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 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 Matt Downing. At this time, I will turn the call over to Mr. Downing.
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 2011 annual report on Form 10-K and our quarterly report on Form 10-Q issued during 2012, 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. Wendy, we are now ready to take our first question.
Thank you. 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 request. 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. Our first question is from Michael Zaremski with Credit Suisse.
Hi. Good morning. Can you hear me?
We can.
Yes.
Great. I was curious, so with rate increases matching the rise in severity, but seemingly above the combined loss cost trend of frequency plus severity, would your targets be to drive margin significantly below 96% to provide a cushion for future loss cost spikes? Or is it more to get back to 96% in order to begin growing PIF again?
More the latter, 96%. We're never so perfect on all of our targeting, nor do we know exactly what future trends will be. I think we can just quickly recap through the year. Let's just focus on auto. We've taken about six points of rate, give or take, a little bit differently, agency and direct, but that's reasonably close. Second quarter, I think we explained very carefully that we got a little bit behind on timing, so we've taken some additional rate during the second and third quarter. As I said in my letter, I think we've got a nice matching now. We will continue. That's not a one-time issue, so we'll continue to take trends and do our normal rate revision processes. Rate revision processes are completely dynamic, happen all the time.
What really happened in the second and third quarter was just a little bit of a catch-up for perhaps some trend that we may have gotten just a little behind on. Our targets remain at 96%. As I said in the letter, while we're thankful for the inflationary premium growth, which is certainly apparent, we'd love to get unit growth, and that's what we seek. We seek the combination of growing and good margins. Continue to try to think of us as a company that's going to grow where the opportunity exists and hit our target margins. Target margins come first.
Okay. As a final follow-up, the expense ratio seems to be tracking recently below historical trend. Can you talk about the drivers there and how long these levels could persist, if at all? Thanks.
Yeah. Brian?
You're right that the expense ratio in the third quarter, in particular in the last several months, has been a little bit lower. A big component piece is in the third quarter, we consciously decided to reduce a little bit of our advertising spend relative certainly to what we had thought coming into the year, and actually are spending at a little lower rate than last year at this time. Some of that is contributing to the lower expense ratio, and you see that more obviously in the direct channel expense ratio versus the agency. The other component piece is just with the earned premium growth being at higher levels than we've experienced for a number of years. We've gained some leverage on the higher earned premium relative to salary costs and other fixed expenses in the organization.
It's a combination of the lower advertising spend plus higher earned premium growth rate that's really driving it.
Yeah. That lower ad spend, I believe at the investor day, you might have alluded to you not being as happy with what you were receiving from the ad spend. Could you comment on that? Thanks.
It was less about comfortable with the yield on the ad spend. It was
Our decisions here in the third quarter were more trying to make certain that we hit the profit objective, that 96 combined ratio that we talk about quite frequently and want to meet. It was a conscious decision more there than the yield or the acquisition cost per sale. The cost per sale versus targeted cost per sale was slightly higher than our targeted, but that wasn't the real driver. The real driver is trying to ensure that we meet a 96 combined ratio for the year.
Got it. Thanks.
Thank you. Our next question is from Vinay Misquith with Evercore Partners.
Hi. Good morning. Just to follow up on the expense ratio and the advertising expenses once again. The expense ratio within the direct platform has averaged roughly 20%-21% over the last few years, but that spiked for the last couple of years to around 22%. What do you think is the more normalized rate? I mean, this year, the expense ratio within that channel has come down. Would you think the roughly 21% rate is the more normal ratio, or is the 22%?
Well, it's tough to say normal. Here's what I'll tell you would be the drivers. We've talked about this a fair amount in terms of our ad spend. Assuming we are meeting our overall profit targets, we would base it upon the yield that we get in terms of our acquisition cost for sale, versus what we call our targeted acquisition cost. When we're comfortable with that, we'll keep spending. If we go above it by a lot, we would then revisit those spend levels. We do that on a regular basis. It can be monthly, quarterly, et cetera, that we're evaluating that. That would be one component piece. It's pretty dynamic. We believe, as we are much more comfortable with our aggregate rate accuracy, that we will actually go back to higher levels of ad spend.
We'll see how that plays out. That is the thought, at least right now, that although third quarter was down and fourth quarter is likely to be a little bit lower, we will return to higher ad level spends as we get more and more comfortable with our rate accuracy. A second component piece is what I mentioned in terms of gaining some leverage on fixed costs and other, call it employee compensation costs, et cetera. Over time, we definitely aspire to grow earned premium growth at faster levels than those costs. That should have a long-term decrease in terms of our cost structure, both in LAE and expense ratio. The final thing, which is very, very important in the direct channel, is the new renewal mix.
Because remember, we have very different targets for new business versus renewal business, and we allocate all of our advertising costs to new business. If we don't get the yield as much on new business, yes, we would reduce or adjust our advertising spend. If we are getting the growth that Glenn referred to earlier, we will continue to spend, as long as we're meeting that new business target and renewal business target. I'd say it's a combination of rate adequacy. We'd spend more other expenses long term, we actually hope to gain some leverage on. What will the run rate for the expense ratio be for direct going forward? I think it's a combination of those effects, but that's how.
Sure. Yeah. Just on the advertising expenses once again. Next year, do you expect to increase the spend more than the growth in the top line or sort of in line with the growth in the top line?
I'd say probably pretty closely in line with expected earned premium growth.
Okay, fair enough. The expense ratio impact on that would be about flat year-over-year, but higher sort of on the absolute dollar spend.
Yes.
Okay, fair enough.
It's not going to match one for one, but closer to earned premium growth than certainly when we were increasing advertising spend 20% or 25% a year, much faster than earned premium growth. That was driving the direct expense ratio higher in past years. Now it's more closer in line to earned premium growth.
Yes. Fair enough. The other question was really on the margin of safety. I believe management has always said you have a 96% target on the combined ratio, but historically, you've had a margin of safety that resulted in a combined ratio being closer to 92%, 93%. With the introduction of Snapshot, do you think that you can now reduce the margin of safety because you can now model your business better, or do you think you still have to keep the historical margin of safety?
Vinay, I don't think you should sort of take into the margin of safety as you're calling it, the 92%, when the marketplace is such that, I don't want to give a long history of why the marketplace has acted the way it has for the last decade or so. Certainly when it's available to us, we will continue to grow, and if we can make a 92% or a 93%, that's a combination we would accept if the market conditions were favorable to do so. I think what I've been saying for quite some time now is the market conditions are much more in the mode of we will be closer to our 96%
To be able to continue to grow. Think of us not so much as trying to build in a safety margin, but trying to be as aggressive in the marketplace as possible, but put a very high premium on attaining our 96% or better. Snapshot really doesn't change that. We're pricing our Snapshot product or the discounts that we embed from Snapshot so that we hit exactly the same type of targets. Giving discounts is a very, very tricky thing. You're clearly reducing the margin on that particular or the price on that particular customer, but we expect to make the same margin. I would just encourage you, don't think about sort of a 92%, 93% as some act of built-in safety margin. Think of us for what we say we're going to try to do is grow as fast as possible at a 96%.
Everything we do, whether it's Snapshot or Name Your Price or anything else, we design to meet the same targets.
Okay, that's helpful. Thank you.
Thank you. Our next question is from Joshua Shanker with Deutsche Bank.
Good morning, everyone. Looking in the queue, I see a combination of things. One is that your new policy applications, after being up for the first half of the year, have shifted to down. I'm wondering if you can comment on whether that's accelerating or whether -4%, given the new rates, is kind of where it stands. Two, it's difficult for me to turn renewal application growth into a retention statistic. You guys are a bigger company than you were a year ago. Are retention statistics more or less the same than they were a year ago, or has something changed?
Josh, on new applications, you're right. Clearly, the rate pressure, I mean, pretty simple physics here. Took rates up. We see the effect in new apps. The 4% that we put there, not going to forecast it, until we see some competitive actions that are even stronger than the ones we've seen, clearly, we are seeing competitive actions that are, in the vast majority of cases, positive. I expect that we will see for some time pressure on new applications. I'm not going to give an estimate of what that will be, but that'll not going to turn around anytime soon. That'll take a little bit of market force. Given that we're going to continue to focus on our target margins, we're very comfortable with that trade-off. Renewal apps, yes, you see. You know the sort of reason that will be.
We obviously put on new business. It's coming through as renewals. We don't give specific PLEs by different classes of business, but we've given some indication that at least for our agency book of business, policy life expectancy is actually increasing. For our direct book, which had actually been experiencing some negative, is now much more of a flat PLE. While there will be a delayed effect on that as well, and I'm not going to forecast exactly what that will be, as of right now, we're very comfortable with our retention statistics for the customers that have actually experienced rate increases as well. New business, probably more concerning, and I expect that that will turn around at some point, but I'm not going to forecast that point.
Thank you. You mentioned that I think the word used was integral, that Progressive Home Advantage is an integral part of the product offering. I think that's the word you used. I may be mistaken there. Can we go into a little bit, is there any metrics you can give us about the success in implementing Progressive Home Advantage? I know it's been slower on the uptake than you guys would have wanted starting back three years ago. Do you have some success stories you can share with us?
Let's break it into two pieces, our direct piece and our agency piece. I don't want to sort of necessarily recount any statements that might've been made, but actually we're quite comfortable with what's happening certainly on the direct side. Recognize that one of the key objectives there, we'd like to bring in new business to PHA, but one of the things we've always set out to do is make sure we don't lose current business that we have when there is a life change that requires someone to get a home policy. About 50% of our business in PHA are our own customers maturing into greater insurance needs and us being able to accommodate them. Frankly, we're actually very happy with our PHA on the direct side.
Second point would be on the agency side, where we very clearly said we did not get out of the box a good solution for agents. The company was fine. It just wasn't suited for agents. You know, announced in June that we've entered into a relationship, a significant relationship with ASI. Relatively small company, but very much in tune with culturally where we are and the sorts of things we want to achieve for our agents. We've been taking over the last several months the notion of Progressive and ASI as a lot more of an integrated offering for agents. Clearly not the same as if it came from one company. But in this case, two companies that are very, very good at what they do, coming together, providing some not only technology that integrates the product, but actually some product features.
That is being very well received by agents. I've personally been out and talking to agents, done some conference calls with agents. I think this is something new to the marketplace in the sense that two very well-respected companies coming together, putting their offerings together in ways that actually are designed for agents. We're actually too early to sort of give you a lot of metrics as to what's happening there. We do have agency selection there. We're not necessarily giving that to all agents, and we're looking for agents who have a very preferred book of business to be able to give us from a new business perspective. We are seeing early signs that Agents, certain agents, not all, are feeling that this is a very viable solution for them, and we're very optimistic about the future of the ASI Progressive relationship.
It is going to be small for some time. Recognize this zone of preferred customers who are looking for home and auto is about 43% of the marketplace. Actually, I can even make that a little higher the way we define things, but it's a big chunk of the marketplace. It is a big chunk of the marketplace that we have extraordinarily low penetration in, and agents have a very large part of that marketplace. For us to be able to be on the verge of taking something to agents that really does give them the opportunity to have a coordinated bundle of home and auto is actually very exciting, and I think that excitement is spilling over from agents. That question will be a good question.
We'll have more data on exactly our progress a year from now, but I would say that's a very optimistic part of our outlook for next year.
Is there anything about the product where ASI has become your preferred vendor compared to your other partners?
For agency, it is our preferred vendor for agency. For direct, we'll have multiple carriers that we plan to use, but on the agency channel, this is one where agents have a workflow that needs to be respected, and the technology that we've worked on together to present our products together, to present sort of data sharing, so on and so forth, it is absolutely our preferred option in the agency channel.
Well, thank you, and good luck with the continued development.
Thanks.
Thank you. Our next question is from Robert Ryan with UBS.
Good morning. What are your observations on Hurricane Sandy, and what would you like investors to know as it relates to auto insurance in general and specifically Progressive?
Sure. I think we all want to know sort of where Sandy settles out, and I'm sure every insurance company right now is doing their best to give what they can. Let me tell you what I know, and then try to avoid saying things that we simply don't know. Overnight reporting, I expect, has probably bumped us up to about 6,000 claims. We've got about 6,000 claims. That's a little higher than the number I had last night, but I suspect that that's well on its way to that number. Think of that as two-thirds flood, one-third wind. About just short of 80% of it is New York, New Jersey. The rest would be another 10%, Pennsylvania, Connecticut, and then obviously, other states that you all know are affected. That's sort of what we know right now.
Flood claims for us are probably going to be more often than not total losses. Saltwater is not good for cars. We have some estimates. We don't know exactly where, and we have great models, but all models are exactly that. We don't know where the reporting will end. Here's the advantage for you and for us. We will release results in about 12 days or whatever that is, 12 or 13 days, something like that, for October. Literally, as every hour goes by, the development of claim reporting is helping us. We'll actually have a pretty good estimate of our exposure by the time we produce results in about 12 or 13 days. So far, 6,000 claims. I don't want to even speculate as to where that is.
If I gave you sort of a ballpark-ish thing, you would sort of maybe take it the wrong way, but I suspect we're seeing half of the claims we're getting or in that neighborhood. There are people clearly, as we all know, without power and so on and so forth. Claims reporting patterns might be just a little bit different than we experienced. As you would expect from Progressive and hopefully all other insurance companies at this point, the job number one is getting everybody back to the conditions that they can move on with their lives.
We have deployed, and we are active as you would expect in the marketplace with resources and doing a great job for the people that have reported their claims, and hopefully, we can get as many of the unreported claims in within the next few days so we can get on those as quickly as possible. Hopefully, for any of you listening that were affected by the storm, hopefully you're able to get your lives back to a situation that's comfortable for you or your families or whatever. Bad event. Insurance companies, I think in general, are stepping up, and I know Progressive will step up really well.
Great. Completely unrelated. The investment portfolio. What have been your actions considering the low interest rate environment, and what should we think of in terms of strategy going forward?
That's fair. We got Bill on the line, so I'll let him take you through that one.
Sure. Our actions have been consistent with what they've been historically, which is to try to look for value where we see it. We are not trying to hit a yield bogey, which is something nice about the way we run things here, is there's no pressure to try to stretch to reach some artificial or hoped for number. We take what's available, and for us, that's been trying to find spread product primarily in, say, corporates or munis or CMBS or sectors like that that offer some reasonable relative value and some decent absolute value as well. That's become a little bit harder to find as spreads have come in for most sectors.
Still in all, we have found a few pockets to invest in, and where we see those opportunities, we'll take them, and when we don't, we don't feel pressure to put money to work and take risks that we don't think are appropriate to take.
Great. Thank you very much.
Thank you. Our next question is from Meyer Shields with Stifel, Nicolaus.
Good morning. Two questions if I can. One, with all the uncertainty surrounding healthcare reform and I guess the election, how are you, I guess, booking reserves? What inflation rate for medical costs are you assuming?
Let's perhaps create a bigger disconnect from any other healthcare bills and so on and so forth, or reform because that's just probably stretching it to believe that we could be that precise. The easy answer for you for our outlook right now on bodily injury, which is one of our clearly most important trend estimates both for pricing and for reserving, 4%-6%, 3%-6%. Don't want to be vague there, but that's sort of a range that feels about right to us. Frankly, if I go back in my career, sort of 3%-5% has been a fairly good estimate of bodily injury trend, which is largely reflective of medical cost as one of the underlying drivers of it. That's our assumptions going forward. What we've talked about, and I discussed in the letter, we've sort of taken a shot at rates.
We've gotten back to margins that we think are about right. Recognize trend is always ongoing, we're going to have to price that in. Our current estimate of trend going forward is sort of that three to five, four to six kind of range on bodily injury. So far, frequency, if I had to sum up frequency, it's mostly noise, ±1% on most coverages. Not a lot of frequency is a big driver of things. That can get awkward if that's the driver. It's mostly a severity issue. I would say if you're using in your models or your estimation or you're thinking about how Progressive might act, we're thinking around three to five in bodily injury trend.
Okay. No, that's helpful. Thank you. I don't know if it's possible to disentangle the ramp-up of the Snapshot free trials from the issues you've had with raising rates and the impact on new applications, but can you talk a little bit about how the performance of this particular strategy has played out in 2012 and maybe 2013 expectations?
Yeah. Probably a mixed bag, to be honest. Our volume of people actually taking the Test Drive has underperformed our internal estimates as we formulate estimates on everything, even if we haven't done them before. Frankly, I would say this volume-wise is under our estimations. Just call it the way it is. Certainly, we got an awful lot of interest or clicks, but I'm not sure that that necessarily is the operative measure. Of those that ultimately take the trial, the funnel that we had expected, there's a lot of the estimates we've made that are panning out.
Actually, we are taking people all the way through the funnel, and the good news is that of those that are self-identifying and taking the test, a very large number of them are actually getting the opportunity to get a discount off of what our rates otherwise would have been. Who's taking the test? That actually is quite a nice positive for us. If I just focus on the three auto companies that are, by market share, larger than us, we have more than 50% of the people who are taking the Test Drive are actually distributed amongst those three companies. It is actually very encouraging for us that while Test Drive is not likely, nor was it ever designed to try to get at the shopper who was going to be shopping in the next day, next week, next month.
This was to try and get people to sort of think about shopping who would not otherwise have shopped. I would expect to get market share from companies that perhaps maybe had more entrenched customers. That seems to be happening. I'm very happy with the mix of customers that are taking us up. That mix is flowing through to the sales. Again, I don't want to overstate the numbers are not sort of dramatic enough to really move the needle, though everything we had hoped for on Test Drive is coming through, except the volume is less than we would have hoped. What are we doing about that? We are clearly very encouraged that our understanding, the public understanding of Snapshot/Test Drive, and I'll blend the two here a little bit, is about 56% awareness.
The awareness of this concept, which if you think about it, is still relatively new to the industry, is actually now quite high amongst the consuming public. The attribution to Progressive is about 84%. People actually know about what it is, and they attribute it to us. I would tell you, and this is a little looser, that while there is a general understanding, there's still a fair amount of ambiguity as exactly what to do about it and what it will do for me. As a result, we have been doing consumer research, and we have a new campaign targeted that will be quite different than what we've done before. A new campaign to try and inspire people to better understand what Snapshot/Test Drive can do and will do for them. In short, really happy with some of the mixed issues that are coming through.
Really happy with the fact that people are getting discounts, clearly those discounts, by the way, translate into higher satisfaction scores, which translate into higher retention scores. The kind of flow through to the funnel is absolutely a positive flow through. We just need to have more volume through the funnel. To that end, we've got some, what I consider to be quite interesting marketing ideas, and they will manifest themselves in the first quarter next year.
Okay, great. Thank you very much.
Thank you. Our next question is from Matthew Heimermann with JPMorgan Chase. Mr. Heimermann, please check your mute button.
Sorry about that. I guess one question I had for you was around advertising. If you all chose, depending on the effectiveness of the rate increases and where margins settle out on a state-by-state basis, if you choose to take advertising up, how should we think about the normal lag between when you spend and when you actually see the growth show up in terms of policy counts and then ultimately in earnings? I guess the reason I'm asking, because the data that I've seen, which is actually a little bit more focused on life insurance than P&C, is that for direct response, it often takes six to eight months to actually get scale in the response rate. Just trying to figure out that dynamic.
Sure, Matthew. For us, when we change our advertising spend, we actually see a fair amount of effects pretty quickly. I wouldn't say it's a six or eight-month lag that life might have, and it's not one for one. When we reduce our spend, we generally see a decline in prospects being people who quote with us, likewise, when we increase it, we see a return. I would also say it probably does differ a little bit based upon media type. What I mean by that, for example, if we were to spend more or less on paid search, where people are looking for car insurance, you know they're shoppers in the marketplace, there you clearly see a very fast reaction to increases in spend and bid prices and ranking and people quoting with you.
TV, radio, and other media types might be a little bit of a different immediate response versus lag function. Generally speaking, when we change our ad spend, we will see a corresponding activity in terms of the number of people quoting with us fairly fast.
Okay, that's helpful. I guess the other thing is there is obviously a lot of questions around frequency and severity, and there is for a whole host of reasons, but just curious, when we think about new car sales have picked up, it looks like the car fleet's actually growing in addition to seeing replacement. My presumption would be, and I might be stretching with this, but my presumption would be that most new car sales are either leased or financed, and the lenders generally require, I think, lower deductibles than one might choose if they potentially owned a car. Curious if that deductible difference really exists, and if so, is that something that potentially on a reported basis potentially makes the severity look worse than it really is, just on a mixed basis?
I'm not sure I have a really meaningful answer for you there, Matthew. I understand, but I don't think our deductible mix has changed very much for a good number of years. I think to see that flow through into severity numbers, you'd really be stretching it.
Okay. That's fair. That was just the only thing I could think of to ask about that probably was independent of frequency. All right. Thanks for that.
Thank you. Our next question is from Josh Stirling with Sanford Bernstein. Mr. Stirling, please check your mute button.
Hi, I'm sorry about that. Thank you for taking the call. I thought I'd start and ask you, talking about ad spend slowing. I'm wondering if you could give us a sense of what seasonality has to do with that, and whether the election cycle and the cost of ad spend sort of influenced your thinking, and whether we should be thinking about first quarter as likely a bigger quarter for you guys to spend advertising, and presumably, consequence, get more impressions and prospects.
I would tell you, think much more in terms of what we've already said, that where we didn't have rate adequacy, we pulled back on our advertising. Certainly, there's no great reason to advertise to bring in customers if you don't think they're making their target margin. That is the biggest issue. Just think that issue. To the extent that we all know that certainly if you live in Ohio, you know political advertising is a big part of what's going on, and that will come to an end here reasonably soon. Not a major factor for us. That's much more of a local buy. A good chunk of at least our television is national buys. Much more driven by our own view of do we have the rate, and if we have the rate, we'll advertise.
If we don't have the rate, we'll pull back. First quarter is a big buying period for auto insurance. It has been, always will be. Expect that the fact that we are signaling that we feel much more comfortable about our ongoing rate levels, that we are very consciously being prepared for the first quarter.
That's great. The thing I'd love to get your color on related to Snapshot. It sounds like we're making progress on sort of using it as an underwriting tool, getting better than average drivers. It sounds like it's either margin neutral if not expansive. The question is around getting customers to pick up the phone. It sounds like we've worked through a few different iterations. You've got something on deck. You've got 2015, 2016, there's sort of the patent cliff, as it were, around sort of the window of time that you guys have to take advantage of this. I'm just sort of wondering, is there something that you think you're working on that'll ultimately make this the killer app?
I totally understand your question, if you were inside Progressive, you would see the same sort of energy on everything. The fact is, we'll keep working at this with the kind of diligence that we work with everything else. Every time we get, we've got now more than 1 million customers have taken Snapshot, so it's not some sort of small data set. We learn things every time. We're learning things about the underwriting, the discount, the measurement period. Expect to see this be very dynamic and change and reflect. You mentioned this sort of cliff. That's a self-imposed cliff. We've said very clearly that we had a lot of intellectual property. In fact, our sixth patent, we've been told that our sixth patent will be awarded here very shortly.
We've been very clear to the marketplace that we're willing to license this starting in the second quarter of 2015. In between that time, we'll be very clear that we don't think people should be infringing on things that have been a significant amount of energy and work for us and have that patent protection. We'll protect ourselves during that period of time, but we invite them to show interest in licensing if they so wish. By that time, we'll just continue to push. This is clearly something that is very exciting. There is no question. There can be no question. This is an underwriting variable that gives us insight to driving behavior and segmentation that no other variable has given us to date, at least in the same way.
How we get that through to people and how we market it is something that we're going to keep pushing at. I wish I could give you an answer and say, "Yes, we've got sort of a killer app in our back pocket." It's not likely to be that way. The more people try it, as I did note the awareness level of it, maybe I'm kidding myself, but I think that's a pretty cool thing to have more than 50% of the consuming public aware of something like this. Now we just need to turn that awareness into action. We're going to keep plugging away at it.
Great. Well, we'll stay tuned. Thanks. Thanks so much.
Thank you. Our next question is from Adam Klauber with William Blair.
Thanks. Good morning. With applications slowing down, what's the time lag until we see PIP slow down?
Well, I think you've already started to see PIP growth slow down. It's a combination of declines in new business how many of your existing policyholders retain. As Glenn mentioned, so far, our retention levels have stayed pretty strong, but I'm certain we will see some decline just based upon our rate change because it's a price-sensitive product. In terms of rate of growth, in terms of policies in force, you've already started to see it start.
Okay. You also, I think in the 10-Q, looked like quoting in direct was down. Is that more of a function of increased rate or lower advertising or a combination of both?
As it relates to the quoting, that would be more relative to ad spend and response rate to ad spend. When we talk about conversion, that is more relative to how many convert into sales. That change in terms of conversion being down would be related to the rate changes. It's pretty clear where we have seen most of our decrease in conversion are in states where we have raised rates. It's pretty clear where we have raised rates, we have seen a decline in conversion. In states where we have not had to change rates much, we haven't seen a decline in conversion at all.
Okay. As far as Florida PIP, it looks like frequency, I think you mentioned, was down 7%, severity was down 2%. Is that due to rate and underwriting actions taking hold in the quarter, or is that just some good trend during the quarter?
Frequency and severity you referenced actually was for all PIP states.
Okay.
Florida, as you may or may not know, has a lot of things going on, one of which was a great number of what I'll call reopened PIP claims based on some district court rulings, and they came at a level that was very hard for us to predict. That seems to be, and I'm just going to say, that's more under control now, and we're getting a better handle on what those true costs will be. That's less concerning. Secondarily, in Florida, there had been a requirement for carriers to file a PIP adjusted rate, effective, what was it, November 1st or October 1st? October 1st. Even though the rules and regulations that actually it applies to don't start until January 1st. We've taken those rate adjustments, and we feel reasonably comfortable with it. In general, we're seeing much more controlled severity in Florida PIP.
If you know anything about PIP, you don't want to make too many assessments that are too long-term. So far, it seems to be a little bit quieter in the last 60 days. Yeah. Another state, I'd say one of the bigger PIP states that has seen a decrease in frequency is New Jersey, and we've seen that for a couple of quarters now.
Okay, one final follow-up. I think in the queue, you highlighted that favorable reserve development was mainly from 2009 and prior. What years, I guess what's changing in those years right now?
Al Neath, our Corporate Actuary, is here. He can respond to that.
A large portion of the older accident years' open reserves are set at policy limits. If people have a 25,000 limit, and of course, those, as they settle, you're now of that amount, so you have favorable development. We've been adjusting our structure to compensate for that, and then that's coming through as favorable development.
Okay. Thank you very much.
If you would like to ask a question, you may press star one on your touch-tone phone. Our next question is from Michael Nannizzi with Goldman Sachs.
Thanks. Just one question, Glenn. You mentioned just sort of claim counts. I'm just curious, if you were to kind of look back at Irene, what sort of claim counts did you end up seeing from Irene?
Ooh, someone give me. Yeah, that sounds about right. Know that you're catching us here without specific data, but I think we have three people who would know, and let's call it 7,000, 8,000.
Okay, great. Thank you.
It's bigger than that.
Right. I'm sure from a tracking perspective, it's certainly higher. That makes sense. Thank you. That's commercial and personal, I assume, together.
It is. Think of the vast majority of being, when I say 6,000, say at least two-thirds are auto. We're going to have boat claims that are in there, all of our other products have claims, the vast majority are auto. Commercial, just in terms of unit counts, because it's not a very large unit count, is just not going to be quite as significant in terms of actual individual claims.
I guess one question kind of emanating from your letter, Glenn, you kind of talked about margin improvement. I know you look at margin, and we kind of focus on earnings, and there's certainly some obvious relationship there. As I look at cats and kind of loss trend we've seen and the rate that you're pushing now, in order to get to ROEs or even just earnings growth that makes sense kind of given your relative valuation, I'm just trying to understand, how do you think about the levers to pull to give you either exposure growth that will lead to earnings growth down the road or the benefit of margin improvement from rate gains, even though that doesn't come with exposure improvement? How do you think about those and prioritize those as you manage your book? Thanks.
Yeah. Clearly, there's a lot of moving parts if you wanted to use them, I don't want to be too dry in my answer, we're going to try to grow our business at or better than 96. That's what drives everything for us. I'd love to think that we could count on higher investment returns, so on and so forth. You know that story as well as I do. We're going to stay the course, grow our underlying book of business, and make our underwriting margin. Under different circumstances, which right now none of us can foresee, we may have a different proportion of earnings coming from investment income. Think of us as a grow as fast as possible at a 96.
That, for me, is the common denominator that will keep us on track and we'll weather storms, whether or not the earnings from other parts of the business come in or not. That'll be the one constant.
The other thing I would say is just we remain committed to how we manage our capital, and in terms of always needing and wanting to have sufficient capital to grow the business. When we think we have more than we need for that, plus contingent purposes such as hurricanes, we'll return it. That was a major driver of why we decided to declare the special dividend of $1, because we want to efficiently manage our capital, which might not be your earnings question, but certainly when you think about Return on Equity, it addresses that.
Great. Thank you very much.
Thank you. Just a reminder, if you would like to ask a question, you may press star one on your touch-tone phone. Our next question is from Ian Gutterman with Adage Capital.
Hi. I just wanted to follow up on the earlier PIP discussion. I just want to get a little bit more sort of what the puts and takes are as far as pricing and advertising versus what should be positives from things like Snapshot and the home expansion. When I look at, I guess we do direct first. Direct, this is the first time, at least in my numbers, that I think you've ever had three straight months of sequential PIP decline. It's not the first time you've ever raised rates. I mean, why is the response so much more dramatic, even in the face of this sort of secular growth from Snapshot we've been expecting?
Probably just size of direct book now. We're just not going to see the same sort of PIF growth that we may have seen when we were smaller. I understand your question, the competition is well understood. We're fighting for every app we can get. Some of our marketing initiatives, we are positive those will be your puts. Right now the take is definitely rate. As Brian said earlier, it's very rate sensitive business. While we look forward to turning that around and having some of the initiatives, Name Your Price continues to work very well for us. Snapshot we continue to be very excited about. We'd like Test Drive to volume wise drive some more business. I don't know that I can be any more specific on balancing out the puts and takes in that. Right now the take is absolutely rate.
Okay. On the agency side, I assume it's similar. Again, I was just looking the last time you saw a sequential quarterly decline of this magnitude was the fourth quarter of 2008 when you were showing negative overall PIF growth in agency for a couple year period. Does this imply we're going back to shrinking PIF in agency until people catch up to you on price?
It may. Also understand that the agency business is very elastic and with comparative raters, any changes across the board by other competitors flow through very quickly to the agent. We expect that we will get the benefit of favorable pricing as others change their prices to keep up, but impossible to know exactly when that's going to happen. In addition to that, the comments I made with regard to our penetration or our planned penetration in more preferred book of agents with homeowners, that will be relatively small, but it will be significant for us over time.
Okay. It feels a little bit from your comments, maybe I'm reading too much into it, that elasticity has picked up versus prior periods when you've led the pack on rates?
I wouldn't say picked up in the recent time, picked up over a five, 10 year period. Comparative rating and the number of apps that we get that come from comparative raters. I think in the 10-Q, we actually tell you we got more looks from just the mere fact that we're exposed on comparative raters. This is an issue of conversion and just rate.
Okay, great. I think that's all I had. Thanks.
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