen for the first half of the year. Whereas last year you saw a level in the first half of the year and a decline in the second half.
I see. Great. Thanks. Then just one other one, I guess. Given your size, you're clearly very large. You're advertising significantly. Your PIF growth has come in and a lot of that seems like was in response to rate actions that you wanted to take. Is double-digit PIF growth in the direct channel, is that a goal, a target? Is that something that you think that you can feasibly attain? Or from your standpoint, is it more about keeping people in the system than aiming at some potential growth metric down the road? Thanks.
I'm going to be a little bit hesitant to give sort of guidance there. That won't come as any surprise to regular listeners. You mentioned something as if it's just new generation. Keeping people in the system is also a way of growing your PIFs. Every time we have someone leave the book, having to replace that with new, it's a whole lot better if you're keeping the person in the book and getting the new. It actually is both sides of the equation, and I will just say, I do not rule out double-digit PIF growth in the direct channel, nor do I forecast it, but that's where we're about. I don't want to sound like a broken record here, but that's exactly what we do with the fine-tuning that I just went through.
I would tell you from my perspective, I feel a lot better about the health of the company right now than at this time last year, where you're having to use those blunt instruments with a lot of, not so much unintended consequences, but there's secondary consequences. Right now, we feel very good. We'd like to sort of hunt for a little bit of growth. That makes perfect sense, but it'll never be at the cost of significant margin reduction.
Thank you.
Paul Newsome, Sandler O'Neill, your line is open.
Good morning. Thanks for the call. I wanted to ask about your perspective of how the independent channel and the direct channel are linked from a competitive perspective, and whether or not that has changed in recent years. If I or anyone else is to take a perspective of an increase or decrease in the general level of competition within one of those channels, should we also be thinking about that naturally bleeding over directly into the other channel? How do you think about that?
Could you just give me that second piece of that again, Paul?
If I think that there's going to be a lot more competition, say, in the independent agent channel, should I be thinking of that as also really affecting the direct channel? Has that changed much over the last several years?
All right. Let me see if I can get a couple pieces of that, then if I miss them, jump back at me. Directionally, I'm only speaking for Progressive here, not a comment on the channel. We have gone over the last many years to great lengths to try to get an equalization of the acquisition costs. We are now distributing in our agency channel at an acquisition cost that is very directly comparable to the cost that we incur in the direct channel. That's a very important statement, it may not seem it, but it means that there's no real macro arbitrage between one channel or another. We've been very consistent in our outlook to say that consumers will shop how they choose to shop.
While it's very easy for some people to come to a conclusion that clearly there'll be a massive directional shift one way or the other, that is not supported by the facts. It'll in fact be a very slow change, we positioned our company so that we are an absolutely equal provider of product to two channels without creating an internal arbitrage. There is clearly a difference in price at a unit level between direct and agency. That we've been very clear on. Agents know it, we know it, customers know it. At the macro level, it actually is a similar cost of acquisition. With the competitive structure in the agency channel, we've talked about this 100 times, being really an auction environment with the comparative raters, we feel very good about that.
It also, we highlighted this at the IA meeting, we said the cost structure of a company to really compete well in the IA channel was critical. We, A, feel like we compete well in the independent agency channel, the number of competitors there is certainly not increasing dramatically. The carriers you know mostly are the same sort of usual suspect group. In some cases, we feel very good about our cost position there, we've also done it so that we're not arbitraging against or for our direct channel. What will happen in terms of channel population will be very much reflective of how consumers want to shop with us. Having said that, I'm not sure if I got at the essence of your question.
I think so. At least from your perspective. There's a lot of concern, I think, that we're going to see more price competition, Travelers has made this comment, in the independent channel. I think we're also thinking, do we need to think of that as sort of a general market issue or a specific within segment issue?
I certainly can't or wouldn't talk to another company's actions, but the results are fairly clear if you take a look over a reasonable period of time that a cost structure and segmentation structure is very important. I say both of those and don't weight one over the other because in an auction environment, it's really important to have your rates right at the individual risk level, not at the macro level. The cost structure is more of a macro issue. We feel very good about our strategy there, and I think it's being supported. I am clearly hopeful that we'll start to be reporting growth numbers in our agency channel. You saw a narrowing of the gap in the second quarter and a growth into the direct channel. I reported at the IA meeting that in fact demand in both channels is strong.
We're about capitalizing on that, and the relative competition in the agency channel is not something that I think is higher or different now and don't project it to be significantly different going forward. I am sure everybody is trying their best to do what they do. With the direct channel, we have on previous occasions tried to give you a perspective or our perspective. I'm sure you have one for yourself. The cost of entry for direct carriers is just extraordinarily high. The likelihood of the landscape on direct changing dramatically seems low to me. Those usual suspects that you know well now will be the ones that will play in that segment.
Thank you very much. One more question, changing gears a little bit. I know you folks have looked at the new accounting ED, and wanted to know if you had any thoughts and comments and whether or not that might have any effect on how you think about your financial targets.
Brian, you want to take that one?
Sure, yes. We certainly have kept abreast of the disclosures. We actually think today's accounting treatment for insurance contracts and loss reserves and the like actually work pretty well. We're comfortable with the accounting treatments today. In large part, we have some concerns that the changes will create a little bit more subjectivity and less comparability across companies. For those reasons, we have a little bit of concern with them, we continue to follow it. We continue to participate in discussions about those. I'm certain we will issue a comment on the disclosure draft. That's our current thinking. We think today's accounting for both short-term insurance contracts and loss reserves is pretty good. It's easy to compare across companies, we think it's adequate disclosures.
Great. Thank you very much.
Mike Zaremski, Credit Suisse, your line is open.
Hi, good morning. First question's on comparative raters. A couple competitors have talked about the third party comparative raters within the agency channel causing disruption. I noticed in the 10Q you guys talk about it helping your quoting activity due to, I guess, California adopting comparative raters. I was just curious, are the comparative raters a good thing for Progressive? Are the comparative raters only in a select number of states and kind of rolling out into more states as time goes on?
If you'd asked that question about four years ago, I probably would've gone into some philosophical rant about whether I thought it was good or not. Now I would say they're here. That's the landscape. It doesn't really matter whether it's good or bad. What it means is you have to understand that's how you're going to play in the agency channel. That puts a premium on the companies who can truly segment and have every price presented. You do not want to win when you have that one bad sell. A bad sell, i.e., we price 16-year-olds at the wrong price. To just make this very simple, it's not quite that simple. If a company has 16-year-olds at the wrong price, lo and behold, they'll win on the comparative rater on a regular and frequent basis, and you'll see that show up in margin.
It puts a premium on being able to have what I'm looking at Progressive entirely, so you have views on other companies. What is a fundamental strength of Progressive of segmenting and trying to get every combination of rates right because it will be exposed faster than ever before through comparative raters. One could say that means that the loss ratio for the entire industry will be at the lowest level that is acceptable for the industry because there is no opportunity, or there are lower opportunities for I put business with someone, it was slightly higher rate, maybe it was a commission issue. Might have been whatever combination that someone wants, in a comparative rater, you're going to actually drive to at least a lower level of pricing. You'd have to ask agents, it doesn't mean an agent always places someone with the lowest level.
I'm sure they only accept carriers that they're comfortable with on their comparative raters. You should not assume that every company is on every agent's display of comparative raters. It is an agent first makes a determination of who they want to represent, and then only those companies are presented. It's not an absolute auction of the entire market at any given time. It's an auction within the agent's selection of companies they're comfortable with. Notwithstanding, it puts a high premium on being a good pricer and segmenter. It puts an equally high premium, as Brian pointed out at the investor relations meeting, on having a cost structure which allows you to add onto that segmented price, a cost structure that also is very competitive with the industry. Those are our two ways of competing in a comparative rating environment.
We used to report on the percentage, so on and so forth. It is frankly not ubiquitous, but it is certainly mainstream, and it serves the public well. It serves the agents well. That's the game. All we ever ask in our business is we need to know the rules, and we'll play to those conditions.
Glenn, would you say that comparative raters are making inroads in the direct channel as well?
No. I'd say no on that. If you call GEICO, you're going to get GEICO's rate. If you call Progressive, you're going to get Progressive's rate. Obviously, Progressive has an asterisk there because we used comparative rating as a way of getting people interested in our company by saying, "These are the kinds of services that you should attribute as brand attributes to us." The number of people who are proactively going through the comparative rating as part of their direct buying process has actually come down over the years. I interpret that, this is my interpretation, that people feel very comfortable that we're a high-integrity company and a company they like to do business with. Oftentimes, they're not availing themselves of the comparisons that we would be willing to provide to them.
They are choosing a company, and I'll just use Progressive, GEICO, and when they call, or more likely go online or go from mobile, they're really only getting one company's rate. What probably, in that case, both of us are doing are making sure that the customer has the opportunity to evaluate alternatives of coverage, of deductibles, those sorts of things, in a very comfortable way, something that agents may have done for them in the past.
Okay, that's.
Less so comparative.
Got it. Lastly, last question on the year-to-date adverse development from the 2012 accident year. How do we think about that relative to the strategy of not increasing pricing that much on an aggregate basis? I guess, does that imply the adverse development is coming from some isolated states? Thank you.
Yep. You can hit that one. You want to take the lead on it?
On personal auto, the unfair development is primarily in the agency channel. Direct is actually slight favorable through June. Yes, it would be specific states. Not all the states are showing unfair development. It would be done on a state-by-state basis. Certainly, as product managers are assessing current rate level as of today, they have that unfair development in their loss cost that they build up to figure out additional premiums or what the right premium rate level is. All that as the unfair development has occurred is already embedded into the loss cost that people are using for indications of what rate adequacy is. I think it's already factored into certain rate level selections, at least in recent months. The second quarter unfavorable development was approximately $16 million unfavorable. Most of the unfavorable development on a year-to-date basis occurred in the first quarter.
I would flip a little bit to commercial auto, where we have had a fair amount of unfavorable development, at least as a percentage of earned premium, significantly more there than in personal auto. There, large component piece of it is in our truck segment, which is an area where we wrote a lot of business and grew quite rapidly in late 2011, 2012 timeframe, but have raised rates fairly significantly in the last, call it nine months or so. We believe we've addressed a large part of that unfavorable development already.
Thank you.
Meyer Shields, KBW, your line is open.
Great. Thank you. Good morning. Glenn, you've talked in the past, and I'm paraphrasing, if I get it wrong, please correct me, about how when Progressive raises rates ahead of its competitors and then they play catch up, there's a great growth opportunity there. It sounds like that's not the market environment we're in now. I was wondering if you could compare maybe growth prospects in that scenario against the growth prospects where Progressive is identifying profitable segments where it's under-penetrated.
Yep. No, I think you got the paraphrase close enough to accurate. When we took rate, let's just go back to the most recent period we took rate, we definitely had an outlook that was, severity-wise, stronger than has materialized. Still rather do that. If I have to make that mistake 10 times out of 10, I'll do it because we have the opportunity to adjust. The alternate is not great. The fact that perhaps that not materializing as strongly didn't necessarily force the market to react as much as we have seen in the past. That said, I think it's an accurate paraphrase.
If you perhaps remember from the IA meeting, I took you through sort of a little bit of a life cycle of a rate revision and how it sort of goes from being slightly overpriced at the point of actually making the rate revision, perhaps in a hypothetical sense, correctly priced at the mid-level of the midpoint of a rate revision, and at the very end of a rate revision, it's now needing rate. The trend sort of extending a little or the trend softening means that the life of that rate revision may in fact last a little longer. Again, I'm doing this at a macro level, having said this is really tens of thousands of the ordered pairs in the organization. What we have now is the opportunity to say, all right, it hasn't materialized quite as strongly.
That means we should be able to maintain our rates considerably longer and good for consumers. More importantly, we've got a longer period where we can go into the products and start looking for these cells. I'm not exaggerating. There's tens of thousands of cells. It's not so much growth and margin that everybody is looking at, but it's relative loss ratio between these segments, which is exactly the way we do it. That's powerful, and I think we'll find most of the growth is the fact that we'll be able to continue our rate revision combined with this more surgical approach. I think you asked me to sort of break it out between the two. I don't know that I can do that with any precision. Both of those will be vectors that I would be looking for our continued health and growth going forward.
To be honest, it's probably three months longer than I might have liked.
Three months longer of better severity than anticipated?
Well, yeah. If the four to six had actually materialized, then I believe that we might have seen more market reaction three, four months ago, which would change the competitive positioning. The fact that that hasn't happened, we'll change our own competitive position by the fine-tuning that I'm talking about, but we'll also be able to keep our rate levels longer than we think we might have been able to. Hopefully during that period of time, we'll continue to see, as I referenced earlier, still some slight change in a positive direction of the competitors around us.
Okay. That's very thorough. Thank you.
A really poor way of saying it is we're growing into our rates. That's okay too.
No, I think I understand that. I want to delve into the concept of ordered pairs that you're discussing today because that seems to be a little bit different from growing as fast as possible with a 96. Simplistically, if you could go from 93 to 96 and take growth from 7 to 7.1, it might not be a good trade-off, but it's more consistent with the macro goal.
Very good point. Very good point. Let me not play more than I would like to play other than I'm glad you got the point of the ordered pairs. An ordered pair of growing very quickly, pick your number, and a 96 is an acceptable outcome for me. What is less acceptable is a very poor trade-off from where you are to where you might go. I think you used an example of about a 10 basis points of growth for a reduction in margin. That doesn't seem like would fit on my indifference curve, if that gives you enough information.
It does. I'm probably not going to get more.
Well, let me be clear. If we're at a place, let's say we're at a 92 and we're getting 5% growth
Maybe there's elasticity in that sell. To give up 3 points of margin to get 5.2 growth doesn't seem like a very good trade-off. An indifference curve, if you like, would be where would that indifference be? Would it be a 9 growth to give up the margin, or would you be as comfortable with a 92 and a 5? An indifferent point might be a 94 and a 9. The example you gave, I said, I don't think would fit on my indifference curve.
Okay, understood. Thank you very much.
Josh Stirling, Sanford Bernstein, your line is open.
Good morning, thank you for taking the call. To ask a couple of questions on Snapshot, if I may. The USAA news, congratulations. It strikes me as a big deal. This is a large, leading company and an innovator in the business. I expect peers will see this as a pretty meaningful endorsement on the importance of telematics and your IT. I was wondering if we can get an update on licensing talks. Are you still negotiating with a number of folks? Should we expect more signings? Are competitors going to actually license the Xirgo devices? I guess sort of finally related to this question, have the terms of your offer changed since the June 30th deadline?
Yep. Josh Stirling, I usually like to try to give straight answers to straight questions, let's just say the discussions are ongoing. Frankly, they are ongoing, and in some cases, we're not looking to disclose the names of our partner or the people we're discussing with. Yes, on that, I think the USAA, I think you'd characterize that very well. Have the terms changed? No. In fact, we actually closed the period for applying for a license at the end of June, I believe it was. If I'm wrong on that, someone correct me. We have a good number of companies that are still in flight, in discussions. I said before, I'm sort of an advocate for level playing field, so we play by those rules as well. We put out terms, and those are the terms.
Got it. Shifting gears from the legal, this is obviously a transformational story, has been, at least from an outsider's perspective, relatively slow to play out. It's hard for us to gauge consumer interest in Snapshot and using telematics devices. The data we have, it still seems pretty low. I'm wondering, you cycled through some new ads. You seem to be running parking lot a lot, and you've got your new iPhone app in test. I'm wondering if you're finding a messaging in media that works and will actually lead to incremental customers. When perhaps we should expect you guys to shift more of your advertising spend to really focus on driving Snapshot. Thank you.
Yep, very fair. I would tell you that getting consumers to engage in a product that, for the most part, they were never asked to engage in, and what I mean by engagement is literally getting something in the mail, plugging it in, is a bigger burden than I think intellectually many of us might have assumed. Let me give you some sense of the journey that we've gone on, I'll keep the numbers, because now I see other people, including people that aren't licensed. Therefore, our information will become probably a little more guided in some cases. As we started into advertising Snapshot, let's just go to approximately April of 2011. Plus or minus, my memory will be close there.
We started to actually advertise, we were getting about, in our direct channel, I'll focus on direct right now because it's a cleaner number for us, about 20%-22% of our customers taking the option. I've described it as an option because you're going to get a rate, that's going to be the rate you say yes to, then would you like the option to, in fact, put this in and potentially improve your rate. Intellectually, I kind of go, why wouldn't 100% of people take that option? You know some of the reasons that people are adverse to this, and privacy and so on and so forth, as well as I do. The answer was about 22% or 20%-22% of people took it. We did some advertising, and we moved that needle to about 30%.
That was roughly where we were last June. We talked in the IA meeting and also a couple of references I've given previously about a new campaign. It was the Rate Sucker campaign to try to get at a different angle for the consumer to sort of say, yes, by not taking this, you might be, in fact, subsidizing others. Combination with that, and as like parking lot, we have a different name for it, but that's okay. I think I know the one you mean. We've now got the needle moved to 35-ish. Again, this is where I'm going to stop becoming guided because there are others out there that are interested in those sorts of numbers. 35-ish. Still a long way from a number that we might all like.
When we go to the marketplace and survey people from an IA interested perspective, surprisingly, you get, I'm going to do these numbers in broad terms. Hopefully, they're illustrative for you, but they will not be accurate, and the survey was done some time ago. You get about 30% of people saying, "Yeah, why not?" You get another 30% of people saying, "Maybe. I need to know more." You get about 40% of people saying, "No way in hell." Think about that as the challenge. Can I say for sure we got the full 30% that would say yes, and we're just starting to penetrate the maybes? That would seem like a little bit of a stretch based on the numbers, hopefully, that is a fair understanding. We're body punching here.
We're trying to find the message that actually moves the needle, it's very significant. I think this is the first time I've said this. I think we now understand how significant a burden it is to try to educate consumers to do something that wasn't the natural buying or engagement process with a product for their lifetime, for the most part. It's a very new, very different process. While we can all understand it from a business perspective, getting that level of engagement is quite a task. We're up for it. We're not turning back. We shouldn't even think about turning back. There's no reason. You've seen some of our numbers.
The real issue is we're just going to keep body punching until we find a combination of messages that really make sense, because we think there is still a latent demand out there that if they knew more and appreciated the benefits, and in many cases, those benefits are substantial, then we win in a big way. I think we've told you that our Snapshot customers that come to us that ultimately get a discount, you've seen some of the distributions on that, retain longer. This is not just about getting new customers. This is about getting the right kind of customers and the customers who retain longer. Those who get a significant discount retain significantly longer and probably have a price point that they could no longer go and shop in the marketplace because it just isn't a comparable price to anyone else's offering.
We got all the reasons in the world to keep going at this, but to say that there is a magic formula on the advertising that breaks through into that category of people who are maybes, we think we're getting there. We're going to keep going, and this is a battle worth winning.
Great, Glenn. Thanks for the update. Good luck.
Before our next question, let me remind parties, star one if you have a question. Our next question comes from Brian Meredith, UBS. Your line is open.
Yeah, good morning. Glenn, I was hoping you could talk a little bit about the PLEs. Understood that the rate increases had some impact on that, is there anything else going on there and any initiatives to try to get that in the right direction?
Yep. Fair enough. The PLEs are just not what we want, probably not what you want. I'll speak for myself, definitely not what I want. Lots of initiatives inside the company. Not going to go laundry list on those, but you can assume that those are going on, and would have been going on anyway. Don't assume that's directly related to the rate revision. That's the kind of intensity we've had on retention. There's always some new things. In fact, I was just reading some of the business reviews on that recently. Happy with the activity there.
There's also, this was directly related to the more recent environment, there were studies done with regard to both NPS and to some extent PLE, which is a more business measure, but NPS is a proxy for that, net promoter score, to see if there are other driving factors other than price. One of the dangers when you do something like take price up and you see a fall and you say, yes, as expected, you certainly don't want to be lulled into some complacency that in fact, there is also something else going on at the same time and you're not seeing it. We have looked and looked and looked for that, and we don't see anything that is an additional driver other than price.
That gives rise to my confidence that we will start to see an appropriate reversal of our PLEs to expectancies that feel more consistent with where we were. That will be the price effect. The internal initiatives to try to keep getting PLE extension, those would be on top of that to try and take it to new levels, which is certainly not where we are right now. I doubt that the next conference call will be much more than directional because these things change slowly, but I hope that that's a question that we'll be addressing pretty openly six months from now with some different answers.
Great. Thank you.
The actions are fine, and at least the primary causation seems to be exactly the way we are reporting it.
Great. Thanks. The second question, just curious, I know the policy acquisition ratio has been coming down, obviously, with the mix shift as well as some accounting stuff. Is there anything else in there that's been happening with respect to your commission rates or contingents or anything like that that's caused it to decline fairly quickly in the last, call it, year? Should we expect it to level out or should we expect it to continue to go down?
I assume you mean the expense ratio.
Yeah, policy acquisition cost specifically.
Okay.
Commission levels really haven't changed much from in the last several years. We've previously talked about, I think, a range 10-10.5, and it has basically stayed in that area. That would not be a driver of an increase in policy acquisition costs. In fact, I'm actually pleased with our overall expense structure. We've actually made some gains on our expense structure relative to a year ago, and a large part of that certainly is a function of the higher premium per unit. We've been able to maintain staffing levels at relatively flat staffing levels versus a year ago. Compensation-related costs are growing at less than our premium growth rates. We're actually making some progress on that. We still need to continue to have diligence around that, but that would be core central to what we do.
The specific question around commission rates changing or contingencies changing much, no, that would not be a driver.
New and renewal split for direct.
Was that helpful or confusing? Or are you-
No, that's helpful.
Yep.
Next, we have Robert Glasspiegel, Janney Capital. Your line is open.
Good morning, everyone. I was wondering if I could shift to the upper left side of the balance sheet. You made a successful surgical move into equities a few years back, and your move into shortening the portfolio and the bonds has taken more patience to play out, perhaps. With the 70 basis points increase in rates, I was wondering if you could say whether that changes anything dramatically from an investment point of view, recognizing that you tweak within pretty narrow bands, which you might do. On the margin, is there anything changing?
Bill, do you want to field that one?
Sure. I think on the margin's the right word. As rates rose late in the quarter, and particularly in June, it provided some opportunities to put money to work in the fixed income space with slightly longer durations. We moved the duration out just a little bit, but we're still under two years. Then as rates rose for products other than Treasuries, it gave us a few opportunities to find some attractive investments there. It's not a wholesale strategic shift. We're still and always thinking about our investment portfolio from a total return basis and protecting our capital. Year to date, we're still up and contributing to our book value from the investment perspective. In Q2, we were call it either side of flat, which felt pretty good given the environment.
As rates go up, and hopefully more, we'll have a few more opportunities to do something there.
Do you have a specific view on munis, which have gotten hit more than the rest of the bond market this quarter? Some are arguing they could be attractive now.
We have added to our muni portfolio, particularly in June. We were lightened up on it earlier in the year. There I'd say munis, longer maturity munis were hit particularly hard. The front end of the muni curve held up a fair bit better than the long end did. We happen to be in the front end of the curve largely to protect our capital. Our muni portfolio was not hit as badly as longer munis were. We did add to that somewhat.
Are you saying you're adding munis to the mix, or you're just adding munis within the mix of your normal bond portfolio?
Our muni percentage hasn't changed dramatically, but it's gone up a little bit. We had some opportunities to add munis. They're always part of our mix, or they've always been part of our mix.
Right.
There were some attractive opportunities in munis as that market sold off, and there were a fair amount of sellers as we looked at the fund flow data across lots of sectors, whether it was high yield or corporates, munis, et cetera. Munis were particularly hard hit from a fund flow perspective. It gave us some opportunity to pick up a few bonds at attractive levels when others were selling more aggressively.
Thank you very much.
Yep.
That was our final question. This does conclude The Progressive Corporation's Investor Relations Conference Call. An instant replay of the call will be available through Friday, August 23rd, by calling 1-800-925-0570, or can be accessed via the investor relations section of Progressive's website for the next year. Thank you.