Progressive Corp (PGR) — Q1 2020 Earnings Call Transcript

Thank you, Jake, and good morning. Although our quarterly investor relations events typically include a presentation on a specific portion of our business, we will instead use all of the 60 minutes scheduled for today's event for a question-and-answer session with our CEO, Tricia Griffith, our CFO, John Sauerland; Personal Lines President, Pat Callahan; Commercial Lines President, John Barbagallo; Chief Investment Officer, Jonathan Bauer; and the General Manager of our Property Business, Dave Pratt. Phone participants may ask questions via the telephone; dial-in instructions may be found at investors.progressive.com/events. 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 2019 annual report on Form 10-K and our first quarter quarterly report on Form 10-Q, 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. In particular, note that our quarterly report on Form 10-Q includes discussions of the risks and uncertainties arising directly and indirectly from the COVID-19 pandemic. These documents can be found on our website, investors.progressive.com. Before going to our first question from the conference call line, our CEO, Tricia Griffith, will make some introductory comments. Tricia?

Good morning. Before we open up for your Q&A, I'd like to make just a few remarks on how Progressive has responded to COVID-19 because I'm extraordinarily proud of my team and the nearly 43,000 people that make Progressive an incredible company and culture that we all enjoy. As you know, with our incredible growth over the past several years, I've had the opportunity to welcome thousands of new people into Progressive. I take an hour to meet with new hires and talk about our core values in our culture. I sometimes struggle describing our special culture because it is somewhat indescribable. So I usually say that it becomes crystal clear when something really great happens or when there is a crisis. This unprecedented situation has allowed all of our Progressive family to visibly live our core values and completely understand why this is such a unique place. The actions we've taken for both our employees and customers have absolutely created and reinforced their loyalty to Progressive. Let me walk you through a few specifics. We immediately determined the needs of each of our constituents and started to develop plans forming teams to address each party. We've named the program the Apron Relief Program, a nod to our brand icon; it symbolizes protection and strength. Let me start with our employee base. We knew we needed to get the majority of our employees home to be able to work and take care of our customers. We immediately put into play our business continuity plan to protect our people. Currently, 95% of our workforce is working from home and for the employees that need to continue to come into the office, we've adjusted the workspaces to increase social distancing and we've intensified our cleaning measures. We also knew that even though every Progressive employee has a job, many of them have spouses and significant others that aren't as fortunate. In order to help our employees have financial confidence, we paid our non-equity employees a portion of their annual gain share bonus in April. We also have created and committed $2 million to the Progressive employee relief fund to assist our employees experiencing hardships. Our employees have really appreciated the communication from every level of leadership at Progressive. I send a weekly video from my home and have literally received thousands of notes from our employees. I'll share one that will give you a sense of the sentiments: 'In a time of uncertainty, I want to let you know your videos in Progressive have been so encouraging and uplifting. I've never been prouder to be part of our Progressive family. I bleed blue and orange, but all that we are doing during this most difficult time to help each other and others is inspiring.' Thank you for taking the time to be so honest and for opening your home and family to all of us. It's refreshing to see that your family's experiences are similar to ours. I love your journey through the years at Progressive and how approachable and friendly I've always found you. I know we try to be not what you expect an insurance company to be for our customers, but I'm very grateful and proud that has also extended to our employees. I have received so many of those. The customers that we are privileged to serve need us now more than ever. We are providing premium credits of 20% to personal auto policies in force at the end of April and May, which amounts to approximately $1 billion. In addition, we temporarily suspended cancellations and non-renewals on personal and commercial lines policy, paused collection activities, and have deferred some deductibles. We also provided meals for our 400 trucking customers, first responders, and healthcare providers. I'll share one of the many comments we received from a first responder: 'I'm so impressed with Progressive and what they are doing about the COVID situation. You guys are really helping our customers and even providing food to our table. Thank you.' These kinds of things make you want to stay with the company forever. For our communities, we've given $8 million in donations to charities focused on hunger, health, and homelessness. I recently received a call from Claire, the CEO of Feeding America, and she was so thankful that we were providing meals to so many who need them now more than ever. I also recently received a letter from Gail, the CEO of the American Red Cross. I'll read a short excerpt: 'I wanted to reach out to you with a personal note to express my most sincere appreciation for the Progressive Insurance Foundation's recent and truly impactful gift to the Red Cross, powering the continued delivery of our life-saving mission nationwide during the Coronavirus outbreak. As our humanitarian organization continues to adapt to meet the new challenges presented by this pandemic, your generosity ensures that the Red Cross is there to provide vital blood and disaster relief services to people around the U.S. who rely on us when they need help.' We also care immensely about our partners and helping them get through this trying time. For our body shops and independent agent partners, it's about loyalty, but it's also about minimizing the disruption of our supply chain as we get on the other side of this crisis. For more than 35,000 independent agents, we are partnering with agent associations to provide over $2.5 million in grants to help agents address new challenges presented by the virus and we're also administering an internal fund to provide additional targeted relief to our agents. Additionally, we've made over $40 million available to agents by advancing performance bonus payments to more than 4,500 of our agents. While the opt-in period is still open today, we've had over 1,600 agents opt-in for a total of $20 million. In addition, we sent $1,000 to each of our network body shops to use as a soft pad. We saw this as another opportunity to help when they needed it most and to show them how much we value them. Lastly, we aren't sitting still and have our eyes focused on the future. In fact, we formulated three distinct scopes of work outlined under constructs we call Resolve, Return, and Reimagine. Resolve, first and foremost, we are addressing the immediate challenges COVID-19 presents to our workforce, customers, agents, communities, and other stakeholders. Return, next, we are creating detailed plans to return business back to scale quickly as the virus evolves, lasting impacts are more understood, and effects become clearer. Reimagine, lastly, we have formed several teams under this category and the goal is to understand how the environment may shift and reimagine the next normal and how we can position ourselves to flourish. All of this to say our shareholders should feel very confident that we've got this covered for the short, medium, and long term. Our resilience is shining brighter than ever and we will come out of this stronger, and I'm confident of that. Thank you, and now we'll take the first question.

Jake, please go ahead with the remainder of the script.

I'm going to give Jake just a moment to allow additional callers into the question queue. But so I'll get started with the first question, which is can you talk about the current shifts in automobile usage and potential shifts in automobile usage as the COVID-19 restrictions are lifted and the resulting impact to Progressive? Well, absolutely. Let me start with our usage-based insurance data because it continues to evolve as the shelter and place orders are lifted. So we saw abrupt declines in miles driven in mid-March. And by the end of the month, daily driving for vehicle miles traveled was 40% lower than pre-COVID baselines. And then, in the first few days of May, we started to see some broad-based increases in driving. I'll give you a little bit more on that. So last week, we actually saw driving down only 14% countrywide versus pre-COVID. Now, that changes, and even up to this Monday we saw around 20%, 25%. So we are definitely seeing in states where the shelter in place has lifted, driving continues to increase, and we're really following it on a daily basis. I would say the level of data, I normally don't show this level of data, but we're literally watching it state by state and day by day to understand driving behavior. The reductions we're seeing are almost entirely due to changes in the number of trips and not the length of trips. Overall, I can't tell you what will happen in the future because these times are so uncertain. But the fact that we have this knowledge of driving behavior, I think has been really important for us as we understand sort of long-term trends.

I will just add to that, obviously, everyone is wondering how fast this company is back? Does it come back to the same level of miles traveled as pre-COVID, and we're obviously trying to assess that as well. We believe there may be some trends around lower usage of public transportation over the longer term. There are also thoughts that there might be some substitution effect from air travel to vehicle travel for longer trips. We will be watching this carefully over time. If we continue to see opportunities to give credits to our customers, we'll do that. But we are going to take it on a sort of month-by-month and a geographically specific basis. Obviously, our product managers at Progressive are a huge competitive advantage for us. While we've taken a broad swath to date, we think the right path forward is likely a more surgical approach to any further credits.

Great. Thanks for that Dave. Jake, can we please go to the first question in the queue, please?

Tricia, you guys have done a great job over the years - this is a non-COVID question - a great job over the years of kind of becoming more efficient and lowering your non-acquisition expense ratio. And I guess just curious over the longer term, how much juice you think is left in that so you can improve that?

Well, it's hard to give a certain percentage, Michael, but we do care deeply about continuing to manage costs because this is a competitive environment. That has always been one of our four pillars when we talk about our strategy of becoming consumers' number one choice, so we'll continue to care about costs. From a media perspective, we will spend media when we think it's efficient. This has been sort of a strange time because a lot of our media spend is normally in live sports, et cetera. Obviously, in March, it went down a little bit because of that. But from an efficiency perspective, we are constantly thinking of ways to take unnecessary costs out of the system to be able to have competitive prices for our customers. I can't tell you the exact amount but we talk about it all the time on my team.

Follow-up is just, I guess, curious to hear your thoughts on how you think just the overall personal auto market pricing will be once we get out of COVID and kind of back to normal, maybe 2021, or whatever that is, but what you think the impact of this would be on a normal state back into the auto pricing market?

I wish I had that crystal ball. I think all the good companies are thinking about right now getting consumers back some of the money from the premiums because of the reduction in driving. Again, we're seeing that reduction go to less levels compared to what we saw initially in March. So we will price it. One of the reasons that we did credits was because we care a lot about segmentation and making sure that many variables that we use were priced correctly. We didn't want to mess that up, and I think all the good companies will do that, and we will be competitive. We will think about all the things that are important in terms of continued segmentation. So even during this time, whether it's on the personal line side or the commercial line side, we have been focused on continuing with our product models, understanding right to risk, and making sure our brand has evolved. I believe that combined with everything else, I can only speak on behalf of Progressive. I believe we will come out of this stronger and will continue to capture market share as we have in the last 3 to 4 years.

In the last earnings release and I believe in the Q2, you talked about 200,000 policyholders electing the billing leniency option. As of March 31, do you expect that number to increase a lot? And I assume that number was correlated with the uncertain, I can't recall you called it, but a kind of maybe the potential bad debt expense you also charged you took in your March results.

Yes. So a lot of that is from the leniency, and through March 15, we didn't cancel for non-payment. So we will expect that to increase; we're not going to share the exact amount. But here's what we're really trying to do. I think this is an important piece, Mike. In John Murphy's CRM organization, they're really working closely to personalize it with each customer. We're trying to make sure that if they couldn't pay for a certain period of time, how do we get them back on track? We want people to be legal; we want people to have insurance, and we want to be really flexible with each and every customer that happens to be in that situation. So we have those 200,000 customers, and the payments will start to come due; we'll work with them to design coverage that enables them to remain insured with Progressive. John Murphy's team is working literally many, many hours over many days just to think about how to assist these customers. In fact, the CRM organization has been quite busy because we're doing a lot of personalization and consultation with our customers at this time when they really need to understand how they can stay insured. We actually have a couple of hundred people from our claims organization who had worked in CRM at one point moving over to counsel those customers. So retention is going to be as important as ever; we don't know how many people we will lose or who won't have insurance for a while. There are so many different variables in terms of what is happening in our customers' lives, but our goal is to keep as many as we can, and we are going to do that as much as we can. We're putting so much work into that to ensure our retention stays the same.

Mike, I will just add. Clearly, the 200,000 is through the end of March and leniency goes through May 15. So we won't cancel anyone for non-payment or renew them through May 15. Starting May 15, customers will be getting bills that will be for the balance outstanding for the period during which we planned our leniency as well as the upcoming months. So, we will be working very hard, as Tricia mentioned, in our customer relationship management organization, to make sure we keep those customers. If you're trying to estimate what bad debt write-offs were being through April to May, that's a fair thing to do for sure. We're not providing numbers in terms of additional people that we are providing leniency to at this point, but it's safe to assume that it is more than 200,000 as of the end of March. It will be a difficult challenge, frankly, to estimate what portion of that we won't collect. This is unprecedented. Of course, we normally have bad debt expense routines, unexposed premium; those really don't apply in this case; it's a very different situation. We will be making some estimates, and the good news is, due to our monthly releases, you will have clarity around that for April - just a couple.

May 20. Yes, I mean, we have watched the hardships kind of unfold. I have to tell you a story that just came to me yesterday. And this is back to my culture comment. Mike, so a woman from CRM was talking to one of our customers that couldn't pay for May and we're talking -- she was talking through leniency. One of our CRM reps paid a premium for May out of her own pocket, which to me is like -- that's an incredible tribute to our culture and having somebody listening to a customer and doing the right thing. Now, of course, I don't want that to happen all the time; it's an extraordinary example. I think it is a good example of our culture. And we're going to do whatever we can to ensure that we understand the hardships going forward. The most important thing is to make sure that people stay legal and have insurance, and we hope it's with Progressive.

Tricia, that's helpful. It’s amazing that your colleague did that. Lastly, Tricia, I think you mentioned the gain share factor earlier. It's clearly a very important metric for your colleagues, when they think about their potential bonuses. It's also been an important metric for investors to gauge Progressive's success, and I don't think it's disclosed anymore; I'm curious why that is the case?

We disclosed it publicly because it was correlated with our dividend policies. We've had it internally forever, and when we changed the dividend policy to have that reflected in our gain share score as a piece of the formula, we shared publicly. So we started not doing that when we changed the dividend policy last year. This year, we looked at the gain share for the quarter; we took in conservative estimates, so we didn't go to the full number that we thought it would be. We wanted to make sure that we gave the employees that needed it most some of their bonus that we believe is not at risk. Of course, again, we don't know what will happen at the end of the year; lots of things can happen, but we won't share the gain share publicly going forward, especially since we have monthly earnings releases. We've also gotten more disclosures on that in terms of caps and in our approach to how we look at caps on a monthly basis.

My first question is on new business. When you guys reported your March results, you had pointed to a good slowdown in the back half of the month as individuals weren't shopping even during the COVID situation. Have you seen any change in April? And then I guess maybe combined with that question, because it's also on new business, we've seen others in the space kind of elect to give their refunds related to COVID in different ways, right? Some just sending money in the mail and some waiting until business comes up for renewal. Do you think that that kind of difference in the timing of refund, when it's given will also have an impact on new business, not just for Progressive, but maybe that's more just industry comments as well?

Those are good questions, Elyse. We have seen, I'll have Pat Callahan add in a little bit on this and John Barbagallo if he wants to as well because it's a little bit different depending on the business marketing tier in commercial. But we have seen some uptick in shopping. Usually during disruptive times, you'll start to see that. Again, there are so many variables going on. So we know that a cohort of people in America have received some portion of their tax refund or their tax benefits from COVID. We've always seen shopping in times like this, and we're watching it closely. On the private passenger auto side, it is very different. If you're talking about business auto versus trucking, I will have John Barbagallo talk a little bit about that. The uptick hasn't been extraordinary, but we are seeing it, so we're taking every day to point to understand how during this disruptive time we can have competitive prices. Pat, do you want to add in some more detail on that?

Sure. We definitely have seen a rebound from the immediate lows during the shutdown or shelter in place. We have seen a different recovery by channel as well, where we've seen a faster recovery on the direct side of the business than we have on agency; we expected agents' offices are still somewhat disrupted. And we do see just a slower recovery from our agency channel.

John, do you want to add anything?

Yes, sure. Elyse, on the small business side, the demand function is pretty well correlated with what's going on in the economy. So we saw very definite demand shocks. Similar to personal auto, we are starting to see that come back nicely. We are still on a year-over-year basis below where we'd expect to be, especially given what is normally a peak season; this is somewhat seasonal business, but we are seeing recovery. The other thing is, and Tricia alluded to this, different businesses were affected very differently by COVID. I'll give one example; in our truck, where we have good telematics data through our smart haul program, about a third of our truckers actually saw an increase in miles driven, and they tend to be kind of drive freight, agriculture, and livestock hauling, but about 7%, 8% of them completely shut down. So, if you're an auto hauler, you're not really busy right now. Thus we monitor not only on a state-level but down to kind of industry class codes. We see things very differently, and we will respond to that as data continues to emerge.

For your question on sort of policy credits in our customer accounts, obviously, we have those April and May and we're always assessing. I went through the UBI data; we're assessing that more now on a state-by-state basis because of the different shelter in place orders and what will happen. So going forward, I think it will be key for us to do what we do best in terms of by state, by channel, and by product to understand the differences that have happened from COVID-19 and then react to those. It's hard to say what will happen from an industry perspective because I think different companies handle it differently, but we'll go back to -- I'm really trying to understand it on a more granular level, depending on the state, the channel, and the product.

Okay. That's helpful. And then my second question, you guys gave some good data in terms of seeing miles driven down around 14% last weekend relative to pre-COVID levels and then Monday 20 to 25, right? So still varying but not down as much as I guess like the tail end of March. Did you see April kind of in line with the end of March, or did you start to see, I guess some of this not like returned to pre-COVID levels but a little bit of a bounce back in driving levels? Did you see that towards the end of April, or is this something that you just started to see in May?

That bounce back started about mid-April, mid to late April, started the bounce back to about 25%. Right now, we think we're between 20 and 25. That 14% was specifically just to kind of show you like the detail that we look at for a weekend. So take Monday's data from this past Monday that was 21%. We're right around that point. Again, it varies wildly depending on the states in terms of their restrictions. If you look at New York, it's very different than Georgia. That's how we're looking at it. The New York Times puts out what's happening with restrictions being lifted. We look at that, and it seems to mirror some of the things we've seen. Of course, we don't have all the data that's in there, but we believe there's a correlation. This next two to three weeks will be really interesting because so many states are starting to lift restrictions, and of course, depending on what happens with cases and testing, that may change. But, anecdotally, I was talking to Dan Mascaro, our Chief Legal Officer on Monday, and he went to hike in the metro parks in Cleveland, and he said it was so crowded. You start to see this rare sunshine in Cleveland, and people get out and they start to drive. Like Mike Johnson, we have a lot of theories that we play around with on my team to think about, okay, this summer, will people drive to grandma's house or to wherever versus fly? Could there be an increase in those longer trips? Of course, that has different frequency as well. So yes, I would say anywhere between right now we're seeing 20 to 25% but we started to see that mid-April.

I had a question about the premium median fees because I remember in the past tracking non-payment of premium was itself an underwriting tool and I'm wondering whether that visibility is being dampened by obviously, I think necessary grace period extension?

I'm not sure if I understand your question. John, do you want to take that?

I think that I can try. If I'm off-base, please redirect. We do look at payment patterns on current and incoming customers as a portion of a set of data that we look at when we are underwriting both new business as well as renewals. Is that the direction you're taking the question?

Yes. In other words, is it less predictive now?

Yes. So that's a great question. Similarly, with our snapshot, data patterns have changed dramatically relative to fairly normal and very predictable datasets over time. Yes, that will be a challenge for us. We are making exceptions in our underwriting today around new businesses, especially where we can pull data sets from common sources that the industry contributes to look at previous insurance ownership patterns. Yes, that's been disrupted. In the near term, it will be fair to say that there will be a period where we probably have to exclude this from our longer-term run. I think the snapshot or vehicle usage-based data will fall into the same camp. It's really difficult to read right now. But you're right, that is an underwriting variable that we have used; I would say in the interim, we are redirecting a bit. In the long-term, we think we will continue to use that. The underwriting we've done we think has been a huge benefit to us in terms of avoiding new business that we probably are going to price accurately.

Yes. Sorry about that, Meyer. I wasn't sure about it. But yes, I think we'll continue to use that. It’s also only one variable that we use when we look at the sort of holistic rates to risk. But again, during these times, there's going to be a lot of data that will skew things that we'll have to understand as we think about pricing and risks going forward.

Thanks. That was clear. So that's very helpful. The second question, as we seen the claim frequency decline, is there any offset in terms of maybe the gap between pre-virus average speeds and how people are driving now?

I've seen a lot of data around speeds and anecdotally driving today, there were a lot of people going really fast because there are not many on the highway. So I kind of made a note of that. What we've observed is, so we looked at hard brakes for 100 miles driven and the percentage of trips with time with their phone in their hand, we’ve seen that increase about 10% to 15% after the post-COVID-19. It could suggest that the miles are riskier; however, we are not seeing that in the claims data yet. So we're going to watch that closely.

A couple of questions here for you. First, I'm curious, I know it's a real new product here for you. But the Atlas product, does it have business interruption coverage in it? And if so, do you have virus exclusions in there as well? And does this situation make you think about the design of your product and potentially changing it?

Yes. I think you'd refer to our Bob product, Atlas service, yes, behind it. So for Bob products, we have less than 200 of those policies that have business interruption insurance, and we have an exclusion for damages caused by virus or bacteria in those. We use ISO verbiage, so we feel like our risk is very, very low, less than 200 policies, and we have an exclusion. I do want to say as long as we're talking about this, as a leader in the U.S. P&C marketplace, we're very actively involved in ensuring the COVID pandemic doesn't result in legislative or regulatory actions that permanently damage the voluntary insurance market and slow our nation's economic recovery. The U.S. markets are heavily regulated, and we want to ensure carriers provide essential products that comply with the applicable regulations. So when they're developing and filing these programs, the voluntary insurance market relies heavily on contract sanctity, and that's a really important piece that we believe in. We have to ensure that we have adequate prices for all included exposures. When you think about the economic damage that is, it is tragic for small business; we don't believe that fabricating coverage that doesn't exist on insurance policies is the right solution for this problem. That said, we have little exposure if any, but as an industry, we feel very passionate about the idea of contract sanctity.

And then another quick question here, with respect to your homeowners product; I'm just curious how you deal with a situation where the insurance payment is tied with a mortgage and with respect to mortgage forbearance; this may not be your decision with respect to when ultimately the insurance payment comes in. Could be that just the bank extending mortgage prevents?

Yes. I don't know if I have a specific answer to that. Normally, when it's part of the mortgage, it's less likely to not be paid, because it has to be part of that, and so it's just a pass-through.

Yes. It's generally paid up front in the mortgage. While the forbearance might postpone payments to the bank, generally speaking, the insurance premium is generally paid upfront in that situation.

Now I get that, but I mean, if it's part of - you wouldn't necessarily get the mortgage forbearance and you may not necessarily get your premium?

While the premium again is generally speaking, paid upfront, so then the payment from the customer to the bank, the bank would be in that case, short on the money because the bank has generally recorded the entire insurance premium to us at the inception of that policy. Yes. They would have collected via escrow and put a year of homeowners insurance aside exactly for these types of either late payments or forbearance, to escrow directly.

Perfect, perfect. And just one quick one. How do you think about [indiscernible] in these types of situations?

Well, I’d have to watch it. I know we have a lot of history, but no history is like this, and so we look back to times like during the financial crisis, etc. We will just have to follow the trends.

Yes. If you let Yaron Kinar into the question, please.

A couple of questions. One, you mentioned that frequency has started to pick up from its mid-March to mid-April trough. Have you seen any change in severity corresponding to that change?

Yes. The severity has been a little bit different for us. First of all, we report incurred trends instead of paid trends. For frequency, the incurred is more responsive, and for severity, both incurred and paid are more impacted by sudden changes in data. That may not be a true reflection of our trends. My opinion on severity right now, I can't necessarily tell, partly because the incurred counts distort the severity trends. Let me give you an example. Our property damage for the quarter was about 14% on severity trends. We think about 9 points of that were from trends we have been seeing in the past, total loss repairables. We think that the other 5% is really applied to supplement dollars that came in March from prior months and some dollars from other companies from prior months. When you apply those to March, they increase the incurred severity. We think that trend is a little bit different during times when we have less incoming volume because the mix changed. So we do think that distorts that a little bit.

Bodily injury severity even more generally speaking, as our inventory ages, our reserving factors are such that we increase the expected cost of an injury claim, the older it gets. We put those dollars into the current loss dollars each month we're dividing by the incurred counts for that month. To the extent new volume coming in is lower and we continue that inventory aging on bodily injury, our current severity trend is going to look higher.

If you look at the quarter for bodily injury, it was about 9% and through February, it was 5%. We know that in March there were fewer incoming claims, which increased the age like John said. There were more attorneys but fewer lawsuits. We think with our average age increasing the incurred severity would be higher than February.

Okay. So maybe I'll try else for a different angle. As miles driven or the number of trips increases again from the mid-March trough, are you seeing speeding decreasing and maybe distracted driving decreasing?

Well, we talked about the hard braking and the phone in hand. We’ve seen that increase about 10% to 15%; however, we have not seen that result in greater claims costs.

A couple of questions here for you. First, I'm curious, I know it's a real new product here for you. But the Atlas product, does it have business interruption coverage in it? And if so, do you have virus exclusions in there as well, and this situation at all, make you think about the design of your product and potentially changing it?

Yes. I think you'd refer to our Bob product Atlas service, yes, behind it. Yes. Well, so for Bob products, we have less than 200 of those policies that have business interruption insurance, and we have an exclusion for damages caused by virus or bacteria in those. We use ISO verbiage. So we feel like our risk is very, very low, less than 200 policies and we have an exclusion. I do want to say as long as we're talking about this, as a leader in the U.S., P&C marketplace, we're very actively involved in ensuring the COVID pandemic doesn't result in legislative or regulatory actions that permanently damage the voluntary insurance market and slow our nation's economic recovery. The U.S. markets heavily regulated and we want to ensure carriers provide essential products that comply with the applicable regulations. So when they're developing and filing these program, the voluntary insurance market relies heavily, we rely heavily on contracts sanctity, and that's a really important piece that we believe in. And we have to ensure that so that we have adequate prices for all included exposures. So when you think about the economic damage that is, is tragic for small business, we don't believe that fabricating coverage that doesn't exist on insurance policies is the right solution for this problem. That said, we have little exposure if any but as an industry, we feel very passionate about the fact of contract sanctity.

And then another quick question here, with respect to your homeowners product and just curious, how do you deal with a situation where the insurance payment is tied with a mortgage and with respect to mortgage forbearance, so it may not be your decision with respect to -- when ultimately the insurance payment comes in. Could be that just the bank extending mortgage prevents?

Yes. I don't know if I have a specific answer to that. Normally, when its part of the mortgage, it's less likely to not be paid because it has to be part of that and so it's just a pass-through.

Yes. It's generally paid up front, in the mortgage. So while the forbearance might postpone payments to the bank, generally speaking, the insurance hasn't paid upfront in that situation.

Now I get that but I mean, if it's part of you would get -- you wouldn't necessarily get the mortgage forbearance and you may not necessarily get your premium?

While the premium again is generally speaking, paid upfront, so then the payment from the customer to the bank, the bank would be in that case, short on the money because the bank is generally recorded the entire insurance premium to us at the inception of that policy. Yes. They would have collected via escrow and put a year of homeowners insurance aside exactly for these types of either late payments or forbearance, to escrow directly.

Perfect, perfect. And just one quick one. How do you think about [indiscernible] in these types of situations?

Well, I'd have to watch it. I know we have a lot of history. But no history is like this. We look back to times like during the financial crisis, etc. We will just have to follow the trends.

Yes. If you let Yaron Kinar into the question please.

A couple of questions. One, you mentioned that frequency has started to pick up from its mid-March to mid-April trough. Have you seen any change in severity corresponding to that change?

Yes. The severity has been a little bit different for us. First of all, we report incurred trends instead of paid trends. For frequency, the incurred is more responsive and for severity both incurred and paid are more impacted by sudden changes in data. And so that may not be a true reflection of our trends. My opinion on severity right now, I can't necessarily tell, partly because the incurred counts distort the severity trends. Let me give you an example. Our property damage for the quarter was about 14% on severity trends. We think about 9 points to that, how to deal with trends that we've been seeing in the past, total loss repairables. What we think of the other 5% is really applied to supplement dollars that came in March from prior months, subrogation dollars from other companies from prior months. When you apply those to March, they increase the incurred severity. So we think that trend is a little bit different during times where we have less incoming volume because the mix changed. We do think that distorts that a little bit.

Bodily injury severity even more generally speaking, as our inventory ages our reserving factors are such that we increase the expected cost of an injury claim, the older it gets And we put those dollars into the current loss dollars each month we're dividing by the incurred counts for that month. So to the extent new volume coming in is lower and we continue that inventory aging on bodily injury and current severity trend is going to look higher.

If you look at the quarter for bodily injury it was about 9% and through February was 5%. We know that in March fewer incoming which increased the age like Jon said there were more attorney but less lawsuits. So we think with our average age increasing the encouraged severity would be higher than February.

Okay. And then my follow-up is on new business that you mentioned in the Q that you saw a significant drop-off in new business in even the direct channel and in the COVID environment. Does that surprise you? And would you expect that to maybe pick up as people -- maybe as the environment stabilizes?

Yes. It didn't surprise us. We didn't really know how deep the initial decrease would be. But we've already seen it pick up from pre-COVID and specifically in the direct channel.

What do you see in terms of post-COVID from the standpoint of distribution, either direct or through the agency channel? Do you see that this period is going to, in a sense, hurt the agency channel and what kinds of adjustments are you looking at?

So we are a big advocate of the agency channel. Since half our business on the auto side is in that channel, we are seeing a little bit of a decrease, and then a little bit slower increase in the agency channel, just has to do with a lot of times people want to go in, sit knee to knee, talk with their agents. On the small business side, it's a lot of the same as what's going on with COVID-19. We're very supportive and that's why we've been trying to find grants for the industry, and then grants for individual agents that call us. So because we obviously have social distancing, our sales reps are making calls daily to our agents making sure they have what they need, we've responded to get some of them computers and printers and things they need to work out of their home. I think that they will try to get back to business as soon as the shelter in place orders are lifted in their areas. I can't tell you if there'll be people that don't last through this. We hope they do, and we're going to do everything we can to support that channel and all of our 35,000 independent agents.

On the direct side, as we pointed out in the Q, advertising was up a lot for January and February, I believe 28%, down a bit in March. Pat can maybe comment a bit more. We are a large advertiser on live sports, and obviously, the spend dropped to virtually nil overnight. That is part of the reason our advertising spend for March recorded less than 2% relative to the previous March. That said, the desire to grow in the direct channel is strong, and we'll spend what we call allowable. I think that we are continuing to find opportunities.

I would build on that and just say that on the direct side, specifically, we are constantly evolving our media mix and testing and measuring what's efficient and effective driving demand. While we did see that trough, appropriately so, the focus on other things in car insurance, we are shifting to more over-the-top and streaming services that people spend more time at home, some more digital than necessarily mass media, and finding select programming that we see significant spikes in viewership that we want to have Progressive brand positioned well. Now, on the agency channel, I think everything that Tricia said is absolutely spot on. The other thing to recognize is that agents for the most part are small businesses. The disruption to small businesses can't be overestimated, and we do expect that the agency channel will come back just as strong as it was previously. And I think some of the digital capabilities that Progressive has invested in to help agents, both service customers and in the case of our snapshot usage-based insurance program, control their costs, or match their costs to their driving will potentially position us well to benefit from that rebound in the agency channel over time.

A great part of our CRM organization is that they take service calls on behalf of the agents. So even if they are at home, we're able to talk those agent customers through the same sort of situations as our direct customers.

Just shifting gears. Any change or what's your sort of view of the investment side of your portfolio in terms of asset allocation or your approach to the fixed income side of the investment? I'd be curious what you're doing, if anything?

Yes. I'll let Jonathan Bauer, who is our PCM President, talk a little bit more about this. We've talked a lot about their ability to protect the balance sheet and to get a total return that is comparable to our index group. So that has not changed. Our philosophy on investing hasn't changed. Jonathan's been able to take advantage of what's been happening in the economy. I'll let him give you a little bit of detail. And I will say risks, it's slight; any risks that we've added during this situation. Jon?

Yes. Thanks very much for the question. As Tricia mentioned, for us, the focus is always number one to protect the balance sheet so that the operating business can grow as fast as it wants to grow. After that, to earn the best total return that we can, we were fortunate to come into the year with a very conservative portfolio. The group one measure that we use for our riskiest assets, which are things like stocks and high yield bonds, was at its post-crisis lows. When this started to happen in late February into March, we began to invest in things as you saw in 10-Q, high quality corporate bonds, the municipal bond market, which we do for tax changes in the corporate tax rate, have been very unattractive over the last two or three years as that market faced some outflows. We're able to buy some very high quality municipal bonds and then sprinkle in some securitized products as well. So we decided to add within what we would label as high quality in the fixed income throughout the month of March, starting in late February. We think our position is still incredibly conservative in our portfolio, but we think we got some great total return opportunities. I think we stand in a really strong place as we head into the second quarter.

Why don't you talk a little more about the operating expenses? Maybe we can put aside the advertising expenses; it feels like a pretty well covered. But are there just discretionary expenses in the business or levers that you can pull down at a time like this to maybe help support the expense ratio improvements that may come back next year or at least to offset some of the increases in allowance for doubtful expenses or other things like that to maybe neutralize the upside expense pressures you might be seeing?

I think we always have different levers. You've seen in the past when things have happened, where we've gotten closer to our 96, we’ve done that; we're really not in that position now because of the margins. Like we talked about, we have the expense for 28 points for the doubtful accounts. We will watch and see how that continues to impact us through April. We're always looking at expenses and how to do more with less, etc. This is an odd time, but I think once we get through this and things are back to normal and claims frequencies back to normal we will continue with our expense management. A lot of this, we learned about how many people work from home. Initially, before COVID happened, we probably had maybe about 10,000 of our employees or 43,000 employees working from home. Now we have 95%. As we think about returning, there could be an advantage for real estate because many of those people will be very efficient and effective working from home. It would be better for them. So those are all the things that we will look at. When I talked about that sort of third tranche of how we think about the future, we have five different teams working on what we call 'reimagine'. One of those is based, it really talks about expenses and people and the workforce. We will look at all these things that happen, and then figure out how to come out on the better end. As an example, when I was -- when during the financial crisis I was the President of Claims, we had same situation where the frequency had diminished during that timeframe. That’s when we started learning about being able to do things virtually that you didn't have to be sitting necessarily in every office. We really started to consolidate and have right file, right rep, right time. I believe we will learn a lot from these to continue to be more efficient. We care about that immensely.

Interesting here is a bit of picking up on the ride-sharing business. Have there been any interesting lessons that have come out of the decline of frequency broader? Had the economics of the ride-sharing business changed at all?

I have to let the people that run the ride-sharing companies talk about that. We continue to be very happy with our relationships. As you saw, we had a decrease in net premium written of over 110 million on the commercial side. That wasn't surprising because we look at miles driven during a given policy period, and then we kind of true that up with extra miles. It’s just clear right now, in fact, those companies are saying you shouldn't necessarily drive. I think we'll watch and see if that comes back. It really all depends on how quickly the shelter in place orders are lifted and how comfortable people feel, but more importantly, on vaccines. I can't predict the future, but I'm not surprised that the decreases based on the restrictions in the States.

Great. So Jake, we'll go ahead and take our next question from Mike Zaremski.

My question and if I missed this, just please tell me was on telematics. Are you seeing any changes in adoption rates? And also does your telematics data give you any kind of potential competitive advantages with filings as we kind of come out of this in certain states that might allow you to take in telematics data to be kind of more precise or agile in your filings in the future? Thanks.

Pat, you can weigh in on this and John B even on your with your smart haul. We've seen the adoption, I think people are more willing to adopt UBI because they realize they may be driving less, and that would be a good program for them. We're hoping that continues, because we believe this is a really powerful variable. There are some states that we are not able to use it. It's only a few, so we'll continue to have usage-based insurance. We will continue to learn from it. We’re not sitting still and saying we're going to stop at, UBI 2.0; we’re going to continue to evolve that as we do everything. On the commercial side, it has been great; like John Barbagallo said, we're able to understand that a third of our truckers are driving more; some are driving longer, and we're able to work with them to help them get through this. We’re able to support those truckers, and the discounts they deserve with that program will continue to evolve that program as well with something we call PROVIEW. That will be rolling out in this quarter. We are very bullish on telematics across our entire company on both the private passenger auto and commercial side. So do you have anything to add, Pat?

Sure. On the personal line side, exactly as you mentioned, we have a lot of monitoring that's in place. We've seen some survey data that indicates that people are now more open to usage-based insurance, so that potentially will drive adoption and help primarily in the agency channel where we still lag behind our direct channel adoption. But beyond that, we've also seen a higher take rate within our quoting funnel. It's not surprising that people are looking to think a little more about getting a benefit from driving less. If they are thinking and looking forward to working from home for an extended period of time, they may think of Progressive as a leader in usage-based insurance as a good choice for them as they think about their future insurance needs. From a state level filing perspective, one of the toughest decisions we have to make is with the uncertainty around how we're pricing policies on a going forward basis. I think Tricia highlighted some of the detailed level data that we have. Our snapshot program gives us hundreds of thousands of daily monitored drivers across the country. What that gives us at the state and DMA level is visibility into not only how the recovery is taking place but then correlating those miles traveled with our actual claims data. That's a really important thing to understand because the ramp down of miles was so quick that we saw them highly correlated when they ramped down, and what we need to watch is on the recovery side; does the time of day and day of the week of those vehicle miles traveled correlate with higher frequency events so that we can price policies accurately going forward.

So Mike, I would say on the commercial side, we're still fairly early in the adoption phase of both of our telematics products; smart haul has been out there longer. It has been well received and has been doing very well. I can't, at this point, say how the adoption rate has increased due to COVID. But I think one of the things we're learning with this pandemic is that truckers are affected very differently by what's happening. This actually gives us the ability to kind of proactively have a conversation with them about making use of space adjustments to their rates. We think that's something that has marketing power beyond just what we're going through right now. So excited about that. Snapshot PROVIEW, very early in the adoption phase, that's more than just telematics-based pricing and brings with it a host of additional services. We're pleased with how that's going as well. Of course, overall demand has dropped as I mentioned earlier but again, nothing there to suggest it would interfere with the adoption of that program. But, again, I couldn't tell you it's going to accelerate at this point in time, but we will be curious to see how that plays out.

That would appear to have been our final question, actually. So that concludes our event. Jake, I will hand the call back over to you for the closing script.