Progressive Corp (PGR) — Q4 2017 Earnings Call Transcript

Thank you, Latoya, and good afternoon to all. Today, we will begin with a presentation about efficient marketing to maintain a leading brand. Our presentation will last approximately 45 minutes and be followed by Q&A with our CEO, Tricia Griffith; our CFO, John Sauerland; and our guest speakers, Dan Witalec and Cat Kolodij. Our Chief Investment Officer, Bill Cody, will also join us by phone for Q&A. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during the event. Additional information concerning those risks and uncertainties is available in our 2017 annual report on Form 10-K, where you will find discussions of the risk factors affecting our businesses. Safe Harbor statements related to forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investors page of our website, Progressive.com. It is now my pleasure to introduce our CEO, Tricia Griffith.

Thanks, Julia, and welcome to Progressive's Fourth Quarter Webcast. During the last few webcasts, we talked a lot about top line growth as far as revenue. We really outlined the addressable market on both the auto and home side. It's almost $300 billion, of which we have about $30 billion, so a lot of runway, and we're very excited to continue to execute on that plan and continue to gain market share. For today and the next webcast, we're going to talk a little bit more about bottom line growth, specifically efficiency. Today, we will be on brand efficiency and in creative. But before I go into that, I want to talk about how we think about winning at Progressive and winning in the right way. And we use what we call our four cornerstones: our core values, who we are; our purpose statement, why we're here; our vision, where we're headed; and our strategy, how we're going to get there. Let me start with our core values. Our core values were penned by Peter Lewis back in 1986. And although the words have been tweaked a little bit over the years, they are really special to Progressive and really special to our culture. They are not just posted on the wall. We really try to bring them to life all the time. In fact, I think I've mentioned before, I attempt to do every new hire class across the company. And believe me, that's been a lot in the last couple of years because of our growth. And I do so, obviously, to welcome the new hires, but to be able to talk about our core values and how important they are and make sure that they know that they need to nurture our culture, and it starts with our core values: integrity, the golden rule, excellence, objectives, process, all of them woven together to create a really special culture. Our purpose statement is relatively new. I wrote a little bit about it in my annual letter. Our mission statement was an amalgam of some from Peter, a little bit from Glenn, a little bit from me, and it really became what we do. And for us, that's second nature. So we wanted our purpose statement to reflect who we are. And so we went to the company, and this statement was influenced by many different areas of the company, and we ended up putting it out to a company-wide vote. The chosen statement is true to our name, Progressive. What that means to me is really the first eight letters of Progressive: Progress, moving forward, doing better today than yesterday, our rich history of innovation and transparency and always thinking how to be better for our shareholders, for each other, and the customers we're privileged to serve. Our vision is to become the consumer's number one choice and destination for auto and other insurance. We've had this vision for some time. We added destination and other when we fully entered the Destination Era. Clearly, becoming consumers' number one choice is a big challenge, but as we continue to gain share and as we continue to have customers choose us and then choose to stay with us, we get closer and closer to that vision. Our strategy, which we're going to talk about today, has four pillars. Let me talk a little bit about those. Our first one is our people. Our people and our culture we believe are a true competitive advantage, and we're going to be able to prove that on spreadsheets—probably not—but I will tell you. Over 30 years ago, I walked into the Indianapolis Claims Office. My intention was not to work for an auto insurance company in Cleveland for 30 years; my intention was to pay off my school debt so I could get my MBA and go back into debt. So what I did was I got claims rep training, I went to the claims office, learned how to estimate cars, learned how to talk to attorneys about injuries. I would tell you about eight months in, then I fell in love. I fell in love with the people, the culture, the values, and every day coming to work and learning something new. In fact, my team of 12 has a cumulative tenure of 305 years, so it's the place where you want to stay. This is something really important to us. The second pillar is meeting the broader needs of our customers. We like to think of this as where, when, and how customers want to shop. In our last webcast, Heather Day talked about our HomeQuote Explorer, which you will hear us call 82x, just an easy streamlined way to have a HomeQuote online to our new digital device. And we will continue to reiterate that to make it easier and easier for our customers. Our latest innovation in terms of where, when, and how customers want to shop is our Flobot, our Chatbot through Facebook Messenger to get auto insurance quotes. We will continue to innovate because this is really important for us to serve any sort of customer demographics. Our third pillar is offering competitive prices. We do this by having leading segmentation in the industry. We do this by having Great Plains accuracy, which is most of any dollar premium that comes in, and most importantly, being very efficient. The efficiency part will be the subject of our next webcast. We're going to talk about our LAE efficiency and what we call NAR, non-acquisition expense ratio, and we'll talk about how important that is. When you look at the companies that grow and grow profitably, they are very efficient. Today we're going to talk about brand. We're going to look at it from two aspects: I'm going to have Dan Witalec, our Leader of Acquisition, come up and talk about the metrics around brand. How we use our money wisely? We have a very big budget, and we want to make sure that every incremental dollar is put to great use. Cat Kolodij, who is our Leader of Marketing Strategy, will be on the other side talking about that creative that works with what Dan is buying. The two work together hand in glove to make sure we are really proud of our brand, acquiring customers and keeping customers. But before I invite Dan up, we thought we would step back and say, what questions would you have you would want us to answer in these next 40 minutes while they talked?

Thank you, Tricia. So why are we talking about marketing spend today? As you likely know, we have seen a real explosion in the insurance industry's advertising spend over the last two decades. This chart shows U.S. P&C insurance advertising from 1996 through 2016, the last few years that we had industry spend available. And you can see there’s been about an 11% average annual increase in advertising spend in the insurance industry. When you compare that to overall advertising spend in the U.S., only going up about 2% or 3% per year, you can really see why insurance has become one of the most heavily advertised industries across the entire country. The rest of it has certainly been a big part of that, and the increase in spend along the way has actually slightly outpaced industry spend during this time. So that’s why we’re here with all of this spend going on; we want to make the case if you’re spending it efficiently. And we will do that by hitting on these four different topics. So I'm going to talk a little bit about the discipline controls that we have around our media spending, then I am also going to talk about our media mix, and then I am going to turn it over to Cat Kolodij to talk about some of our efforts beyond auto and our creative network. So let’s start on discipline. The natural question is: are we getting a good return for all of that spend that we have going on? One simple way to look at that is: are we getting incremental sales as we spend more? Here is a chart that shows a scatter plot where media spend is on the horizontal axis and direct auto unit sales are on the vertical axis. Each dot here represents a year; 2001 is in the lower left-hand corner, and 2017 is in the upper right-hand corner. The great news for us here is that in general, we see a linear relationship. We have seen and we continue to see generally a linear relationship between spend and sales. So as we spend more, we are getting incremental sales. And in fact, if you look at 2017 in particular, we had a large increase in our media, but we’ve got those incremental sales to go along with it, even slightly above the line here. So we generally feel great about that incremental benefit we’re getting. So what are some of the controls that we have to ensure that we are spending efficiently? At a high level, our most important single control on our spending is looking at our cost per sale and ensuring that that is less than or equal to our target acquisition cost. Let me explain each of those terms. Our cost per sale is simply our total acquisition cost which is mostly media, but also includes other items like the cost to generate new creative, and we divide that by the direct auto unit sales in a given time period. So, we want our cost per sale, again, to be less than or equal to our target acquisition cost. I think about our target acquisition cost simply as our maximum allowable spend to acquire a new customer. It’s also how much we recover for acquisition expenses over the life of a policy. So it is fundamentally tied to how we price, and that is obviously very important for us. This all fits into our overall pricing and economics. Now I am going to show some data at a high level in aggregate for our business on cost per sale versus target acquisition costs. But note that we actually have the data and make decisions at a very refined segment level. For example, an auto and home bundled customer in a high premium state is going to have a very different cost per sale and target acquisition cost than an auto insurance customer who rents in a low premium state. So let’s look at some data on cost per sale. So this is our cost per sale from 2010 through 2017. You can see it’s actually been pretty flat over that time period despite some pretty significant increases in spend. This is actually one chart of my presentation that I don’t want to rock it up until the right. We are actually pretty excited that we've been able to keep cost per sale relatively flat over this time period. Perhaps the bigger story here is that we've actually seen a nice increase in our target acquisition cost over the last several years. Now remember, we generally want our cost per sale to be less than or equal to our target acquisition cost, so we actually feel great about that gap. I think it's really a testament to many of the Destination Era strategies we've been talking about playing out. So what's driving up that target acquisition cost? Probably, most notably, our retention has been increasing significantly. This has long been a goal of ours, and we are really seeing some nice benefits over the last several years. In fact, our retention is up about 15% relative to 2013. When you have customers stay with you longer, their lifetime profit increases. And so you can spend more to acquire new customers, and that is certainly what we're seeing with retention increasing. On a related note, we are also seeing a nice shift towards longer-retaining customers. So at the last investor call, Heather Day talked a little bit about our Robinsons segment. That is our home and auto bundlers. Now they are our smallest segment right now, but they are growing the fastest, and that's a segment that retains the longest. So you can see on this chart that the Robinsons segment is growing really quickly. They retain longer as they become a bigger portion of our book. That is certainly contributing to our overall retention as well. So another way to look at our marketing spend efficiency is to look at our total acquisition expenses in a given year and compare that to the projected lifetime premium of a new cohort of customers coming in during that given year. If you look at that over time, it's actually been coming down for us. So again, we feel great about this, a nice testament to the fact that our Destination Era strategies are really paying off for us. While cost per sale relative to target acquisition costs is our single most important control, we look at several other things that could potentially constrain our spending. First of all, we need to make sure that our direct auto lifetime combined ratio is at or below a 96%. So cost per sale and target acquisition cost refer to our acquisition expenses, but we also want to make sure our other parts of the combined ratio still all fit together to be at a 96% or less. We feel great about that. We also need to be able to service our customers well. It's rare, but there have been times where we're growing so quickly in a state that we don't feel good about the staffing levels. And we have to pull back on our growth by pulling back on media spending. This hasn't been the case recently, but we always put customers first, so we are willing to do that if we need to. The final constraint here is we need to make sure, as you well know, we have an aggregate, company-wide, calendar year combined ratio at 96% or less. In 2016 in particular, we were worried about our calendar year 96%, and so we did pull back on media spend that year because of that. So those are three key constraints. I also want to talk about a fourth one, and that is really thinking about our incremental cost per sale and ensuring that that's sufficient. When I talk about incremental cost per sale, I'm really thinking about the last dollar we spend, making sure that that is a good use of funds relative to alternative uses of those funds. This is a harder thing to measure, but it's really critical for us to ensure that we are being efficient overall. So as I talk about incremental cost per sale, that's a natural segue into our media mix. So media mix is simply of our total marketing spend, which particular media types are we spending those dollars on. Is it TV, digital, direct mail, or other media types? Any presentation on media mix has to start with this quote attributed to John Wanamaker many years ago: 'Half the money I spend on advertising is wasted. The trouble is I don't know which half.' Our goal really is to try to understand every dollar and make sure we have little to no wasted media spend. So how do we accomplish that? Our main tactic in trying to really understand our incremental cost per sale and ensuring that we're efficient is focusing on randomized controlled tests or AB tests. What's that AB test in the media space? It simply means that we will have a group of consumers, call them the test group or the B group, that will receive one of our ads and we’ll compare the results of the effect of that ad to a control group — the A group that doesn't receive that ad. The difference between those is the lift of that ad. Now AB testing is not new; as long as we've had Progressive.com or our auto quoting funnel, we've been doing AB testing and we continue to do them heavily to this day. In media, however, it's traditionally been quite a bit harder to actually do AB testing robustly, especially in some of our offline media. So I'm going to talk about that in a bit, but let me first just give you an example of why we think AB testing and incrementality is important for us. Here is a fictional car shopping site where you can see a Progressive ad in the lower right-hand corner. Traditionally, how we measure the effectiveness of that digital ad, we can actually see when a customer or when a consumer goes to the site, sees our ad, and then comes to Progressive.com and actually buys an auto insurance policy from us. When we measured in that way in the past, we actually felt really great about these car shopping sites and their effectiveness with digital ads because we saw a lot of sales after somebody visited a car shopping site and saw our ad. However, several years ago, as we thought more about incrementality, we added a new layer to this test. We had a holdout group or control group that saw a public service announcement ad, like this ad here for the American Red Cross, and that group we looked at how often they actually bought Progressive insurance from Progressive.com when they saw this public service announcement ad. We found that there actually wasn't that much of a difference in terms of sales for people who saw the Progressive ad on that site versus those that saw a public service announcement ad. This was a great insight for us; it led us to advertise much less on these car shopping sites because we saw that we didn't get true incremental sales from that advertising. The main point of this isn’t specific to this example; I think this example is unique to Progressive's particular situation and the power of our brand and our other advertising—the fact that a lot of these people who came to the car shopping site came to Progressive.com, regardless of whether we had a digital ad. The bigger point here is that having that system in place is the best way for us to really understand the effectiveness of our ads. So I guess the other thing I'll say on here, you’ve likely heard various news articles over the last several years about how problems in digital media reporting, so there are some thoughts or other reporting issues that may cause wild miscounts of impressions or clicks. This is a big problem in the digital advertising industry. We are less vulnerable to those types of issues because we are measuring incremental sales directly, and we get that data on incremental sales without having to depend as much on our partners’ sites, so just another reason why incremental media investment is really important for us and incremental sales are really important for us.

Well, thank you, Dan. I think we've made it pretty clear why marketing loves to work with acquisition. In fact, Dan did a really good job of explaining how we measure and distribute our marketing message. It's critical in today's highly competitive environment. Now we're proud to be able to do so efficiently and effectively because of this disciplined approach to media planning and buying. As we flex our marketing engine for the Destination Era, what we say and how we say it is going to become as important as where we say it. I am thrilled to be able to take some time with you today to talk about how we are expanding the brand so that we are known for more than just auto, and also, how we are evolving our creative platform so that we really can manage our network just more to connect with more types of people. Now with everything that progresses, we’ve taken a disciplined approach to both message development and creative management in order to generate growth. Let’s start with how we are efficiently expanding our brand beyond being known as an auto insurer. Now a moment ago, Dan talked about the importance of driving a shift in our customer mix. In order to attract additional customer segments, we actually need to improve how we talk about our products and the kinds of services that we provide, in order to meet the new and emerging needs of these segments; specifically, meeting these as they evolve over their lifetime. This means we need to expand what our brand is known for, which means we have to begin with customer segmentation. Now as a reminder, if you've actually been participating in some of our webcasts before, we have four major consumer segments. The first two, Sam and Diane, have simple insurance needs. Sam is our frequent auto insurance shopper, often driven by price. Diane is our biggest customer segment. They are also interested in price, but for very different reasons, because Diane is trying to save money in order to fund major life events. Both Sam and Diane are interesting in our price-based message but for very different reasons, and they will always remain our core audiences. They are vital to our growth. Most of our broad-based marketing is targeted to their needs. Now, our emerging segments are our homeowners segments, Robinsons, who bundle their home and auto together with a single insurance company, and Wrights, who are auto owners but they actually have insurance for their homes with a different carrier. Homeowners as a group tend to not want to shop a whole lot. They are really good for our customer retention but not really good for our customer acquisition. We’ve actually talked a lot about our strategy to focus on the younger segments, and we continue to do so today. Because of the inherent nature of homeowners, we focus our acquisition efforts on a group that we call Future Robinsons. With a more favorable opinion of Progressive and more active shopping behavior, we actually think that this segment is perfect for us and shows great promise. Our strategy is to attract them and retain them so that as their needs change, we can successfully transition our Future Robinsons into Robinsons. But to do this, we have to first understand who they are and what they need—specifically, what do the Robinsons need? So who are the Robinsons? Representing 41% of the auto and homeowner households in America and 7% of our customers, that's the percentage of households that we have, not necessarily the percentage of premiums. The Robinsons segment bundles their auto and home insurance as a single provider. Now savings do remain important to them and is a key driver of bundling. Savings is not the only reason they bundle. In fact, many Robinsons bundle because they have complex insurance needs. By keeping all of their insurance with one insurer, it actually just makes things a whole lot easier. What is interesting is many Robinsons need to insure much more than just their auto or their home. In fact, our research indicates that up to 16% of Robinsons have other things in their garage that belong in our special lines product portfolio, like motorcycles, boats, or RVs. Given our leadership position in special lines, we feel really good about our ability to cover all of their needs, whether it's auto, home, or even more. Now, as you might imagine, it will take a little bit of time for us to build our reputation among the more mature Robinsons. However, the same isn't true for their younger generations. In fact, if you take a look at the future Robinsons, their needs are much more aligned with what we can offer today. Let's take a look at the chart on the right. If you look at the red dots with the dark outlines, those are the Robinsons. You can see their needs diverge greatly from those of the other segments. Now if you look at the red dot with the hash, that's actually our Future Robinsons. Their needs are much more closely aligned with the other segments that we've always been successful with. We think that because of this, we’re going to be building on a solid foundation with our Future Robinsons. Actually, let's take a closer look. You probably already understand that Progressive has always been known as a value brand. This is a position that we want to maintain in the future years. Historically, we've put a lot of money into our savings or price-based messaging in order to build up this value reputation. But the thing about value is that it actually has two parts. Price is very important, but so too is quality. Now we know that our reputation as a quality provider will be increasingly important to us as we grow. After all, I just got through telling you that quality is quite important for our Robinsons. Here, you'll see a chart illustrating the degree to which people believe that Progressive is a quality brand. Here, quality is a 10-attribute number that includes statements like: cares about the customer, gives me confidence, resolves problems quickly, or is a company I can trust, just to name a few. As you can see here, we actually do fairly well across all the segments. After Sams, though, Future Robinsons have the second-highest perception of our quality. After that, it's Diane. So building on our quality perception is increasingly important for us as we expand beyond our Sam and Diane cores. Now to be clear, this is going to be a balance. Let me talk a little bit about how. You’ve probably seen before, we measure our position in the marketplace on a 2x2 chart, where savings perceptions are on the vertical axis and quality perceptions are on the horizontal axis. As you can see, the top 10 national carriers all cluster in the lower left quadrant with Progressive leading the pack. Unlike Dan's caution that we don’t want to see the cost per sale rocket up and to the right, we’ll be okay with this perception rocketing up into the right. So let’s take a closer look. Zooming in, you will see that Progressive is leading the top four auto carriers in price perception and is slightly lagging another major carrier in quality perception. To be honest, we actually do like our position here, but we do think it could get just a little bit better. So we will begin to change our messages so that we have more quality messages. The truth is we think we have a lot of quality stories to tell, whether it's about our product or our service. However, we will always be a value brand. This means we will maintain what we internally call a price-plus position. We will seek to improve perceptions of quality while maintaining our price perception. One way to do both at the same time is to consider focusing on consideration. Let me talk about how. When we look at consideration across our segments, like many insurance companies, we’re actually doing very well with our customers. Future Robinson customers have the highest consideration of all our segments. This is a strong indication that we're going to do well as this segment graduates to Robinsons over time. The story changes a little bit when you take a look at prospective customers. Prospective customers' consideration is significantly lagging that of our customers—this is not unique to Progressive. In fact, many major carriers have a very similar picture. This is because people tend to trust their insurance carrier more than the rest of the industry. But if you take a look at our claims satisfaction ratings and our long customer retention among Robinsons, it's really clear that our customers know and understand us far more than prospects do. In marketing, it’s our job to tell the story of how we take care of those customers more broadly, so we can shape the opinions of both our customers and prospective customers at the same time. Now doing so with discipline is going to be extremely important. I want to take a few minutes to talk about how we might do just that. What you can see here is a chart with the five major attributes that are most correlated with consideration. In other words, these are the things that people believe are true about a carrier that they would consider for their insurance needs. Let’s take the first attribute. Our model shows that if you believe Progressive is for people like me, you are many times more likely to consider us for your insurance needs. How are we doing against these five drivers of consideration? The answer is just okay. If you look at the chart, you’ll see that between 20% and 30% of people believe that these attributes are true of any of the major carriers, with only one carrier doing well against being for people like me. So what does this mean for us? First, there’s a big opportunity here to focus on messages and stories that are more likely to help people believe that we’re this kind of company. In fact, we've recently done just that; we’ve increased the number of messages that we are delivering in mass media so that they are more aligned with homeowner insurance. Why do we do this? It’s because the easiest way to show that we are for people like me is to talk more about the products that people like me need, and for many of those, that’s home. It's one of the reasons that we actually increased that message to almost 40% of the market, with a target of 40% by the end of the year. Second, we think we have an opportunity to focus innovations to solve for these needs so that in the future we’ll have more stories that will likely drive up consideration. Don’t get me wrong; we believe and are beginning to tell stories about our products and services today that we think will do just that. But believe me when I say Dan and I are very excited about the possibility of the new stories that we will be telling about our innovations in the years to come.

Well, we’ve actually exhausted our scheduled time, so that concludes the event.

Before we take our first participant from the conference call line, Tricia and John would like to address a question that is probably on the minds of many.

So John and I were talking a couple of weeks ago about a lot of the questions we're seeing around the Tax and Jobs Act of 2017, so we thought we'd get out in front of it and how we think about it really from all three constituencies, which we are both aware of: customers, employees, and stockholders. So we’re going to answer sort of a high level. If you have other questions, we can answer them. We also have our resident expert, Jim Cruzman, in the audience if you want a deep dive into anything tax-related. Let’s think about investors. As a growing company, we need more capital for more growth and to satisfy our regulators. Any profits will help with that. It's always our first choice to reinvest in the Company. In addition, our annual variable dividend considers the tax rate. So all things equal, we'll be about 21% higher; that’s how we think about it from an investor perspective, growing the Company and our annual dividend. When we think about customers, we sort of put customers and communities together. We have a Progressive foundation that has been in force for over 15 years, and our employees really like it because they're able to give and get a match up to $3,000. In fact, the average amount we paid out of the foundation over the last five years has been $4 million a year, and they can give as long as it's a not-for-profit of 501(c)(3) to either national or local communities. A lot of people love giving to local communities, of course, where our customers are—to churches, to schools. We continue to fund the foundation. Because it's based on underwriting income, it will also, all things equal, increase by about 21%. In addition, since the beginning of 2016 to today, we have hired over 13,000 new external hires. Having those jobs, and they’re not just in Cleveland—they're around the country—specifically in the claims organization and the CRM organization, having those robust jobs, we believe, really help the communities that we serve. As for our employees, we are market-based for both compensation and benefits and will continue to be market-based. As the market changes, we will shift, and we'll watch any inflationary trends. We'll look for key indicators like high turnover in an area or people not accepting our jobs. We no longer ask for your prior compensation, but people might give us anecdotal information, so we are prepared to shift as the market shifts. In addition, and this is related to the tax plan, how Progressive has always thought about employees is really to our gain share plan. I know a lot of companies gave one-time bonuses, which I think is great. We've had a gain share plan for over 25 years; last year, the gain share was 1.79, and our median bonus was $8,100. Our philosophy has always been when we gain, we share with our employees and shareholders. So that gives you a kind of an overview of how we've been thinking about the tax changes, and now if you want to open it up for other questions, that would be great.

Great, Latoya, we will now take our first question from the conference call lines.

I guess first just to follow up on what you're talking about on the employee growth. I think there was a newspaper article around you suggesting you were hiring 7,500 new people, which is, I guess, a 20-plus percent growth rate. Given there's quite a bit of wage inflation there too, should I interpret that as putting pressure on expense ratio or am I reading too much into that? Is that a gross number, not a net number? Is there attrition that offsets that? Just how should I think about that?

Yes, Ian, there will be some attrition to offset that. What we've been trying to do is grow in customer-facing organizations. We've been trying to keep our non-servicing headcount fairly flat and add when we need to. But again, as we grow the ratio of our premium, so as we've grown and added people, it’s worked out. So it hasn't put the pressure you would think on our expense ratio or LAE.

So then just one other topic real quick is on capital. I think there was some language in the K about essentially the strain from some growth, and you mentioned maybe having to raise some debt. I hope you could give a little more detail on that. I was just taking sort of consensus numbers just as a proxy and it looks like, if I look at where premium growth in street models, that requires adding near 3 to 1, as much as $1.5 billion capital for growth, which is greater than your dividend capacity. So when I look through that, it seems that I shouldn't expect much of a stock dividend this year. Is that the right way to think about it that essentially earnings growth is going to fund the growth and this has to be all the kind of small, and the debt will pay the corporate dividend, the debt raise?

Here's how I would think of it, and John you can weigh in. Earnings are a material source of our capital and when that's not enough, then you can expect that we'd go to the capital markets for more. We do have a lot of earnings coming in, but that's how we think of it. Literally, John and I, and Bill Cody from our Capital Management, and Katherine Brennan, our treasurer, we talk about capital all the time in terms of how we can continue our growth, knowing the regulatory constraints you put on the 3 to 1 on the auto. We think about that all the time, but earnings will be a material source of our growth. But again, we can expect to go to the capital markets, if in fact we needed more.

And to that, you mentioned our dividend. Our dividend is an annual variable dividend and it is tied to our gain share score, which is a function of growth and profit across our business lines, multiplied by a third of our after-tax abstract underwriting income. We have established that dividend program for the year, and we would use any capital beyond that, obviously, as efficiently as possible. Today, that means reinvesting in the business.

I had a question on the announcement that came across recently about Uber and your relationship with Uber. This has expanded. I know you went into Texas a couple of years ago, but you haven’t talked about it recently and it seems like it’s an important source of additional data that can be used in commercial lines. Maybe there’s some overlap with what you’ve learned in Snapshot with that, and I wondered if you could just update on how you are looking at that program? What it might mean for your data analytics in your long run? Any thoughts you have on that program?

Thanks, Gary. Yes, we started with Uber in Texas in 2015 when it was a pilot on the commercial side, and we’ve been learning a lot, and of course this moved from pilot last year to full board and that was added on as of today in Arizona, Colorado, and Florida. I wouldn’t say it’s necessarily related to an UBI, I would kind of bifurcate though. But I would say that we’re learning a lot about the transportation industry and the T&C industry. We are really excited to continue to work with Uber and add on three more states. Again, because it’s new to us, we are going to take a measured approach. I think we are really excited about that, but I wouldn’t necessarily correlate it to our usage-based insurance.

Maybe you could talk a little bit—then about the usage-based. Is there anything that you’ve learned or discovered? Just update on how powerful you think your Snapshot program has become?

Yes, what I would say is that we are really happy about the mobile device specifically on the direct side and the take rate on the mobile device. So, we are learning more and more, and I would say we are learning more about distracted driving. We are not ready to use that data in ringing, but we are learning a lot, so more to come on that. It’s going to take a while before you gather in, and our customers still have the option to have the dongle or the mobile. However, we are finding we are gathering a lot of data on the mobile and learning—very interesting segmentation things around distracted driving.

Right, Latoya, I am actually going to take a question from the webcast now. The next question is about frequency versus surprising benefit in 2017, and one that you probably didn’t plan for. In fact, I think we’ve said we didn’t plan for. How do you view giving back some of that critical 'excess' profit to further accelerate growth?

Yes, so when we think about—it’s really hard to understand and predict frequency, and in fact—over the last trailing 12, our frequency has been much more negative than the competition. In the third quarter of 2017, the rest of the industry kind of changed a little bit as we saw competitive fair results. We are seeing as an industry. Again, we don’t necessarily bake that into our rate. We don’t see where we are at as of the end of 2017 or even January in excess profits. We think about it as continuing to invest in the business. Again, this is very capital intensive when you think of the regulatory capital we have to maintain. I might see differently if we weren’t growing. We have that balance of growth and profit. If you’re in a really sweet spot and able to roll really fast and make at least $0.04—remember it’s at least $0.04—we want to do both. If either one of those changes, as you know from 2016, we will monitor that and react to that. But we're going to need capital to grow.

Thank you. Latoya, if we could take the next caller from the line please?

Tricia, I'm just curious, as I look at your loss ratios and loss ratios going forward. Are you seeing a benefit from the Robinsons on your loss ratios, kind of increasing the mix? Is that perhaps maybe mitigating some of the kind of 10-year effect that you typically see with the growth you’re putting on?

We would say that our Robinsons are considered lower pure premium in that they're less likely to get into a loss. The hard part is we look at everything so granularly in terms of states, channels, and products. What you'll probably see more movement on, when you think about ratios, would be more on the LAE or NAER side. Do you want to add anything to that?

Yes, I think you start hitting on the fact that we priced all segments to a common combined ratio target. In the preferred segment, we look at both the loss side as well as the expense side, so both of those are considered in the pricing. There are some segments that drive higher expenses, and we build that into the prices as well. So you will find segments for our business that have lower loss ratios and higher expense ratios than perhaps the Robinsons in aggregate. But the point is that we are looking at each segment very granularly and making sure that we're pricing to the same lifetime combined ratio target.

I guess, that's very helpful. My second question is, are there any calendar year constraints that you're undergoing right now?

Right now, our calendar year constraint is the same it's always been; it's 96 calendar year growth as fast as we can, as long as we can service our customers. So when we were in a similar position a couple of years ago, we were able to get out in front of hiring and make sure that we could service our customers. And we had this competitive price and a great product; our 8 to 4 product is on the street. We wanted to capture as much of the market as we could. Of course, you remember in the fall of 2016, we pulled back on advertising because of the CAT losses. That will always be our constraint. Every calendar year, our constraints are going to be 96. That is a constant; it's part of our culture. It's not a sale for—all of that will obviously be a constraint. But right now, we’re not seeing that as a constraint. However, we've got one month of results in. It’s a long year, and we don’t know what’s going to happen with nature. I wouldn’t have thought 2017 would be a more difficult CAT year than 2016 but of course it was. So that’s really our biggest constraint; it’s our profit goal and making sure we can take care of our customers. We've been very happy. I wrote in my letter about what I call our recruiting machine. It’s not just the amount of people we’ve been able to hire but also the caliber of people. When I am ending hiring classes, I am really amazed. One of the ways we look at that especially in the claims organization is how their accuracy is going. So that’s a large part of what we pay out in loss cause, and our accuracy continues to be at record levels. That really excites us about having few constraints right now. It’s a good time here.

I had a follow-up to the earlier ride-share question but along different lines. Specifically, what’s in the personal auto segment? Are you able to comment on whether you feel ride-share services are impacting the loss cause? One of the reasons I ask is that an increasing number of insured drivers are making ride-share services a part of their lifestyle, and I'm also pretty sure your client base is relatively more tech-savvy than many peers as well.

Yes, we have a personal auto endorsement in 22 of our states, so we always offer them and ask when we are getting navigation as well as a loss if you’re an Uber or Lyft driver. We strive to flush out, and it helps us understand if we need to charge them differently, add an endorsement that is covered. It’s really hard to understand fraud that could happen there; it’s actually why we are offering endorsements. I think we believe you’re asking the right questions to the right people at the right time.

It's very hard, I think, to tease out what you are getting at. We do generally have a younger clientele than some of our competitors, certainly on the direct side of business. We think we skew more toward urban areas where we would expect there to be higher penetration of T&C users. However, it's very hard to definitively understand if and to what degree people using Uber, Lyft, etc. at different times of the evening or weekend are impacting our loss experience at all. But it’s certainly a great hypothesis, and one that we really can’t answer with any surety.

My first question was related to your mentioned internal strategy council that you guys are forming. I was hoping to get some additional color there. Is this in response to autonomous vehicles? Is there something else in the industry? And how would that potentially include Progressive potentially expanding into underwriting its small commercial policies on to our own balance sheet or potentially include additional M&A?

Okay, so if you recall a couple of webcasts ago, I went over sort of our Horizon concepts that we have: Horizon 1, which we talked a lot about today; Horizon 2, which was Expand; and we talked a lot about the commercial that you talked about a little bit Elyse with Bob in small business. What I am having the strategy council really focused on is Horizon 2, which is explore. You can think of it as assuming there's a day where all these vehicles are autonomous or half of that, etc., so we're modeling out opportunities for us. Right now, the Strategy Council is fairly new. John and I meet with them very regularly. It's a group of 10 folks within the company. Andrew Quigg, who I think you have met, is doing it as a side to his job involving retention and PLE. We have other people taking some of his work, and he's doing a tremendous job. The team around him, we picked because they had a diversity of careers at Progressive. We're leveraging those careers to think about what we do well, and if we want to either grow our revenue or replace revenue if the market gets smaller, what opportunities can we pursue? We’re excited about this council, and again, it’s pretty new here—about 90 days in. I’ll have more to come. We’re really excited and I’ve been very impressed with their work to date.

You guys have been growing a lot over the past couple of years. As some of your peers have been retrenching, taking a lot more rate as they've seen pretty high frequency and, in some cases, severity trends. As we think about this overall, it seems like most players in the space are more or less at peak rate-taking levels. They’re taking less rate and looking to grow in 2018. As you envision that environment, how does that play into your strategy regarding the Robinson cohort and your growth in policies in force?

We’ve always talked about rate in terms of not having to rate shock our customers. When we’ve had to do that, you see PLE decline. So we've gotten out ahead of rates probably since 2015. We've said it's better to have smaller bites of the apple; so a 3 to 1 is better than 1 to 3 in terms of increase, and so we’re really comfortable with our rate right now. We've watched our competition, and that’s what happens. This hard market has privileged us to get those customers while they're shopping. Because we have a competitive rate, we’ve been able to grow. So at this juncture, I don't know obviously what all the competition is doing. Very few companies when we look at statutory data, I think as of Q3, only 2 companies were growing profitably. I imagine those companies will want to get out in front of rate, and hopefully, as people shop, we will continue to be the recipients of those customers—Robinsons of course, but actually, every customer. We want every Sam, Diane, Wright, Robinson we can get as long as we can service them. We’ve obviously talked about the Robinsons a lot because that's really the customer that we want based on our acquisition of ASI on the agency channel and working with other affiliated—unaffiliated companies on the direct side. So we’ll continue to push those, but I think Cat talked a little bit about our changing creative. Really, when you think about the Parentamorphosis and owning your first home, that's really addressed to the Robinsons. We are seeing that happen. We’re going to continue with more creative around trying to retain more Robinsons.

Thank you for your time. Please give us a few minutes as we set up for Q&A.