The Progressive Corporation (PGR)
2010 Annual Investor Relations Meeting Transcript
June 17, 2010 9:00 am ET
Glenn Renwick – President & CEO
Brian Domeck – CFO
Jim Haas – Director of R&D for Passenger Auto
John Sauerland – Personal Lines Group President
John Barbagallo – Commercial Lines Group President
Jay Gelb – Barclays Capital
Vinay Misquith – Credit Suisse
Ian Gutterman – Adage Capital
Brian Meredith – UBS
Matt Heimermann – JP Morgan
Keith Walsh – Citi
Josh Shanker – Deutsche Bank
Paul Newsome – Sandler O'Neill & Partners
Harry Fong – Soleil Securities
Previous Statements by PGR
» Progressive Corporation Q4 2009 Earnings Call Transcript
» Progressive Corp. Q3 2009 Earnings Call Transcript
» Progressive Corporation Investor Relations Conference Call Transcript
Good morning. So, it’s good to have a chance to tell the Progressive story. So, thank you for coming. Each year, at this time, we try to give you some sense of what’s on our mind, what we think is important. We’ll also try to from time-to-time bring other members of the Progressive management team to introduce, so we’ve done that again today. And ultimately, there is the opportunity to appropriately introduce some new ideas into the marketplace, I think we did that a couple of years ago with Name Your Price and we have a couple of things today.
Over the years, and I recognize there are some new faces in the audience, I think we’ve had the opportunity to cover a fair amount of territory and hopefully what we say we will continue to come back and reinforce how we’ve done on those things. Sometimes it’s exactly as we intended, sometimes not quite as we intended, but ultimately what we get is a sense of real intensity around followup on the issues. So as I think back over 10 years or so we’ve covered concierge claims service, we’ve covered sort of our first reserving, our targeting combined ratios, we’ve certainly done a fair amount of work on retention science and our activities around that, how we’ve started to target our customers a little differently, some work on Net Promoter Score, and how we use this as a diagnostic inside of our business. Certainly in recent times a little bit more work on our branding activities.
So, while not complete, that’s a fairly representative area of things that we have covered over a decade or so. Today, we’ll do a lot of that. We are going to try a slightly different format and hopefully that will give you a sense of just maybe how all these pieces come together. So, in your packages you all have a blue document, recognizing that readership on the screen is always a challenge, you’ll have this to take away for words. So this is something we call Progressive on a Plate. Right now it just looks like words. I hope after a couple of hours you have a sense that those words are really words that define Progressive uniquely and govern our actions.
It was actually a fairly objective comment that was passed along to me that suggested may be this will be a good format for a meeting like this, regroup a little with regard to the activities we’ve been working on, but please don’t feel slighted by this comment, but this wasn’t put together for this meeting at all. In fact, this was put together so we could present it and the senior leadership of Progressive could present it to every employee in the Company. So, the senior leaders are with me today and I want to introduce them in just a moment, and many other have actually used this to talk to every single person in the Company about what we are doing, and why, so they have a sense of what’s expected of them, and what their role does and how it contributes to the overall Company. So, hopefully at the end of the day, this will just a little bit more than it does right now.
Consistent with our prior practices, we don’t intend to sort of reformulate any numbers that we’ve already shared with you. Hopefully, you get those in a timely fashion, so we are not going to reorder them and do anything with them. So, we’ll talk more about our activities in the Company, what we are doing, how we are thinking.
When I think about strategy, and I guess that’s a word that we use, all of us, probably pretty commonly, question is whether it’s the same thing. I think this way. Being abundantly clear about what we are doing, and why. And almost by virtue of being very clear about what we are doing we are equally as clear about what we are not doing. And then for us it’s very much about making sure that every who is involved in executing understands it and understands their role and that’s what we have used this for. It’s actually been a very, very, very insightful exercise to go through Company and very rewarding, I think, for those that has taken this probably a year to get that done, and clearly it’s not quite in the same format as you will get today.
So, hopefully, by the end of the day while it appears to be words right now, and words that could arguably be used for other companies in the same industry, will have a little bit more meaning, and, again, as I said earlier, sort of uniquely define what Progressive is all about.
So, we shall enjoy that and the way we’ll do that is to some extent I will try to narrate some of the story at least around the key activities and my colleagues will sort of explode the bullets if you like and some, not all of them, we won't get time to cover all of them, but a good number that we think are relevant and important to what we are up to today. So, let me just quickly introduce so your right to left, Brian Domeck, Chief Financial Officer is with us. By the way, in the back of your book there are bios on each of us. Jim Haas, who – to his right – our Director of Research and Development for Passenger Auto; John Sauerland, you’ve met, our President of Personal Lines; and John Barbagallo, our President of Commercial Lines, and also responsible for our agent distribution sales efforts. So, this will all become relevant as they have different striking points later on today.
So, that will be our approach. Let me first start, if I might, by just a couple of comments that set a few of the things we’ve done over the last year in perspective where I think we’ve tried to say we have aspirations and intensity around our activities, just how they have come about. So, let me start with that for about five or 10 minutes and then we’ll get into exploding Progressive on a Page.
Just quickly, you all realize before this slide there was the Safe Harbor statement, we all know what that means, so, we’ll respect that during the course of the day. The purpose of this slide is not to be very convenient array data that just is sort of puts us in a good position, but just a quick snapshot of the first quarter and the real point I want to make here is while Progressive Direct and GEICO have been fairly long term resident of the more desired upper right quartile, it’s great to see our Progressive Agency business coming into that zone and starting to find some growth. We have said consistently we wanted to be very nimble. We wanted to respond to the market conditions. We didn’t approach this position by going above our targeted combined ratios. We think of that as an (inaudible) from below, but we’ve actually positioned ourselves very well. We have rate adequacy, we have the service of the business right now. And I recognize you have to take my word for this. Just a lot of things feel right at Progressive in terms of how things are coming together both on a pricing and a servicing basis. And that’s really allowed our agency business to also prosper.
Demand for our product is up. Great. It’s somewhat evident from the first graph, but it’s very true, the exercise and intensity around branding has worked quite well for us in Direct. We can never actually measure the direct strength of that. Name Your Price has been something that we’ve shared with you for some prior periods. That seems to be contributing to growth. You know the numbers on Direct, very pleasing, so far so good. We are never ever comfortable. Growth, profitable growth is what we are all about and always looking for ways to accelerate that.
In the Agency environment we’ll talk more about this today. We have accepted that the environment has changed. We’ve talked to you in I think it was 2006 about comparative rating and how the environment inside of the independent agency channel has really changed. We have accepted that. And we’ve adapted to that and we’ve retailed our product into that in different ways, in ways that we think are actually putting us at a slight advantage and we’ll continue to find ways to work within what we now see as an channel acting differently and play to our strengths.
All of the things that we’ve talked about and I know there is a good number of people in the audience that have seen us talk about retention, retention, retention, we’ve given you actions that we’ve done, we’ve given you the way we think about it, diagnostics, we’ve given you a little bit about the science of policy life expectancy, we’ve talked about nature and nurture, all those sorts of things. I am not going to talk too much about those today. But I actually hope here we get to the point where I would have a really boring story about retention and that the graph would just be year over year over year better. Because the economic impact of extending policy life is incredibly strong.
And the good news is so far I am becoming really boring. And happy to be so because these are graphs year-over-year our policy life expectancy as a book. Now we write that down to a lot finer detail in terms of different customer segments so on and so forth. But for right now a macro view and a fair takeaway is the policy life expectancy of Progressive customers on average are longer and continuing to get longer as we create reasons for our customers to stay, and we eliminate and we continually work hard to eliminate reasons that might cause them to leave. So it’s as simple as that, eliminate the reasons that leave – that they may leave and create reasons for them to stay, whether it’s loyalty programs or the like.
And I would suggest to you that the percentage of our income now being derived from renewal business and the future life expectancy in the book is starting to make Progressive a very different company and in my opinion the earnings stream is considerably more valuable and likely to be sustained over a longer period of time. So, something we are very pleased about. A simple line graph, but I think there is a lot of power behind that.
So, demand for our product is up, retention is extending. Good things; clearly not end game, but on the right track.
Our capital is strong. Certainly we’ve had a session in this room a couple of year ago where – that was a little bit a different picture, so actually just pulled out the same picture, hopefully a couple of you will relate to it, recognize the zero line here is the capital above our statutory capital. So at a three-to one level, so think of that as close to a five billion and then on the orange I use the same labels that I used at that time, we suggest that we are in our contingency, our self-imposed contingency layer for capital. And that would give us some concern to be in our contingency.
At the time that perhaps we were talking about this a little bit more intently about exactly where we were, I used the term several hundred million above our concern level. And that always was true. So you can see the low point there back in 2008. And you can see now that clearly we are in a very strong position having had a very nice run and a consistent run of underwriting profitability, being able to put that back into the capital mode and clearly some recovery in the investment marketplace.
You all presumably know that just last week we lost a tender for $350 million of our hybrid debt and that’s conditioned on getting a removal of a replacement capital covenant. We don’t know anymore about that at this point in time as to the success that will be next week. So we are not avoiding questions on it, we just don’t know any more. That’s out in the marketplace right now. So, about the 23
, we’ll know a little bit more.
Bottom line, a nicer picture for us on a capital basis. We’ll continue to manage our capital in a way that we have consistently communicated that when we have more capital than we can effectively use in the business, we’ll find ways to return it to shareholders. We’ll put it to a very practical use and I think the opportunity to retire some of our hybrid debt at this point in the market cycle is a very, very effective use of capital. So, we are on track for that and we’ll know more next week.
Also, our dividend and certainly I don’t want to start projecting or any guidance, so all sorts of whatever caveats would be needed, but if the year continued on the same course and speed as we see ourselves at this point, we will be looking at the largest regular dividend ever paid from Progressive. So the dividend that most of you know, how it’s calculated, you see the gains we have scored and the monthly results, it’s actually on a course for being a significant number. The year clearly hasn’t ended [ph] so we are a long way from that and things could happen. But it’s interesting to note that our return of capital now, we actually have multiple methods. We clearly have our share repurchase, we have a meaningful dividend. We have used the special dividend in the past. And here we’ve got an opportunity to repurchase stock.
So three big takeaways. Now, just a couple of points that are a little bit more macro strategy of a many years and I would say things that matter in this business, be on price. I mean price is clearly important. Cost structure. Everything goes into price. And a few things that we really, really wanted to do. I am just going to give you a sort of health check on those. First is sort of positioning. In our Direct channel, we said starting in 2000, I know I said many times we wanted to become the leader in the Internet space. When I say the leader, clearly other people want that position as well.
I think we have been very credible in positioning ourselves as company that really is a significant player in the Internet space for auto insurance. We are recognized, I am glad to have the opportunity to say that Forrester Research had recognized or website as the best website in all financial services, not just insurance. We – just a couple of weeks ago won another recognition from Keynote as the Insurance space winner for our website. That’s our 15 out of 16 consecutive wins in that category. In and of itself, that’s not important, but it does give you a feel for it’s not just luck.
And ultimately what matters is that the dog hunts and we are starting to see the Progressive production on quote initiation be in a position with GEICO to really say a significant position in the Internet space and we are very, very happy with that and so far so good. Clearly, this is going to sort of get exploded into the mobile space. We are going to be looking at very different opportunities. So, this is a place for the talent and progressive and the resources available are something that take a special place and we want to make sure that we are really set up to succeed.
The agent retailing, actual John Barbagallo is going to talk us through some of that, but really this is the issue of the environment changed somewhat, we changed with it. We think we became a better retailer. And frankly, our brand is not hurting us in anyway with our agents thereby it’s helping with our agents. So, now agents – our independent agents actually have a nationally recognized brand to sell in their agency. Certainly, while that’s a hard one put it absolute value the contribution to it is meaningful.
Our reach is expanding. I hope that at least some of you remember, I think it was two years ago that we used the format of this meeting to talk about sort of profiles of customers. And they are not quite the profiles that we use internally in Progressive, but they are certainly good enough for this kind of a descriptive. We have a little bit more complexity to the customer tiers that we use. But we defined four tiers
Sam may be is a little bit more of the classical nonstandard we try to move away from a lot of those terms. And if I remember correctly some one in the audience felt that Sam was a very strong profile to at least have brother-in-law or some other family member, so hopefully that recognition is still there.
The Diane’s of the world, more upwardly mobile, a little bit more consistency in their insurance behaviors. These profiles, by the way, are also in your appendix. The Wright family certainly moving into a home, not necessarily a bundled family, a place that we are very strong.
But the real interesting thing here is the Robinson family and that’s a much more complex need family, not a target that we for the most in the career – of the history of Progressive have really said our products have targeted that group. We’ve done a lot of work. You’ve heard about our entry into home, Home Advantage, which is depicted a little bit by sales on the – of the side of the graph there. It’s given us an opportunity to really speak to that audience. And we are starting to grow the audience. Clearly, the numbers of 200% are a little silly. Because that has to mean we had very little to start with. That’s not the point here. The point is we now have a product that we can start bring into that space. And even if that doesn’t attract a lot of switches to people at that stage in their life, it gives us an opportunity to make sure that we create our own as they start moving through and their needs develop over time.
That may be the more powerful point. So our reach is expanding. We’ve changed Progressive in many ways from a company that was extremely successful at a target group of customers. We’ve expanded that because it was consistent with our skill set and not our strategy.
I want to make the point very, very clearly, the Sam’s, even though the percentages, in this case this is policy in force growth for the last three years, while the percentage of our business might shift a little away form nonstandard, we don’t want to give up and ounce on nonstandard. That’s a very good business for us, we know it, we absolutely do not intend to be moving away from anything. It’s more we are moving to something else in addition. So, our reach is expanding and it’s starting to work. We feel very good about the opportunities to do that, but the potential just seems so great when we realize – and we are not as good. We are not as good at the Robinsons. But we’ll get better.